Coherent Corp.

Good afternoon and welcome to Coherent's fourth quarter fiscal year 2020 financial results conference call. All participants will be in 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 or a 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 DeMarco, Executive Vice President and Chief Legal Officer.

Please go ahead. Thank you, Jason, and good afternoon, everyone. Welcome to today's conference call to discuss Coherent's results from its fourth fiscal quarter and fiscal year ended October 3, 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 Platnick, 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's 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 Coherent's 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 joining our earnings call today. While fiscal Q4 was still overshadowed by the impacts of COVID-19, I'm happy to report that on just about every metric, our performance exceeded the fiscal low of Q3. But before I discuss our results and market trends in more detail, I want to take a moment to acknowledge the tireless effort and dedication of all our teams around the globe who 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. It is exciting to see that innovation and our customer-centric focus continue to flourish even in these unusual circumstances. Looking at our top line, we improved bookings and revenues sequentially from last quarter's low. And even though full fiscal 2020 top line was lower than the previous fiscal year, we finished the fiscal year with a positive book to bill ratio and an improved backlog position that increased approximately 10% year over year. To add a little color, three of our four end markets saw solid double-digit percentage increases in bookings over the prior quarter. As anticipated, our OEM components and instrumentation as well as our scientific businesses saw the fastest recovery as research labs and non-COVID-related hospital utilization drove a sequential increase in clinical testing and laser-related medical procedures.

Let me now start with microelectronics.

