Good day and welcome to the Coherent First Quarter Fiscal Year 2020 Financial Results Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to introduce Mr. Bret DiMarco, Executive Vice President and General Counsel. Please go ahead.

Thank you, Sean and good afternoon everyone. Welcome to today's conference call to discuss Coherent's results from its first fiscal quarter ended December 28th, 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 efficiency; the impact on global trade arising from coronavirus-related actions by world government; and 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 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 Bret and welcome everyone to the call. There are several encouraging takeaways from our first fiscal quarter of 2020. The book-to-bill was well above 1 due to strong demand from multiple applications. The full year outlook is improving in certain key markets and competitive dynamics in China, while still aggressive, are mostly unchanged. The news was positive across the microelectronics market. Display orders were up significantly for LineBeam systems and service. The system orders were for LineBeam 1000s destined to China. This is the third consecutive quarter that we have received new system orders which aligns well with our prior industry commentary on Phase II investments. The increase in service orders reflects higher demand for OLED-equipped smartphones in the fourth calendar quarter of 2019. In addition to the ELA orders, bookings for OLED cutting using short pulse and CO2 lasers were also up as the industry prepares for projected 60% ramp in flexible OLED units in 2020. There is a small contribution from foldable displays in the 2020 ramp, but the penetration is likely to remain low for two to three years as manufacturers and suppliers lock down the specs and material sets. Following CES, the number of predictions and questions regarding Micro-LEDs has to no one's surprise has gone up. The demos at CES from the likes of Samsung, Sony, and others were impressive. Samsung's wall covered 292 inches and tiles could be added while the display was running. The technology clearly has potential, but costs remain prohibitive. It will likely take years for Micro-LED to achieve mass market viability. The full year outlook for Semicap spending changed dramatically in the last 90 days with TSMC and Samsung both announcing higher CapEx spending. TSMC is reportedly adding capacity at 5-nanometers and 7-nanometers for AI servers and 5G chips. Samsung is reportedly seeing renewed demand from memory. Our OEM integrated partners responded by raising their build plans for a variety of inspection and metrology tools. Consequently, our laser orders for Semi applications were up sharply on a sequential basis. Our service bookings benefited from sustained high utilization and the timing of annual service contracts. Rounding out the microelectronics picture is API, which also enjoyed double-digit sequential growth in orders arising from increased service demand and marking subsystems for semiconductor chips. We are also seeing an uptick for 5G-related technology due to Chinese government programs to drive adoption. Printed circuit board designs for 5G are currently trending towards 45 micron to 50 micron HDIs that support 20-plus percent higher circuit density. These requirements should drive a double-digit increase in HDI tool demand during calendar 2020. We also expect to see a corresponding demand uptick in upcoming quarters for lasers used to manufacture 5G antennas. The materials processing market appears to be stabilizing. PMIs in North America signal modest expansion. China's PMI moved into positive territory on the strength of domestic demand although exports are still lagging. Europe still faces headwinds partially due to a depressed global market for autos and Germany's PMI is well below the eurozone average. The data for our business reflects a stabilizing market. The book-to-bill was one for our seasonally adjusted first fiscal quarter and bookings worth on a few percent from the prior year period. Within the various submarkets orders for high-power CO2 lasers used in cutting outperformed the broader cutting market and medical device manufacturing systems held up well following a very strong prior quarter. Our orders for automotive applications were up sequentially, but the overall market conditions remain challenging due to weak automobile demand and the shifting sands of portfolio mix from internal combustion engines to electric vehicles. Competition in the Chinese market is rising for components and lasers. Chinese laser manufacturers are sourcing more pump diodes domestically due to pricing and to a desire or direct them to become independent from Western suppliers. We have heard from end users that domestic Chinese fiber laser manufacturers are taking share at the 3 kilowatt to 6 kilowatt power level. As optic powers increase, manufacturers will shift along the wavelength of pumps, which currently favors Western diode suppliers. Instrumentation and OLED component bookings were lower following a record setting performance in the prior quarter. This is neither surprising nor indicative of a change in long-term demand or market share. Bioinstrumentation applications like flow cytometry are experiencing greater clinical adoption. One of the capabilities that is driving this trend is the ability of UV-activated reagents to study small particles that are critical to cell functionality. Our OBIS platform is the leading laser solution for exciting ultraviolet reagents and we expect multiyear growth from this product platform. Our medical business is also in solid shape. One of our OEM integrators is making inroads to China for cataract therapy, the aesthetic business saw good demand from new and legacy procedures and finally the aerospace and defense business is on track for strong double-digit annual growth mostly in conjunction with North American primes. I'll now turn the call over to Kevin Palatnik, our Chief Financial Officer.

