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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, and welcome to Coherent's Fourth Quarter and Fiscal Year 2019 Financial Results Conference Call. [Operator Instructions]. Please note, this event is being recorded.
I would now like to turn the conference over to introduce Bret Dimarco, Executive Vice President and General Counsel. Please go ahead.
Thank you, Lisa, and good afternoon, everyone. Welcome to today's conference call to discuss Coherent's results from its fourth fiscal quarter and fiscal year ending September 29, 2019. 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 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 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 United States and China; our ability to integrate the business of Rofin and other acquisitions successfully, manage our expanded operations and achieve anticipated synergies; our ability to successfully manage our planned site consolidation projects and other cost-reduction programs and to achieve the related anticipated savings and improved operational efficiencies and other risks identified in the company's SEC filings. For a detailed description of risks and uncertainties, which can impact these forward-looking statements, you should review Coherent's periodic SEC filings, including its most recent Form 10-K, Form 10-Q and Forms 8-K, including the risks identified in today's financial press release.
I will now turn the call over to John Ambroseo, our President and Chief Executive Officer.
Thanks, Brett, and welcome, everyone, to the call. The one word that best sums up our fourth fiscal quarter is mixed. Microelectronics is moving into positive territory and instrumentation remains robust. On the other side of the ledger, materials processing is beset by a number of challenges. It is tempting to project that we are at or approaching the bottom, but we are mindful that irrational behavior from foreign and domestic competitors could further upend the market. The best defense in these circumstances is innovation, which has long been a hallmark for Coherent. The trends in the various submarkets of microelectronics remained largely unchanged since last quarter's report. Bookings were sequentially up in the low double digits by virtue of a new fab order in the FPD business, adding to the backlog position for fiscal 2020. While this is encouraging, we expect integrators and end users to continue to reduce their service spares inventory as they focus on short-term cash conservation.
Several factors will influence OLED market performance in calendar 2020. The largest opportunity would be an all-OLED iPhone lineup for the September 2020 release. Samsung has the capacity in place to address this and a standardized touch on encapsulation or Y-OCTA structure could reduce costs by 10% to 15%. It is widely known that LG and BOE are also vying for this business. One or both would have to pass engineering and production qualifications no later than the middle of calendar 2020 to have a legitimate chance. The stakes seem particularly high for LG, given their recent financial report, citing a loss on display operations of roughly $370 million. Moving their mobile OLED business to profitability will provide clear benefits to their organization.
In China, display manufacturers are pursuing yield gains and government funding, an increasing number of SKUs from Chinese handset manufacturers points to higher OLED output, mostly for rigid displays. But there has not been a watershed moment in production. The question we are most frequently asked by the investment community is to outline the timing of future fab investments. The short answer is timing has been and remains fluid. We anticipate additional orders in the first half of the year that will cover our build plan for fiscal 2020. The long-term view hasn't changed other than JDI, which is reportedly facing funding challenges after the Harvest Tech deal fell through.
We've been reporting that our Semicap business has been outperforming the broader wafer fab equipment market. Our Semicap bookings grew by mid-single digits in fiscal 2019 compared to a projected decline of 10% or more for the overall WFE market. Our results reflect our market alignment, investments in process control, where we have designed into multiple nodes fared better than other tools in fiscal 2019. EUV use grew year-over-year. And our Azure platform is used in patterned wafer inspection in the EUV process. Finally, automotive and IoT pool remains robust, leading to solid service demand across our range of legacy nodes and laser architectures. Current Semicap projections for calendar 2020 point to another decline in demand. We believe we will again outperform the market for the same reasons that led to fiscal 2019 results.
It was a difficult year for the advanced packaging submarket. Most tool manufacturers have reported down years and end users are tightly managing utilization and investment. There are a few outliers that are seeing demand growth tied to new tools and/or capabilities. Returning to growth is dependent upon 5G, which offers something for everyone. Consumers benefit from faster speeds, wireless providers can address new markets and mobile device manufacturers should see increased demand for 5G-enabled products. The laser solution of choice is still unclear, however, with CO2, nanosecond UV and ultrafast lasers in the mix.
