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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to Coherent's First Quarter Fiscal Year 2018 Financial Results Conference Call hosted by Coherent, Incorporated. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce Bret DiMarco, Executive Vice President and General Counsel. You may begin your conference.
Thank you, Jeff, and good afternoon, everyone. Welcome to today's conference call to discuss Coherent's results from the first fiscal quarter of 2018. On the call, we have John Ambroseo, our President and Chief Executive Officer; and Kevin Palatnik, our Executive Vice President and Chief Financial Officer.
I would like to remind everyone that some information provided during this call may include forward-looking statements, including, without limitation, statements about Coherent's future events, anticipated financial and operating results and business trends. These forward-looking statements may contain such words as expects, will, anticipates, intends or referred to as guidance. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict and may cause actual results to vary significantly. These forward-looking statements reflect beliefs, estimates and predictions as of today, and Coherent expressly assumes no obligation to update any such forward-looking statement. For a description of risks and uncertainties, which could impact these forward-looking statements, you are encouraged to review Coherent's periodic SEC filings, including its most recent Form 10-K, Form 10-Q and Forms 8-K.
I will now turn the call over to John Ambroseo, our President and Chief Executive Officer.
Our apologies for the delayed start, there was a glitch on our end in getting clearance of the press release from NASDAQ. I’d like to begin with – provide our perspective on the display market. Before doing so, let me just say that our financial results for the last quarter were solid on all aspects, and Kevin will review them in more detail in just a few minutes.
Since sales figures for the iPhone X started to leave several weeks ago, assumptions have been ramping regarding the near and long term outlook for OLEDs leading to very high volatility for our related stock.
The operating environment is far or less dramatic. A channel check with integrators and panel manufacturers did not identify any changes in delivery cadence or service demand. What’s the reason for the disconnect, we think it’s rather simple. The leading OLEDA manufacturer committed its resources to a single customer, other interested parties left with no choice stayed with LCDs. Turning these customers on requires them to change the display drive electronics, which takes months not days, so the leading supplier has a short term glut.
Other panel manufacturers continue to invest in technology and capacity as a means to broaden the OLED market and capture share, they have shown no signs of slowing down. The only bump in our road is a short term supplier related issue that Kevin will address in his prepared remarks.
Orders for the Semicap market grew well into double digits over the prior quarter on memory demand. The growth is for laser used in inspection. The industry outlook for the balance of calendar 2018 remains upbeat, memory prices are projected to soften throughout the year, and intention will then shift the EUB roll out and fab utilization especially for legacy nodes.
The advance packaging market was lower following a good Q4. via drilling is tracking the trend in Semicap particularly for smart phones. Packaging houses are eager to see equipment lead times come down and tool manufactures are cautiously increasing their output.
These customers are also evaluating the best pathway to drill smaller via’s, and potential solutions include carbon monoxide or CO lasers, a Nanosecond UV laser which are both part of our portfolio. The other area that has become very active is Flex PCBs again for smart phone applications. Nanosecond UV lasers such as our AVIA NX series are of the solution of choice here. Although the materials crossing market exhibit typical seasonality in the December quarter, there were a number of notable highlights. The first quarter book-to-bill was positive; we secured our first volume order from one of the largest integrators in China for sheet metal cutting. It was a combination of three and six kilowatt fiber lasers. This is a great first step in a large account.
In the overall sheet-metal market, more than half our orders were for lasers above 6 kilowatt which is following in the trends in the market. Integrators and end customers are experiencing their usual growing pains in transitioning the higher powers but are confident that the power management issues will be resolved.
Orders for automotive applications were up significantly on a sequential basis from several applications. Our Tier 1 supplier order high-power fiber laser through fuel injector welding, polymer welding for body trim and lighting assemblies was up, and bookings for lasers used and lasers and modules used in label printing and marking were also hired on compliance and traceability requirements.
Medical device manufacturing workstations posted very good results. Drivers and aging population that increasingly requires part of our cardiovascular therapy. We have gained share in this area by combing a legacy rope in workstation with the current laser.
