Coherent Corp.

Good morning and welcome to Coherent's second quarter fiscal year 2020 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask your question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference Over to introduce Brett DiMarco, Executive Vice President and General Counsel. Please go ahead.

Thank you, Grant, and good afternoon, everyone. Welcome to today's conference call to discuss coherence results from its second fiscal quarter ended April 4th, 2020. All of us here at Coherent hope that you and your family are staying healthy and safe. On the call with me are Andy Mattis, our President and Chief Executive Officer, and Kevin Palatnik, our Executive Vice President and Chief Financial Officer. I would like to remind everyone that some information provided during this call may include forward-looking statements, including without limitation statements about coherent future events, anticipated financial results, business trends, global economic trends, and the expected timing and benefits, if any, of such trends. These forward-looking statements may contain such words as project, outlook, future, expect, will, anticipate, believes, intends, or referred to as guidance. These forward-looking statements reflect beliefs, estimates, and predictions as of today, May 27, 2020, 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 achievement to materially differ from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, risks associated with the recovery of global and regional economies from the negative effects of COVID-19 and related private and public sector measures, the impact of COVID-19 on our business, global demand, acceptance and adoption of our products, the 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 applications, our ability to generate sufficient cash to fund capital spending or debt repayment, our successful implementation of our customer design win, our and our customers' exposure to risks associated with worldwide economic conditions, our customers' ability to cancel long-term purchase orders, the ability of our customers to forecast their own end markets, Our ability to accurately forecast future periods Continue timely availability of products and materials from our suppliers Our ability to timely ship our products and our customers' ability to accept such shipments Our ability to have our customers qualify our products Worldwide government economic policies, including trade relations between the United States and China Our ability to integrate our acquisitions successfully Manage our expanded operations and achieve anticipated synergies For a detailed description of risks and uncertainties which could impact these forward-looking statements, you should review coherent periodic SEC filings, including its most recent Form 10-K, Form 10-Q, and Forms 8-K, including the risks identified in today's financial press release. I will now turn the call over to Andy Mattis, our President and Chief Executive Officer.

Thank you, Brett, and thank you to everyone for welcoming me to Coherent. I am still measuring my time here in weeks, and this marks my eighth week. Joining a company as a CEO during a time when the world is fighting a pandemic, and most of us are under stay-in-place orders is a truly unique experience and uncharted territory. Getting my arms around our company in a virtual world has made for long days, but it is amazingly productive and effective. I've spoken with most of our top 20 customers, visited many of our sites through virtual tours, connected with coherent top 100 managers, and have helped multiple virtual coffee talks with employees of all levels around the globe. I'm very energized by the customer feedback I received about the quality of our service, the performance of our product, and the high degree of collaboration that our customers value when they design process solutions with Coherent. I must admit I am extremely impressed with the talent The dedication and most of all the level of engagement that our colleagues around the world display in the new normal of working remotely. As a leadership team, we focus our energy during the last week around the health of our employees, the financial health of our company, and the health of our partnership with our customers and suppliers. We established a central nerve center, the COVID Steering Committee, or CSC, under the leadership of our newly appointed COO, Mark Sobey. All executives of the company video meet multiple times a week to stay on top of the ever-changing situation and safety protocols around the globe, to synchronize our actions and responses, to enable a stable supply chain and logistics, discussed inventories of critical parts and to meet desired customer delivery dates. For most of April and May, we have maintained manufacturing at approximately 85% to 90% of capacity while adhering to all social distancing rules. The CSC is now shifting its focus towards bringing our employees back to work safely, how to incorporate remote working into the new normal of our company, and how to accelerate best practice sharing around collaboration, flexibility, inclusion and accountability. Before I talk more about the road ahead of us, let me hand the mic over to Kevin to discuss our Q2 results and guidance.