Our book-to-bill ratio in materials processing was above one for this first time in a number of quarters, but customer demand is still challenged on several fronts. Global PMIs are largely in negative territory, most notably for Europe and specifically for Germany, which recently turned down its growth forecast from 1.5% to 1% for 2020. Several economies, including the U.S. and China, have bounced around PMI neutrality, but recent comments from Caterpillar and weak auto sales don't bode well for sustained near-term improvement. The U.S. trade standoff further exacerbates the situation.
Within the materials processing submarket, automotive is facing dual challenge of low-growth global demand and an accelerating transition from internal combustion engines, or ICE, to electromobility. Unfortunately, the gains in the latter cannot offset declines in the former in the near term. There have been announcements from various Tier 1 component suppliers that they are cutting production for legacy components and laying off workers. Part of the aforementioned GM-UAW dispute involves moving workers from ICE to electric drivelines.
The slowdown in two dimensional sheet metal-cutting continued in the fourth fiscal quarter, which is partly attributable to the automotive sector. While the volumes are down, price competition heats up. This means ASP erosion in the Chinese fiber laser market is unabated. The die board and textile markets tell a different story, and demand is comparatively stable for a range of CO2 OEM lasers, subsystems and systems.
Medical device manufacturing, or MDM, was a bright spot in materials processing, with all key regions moving towards historical run rates. Unlike other submarkets, our MDM business is largely comprised of end-user systems with higher levels of differentiation. The 2020 outlook is also encouraging with projected growth in North America, Europe and China.
Orders from OEM from materials processing customers were flat overall, thanks in large part to a biannual order for a legacy customer. Current market dynamics paint a different picture. Overall market softness, combined with aggressive pricing from Chinese diode laser manufacturers, are leading to under absorption in our semiconductor manufacturing unit. We're taking all available steps to reduce costs, but we will not able - be not be able to fully compensate for the loss of volume in the short term. However, this may reverse course over the next year or so. Chinese fiber laser manufacturers recognize that to compete at all power levels requires higher-performing diodes at different wavelengths than what is available domestically. This opens a window for U.S. and German semiconductor laser manufacturers.
We had a very strong finish to a record year for OEM components and instrumentation. Orders, which set a quarterly record in the fourth fiscal quarter and revenues, both enjoyed strong double-digit annual growth. Our bioinstrumentation business benefited from a number of factors, including increased clinical adoption of cell-based therapies such as immuno-oncology. To support this trend, we've introduced a new subsystem that offers enhanced capabilities of smaller footprint.
We're also well positioned to support customers for combining in cytometry and imaging to gain even more information about cell size, cell shape and the distribution of labeled or target biomolecules. Our recently launched Axon platform looks like an ideal solution for clinical imaging applications.
The medical OEM business saw growth in dental aesthetic and surgical consumables. The dental market is driven by a lead customer that is helping transform the patient experience. Vanity procedures like hair removal and fat emulsification are driving growth in our aesthetic sales. And a higher number of lithotripsy procedures is behind the improvement in surgical consumables.
The defense and aerospace market had an excellent year. Revenue from directed energy programs doubled year-over-year. Orders of space and ground-based telescopes was very healthy. We are being invited to participate in new programs that can create an attractive funnel over the next few years.
I'll now turn the call over to our Chief Financial Officer, Kevin Palatnik.
Thanks, John. Today, I'll first summarize the fiscal fourth quarter 2019 financial results then move to the outlook for fiscal Q1 2020. I'll discuss primarily non-GAAP financial results and ask that you refer to today's press release for a detailed description of our GAAP results as well as the reconciliation between GAAP and non-GAAP financial results. The non-GAAP adjustments relate to stock-based compensation expense, amortization of intangible assets 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 website. A replay of this webcast will also be made available for approximately 90 days following the call.