Thanks, John. Today, I'll first summarize fiscal first quarter 2020 financial results and move to the outlook for fiscal Q2 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 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 website. A replay of this webcast will also be made available for approximately 90 days following the call. Fiscal first quarter 2020 financial results for the company's key operating metrics were; total revenue of $320.8 million, non-GAAP gross margin of 38%, non-GAAP operating margin of 9.4%, adjusted EBITDA of 14.3% and non-GAAP EPS of $0.86. Total revenue for the fiscal first quarter was $320.8 million and came in above the midpoint of our previously guided range due primarily to moderate stability rather than significant weakness in the materials processing end market. Our revenue mix by market for Q1 was microelectronics 41%, materials processing 27%, OEM components and instrumentation 22%, scientific and government 10%. Geographically, Asia accounted for 51% of revenues in the fiscal first quarter, the U.S. 24%, Europe 20% and rest of the world 5%. Asia includes two territories with revenues greater than 10% of sales. We had one customer in South Korea related to large flat panel display manufacturing that contributed more than 10% of our fiscal first quarter revenues. Other product and service revenues for the fiscal first quarter were $117 million or approximately 36% of sales. Other product revenue consists of spare parts, related accessories and other consumable products and was approximately 32% of sales. Revenue from services and service agreements was approximately 4% of sales. Total service revenues increased sequentially by approximately $3 million as our integrators and end users replenish their service stuff. Fiscal first quarter non-GAAP gross profit excluding stock-based compensation costs, intangibles amortization and restructuring was approximately $122 million. Non-GAAP gross margin was 38% for Q1 and came in at the midpoint of our previously guided range. Non-GAAP operating expenses increased by approximately $2 million, primarily due to factors relating to our new fiscal year including merit and fringe increases and other miscellaneous expenses. This resulted in a non-GAAP operating margin of 9.4% for the fiscal first quarter and came in slightly above the midpoint of our previously guided range. Adjusted EBITDA was 14.3% of fiscal Q1. Turning to the balance sheet, non-restricted cash, cash equivalents and short-term investments were approximately $350 million at the end of fiscal Q1, an increase of approximately $44 million compared to the end of last quarter. We did not make any voluntary payments against our term loan and at the end of fiscal Q1 the outstanding amount of the term loan was approximately $405 million. Accounts receivable DSO was 66 days compared to 72 days in the prior quarter. The net inventory balance at the end of fiscal first quarter was approximately $450 million, an increase of $7 million from the prior quarter primarily due to foreign exchange. Now I'll turn to our outlook for the second fiscal quarter of 2020. Let me say at the outset like other multinational corporations with sales, service and operations in Mainland China, we continue to monitor the rapidly evolving situation related to the coronavirus. The Chinese government's actions particularly from quarantining individuals in and around major hubs such as Wuhan and restricting the opening of businesses will likely have an impact on our ability to sell our products and service our installed base in impacted areas. We continue to monitor the situation in China as well as actions being discussed and rolled out by other world governments. Our second fiscal quarter outlook attempts to reflect these uncertainties and includes an approximate $20 million to $25 million reduction in revenue at the midpoint and a wider than normal revenue range. Having said that, revenue for fiscal Q2 is expected to be in the range of $290 million to $330 million. We expect fiscal Q2 non-GAAP gross margin to be in the range of 35% to 39%. Non-GAAP gross margin excludes intangibles amortization of approximately $11.2 million and stock compensation cost estimated at $1.4 million. Non-GAAP operating margin for fiscal Q2 is expected to be in the range of 4% to 8%. This excludes intangibles amortization estimated at a total of $12.5 million and stock compensation expense of a total of approximately $9.5 million. As you work through your models, you'll note that the operating expenses show healthy sequential growth. This increase is primarily due to our fiscal Q2 being a 14-week quarter versus the typical 13-week quarter as well as less holiday and vacation in our March quarter. Other income and expense is estimated to be an expense in the range of $2 million to $3 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 Q2 non-GAAP tax rate to be in the range of 24% to 25%. We're assuming weighted average outstanding shares of approximately 24.3 million for the second quarter. And finally we have also received Board authorization to repurchase up to $100 million in the company's common stock over the next year. I'll now turn the call back over to the operator for a Q&A session.