Thanks, Andy. Today I'll first summarize fiscal second quarter 2020 financial results, then move to the outlook for fiscal Q3. I'll discuss primarily non-GAAP financial results and ask that you refer to today's press release for a deep description of our GAAP results as well as a reconciliation between GAAP and non-GAAP financial results. The non-GAAP adjustments relate to stock-based compensation expense, amortization of intangible assets, goodwill and other long-lived asset impairments, restructuring costs, the related tax adjustments, and tax adjustments for stock-based compensation. The full text of 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 second quarter 2020 financial results for the company's key operating metrics were total revenue of $293.1 million, non-GAAP gross margin of 36.2%, non-GAAP operating margin of 8%, adjusted EBITDA of 11.9%, and Nongap EPS of 61 cents. Total revenue for the fiscal second quarter was $293.1 million and came in at the low end of our previously guided range. Sales were negatively affected by the COVID-19 pandemic, primarily in Asia during Q2 and began impacting Europe and North America later in the quarter. We estimate the impact of revenues was approximately between 30 and $35 million during the quarter. Our revenue mix by market for Q2 was microelectronics, 42%, materials processing, 29%, OEM components and instrumentation, 22%, and scientific, with 7%. Geographically, Asia accounted for 48% of revenues in the fiscal second quarter, the U.S., 25%, Europe, 22%, and rest of the world, 5%. Asia includes two territories, and Europe includes one territory with revenues greater than 10% of sales. We had one customer in South Korea related to large flat panel display manufacturing that contributed more than 10% of our fiscal second quarter revenues. Revenue from other product and service for the fiscal second quarter was $99 million, or approximately 34% of sales. Other product revenue consists of spare parts, related accessories, and other consumable products, and was approximately 29% of sales. Revenue from services and service agreements was approximately 5% of sales. Total services revenue decreased sequentially by approximately $18 million, primarily resulting from the inability to service our install base due to shutdowns and travel restrictions in coronavirus-impacted areas. Fiscal second quarter non-GAAP gross profit, excluding stock-based compensation costs, intangibles amortization and restructuring, was approximately $106 million. Non-GAAP gross margin was 36.2% Q2 and came in slightly below the midpoint of our previously guided range due primarily to higher manufacturing costs related to lower volumes. Non-GAAP operating expenses decreased sequentially by approximately $9 million from a myriad of items. The significant items were decreases in variable spending, travel related spending and a benefit to expense related to our deferred compensation plan. This resulted in a non-GAAP operating margin of 8% for the fiscal second quarter and came in at the high end of our previously guided range. Adjusted EBITDA was 11.9% in fiscal Q2. Turning to the balance sheet, non-restricted cash, cash equivalents and short-term investments were approximately $369 million at the end of fiscal Q2, an increase of approximately $19 million compared to the end of last quarter. Given our focus on cash preservation during this period of relative uncertainty in the global economy, We did not repurchase any shares in Q2 pursuant to our current buyback authorization. We also did not make any voluntary payments against our term loan, and at the end of fiscal Q2, the outstanding amount of the term loan in USD was approximately $390 million. Accounts receivable VSO was 62 days compared to 68 days in the prior quarter. The net inventory balance at the end of fiscal second quarter was approximately $457 million. An increase of 7 million, primarily due to an increase in finished goods as a result of closures in the shipping and receiving departments of some of our customers due to COVID-19. Now I'll turn to our outlook for our third fiscal quarter of 2020. Let me say at the outset that there is no clarity with what will happen with global demand in the coming weeks and months. This uncertainty makes forecasting our business challenging in the near term. However, our strong balance sheet and cash position provides a significant flexibility in responding to continued coronavirus related disruptions going forward. Having said that, revenue for fiscal Q3 is expected to be in the range of $265 to $305 million. We expect fiscal Q3 non-GAAP gross margin to be in the range of 30 to 34%. Non-GAAP gross margin excludes intangibles amortization of approximately $2.2 million. and stock compensation costs estimated at $1.7 million. Non-GAAP operating margin for fiscal Q3 is expected to be in the range of 1 to 5%. This excludes intangibles amortization estimated at a total of $2.9 million and stock compensation expense of a total of approximately $16.1 million. Other income and expense is estimated to be an expense in the range of $5 to $6 million. We do not include transaction gains and losses related to future changes in foreign exchange rates in our OIE outlook. We expect our fiscal Q3 non-GAAP tax rate to be in the range of 17% to 18%. And finally, we're assuming weighted average outstanding shares of approximately $24.2 million for the fiscal third quarter. I'll now turn the call back to Andy.