As you know, this market is made up of three sub-segments, flat panel display, semi, and advanced packaging and interconnect. Our SPD business is primarily driven by mobile demand and also worldwide sales of new handsets remains depressed relative to pre-COVID level. We saw a clear upturn in factory utilization of our ELA installed base from the prior quarter as consumer spending recovered, and several smartphone manufacturers ran production on new 5G-enabled models. We were especially excited to see the entire new iPhone 12 lineup from Apple adopt flexible OLED displays, which together with the new foldable models from Samsung, LG, and several Chinese manufacturers should continue the trend towards flexible OLED becoming the technology of choice. We continue to be cautiously optimistic that we are at the front end of a multi-year 5G-driven smartphone upgrade cycle, which together with announcements of more than 20 laptops having OLED screen options, including the new Lenovo ThinkPad X1 Fold and the recently introduced Samsung Galaxy Tab S7 Plus tablets, all bodes well for further utilization of our ELA installed base, which drives a healthy service business. Published reports have noted that one or more display makers other than the historical incumbent may now be supplying flexible OLED displays into Apple, even if only in limited volumes for replacement screens. Similarly, other published reports have noted that several Chinese OLED manufacturers have reached a yield inflection point where they are actively allocating production capacity for larger screens for IT devices such as tablets, laptops, and monitors. We believe that these changes in the competitive landscape will help drive OLED price points lower in all mobile screen formats and reduce the premium over LCD which is the stimulus required to drive the next round of new capacity and fab investments. In that regard, I'm also happy to report that since our last call, we have several new orders from multiple customers in China. In Q4, we also saw a significant increase in the level of investment and bookings related to micro LED displays where we enjoy an industry leading position. This is reflected by sales and active engagement with more than 25 customers, all working on process development as a precursor to a mass production solution. Our microLED customer base includes almost all current OLED and LCD manufacturers, as well as many well-known microLED-specific startups and display industry integrators. We are uniquely positioned with multiple UV solutions for four separate micro LED processes. ELA for high performance, low power consumption backplanes, laser lift off for customers using Sapphire carriers, laser transfer and laser repair. The appeal of micro LED is reduced electrical consumption for improved battery life and higher absolute brightness relative to OLED. We are continuing to accelerate our efforts and investments in UV micro LED solutions to help our customers develop the laser processes of record so we can, in turn, develop the laser-based capital equipment systems needed for mass production. We will further discuss our new process development product offerings with you later in fiscal 21. We see a coexistence of the two technologies in the years to come with flexible OLED remaining the dominant choice for mobile in the long term and micro LED becoming the new entrant in high-end TV where brightness is a key advantage and devices where battery size is at a premium such as watches or future smart glasses. We believe we are well positioned to remain the laser solution display industry leader for all display technologies. Moving on to the semiconductor market, consistent with widely reported industry news, we are seeing sustained strength and increased demand for both new systems for semiconductor inspection, as well as for service demand from our installed base. The outlook for Q1 is up, and in general fiscal 21 looks positive. To that end, we had recently had a significant design win at an industry leader displacing a legacy competitor. In advanced packaging and interconnect, we see 5G driving increased demand in smaller geometries, better power management, and next-generation HDI PCBs, which is playing to our strength in our CO2 laser via hole drilling business. As a result of the continuous drive in semi-innovations, including miniaturization and energy efficiency, lasers are gaining share from traditional mechanical drilling solutions. We are well positioned with China's leading HDI laser drilling equipment supplier, who appears to be taking share from the historical industry leader. We have taken more CO2 laser orders in the first four weeks of this quarter, then all of Q4, and appear to be at the front end of a 5G-driven multi-quarter expansion across the entire API space, similar with that seen in FPD and in SEMI. Moving on to materials processing. Consistent with the September manufacturing PMI, which indicated an expansion in the index across all major economies, materials processing orders in Q4 increased double-digit percentages versus Q3. A few highlights. We saw improvement in medical device manufacturing orders for marking, cutting, and welding applications, as well as orders driven by the return of elective surgeries. Our machine tool or systems orders also improved sequentially primarily due to micromachining and general marking and engraving applications. The main priority for our material processing business is to continue the turnarounds in profitability, which we began last fiscal year with our withdrawal from the commodity kilowatt fiber laser market. Going forward, we will focus on precision manufacturing, A subset of the materials processing market where we participate well, both in terms of market share and margins on all three levels of components, lasers, and systems. We will be focusing our R&D and our manufacturing capabilities towards new products that will serve higher margin, defendable markets. Examples in our systems business include medical device manufacturing, semiconductor waiver marking, and precision welding. Later this fiscal year, in the component space, we will be launching a whole new category of laser diode products that will allow us to address completely new applications and customers, dramatically increasing the size of our servable market. We will give you more color on a future call. This recovery in the medical area also extends to large parts of our OEM components and instrumentation business where orders increased double-digit percentages from Q3. The principal driver was a rebound in flow cytometry. Demand, as reported by several of the flow cytometry industry leaders, is back up to some 90% of pre-COVID level although still constrained due to reduced hospital utilization, lab testing, and research lab openings. Customer halted their medical consumables