Q1 2020 Earnings Call
[music].
Good day and welcome to the Coherents first quarter fiscal year Twentytwenty financial results Conference call.
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I would now like to turn the conference over to introduce Mr., Brett Demarco Executive Vice President and General Counsel. Please go ahead.
Thank you Shawn and good afternoon, everyone. Welcome to today's conference call to discuss coherence results from its first fiscal quarter ended December 28 2019.
On the call with me here, John Ambroseo, our President and Chief Executive Officer, and Kevin Platinum, our executive Vice President and Chief financial.
I would like to remind everyone that some information provided during this call may include forward looking statements, including without limitation statements about coherents future events anticipated financial results business trends and the expected timing and benefit if any at such trends.
These forward looking statements may contain such words as project outlook future expect will anticipates believes intend or referred to as.
These forward looking statements reflect beliefs estimates and predictions as of today and coherent expressly assumes no obligation to update any such forward looking statement.
These forward looking statements are only predictions and are subject to substantial risks uncertainties and assumptions that are difficult to predict and may cause actual results performance or achievements to materially differ from those expressed or implied by these forward looking statement.
Factors that could cause or contribute to such differences include but are not limited to risks associated with global demand acceptance and adoption of our products worldwide demand for flat panel displays and adoption of OLED for mobile displays the pricing and availability of OLED displays the demand for and use of our products and commercial application.
And our ability to generate sufficient cash to fund capital spending or debt repayment, our successful implementation of our customer design wins, our and our customers exposure to risks associated with worldwide economic conditions in particular in China, and the eurozone, our customers' ability to cancel long term purchase orders the ability of our customer.
As to forecast thorough the end markets, our ability to accurately forecast future period continued timely availability of product and materials from our suppliers our ability to time, they ship our products and our customers' ability to accept that shipments.
Our ability to have our customers qualifier products worldwide government economic policies, including trade relations between the United States in China.
Our ability to integrate the business of growth and then other acquisition successfully.
Manage our expanded operations and achieve anticipated synergies our ability to successfully manage our plant site consolidation project and other cost reduction program and to achieve the related anticipated savings and improved operational efficiencies the impact on global trade arising from Kuroda virus related actions by world governments and other risk.
Identified in the company's Sep planning.
For a detailed description of risks and uncertainties, which could impact. These forward looking statement you should review coherence periodic SEC filings, including its most recent form 10-K form 10-Q forms 8-K, including the risks identified in today's financial press release.
Ill now turn the call over to John Ambroseo, Our President and Chief Executive Officer, Thanks, Brett and welcome everyone to the call.
There are several encouraging takeaways from our first fiscal quarter of 2020, the book to Bill was well above warm due to strong demand from multiple applications, but full year outlook is improving in certain key markets and competitive dynamics in China, while still aggressive are mostly unchanged.
This is positive across the microelectronics market display orders were up significantly for Linebeam systems and service. The system orders were for Linebeam 1000 is destined to China. This is the third consecutive quarter that we have received new system orders, which aligns well with our prior industry commentary on phase two investments.
The increase in service order fours reflects higher demand for Olin equipped smartphones in the fourth calendar quarter of 29 team. In addition to the leadership bookings for OLED cutting using short pulse and Seo to lasers.
So up as the industry prepares for projected 60% ramp and flexible OLED units in 2020.
There is a small contribution from foldable displays in the 2020 ramp but the penetration is likely to remain low for two to three years as manufacturers and suppliers lockdown, the specs and material sets.
Following CES the number of predictions and questions regarding micro these has to know one surprise gone up the demos at CES from the likes of Samsung Sony and others were impressive Samsung's wall cover 292 inches and tops could be added while the display was running.
The technology clearly has potential but costs remain prohibitive it will likely take years for micro R&D to achieve mass market viability.
For full year outlook for semi Chem semi capex spending changed dramatically in the last 90 days with TSMC and Samsung both announcing higher capex spending.
Since he is recorded reported we added capacity at five nanometers, and seven nanometers for AI servers and Fiveg chips.
Samsung has supported we've seen renewed demand from memory, our OEM integrator partners responded by raising their build plans for a variety of inspection and metrology tools. Consequently, our laser orders for similar applications were up sharply on a sequential basis, our service buffers benefited from sustained high utilization and attack.
