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Good day, ladies and gentlemen, and welcome to Coherent’s Second Quarter Fiscal Year 2019 Financial Results Conference Call hosted by Coherent, Inc. At this time, all participants’ lines are in a listen-only mode. At the conclusion of our prepared remarks, we will have a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded.
I would now like to introduce Bret DiMarco, Executive Vice President and General Counsel. Sir, you may begin your conference.
Thank you, Joanna, and good afternoon, everyone. Welcome to today’s conference call to discuss Coherent’s results from its second fiscal quarter. On the call with me are 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 results, business trends, and the expected timing and benefit, 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, uncertainties and assumptions that are difficult to predict and may cause actual results, performance or achievement to materially differ from those expressed or implied by these forward-looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, risks associated with global demand acceptance and adoption of our products, the worldwide demand for flat panel displays and adoption of OLED for mobile displays; the pricing and availability of OLED displays, the demand for and use of our products in commercial applications, our ability to generate sufficient cash to fund capital spending, operations or debt repayment, our successful implementation of our customer design wins, our and our customers’ exposure to risks associated with worldwide economic conditions, in particular, in China and the Eurozone, our customers’ ability to cancel long-term purchase orders, the ability of our customers to accurately forecast their own end markets, our ability to accurately forecast future periods, 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, our ability to have our customers qualify our products, worldwide government economic policies, including trade relations between the U.S. and China and Chinese monetary policies, our ability to integrate the business of Rofin and other acquisitions successfully, manage and integrate our expanded operations and achieve anticipated synergies, as well as 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 Form 8-K, including the risks identified in today’s financial press release.
I will now turn the call over to John Ambroseo, our President and Chief Executive Officer.
Thanks, Bret. Good afternoon, everyone. Our four verticals are very much in line with global trends. The microelectronics business is experiencing lull in new capacity additions and utilization rates are currently stable. Materials processing demand is showing its dependence on PMI data as well as effects from trade issues. The components market remains robust, especially within aerospace and defense. And in the research market, the U.S. and China are facing off a citation and investment leadership.
The OLED market performance is in line with our previously announced expectations of a down year for capital spending. Scheduled deliveries are continuing and will likely trough in the current fiscal quarter. Service demand is very consistent with fab utilization data, which we believe is influenced by iPhone sales. We would expect service revenue to grow if Apple goes all OLED for this year’s product rollout.
Overall, customer engagement remains very high and RFQ activity is increasing. Based on historical trends, the conversion of RFQs to orders is typically in six to nine months range. If that type of trend holds along with increased RFQ activity, this would be consistent with the projected capital spend recovery starting in calendar 2020.
There have been numerous reports about yield improvements for display makers not named Samsung. It’s difficult to opine on these reports because each manufacturer has its own criteria. The source of the improvements is usually attributed to improved lamination and fine metal mask alignment.
Initial shipments of foldable displays began recently and it has been a bumpy start based on product reliability. This isn’t the first time a new display technology has strolled out of the gate and we assume that failure analysis will lead to a solution. These early issues aside, nearly every display manufacturer has announced the plan around foldable displays with product releases in the two to three-year timeframe.
We believe our Semicap business has been outperforming the broader wafer fab equipment market for several reasons. Fab utilization remains high which supports service revenue. Our lead OEMs have gained market share against their competitors and have also continued to invest in next-generation designs. This often drives new system sales.
The larger node market is doing well due to demand from IoT and automotive devices. Analysts predict that there’s a need for an additional – for 2,000 additional tools to serve these applications. Refurbishing older tools can provide partial relief. These established players may not want to build legacy tools, so new vendors are considering this space.
We are positioned to address the demand either through legacy devices where copy exact is required or our next generation of energy efficient solid state alternatives. The API market has slowed from last year’s run rate which is reflective as an overall industry trend. Initial orders for specific 5G processes are coming in. Vendors are taking a wait and see approach until the long-term requirements are better understood.