Orders for device margin increased significantly where our laser is used to print product identification information that resists fading and contamination. Bookings in OEM components and instrumentation were predictably lower after a record setting fourth quarter. Timing and side the market is in good shape. Bio-instrumentation is growing based upon increased clinical adoption of flows [Indiscernible] sorts and sequencing. We serve these applications with our oldest sapphire and subsystem solutions.
Medical OEM customers are anticipating sustained growth above 10% through the early 2020s prosthetic, surgical and dental applications. The drivers are well understood, less invasive procedures, faster healing and delivering what [Indiscernible] in a thousand review.
By contrast the atomic market is facing some challenges. Western markets have a significant installed base of vision correction tools, parts are very accurate and the performance enhancements have slowed. To further complicate matters, a series of acquisitions by big pharma over the past two years has not delivered of targeted financial results. These acts which are back in play, which contributes to market uncertainty.
The aerospace and defense market is rapidly evolving with several technologies moving from proof-of-principle to deployment. Directed energy devices are being called upon to dazzle, disable or destroy targets in land, sea and air platforms. The timeline calls for low-power dazzler to deploy in 2019. We are providing components and modules to primes and sub primes in this area. We continue to secure large orders or orders for large optics rather used in satellites and telescopes that we produce along ELA optics in our Richmond facility.
Our outlook for fiscal 2018 is unchanged; we expect it to be a record setting year. Now integration and expansion plans remain on track and we made another voluntary principal payment of €75 million at the end of December. This brings our total voluntary principal payments to €225 million and we’ve repaid about a third of the loan in the first 12 months.
We anticipate sustained strong cash generation, we will continue to invest in growth and pay down the debt. We also want the flexibility to return value to shareholders and our board has authorized us to repurchase up to $100 million of common stock over the next 12 months. Any buyback will be subject to customary market conditions and limitations.
I will now turn the call over to Kevin Palatnik, our Chief Financial Officer.
Thanks, John. Today, I'll first summarize fiscal first quarter 2018 financial results and move to the outlook for fiscal Q2. I'll just 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 GAAP adjustments relate to stock-based compensation expense, amortization of intangible assets, restructuring costs, impairments of assets held for sale, the related tax adjustments and the tax adjustments for The Tax Cuts and Jobs Act.
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 first quarter 2018 financial results for the company's key operating metrics were, total revenue of $477.6 million, non-GAAP gross margin of 48.5%, non-GAAP operating margin of 27.8%, adjusted EBITDA of 30.9% and non-GAAP EPS of $3.54.
Net sales for fiscal first quarter were $477.6 million, representing growth of $38 year-over-year. As expected sales came in seasonally weaker in fiscal Q1 when compared with fiscal Q4, 2017 specifically in the material processing market, but overall exceeded the midpoint of our previously guided range.
Our revenue mix by market for fiscal Q1 was microelectronics at 56.2%; materials processing, 26.7%; OEM components and instrumentation, 10.2%; and scientific and government at 6.9%.
Geographically, Asia accounted for 66% of revenues in the fiscal first quarter; the U.S., 15%; Europe, 16%; and rest of the world, 3%. Asia includes 2 territories with revenues greater than 10% of total sales.
Other product and service revenues for the fiscal first quarter of 2018 were $129 million or approximately 27% of sales, representing an increase of approximately 57% year-over-year.
Other product revenue consists of spare parts, related accessories and other consumable products and was 24% of sales. Revenue from services and service agreements were approximately 3% of sales.
We have one customer in South Korea related to large flat panel display manufacturing that contributed more than 10% of the fiscal first quarter revenues.
Fiscal first quarter non-GAAP gross profit, excluding stock-based compensation costs, intangibles amortization and restructuring costs, was $231.5 million. At 48.5% of sales for the quarter, non-GAAP gross margin came in at the midpoint of the previously guided range.
Non-GAAP operating margin was 27.8% for fiscal first quarter and was below the midpoint of the guided range primarily as a result of the strength of the stock market and its impact on our non qualified deferred compensation plan liabilities.