Thank you. We will now begin the question-and-answer session. Our first question today will come from Jim Ricchiuti with Needham & Company. Please go ahead.

Thank you. Good afternoon. John or Kevin, I'm wondering if you can give us a little bit more color on the impact that you're seeing from the coronavirus. Is that $20 million to $25 million impacting you in any particular one vertical more than the other?

It's impacting us across the markets, everything from the scientific business to microelectronics. The current situation I think as you're aware is the country is on an extended holiday following the Lunar New Year. And until we have people back in the offices, our employees as well as those of customers and suppliers, we won't be able to fully assess what the quarter is going to look like.

John looking at your -- what you're seeing in terms of recovery in the FPD market, do you anticipate a mix similar to what you're seeing where you're calling out some orders or I believe the LineBeam 1000. Is that what you're anticipating? Or do you see the cycle potentially changing and shifting more toward some of the larger LineBeam machines over the course of the year?

I think it's going to be -- first of all -- well; first of all it's a good question Jim. I think it's going to be largely situational with individual customers based on their own competency and also based on the availability to secure other systems as part of the supply chain. While we're not the long pole in the tent in terms of delivery there are some other very difficult to procure systems that are part of these 1,500 factories. And those lead times right now seem to be exceptionally long. That would probably have an impact on the customers' thinking especially as some of these customers are trying to position themselves to be a supplier of record for next year's smartphones, or I should say we're in 2020 for later this year.

Got it. And last question for me, I'll jump back in the queue. But just the -- again on the flat panel display business, the strength you're seeing in the cutting market. I mean that's clearly something that's a little different from the last cycle. Is there any way to help us think about the potential for you guys in that business over the course of the next one to two years?

Well, the ASPs are substantially different between the annealing market and the cutting market. And while the unit volume for cutting is going to be obviously much higher than it is for annealing, you're still probably an order of magnitude different in market size.

But your competitive stance in that market, it's a little bit more competitive. It sounds like you feel like you're -- and that's an award about. Do you feel like you're holding your own in that market gaining share?

I think we look at 2020 as a year that we're going to gain share. And certainly the early opportunities in this market have favored us.

Okay. Thank you.

Our next question will come from Blayne Curtis with Barclays. Please go ahead. Tom O'Malley: Hey, guys. This is Tom O'Malley on for Blayne Curtis. I had a question on the guidance in the 14-week quarter. I think companies kind of forecast a little bit differently there. Normally, OpEx runs a little bit ahead, and you don't always get the benefit on the revenue side for the 14-week quarter. Can you just talk about what your expectations are when you were forecasting? Are you including that additional week there in the revenue? Or are you being conservative thinking you may not get all of that benefit?

Yeah. You're right, Tom. This is Kevin. There's a little bit of a mismatch in the back-end on ability to bring revenue in compared to the expenses. The expenses are definite. From a planning or a forecasting standpoint, that is included in guidance. And certainly the 14-weeks related to the quarter on the expense side that's definite that's definitive. We can do that. Tom O'Malley: Okay. And then the next one is really on the Semicap side. You guys in your prepared remarks spent a lot of time talking about forecast for both 5-nanometer and 7-nanometer. This year obviously it seems as though that Semicap is becoming a larger portion of the microelectronics bucket. Can you talk about how you see that turning over the course of the year? Do you think that becomes a greater portion of that bucket? And can that kind of help drive some additional upside versus where you guys were initially thinking this year?

I guess I'll try to frame it this way. Semi appears that it's going to do better than we had forecasted at the beginning of the fiscal year, largely to the two factors that I talked to earlier, which is both TSMC and Samsung upping their CapEx. As to whether or not it becomes a larger percentage of the microelectronics bucket, that's a little bit tougher to answer, simply because we expect to see the display business start to pick up as we go through the year. So, I think the short answer is on an absolute revenue basis, Semicap is probably going to do better than we had in the plan originally. But as far as what the mix is within microelectronics, a little too early to call that one. Tom O'Malley: Fair enough. Thanks guys.

