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spk04: Good afternoon and welcome to Coherent's third quarter fiscal year 2020 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone 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 DeMarco, Executive Vice President and General Counsel. Please go ahead.
spk06: Thank you, Danielle, and good afternoon, everyone. Welcome to today's conference call to discuss coherence results from its third fiscal quarter into July 4, 2020. All of us here at Coherent hope that you and your family are staying healthy and safe during these challenging times. 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 coherence 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, expects, will, anticipates, believes, intends, or referred to as guidance. These forward-looking statements reflect beliefs, estimates, and predictions as of today, and coherent expressly assumes no obligation to update any such forward-looking statements. These forward-looking statements are only predictions and are subject to substantial risks. 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, global demand, acceptance and adoption of our products, including but not limited to, adoption of OLED displays, the demand for and use of our products in commercial applications, continued timely availability of products and materials from our suppliers, our ability to timely ship our products, and our customers' ability to accept such shipments. worldwide government economic policies, including trade relations between the United States and China, and other risks identified in the company's SEC filings. For a detailed description of risks and uncertainties which could impact these forward-looking statements, you should review Coherence 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.
spk03: Thank you, Brad, and thank you to everyone for joining our earnings call today. This was my first full quarter at Coherent, and as you can imagine, I am still on a steep learning curve about our company, our customers, our product portfolio, and our people. I had never imagined how much one can actually get done in a solely virtual world. And I must say I'm extremely excited to see how all our employees are actively embracing the new normal of either getting business done remotely or working in our labs and manufacturing sites by adhering to our strict stay safe and healthy rules. I am pleased to report that both the number of active COVID cases as well as necessary quarantines in our workforce were de minimis. Under the leadership of our COVID Steering Committee, we have been able to safely ramp up our manufacturing readiness from some 80% back in April to over 90% today. Looking at our top line, we were able to improve our revenues sequentially from last quarter although our book-to-bill ratio dropped below 1 as we saw the effects of COVID slowing demand in several markets. To add a little color, Q3 was the first quarter that was fully overshadowed by COVID with substantial headwinds as most of Europe and the U.S. were under shelter-in-place orders. This impact was seen much more on the booking side than on the revenue side. On average, our proposal activity level in Q3 was more than 10% below the previous quarter. The month of April marked the low point with proposal activity more than 40% below Q2 average. We are encouraged to see that both June and now July proposal activity rebounded to levels north of the Q2 average. To be clear, when I say proposal, I am referring to quotes, RFQs, RFPs, and similar activities. If we do not experience another shelter-in-place environment in the months to come, this should be an early sign of recovery that could manifest itself in our Q1 booking. Now let's take a closer look at our market segment. Starting with microelectronics, as you know, This market is made up of three sub-markets, flat panel display, semiconductors, and API. All three markets have been impacted by COVID-19, but there are bright spots. In quarter, flat panel display revenue was aided by increased line beam shipments destined for Chinese customers. Fabularization by our customers was still down in Q3 and our corresponding service revenue was off for a second quarter in a row by more than 20% from our pre-COVID run rate. However, we experienced strong service bookings, which together with consistent reporting of higher FAB utilization in July, votes well for increased service revenues in the future. Reports of many new 5G and flexible OLED-enabled smartphone launches in the next quarters gives us confidence that the recovery should be sustainable as these products are expected to drive an upgrade cycle. If you look at the microelectronics market more broadly, we continue to capture mind and market share in the laser lift-off technology for flexible OLED with our UVBlade 750 which continues to outperform our solid-state laser competitor. And we have one significant repeat ultra-fast business in Korea related to flexible OLED cutting and ultra-thin glass for foldable phones. Semiconductor inspection remains a bright spot with a strong demand across all nodes driven by strength in cloud computing and data centers. our fiscal Q3 saw a historic high demand. In advanced packaging and interconnect, we see 5G driving