Flat Panel Orders Drive Coherent Profits

by Melinda Rose, Senior Editor

Strong sales in the microelectronics market — including the first bookings of a record $77 million display order — allowed laser maker Coherent Inc. to post a third-quarter profit of $19 million, or 74 cents a share, the company announced last week.

The $210 million in revenue for the quarter was a new record for Coherent, CFO Helene Simonet said in the company's earnings call with analysts and investors on July 27. The nearly 27 percent growth in sales, as compared to the same quarter a year ago, and five percent increase over the previous quarter was primarily driven by microelectronics sales, "which for the first time exceeded the $100 million level on a quarterly basis," Simonet said. She added that the sales increase was largely the result of a significant step up in the flat panel display business. Even so, the company's $122.5 million in microelectronics orders, an increase of almost 67 percent over the prior-year period, represented a decline of 15 percent compared to Coherent's record-setting second quarter results.

Coherent CEO John Ambroseo echoed Simonet's statements on microelectronics sales in comments to investors, saying the company had "hit the motherload" with the flat-panel display market and announced Coherent had received a record $77 million order for annealing excimer lasers and optics used in current and next-generation flat panel displays, primarily organic LED-based. The size of the order — $55 million of which will be booked over the next two quarters — and its service contracts will require the company to make some investments, Ambroseo said.

"Each of the next-generation lasers and optical systems, which sell for well over $7 million each, support display sizes well beyond anything being laser annealed today," he told analysts and investors. "We're developing a modified light source and new line beam optics to produce the proper process conditions. We will step up R&D spending by a total of $5 million to $6 million, predominantly for materials, over the next four quarters. The next-gen lasers also have a much larger footprint than the current lasers. We do not have enough manufacturing space in our existing facility to build them, and are in the process of acquiring a building adjacent to our Göttingen site."

The long-term service requirements of the excimer lasers will also require some capital, he said. Because the large quantities of ultraviolet light produced by the lasers creates processing power but limits the operating lifetime of the laser discharge unit, or LDU.

"The use pattern determines how many replacement LDUs are needed for each laser per year. Base on current estimates, the installed base, plus the backlog, will require hundreds of replacement LDUs per year," Ambroseo said. "Our current LDU capacity is inadequate to support this demand. Moreover, given the recent concentration of orders in Korea, we will open an LDU refurbishment facility in-country. We are in the process of leasing space and hiring staff for this facility."

Simonet raised fourth-quarter revenue projections to between $205 million and $212 million. She also upped revenue guidance for the fiscal year to between $800 million to $807 million from last quarter's $790 million to $805 million. Simonet cautioned that much depends on the timely delivery of core components by its suppliers. "It is not a small task for our suppliers to increase production from the third-quarter levels," she said.

During the question-and-answer session, Ambroseo was also asked about supply issues.

In terms of the large display order it is currently fulfilling, only a few companies in the world can make the very large optics required for shaping the beam from the excimer laser and converting into the thin, homogenous line used in the annealing process, he said.

"We're pushing them to increase their capacity. And it is non-trivial to do, and that's why only a handful of them are capable of making them in the first place," Ambroseo said."So it is not a widespread shortage by any stretch of the imagination, it is very focused on one product line. The challenge is that these products [have] very high ASPs [average selling prices], so if one goes or doesn't go, it's sort of millions of dollars in revenue."

Ambroseo was also asked his thoughts on recent acquisition moves by Coherent's competitors, such as Newport's announcements in July that it would buy High Q Laser (See: Newport Buying High Q) and Ophir Optronics (See: Newport to Acquire Ophir Optronics)

"While I applaud some of our contemporaries in the market for the moves they've made, they also, I would argue, have paid very high prices for the assets they're acquiring, and it remains to be seen whether they can generate the appropriate kind of returns for the risk that you incur when you take on an M&A [merger and acquisition] project," Ambroseo said. "We want to grow intelligently, and more than anything else we want to make sure that the investments pay off."

Ambroseo also told investors that the company will make the first shipments of its kilowatt-class fiber laser in 2012.

For more information, visit: www.coherent.com