Fiscal fourth quarter 2019 financial results for the company's key operating metrics were: total revenue of $335.5 million; non-GAAP gross margin of 36.4%; non-GAAP operating margin of 9.6%; adjusted EBITDA of 14.3%; and non-GAAP EPS of $0.89. Total revenue for the fiscal fourth quarter was $335.5 million and came in above the midpoint of our previously guided range due primarily to increased shipments in our OEM and instrumentation and components business, particularly in the aero and defense market. Our revenue mix by market for Q4 was microelectronics, approximately 42%; materials processing, 28%; OEM components and instrumentation, 21%; and scientific and government, 9%. Geographically, Asia accounted for approximately 49% of revenues in the fiscal fourth quarter; the U.S., 27%; Europe, 20%; and rest of the world, 4%. Asia includes two territories with revenues greater than 10% of sales. We had one customer in South Korea related to flat panel display manufacturing that contributed more than 10% of our fiscal fourth quarter revenues.
Other product and service revenues for the fiscal fourth quarter were $114 million, or approximately 34% of sales. Other product revenue consists of spare parts, related accessories and other consumable products and was approximately 30% of sales. Revenue from services and service agreements was approximately 4% of sales. Total service revenues decreased sequentially by approximately $4 million as our integrators and end users focus on conserving cash by keeping their service stock to minimal levels.
Fiscal fourth quarter non-GAAP gross profit, excluding stock-based compensation costs, intangibles amortization and restructuring, was approximately $122 million. Non-GAAP gross profit was impacted primarily by higher-than-normal inventory reserves, resulting in non-GAAP gross margin of 36.4% for Q4. Non-GAAP operating expenses increased by approximately $2 million primarily due to a deferred compensation plan liability increases that are posted to operating expense, with the approximate offset posted in other income and expense. This resulted in a non-GAAP operating margin of 9.6% for the fiscal fourth quarter and came in slightly above the midpoint of our previously guided range. Adjusted EBITDA was 14.3% in fiscal Q4.
Summarizing the income statement, we were above the midpoint of our previously guided range for both revenue and operating margin using higher-than-expected operating income. However, there were more than offsetting impacts below the line. Discount rates across Europe and, in particular, Germany have decreased sequentially, adding to our pension costs recorded in other income and expense. In addition, a higher-than-expected non-GAAP tax rate also impacted overall net income.
Turning to the balance sheet. Non-restricted cash, cash equivalents and short-term investments were approximately $306 million at the end of fiscal Q4, a decrease of approximately $13 million compared to the end of last quarter. We did not make any voluntary payments against our term loan. However, we did repay $30 million against our line of credit. At the end of fiscal Q4, the outstanding amount of the term loan in USD was approximately $399 million. Accounts receivable DSO was 72 days compared to 71 days in the prior quarter. The net inventory balance at the end of fiscal fourth quarter was approximately $443 million, a decrease of $27 million from the prior quarter.
Now I'll turn to our outlook for our first fiscal quarter of 2020. Revenue for fiscal Q1 is expected to be in the range of $305 million to $325 million. We expect fiscal Q1 non-GAAP gross margin to be in the range of 36.5% to 39.5%. Non-GAAP gross margin excludes intangibles amortization of approximately $11.6 million and stock compensation cost estimated at $1.3 million. Non-GAAP operating margin for fiscal Q1 is expected to be in the range of 7.5% to 10.5%. This excludes intangibles amortization estimated at a total of $13.1 million and stock compensation expense of a total of approximately $10.2 million.
Other income and expense is estimated to be an expense in the range of $5 million to $6 million. We do not include transaction gains and losses related to future changes in foreign exchange rates in our OI&E outlook. We expect our fiscal Q1 non-GAAP tax rate to be in the range of 24% to 25%. And finally, we're assuming weighted average outstanding shares of approximately 24.1 million for the fiscal first quarter. I'll now turn the call back over to the operator for a Q&A session.