increased demand in smaller geometry and next-generation PCBs, which is driving strength in our CO2 laser via drilling business. We are well positioned with China's leading equipment supplier, who appears to be taking share from the historical industry leader. With consumer spending and habits worldwide being impacted by COVID, we would expect to see a somewhat quicker recovery for mobile electronics compared to big ticket items such as, for example, cars. We therefore expect a faster recovery across microelectronics than we would for materials processing. Looking at materials processing, machine tool demand remains depressed especially across Europe and to a lesser extent, the US. Bookings are down more than 25% from pre-COVID levels. This trend already started in the German automotive sector before the pandemic, but has been exacerbated by the impact of COVID. With our recently announced exit from the commodity kilowatt fiber laser business, we chose to have a more limited participation in the China materials processing market. However, we continue to see strength in non-metal applications, such as converting, medical device manufacturing, and speciality semiconductor marking. We expect a slow recovery in the overall European and US marking, welding, and cutting markets, given the big-ticket nature of the sector, but we are using the opportunity to retune and invest in our industrial systems and component sales organization ahead of some key new product launches, which we believe will position us for share gains even in a relatively flat market in our upcoming fiscal year. Our OEM components and instrumentation business is made up of three important sub-markets, life science instrumentation, medical diagnostics and therapeutics, and defense. Life science is down more than 15% from pre-COVID run rates, as many non-COVID related research labs have been closed. This was partially offset with reasonably robust demand for clinical applications. In the last few weeks, we've seen some upturn in sales activity, which feels like the beginning of a recovery, but we need another month or two to verify if this is truly the case. In medical therapeutics, we definitely experienced an upturn in sales activity as pent-up demand for mainly elective procedures starts to rise. Similarly, we see many research scientists now returning to their labs, and the proposal pipeline for sales in ultra-fast laser research and ground-based astronomy looks robust after a very weak Q3 when few labs were open. As part of the OEM components and instrumentation and market, defense is emerging as an attractive submarket for us, where we are very well positioned in amplifiers for directed energy, countermeasures, as well as speciality optics for aerospace, and continue to see strong bookings. We see this as a multi-year growth opportunity and will expand further on our plans in this market in future calls. early in the pandemic we recognized the need to enhance our go-to-market approach as the world around us is changing at an unprecedented pace as announced yesterday it was therefore that for the first time in our history we added the position of a chief marketing officer to the executive staff with david g i'm excited to welcome a digital marketing expert to coherent upskilling our leadership builds on multiple levels is one part of our good-to-great initiative that we launched in Q3. Operational excellence, increased efficiencies and best practice sharing across all parts of our global organization is another important pillar of our good-to-great transformation. It is therefore that I ask Mark Sobey, our Chief Operating Officer, to oversee both our ILS and OLS business units. One area that clearly underlines the fact that operational excellence is a team sport and requires ongoing and continuous improvement on all levels of an organization is cash generation. I'm therefore very excited to report that as a company, our focus on cash is starting to manifest itself in a noticeable improvement of our cash position from Q2 to Q3. And with that, I'll turn the call over to Kevin.
spk09: Thanks, Andy. Today, I'll first summarize fiscal third quarter 2020 financial results, then move to the outlook for fiscal Q4. I'll discuss primarily non-GAAP financial results and ask that you refer to today's press release for a detailed 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, 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 third quarter 2020 financial results for the company's key operating metrics were total revenue of $298.3 million, non-GAAP gross margin of 33.1%, non-GAAP operating margin of 5.9%, adjusted EBITDA of 9.6%, and non-GAAP EPS of 52 cents. Total revenue for the fiscal third quarter was $298.3 million and came in at the high end of our previously guided range. Although we were high in the range, sales were negatively affected by COVID-19. We estimate the impact to revenues was approximately $9 to $10 million during the quarter. Our revenue mix by market for Q3 was microelectronics, 48%, materials processing, 27%, OEM components and instrumentation, 18%, and scientific and government, 7%. Geographically, Asia accounted for 54% of revenues in the fiscal third quarter, the US, 22%, Europe, 19%, and rest of the world, 5%. Asia includes