Our next question will come from Mehdi Hosseini with SIG. Please go ahead.

Yes, two questions. Kevin, what would have been the absorption and impact on operating margin if you were to add back the $20 million, $25 million of revenue that now is being adversely impacted by the coronavirus? And I have a follow-up.

Yeah. Mehdi, we did 38% in the quarter. I suspect that we could achieve that or maybe even improve against that with the $20 million to $25 million back in.

Okay. I guess what I was trying to figure out is that $20 million, $25 million part of the growth in lower than corporate average margin? Or is that more like a corporate average or higher margin? That's what I was trying to figure out.

Yeah Mehdi, as John said earlier, right the decrease is across the board across all end markets. So, in terms of the mix impact, it's across the board. And that's what I said without it. Without the impact, we probably would have been about the same or a little bit higher. That's the best I can do now.

Sure. Thank you. And then one question for John. You turn more constructive on flat panel display sometime mid last year or even earlier. And it now seems like the real inflection point is more of -- in the latter part of 2020. How should I think about your way of communicating the pickup in booking and the lagging impact on the inflection point in revenue and specifically for flat panel display?

Interesting question. I'm not sure I completely understand it, but let me give it a shot nonetheless. In 2019, we started the year with backlog in display and a dearth of orders. So, as we moved through the year, we were continuing to burn our backlog, which means to equal or surpass 2019 in 2020, you have to have all those orders in place. So what you refer to as an inflection I assume you mean when display revenues surpass the prior year. Is that a correct assumption on my part?

Yes, yes.

Well, then the answer is simple. You have to get the orders and build the backlog before you can move past the prior year period. I don't perhaps I didn't communicate it as clearly as I could have but I think that we were constantly talking about the fact that we were building 2020 and developing momentum into 2021 and 2022.

And Mehdi, Kevin again here. And remember, right we have a six-month lead time on these systems. So from an order or booking to when we potentially see revenue it's in the neighborhood of five to seven months plus or minus a month around the six-month delivery.

If I may inject just one quick follow-up. I think some of the confusion that's been going on for a few years started when you stopped providing booking or even backlog on a quarterly basis. Is there any chance that you can reinstate it? I think that would help with more clarity but I'm just wondering if you would change your mind?

No.

And you want to elaborate? Or should we just...

I think that's a pretty clear answer. Is it not?

Yes sir. Thank you.

Thanks, Mehdi.

Our next question will come from Larry Solow with CJS Securities. Please go ahead.

Yes, hi, it's Pete Lucas for Larry. You covered most of the stuff. Just a macro question. Appears to be visibility on plans to open 20 or so fabs by 2023. And while timing is hard to predict. Just wondered what's your confidence on this occurring and what's your thoughts on the risk of them not opening in the cycle getting elongated further either due to lower yields or other issues?

A great question. It's hard to always predict how people are going to do in terms of yield improvement. It certainly has taken longer for companies other than Samsung to improve their yields thus far. The feedback that we're getting from a number of suppliers and certainly the comments that they're making publicly would suggest that they're going to ship much higher levels of OLED displays this year than they did in any prior year. So that's encouraging. I think the coronavirus could push things to the right a little bit. And depending on how severe and how long it lasts that could have an impact. It's very difficult at this juncture to predict what that explicit impact may be. And I think that's as much as I could say at this point.

Yes fair enough. And if we were to assume that these fabs did open, do you think that the ones predicted so far would be enough to satisfy the demand for handset market's conversion to OLED?

The accounts that we have and what we know about yields would say no. But you still need additional fabs. If you start to do the math that everyone gets to Samsung-like yields then you could do a more explicit calculation. But if you do a mixture of yields it gives you a very different result.

That’s very helpful. Thanks. I’ll jump back in the queue.

Sure.

Our next question will come from Brian Lee with Goldman Sachs. Please go ahead.

Hey, how is it going? This is Alex on for Brian. So going back to your prepared remarks on microLED. I was just wondering if you could provide a little more clarity on what the opportunity that you see is? I know you mentioned we're a bit or a few years away from costs being economic here. But I guess what are the main used cases from the device side? And how large do you expect that opportunity to get?