Materials processing orders improved in the low-double digit range from the previous quarter. We believe part of this can be attributed to seasonality and part to pent-up demand. If we look at it on a regional basis, the U.S. continues to perform well with a PMI number above 50. The Eurozone is struggling and Germany’s most recent PMI number is at its lowest level since July 2012.
There are conflicting signals in the Chinese market. Trade issues with the U.S. and weakened domestic demand persist but the atmosphere at Lasers Shanghai was upbeat, leading some to project a second half rebound in orders. We are taking a more measured view and believe the recovery will be slow and steady.
OEM components and instrumentations continues to be a bright spot. Bookings increased sequentially and compared to the prior year period. Revenue was currently on track for strong double-digit growth which would culminate in a record year. The biggest contributor to growth is our aerospace and defense business which we believe will approximately double compared to fiscal '18.
Our leadership positions and bioinstrumentation and medical OEM remain unchallenged. Our customers are seeing growth in emerging markets and new applications. These are encouraging trends which will benefit from new products that can create greater value for our customers.
I trust that everyone has seen the announcement that I plan to retire no later than April 2021. There’s no mystery behind the decision. I’m approaching my 31st anniversary with Coherent and I’m in my 17th year as CEO. It’s time for me to start planning for what’s next. The two-year runway is intended to allow ample time for a search and handoff to my successor. Until then, it’s business as usual.
I’ll now turn the call over to Kevin Palatnik, our Chief Financial Officer.
Thanks, John. Today, I’ll first summarize fiscal second quarter 2019 financial results then move to the outlook for fiscal Q3. I’ll discuss primarily non-GAAP financial results and ask that you refer to today’s press release for a detailed description of our GAAP results as well as a reconciliation between GAAP and non-GAAP financial results.
The non-GAAP adjustments relate to stock-based compensation expense, amortization of intangible assets and 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 Web site. A replay of this webcast will also be made available for approximately 90 days following the call.
Fiscal second quarter 2019 financial results for the company’s key operating metrics were total revenue of $372.9 million; non-GAAP gross margin of 38.7%; non-GAAP operating margin of 14.2%; adjusted EBITDA of 18.2%; and non-GAAP EPS of $1.61.
Total revenue for the fiscal second quarter was $372.9 million and came in slightly above the midpoint of our previously guided range. Our revenue mix by market for Q2 was microelectronics approximately 45%, materials processing 28%, OEM components and instrumentation 18%, and scientific and government 9%.
Geographically, Asia accounted for approximately 51% of revenues in the fiscal second quarter, the U.S. 23%, Europe 22% and rest of the world 4%. Asia includes three territories with revenues greater than 10% of total sales. Europe includes one territory with revenues greater than 10% of total sales.
We had two customers, one in South Korea and one in Japan, related to large flat panel display manufacturing that each contributed more than 10% of our fiscal second quarter revenues. Other product and service revenues for the fiscal second quarter were $116 million or approximately 31% of total 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 3% of total sales. Total service revenues were sequentially down by approximately 2 million as our key integrators continue to focus on conserving cash by keeping their service stock to lower threshold amounts.
Fiscal second quarter non-GAAP gross profit, excluding stock-based compensation costs, intangibles amortization and restructuring was $144 million. Non-GAAP gross profit was impacted sequentially primarily by volumes and product mix and to a lesser extent by the Q1 benefit of the ELA equipment cancellation fee resulting in non-GAAP gross margin of 38.7% for Q2.
Non-GAAP operating expenses increased sequentially by approximately $5 million, primarily due to deferred compensation liability increases as well as the decreased number of holidays and vacation taken in the March quarter when compared to our December quarter. This resulted in a non-GAAP operating margin of 14.2% for the fiscal second quarter and also came in slightly above the midpoint of our previously guided range. Adjusted EBITDA was 18.2% in fiscal Q2.
Finally, with regard to our non-GAAP tax rate, we realized the significant decrease in the rate from our previously guided range. For the most part, foreign income is taxed at a higher rate than domestic income. As a result of our geographic mix of income, we realized a more favorable tax rate.