Finally on an annual service contracts.
Rounding out the microelectronics picture as.
Which also enjoyed double digit sequential growth in orders arising from increased service demand and marketing subsystems for semiconductor chips.
We're also seeing an uptick for fiveg related technology due to Chinese government programs to drive adoption.
Circuit Board designs for Fiveg are currently trending towards 45 to 50 Micron HD guys that support 20 plus percent higher circuit density. These requirements should drive a double digit increase and HDR tool demand. During calendar 2020, we also expect to see a corresponding demand uptick in upcoming quarters.
For lasers used to manufacture fiveg antennas.
The materials processing market appears to be stabilizing pmires in North America signal modest expansion.
Chinese PMI moved into positive territory on the strength of domestic demand. Although exports are still lagging Europe still faces headwinds, partially due to a depressed global market for autos and Germany, PMI is well below the euro zone average.
The data for our business reflects the stabilizing market. The book to Bill was one for our seasonally adjusted first fiscal quarter and bookings work on a few percent for the prior year period within the various submarkets orders for Highpower Seo to lasers used in cutting outperformed the broader cutting market the medical device manufacturing systems held.
Yeah, well, but only a very strong prior quarter.
Farm orders for automotive applications were up six potentially but the overall market conditions remain challenging due due to weak automotive demand and the shifting sands of portfolio mix from internal combustion engines to electric vehicles.
Competition competition in the Chinese market is rising for components and lasers Chinese laser manufacturers are sourcing more pump diodes domestically due to pricing and to a desire or directive to become independent from western suppliers.
We've heard from end users that domestic Chinese fiber laser manufacturers are taking share at the three to six kilowatt power level.
As of the powers increase manufacturers will shift to longer wavelengths pumps, which currently favors westin diet suppliers.
Instrumentation and only only component bookings were lower following a record setting performance on prior quarter. This is neither surprising nor indicative of a change in long term demand for market share.
Bioinstrumentation applications like flow cytometry are experiencing greater clinical adoption one of the capabilities that is driving this trend is the ability of use the activate reagents to study small particles that are critical to sell functionality.
Our oldest platform as the leading laser solution for exciting ultrabook ultraviolet reagents, and we expect multi year growth from this product platform. Our medical business is also in solid shade one of our OEM integrators is make inroads or China for cataract therapy. The aesthetic business saw good demand for new and legacy procedures. The finally the aerospace.
Jason Defense business is on track for strong double digit annual growth, mostly in conjunction with from North American primes I'll now turn the call over to Kevin peloton. Thank our Chief Financial Officer. Thanks, John Today, I'll first summarize fiscal first quarter 2020 financial results and move to the outlook for fiscal Q2 2020 I'll discuss.
Primarily non-GAAP financial results and ask that you referred to today's press release for detailed description of our GAAP results as well as a reconciliation between GAAP and non-GAAP financial results.
Non-GAAP adjustments relate to stock based compensation expense amortization of intangible assets and restructuring costs related tax adjustments and tax adjustments for stock based compensation.
The full Texas, today's prepared remarks, and trended GAAP and non-GAAP supplemental financial information will be posted on the coherent Investor Relations website. A replay of this webcast will also be made available for approximately 90 days following the call.
Fiscal first quarter 2020 financial results for the company's key operating metrics were total revenue of $320.8 million non-GAAP gross margin of 38% non-GAAP operating margin of 9.4% adjusted EBITDA of 14.3% and non-GAAP EPS from 86 cents.
Total revenue for the fiscal first quarter was $320.8 million and came in above the midpoint of our previously guided range due primarily to moderate stability rather than significant weakness in the materials processing and market.
Our revenue mix by market for Q1 was microelectronics, 41% materials processing, 27%, OEM components and instrumentation, 22% scientific and government 10%.
Geographically Asia accounted for 51% of revenues in fiscal first quarter, the us, 24%, Europe, 20% and rest of world 5%.
Asia includes two territories with revenues greater than 10% of sale.
We have one customer in South Korea related to large flat panel display manufacturing that contributed more than 10% over fiscal first quarter revenues.
Other product and service revenues for the fiscal first quarter were $170 million were approximately 36% of sales.