two territories with revenues greater than 10% sales. We had one customer in South Korea related to large flat panel display manufacturing that contributed more than 10% of our fiscal third quarter revenues. Revenue from other product and service for the fiscal third quarter was $97 million, or approximately 33% of sales. Other product revenue consisted of spare parts, related accessories, and other consumable products, and was approximately 28% of sales. Revenue from services and service agreements was approximately 5% of sales. Total service revenues were virtually flat sequentially, with a bit of a rebound in display, offset by decreases in materials processing. Fiscal third quarter non-GAAP gross profit, excluding stock-based compensation costs and tangibles amortization and restructuring, was approximately $99 million. Non-GAAP gross margin was 33.1% for Q3 and came in above the midpoint of our previously guided range, due primarily to a stronger mix of our ELA tools partially offset by higher manufacturing costs related to lower volumes. Non-GAAP operating expenses decreased by approximately $1 million. This resulted in a non-GAAP operating margin of 5.9% for the fiscal third quarter and came in above our previously gathered range. Adjusted EBITDA was 9.6% in fiscal Q3. Turning to the balance sheet, non-restricted cash, cash equivalents, and short-term investments were approximately $421 million at the end of fiscal Q3, an increase of approximately $52 million compared to the end of last quarter. Given our focus on cash preservation during this continued period of relative uncertainty in the global economy, we did not repurchase any shares in Q3 pursuant to our current buyback authorization. We also did not make any voluntary payments against our term loan at the end of fiscal Q3. The outstanding amount of the term loan in USD is approximately $406 million. Accounts receivable DSO was 60 days compared to 62 days in the prior quarter. And that inventory balance at the end of fiscal third quarter was approximately $449 million, a decrease of $8 million, resulting from our continued focus on optimizing our inventory balances and increasing our terms. Now I'll turn to our outlook for our fourth fiscal quarter of 2020. Revenue for fiscal Q4 is expected to be in the range of $290 to $320 million. You'll note that we tightened the guided range as a result of our improved visibility in certain end markets. We expect fiscal Q4 non-GAAP gross margin to be in the range of 34 and a half to 38 and a half percent. Non-GAAP gross margin excludes intangible amortization of approximately $2.3 million and stock compensation costs estimated at $1.2 million. Non-GAAP operating margin for fiscal Q4 is expected to be in the range of 6.5% to 10.5%. This excludes intangibles amortization estimated at a total of $2.9 million and stock compensation expense at a total of approximately $13.2 million. Other income and expense is estimated to be an expense in the range of $4 to $5 million. We do not include transaction gains and losses related to future changes in foreign exchange rates in our OI&E outlook. We expect our fiscal Q4 non-GAAP tax rate to be in the range of 20% to 21%. And finally, we're assuming weighted average outstanding shares of approximately $24.3 million for the fiscal fourth quarter. I'll now turn the call back to the operator, Danielle, for a Q&A session.
spk04: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble the roster. The first question comes from Jim Rusciutti of Needham & Company. Please go ahead.
spk12: Hi, thank you. Good afternoon. If I heard you correctly, I think you said the book bill was below one for the quarter and some of which clearly, I guess, is the result of COVID. But I'm wondering if... you can talk a little bit about how the book to build might have varied from different sectors. For instance, is there any color you can give us on the activity in the display market where there's clearly some build-out, but there's also some push and takes about things being pushed to the right?
spk09: Hey, Jim. It's Kevin. Hi. How are you doing? So listen, we did say that book to bill was less than one. You know, it was pretty much across the board against all of our end markets, microelectronics, materials processing, et cetera. You know, we haven't called out display specifically in a couple of years, you know, in terms of bookings or book to bill or even backlog. We do that once a year, you know, after the K. So let me just say that Across the board, we were less than one. There were some bright spots, as you heard in Andy's prepared remarks. Defense was strong. Some biomedical stuff was strong. Materials processing generally was weak, very weak. And let me leave it there.
spk12: No, that's helpful, Kevin. I appreciate that. And just with respect to the display business, you know, the service business The question I have is you called out utilization, and clearly that's a factor. But if we look at the overall service business, is there anything else going on within that display-related service business that potentially suggests that maybe customers are finding a way to utilize the lasers more efficiently where we're not seeing this kind of recurring revenue that maybe we would have thought otherwise?
