Good day, ladies and gentlemen, and welcome to Coherent's Fourth Quarter and Fiscal Year 2015 Financial Results Conference Call hosted by Coherent Inc. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce Ms. Leen Simonet, Executive Vice President and Chief Financial Officer. You may begin your conference.

Thank you, Janna. Good afternoon, and thank you for joining us on today's call. I will provide financial information and John Ambroseo, our President and CEO, will provide a business overview. As a reminder, any guidance and any statements in today's conference call pertaining to future guidance, market trends, plans, events or performance, are forward-looking statements that involve risks and uncertainties, and actual results may differ significantly. We encourage you to refer to the risk disclosures and critical accounting policies described in the company's reports on Forms 10-K, 10-Q and 8-K, as applicable and as filed from time-to-time by the company. 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 been made available for approximately 90 days following the call. Let me start by saying that we're very pleased with the fourth quarter results that we're announcing today. Revenues for the quarter were $209.6 million with corresponding pro forma earnings of $1.25 per diluted share. The fourth quarter earnings were positively impacted by a lower tax rate, most the result of a more advantageous geographical mix of profits, adding approximately $0.10 per share to our results. Pro forma gross profit and period expenses were also favorable compared to our guidance and contributed to a record pro forma EBITDA of 22.1% for the quarter. Our fiscal 2015 pro forma EBITDA reached 19.3% and exceeded the low end of our long-term targeted range of 19% to 23%. We ended the quarter with a cash balance of $325.5 million, reflecting a quarterly cash flow from operations of approximately $56 million resulting in a record cash flow from operations for the year. Net sales for the fourth quarter of $209.6 million increased…

Thanks, Leen. Good afternoon, everyone, and welcome to our fourth fiscal quarter conference call. As you've just heard, we posted some pretty good results in our fourth fiscal quarter with clear benefits from mix, warranty and fiscal discipline. I'm particularly pleased by the benefits from reduced warranty costs. A few years ago, I challenged the organization to take a quantum step in design and manufacture for reliability, which benefits both the customer and the bottom line. The value of growing of our income is clear, but we also took the opportunity to reduce the share count by repurchasing $50 million or approximately 3.5% of our common stock. We replenished the cash balance through exceptional cash generation during the quarter, thereby maintaining our flexibility on a go-forward basis. Before discussing the quarterly results, I would like to offer some observations about our business in China. Thus far, the slowing Chinese economy has had a de minimis impact on our business. China continues to invest aggressively in R&D, which is reflected in sales of our scientific products. A nationally-sponsored effort to develop a domestic, high-end FPD industry has been similarly unaffected. While there have been some flutters in the instrumentation market, the trend currently remains up and to the right. Our materials processing business in China, which should be most susceptible to macroeconomic pressure, grew by 39% in fiscal '15 including a pretty strong fourth quarter. The only observable skittishness has been with mom-and-pop integrators who don't have much traction with international customers. Fourth quarter bookings of $205.4 million increased 16.3% sequentially and 12.4% compared to the prior year period. The book-to-bill for the fourth quarter was 0.98. Scientific orders of $33.5 million increased 15.2% sequentially and declined 1.2% compared to the prior year period. We enjoyed a typical fourth quarter bounce…

[Operator Instructions] Your first question comes from Mark Miller with Benchmark.

Yes. I'd like to embarrass Leen, also. Leen, it's been a pleasure working with you and the best for your future endeavors. I was just wondering...

She can't talk, Mark. I'll say thank you for her.

Okay. So we did a good job embarrassing her. Could you give us sales -- did you bring out sales, or did I just miss them? I'm multimode in here with several calls.

Yes, we broke out sales.

By geography or what?

By geography or market, Mark, or both?

By dollar, by dollar. I got the percentages, but...

I didn't. It is on the website. We have all the supplemental financial information on the website, but I can definitely give you the revenue if you would like on the...

No, that's okay. I can get it off the website. Like I said, I'm dealing with multiple calls simultaneously here. John, you mentioned semi, semi was -- you're insulated to a degree by your concentration on scientific. We've heard from several firms they're expecting a pause over the next couple of quarters. What's your outlook there?

In semi?

In semi equipment?

So what we're seeing, Mark, is sort of continued -- I would say pretty strong demand on the service side, which is reflective of the fact that the fabs are running quite hot at the moment. New investment is very limited and I'd say that customers are buying for very specific projects. They're not buying to inventory, they're not doing a lot of future planning at this point. And it's a complicated situation, right? You have a lot of pressure on pricing right now. I think the numbers on memory is down about 50% over the last year. When that happens, it tends to reduce the appetite for investment. And then you have a number of mergers and acquisitions that are taking place among chip makers and equipment manufacturers, whatever it might be, and that leads to the inevitable sort of standstill while people try to figure out exactly what's going on. For us, I think we're-- if we're not at the bottom, we're very close to the bottom on semi. And I'd say that, going forward, it's probably more towards the upside than the downside just where we are relative to the market.