Other product revenue consistent spare parts related accessories, and other consumable products and was approximately 32% sales.
Revenue from services and service agreements was approximately 4% of sales.
Total service revenues increased sequentially by approximately $3 million as our integrators and end users replenish their service stuff.
Fiscal first quarter non-GAAP gross profit excluding stock based compensation costs intangibles amortization restructuring was approximately $122 million.
Non-GAAP gross margin was 38% for Q1 and came in at the midpoint of our previously guided range.
Non-GAAP operating expenses increased by approximately $2 million, primarily due to factors relating to our new fiscal year, including merit and fringe increases and other miscellaneous expenses.
This resulted in non-GAAP operating margin of 9.4% for the fiscal first quarter and payments slightly above the midpoint of our previously guided range.
Adjusted EBITDA was 14.3% for fiscal Q1.
Turning to the balance sheet Nonrestricted cash cash equivalents and short term investments were approximately $350 million at the end of fiscal Q1, an increase of approximately 44 million compared to the end of last quarter.
We did not make any voluntary payments against our term loan and at the end of fiscal Q1, the outstanding amount of the term loan as approximately $405 million.
Accounts receivable DSO was 66 days compared to 72 days in the prior quarter.
The net inventory balance at the end of fiscal first quarter was approximately $450 million.
An increase of 7 million from the prior quarter, primarily due to foreign exchange.
Now I'll turn to our outlook for the second fiscal quarter of 2020.
We see at the outset like other multinational corporations with sales service and operations in mainland China, We continue to monitor the rapidly evolving situation related to the Corona buyers.
Chinese governments actions, particularly from quarantining individuals in and around major hubs, such as Weve Han and restricting the opening of businesses will likely have an impact on our ability to sell our products and service our installed base impacted areas.
We continue to monitor the situation, China as well as actions being discussed in rolled out by other will governments.
Our second fiscal quarter outlook attempts to reflect these uncertainties and includes an approximate $20 million to $25 million reduction in revenue at the midpoint and a wider than normal revenue range.
Having said that revenue for fiscal Q2 is expected to be in the range of $290 million to $330 million.
We expect fiscal Q2, non-GAAP gross margin to be in the range of 35% to 39%.
Non-GAAP gross margin excludes intangibles amortization of approximately $11.2 million and stock compensation costs estimated at $1.4 million.
Non-GAAP operating margin for fiscal Q2 is expected to be range of 4% to 8%.
This excludes intangibles amortization estimated a total of $12.5 million and stock compensation expense as a total of approximately $95 million.
As you work for your models, you'll note that the operating expenses show healthy sequential growth.
This increase is primarily due to our fiscal Q2 being a 14 week quarter versus the typical 13 week quarter as well as less holiday in vacation in our March quarter.
Other income and expense is estimated to be in expense in the range of $2 million to $3 million.
We do not include transaction gains and losses related to future changes in foreign exchange rates in our aligning outlook.
We expect our fiscal Q2 non-GAAP tax rate to be in the range of 24% to 25%.
We are assuming weighted average outstanding shares of approximately $24.3 million for the second quarter and finally, we have also received board authorization to repurchase up to 100 million in the company's common stock over the next year.
I'll now turn the call back over the operator for QNX section.
Thank you we will now begin the question and answer session.
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Our first question today will come from Jim Ricchiuti with Needham and company. Please go ahead.
Thank you good afternoon.
John or Kevin I'm wondering if you can give us a little bit more colour on the.
The impact that you're seeing.
From the Crown desires is that 20 to 25 million.
Impacting you in any particular, one vertical more than the others.
It's impacting us across the markets.
Everything from the scientific business to micro electronics. The current situation I think as you're aware is the countries is on an extended holiday following the lunar new year.
And until we have people back in the offices are our employees as well as those of customers and suppliers.
We will be able to fully assessed what the what the quarter is going to look like.
And John looking at years, what you're seeing in terms of recovery.
In the CD market.
Do you do you anticipate mix.
Similar to what you're seeing where you're calling at some orders or I believe the Linebeam 1008 is that.
What you're anticipating or do you see the cycle potentially changing and shifting more towards some of the larger linebeam machine over the course of the year.
I think it's going to be first of all ball first of all its a good question Jim.