spk09: Jim, it's a very, very, very small factor. There are always improvements in process that they yield a little bit more what we call flashes for the tubes. But frankly, it correlates much, much stronger to utilization. And if we look back in time to the April-May timeframe, frankly, utilization was down. We have seen it pick up in the last month or so. As companies start to gear up for the fall set of phones and the early spring set of phones by two of the major handset manufacturers. So as we look forward, we do expect a bit of a rebounded display. As I mentioned, we saw a little bit in the current quarter was more than offset by materials processing. But as we look ahead, services should be on the rebound path.
spk12: Last question for me, and I'll jump back in the queue. Andy, when you joined, you talked about, and it was early days when you first joined, but you talked about, in broad terms, focusing on markets where you think you have the potential to be either number one, number two. And I wonder if you could talk a little bit about, you know, if you can add a little bit more to that narrative, that discussion about how you see the portfolio possibly evolving.
spk03: If you also recall, we said we would give more color on that after the close of the fiscal. But just kind of where we are and where the wind is blowing right now, I mean, it's clearly for some of the key markets, It's definitely displays. That's OLED and whatever other next-generation displays there are on the horizon. It's the whole laser liftoff market. Semi is a very strong place for us. Scientific is a strong market for us to go. On the materials processing and the devices, we're going to be very focused. We like medical and life science, so we'll put big markets where we have a very strong standing. We like marking, especially speciality marking. And then we like a lot of the non-metal cutting and handling businesses. And then as we said earlier on the call in our prepared remarks, defense is starting to show up on our radar screen as a truly attractive opportunity for many years to come. But you've got to give me a few more weeks to work through that before we can squawk a little bit more about that.
spk12: Fair enough. Thank you. I'll jump back in the queue. Thanks, Jim.
spk04: The next question comes from Tom O'Malley of Barclays. Please go ahead.
spk07: Hey, guys. Thanks for taking my question. I just wanted to look at the September quarter. Obviously, you thought there was about a 30 million headwind from COVID coming into June, and it only impacted you, I think you said 9 million. And looking at September, you're seeing some sequential growth at the midpoint. But can you talk about the different levers that are getting you to that growth? Clearly, if you take the lower base, you know, you need some high sequentials to get there. But with the better numbers, you know, what came in a little bit weaker into September or what's improving to get you to that midpoint of 305?
spk09: Tom, it's Kevin. Yeah, so you're right. At the midpoint, call it 305, up 7 million or so. And for seven million, it's a myriad of things within the business. Suffice to say, we're still a bit cautious as we look forward. There's been a lot of talk in California about potential shutdowns with the resurgence and such, and that may spread across the U.S. So, you know, we believe the guide reflects some of that uncertainty. But for the seven million increase to the midpoint, it's a myriad of small things.
spk07: And are you quantifying any COVID impact for the September quarter, or are you just building that into the guidance?
spk09: We've built a little in the guidance, but we'll talk about it after the fact when we have a better view looking backwards.
spk07: Okay. And then my follow-up is just in the materials processing business, you walked away from some commodity business, and you described some moving parts in the preamble, particularly the strength in non-metal applications. But that segment really isn't down as much as I would expect. Can you talk about what's doing better there? And if you're walking away from a couple million dollars, you clearly need to see something more than offset. Is it just the non-med applications, or are you seeing any last-time buys from customers that are walking away, or is that all out of the run right now?
spk09: So the majority of it is out of the run rate for sure. You know, if I look at the materials processing bucket from a revenue standpoint, we were down about 6%, 5%, 6%. You know, frankly, there wasn't, I'd say, any strength in that sector at all. You know, we talked about last quarter during the call that I expected materials processing to be in the low 80s, and we came in at 81 and change. I think we're nearing a trough. At least that's my perspective at this point. So, you know, frankly, there was not a lot of strength in materials processing from a booking standpoint. So I hope you get that. Great. Thanks, guys. Thanks, Tom.
spk04: The next question comes from Mehdi Hasini of SIG. Please go ahead.
spk01: Yes, thank you for taking my question. I want to go back to your commentary regarding... book to bail and how business fundamental actually showed improvement into the month of June and July. And I want to use the microelectronics to ask a question. It was double-digit. Perhaps the supply chain disruption were behind you, so you were able to show double-digit growth on a sequential basis. Perhaps lack of face-to-face interaction. may have pushed out some additional booking from June into September. Is that the way we should think about the dynamics, or is there something else that you can elaborate on? I don't have a follow-up.