We record changes in plan liabilities to cost of sales and operating expenses with a nearly offsetting entry to other income and expense for changes in plan assets. The impact in non-GAAP operating margin was nearly 50 basis points, however the net impact is virtually zero to earnings per share. Adjusted EBITDA was 30.9% in fiscal Q1
With regard to The Tax Cuts and Jobs Act, as expected we realized a small benefit from the lower tax rates. Our fiscal Q1 pro forma tax rate was 28.8% a decrease of 50 basis points from fiscal Q4 of 2017s pro forma tax rate of 29.3%. As a reminder, the significant majority of our income is generated overseas so the change in tax legislation had a minor effect on our tax rates.
Turning to the balance sheet. Non-restricted cash, cash equivalents and short-term investments were approximately $423 million at the end of fiscal Q1, an decrease of approximately $52 million compared to the end of last quarter.
During the quarter, cash from operations generated $65 million and consistent with our priority of using excess cash flow to delever the balance sheet, as John mentioned we made a voluntary €75 million payment against our outstanding debt.
International cash was $273 million or approximately 65% of the total cash and short-term investment balance. Approximately 45% of the total cash and short-term investments is denominated in dollars.
Accounts receivable DSO was 58 days compared to 56 days in the prior quarter, and the net inventory balance at the end of the first quarter was approximately $433 million, an increase of $18 million, due to growth needed to support our [excimer] and high power fiber laser businesses. Capital spending for the quarter was approximately $24 million or 5% of sales.
Now I'll turn to the outlook for our second fiscal quarter of 2018. Revenue for fiscal Q2 is expected to be in the range of $470 million to $490 million. This range reflects the impact of one of our suppliers being behind on deliveries with a critical component in the manufacturing of our Linebeam systems.
As a result, we expect we will miss a single system shipment in fiscal Q2. And given the ISP of this machine is approximately $10 this becomes meaningful to the top line. We are in the process of implementing actions to remediate this issue and expect to be back on track with shipments within a quarter’s time.
We expect fiscal Q2 and non-GAAP gross margin to be in the range of 46% to 49%. Non-GAAP gross margin excludes intangibles amortization of approximately $11.6 million. And stock compensation cost is estimated at $1.1 million.
This range is a sequential decrease to fiscal Q1 results and reflects the continuing strength of the euro. The FX impact included in this range is approximately 70 basis points.
Non-GAAP operating margin for fiscal Q2 is expected to be in the range of 25% to 28%. This excludes intangibles amortization estimated at a total of $14.1 million and stock compensation expense of a total of approximately $8.1 million.
This range is also a sequential decrease to fiscal Q1 results and is also impacted primarily by FX. The total FX impact included in non-GAAP operating margin range is approximately 120 basis points.
Other income and expense is estimated to be in the range of $5.5 million to $6.5 million. We expect our overseas income to increase in fiscal Q2 such that our non-GAAP tax rate is expected to be in a range of 29% to 30%. And we are assuming weighted average outstanding shares of approximately $25.1 million for the second quarter.
Finally, I would just like to note that historically we haven’t talked much about FX since it didn’t have a material impact on our financial results. However, as a result of the Rofin acquisition, we now have a larger population exposed to the euro. At the current 124 rate, the strength of the euro has a projected 120 basis point impact on operating margin which translates into an impact of $0.16 to non-GAAP earnings per share for fiscal Q2, 2018
I'll now turn the call back over to the operator for the Q&A session.
[Operator Instructions]. Our first question comes from Patrick Newton. Your line is open.
Hi good afternoon, John and Kevin thank you for taking my questions. I guess John you kind of eluded to this in your prepared remarks, but I think it was last quarter, you spoke to the need to increase capacity in FY’19 to satisfy demand in your flat panel display business given work with manufacturers process multiple geographies. And so I think there is clearly a fear in the market that all that adoption trends have changed and given that you are closer to the source. Are there any changes in your plan capacity expansion or I guess ask differently have you seen a shift in customer appetites or potentially OLED market opportunities from an order perspective?