[Operator Instructions]. And the first question today comes from Jim Ricchiuti of Needham & Company.
Just a point of clarification. The order, John, that you alluded to. Is this a separate order from what you talked about in the end of July? Or is it the same order?
It is a separate order.
Got it, okay. And Kevin, I know it's going to be in the K. Can you give us the backlog at the end of the year? And if you're able to, the OLS segment of the backlog?
Yes, Jim, I'm going to wait for the K to come out. It'll come out in a couple of weeks, and you'll have a lot more detail in the K.
Okay. And just with respect to the materials processing portion of the business. John, it sounds like things are soft. Is it softness that you're seeing across all geographic regions? And I'm wondering how much is automotive weighing on you just given the legacy Rofin business.
Direct sales to automotive are a relatively small percentage of total business. However, we do sell a lot of lasers that go into automotive systems, manufacturing systems provided by others. And it's clearly creating pressure across the supply chain.
And the weakness you're seeing in all regions, including U.S., it sounds like...
The U.S. is actually holding up better than Europe. And if you've been following the news, particularly out of the German automotive sector, it's not very encouraging. Numbers are down pretty significantly in the tens of percentage points.
The next question comes from Brian Lee of Goldman Sachs.
Maybe first off, on the book-to-bill above one in materials processing, I know you don't want us to read too much into that, and there was a legacy order in there. So maybe if we can just parse that out a little bit. How much was the legacy order? And I guess, if you took that out, would the book-to-bill have been below the one? And then as you look into sort of the near term, do you expect that book-to-bill sort of continue to stay below that 1:1 level? Just, I guess, you don't want us to be thinking there's any sort of a trough here in the very near-term on materials processing.
Yes, Brian, it's Kevin. So we did say materials processing had a book-to-bill greater than one. In terms of the order, the legacy order, I'm hoping that you'd confuse that with the OLED order. We did have a legacy large customer in prior quarters, if that's what you're referring to. But even netting that out, for the quarter, we still were above one. Forecasting that into the future, there's too much uncertainty to do that at this point. We're happy that we were above one in the current quarter, but too much uncertainty going forward to really forecast that out.
Yes. And Brian, it's John. I'll just reiterate what I said in my prepared remarks. It's always tempting to try to call the bottom here, but as Kevin has pointed out, again, there are too many pieces here to make a definitive statement at this juncture. We'd like to have more than a quarter's worth of data to the positive before we feel comfortable saying that we're on the upside.
Okay. Fair enough. Makes sense. And then maybe shifting gears, Kevin, to that OLED order that you picked up this quarter. I know you're saying it's revenue in the current fiscal year. I think lead times, you mentioned last quarter when you got the first OLED order in this cycle kind of being in that six months' time frame, anything changed there? And from a revenue recognition perspective, would that imply this is more first half fiscal '20 than second half? Just trying to get a sense for what you want the expectation to be for - in terms of the cadence here?
Yes. So no change, primarily, Brian. We're still quoting lead times of six months. And beyond the six months, we still work with our customers to schedule delivery dates. That could be plus or minus the six a little bit. But I think for modeling purposes, whatever we book in the September quarter, plus or minus six months later, we'll ship and revenue that.
Okay, great. And then just last question, maybe a bit bigger picture. Around this time last year, you gave some quantitative color around the OLED business specifically, you didn't give it for the entire business for the fiscal year. But given where we are in the cycle, it sounds like you're seeing some positive momentum, the tone has obviously shifted to being much more positive as well. Any sort of either quantitative or qualitative direction you're willing to provide as we think about fiscal '20 with respect to the OLED business similar to what you provided last year?
I'll repeat a little bit here and maybe augment some. We've received some orders recently. Obviously, a very positive development after a stretch where there were no new system orders. The way that I would say you look at this year is we're going to build the backlog not only to fulfill what we have in the build plan, but also to position ourselves for '21.
The next question comes from Blayne Curtis with Barclays.