spk03: Yeah, I think that's a pretty fair way to think about it. I mean, if you look at the quarter, April was basically a throwaway month from a sales point of view. And we're just now back at a rate where we used to be before the pandemic. And even that is predominantly through remote channels. So I think you're thinking about it in the proper way.
spk01: Okay. And then the follow up is for both you and Kevin. You are making changes to the executive team. You're also streamlining your product portfolio, and you have hired the chief marketing officer. Should I expect some elevated OPEX for the next couple of quarters as you pursue new initiative, or changing the leadership, especially the executive team, is separate from how you are managing the OPEX?
spk09: Yeah, Mehdi, it's Kevin. So from an OPEX standpoint, as we look into the September quarter, you'll see based on my guidance that OPEX does increase a bit. Again, from a myriad of items, not the least of which is new executive management, if you will. So, you know, if you work the numbers, you'll see a mid-80s OPEX on a non-GAAP basis. And I think that's a pretty good number going forward.
spk01: Okay. And Kevin, your net cash per share showed a positive trend for the first time in many quarters. Is that going to be sustainable?
spk09: We do believe it will be sustainable, Mehdi. And in fact, given the strength in the euro right now, actually converting the euro loan into USD, the strength of the euro hurt us. we would have been that much more net positive. But regardless, specific to your question, yeah, we should be able to maintain and grow that.
spk01: All right. Thank you.
spk09: Thank you.
spk04: The next question comes from Larry Salo of CJS Securities. Please go ahead.
spk02: All right. Good afternoon. Just a couple of follow-ups. Kevin, you mentioned sort of the sequential improvement on revenue. At the midpoint, no mention of OLED equipment and flat panels. I know you mentioned you shipped some line beams in this quarter. Was that a little bit ahead of schedule, or is that related to recent orders, I assume? I thought we were going to get a little bit of a bump up just from that alone, and I realize they're big-ticket items, so two, three machines can obviously make a big difference. Any color on that?
spk09: Yeah. Yeah, Larry, I've got to be careful here. I mean, we've never really called out display and calibrated it specifically. You did see double-digit growth in absolute dollars this quarter. You know, I look forward, you know, suffice to say, I think Andy said it in his prepared remarks, you know, we will ship line beams in the September quarter, but I'm not going to calibrate that for you. Suffice to say that we are showing you know, to the midpoint, we are showing an increase in revenue in total.
spk02: Yeah, fair enough. Absolutely. Fair enough. And then just on the sort of the cadence of, it sounds like you certainly saw some improvement in proposals through the quarter. And I guess that translates, I guess you sort of build in the standard sort of one quarter delay. So is that why you're looking towards maybe an improvement in bookings and I think Andy highlighted in Q1 of next year. I guess that's just sort of directly correlated with the rise in proposals. I don't know how that shakes out for Q4, but I guess that's sort of just that in a vacuum proposals related to bookings one quarter later, I guess, right?
spk03: Yeah. Look, we've got a broad portfolio of Uh, some of our deals, I mean, if you take a look at, at the big Eximer deals, they have a super long lead time. Uh, when we do, um, when we work on design wins, they can have gosh, lead time north of a year. But I think for the majority of our portfolio, you're looking at a four to six months from quote to, uh, uh, to contract type of, uh, cycle. we see that many companies are trying to preserve their cash and are super prudent on their capex spending. So right now, they will probably err to be on the side of the longer sales cycles. Then again, if demand flips, these things can also flip relatively fast. But I do think you're thinking about it from a modeling point of view the right way. Okay.
spk09: Larry, if I could add.
spk02: Please, yes.
spk09: Yeah, I mean, you get, everyone gets that the only difference between revenue and booking is timing.
spk02: Absolutely.