From what you've said and when I've heard on another call, there was a significant shortfall in LEDs for backlighting TV. It seems like OLEDs are really at a very strong inflection point right now. Is that a correct read? And are we going from now the majority TVs will be OLED? And just wondering what, compared to 2015, what percent will be OLED coming in 2016?

So there's, I'd say, there's a bit of difference here when you talk about TVs versus handsets. We do see a potential inflection in the use of OLED in handsets. And that's based on a lot of discussions that are taking place in the industry right now, some of the very well publicized. Your specific question about, I think I heard the comment that LED sales were down because TV sales were down. I don't know if it was really the impact of OLED televisions because OLED TV numbers are still very small as a percentage of being -- of the total market. It will be surprising to me if it had that much of an influence on LED sales.

Do you see that number doubling or tripling next year for the small percentage?

On the TV side?

Yes.

I have no visibility to comment on that. Again, our level of engagement on the TV side is still in the laboratory. It's not in the marketplace yet.

I mean, if you watch the TV, there is somebody showing off what looks to be a handheld mobile phone with an OLED screen. I forget who it was, but that's been on the TV the last week or so if you caught those commercials.

I have seen it. I think it's a Moto X phone that you're referring to. It's when it's dropped to the ground, it doesn't break. Is that the one?

Right, yes.

Yes. There's a very high likelihood that screen was processed on our equipment. What we're seeing specifically in the handset market is a broader adoption of OLED screens than we've seen previously. And I -- and that's probably reflective of the fact that some of the OLED manufacturers, and right now there are only 2 of them of note, are opening up beyond their own borders.

Your next question comes from Joan Tong with Sidoti & Company.

A couple of questions. Just regarding your events packaging. You said that it's actually came back down a little bit after 2 pretty decent quarters. How should I think about, again, or what's really the timing of a cycle? But I know that in the past, there are some imbalance between supply and demand. But in a normal situation, is the cycle shorter than a year? I'm just wondering, like, what's really happening there?

Well, if we look back over a long period of time, the cycles were very similar to the semi market, but with a lead lag of about 6 months. They typically kicked in about 6 months after a semi upcycle started and would trail off about 6 months after semiconductor -- after the semi cycle trough. Recently, we've seen a lot more sort of erratic behavior in that market as people have struggled with capacity shifts and market share shifts. So I don't know if I could give you an exact answer to that question, Joan, of that cycle looks like because it has been somewhat erratic.

Okay. And then how about on the, obviously, your service revenue is very strong this quarter. And that's really helped out with your gross margin. And I think, Leen, you mentioned that, like the flat panel display service revenue is actually up 5%. But year-over-year, as a total, it's like up 12%. So other than the flat panel display, what else is in there? I know semi is part of it, but what's really causing the service revenue being so strong and is this sustainable going forward?

I mean the strength is mainly coming from flat panel display because it increased $5 million quarter-over-quarter.

Right. But on the year-over-year basis, I assume that utilization rate last year, like, in the same quarter is also very strong. So I'm just kind of gauge that on a year-over-year growth what's really causing that?

In the first half of this fiscal year, the utilization was really lower. The utilization ticked up very much in Q3 and Q4. So on average, the increase for flat panel display was 4%, but the -- there was a step up in the second half of fiscal '16.

Okay, okay. And I assume that like in the December quarter, you would see that come down a little bit just because of the seasonality.

We didn't forecast, definitely not an increase and I would say that our forecast probably reflects a little reduction in the service revenue.

That's fine. And then, John, questions regarding the flat panel display order, the ELA order. It seems like you're very optimistic about that. And I think you mentioned there's additional $45 million order. What's your expectation going forward? Like, also taking into consideration of the shift from 750 to more of the larger format. And how should we think about it in 2016?

Sure. So the $45 million in orders that I referenced are actually already in-hand. They were subsequent events because they booked just in the last week or so. We do see a high level of -- or we are having a very high level of engagement with customers to talk about how to drive capacity expansion. And it is going to be related to what kind of products they want to manufacture. If indeed the shift is towards OLEDs, those are going to be for either Twin or Triple Vyper systems. If you look at the progression of a 750 to a 1000 or 1300 or 1500, the price points are about $4.5 million to $5 million for a 750 depending on the exact configuration. A 1000 or 1300, they're roughly the same price range. They're probably $10 million to $11 million; and then the 1500 is a $20 million product.

Okay. And John, just lastly. Any read in terms of like how we should think about 2016 as a full year? I know that you're reluctant to give full year guidance maybe at this point, but just kind of early read, also think about the macro factor into macro environment that we are in right now?

Sure. I'm not surprised by the question, Joan. I was surprised that it didn't come sooner. The thing that's a little bit difficult for us at this point to project on '16 is what the volume and mix of these ELA orders will be. Because the price points are so different, they can actually drive the numbers in a pretty significant way. And as a consequence, I feel like any number I put out there is going to be suspect because I don't have a good enough read on what the mix is right now. The sense is that for display, and to an extent consumer electronics, there are some very attractive opportunities out there, which should support a pretty nice growth model. But I'm not going to jump into yet, because there's a lot of moving pieces. As far as other things that affects '16, I have to tell you that I've been pleased -- surprised and pleased by how well the business in China has held up. There were -- was, again, a lot of uncertainty. Through the end of fiscal '15, it had really a minimal impact for us. Could that change to the worse? Obviously, yes. But it has held up pretty well so far and that would be the big concern that I would have is how demand in China, both direct demand and international capacity affects that business.