This is Tom O'Malley on for Blayne Curtis. My first question is centered around the Semicap portion of the microelectronics business. Clearly, with sequential growth there in microelectronics, you're seeing some real strength there. Can you talk about how big of a portion of that strength sequentially is from Semicap? And then can you talk about how you see your business growing next year with the expectation that the total market's down?
So let's unpack that a little bit. In terms of the breakout, we've never drilled down into the individual pieces. I would say that the bookings - the dominant part of the booking strength quarter-on-quarter was driven by OLED. It was not driven by Semicap. Having said that, Semicap has, as I mentioned, outperformed the broader wafer fab equipment market. And really, a part of that is alignment. If you look at the spending that took place to the high-water mark of 2018, a lot of that was big process equipment, etch tools, et cetera. And it looks like the inspection equipment that would go along with that was at a phase by probably six months or so. So that part of the business befits us because our content is in inspection and metrology. And as we look at the year going forward, particularly with the strength that we're seeing around EUV orders, these are not large numbers of orders, but they're pretty expensive tools. So there's a benefit that comes in as a consequence of that.
All right, that's really helpful. And then my second one is just on the other products and services line. You guys are saying that customers are being cautious, and that makes a lot of sense. But as you guys scale here, particularly with some of the orders in FPD as you get into the back half of '20, do you expect that to scale linearly? Or do you normally see any sort of time shift there? Just helping me get a little color around what I think that should do.
Sure. This is Kevin. It won't correlate one for one. There will be some time offset whenever we deliver and install a new machine. Typically, the replaceable or the consumable parts in that has a rough life of six months or so, consider that the warranty period, and then it rolls into the service pool. So there is a timing element to this, but longer term, over longer periods, you can see a very strong correlation to - from shipments into the service revenue line.
Next question comes from Mehdi Hosseini of SIG.
Just as a follow-up to the prior question. Is that nonlinearity, is that why your material revenue didn't really show an improvement despite the fact that your customers' utilization rate has materially improved since March quarter?
Yes, Mehdi, I wouldn't say that utilization has materially improved. Certainly, Samsung utilization has been somewhat volatile, especially as they support their largest customer. And then there's China. China, as you know, they continue to progress in terms of systems installations, but have very low yields. So the basic premise that utilization has gone up significantly, I think, is erroneous.
Got it. And then a question for John. Over the past 6, 9 months, you have taken action, resizing the Rofin, but it seems like the end-market demand mix by geography or who's been more aggressive competitive landscape, which is still pressuring in the margins there. Is there anything else that you can do, any other tools in your toolbox that you can leverage to improve margin profile in the fiber laser, specifically Rofin? And I have one last follow-up.
I would say that the actions that we've previously announced around fiber laser are underway, and they're going to deliver the benefits that we had outlined when we announced those actions. It is not our practice, Mehdi, to make statements about things that we haven't internally announced yet just because it's a bad practice to tell you guys before we tell our own people. So whether or not there's anything that is cooking, we certainly wouldn't acknowledge it during a call.
But does that mean that you're cooking something?
No, it means that I'm not going to predict anything during a call.
Sure. And just one clarification. In your prepared remarks, you said you expect Semicap to be down in 2020. Was that a reference to fiscal year? Or did you really mean it that Semicap will be down in 2020?
The comments were tied to our fiscal year, which is normally to my practice. And from what we're hearing, the overall market is probably going to be down. Again, we expect to outperform the market in 2020, just as we did in 2019.
And that - nothing to do with lithography versus the risk? Because that's kind of contrary to what a leading OEM have said. They have talked about the bottom and then increase prospect of shipment picking up into calendar year 2020.
We're looking at different data then.
Okay. We could take it offline.
The next question comes from Larry Solow of CJS Securities.
Just a couple of follow-ups. John, can you maybe just clarify on the flat panel and OLED opportunity sort of the second phase, I think you've turned it. You've had mentioned on prior calls, I think you thought it would be like a 4 to 5 year sort of cycle and sort of a bell curve getting - peaking out and then troughing for a while, flattening and then coming back down. Do you still see those same dynamics? And it sounds like maybe things have shifted a little bit to the right on that. Is that fair to say?