Thank you, Kevin. In addition to the financial data, let me give you a little color on the main market we serve. Starting with microelectronics, There are two distinct dynamics at play here. On the one hand, there's a weakness in smartphones driven by slowing of consumer spending, which is providing headwinds in displays, impacting our near-term service revenues as fab utilization slows. And on the other hand, there's strength in the semiconductor business due to telecom, cloud, and data center investments, and a shift in businesses towards laptops. Specific to displays, we are encouraged by recent announcements from multiple laptop manufacturers that they are now including OLED displays as options for their high-end models. We believe this is a trend that is likely to continue, especially as the yields of our Chinese customers improve and they have the ability to move pricing more in line with LCD over time. We also remain optimistic around the pending upgrade cycle to 5G-enabled mobile devices as the linkage between thin, flexible OLED screens and 5G capabilities seems high, driven by the need for larger batteries to occupy more of the device volume as a requirement for powering the shorter range, higher frequency antenna. Moving on to materials processing, even prior to the recent COVID pandemic, there was a widely reported slowdown in the German automotive and machine tool industry. And overall, the market is seeing further weakness related to the COVID impact on consumer demand. There have been mixed reports about an early recovery in China, we remain cautious to see how that plays out. In general, coherent has less material processing exposure to China than the U.S. and European markets, and our core strength is in more specialized segments of the industry in the non-metal cutting and welding applications, where our strength in CO2 and diode lasers remains a differentiator. Overall, our instrumentation business remains robust as we are diversified over a range of applications across life science research, clinical diagnostics, and therapeutic procedures, both elective and insurance-based. We've been excited by the use of many of our life science customers' high-end instruments in the development of vaccines and immunological advances in the fight against COVID as well as clinical applications. We've seen demand at that end of the spectrum for certain customers go through a two-fold increase. Conversely, the same customers sell the same instruments to research labs across the world for non-COVID-related studies, and many of those labs and universities have been closed. For those customers, new system demand has sloped. We are seeing a nice rebound from our therapeutic medical customers now that the COVID-related restrictions to non-urgent medical procedures are being eased across the world. The scientific market segment basically took a timeout as universities and labs have been largely closed. We expect this segment to recover as the scientific institutions reopen and Tent of Demand from unspent research grants begin to flow. Defense has been an unaffected area and remains an area of investment for Cajerent. We are well positioned across multiple opportunities from laser amplifiers for directed energy applications to speciality lightweight aerospace optics. We have secured key design wins with well-known prime contractors We see this as an area of strength going forward for the company. Our Q2 book-to-bill ratio was significantly above 1, and our backlog exiting the quarter is up from previous quarters. Nobody knows how long COVID-19 will impact the global economy, but between our backlog and our balance sheet, we see coherence to be in a stable position for quarters to come. Having said that, we are concentrating our near-term actions on cash generation. While we have not made any final decisions, we are currently analyzing a variety of key steps and going forward we will initiate our good-to-grace transformation which will encompass some actions that are already in flight as well as incorporate new ones including applying a strategy to our business Thank you for watching. We will focus on areas where our technological advantage will get rewarded by the market. For example, microelectronics, bio instrumentation, and medical device manufacturing. Also, we will double down on the OLED market and use our pole position to enable advancement of technologies like micro LED displays, knowing that these are still in the future, but will be based on many laser processes. And finally, We will be simplifying our company from an organizational setup to the number of locations to the way we run and report our financials. As you can see, we have quite some summer homework ahead of us. We will have more to share around our good to great transformation and on our next call in a few months, and especially when we announced our Q4 results and moved into the new fiscal year in October. and with that, I turn the call back to the operator for our Q&A session.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question today will come from Jim Ricciuti with Needham and Company. Please go ahead.

Hi, good afternoon. Question I had is just on the reference to the book to bill being significantly above one. I'm wondering if you can tell us if the bookings were up sequentially. or if you're just referring to generally strong bookings, strong book to bill versus the obviously the lower level of revenues that you reported that was expected.

Yeah. Hi, Jim. It's Kevin. So, you know, we stopped talking at any type of detail on bookings a few years back. So, when we talk about book to bill, it is within the quarter, current view Q2. Billings to Bookings in Quarter. Fair enough.

And Andy, by the way, welcome. Didn't want to give you a welcome to Coherent. Can you talk at all about whether you saw Bookings activity in the OLED space in China? There's been a lot of speculation, as you know, about new capacity being added there, but I wonder if you could talk to the cone of business in the OLED market in China.