So Patrick, you know I’m going to refer back to my prepared remarks. We’ve gone through and spoken with customers both from the integrated side as well as panel manufacturers side and you know short term turbulence has not impacted their plans as we see them today. So we are going to continue with our plant expansion, again the size and dollars involved are nominal. If we don’t do that we won’t be able to live up to our commitments.
Great. And I guess a couple of quarters ago you also talked about three major fabs being discussed on the market. One that have been confirmed, another in Korea and then another in China, and you had stated at the time that there are virtually no orders from those fabs and your June quarter backlog, so I’m curious as we sit here today, only those three fabs and a meaningful contributor to either what you have ported exiting FY’17 or the current quarter.
So I’m not in a position where I’m going to update you. You know we don’t discuss detailed orders, we certainly don’t discuss what’s coming from specific customers. But I’ll go back to my previous statement. If we are planning to move forward with our plans, it means that we have good visibility into what customers are going to need and when they are going to need it.
Okay, that’s helpful. And then just could you provide us a little bit more details on this shortage of a critical line be component, it sounds like it’s for a 1000 system. I’m curious is this component that goes into all of your systems and you just happen to be one short and then should we anticipate that in your – I guess in the June quarter that we should see somewhat of a snapback as you maybe over shipped by one Linebeam?
Yeah Patrick, it’s Kevin. So I was a little bit elusive in the prepared remarks, but I think both John and I have been very consistent over the handful of quarters that optics is probably long pole when it relates to Linebeams. And so that is the critical component we are working it a number of suppliers to correct that, to remediate that and we will snap back within a quarter.
Great. Thank you for taking my questions. Good luck.
Thank you.
Your next question comes from Jim Ricchiuti. Your line is open.
John, just wanted to ask you regarding the utilization rates, just given what we’re seeing and hearing in the market, isn’t it somewhat surprising that we are still seeing the same kind of utilization rates of your equipment.
So Jim the thing to bear in mind is that even customers that are not producing product as they go through qualification and fab spin up are still burning through tubes.
But with include customers that are have been ramping for sometimes. Are you seeing any kind of change in utilization rates among those customers?
I understand the question and we can’t. Given our position in these fabs we can’t comment on a situation that might refer back to a single customer. I certainly understand the reason you are interested in the information, but I can’t provide any color on that, I’m sorry.
Okay, let me just switch over to one other area the micro electronics business and it does tie in I think as well to just the concerns people have about smartphone demand particularly the newer products. Have you noticed any change in either in – you mentioned you call that the Flex PCB area is an area I believe of strength and advance packaging. Have you seen any change in the demand environment there just in light of what’s been happening the last couple of weeks?
We have not.
Okay. And then one final question and I’ll jump back in the queue. Congrats on the momentum you are seeing on the fiber laser side of the business. Can you talk a little bit about how competitive this win was for you with this Chinese machine tool company, would you characterize either pricing or margins, was it in line with your expectations or is this just potentially going to be a more competitive business as you start to ramp it?
We are not trying to buy share in this market. We are trying to sell at competitive prices with respect to competitors. And by definition all of these sales are competitive, there is a – the leader in the space is extremely confident they have built a great product and they set the standard which everybody else has to meet. We feel that we’ve done that here, also we wouldn’t have won the business. But we are not chasing the business; we certainly don’t have any interest in starting a price war.
And then just let me slip one more and just the environment that you are seeing in materials processing, particularly in China. How would you characterize the overall level of demand that you’re seeing there?
You know, it has continue to be quite active and quite good, the customers are becoming more and more sophisticated in terms of their interactions with companies. They understand how to play people off against one another to their best of their abilities. They're looking for the best overall performance and value that they can get. Quite frankly they’re doing what they should be doing in an environment where there are multiple vendors capable of supplying their needs.
Okay. Thank you.
Sure.
Your next question comes from Joseph Wolf. Your line is open.