So I don't think that we talked about out to four, five years - well just technically, we talked out to 2023. We're in 2020 now so it's out to about three years. There will be a curve to it. It's going to be a different composition than the first go around, which was dominated by a single large customer. This is going to be a broader set of customers. It will have a - probably a broader plateau than we've seen in the past. And that's about as much as I can tell you at this point, Larry.
Okay. And any visibility maybe with earlier orders on whether it would be more on Gen 5 or Gen 6? Or is that too early to tell?
I think it's going to be a combination, and it's really going to be customer-specific as to what their confidence level is in being able to utilize those tools.
Okay. On the materials processing side, you mentioned you never know with some potentially irrational behavior from foreign competitors. Have you seen a lot of that outside of - I know - and I know it's been pretty highly talked about on the fiber laser side, but are you seeing that in general on the materials processing side? Or is that still very much concentrated to fiber lasers?
Well, certainly, the most aggressive behavior we're seeing is in the fiber laser market. But I would say that the lower-performance - lower-performance lasers that are produced by certain foreign manufacturers, they're also being aggressive on pricing but not to the extent that we've seen in the fiber laser market.
Okay. Okay. A question on the dental piece. I realized it's small today or minimal but perhaps in the future it could drive some revenue growth. Can you just speak more to that? You mentioned a lead customer is sort of transforming performance. Can you just give us a little more qualification on that?
Well, I think my comment was transforming the patient experience. From what I have read and been exposed to, it's approaching painless dentistry, which is a pretty big deal for lots of patients or for all patients, I guess, but particularly young patients who have this fear going to the dentist. This looks like it's removing some of those barriers. And that's a good thing. And as they continue to gain traction, we would expect the adoption of these tools to rise.
Because I know - I think other dental lasers have failed in the past. So I guess this is clearly - must be a step-up from those?
The difference - if I had to distill it down to one difference, this seems to be the first dental tool that can do hard and soft tissue and it can cover probably 90 - maybe 95% of the procedures that a dentist will typically perform in the office. Some of the dental tools that have come out in the past have really been pigeon-holed as hard tissue or soft tissue. And you're correct that they have disappointed. This seems to be different.
Okay. Okay, great. And then just lastly, a question for Kevin. Just on the operating margin, sort of the midpoint is - call it, whatever, high single digits. I realize we're hopefully at a trough in revenue. Can this margin, as we look out over three years or so - obviously, we were in the mid-20s on the EBIT margin just two years ago. Is the contraction, is it all negative operating leverage? Or is there anything else structurally different in there?
I think to attribute it, operating leverage makes a lot of sense, Larry. We've said for many years now that the ELA tools for OLED, right, are accretive to corporate margins. They were at peak margins for the company as well as now kind of these lower margins. So with each incremental shipment, the operating leverage that you gain from that is very powerful and will expand operating margins going forward.
Our next question comes from Mark Miller of The Benchmark Company.
Just was wondering, Samsung's recently announced they're beginning poly-production of this QD OLED. It's supposed to be a simpler process, I believe. Any impact on your opportunities or on the marketplace with this announcement?
The QLED, or the QO - no that's QLED, sorry, is their quantum dot overlay on an LED panel. It's what they have been using for their high-end TVs and they recently announced a multibillion-dollar investment in that space. These production systems do utilize lasers, but they use - they don't use any backplanes as is true for TVs in general. So not a needle-mover for the display business. It will have pull-along for a variety of other lasers used in packaging.
Okay. In terms of - we've been hearing about pricing pressures in China. But also, I'm just wondering, the impact of the trade uncertainties and the tariff situation, is that having a significant impact on your margins?
It's certainly having an impact. It varies by product line. For certain products like the FPD systems, no impact, because the channel is from Germany to China, so it circumvents the tariff issues. Products that are produced in the U.S. face varying levels of tariff activity.