Your next question comes from Patrick Newton with Stifel.

Leen, congratulations on the well-deserved retirement. It's been a pleasure working with you. So to continue the focus on the OLED commentary and the FPD commentary. Can you walk us through how important it is that you vertically integrated this large format optic supplier? I understand that they were shuttering the business, but it seems like it's relatively core to obviously what you did -- to what Coherent does. But are there any margin implications for either initial shipments or for your LDU business that are positive stemming from you vertically integrating this business?

So the answer is yes, there are positive margin implications. There are -- on the initial shipment, there is no impact on the LDU because you don't replace these optics as a part of a service event. They're very long-lived devices. And I know I can imagine your next question is, how much of the benefit is it? And the answer is until we've manufactured a bunch of them under our own mantle, again, it's going to be difficult to tell you that number. But it's -- it will give us a positive uplift, I think when we ship out of that factory.

Okay. And then, I guess, on typing the OLED and included bullishness on the mobile devises. I'm curious on -- just ask maybe that TV question a little bit differently. There are some Korean panel vendors that have talked about increasing investments for OLED production in TVs. They've talked about targeting niche high-end markets and quantify 4 million to 5 million OLED TV units per year. And I think that you even discussed having production at full swing to target this market in calendar year 2017. So I realized that's still some time away, but I would assume earlier you said that OLED TV is still on the lab relative to this, just talking about kind of getting off the ground. Is there -- I guess, I just wondered how OLED TV is already being produced or and then I've been -- I assume they're being produced with your equipment. And then, 2, is -- with this opportunity, is this something that you are aware of looking at? And I know that unit volumes aren't necessarily huge, but this is a square inch of glass type of game and I imagine it would we still be relatively substantial at that $3 million to $4 million unit type of run rate.

Sure. So the -- as far as I know, Patrick, there's only one manufacturer that's shipping OLED televisions right now, and that's LG. And they do not use an LTPS process to make those TVs. We're engaged with other companies that are looking at OLED television and some of them may in fact use LTPS-backplanes. But the current product that is in the market from LG does not use our equipment.

Okay, that's helpful. And then just circling back to the FPD service revenue being up 4% year-over-year. It seems like you're relatively low number given the accelerating installed base. So is that due to lower-than-anticipated utilization of the installed base? Or if recall, is that a function of some cost-savings you passed on to customers that I think was quantified at about $8 million to $10 million, but I guess, if that makes sense, John?

Patrick, you're correct that -- I think it was up about a year ago, we mentioned that we had taken some costs out of the service model and we'd pass those onto the customer. And that we would have to grow the service business by $8 million to $10 million before we started to see absolute growth in service. So that's all. That changes baked into the numbers.

So your, call it, organic service growth rate for FPD is not really 3% year-over-year. It'd be more like 8%, if we normalize for the cost savings?

Yes, I hate doing that math. Yes, you could do that way, but our service business grew by 4%.

Okay. And then on semi, you addressed some of the consolidation trends impacting the market. You talked about -- I think you said belt-tightening is going to be the result. But then I think you also made a comment that this trend is largely being baked into your own expectations. And I'm curious as to how you can have comfort that any fallout from consolidation trends can be fully understood at this point given I would imagine that it still quite a large unknown.

So when I look at it from the standpoint of our business, part of the business judgment that goes into that is how likely is it for our products to be impacted by a consolidation? And in one case, one of our customers is being acquired, but they're being acquired by someone who doesn't have a footprint in the same space. So is it likely to have an impact on our business or are the synergies that they seek to extract is going to come from other places? And the answer on that one, I think, is they come from other places. If there is consolidation on the chip makers, could that have an impact on the business? Yes, it could, to the extent that they can eliminate or consolidate fabs. But we haven't seen as much of that yet in the grand scheme of things.

Okay. And just last one, somewhat of a pointed question I guess on fiber lasers. You have your next-generation laser that I think has been out for about 5 months now. You talked about some traction as far as demos and strong customer interest. But bluntly, do you think Coherent will be large player in the fiber laser market? Or do you see Coherent being more of a fringe player that can pick up tens of millions of annual revenue that's beneficial to you, but not necessarily a big dent in the broader fiber laser materials processing market?

I think -- I've said the same thing for a while that our initial goal is to pick up about $100 million in high-power materials processing, which is a combination of fiber lasers, direct diode and high-power CO2. That outlook hasn't changed. We -- I don't think we ever positioned ourselves to become the lead player in this market, at least not right out of the gate.

At this time, we have no further questions in the queue. I will turn the call back over to John Ambroseo for any additional or closing remarks.

Thanks, everyone, for participating, and we'll talk to you in a few months.

This concludes today's conference call. You may now disconnect.