production for a time in Q3 and have now started to replenish inventories as hospital utilization improved. Discretionary procedures benefited from the US consumer confidence increasing sharply in September After back-to-back monthly declines. We continue to lay the foundations for OEM volume growth and flow cytometry with several design wins with our recent UV product offerings at 360 and 320 nanometers, enabling completely new applications. Similarly, we received several new design wins from industry leaders with our industry-leading Dell X laser light engines, opening up an expanded serviceable market. Our customers want to work with us not just to supply them the lasers, but also all the beam delivery optics in an integrated subsystems. These design wins are foundational for revenue growth later in 21 as our customers ramp to volume. The scientific business is the smallest of our market segments and represents lasers Sales of Laser Equipments to Universities and National Labs. These activities are funded by central or local government organizations, university endowments, and private foundations. This segment was hit hard during the COVID shutdowns in Q3, and as expected, bounced back noticeably as soon as universities and research institutes reopened. Not only did we experience double digit percentage booking increases, We nearly reached our 2019 run rate order volumes in this segment. An early decision of our strategy work has been to double down on our small but successful defense business that has largely been operating in stealth mode for many years and to declare our intent to focus on and serve this market much more decisively and publicly. Let me expand in some detail. Coherent currently serves aerospace and defense applications, such as directed energy weapons, as well as technology for target designation, countermeasures, fiber optic gyroscopes, speciality large diameter optics, and entire telescope payloads for intelligence, surveillance, and reconnaissance. To give you some specifics, We've shipped more than 700 directed energy amplifiers in total. This equates to well over a megawatt of laser power. We sell products to a significant number of U.S. defense contractors that serve all branches of the armed forces. We have recently been awarded with some exciting design wins in the defense space, which will boost our revenue in this market in 22 and 23. What sets us apart in this market is a U.S.-based supply chain for all critical components, many of which are vertically integrated within Coherent, which we believe is unique in the industry. Our U.S. defense customers have made it clear that a secure U.S.-based supply chain is and will be required moving forward. We not only make our own laser diode epi and package diodes in the U.S., but we also supply the speciality single mode amplifier fiber critical for every directed energy amplifier. We own several other businesses that make critical components, and today we are announcing that we have entered into an agreement to acquire EOT, a privately held highly specialized U.S. component maker of optical isolators and other specialized fiber components which are supplied to the U.S. directed energy market. This acquisition supports our U.S.-based supply chain with further vertical integration of critical components. Once we clear regulatory approvals, we expect the transaction to close in our second fiscal quarter. The megatrend that is driving this opportunity in aerospace and defense is related to asymmetrical threats from relatively cheap drones, drone swarms, and the potential to counter other threats such as mortars where there are no current defensive solutions. Coherent has been working on this technology for well over a decade, and it's only in the last year that the technology has reached Technology Readiness Levels 6 and 7, meaning successful prototype demonstration in relevant operational environments, based on the Department of Defense's nine-level Technology Readiness Levels. Several U.S. programs are slated to progress to Technology Readiness Level 8, meaning full system qualification and hence higher volumes, in the next three to five years with deployment beyond that timeline. To focus our resources and our expertise effectively and to demonstrate our commitment to the defense space, we have moved the management reporting of all aerospace and defense-related sites under a single Senior Vice President reporting directly to our COO and we're staffing up the entire organization for growth. Now let's take a broader look at our strategy. As indicated on our last call, we wanted to give you an update on where we're heading and our priorities. We've spent the past six months laying the foundation for our mid and long-term growth strategy and our good to great transformation. You've already heard many near-term specifics of what we plan to do woven into the end market commentary above, including our newly publicly declared focus on aerospace and defense. Our approach to strategic growth is twofold. On the one hand, we will align our business around end markets that are supported by global industry megatrends. One example would be healthcare. driven by the confluence of low-cost clinical instrumentation, AI, genomics, and aging population and unsustainable cost. Our objective is to hold or obtain a number one or number two position in all major markets that we participate in. In parallel, we will strengthen our operational excellence to optimize the enterprise, more of which you will hear in our Q1 call. Going forward, we will be focusing our efforts on four end markets. Microelectronics, which as today captures the three subcategories of display, semi, and API. Instrumentation, which captures the three subcategories of bioinstrumentation, therapeutics, and research. Precision manufacturing, which captures non-microelectronics Non-Commodity Kilowatt Fiber Industrial Applications and Aerospace and Defense. We will explore opportunities to move up the tech stack and offer wherever possible subsystems to our customers that will enable them to go to market faster. By doing so, we believe we can more than double our addressable market over the next two to three years. Cisco 21 is a foundational year for us. Our continued focus on operational excellence will take us from good to great. Putting it in a simple formula for 21, we will transform our ILS business while driving new investments in our OLS business. And as we will continue to report these two segments, you will be able to see our progress each quarter. If you look at our good to great transformation more holistically, we're kicking off projects that will transform the operational efficiency of all our processes, reduce the complexity of our portfolio, focus our investments on growth opportunities, and enhance the focus and alignment with our customers even further.