I think it's going to be larger situational with individual customers based on their own competency and also based on the availability to secure other systems as part of the supply chain.
While we're not the long hole in the 10th in terms of of deliveries. There are some other very difficult to cure.
Systems that are part of these these 1500 factories and those lead times right now seem to be exceptionally long that would probably have an impact on the the customers thinking, especially as some of these customers are trying to position themselves to be a supplier of record for next year smartphones.
Well I should say four in 2020 for later this year.
Got it last quick I'll jump back in the queue, but just the again on the flat panel.
Display business.
Thank you are seeing in a cutting market I mean, thats clearly something that will differ from the last cycle is there any way.
Help us think about the potential for you guys.
In that business over the course of the next wants to two years.
Well the asps are substantially different between the annealing market and the cutting market.
And the multi unit volume for cutting is going to be obviously much higher than it is for annealing.
You are still probably an order of magnitude different in market size.
But your competitive stance in that market, a little bit more competitors that sounds like you feel like your peers and thats what.
About any business do you feel like they're holding your own in that market gaining share.
I think we look at 2020 as a year that we're going to gain share and certainly the early opportunities in this in this market have favorite OS.
Okay. Thank you.
Our next question will come from Blayne Curtis and with Barclays. Please go ahead.
Hey, guys. This is Tom O'malley on for Blayne Curtis I had a question on the guidance in the 14, we corner.
The company's kind of forecast a little bit differently, there normally opex run a little bit ahead, and you don't always get the route the benefit on the revenue side for the 14, we quarter can you just talk about.
What your expectations are when you were forecasting are you, including that additional week. There in the revenue are you being conservative thinking you know you may not get all of that benefit.
Yes, you're right. Tom This is Kevin there is a little bit of a mismatch in the back end on our ability to bring revenue in compared to the expenses the expenses are different.
From a planning are forecasting standpoint that is included in guidance, but certainly the 14 weeks are related to the quarter on the expense side.
That's that's definitely Thats definitive we can do that.
Okay and then the next one is really on the semi Chem side you guys. In your prepared remarks spent a lot of time talking about forecast service for both five nanometer in seven nanometer.
This year, obviously, it seems as though that that semi cap is becoming a larger portion of the microelectronics bucket can you talk about how you see that turning over the course of the year do you do you think that becomes a greater portion of that bucket and cannot cut to help drive some additional upside versus where you guys were initially thinking this year.
I guess I'll I'll.
I will try to frame it this way.
Semi appears that it's going to do better than we had forecasted at the beginning of the fiscal year largely to the to.
The two factors that I talked to earlier, which is for TSMC and Samsung upping their their capex.
As as to whether or not it becomes a larger percentage of the microelectronics bucket.
That's a little bit tougher to answer simply because we we expect to see.
The display business start to pick up as we go through the year.
So I think.
The short answer is.
On an absolute revenue basis.
Semi cap is probably going to do better than we had in the plan originally.
But as far as what the mixes within microelectronics, a little too early to call that one.
Fair enough thanks, guys.
Our next question will come from Mehdi Hosseini with ESI Ji. Please go ahead.
So two questions Kevin.
What would it be into absorption and impact on operating margin. If you would add back the 2020 5 million of revenue and now he's been adversely impacted by the core in a virus.
And I have a follow up.
Yes.
Committee, we did 38% in the quarter I suspect that we could achieve that or maybe even improve against that.
With the 225 back in.
Okay, I guess when I was trying to figure out of that.
Is that 2020 5 million part of that that rofin lower than corporate average margin or is that more like it.
With that rates are higher margin.
That's what I was tremendously.
As John said earlier right the decreases across the board across all end markets. So you know in terms of the mix impact.
It is across the board.
And Thats why I said without it without the impact we probably would have been about the same or little bit higher.
But that's that's as I can do not.
Sure. Thank you and then one question for John.
Yeah, you 10 more constructive on.
Display sometime mid last year, we would earlier and now it seems like the real inflection point is more foot in the latter part of it 2020.
How should I think of that.
Your way of communicating the pickup in booking.
And then lagging impact on the inflection point in revenue and specifically for flat panel display.
Interesting question I'm, not sure I completely understand but let me give it a shot nonetheless.
In 2019, we started the year with backlog in display.
And a dearth of orders.
So as we move through.