Thank you. I guess just to come back to that CapEx, should that be the value where the dollar spent in this quarter be that one that continues for the rest of the year and can you give us some kind of feeling for how much is being on spent on the laser business not the exponent side?
Yes. So, Joe, Kevin here. I don’t parse it into those pieces of you will, but overall I think we've said in the past, talked in the past that as we look in the fiscal 2018 given the expansion or investment in capacity that we talked about the range would be 5% to 6% of sales for the year. So we start out the year 5% of sales fiscal Q1.
Okay. And then, in the ILS segment, I guess on an operating basis turn profitable but you talked about the euro impacting the translation. Can you talk about just the trajectory of the profitability in the back half of the fiscal year and then into the calendar year?
Yes. Joe, Kevin again. So we’ve talked about in the past that we will deliver a vertically integrated fiber laser in fiscal 2018. That will certainly improve margins. We talked about in-sourcing the semiconductor chip obviously which is related to that which will drive margins. That's probably one of the stronger items that will influence both ILS and Coherent margin is going forward.
Okay. But no timing on how we can think about the reversal of some of the FX?
Well, many considerations in that particularly obviously the strength of the euro, and 124 I'm getting very -- I’d say estimates or forecasts on what the Euros going to do, I hasten to say that you margins can compensate for that win. All of us really don't know the direction of the euro for fiscal Q2 we’re assuming that 124 rate for the remainder of the quarter that's about as much visibility that I feel confident in terms of projecting.
All right. Perfect. Thank you.
Thank you.
Your next question comes from Mark Miller. Your line is open.
On the lasers you’re going to be shipping fiber lasers in to China, are the diode bars internally produced?
Kevin just mentioned that’s one of the things that we’re working on during this year those are still sourced from a third-party.
Can you give us an update in what you’ve seen in the MicroLED display market? Does it still out there?
There's still a lot of – still lot of talk going on and think at the CES one of the more entertaining technology that we shown was a video wall from, I think, it was Samsung, that was 164 inches of something, it was a massive wall. Great color you know not a product that is ready for deployment and I don’t think much has changed in our view for a microLEDs for small embedded displays and Googles and things like that. Yes it could make sense there and yes on these very big displays where you’re not limited by the chamber size. They could make sense. But beyond that we’re not seeing much in terms of product flow. We continue to see R&D efforts being taking place.
So you still believe their cost prohibited for a smartphone application?
I don’t think much has changed in the cost calculation in the last three months. Three months ago it was estimated to be about 10x the cost of Lenova display and I don’t – I’m not aware of any data to suggest that is shifted.
Thank you.
Your next question comes from Larry Solow. Your line is open.
Okay. Just a few follow-up, most of my questions have been answered. On the stock repurchase authorization, John, I know you don’t take this lightly, any reason behind it other than just adding sort source of capital allocation in a way to pay back shareholders? Does it coming at a time when you think your stock is not fairly valued or something. Any comment on that?
Larry, we’ve had lots of conversations with shareholders, one of the things that they always want to know about is uses of cash and we said there are essentially three things we can do with the cash, we can invest it in the business. We can pay down the debt or we can return it to shareholders either through buybacks or dividends. And we’ve been very active in paying down the debt obviously. We’re at a point now where we may have the opportunity to use some of the cash for a third purpose and we can't do that without an authorization. So we put it in for flexibility purposes.
Fair enough. On the fiber laser side timelines on diode obviously this is not an exact science or something you are prepared to give, but is it fair to say by fiscal 2019 the majority of your diodes will be internally produced?
So, the goal – well, the target haven’t change, right. We said we were going to ship vertically integrated product this year. We’re on track to do that. How fast we burn through the inventory of third-party diodes will determine when we’re completely independent. I suspect that will happen some that will burn for all that inventory sometime in 2019. Can I pinpoint the date -- my crystal ball isn’t that good, sorry.
That’s fine. But it sound like that’s a plan always moving forward. And on that, the fiber laser agreement you announced. By itself is it actually mover, a needle mover or is it just obviously a good indicator that you’re moving forward and does it potentially open the doors for more deal?