New product introductions

and strategic design wins will be early proof points on the go-to-market side. Looking at our P&L, you will see us return to a gross margin with a four handle by the end of 21. We will keep you updated on our progress at our upcoming earnings calls and we are planning to hold an investor day in the summer of 21. With that, let me turn the call over to Kevin.

Thank you, Andy. Today I'll first summarize fiscal fourth quarter 2020 financial results, then move to the outlook for fiscal Q1 of 2021. 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 the 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 fourth quarter 2020 financial results for the company's key operating metrics were total revenue of $316.8 million, Non-GAAP gross margin of 37%, non-GAAP operating margin of 8.4%, adjusted EBITDA of 13.2%, and non-GAAP EPS of $1.01. Total revenue for the fiscal fourth quarter was $316.8 million and came in at the high end of our previously gathered range. The scientific and OEM instrumentation markets were the key drivers of revenue this quarter. as a result of many university and research labs reopening. Our revenue mix by market from Q4 was microelectronics, 45%, materials processing, 25%, OEM components and instrumentation, 20%, and scientific and government, 10%. Geographically, Asia accounted for 52% of revenues in the fiscal fourth quarter, the US, 26%, Europe, 18%, and the rest of the world, 4%. Asia includes two territories with revenues greater than 10% of sales. And we had one customer in South Korea related to large flat panel display manufacturing that contributed more than 10% of our fiscal fourth quarter revenues. Revenue from other product and service for the fiscal fourth quarter was $105 million or approximately 33% of sales. Other product revenue consists 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 services revenues increased sequentially by approximately 8.5%, primarily due to increased utilization in our ELA tools for flat panel display manufacturing. Fiscal fourth quarter non-GAAP gross profit, excluding stock-based compensation costs, intangibles, amortization and restructuring was approximately $117 million. Non-GAAP gross margin was 37% for Q4, a sequential increase of 390 bps, and came in above the midpoint of our previously guided range due primarily to a myriad of items, including increased volumes, lower inventory write-offs, and lower warranty costs. Although non-GAAP operating expenses increased to approximately $91 million, non-GAAP operating margin increased 250 bps to 8.4% for the fiscal fourth quarter. and came in virtually at the midpoint of our previously guided range. Adjusted EBITDA was 13.2% in fiscal Q4. Turning to the balance sheet, non-restricted cash, cash equivalents and short-term investments were approximately $476 million at the end of fiscal Q4, an increase of approximately $55 million compared to the end of last quarter. Given our continued focus on cash preservation, we did not repurchase any shares in Q4 pursuant to our current buyback authorization. We also did not make any voluntary payments against our term loan, and at the end of fiscal Q4, the outstanding amount of the term loan in USD was approximately $420 million. Accounts receivable DSO was 63 days compared to 60 days in the prior quarter. The net inventory balance at the end of fiscal fourth quarter was approximately $427 million, a decrease of 22 million in spite of a currency headwind, and resulted from our continued focus on optimizing our inventory balances and increasing our terms. Now I'll turn to our outlook for our first fiscal quarter of 2021. Revenue for fiscal Q1 is expected to be in the range of $300 to $320 million. This revenue range reflects the current uncertainty in Europe with regard to the impact of the COVID resurgence and many countries in the region implementing some form of a lockdown. We expect fiscal Q1 not Gross margin would be in the range of 36% to 39%. Non-GAAP gross margin excludes intangibles amortization of approximately $1.9 million and stock compensation costs estimated at $1.7 million. Non-GAAP operating margin for fiscal year one is expected to be in the range of 7% to 10%. This excludes intangibles amortization estimated at a total of $2.5 million and stock compensation expense of a total of approximately $11.9 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 Q1 non-GAAP tax rate to be in the range of 24% to 25%. And finally, we are assuming weighted average outstanding shares of approximately $24.4 million for the fiscal first quarter. I'll now turn the call back to the operator for Q&A session.

Thank you. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. First question is from Jim Ricciuti from Needham and Company. Please go ahead.

Hi. Thank you. Good afternoon. A couple of questions. I'm wondering if you can give us some sense as to how much of your display backlog is represented by these emerging micro-LED winds that you've alluded to.