Through the year, we will continue to burn off backlog, which means to equal.
For surpassed 2019, and 2020 you have to have all those orders in place. So what you referred to as an inflection I assume you mean when.
Display revenues surpass the prior year.
Is that correct assumption on my part.
Yes, yes.
Well.
Then the answer is simple into you have to get the orders and build the backlog.
Before you can move past the prior year period.
I don't.
Perhaps I'd and communicated as clearly as I could have.
But I think that we were constantly talking about the fact that.
We were building 2020, and developing momentum into 21 and 22.
In many Kevin Kevin again here and remember we have a six month lead time on these systems, so from ruminant order or booking to when we potentially see revenue it's in the neighborhood of.
Five to seven months, plus or minus a month during the six month delivery.
If I may just one quick follow up I think some of the confusion there has been going on for a few years has started when do you still providing.
Booking.
Ointment backlog on a quarterly basis.
Is there any chance that you can reinstated I think that would help.
More clarity.
But just wondering if you would change your mind.
No.
And you want to elaborate or should we just.
I think thats, a pretty clear answer is that not okay, yes, Sir thank you.
Thanks.
Our next question will come from Larry Solow CJS Securities. Please go ahead.
Yes, Hi, it's Pete Lucas for Larry you covered most of the stuff just a macro question appears to be visibility on plans to open 20, or so fabs by 2023, and while timing is hard to predict just wondered what's your confidence on this occurring and what what's your thoughts on the risk of them not opening in the cycle getting elongated further.
Either due to lower yields or other issues.
Hard to Ed Great question, it's hard to always predict how people are going to do in terms of yield improvement.
It certainly has taken longer for companies other than Samsung to improve their yields thus far.
The the feedback that we're getting from a number of suppliers and certainly the the comments that theyre, making publicly would suggest that they're going to ship much higher levels of OLED displays this year than they did and any prior year. So that's encouraging I think you know the the corona virus could push things to the.
Right a little bit.
And depending on how how severe on how long it last.
That could have an impact it's very difficult at this juncture to predict what that what that an explicit impact may be.
I think that's as much as I could say at this point.
Fair enough and if we were to assume that these fabs did open.
Do you think that that date the ones predicted so far would be enough to satisfy the demand for handset markets conversion to OLED.
On the couch that that we have and what we know about yields would say no.
But you still need additional additional fabs, if you start to do the math.
That everyone gets to Samsung like yields.
Then you could do a more explicit calculation, but if you do a mixture of yields. It gives you a very different result.
Okay.
Very helpful. Thanks, I'll jump back in the Kim.
Sure.
Our next question will come from Brian Lee with Goldman Sachs. Please go ahead.
Hey hasn't gone this is Alex on for Brian.
So going back to your prepared remarks on micro LNG has just wondering if you could provide a little more clarity on what the opportunity you see is I know you mentioned.
Our bid for few years away from cost being economic here, but I guess, what what are the main use cases from the device side and how large do you expect that opportunity yet.
So as it stands today I don't think a lot has changed since we first spoke about this a few years ago micro Levy has a a play in very small format displays so things like.
Hey, AR and VR.
Inserts, where theyre in close proximity to the to the Guy and then clearly on very large displays.
These walls are one example, but you would also imagine that micro led based Tvs.
Could be a viable technology as a as you go forward.
In the R&D phase there are there are two processes, where we have a meaningful play. The first is when you take the emitters offer the growth substrate and transfer them to a display substrate.
Oh, which is called laser induced forward transfer.
A lot of that work is being done with excimer laser similar or identical to the ones that are being used in the annealing process.
For very small displays like the ones that are used in a rnvr, it's likely those will use a neil backplane for power and seat management.
For the very large displays where the pixels are pretty far apart you can probably use a more traditional.
Backplane, but again were very early in the the development of these things.
Worse, we meaning the community not just coherent is still finding out what the capabilities are and what the limitations are.
But as we said.
This puts us in the front a plane and in these devices right now for for a heads up displays.
Or LTPS enabled displays looks to be more brought about it we're in the backplanes.
So if you have devices, where it's used in both it sort of doubles our play.
Is that helpful.
Yeah, It's super helpful. Appreciate that and I guess sure.
I guess kind of an unrelated.