The customer that I refer to in China, we got a very small portion of their today volume, which is the way these things start out. You do the development work, you prove out the product, they’ll take some, see how they go in the field as they meet all of the requirements or all the expectations. Then you can opportunist to compete for the large part of the business. For our fiber laser business it’s obviously a pretty important first step. For the overall business obviously there’s a still very small numbers, but the trend line I would say is what encouraging to us that we’re getting these opportunity.
Okay, great. And then can you just clarify on the advance packaging market. I don’t think changed that fast. So I know last quarter you spoke to add a capacity and we’re drilling in the direct imaging side of your business, so it sound like order were good there I believe even talked about record orders at the end of last year. If the slowdown you cited this quarter more of a temporary thing and just in order flow or any other color that will be great?
So I don’t think that I talked about expanding capacity in either of those areas. I said demand was up and last quarter I did say demand was up in both areas, but we were able to handle that with the existing resources. As far as you know the trend lines it’s not uncommon that things in API slowdown in the December quarter because most of the manufacturers put capacity in place earlier so that they could have devices on the shelves for the holiday shopping season.
I don’t think there’s anything terribly unusual here. Overall handset demand hasn’t changed in a dramatic way. There’s some shift between devices that more or less always happens, but I think its timing based on where we are in the buying cycle for the year. And then of course there’s always a push when devices get launch, there’s always more capacity that goes into the fabs that are going to build them. So again pretty much a standard response from what we’ve historically seen.
Okay. The supplier issue, did they have any impact this quarter, and is it sort of sound like it's usually the one big ticket item, but is there a trickle effect down effect and did they hit margins at all other then the leverage you may get on that one sale?
Larry, Kevin here. It’s a physical Q2 concern, a single system as I mentioned on the prepared remarks, $10 million obviously that has up-and-down impact to the P&L. I’m not going to get into margins because we’re not going to isolate that a single machine and convey margin to that, but clearly it had an impact with or impact on guidance.
Got it. And just last question on the tax Kevin. Obviously the lower tax rate doesn’t benefit you guys too much, slightly lower going forward at least for next quarter. Does that include an adjustment for the repatriation of funds that I guess was spread out over eight years or whatever?
Yes. So actually that’s the actual cash payment for the repatriation. We have to basically accrue that and identify that into the tax rate is a discrete item, that's been done for Q1. If you look at the GAAP rate versus the pro forma, right, there’s a pretty significant difference. But as we look into Q2, as we make up the shipment we’ll generate more of income overseas at higher tax rates and that's why the [288] pro forma tax rate for Q1 we guided 29 to 30 for physical Q2.
Okay. So it sounds like we’ll sort of stay in the high 20s to 30 range and for the foreseeable future at least?
At least for Q2, yes.
Okay, great. Thanks a lot.
Thanks.
Your next question comes from Mehdi Hosseini. Your line is open.
Yes. Thanks for taking my question. I only have a few questions no five-part question. Going back to flat panel display how would you characterize opportunities for Coherent when comparing rigid to plastic OLED. You can either tell me about the TAM or from a pixel count, but it seems like there's lot of noise out there and when it comes to smartphone market maybe some of the confusion has more to do with the rigid versus plastic and any color here would be really appreciated?
What matters to us or what matters to our business is the square meters per month that are produce whether it rigid or Flex is relevant. So it’s the same hardware. It’s almost an identical process?
Right, right, right. Okay. Now to that extend and if you are so confident about underlying business momentum in the long-term growth prospects why not help us perhaps you can tell us about where the systems are shipped to maybe shipment by geography especially with your non-flat display business in China growing and that could help diversify outside the Korea. Is there any metric or any way you can help us better understand at longer to opportunity rather than being so preoccupied by the daily noise?
Mehdi, Kevin here. Frankly we can’t parse it down to that granular level. As you know there's still pretty much a single dominant supplier out there and if we were to talk about some of those numbers or calibrate it that way it would just correlate right back to that single dominant player. They don’t like that, we don’t like that and so until the supplying or the industry runs out we’re still going to be have to be illusive with how we characterize shipments and so forth. We just can't go there.