spk09: And given COVID in April, partly May, and so forth, I mean, that just delayed everything. And so from a bookings to revenue standpoint, as Andy explained, that difference between when you book, when you take an order, and even the sales activity prior to that, It just seems like it's taking a little bit longer and such that that'll roll into Q1 as opposed to the September quarter. We've got backlog for, you know, September quarter and such, and we are showing an increase in revenue, right, sequentially. But all the newer sales activity that we're starting to see and starting to grow will benefit from that in the Q1 or the December quarter. Right. Okay.
spk02: And then just in response to the prior question about potential increase in operating expenses for, you know, obviously building out the management team a little bit, you know, I'm thinking maybe in the midterm, you know, you spoke last quarter about, without getting into, you know, quantifying specifics, but you spoke, you know, Andy, about, I think it was my question about how do you grow, you know, the materials processing business in a sort of economy that's unlikely to grow the next couple of years and, you know, related to COVID and we already obviously were strained and materials processing was already coming in as a, you know, on the, on the downbeat before COVID. So, and you spoke to, you know, improving profitability and whatnot and exiting some, some businesses where your margins are probably lower, maybe money losing businesses even. So I'm actually thinking perhaps over the next, again, the few quarters, your operating expenses will potentially at least in those businesses go down. I don't know if you can add any color to that. Thanks.
spk09: Yeah, from from an OpEx standpoint, what you're really thinking about Larry is the cog side, the cost of sale side, all of the facility, the equipment, the labor to produce product, right, that all goes into COGS. So to the extent that we streamline our manufacturing operations, that will benefit COGS from an OpEx standpoint, you know, sales, marketing, finance, all the corporate overheads and such. As we add David for marketing and potentially others we'll see, that will impact OPEX proper.
spk02: Fair enough. Okay, great. I appreciate that clarification. Thanks again. Thanks, Larry.
spk04: The next question comes from Mark Miller of a benchmark company. Please go ahead.
spk08: Thank you for taking my question. Your departure from the fiber laser business, were there any charges or material charges in this quarter's report?
spk09: Nothing material, Mark. This is Kevin. You'll see in the gap to non-gap reconciliation, there's a little bit of restructuring that you'll see. Some of that is related to getting out of the kilowatt fiber business.
spk08: Your stock-based compensation took a jump. Is this a new trend or was there some one-timers and stock-based compensation that drove it higher than previous quarters recent?
spk09: Yeah, I appreciate that question, Mark. It did grow rough numbers, $5 million quarter over quarter, and that has to do with Andy coming on board and John transitioning to the special advisor role. When that happens, any commitments we've made as a company to John get accelerated to the current quarter, and then layer on top of that Andy's equity and such and that drives the significant piece of that stock comp increase.
spk08: So does that go back to around the $8 million level in the upcoming quarters?
spk09: I don't think it goes all the way down. We gave a number of 13 and change, so close.
spk08: Thank you.
spk09: Thanks, Mark.
spk04: The next question comes from Nikki. Petoro of Longbow Research. Please go ahead.
spk11: Yeah, thanks. Hey, guys. Congrats on good results and execution. Kevin, can we dive a little bit into the services portion? Because if we look at third-party data for utilization, the first half of 20 utilization was actually up versus the first half of 19, at least the data that I'm looking at. And I know you guys have been talking that your supply chain partners have been lowering their inventory on hand, and I thought that that had reached a trough. So how should we think about why, of course, why are you not seeing an increase here in the June quarter? Is there anything preventing you from maybe reaching out to customers and doing changes in the services? Or how should we think about the ramp up of that going forward as we think utilization will be scaling up pretty substantially?
spk09: Yeah. Hi, Nick. Thanks for the question. You know, we did see things improve a little bit on utilization throughout the quarter. Early in the quarter, it was still pretty down. You know, this isn't numbers that I share, but behind the 97 million I talked about for bill of services, display was up sequentially. and that was completely offset by the other areas, primarily in materials processing. As we look forward, and as I mentioned earlier, as some of our customers in the panel business ramp up to supply the fall set of phones and the spring set of phones of 21, utilization should grow, and therefore services should rebound a bit as well.
spk11: Okay, and just related to that, what is the level of inventory, at least to your visibility of your customers and the end users? Is it still above normal, below normal? How would you characterize it?