Jim and Kevin again. So again, I won't provide a lot of detail here because we just don't isolate it to, you know, FPD or microelectronics from a booking standpoint. But we did take orders in quarter for ELA tools as we did last quarter and the prior two quarters.

That's helpful. And then, Kevin, if I may, If I heard you correctly, it sounded like you saw a bigger impact from COVID in the quarter, if I got the numbers correctly. I think you were talking going in about 20 to 25 million. Did you say it was around 30 to 35 million?

That's correct, yeah.

Was that a bigger impact that you saw in China, or was that just the economy? Early Impact, elsewhere, Europe and the Americas that contributed to the bigger hit there.

It was larger than we expected, Jim. And I'd say what we failed to recognize was that in some of our scientific and OEM instrumentation areas, universities and research labs really completely closed down. You know, the proximity of people working in the labs and or universities either shipping and receiving wasn't available or the lab people themselves couldn't receive product because they just weren't there. So I think we did underestimate that a bit.

Got it. And if I may, last question, I'll jump back in the queue. As you begin to de-emphasize some product areas, including the kilowatt fiber laser segment, can you give us a feel? I know that business has not necessarily been That meaningful, but can you give us a sense as to what the revenue impact of that would be?

You know, Jim, I don't want to get into that level of detail in the call here. We're still analyzing different pieces of the business to figure out where we want to invest going forward. I think once we have that data, then we can be a little bit more forthcoming. But as we've discussed in the past, The commodity fiber for our business was very small in terms of its contribution. Okay. Thanks very much. I'll jump back in the queue.

Our next question will come from Brian Lee with Goldman Sachs. Please go ahead.

Hey, guys. Thanks for taking the questions. And yeah, welcome, Andy. Looking forward to working together. I guess the first question I had was just around the trajectory of revenue recognition. I appreciate the comment, Kevin, that you had another ELA order in the quarter. So that makes three in a row where you're having some ELA orders. And you've been saying for a while that the lead times are about six months. So I guess two questions here. One, have lead times changed at all from that six-month range you've provided in the past? And then two, assuming that they haven't, it would seem ELA tools from the orders you saw a couple quarters ago when the cycle kind of started would start to see revenue in Q3 and definitely by Q4. But then the margin guidance seems to be a bit light for having some ELA high margin tools in there. So I'm just wondering, has anything changed on the sort of lead time shipment trajectory and rev rec timing that we should be aware of here?

Yeah, thanks, Brian. Kevin again. So, you know, we have taken orders over the last four quarters, actually. And we did say that from a lead time perspective, it's a minimum of six months. So as we look into the second half of the year, we have given guidance for our next quarter, our June quarter, and it is flat to slightly down. But with COVID and such, you know, just think of COVID as delaying, you know, things for a quarter or so. But we should be right back on that trajectory going forward.

Okay, no, that's helpful. And would you say it's fairly customer-centric with respect to those delays or does it cross the board? Because the reason I ask being you obviously have some customers in your China mix which are directly situated in Wuhan where this COVID crisis first materialized and then you had and other parts of China where maybe the impact was a little more peripheral or indirect. So are you seeing the level of delays being pretty broad across the board or is it more concentrated in the handful of manufacturers that have the direct impact?

Yeah, thanks, Brian. You're right. One of our major customers or one of our key customers, Seasat, China Star, is in Wuhan. And as you know, Wuhan shut down for two to three months. So I'd say it's primarily geography-based, meaning Wuhan. There are a couple of customers there, Seesaw being the larger of a couple of customers. But, you know, you'd expect a delay given the shutdown by about a quarter.

Okay. That's great. And then maybe the last one, and I'll pass it on. You know, can you kind of comment on utilization rates you're seeing across your customer base? Obviously, we had a downtick through different parts of calendar Q1 in China because of the COVID crisis. And then, you know, you've mentioned in other parts of the world, you're starting to see the impact come in on the back of China. But where are you kind of seeing utilization rates? How How quickly are they recovering, particularly in China? And then how should we think about that translating to service revenues here in Q3 and moving through the year? It seems like, you know, we haven't seen a sub $100 million service revenue quarter in a while. So is that kind of the low point? And just wondering how quick that metric could recover as you move through the rest of the year.