And finally, additive manufacture was a pretty good driver for a lot of laser firms. Has that market cooled off? And do you expect any rebound in it?
I think the long-term on additive manufacturing, it remains a compelling story for the production of metal parts. It has cooled off significantly. Part of that is driven by the change in automotive investment. But I think the long-term thesis is there. And as an industry, we and the powder providers have to figure out how to make it much more cost-competitive with traditional manufacturing.
Next question comes from Nick Todorov of Longbow Research.
In the life cycle, you guys used to quantify the size of the FPD orders. I understand and assume this time you're now willing to do so. But can you at least try to compare the size of the two orders that you have received so far?
Nick, we stopped giving out detailed booking information specific to the ELA back in '16. So we're going to stay consistent with that practice and not talk about it at that level of detail.
Okay. Then to clarify, you - I think you mentioned that you expect to receive several orders for the next - or in the current and next quarter. And did I hear correctly that the orders that you received over the next two quarters, do you expect all of them to ship by the end of the fiscal year? Or is that more of a kind of building the backlog and some of them will spill into '21?
Yes, Nick, Kevin, again. We quote six month lead times. So if there's a fab-in date six months out, they need to put an order on the books today, right, roughly. That's a market improvement than where we were a couple of years ago when we were primarily shipping into Korea for the local end-users there, Samsung, LG. Back at that point, they were 15 to 18 months for the big systems. Working with our supply chain and so forth, we've managed doing that down to six months, and that's what we're quoting customers today.
Okay. And just another clarification, sorry if I missed this, but the order that you mentioned the last quarter, is that also expected to be delivered in fiscal year '20?
Yes.
Okay. And then just quickly on materials processing. You said you're tempted to call a bottom, but I heard more negative comments in terms of PMIs and auto weakness. I guess, what are the positives that give you that temptation?
Well, certainly, the fact that we have a positive book-to-bill is the largest one. That is affected by revenues as much as it is bookings. I don't think that we're - as I said, it's always tempting to call a bottom. I didn't say we're tempted to call the bottom, and that's a small nuance. I think we have to see sustained activity in this market before we're going to be comfortable saying that it's turned the corner.
That next question comes from Joe Wittine of Edgewater Research.
I wanted to ask on the inventory reductions in the LDU service tubes. Can you help us square that dynamic with the rising orders on the cycle? And I presume what are at least expectations of rising utilization at the fabs, so Kevin, I understand your point that utilization hasn't risen yet. I mean were there perhaps excess inventory of tubes in the integrated pipeline still from the last cycle? And when do you expect the inventory to reverse and potentially become your friend?
So Joe, it's John. With respect to the locally held inventory, this is a fairly common practice as things approach the bottom of the cycle. Everybody in the chain is trying to burn off inventory. These orders come in periodically throughout the year. And the expectation from the end users and the integrators, is that we'll be able to respond quickly if they need service capacity. And there's a degree of accuracy to that. It's not an infinite amount of flexibility, but there's some flexibility on our end to respond quickly to their needs. And we would expect, once it moves back into a more normalized demand cycle, especially as we start to see breakthroughs in yields from some of the Chinese players and also, as we move into the sort of the middle of the year where the winners and losers in the Apple suite stakes will be defined, I think that's when you start to see a change in footing.
Okay. And then one on MPE, you mentioned the one dynamic holding back more optimism was the potentially irrational behavior by players there. Can you help us understand would downstream competition be such a risk for your business as long as you're kind of maintaining the share or the socket, and as long as the kind of power per box, this is probably a better way to put it, then that continues to rise. Why is competition downstream? Is the resonator suppliers a risk for Coherent?