Jim, the financial impact of the micro-LED orders is relatively minuscule in comparison to our overall backlog. The strategic relevance of these design winds is extremely high because it shows movement in a brand new technology and we think we are at an inflection point where display manufacturers are really trying to figure out how to turn micro LEDs into a commercially viable solutions, how to include lasers as a process of record for the manufacturing process and we're helping them

Thanks for clarifying that. And then, Andy, with respect to the aerospace and defense opportunities, you mentioned that this part of your business has been in a stealth mode. Can you give us some sense as to how big that portion of the business is and then as we begin to think about it over the next one to two years. It sounds like you see a pretty good runway of opportunities, but can you give us a sense of where it is today?

Jim, it's Kevin. Hi, Kevin. You know, we're going to defer that until Q1. As Andy mentioned in his prepared remarks, these are one of the four markets that we'll focus on going forward. And as a result, we'll break that out as we do today with our four markets. but we won't do that until Q1.

Okay, and then last question and I'll jump back into Q. It appears as you're going after these opportunities that your R&D levels may be going up. Is that a fair way to think about one area of your OpEx?

We're going to be making sure we invest enough R&D dollars into the areas that matter. We will do both. We will defocus areas where we feel we can weed out the portfolio, where we can streamline the portfolio. We'll set those R&D dollars free, and we'll double down in those areas that we think will hold attractive growth potential in the near and in the midterm. Net-net, it might lead to a slight increase of the R&D dollars. but nothing earth-shattering in the relationship of our total OPEX cost envelope.

Got it. Thank you. Jim, if I could add to that, Jim. We closed the quarter at $91 million. As Andy said, we'll defocus in some areas, focus on other areas. Maybe that's a net add. But for planning purposes, for modeling purposes, because I know this will be a question from others as well, I think the mid to high 80s is the right area to be in for opex modeling. Great.

Thank you, Kevin.

The next question comes from Tom O'Malley from Barclays. Please go ahead.

Hey, good evening, guys. Thanks for taking my question. My first one is really related to the outlook into December. Obviously, at the mid-port of guidance, you're seeing some deceleration. Could you walk us through what's causing that? Is it the scientific and government taking a breather after recovery, or does microelectronics step down? Just any color on those moving segments into December is super helpful.

Yeah, Tom, it's Kevin. So, from a university and research standpoint, as you might imagine, a lot of kids are coming home from college It's doubtful they'll go back post-Thanksgiving. And the expectation, and certainly embedded in our outlook, is universities will start to close down a bit, as opposed to the reopening that we saw mid-quarter. Similarly in Europe, as you've already read, I'm sure, there are different types of lockdowns going on in many different countries. There is an expectation that that will increase, and clearly that will impact the business Instrumentation and Scientific will be impacted as well.

Okay, that's helpful. And then if you're going to size the impact, you obviously made a point of specifically mentioning the European lockdown. Is that factored in conservatively? Are you already seeing trends? I'm trying to understand if this is cautionary going into the next quarter or if you're actually seeing business trends slow.

Yeah, it's D all of the above, Tom. You know, we're concerned in certain countries, our ability to for some of our field service engineers to travel and therefore potentially impacting service revenues. And then it just broadens from there. So, you know, at this point in time, with the information we have, this is where we landed in terms of a December revenue range.

That's helpful. And then just I want to sneak one more in. You mentioned that You had several orders during the quarter from customers in China. You've also mentioned micro-LED. Can you talk about the mix of business going forward? I know that it's a couple years out, but do you think that micro-LED will represent a bigger portion of what that TAM in the microelectronics business will be longer term, or do you still feel the same way that your existing OLED opportunities are really going to make the bulk of that growth up?

For the next two to three years, there's no question that OLED, Flex OLED is going to make the bulk of the opportunity and it's going to drive top line any way you look at it. It gets really interesting when you look past three years, if you look in the three to five year time horizon, we then start to see micro LED picking up and that's all net new TAM technology. because it's going to go into new fields. And if you go back to my prepared remarks, we see one of the areas where micro LEDs will be effective might very well be in the TV space, which is a space that we currently do not play in. So anything we do in the TV space is going to be net new TAM for coherence. Thanks a lot guys.

The next question comes from Brian Lee from Goldman Sachs. Please go ahead.