Turning to the balance sheet. Non-restricted cash, cash equivalents and short-term investments were approximately $349 million at the end of fiscal Q2, an increase of approximately 29 million compared to the end of last quarter.
During the quarter, we repurchased shares totaling approximately $26 million. We did not make any voluntary payments against our term loan. The outstanding amount of the term loan in USD is approximately $414 million.
Accounts receivable DSO was 76 days compared to 78 days in the prior quarter. The net inventory balance at the end of fiscal second quarter was approximately $484 million, a decrease of 9 million from the prior quarter. And capital spending for the quarter was approximately $18 million or 5% of sales.
Now, I’ll turn to our outlook for our third fiscal quarter of 2019. Revenue for fiscal Q3 is expected to be in the range of $335 million to $355 million. We expect fiscal Q3 non-GAAP gross margin to be in the range of 37% to 40%.
Non-GAAP gross margin excludes intangibles amortization of approximately $12.3 million and stock compensation costs estimated at $1.3 million. Non-GAAP operating margin for fiscal Q3 is expected to be in the range of 11% to 14%. This excludes intangibles amortization estimated at a total of $14.4 million and stock compensation expense of a total of approximately $9.3 million.
Other income and expense is estimated to be an expense in the range of $3 million 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 Q3 non-GAAP tax rate to be in the range of 19% to 20%. And finally, we are assuming weighted average outstanding shares of approximately 24.2 million for the fiscal third quarter.
I’ll now turn the call back over to the operator for the Q&A session.
Thank you. [Operator Instructions]. We have a question coming from the line of Blayne Curtis from Barclays. Your line is open.
Hi, guys. Thanks for taking the question. I was curious, you saw – you said a pickup in orders in materials processing. I was just kind of curious in your outlook for June if you can give us some color as to what you expect from – between your segments? And particularly in materials processing if you can just talk about the pricing environment there as well? Thanks.
With regards to materials processing, as John said in his prepared remarks, we did see some double-digit growth in orders but we’re taking a very measured approach going forward when it comes to materials processing. We still see challenges in China even though there was a little bit of ray of sunshine, if you will, there. But again, we’re being very measured. So I’m not going to call out materials processing per se either in absolute terms or percent of revenues, but we’re taking very measured approach, slow and gradual recovery.
Thanks. And then maybe you can just comment on the microelectronics side particularly flat panels. I think as you look, you mentioned China and working through yields. Just kind of curious as to the dip here. Have you seen any change in plans over the last quarter or so in terms of deployment of these factories?
So if we look at what’s happening in the microelectronics market but specifically in the display space, a lot of news coming out of China regarding improvements in yields. As I mentioned in my prepared remarks, it’s a little bit tough for us to tell exactly what that means because everybody defines yield in a different way and it’s very dependent on what kind of product they’re trying to make especially when it comes down to things like PPI. That will dictate what customers would be receptive to taking those products. But generally there’s optimism especially in most of the Chinese manufacturers that they’re making headway in cracking the code and a lot of the headways again as I mentioned already in lamination and fine metal mask alignment. Those have been two processes that they have had particular challenges with. We would expect a lot of this capacity to actually serve Chinese handset manufacturers where there’s better alignment in terms of supply chain cost or pricing et cetera. We think there’s still a fairly long way to go before one or more of these players can challenge for the position with Apple as a supplier simply because the Apple spec on that display is the most demanding or among the most demanding in the world.
Thanks.
Sure.
Thanks, Blayne.
Our next question comes from the line of Jim Ricchiuti from Needham & Company. Your line is open.
Hi. Thanks. Good afternoon. John, when you talk about the activity or the conversations picking up with respect to new investments that potentially could come online in 2020, in very recent conversations. What does that mean? Does that mean since you guys reported your fiscal first quarter? How recent and how serious do you think these conversations are at this point?