spk09: It's still below normal, Nick. I think everybody, given the macro environment of the pandemic, I think everybody is really focused on cash and managing inventories. We've seen that really streamline and even come down further than we thought. you know, just a couple of quarters ago. So they are very sparingly using their inventory and maintaining lower and lower thresholds.
spk11: Okay. Switching to gross margin, the September quarter guide is pretty good relative to the incremental revenue growth that you're guiding to. Are you guys willing, obviously the ELAs are helping, but are you guys willing to provide any framework to how we should, an investor, think about the gross margin of trajectory relative to a certain level of revenue as we start to think about the ELA scaling up into next year?
spk09: Yeah, the best I can do there, Nick, is if we go back to the peak periods of 17 and 18 when, you know, ELA was pretty dominant in the overall portfolio, you know, I'm thinking we can get back to those levels once the true OLED ramp hits. you know, it won't be linear, it may be a little lumpy, but we can get back to nearly those levels going forward.
spk11: Okay, that's very helpful. And last question for me, I think we spoke previously about 5G being a tailwind for many businesses, but including the AIP business related to PCB interconnects. I think, Andy, you mentioned that you're starting to see some up in increasing activity, how do you, how should we think about the ramp up of, of those orders and, and, and, and sales, uh, as we, you know, expect 5g small, far small. So eventually we'll become about 40% of mixed by some third parties and next year.
spk03: But the good news about 5g phones is that they need more real estate for the antenna and they need more power. And, um, both you can get to, um, with our technology. If you optimize it, you optimize it on the OLED, and then we also help them on the VR drilling on the chip side. So net-net, the more 5G, the more tailwind for the usage of our technology. Now, these are not things that people order off the shelf and put in tomorrow, but as you see 5G ramping and as 5G readiness goes from the high end of the smartphones into the mid-range, That will be goodness for us, and that should continue all through the next year.
spk11: Got it. Thanks, guys. Good luck. Thank you, Nick.
spk04: The next question comes from Brian Lee of Goldman Sachs. Please go ahead.
spk05: Hey, guys. Thanks for taking the questions. I apologize if you've covered some of this. I had to hop on a little bit late. Andy, Kevin, were there any orders in the quarter for the OLED business? It seems like maybe this is the first time in several quarters where you didn't have a new order, but I just wanted to confirm that. Maybe I'll start there.
spk09: Yeah, Brian, yes. The answer is we did not take any orders for our high-end ELA equipment. We did take orders in display. surrounding that, but none of our high-end systems. And again, we attribute that to COVID, our inability to sit side-by-side with the customer. All of that's done virtually, and it's often difficult with two different languages to really communicate. But we do see, as we look forward, we do see orders in the upcoming quarters based on the ramp.
spk05: Okay, so this is more of just a timing slash COVID-related issue. This isn't something where you would consider it to be a pause in the cycle, and you have seen no cancellations, that's correct?
spk09: That is correct, and yes, we would view this as temporary, you know, timing-oriented related to COVID primarily.
spk05: Okay, that's helpful. And then I guess related to that, just on the guidance, it seems a bit more, and this is with respect to the revenue outlook, but it seems a bit more flattish than I suppose we would have anticipated given the ELA orders and also LLL orders over the past several quarters and your stated six-month lead times. Are you seeing lead times extend or have you seen customers kind of push out installation timing? Just maybe can you provide some context for how to think about the order strength of the past, you know, three to four on the OLED side of the business and how that's going to translate to the P&L? I thought, you know, maybe we would have seen a bigger inflection here into the fourth quarter.
spk09: Yeah, Brian, Kevin again. So, yeah, things are taking generally just longer. The lead times per se for our equipment haven't changed significantly. But the front end of that, the negotiation, the contract work, the sales activity, that is taking longer. And, in fact, in part, it was shut down for part of March leading into, you know, the fiscal third quarter or June quarter and early April. So that really pushed things to the right by a quarter or more.
spk05: Okay. That's helpful. Thanks, guys. I'll pass it on. Thank you, Brian.
spk04: The next question comes from Andrew De Gasperi of Barenburg. Please go ahead.