Yeah. So Brian, I can't get into specific customers and their yields. I mean, that's proprietary information for them. I certainly wouldn't want to talk about that on the call. Suffice to say that just anecdotally, it seems like and feels like yields are improving. One of a large Chinese OLED manufacturer has come out and said that they expect to shift 70 million displays this year compared to what was probably 5 to 10 million last year. And I believe that's on the back of improving yields. In terms of services revenue, as I mentioned, I prepared the marks. We had a few service engineers that just couldn't go into China and serve as equipment. And that impacted us by $18, $19 million, or thereabouts. And given that China's reopened, or for the most part reopened, I would expect some, you know, rebound in Q3. As we look into Korea, Korea was impacted as well. So we probably won't see a full snapback, but we'll see improvement in Q3. Okay.

Thanks, guys. I'll pass it on. Appreciate it. Thank you.

Our next question will come from Tom O'Malley with Barclays. Please go ahead.

Okay, guys. Thanks for taking my question, and welcome, Andy.

Good to have you here.

My first question is related to the impairment charge you guys took in the quarter. You said it was related to the industrial lasers and systems business. Could you be a little more specific? It was obviously a larger charge, I think $400 million plus, to where that was related to in that business?

Sure, Tom. This is Kevin again. You know, with regards to impairment, there's a multi-step process to go through this. I won't drag you through that mud. Suffice to say that when the carrying value of a certain business on your books is comparing with it the fair value of that business. When fair value is lower, you have to write down or take the impairment. You know, specific to the businesses, it impacted the ILS segment. And the ILS segment is primarily the industrial side of lasers. So it includes a tools business, a fiber business, diode and fiber components. It's across the board. But again, the key there is, as we evaluated the business, fair value was less than book value. And that's why you take the impairment.

And then I guess kind of want to follow up to that question. And a question related to Andy is just you focus really on, you know, key areas for cash generation. And you made that point in the prepared remarks. And you made the comment that you would only really participate in the market segment if you could achieve a one or two position. You commented that the fiber laser business, you're going to walk away from some non-strategic portions of that business. But can you just talk about the general laser business? And do you think that you can have a one or two position in that longer term? And if not, what do you think, you know, alternatives may be if that's not an area you think you can compete?

Look, let me just start out. Kevin has more real life examples here. But We think we have some very unique positions. And when I talk to customers, let me just take the medical instrumentation side, for example. Phenomenal market share. We're clearly the market leader. A lot of opportunity, great reputation. This is a perfect example of the type of market that we want to go after. And there are plenty of those opportunities out there. And the task at hand for us is to make sure we focus on the areas where our technological advantage, our capabilities, our ability to customize into very special manufacturing or testing processes for our customers comes to full play and where we can grow at a very nice margin profile.

Thanks, just one more and I'll pass it along. If you look at the outcourt that you guys just got into, you know, revenue isn't moving that much quarter over quarter, it's only down slightly. But to hit on the gross margins, again, you're seeing a step down. You guys mentioned that manufacturing is going to be about, you know, 85 to 90% capacity in the quarter. Is the gross margin step down just a function of mix? Or is there a moving part within one of the businesses that's dragging that overall number down?

Thanks. Yeah, hey Tom, Kevin again. There's a couple of contributing factors. You know, certainly with revenue coming down ever so slightly, volumes take a hit and therefore manufacturing costs go up. In terms of just COVID and call it the business continuity plans that we have to put in place, the distancing, the PPE, et cetera, et cetera, that costs money and that's worth 50 to 60 bps. Beyond that, again, as volumes come down, we have inventory on hand. and we may have to take some provisions against that inventory because of lower volumes. So, you know, all of those contribute to the margin impact sequentially. Thanks a lot, guys. Thank you.

Our next question will come from Maddy Hosseini with SIG. Please go ahead.

Hi, this is Laurie. I'm filling in for Maddy. and welcome Andy on board. So the first question is what do you think about the opportunities in China and how does that impact the blended growth margin?

If you take China and you go by our segment needless to say OLED and everything around it Very, very well positioned. If you take the other end of the spectrum, our materials processing business in China is relatively small. I was highlighting that in my prepared remarks. We're stronger in Europe or in the U.S. when it comes to these type of businesses. Scientific markets also strong in China, but the Chinese universities were closed just as the Western universities were. So that market literally didn't happen for the last month. And you'll see that bleed into this quarter as universities are just starting to reopen. So most of our China opportunity sits in the microelectronic market and the semiconductor market.