So, Jim, I don’t think much has changed in displays based in the long term, because if you go back to commentary that we offered in fact years ago, we said follow the fabs, because as fabs get built, they’ll need to buy equipment to run those fabs. So part of this is just reflective of the fact that there are a number of new fabs that are going to come online starting I guess later this year or they’ll probably be completed and then they’ll start looking at fab in, what kind of mix of equipment, what size of panels they’re going to be manufacturing, all of those decisions. So the conversations that we’ve been having with customers are around those issues. Are there going to do a Gen 5.5? Are they going to do a Gen 6? Are they going to do something different? What are their requirements? It is very typical conversation. From the standpoint of what does recent means, recent means within the last few weeks. We’re in constant dialogue with these customers and we’re always going back and forth on a variety of topics whether it’s capacity, whether it’s service requirements, timing, et cetera, because the fabs have to coordinate a tremendous amount of fab in equipment. We’re one part of a very large supply chain that has to be coordinated. So again the conversations are consistent with where they are in their own cycle.
Okay. Thanks. And you alluded to the fact that on the Semicap portion of the business you appear to be and I think you have been outperforming. Do you anticipate that remaining the case? It sounds like you have some more unique drivers to that business. Is it your expectation that you can continue to outperform in this area?
Well, if you look at the different components, right, service demand has remained very high as we’ve been reporting it seems like for years with utilization rates running in the 90s I think even when they’ve just – they haven’t gone much below the high 80s, although I’m making that statement from memory rather than having the data explicitly in front of me. Are there any signals that we see today that would suggest that utilization rates are going to dip precipitously? Today, not. Could it happen? Sure, but we don’t see that today. So you say, okay, the service part of the business looks like it’s in good shape. On the capacity side, the two things is leading edge capacity and there some of our lead OEM customers have taken share, which is good for us because it means we get a bigger piece of the pie on the leading edge equipment. And on the legacy stuff we’re one of the few vendors that can actually support that activity. So there really is a need for 2,000 additional tools to address automotive and IoT, we should have a front row seat to that. Can I tell you what the explicit timing is? No. Can I tell you that we’ve got the right tool kit? Yes.
Okay, fair enough. One last question from me, I’m just kind of curious. What’s driving the growth that you’re seeing in the aerospace and defense portion of the business? And I don’t know if there’s a way for you to give us some sense as to the size of that business?
So we can’t comment on the size, but I can tell you that there are a couple of things that are driving it. Number one, we’re one of the very few domestically based manufacturers that can provide equipment – specific equipment into defense applications. And as a consequence that puts us in a better position to win that business. And we’ve been weighing our fair share of those opportunities and after years of making investments, those volumes are starting to pick up as the equipment is being or these systems are being deployed out into the field. The other thing that we’ve seen a very nice uptick in is our optics business. You may recall a few years ago we bought the assets of Tinsley Optics from L-3 and I think this was three or four years ago. I don’t remember the exact timing. And we bought that not only to support our high-end ELA systems but also because we felt there was an opportunity in large scale optics. There’s a lot going on in ground-based and space-based telescopes both for civilian and military applications. The same is true there. We’re just winning more of that business because of our capabilities and our footprint.
Got it. Thanks a lot.
Sure.
Our next question comes from the line of Patrick Ho from Stifel. Your line is open.
Thank you very much. John, maybe as a follow up to Jim’s question on the aerospace and defense uptick that you’ve seen, traditionally aerospace and defense is very project related, it takes years to kind of gestate. Can you give your thoughts on the sustainability of these trends over the next couple of quarters and maybe even to 2020, whether there are more projects that are going to hit the volume bases for your guys?
So, Patrick, I’d say two things. First your comment about the gestation period is correct. These things typically take a long time to work themselves through. There is a desire to have more flexible and energy efficient platforms being deployed into certain applications. The programs that we’re currently working on are for land, sea and air systems. There is an increasing level of activity on future programs as well. So if you look at the funnel, we have things passing from the top of the funnel to the bottom of the funnel and that’s where you get your volume, but at the same time we’re seeing more projects entering the funnel that we’re engaged on. Some of them will lead to funded programs, others will not. I think that’s the typical pathway here. But there’s definitely an increase of activity in the aerospace and defense space.