Another question here, we've we've heard some things about new product rollouts, including maybe Samsung a five do you have any any color on that.
Oh, what have you heard in the market rumors the rumors or raging at around 85, there have been.
I think two or three false starts on a five over the last few years.
We currently don't habit in our in our plans.
So we would view that isn't as an upside opportunity and we're well positioned to be able to address any needs. They may have but until we know what the mix is going to be in the plant, whether it's going to be mobile or mobile in TV and how much is going to be allocated to each it's it's difficult to to judge.
The size of the opportunity, but we know have we have the capacity in place to address it regardless.
Okay got you appreciate the insight.
Sure.
Our next question will come from Mark Miller with the Benchmark company. Please go ahead.
Thank you for taking my question just.
The rest in compared to the first half what could be the upside drivers of second half such as more memory.
Equipment going into the Fabs.
Especially on our you serving the domestic fabs in China. Some of these fabs are coming up.
Fiveg will be another area might be a driver I'm just wondering what do you think will be the any.
Previous potentially being upside driver in second half derivatives.
Well, I'd say compared to compare to where we where when we started doing the plan, which would have been sort of those June timeframe of last year.
The single the single biggest change has been in a semi market.
The early projections were semi was going to be soft and probably have somewhat down year, we still expected to outperform the market I think we communicated that in either the prior call all of the one before that.
So this is a meaningful change because the increases in capex spending from two very big industry players is is meaningful.
What the what the explicit timing will be is obviously subject to some conversation as far as China goes.
To the extent that theyre relying on.
Metrology and inspection equipment provided by non Chinese players that is also an opportunity for ups.
I'd say that.
The the view that we get from our folks inside China is that there's even a greater sense of urgency.
To to become independent on the integrated circuit front than they were previously this still seems to be somewhat of a gap and capability.
And then of course this is a third or fourth time that I've I've mentioned in front of virus.
As a curve ball that we all have to deal with.
But thats if anything it is it's a delay in timing, it's not a delay in programs.
What about Fiveg picked up some revenues for circuit board applications and antennas do you see that accelerating because the the fiveg ramps really supposed to come on the second half a year.
So the answer is we are optimistic about fiveg opportunities.
When you have certainly been talking about them for up for a while.
It remains to be seen who the who the network or who the equipment suppliers are for for Fiveg.
The hostilities between us and certain Chinese.
Vendors will have to be reconciled in one way or another.
As to where that capacity is going to be put in place but.
The things that have been available early.
Have been encouraging for us we've we've won our.
Our fair share and probably a bit more of them.
And finally, it is a well known fiber laser competition in China. You mentioned diodes are you seeing increasing competition in any non fiber laser space in China.
And what would be area.
No the.
There has long been.
Local suppliers or things like glass based cotwo lasers.
And low how low power UBI lasers that really hasn't changed.
Thank you.
Susan.
Our next question will come from Nick Todaro with Longbow Research. Please go ahead.
Thanks, Hello, guys going back to the question of easily mix I'm sensing that mix relative to life cycle could be different here, maybe because the mix of customers are so much.
But I guess the question is what are the factors that could lead to higher mix of your of 11 hundreds of 1000 systems versus 1500, some given that assuming.
Funding is not an issue and 51 hundreds are so much superior in terms of throughput and ROI.
So again, Nick I think the two things that will come into it is customer competency.
If they have experience at the 1000 format.
Are they more likely to continue to deploy 1000, the answers I think yes.
And then the availability of equipment outside of the annealing tools from other manufacturers that are currently capped in terms of of capacity.
If you have to wait 18 months to get a piece of hardware, you say well I'm going to wait the 18 months and Miss my market window or am I going to go for a format that is that I can deploy.
Much more quickly and jump into the market. That's I think thats, what it really comes down to.
Okay and materials processing, a book to Bill again above one I think last quarter you talked about.
Having a large semi annual order driving a little bit better bookings can you talk about this quarter, if you've seen maybe a more diverse set of short term.
Okay, and bookings and materials processing or was that again on maybe a larger order that is more extended.
It was it was a mix of products.
I'd say the largest areas will probably general consumer products production.
And then components that are used in in fiber lasers, we'll probably that the two areas that had the most activity.
Within our materials processing bucket and neither of those.