Great. and what do you see the impact on the margin?

It goes back to what we said earlier. We'd like to play in market where our position gets rewarded and in those segments where we have a strong representation, we also enjoy the margin profile.

Great. And then on the OLED opportunity that you mentioned, you guys are doubling down on OLED. and what do you see the future for in China versus Korea? And can you also comment on the micro LED?

Yeah. Hi, Lori. It's Kevin. You know, rather than geography, let's talk about the application. And in Andy's prepared remarks, he did talk about micro LED. You may be familiar that's a very process intensive application. because you have to pick and place the LEDs to a display substrate. But you use lasers in doing so. We've already sold some development equipment in that space. And, you know, as we enjoy our position with ELA tools and OLED, we'd like to enjoy the same position in tools provided to micro LED.

Gotcha. and the last one for me is the margin. What do you see the margin going forward in the second half?

The best way I can answer that, Laurie, is if you go back to years 2016, 17 and 18 with phase one of the OLED ramp, you saw the positive upward pressure primarily based on that OLED ramp. We've always said that The ELA Tools microelectronics in general is accretive to overall corporate margins. So as we ship more of those machines, that will put a positive upward pressure on margins.

Got it. Great. Thank you.

Thank you. Our next question will come from Larry Solo with CJS Securities. Please go ahead.

Great, thank you. Good afternoon. Welcome, Andy, as well. Most of my questions have been answered. Maybe just a couple of high-level ones. I'll give you one, Andy. I know, I think, when you joined Coherent, just looking at your path, I think one of your focuses has been sort of transforming or sort of repositioning companies for growth. Do you view Coherent as that type of a project or is it more of just a fine tuning of focus?

Well, look, if you take a look at our transformation work, that's what I was trying to express when I called it a good to great transformation. Coherent is a really good company. Now, having said that... like any company, there are areas in our business where we can do better, where we can double down on operational excellence and execution and while COVID is going to put a question mark here on there on the top line and how quickly consumers react everything that's on the cost side is completely under our control and it's something we can address Right here and right now, and we'll be doing that all through the summer months, and we'll update you as soon as we can squawk about it. Secondly, midterm, we're doing everything to position the company onto a profitable growth trajectory. I wholeheartedly believe that there is no such thing as a great shrinking company, so we're going to make sure that we will be back towards Thank you. Great.

How about just a couple of also, you know, longer-term questions. I'm not so sure we have great visibility or any change with COVID impacting. Just in terms of the, you know, planned trajectory of OLED openings over the next few years, Have you seen any change, whether it be subtle or maybe more material? A lot of this has been on the supply side, but if there's a less demand, if we go into a slower, even a professional environment, and there's less demand for new phones and OLED phones, could that potentially shift out the build-out on the supply side?

Hey Larry, it's Kevin. You know, when it comes to OLED, there's no change in story there. We continue to see the OLED ramp in front of us. In fact, recently we've gotten data that says 18 different laptops at the high end, albeit, have OLED screens. So we're seeing OLED progress, you know, from mobile into laptops. We expect tablets will be next. So in terms of our wave theory, you know, wave one being mobile computing, you know, and handsets, wave two and three, if you will, you know, tablets, laptops, automotive, we see that path, no change to it at all. And we're very encouraged by as many laptop manufacturers that have OLED currently.

Right.

Okay.

And then just another, you know, bigger picture question on the, you know, obviously, materials processing, a bigger, bigger piece of, second biggest piece of business by itself, although I realize it's sort of many sub markets there, but, and like you mentioned, you prepare a market sort of, hasn't been doing great over the last several quarters with your global economy for tutoring. It's obviously, you know, post COVID-19, I assume industrial production will be at a lower level than where we were. You know, and if anybody's asking where that goes, how low it goes and how much it rebounds. But could you guys still improve performance even in a lackluster to down industrial production environment in the next 12 to 18 months? This goes back to our good to great transformations.

We do see room for improvement, especially on the ILS side of the house when it comes to our margin, when it comes to our factory loading. And the more we apply and invent once and reuse often type of philosophy for our systems and our tools in the way that we approach the market and our customers, that will automatically have a positive impact on the margin profile that we will be generating.