Great. That’s helpful. And maybe as my follow-up question to Kevin, gross margins obviously have a lot of moving parts whether it’s absorption, product mix and even customer mix. Given where microelectronics is today, is absorption still the biggest issue that you’ll see with gross margins over the next couple of quarters as we model that out?
Yes, Patrick, thanks. As you know, volumes was give it and take it and the downside from an absorption standpoint, you pay for that multiple times over. No matter what you do on the manufacturing side, you’re chasing the expense down with volumes deteriorating it just increases cost. On the material side if volumes come down, your suppliers pass those addition costs out to you as well. So yes, as we look forward, absorption because of volume degradation will be impacting us.
Great. Thank you very much.
Thank you.
Our next question comes from the line of Brian Lee of Goldman Sachs. Your line is open.
This is Gabrielle [ph] on for Brian Lee. Thanks for taking our questions. So first it would seem like the display fabs might be seeing more stable trends. Would you say that this is a fair characterization here? And do you have any updated thoughts as to your original down 15% to 20% guidance for OLED revenue this year?
So as far as stable trends, I’ll refer back to the comment I made during my prepared remarks that we’re likely seeing a trough in that business. I don’t know that I would say – I don’t know if I would define a trough as stable, but it’s a point in time. Certainly what we’re seeing from fab construction would send a positive signal, but what has to happen is that fab construction has to lead to orders, which therefore creates your revenue opportunity. As far as updating any long-term guidance, we’re not going to do that. We made the statement last quarter that we were going to focus on quarterly guidance for the foreseeable future and we’re going to stick with that.
Okay, thanks. And then just as a follow up on the comment you made regarding display fabs in 2020. Can you give us some sense of the geographic mix? Is it all China or mostly China? And then would you anticipate that the two orders there will be geared more towards the LineBeam 1000 like they have been in the past or are you seeing that trend towards 1500 there by 2020?
So from the perspective of where most of the new fabs will be, I think just counting bellybuttons, if you will, is probably China will lead in the number of new fabs. As far as the configuration, that’s part of the discussion that’s still ongoing. I think the decision that the fabs have to make is do they have enough confidence in all of their processes to make the investment in what is largely viewed as the most efficient format which is Gen 6 panel size. But in order to make that decision they have to really be confident that they have all of these issues worked out. If not, then in all likelihood they would look at a Gen 5 or a Gen 5.5. Early days for that conversation but a very appropriate question.
Okay. Thanks.
Thank you.
Our next question comes from the line of Mehdi Hosseini of SIG. Your line is open.
Yes. Thank you for taking my question. John, if I go back to the topic of fab construction, what gives the confidence that these customers don’t change the type of OLED fab? We have seen it in Korea where a fab that a couple of years ago was dedicated to RGB OLED foldable is now going to be half used for TV. And in China, do we really know what end market application is? And I’m asking this question because I think there’s a little bit of misunderstanding of your opportunity as it relates to TV versus handset. And I have a follow up.
Sure. So if you look at where the Chinese manufacturers have focused most of their efforts, today it’s been in the mobile market. And whether that is for handsets or larger formats, it’s predominately in the mobile space. If you think about the TV market, you’re correct there’s different – there are different configurations. There’s the metal oxide approach that’s led by LG. Others are looking at that but they’re also looking at some sort of annealed backplane as one of the possibilities for the TV market. So you’re correct that we don’t know explicitly what these fabs will be utilized for. But if you look at where they have the best near-term revenue opportunities, it still appears to be in the mobile space rather than in the TV space. Could that change? Sure. Based on what we’re seeing today it appears more likely than not that it’s going to beat the mobile applications.
Sure. Great. And then the follow up has to do with Rofin and I apologize in advance if the question has already been asked. I joined the call late. Is there an update on the manufacturing facility in Germany and where are we in having an in-sourced system solution?