So as it stands today, I don't think a lot has changed since we first spoke about this a few years ago. microLED has a play in very small format displays so things like AR and VR inserts where they're in close proximity to the eye. And then clearly on very large displays these walls are one example but you would also imagine that microLED-based TVs could be a viable technology as you go forward. In the R&D phase there are two processes where we have a meaningful play. The first is when you take the emitters off of the growth substrate and transfer them to a displaced substrate, which is called laser-induced forward transfer. A lot of that work is being done with excimer lasers similar or identical to the ones that are being used in the annealing process. For very small displays like the ones that are used in AR and VR, it's likely those will use anneal backplane for power and heat management. For the very large displays where the pixels are pretty far apart you can probably use a more traditional backplane. But again we're very early in the development of these things. We're – we meaning the community not just Coherent is still finding out what the capabilities are and what the limitations are. But as we said this puts us in the frontplane in these devices right now for handset displays or LTPS-enabled displays and let's be more broad about it, we're in the backplane. So if you have devices where it's used in both it sort of doubles our play. Is that helpful?

Yeah. Super helpful. Appreciate that. And I guess kind of an unrelated -- another question here. We've heard some things about new product rollouts including maybe Samsung A5. Do you have any color on that? What have you heard in the market?

The rumors are raging around A5. There have been I think two or three fall starts on A5 over the last few years. We currently don't have it in our plans. So we would view that as an upside opportunity and we're well positioned to be able to address any needs they may have. But until we know what the mix is going to be in the plant, whether it's going to be mobile or mobile and TV and how much is going to be allocated to each, it's difficult to judge the size of the opportunity, but we know we have the capacity in place to address it regardless.

Okay. Got you. Appreciate the insight.

Sure.

Our next question will come from Mark Miller with The Benchmark Company. Please go ahead.

Thank you for taking my question. Just interested in compared to the first half, what could be the upside drivers to second half such as more memory equipment going into the fabs? Especially, are you serving the domestic fabs in China, some of these fabs are coming up. 5G would be another area that might be a driver. I'm just wondering what do you think will be the -- any greatest potential to be an upside driver in second half revenues?

Well, I'd say compared to where we were when we started doing the plan which would have been sort of the June time frame of last year, the single biggest change has been in the Semi market. The early projections where Semi was going to be soft and probably have somewhat down year. We still expect it to outperform the market. I think we communicated that in either the prior call or the one before that. So this is a meaningful change because the increases in CapEx spending from two very big industry players is meaningful. What the explicit timing will be is obviously subject to the some conversation. As far as China goes to the extent that they're relying on metrology and inspection equipment provided by non-Chinese players that is also an opportunity for us. I'd say that the view that we get from our folks inside China is that there's even a greater sense of urgency to become independent on the integrated circuit front than they were previously. There still seems to be somewhat of a gap in capability. And then of course this is the third or fourth time that I've mentioned coronavirus, it's a curve ball that we all have to deal with. But that's -- if anything it's a delay in timing, it's not a delay in programs.

What about 5G? You picked up some revenues for circuit board applications and antennas. Are you seeing that accelerating because the 5G ramp is really supposed to come on in the second half of the year?

So the answer is, we are optimistic about 5G opportunities. We've certainly been talking about them for a while. It remains to be seen who the network or who the equipment suppliers are for 5G. The hostilities between the U.S. and certain Chinese vendors will have to be reconciled in one way or another as to where that capacity is going to be put in place, but the things that have been available early have been encouraging for us. We've won our fair share and probably a bit more of them.

And finally, the well-known fiber laser competition in China you mentioned diodes. Are you seeing increasing competition in any non-fiber laser space in China? And what would be the area?

No. There's long been local suppliers of things like glass-based CO2 lasers, low-power UV lasers that really hasn't changed.

Thank you.

Our next question will come from Nik Todorov with Longbow Research. Please go ahead.

Thanks. Hello guys. Going back to the question of ELA mix, I'm sensing that mix relative to life cycle could be different here maybe because the mix of customers is so much different. But I guess the question is what are the factors that could lead to higher mix of your -- of 1,100 of 1,000 systems versus 1,500s. Given that assuming funding is not an issue and 1,500s are so much superior in terms of throughput in ROI.