How long would it take for you to scale this fiber laser opportunity in China?
That really depends on – with this the one that I mention to me the single customer?
Yes.
So that’s going to be depended on the customer somewhat because they’re going to – they’ve ordered a bunch of devices from us, we’ll put those in the field and evaluate both short and long-term performance. And if we check all those boxes then we have an opportunity to compete for a large portion of their business. I can't tell you if that's a three-month process or a six-month process or one-year process. I think it’s going to be very dependent on how the customer -- how and where the customer deploys those products.
Sure. Okay. And my last follow-up has to do with in-sourcing components as relates to Rofin. Given all the variability that you have to deal with in the flat-panel display and new product why not accelerate the in-sourcing of component for Rofin, and why not try to perhaps reached at inflection point, the Rofin gross margin which could have a positive impact on the blended gross margin?
The process of in-sourcing follows a pretty predictable pathway. And as I mentioned in previous calls, we did a design route on an existing product that went through testing. We wanted to dilute it a bit further so it was a tweak. And then you go through another growth phase and growth and growth tax so growth is actually making the devices. and once you have the made and package you can start to put them through testing, there are some of the testing you to at an accelerated fashion and some of the testing you just have to let them cook, because you're trying to develop long-term reliability data before you put these things out in the field and in mass quantities.
We’re at a point where the time line is probably somewhat incompressible around the data collection. But again, it's completely in sync with what we told people to expect that we ship vertically integrated product this year and if all those things past the checklist then can we could take it across the portfolio and I apologize maybe I’m repeating myself again, but just to make sure it’s clear, we do have some inventory of these third party diodes, we’re going to want to burn for all of those first before we go to a completely internal supply. Its underway, I can’t give you and exact date because we haven’t finished the data collection yet.
Got it. Thanks so much.
Sure.
Your next question comes from the line of Joe Wittine. Your lines are open.
First off, as it relates to all that application development, so you obviously have some visibility of what’s happening at the device level, certainly better visibility than I do. So John what applications excite you as potential kind of near term needle mover be it in smartphones or beyond. And then what you are your updated thoughts on the smartphone adoption curve as you position here before through 2020 etcetera? Thanks.
Sure. So I again I’m going to go back to comments that we’ve made in the recent past. What we’re hearing in the marketplace is OLEDs broadening beyond smartphones, this discussion of it being brought into tablets, and that probably become more, more reality is more vendors come into play on the OLED side. And then people have very opinion about a foldable phone. Some of them were demonstrated at CES little over a month ago. There was the full spectrum of reviews and opinion on them but if you look at the device that can be a game changer from a user perspective that’s probably one of them.
And I’m going to sound terribly bias and I don’t – well, I’m going to sound terribly bias. A lot has been decided – seemingly decides about this market based on the performance of a single smartphone. You know the momentum that is behind OLED is seems to be quite strong and quite sustainable over a long period of time. And one of things that we keep talking about is you have to look at the overall cost in the long term where you have tremendous difference in the material costs between OLEDs and LCDs and you have a pretty significant performance gap between OLEDs and LCDs.
The conversion is going to happen. We can argue exactly when it’s going to happen, what is going to happen and that view on our part hasn't changed. And apparently based on what we’re hearing from customers, it has not much of change from their standpoint in terms of continuing to make investments to develop the technology and to expand capacity.
That's – it’s very helpful. And Bret you pointed out the current device, I think its pretty commonly accepted that the demand related problem [for the tenets] is principally price related, so on that do you get the sense of the cost of the panel is kind of functioning is the key part of the bill material that necessitates those high prices?
And secondly, do you get me sense from the supply chain that we will see lower device prices to counter weak demand in the near term or from where you see it or the device makers content with maintaining device at the current price point for the calendar 2018?