Hey guys, thanks for taking the questions. Maybe just a follow up on that previous one. The multiple orders from different Chinese customers in the quarter, Can you provide a bit more context? Is that ELA? Is that LLO? Is there a mix? Can you kind of give us a sense of what that mix looked like and also how many customers you saw new bookings from in the quarter for OLED equipment?

Yeah. Hey, Brian, it's Kevin. So in terms of the orders that we referred to in the prepared remarks, the significant majority of that was all ELA. for OLED. There's some other things that we took orders for in terms of dollar amounts. Those systems, you know, call them prototype systems, much less expensive or lower ASP than the ELA equipment and therefore driving the, again, the significant majority of those bookings were ELA. You had a second question and I missed it.

I mean, multiple customers, does that mean you had two customers order ELA? Was it four or five? Or kind of give us a sense of the magnitude of how broad a customer ordering base you saw?

Yeah, we're going to stay with multiple customers, Brian.

Okay, fair enough. And then just two more from my end, and I'll pass it on. The cycle times, are we still in that sort of six-month lead time from order to order? Thank you for joining us today. Having a four-handle by the end of 2021, I just want to make sure I understand the commentary clearly so we're all on the same page. That's 40% plus on non-GAAP gross margin being achieved in fiscal Q4 2021. Is that right? I guess if so, why maybe wouldn't we see a better progression since you're already guiding 36 to 39 for Q1 and Q4 is still a ways away. Thank you, guys.

Brian, first of all, yes, it means 40% plus towards the end of Q1. Sorry, towards the end of 21, my bad. And that could be the end of Q4. It could actually also be the end of the calendar year. Needless to say that revenue and revenue growth will augment the ramp of... Our gross margin. And we cannot predict the full revenue ramp for the year yet. Hence, you've got a little bit of flexibility in that statement. But we feel very certain that the work that we do on our good to great transformation in our portfolio redirection will get us to the forehandle as the year progresses.

Okay, no, I appreciate that color, but I guess the way you answered it, Andy, you know, fiscal Q4, you know, end of fiscal 21 or end of calendar 21, so it's either going to be later, later, as opposed to, I mean, you wouldn't open up the sort of thought process here that, you know, you could actually pull that forward to any degree because fiscal Q4 versus, you know, calendar Q4, you're sort of making a wider range out several quarters as opposed to bringing that in.

Brian, if we see the world after the announcement yesterday about a vaccine, if we see the world bouncing back to pre-COVID levels sooner than anticipated, that will drive volume and volume increases will always help you to achieve higher gross margins as they'll drive our fab utilization. But we don't know that yet. So at this point, let's just stay with where we are. and as the year progresses, we will update you accordingly.

Okay, fair enough. Thanks, guys. Thanks, Brian.

Next question is from Mehdi Husseini from SIG. Please go ahead. Yes, thanks for taking my question.

Andy, Kevin, did you say the backlog was up 10% year-over-year?

Correct. 10% Q4 versus Q4 in 2019. That's right.

Right, right. You also mentioned that for ELA system, the minimum cycle time is about six months. And if I were to put that in the context of backlog, does that mean that customers, especially on the OLED side, can afford to wait and come back later and book additional systems?

Well, they can always come back and book systems. I would look at it a little differently. And specific to fiscal 21, it means they could book as late as March, and we can still ship and revenue it in fiscal 21.

Right, right. Unfortunately, you don't report back bookings on a quarterly basis.

We don't, but our K is going to be filed in early December. and we'll calibrate backlog at that point.

Got it. Thank you. And then a couple of follow-ups. I'm a little bit confused with all the initiatives you're taking in regrouping for new segmentation and focusing on a higher growth and expanding the TAM. But I haven't heard anything about I haven't heard anything about improving the cost from resizing. You mentioned that you're expecting the volume to help with the 400 gross margin. How should I reconcile these two?