Okay. Fair enough. Okay. All right. Good, Don. I realize, you know, you'll give us more color to take time again. I appreciate your thoughts, and again, welcome people here, and thanks again. Thanks, Larry. Thanks, Larry.

Our next question will come from Mark Miller with the Benchmark Company. Please go ahead.

Let me extend my welcome also. Just had a question about supply chain. Were you impacted by any supply chain issues because of the virus?

Hey Mark, it's Kevin. From the supply chain, very, very minimal impact. We work with all of our top 10 suppliers around the world, make sure that either we bought ahead or they had enough supply on hand to certainly supply us through Q2, Q3, and beyond. So we were in good shape there.

You mentioned 5G as becoming an opportunity for you. I assume that's because of the higher density silicon will require smaller microvias and a possible transition, new type of laser. Is that starting to pick up steam or is that 5G playing in another way?

Sorry, Mark, Kevin again. You know, not only in the microvias, right, to put more content on the boards, but it also has to do with the antenna itself. The antenna is a little bit more bulky and requires more power. And so the systems need more battery, if you will. And because OLED is so much more thinner than LCD, You can pack more battery in because of its thinness. So there's a couple of things contributing to 5G in terms of benefits to the company. In terms of what we're seeing, we are seeing a little bit of a pickup, but it's still more in front of us than behind us.

I might have missed this. Did you say the cash flow from operations was $19 million or that was just the increasing cash? I was just wondering what the cash flow from operations was.

Yeah, the increase in cash was the 19, cash from ops was 47 million.

47 million for cash ops. Okay, thank you.

Thank you, Mark.

Again, if you have a question, it is star then one, star then one to ask a question. Our next question will come from Nick Todrow with Long Grove Research. Please go ahead.

Hey guys, good afternoon. Thanks for letting me ask questions. Regarding the guide, Kevin, can you bridge the guide sequentially? How much of a COVID impact are you making in your assumptions? And is it fair to assume that the biggest hit sequentially potentially will come from the scientific and government programs due to university exposure and materials processing?

Yeah, Nick, so From a revenue standpoint, you know, again, a small decrease quarter on quarter. And yes, there is some expectation that labs will open up, universities will open up. The question there is timing, right? So it will happen in the June quarter. You know, some are reluctant to open up to date. So that impacts revenue. On the gross margin side, certainly with lesser volumes, that drives unit costs up. But in terms of COVID and its impact, I mentioned earlier that when you look at safe distancing, physical distancing of people, you know, split shifts, multiple shifts, all the things necessary to protect our employees, that's costing us between 50 and 60 bits in margin.

Okay. And from a top line perspective, is the COVID impact similar in size relative to the March quarter, roughly about 30 million that you're banking in?

I would suspect that it's probably in the 30-35 range or slightly less.

Okay, okay, got it. Switching gears to SPD, so in the last cycle, you had one large player, and if you look at the trajectory of shipments, it was a really smooth and linear pickup in orders and shipments. So now that this cycle is reflecting multiple players, potentially up to eight or nine, can you share your view now that you have several orders and a decent backlog under your belt? How should we think about linearity of line being deliveries over the next 12 to 14, 24 months? Should the investor expect a similar trajectory as the last cycle, or should it be a little bit more lumpy?

Yeah, Nick, Kevin, again, you know, in terms of the number one customer back in the 16, 17, 18 timeframe, not only did they place really large orders on us, but they were multi year orders. So we could work with that customer and really plan out the shipments over time. As you mentioned, you know, there's many more customers in the phase two, obviously China related, we do our best to help them plan. to receive equipment. But I don't expect the same ramp that we saw in 1670 and 18. I can't go into too much further detail than that. We've never shared that before. But suffice to say, I don't think it'll be as dramatic as it was in years past.

Okay, got it. And then in the materials processing side, you said there's different reports coming up regarding China recovery. I think March and April were relatively strong, but are you saying that you're seeing potentially May orders are kind of stabilizing or the recovery momentum slowing down?

What are the signs that give you a pause about the recovery in China in materials processing? Yeah, Nick, Kevin, again, you know, frankly, we're a bit more cautious than some of our peers when it comes to China. There were some indicators here and there, that things have stabilized a bit. But then as you may have seen, there were some flare ups in various provinces related to COVID. So we are much more cautious than some of our peers related to China.