Our terribly surprising.
Okay, and lastly from me you talked about a.
Last quarter potentially recovery and the services side from from a from this.
Place industry, maybe taken a quarter or two to turn around seems like it's happening much quicker than expected.
Can you talk about some of the factors I think Samsung talked about having also lower utilization in the March quarter. So was just inventories have gotten so low and they had to restart replenished dose or what are some of the the drivers there.
Yes, Hey, Nick it's Kevin This is another case, where we've got one good data point in a row.
So I wouldn't extend that out beyond current quarter, we did improve services revenues by $3 million at quarter end, primarily that was some of our and customers integrators refreshing their stock.
As we've talked throughout the late 19.
They were constantly lowering their inventory levels to manage cash and we finally see that take a bit of an uptick but again, it's a single data point.
Let's not extrapolate off that just yet.
Got it thanks, good luck guys.
Thank you.
Our next question will come from Andrew Degasperi with bearing Burke. Please go ahead.
Yeah. Thanks, I just wanted to ask a question regarding your comments on the competition that three to six kilowatt from a Chinese.
Major makers can you maybe elaborate on that like do you think they've achieved certain degree of reliability at this stage that a lot of.
Integrators will now potentially with place or potentially use those Chinese major maintenance for putting a neat.
So what we have what we have heard is that they're becoming more competitive in the three to six kilowatt range than they were at any time in the in the past year or so.
[music].
This is I don't think this is a pricing discussion because we know the pricing is aggressive.
This probably is on a or reliability and performance basis that those comments are being made.
And look you know they have done this the the Chinese manufacturers have done. This previously at lower power levels, it's not unreasonable to assume that they would master higher power levels on a go forward basis.
So that's that's where the common as about it appears that theyre mastering higher power levels and they're gaining share.
In that range in the Chinese market.
Got it and then maybe secondly can you maybe update us on defense side anything thats trending on that.
You another.
The number of opportunities is becoming.
Is becoming larger than than we had anticipated now a lot of these are early stage projects rather than things that are ready for deployment.
But the programs that we've been involved in have done well Vicki you know the primes keep checking all the boxes they need to check to take these things forward and some of them are now going into the field deployment.
That's generally good news and you know our view that this becomes a a meaningful piece of business over the next few years I don't think theres anything that would change our position there.
Great. Thank you.
Our next question is a follow up from many Hussain with SNG. Please go ahead.
Yes, thanks for taking my follow up.
To follow up question.
Kevin would you think about the sick and have a calendar year and how should they think it but leverage and operating margin.
And I ask that as a way too.
Figure out how the mix changes from the first after the second half.
Yes, Mehdi so.
As we've talked about in the past as we've stated publicly right for our yearly are aligned be machines are accretive.
So as we continue to take orders and then deliver against orders future that will have very good leverage to the PNM.
Im not going to get into specific timing budget as we've talked about in the past we took order in the June quarter, We took orders in the September quarter, no more orders in the December quarter.
And roughly at our minimum six month lead time.
You can map out or at least model some revenue scenarios.
But given the accretive nature of these machines they will have leverage on the you know for sure.
Great and six as follow up.
For you and John is there any update on the CEO transition.
The process is ongoing and when they're ready to make an announcement one will be made.
What are we in the process.
Mehdi this is a confidential search.
We're not going to give periodic updates as to where we are.
Thank you.
Thanks, Nick.
Our next question as a follow up from Mark Miller with the Benchmark company. Please go ahead.
Just for modeling you indicated the opex will be up next quarter because of the extra week will the opex it won't scale as much up in SGN a because.
So in as much or will they both have rise by roughly the proximately percentage of the extra week.
Yeah, it's the latter.
Mark It will it will scale up from 13 to 14 weeks that impacts.
The functions across.
All functions, if you will so it will scale in quarter.
And then the following quarters back to a 13 week quarter. So we should see some efficiencies there.
Okay with both SGN, a R&D will scale approximately the same.
Well, they're different absolute amounts, but but yes, they will scale because of that additionally.
Thank you.
This will conclude today's question and answer session I would now like to turn the conference back over to Mr., John Ambroseo for any closing remarks.
Thanks, Sean I'd like to thank everybody for participating and.
Well look forward to doing this again in a few months.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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