If you go back, I said we're going to do four things in our good to great transformation. A, transform the operational efficiency of all our processes. B, reduce the complexity of our portfolio. D, focus our investment on growth opportunities. And D, enhance the focus and alignment with our customers. If you look at the first two, that clearly includes Streamline of Portfolio. It also includes we're going to take a critical look at the footprint of our organization. And these are all elements of our good to great transformation. But especially if you look at the site consolidation, these are very complex issues because you've got people, you've got product lines, you've got customer commitments that you have to work through. which is why I also told you that we will keep you updated and give you more color at the end of Q1 because these are things that take proper planning and very good execution so that they will show up as margin accretive to the organization.

Great, very helpful. Would it be fair to say that as you exit FY21 you have the tailwind behind you and and you look into FY22 is when both revenues with the scale and also operational efficiencies would help with the market profile. Is that the right way to think about it?

Absolutely. We should do most of the restructuring in fiscal 21. We're going to do most of the product streamlining in fiscal 21. So think about it this way. We're going to be looking at every product, especially products that fit in markets where the market isn't so attractive and where the margin contribution of the product is diluted to the organization. Those are the first things on our radar screen. And we've actually developed a complete roadmap around this, and we're tackling every single one of them. and as you know we have a pretty broad portfolio and in a broad portfolio you have some stars and you have some elements of the portfolio that aren't as well performing so we're going to be working through all of this but going into 22 the benefits of all that work should be with us on a sustainable basis for the whole 12 months in the next fiscal year.

So it seems to me that you may try to keep Kevin so that he could also enjoy the benefits of all the hard work in FY22. Is there any chance there? Or any update on the CFO search? I'm happy to give you an update on the CFO search.

We're looking at a very strong slate of diverse candidates. I've interviewed personally more than a dozen highly qualified individuals. Any one of them would have been Thanks very much.

The next question comes from Larry Solow from CJS Securities. Please go ahead.

Yes, hi. It's Pete Lucas for Larry. You guys covered a lot. Just a couple quick ones for me. Any change in the cadence of Chinese government subsidies and investments in OLED fabs thus far that you're seeing in 2020?

Pete, Kevin here. In terms of the Chinese subsidies, no change there. They're still funding a good part of the capex for the growing fabs that will go into OLED or OLED manufacturing, so no change.

Great, helpful. And just the last one from me, Andy, I think you touched on it in terms of the use of proceeds in cash. I think you mentioned cash preservations and no buybacks or no payments on the term loan now. Can you kind of talk about your priorities for cash going forward and how you think about debt payments, acquisitions, and buybacks, and how you would look to use the cash?

Without saying this is exactly what we're going to do, but just my bias is always if we can use our cash to invest into R&D with our own resources. That would be my first area to go to because that's how you create a very attractive IP portfolio and how you create in the long term very margin accretive elements of your portfolio. If we then find areas where a buy opportunity accelerates our time to market, like the small acquisition that we talked about on this call, We will definitely use our cash to do so, but we expect these acquisitions to be more tuck-in size of acquisitions. And then third, you have every other opportunity of what you can do with your cash. We're not saying we're excluding the opportunities of share buybacks, but it's not our first focus. And let's not... We really want to be mindful stewards of the cash position of our company to give us security and optionality going forward.

Extremely helpful. Thank you very much.

Next question is from Nick Todorov from Longbow Research. Please go ahead.

Yeah, thanks. All right, I have a couple of questions. Can you guys, Kevin, maybe talk about how much exactly of a COVID-related impact are you baking in the December quarter? Because if I look at Europe, it's only 18% to 20% of your sales. Is your OEM and scientific market overweight, the European universities and research labs? Any color there will be helpful. Thanks.

Yeah, again, We're not going to come out and specifically say because the dynamic in Europe is changing week to week. We embedded what we knew at the time. We did take our forecast down into that range, but that's all I'm going to say. I can't calibrate it at this point.

Okay, then switch on all that side. You guys have been taking orders, I believe now since June of 2019. And as we think about typically times has been six months. Yes, there has been some push outs due to COVID, which you spoke about in the beginning of the year. But have you guys seen additional push out of orders? Just because I'm looking at the numbers and it implies that in June and September this year, you should probably the equivalent of one high end system. and just based on your guidance and language, it doesn't seem like there's gonna be a ramp up in those systems in the near term quarters.