I think the general statement is that when the business is ebbing as it has been for a number of quarters now, you're chasing - there are more people chasing the same piece of business. And even though you may be designed-in, customers are not stupid, they understand how to play this to their advantage. And I think all of those things can happen. And if you get one or more competitors who starts to reach desperation level and they just need to fill their factory; things can get ugly in certain places. I don't think it gets ugly across the board, but it can be selective - selective competition. And whether it's at the component level or whether it's at the laser level, I think it's less at the subsystem and system level, where there's a higher degree of point integration and differentiation. But if you're dealing with SKUs that they can get from a variety of different players, I think that pressure can be real.
Okay, makes sense. And then finally, Kevin, what products were the inventory reserves for?
Joe, I'm not going to get that specific. It wasn't a single product or product line; they were multiple product lines. Recognize September as our fiscal year-end, and a lot of things are relooked at or trued-up and that was the makeup of it.
The next question today comes from Andrew DeGasperi of Berenberg.
I guess, on the last call, you mentioned that you were deemphasizing commoditized 2D-cutting applications. I was just wondering timing-wise, I mean is this do you think a 2020 event, where that will be less meaningful to the top line?
Yes. So Andrew, it's Kevin. In our last quarter earnings release, we talked about getting out of this business, minimizing it in the short term. We talked about Hamburg from a site location being fairly significantly reduced in a $24 million cost expense benefit going forward. That we - that $24 million worth of benefit we would see at the end of fiscal 2020. Recognize that in Germany, it takes a while to negotiate with the workers' councils and such and so that correlates to the commoditized fiber laser as well. That will correlate with the headcount reductions, the site reductions and then the benefit of that by the end of fiscal 2020.
And Andrew, it's John. If I could just add a piece to that. In terms of forward going revenue risk, I'd say that the customers that we're engaged with, at this point are largely outside of China. So the greatest pressure point is probably in our rearview mirror.
Great. And then one last one. In terms of - well, I guess, this is probably less meaningful at this point, but are you seeing in the market a general substitution effect where people that normally would buy a higher power laser using are using or buying a lower power one because the output levels have decreased?
I don't know that I have enough data to answer that.
The last question today is a follow-up from Jim Ricchiuti of Needham and Company.
Were the two orders that you received, the OLED annealing orders, were they received around the time line that you expected? I know things can move around a little bit. But just generally speaking, are these orders coming in the way you anticipated?
If you go back a few calls, Jim. I had mentioned that RFP activity was picking up and the typical conversion cycle for RFPs to orders was 6 to 9 months. The first order that we got that we alluded to in the June quarter was probably at the shorter end of that or maybe with - even within a six month window. This more recent one was sort of right in the middle of that range. So from our standpoint, not a lot of surprises here. We interact with these customers on a regular basis. We have pretty good visibility as to when things are likely to happen.
And when you talk about - it sounds like you have a pipeline or a funnel that gets you to the build plan. The build plan for us is difficult to quantify. I mean is there any way you can help us think about that build plan? Is it something similar to what we saw in fiscal '16, fiscal '15? Any help you can give us along those lines?
Yes. I certainly understand the reason for the question. And fully aware that making a comment about a build plan doesn't help you guys very much. The real intent behind the statement was to say we have visibility on what we need to make our plan, which is an obvious statement. We're not expecting a spontaneous return to 2017 or 2018 numbers. It is going to be a process because, again, a larger number of customers building smaller fabs than what we've seen historically. So this goes back to the question that Larry Solow asked about the shape of this thing, it's probably a smoother rise and a longer plateau than the sharp rise that we had seen the last time around.
Yes. Jim, it's Kevin. A little more comment and just to repeat what we said in the past, as we look forward into the OLED ramp, we've said that we see 2020 as a bit of a recovery over 2019, but we see strength in '21 and '22. I know that doesn't quantify things, but qualitatively, that's how we look at it.
This concludes our question-and-answer session. I would like to turn the conference back over to John Ambroseo for any closing remarks.
Thank you, Lisa. And by the way, I want to congratulate you. You're the first person that has gotten Jim Ricchiuti's name pronounced correctly. Everyone, thanks so much for joining us, and we'll look forward to doing this again in a few months.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.