We are shipping vertically integrated product at this time. However, I think as both Kevin and I have mentioned in previous calls, given the overall slowdown in the market the overhang on third-party components is going to take longer to unwind than we had projected a year ago. So we still have that third-party inventory to burn off before we will see the full benefit of being vertically integrated.
Got it. Thank you.
Sure.
Our next question comes from the line of Larry Solow of CJS Securities. Your line is open.
Great. Good afternoon, John and Kevin. Just quickly John maybe too early to congratulate you, but hopefully I’ll be speaking many more times in the call but I will throw out that congratulations. Just speaking to the guidance number that you have given for Q3, what’s sort of driving the sequential, a little bit of a downturn and actually we can see the midpoint of the guidance is sort of down close to 30% year-over-year? Is that just the – I know you mentioned the FPD equipment troughing next quarter, so a little bit of decline there. What else is sort of – other things that are driving that down?
Yes, Larry, it’s Kevin. So as you heard from John’s prepared remarks, we expect that OLED or call it microelectronics more broadly troughs in the current quarter, the June quarter. We’re not right there yet. So that’s a driver of the lower guidance. And when it comes to materials processing between microelectronics and sales processing, round numbers 80% of our business. With materials processing as I said earlier we’re taking a very cautious approach where a lot of conflicting factors and data points out there to suggest that there’s a turnaround. So we’re very measured in that regard as well. Those are the two big end markets that are driving the current guidance.
Okay, that’s sort of in the same obviously drivers for the full year. I’m just a little bit surprised by sort of the sequential decline, but okay. Fair enough. And then it does seem like you mentioned China and it sounds like at least anecdotally hopefully things are – there’s improvement on the horizon. What are you seeing I guess through this quarter and whatever you can update beyond that in terms of just pricing on the fiber laser side and just overall customer attitudes?
So I’ll go back to the Lasers Shanghai. It was a very well attended show. Lots of good discussions with customers. Customers were upbeat. I would say that one of the things you always have to look at is end of last year was so painful in China that any improvement might have an outside reaction. So it’s tough to gauge that. On the pricing side it varies by product class certainly in fiber lasers especially below 4 kilowatts, the pricing continues to be exceeding aggressive in China where the Chinese manufacturers are working hard to gain more and more share. The international manufacturers are trying to defend their share. It is a challenging situation. And an observation not a commentary, but I’d say what’s driving Western manufacturers is P&L and what’s driving Chinese manufacturers is market share. There’s no surprise there. It just leads to very different behavior.
Right. As the stimulus, has that helped at all or maybe too short term to get a read on that?
Well, the stimulus this time around if I remember correctly is predominately infrastructure. It’s on the Belt and Road initiative and there’s been a lot reported on that, a lot of political commentary about the implications for that. Clearly there will be some benefit from a utilization perspective because products that are provided by our industry will be used to manufacture construction materials, et cetera. But I don’t think that it will have the same type of impact as say the automotive or consumer electronics stimuli that China has employed in the past. And as I mentioned I think it was last quarter. Debt levels for Chinese consumers are similar to what they are in the West. It’s not surprising that the Chinese government is focused on infrastructure, because I think it will be tough to get Chinese consumers to double down right now given where their own finances are.
All right, okay. And just switching gears quickly back to OLED and the foldable OLED opportunity, is there a scenario where five, seven years, I don’t know exact – that particular timeline that a majority of handsets go to foldable assuming they can get by this sort of initial issue and then obviously supply issues on the front panel are resolved and I assume that would drive a considerable amount of demand for your equipment.