Okay, and last question for me. I think a couple of quarters ago you announced a new tier one automotive design went and I believe was related to EV battery welding. Can you give us any update if you've seen orders potentially start increasing from that customers and can you comment overall on the environment for EV in both Germany and China and how you see that outlook over the next six to 12 months?

Sandy, when you look at the welding of special materials, that's where our technology, especially our arm laser, has a very unique advantage in the market. We can do that with little to no spatter, which means to say around the whole electro vehicle market is a very important element. So we're seeing a lot of interest and we're seeing many proof of concepts out there with customers as we speak and we would expect that to continue to grow as time progresses.

Okay, got it. Thanks, guys. Good luck.

Thanks, Nick. Our next question will come from Joe with Edgewater Research. Please go ahead.

Hi, thank you. Andy, you just partially answered this question here, but I wanted to ask on the exit from kilowatt fiber, does that strictly include the highlight for cutting? Does it also include any welding applications? It sounds like it doesn't include the highlight arm. And then also within that, does the exit of that market include any Upstream components that you sell into other parts of the kilowatt scale supply chain, such as the diodes and the new fern, etc.

No, let's start. You take a question from the back. So, no, diodes and new fern and all of that good stuff is definitely a key element of our portfolio and will continue to do so. And we also got to be looking at ways to enhance that business. When it comes to welding, as I just said, if you think about welding of material other than metal, that's where our unique advantage lies, whether it's in aluminum, special aluminum, copper, you name it. And we'll be looking for those type of applications. And that also fits to our strategy that we want to play where our technological advantage is going to get rewarded. and we're with if you exclude the speciality market like for instance since or so we're basically not participating in the run-of-the-mill cutting metal market that's truly just the race to the bottom.

Okay and then maybe on goodwill Kevin so so was it more than ROFIN that was written off. Could you give us any more details on what are the pieces, parts within that? I know you did a couple of smaller deals since you're open. I think there was a 3D printing deal and maybe something else.

Yeah, Joe, we may want to take this offline because it's pretty detailed. But, you know, there's the goodwill impairment and then there's the intangibles and some other assets, real property, machinery, equipment, leases, right of use assets, etc., You know, from a goodwill standpoint, the majority of that was related to legacy ROFIN. But then beyond that, some of the assets were broader than that across the full ILS segment.

Okay, great. And then finally, apologies if I missed this, but any help in modeling SG&A given the moving pieces in the first and second quarters will be great, especially as far out as you're willing to go, Kevin.

Yeah, I think you'll see relatively flat from Q2 numbers going forward.

So, no resumption in travel or other variable spend or some resumption there and then offset by other cuts?

I think that's a good way to look at it, yes.

Okay, great. Thanks, guys.

Thank you, Joe.

Our last questions today will come from Jim Ricciuti with Needham & Co.

Please go ahead.

Jim, your line may be muted.

Yes, thank you. Just a follow-up on the medical business. You indicated you're still seeing strength, if I heard you correctly, but we're also hearing, and I'm sure you guys are as well, just with COVID, there's been... a lot of delays and push outs of things like elective surgery and I'm just wondering as you hear about that even in dental applications are you seeing that reflected at all yet in any of your medical related bookings?

So first of all it's amazing what was all considered elective The one thing that absolutely floored me is that kidney stone treatments were considered elective. If you'd ever had to go to one of those, you would beg to differ on that assessment. So what we've seen is really a tale of two cities here. Anything on the research side, anything that's in the flow cytometry space that's even remotely affiliated with the search for COVID and vaccines and anything you can do, huge demand. And we had some customers that kind of called that they literally told us every day counts and make sure you can get systems to us, etc., etc., The flip side, like you said, for example, dental, while we talk with the customers and everybody sees a bright future on that one, needless to say, nobody was putting in orders in the last week. As short of emergency procedures, all the dental offices in the country were closed. So we see this cloud. Thank you. That's it for me. This will conclude our question and answer session.

I'd like to turn the conference back over to Andy Matos for any closing remarks.

Well, thank you all for being with us today. We appreciate your questions and your interest in our company. And we're looking forward to talking to you at the end of the next quarter. Thanks again and stay safe.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.