Yeah, Nick, Kevin again. You know, if I go back to June of last year, we said that we took our first order, singular, related to the next build out. We did come back in the September and December quarters and said we took orders, plural, We never really calibrated that other than singular versus multiple. We do ship ELA systems every quarter. It varies by quarter in terms of the number of shipments. But that's all I'm going to say at this point. You know, we're very pleased that we took multiple orders from multiple customers since our last call. And that will help build out fiscal 21.

Okay, and is there anything different in terms of the mix of those orders? Are you guys seeing maybe a little bit higher mix of Lionbeam 1000s instead of the 1500?

You know, going back to the first order we took back in June 19, we said the Chinese were predominantly Lionbeam 1000s. There's been no change in that.

Okay, okay. All right, and the next question, I think that the gross margin comments, the 40 handle and not until the end of calendar year 21, I guess essentially that implies, if I'm thinking correctly, that your revenue is going to stay roughly slattish or grow very little from here. You're talking about strong bookings growth in all of your segments. You have multiple orders for OLED. How do we square the fact that essentially you're projecting that your revenue is going to range in that low 300 million range for the next four quarters?

Just when you look at the gross margin, you've got to look at the puts and the takes. We also said we're going to streamline our portfolio. If I could magically make every product that dilutes our gross margin disappear overnight, The ramp would look different. But in every product that you have, you have customer commitments. In some cases, you have a next generation of the technology that will enhance our cost position. In some cases, we still have to perform work or do some certifications for products to get there. So you have the positives of the higher-end products offset in the first half of the fiscal year. with the portfolio that's still diluting our gross margin. And as we progress, these things will come swinging to the positive territory. And just to give you an example on how volumes can make a huge difference, I talked in my prepared remarks that we have some very exciting news on our diodes. Those are all FAB business models, and you know how a FAB business model works. Loading of the FAB goes up and your gross margin goes up dramatically. So many puts and takes, many stories within the story. And let's just put it this way. We feel comfortable that we will get to this point and we will update you on our progress and you'll see how fast we'll turn the corner from the low in Q3 to where we said we're going to be.

Got it. Thanks. The next question comes from Mark Miller from the Benchmark Company.

Thank you for the question. I just want to go back to margins again and your projections for improving margins. You indicated it's going to be mainly volume-driven, but are there any mix effects you could see that are also going to help drive the margins? I'm just wondering the breakdown between higher volumes and any improving mix, and what in the improving mix is going to drive that?

Yeah, hey, Mark. It's Kevin. Certainly, again, all the above will contribute to an improved margin. Volumes, for sure, because a better, you know, call it overhead absorption mix will be in our favor as well as we look into fiscal 21. The act of good to great will also help, you know, basically thinning some of the portfolio and reinvesting in other areas to drive higher margin products. all of that will contribute to a minimum floor handle.

Okay. You said CO2 via drilling is certainly an opportunity as we go to 5G in the smartphones. As you go on to smaller via sizes, are you going to have to transition to a new type of laser?

Nope.

We've introduced those generations. The important thing is as they go to the smaller footprint is they can no longer use mechanical drills. So the nice thing about this market is we're actually, this is a classical example where laser infringes on technologies that were done with other technologies previously and so it expands the opportunity. and we have a ready portfolio and our CO2 laser factory is working around the clock right now to fulfill customer demand.

Okay, I believe you said that non-GAAP aspects will be from mid to high 80s. Is that just for the first quarter or is that the trend throughout the year?

That's a good trend throughout the year, Mark.

Okay, so you're going to be bringing that down. Okay, thank you.

Thank you, Mark. There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Andy Mattis for any closing remarks.

I want to say thank you to everybody who spent the afternoon or evening with us on this call. Thank you for all your questions. We've got an exciting business and an exciting year ahead of us, and we will keep you posted as we are making progress on our trajectory. Thank you and good night.

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