So it’s an interesting situation because if you go back a year or two ago, it was really Samsung was the only one that was talking about foldable technology. And it seemed like a very far out approach. Now you have I think a handful, maybe a little less than a handful of manufacturers who are marketing devices but price points are exceptionally high. It’s almost we don’t want you to buy it price. But what’s also interesting is as you go around and talk to all these display manufacturers, they all have a plan of attack here. They’re not looking to enter the market in the next year, they’re looking at two or three years downstream to perfect the technology before they put it out into the marketplace. There are certain compelling aspects to having a larger screen that folds up into your pocket, whether it’s for work use or personal use, I think most people can see that but the price point has to come down fairly dramatically. And the long-term goal I think for many of these manufacturers is to have a foldable display that is priced at what today’s high end display is, so in the $80 or $90 range and the foldable display today is probably twice that. It is not at a marketing enabling price today but that was ever the goal. This is first year demonstration of technology, see what customers have to say about it and then if successful roll it out further. And you’re correct, for all the equipment manufacturers in the supply chain, this is just the surface area argument. The more surface area you’re producing, the more equipment that you need.
Right. Okay. And then if I may just one last question just to clarify. So the handful of manufacturers slated to come online in 2020 or potentially, speaking of that, are these guys that have been working I assume on a smaller basis on R&D that seemed to have improved yields enough to expand capacity to build the new fabs where the pool of providers you’re speaking to or another area?
I would say that there’s a mix. There are some who are new to the game or newer to the game. The majority of them are existing players who are seeking to expand capacity because they believe there’s a greater revenue opportunity for them.
And I would assume they’ve improved – working on improving yields or towards maybe not compatibly Samsung yet, but improving enough to have that opportunity? Is that fair to say?
Yes. Again, Larry, yield is – we see the reports that everybody sees because if nothing else, these people are pretty prolific in terms of announcing new yield numbers. It’s very hard for us to compare one set of yield numbers to another because we don’t know what the underlying criteria might be for each of those manufacturers. But if you take it at face value, it looks like there’s been a pretty substantial improvement in yields for a lot of these players over the last 12 months and they’re projecting more improvement over the next 12 months.
Got it, great. That’s helpful. Thank you very much. I appreciate it.
Your next question comes from the line of Mark Miller from Benchmark. Your line is open.
John, congratulations on your retirement plans. I thought I’d beat you, but maybe not.
Thank you, Mark.
Just was wondering, can you give us a ballpark figure where utilizations are in the major OLED fabs and where do you think they might be at by the end of the year?
So it’s going to vary pretty dramatically. Even if you look within Samsung their A2 fab is probably running near capacity and that’s the one that supplies most of their internal demand as well as some external customers. Their A3 fab has been reported as more or less dedicated to Apple. That’s running at the much lower number. We’re not in a position to tell you what that number is and it’s not our job to disclose it nor is it our right to disclose it. As far as the other manufacturers, their focusing more on the yield number right now, so I would suspect that a lot of these fabs are running hotter than their output would suggest simply because they have to overcome yield to manage output.
Okay. And in terms of OLED screen prices, that’s been high for quite a while but they are coming down and has that opened up especially in the mobile device area, has anybody recently announced new mobile devices with – due to the lower screen costs?
Well, if you look some of the Chinese handset manufacturers, there is an increasing number of devices available with OLED screens. As far as we can tell and I need to think about how to best word this because I don’t want to seem flippant about it, as far as we can tell they are not at the level on an Apple device or a Samsung device in terms of screen quality. But they’re certainly at an acceptable level for the consumer. And the pricing there cannot be what it is for an Apple device, because if you compare what Huawei or someone else is selling a handset for in China, it’s nowhere near what the iPhone 10 sells for globally. And the screen is one of the biggest elements of the build materials, so it has to reflect a lower price. I don’t know what that price is at the level of an LCD. It’s certainly somewhere between an LCD and a high-end OLED.
Finally, did I miss cash flow from operations?
Mark, it’s Kevin. No. That’s not something I really promote on the call. But you’ll see it in future filings. It was 75 million for the quarter cash from ops.
75 million, okay. It’s pretty good. Okay. Thank you.
Sure.
Our next question comes from the line of Nik Todorov of Longbow Research. Your line is open.
Hi, guys. Good afternoon. First to go on the Semicap utilization, you mentioned that you’re seeing high utilization. I’m just wondering in terms of your expectations and kind of your exposure to maybe some of the memory fab utilizations, because at least on the headlines and what people are speaking publicly is that utilization or at least output should be coming down here if not the current, lower in the next quarter or two. How much of an effect will that have on your Semicap business? And if at all, I guess it depends on how much your exposure is, so maybe you can refresh on your exposure in the Semi capital.