So, Joe, great questions and while I love to opine on things that are above my pay grade, it’s difficult for me to tell you exactly what's driving the pricing decisions on the handset. I think what you hear in the marketplace is that the display is about to 2x the cost of the high-end LCD. So 35, 40 bucks to 70 to 80 bucks, I mean those are the numbers that have been thrown around by people who done the teardown analysis. That’s not data that we produced. And I can't I can't comment on it veracity, I’m just parity what’s been out in the marketplace.
But picking a handset from a $700 price point with $1000 price point, if the only change was in the display that seems like an awfully big step to take, so there’s clearly cost have been added somewhere else because at least if you look at the manufacturers most recent financial statement which was unbelievably good not a big move in gross margin. So the new device will dramatically higher gross margin than its predecessor you would expected to see some sort of a shift. So again I'm drawing a lot of conclusions here based on a limited amount of data but it would suggest that costs have gone up for multiple components within that build.
Yes. Fair point. Okay. Then quickly on the fiber win, congrats by the way. Is this year your first high-power sale of that OEM, meaning you or Legacy Rofin and then I just want to ask what the power level was? Is it one or two kilowatts like we’re seeing in most these Chinese integrators today?
No. Let me answer last question first, so in my prepared remarks I said the order was for a mix of three and six: kilowatt lasers. It is not the first sale that we’ve made to this customer, but it is the first time that we've taken a volume order from them.
Great. Then finally from me, Kevin, a quick clarification. Thanks for quantifying the euro impact on the margin lines, I just want to clarify is that compared to euro at year ago levels or is that the sequential change you're seeing right now that would be helpful?
Yes, Joe, thanks for that clarifying question. Is the sequential change, certainly since January the rate or the exchange rate is just taken off, and so we will compared to prior quarter that’s most immediate impact.
That’s it from me. Thanks guys.
Thank you.
Your next question comes from the line of Jim Ricchiuti. Your line is open.
John, we’ve been hearing from some of the industry players kind of maintaining about some strength in areas of laser business, you don't normally associate with growth, CO2 are you seeing hearing any of that?
Our CO2 business actually has been performing quite well, not only for our portfolio of you know a few tens of watts to the hundreds of watts, but even the Legacy high-power CO2 business that we acquire in the Rofin acquisition has shown signs of life which is a pleasant surprise, but not one that we saw coming.
Yes. Would you contribute to that the strengthening that you’re seeing in that area?
So for the low-power applications I think the drivers are very similar to what were seen in the broader markets whether it's in the micro electronics business or the materials processing business. For the high-power product I think this predominantly repeat business with customers that have an established process that don't want to change the process. So there seem growth and to support that growth they just copy and what they have.
Okay. That makes some sense. Thanks. Automotive, it sounds like you're seeing reasonably good demand there. You talk also about opportunities in the battery welding market which is clearly an area that at least for the fiber laser suppliers is been an area of real interest. What can you say about that market?
It continues to be a very hot market attracting lots of investments. It’s still early. If you think about the number of batteries that are being produced these are – it’s still small compared to the overall opportunity. And as a consequence there's a lot of volatility you know order shifting from one quarter to another, manufacturer's changing processes, they’re trying to optimize things, so that causes push outs and pull ins. It’s very common for our perspective it’s very common for early-stage market.
Okay. And last question, any follow-on orders in the glass film cutting area or maybe can you characterize the pipeline there?
A lot of activity going on with glass cutting particularly for our SmartCleave portfolio, we have seen some good orders there. And I know that we’re doing a lot of development – process development work with customers right now. I would expect, I can’t tell you this with absolute certainty, but I would expect as new cell phone models come into the marketplace that when the opportunities become much larger. You know when you're in between product launches you're doing a lot of development work. It's when the product launch they push the go button is when the order starts flowing pretty quickly.
Thanks a lot.
Sure.
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 Jesse. Again thank you everyone for joining us and I’m going to apologize once again for the delayed start. We will do everything we can to prevent the repeat of that. Have a good day. We look forward to taking again soon.
This concludes today’s conference call. You may now disconnect.