spk10: Hi. Thanks for taking my question. I know most have been answered, but I was wondering if maybe, Andy, could you discuss a little bit the significance of hiring David as chief marketing officer? My understanding is this is the first time you have one person in such a role and how important that is for the future of careers.
spk03: No, happy to, Andrew. If you look at it, Careerland is a fantastic company with a great amount of technology talent. And I cannot begin to tell you how impressed I am with all the bright people that I'm meeting. But in a world where the traditional ways of selling have been deeply changed overnight, And we took a very honest look at ourselves. We wouldn't consider ourselves the benchmark in e-business or digital marketing, contrary to where we do consider ourselves the benchmark on technology. So we said that we have a high ceiling on that side, and hence we brought someone on board who actually has software background, who has digital marketing experience background. Just to give you an example, trade shows in our industry were a very important way on how to generate leads and how to talk with your customers. And, um, I don't think any trade shows in the Western world are going to be done probably for another year or so. So we just needed to get fully into the digital space. And with David on board were, working very hard on this, and it's going to change our look and feel, and it's also going to help to increase the effectiveness of our sales force. That's helpful.
spk10: Maybe could you discuss what you've alluded to in your prepared remarks regarding new products potentially rolling out on the industrial laser space? Could you maybe give us a flavor of what those could be?
spk03: You know what? They're really cool, but let's talk about them when we're ready to announce the product. Especially with Europe being an important market for us, you really don't want to launch a product in the midst of when everybody is taking vacation. So you'll hear more from us as we go into the new fiscal year.
spk10: Sounds good. Thank you.
spk04: There's a follow-up question from Mark Miller of the Benchmark Company. Please go ahead.
spk08: Would you provide cash from operations, please?
spk09: Sure, Mark. It's Kevin again. It's $54 million.
spk08: Okay, and I'm just wondering sequentially in terms of specific OPEX, R&D, and SG&A, how does that flow from the prior quarter into this quarter? Are they similar?
spk09: Yeah, for the September quarter, you'll note from guidance that we are guiding up a little bit in OPEX. That has to do with new executives on board, some new initiatives involved. and so forth. So we should typically be in the round numbers, middle 80s for OPEX going forward.
spk08: Okay. And just one final question in terms of China. Another laser firm just reported a very strong rebound in China, but then said that that was going to moderate in the current quarter. What's your outlook for your business in China?
spk03: We kind of reduced our China exposure. So if you look on the display side, that business is going very strong and China is a big opportunity. And we don't see any impact there, but we got out of the kilowatt fiber business. So the headwinds that we saw there and the race to the bottom on the pricing side, that was one of the main reasons why we took the decision that we took a few months ago. to exit that business. And you see it both ways. We didn't quite get the uplift of China coming out of the COVID situation earlier than Europe or the U.S. And by the same token, we're not seeing as much of the pricing headwind because we don't have as much exposure, especially in the material processing side of the house in China.
spk08: Thank you.
spk04: There's a follow-up question from Nick DeToro. of Longbow Research. Please go ahead.
spk11: Yeah, hi again. Thanks. Just related to EV investments, your peers and others in the automotive industry are seeing initial investments related to EV. So I was wondering what is your perspective and what are you seeing specifically in China and EMEA where I think those are much ahead of what's happening in the U.S.?
spk03: EV is an exciting market. We see a continuous increase of interest in our arm laser technology, which is very unique in the way that we can bundle the laser light in the ring and in the inside of the laser. And it bodes extremely well if you need to work with complicated metals like aluminum or copper, which both are very important when you talk about EV and you talk about bringing electricity to the power drain and all that good stuff. we think it's an attractive market but if you run it through your models we also want to be realistic it's still an emerging market once you see the the big auto companies shifting more of their production into electric vehicles you'll see that market ramping but you're talking you're talking years here this is not something that's going to swing the pendulum overnight but we're at the forefront of it, and we're starting to become constructive about this segment.
spk12: Got it. Thanks, guys.
spk04: This concludes our question and answer session. I would like to turn the conference back over to Andy Mattis for closing remarks.
spk03: Let me just say thank you for all of your interest today, and we will keep you posted of our progress and we'll be looking forward to talking to you at the end of the next quarter. Thank you very much, and bye-bye.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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