So first of all, the comments that were made were backward looking in terms of what utilization rates are. We don’t comment on forward utilization rates. Our crystal ball isn’t quite that good. There is of course an impact if utilization dips in a significant way, we will see an impact on our service business. We don’t forecast that going forward, so we can’t do that here. But there is a correlation. We’ve always been clear of this correlation between utilization and what our service revenue does in the Semicap space.
Okay, got it. And Kevin, on the OLED side, I’m assuming that you don’t have concrete orders for those new fab that you talked about for 2020 yet. And just I’m curious when you have conversations with customers, what is the contingency that they’re looking for to decide and pull the trigger and place those orders for mobile capacity versus a TV, for example, or for that matter, they decide, hey, smartphone units are better than you expected or we think OLED penetration would move to the mid-level of smartphones? What are the kinds of contingency and what are they looking for in order to make the decision?
Nik, let me try and answer it this way. As John said earlier, those are complicated decisions. They’re supplier decisions. There’s which generation of OLED display decisions and so on and so forth. So in terms of lead times, one of your questions, we typically say six to nine months type lead times. So they need to figure out their fab, their fab in date for construction of the fab, the decisions around which technology. As you know anything with an LTPS backplane that gets some yield uses our equipment. So whether it turns out to be Gen 5, 5.5 or Gen 6, they will put orders on the books and again those orders are typically six to nine months earlier than when we need it. But very complicated supply chain logistics that in terms of their decision making that’s something internal. We have some of those discussions just so we could plan our own supply in logistics, but it’s not something I can share here.
Okay, got it. And maybe lastly if you can try to dissect this. So you called out this is likely going to be in the trough in terms of OLED panel shipments in the June quarter. But is there any way you can address what the delta when we move into the September and the December quarter? Is it rather substantial? We’re just trying to understand from a modeling perspective what kind of rebound should we expect to the extent that you can comment?
Yes, Nik, I can’t comment too much here. As both John and I have said last quarter and this quarter, we’re only guiding one quarter out. We’re being very measured about that. We do expect to see a trough when it comes to the display business, but that’s as far as we’re going to go. Going beyond that we’re just not willing to do that at this point.
Fair enough, I understand. Thanks, guys.
Thank you.
Our next question comes from the line of Andrew DeGasperi of Berenberg. Your line is open. Andrew DeGasperi, your line is open.
Yes. Hello. Can you hear me?
Yes. Hi, Andrew. Go ahead.
Yes. Hi. John, maybe can you comment on – you mentioned Apple going to full OLED if that’s a potential possibility and service revenue may be picking up on that. Do you think that today Samsung has the capacity to produce all their phones without buying new hardware from you?
So, Andrew, to the best of our knowledge based on what Samsung has said that they can produce somewhere between 400 million and 500 million handset displays and the variation is really related to the screen size. It’s a surface area argument as we’ve said on previous occasions. If you do the math around that, it would suggest that they could support their internal consumption as well as their lead customer and they could do that with existing capacity. They have to run the fabs full out to get to – I assume when they talk about 400 million and 500 million, they’re talking about running them full out. They’re not talking about running them at 60% or 70% utilization rate.
Got it. And then secondly, maybe on the welding opportunity. I know China pulled back some subsidies in April. I was just wondering – one of your peers mentioned they didn’t see anything in terms of a pullback. And then on the investments on the laser side, are you seeing anything on that front?
We have not. If anything we’re getting more and more inquires on the welding applications.
Great. Thank you.
Sure.
At this time, we have no further questions in the queue. I will turn the call back over to John.
Thanks, Joanna. I want to thank everybody for participating. If any of you are planning to be at Lasers Munich, please reach out to Kevin and we’ll do our best to give you a tour of the booth. Thanks, again.
This concludes today’s conference call. You may now disconnect.