So again Nik I think the two things that will come into it is customer competency. If they have experience at the 1000 format are they more likely to continue to deploy 1, 000? The answer is I think yes. And then the availability of equipment outside of the annealing tools from other manufacturers that are currently capped in terms of capacity. If you have to wait 18 months to get a piece of hardware you say, well I'm going to wait the 18 months and miss my market window or am I going to go for a format that is -- that I can deploy much more quickly and jump into the market. That's -- I think that's what it really comes down to.

Okay. And on materials processing book-to-bill again above 1, I think last quarter you talked about having a large semiannual order driving a little bit better bookings. Can you talk about this quarter, if you see maybe a more diverse set of short-term bookings in materials processing? Or was that again maybe a larger order that is more extended?

It was a mix of products. I'd say the largest areas were probably general consumer products production and then components that are used in fiber lasers were probably the two areas that have the most activity within our materials processing bucket. And neither of those are terribly surprising.

Okay. And lastly for me you talked about last quarter potentially recovery in the services side from the display industry, maybe taking a quarter or two to turnaround. It seems like it's happening much quicker than expected. Can you talk about some of the factors? I think Samsung talked about having also lower utilization in the March quarter. So was it just inventories have gotten so low and they had some start replenished those? Or what are some of the drivers there?

Yes. Nick, it's Kevin. This is another case where we've got one good data point in a row. So I wouldn't extend that out beyond the current quarter. We did improve services revenues by $3 million in the quarter and primarily that was some of our end customers integrators replenishing their stock. As we talked throughout the late 2019 they were constantly lowering their inventory levels to manage cash and we finally see that take a bit of an uptick. But again, it's a single data point let's not extrapolate off that just yet.

Got it. Thanks. Good luck guys.

Our next question will come from Andrew DeGasperi with Berenberg. Please go ahead.

Thanks. I just wanted to ask a question regarding your comments on the competition the 3 to 6 kilowatts from the Chinese laser makers. Can you maybe elaborate on that? Like do you think they've achieved a certain degree of reliability at this stage that a lot of integrators will now potentially replace or potentially use those Chinese laser makers for their needs?

So what we have heard is that, they're becoming more competitive in the 3 to 6 kilowatt range than they were at any time in the past year or so. This is -- I don't think this is a pricing discussion because we know the pricing is aggressive. This probably is on a reliability and performance basis that those comments are being made. And look they have done this -- the Chinese manufacturers have done this previously at lower power levels. It's not unreasonable to assume that they would master higher power levels on a go-forward basis. So that's what the comment is about. It appears that they're mastering higher power levels and they're gaining share in that range in the Chinese market.

Got it. And then maybe secondly can you maybe update us on the defense side anything that's trending on that end?

You know the number of opportunities is becoming larger than, we had anticipated. A lot of these are early-stage projects, rather than things that are ready for deployment, but the programs that, we've been involved in, have done well. The primes keep checking all the boxes they need to check to take these things forward. And some of them are now going into the field deployment. That's generally good news. And our view that this becomes a meaningful piece of business over the next few years, I don't think there's anything that would change our position there.

Great, thank you.

Our next question is a follow-up from Mehdi Hosseini with SIG. Please go ahead.

Yes. Thanks for taking my follow-up, two follow-up questions. Kevin, when you think about the second half of calendar year, how should I think about leverage and operating margin? And I ask that as a way to figure out how the mix changes from the first half to the second half?

Yeah. Mehdi. So, as we've talked about in the past as we've stated publicly right, our ELA or our Linebeam machines are accretive. And so as we continue to take orders and then deliver against the orders in the future that will have very good leverage to the P&L. I'm not going to get into specific timing. But as we've talked about in the past, we took order in the June quarter and we took more orders in the September quarter, and now more orders in the December quarter. And roughly at a minimum 6-month lead time you can map out or at least model some revenue scenarios. But given the accretive nature of these machines they will have leverage on the P&L for sure.

Great. And a second follow-up for you and John is there any update on the CEO transition?

The process is ongoing. And when they're ready to make an announcement one will be made.

Where are we in the process?

Mehdi, this is a confidential search. We're not going to give periodic updates as to where we are.

Got it. Thank you.

Thanks, Mehdi.

Our next question is a follow-up from Mark Miller with The Benchmark Company. Please go ahead.

Just for modeling you indicated the OpEx will be up next quarter because of the extra week. Will the OpEx -- it won't scale as much up in SG&A, because you're not selling as much? Or will they both up, rises by roughly the approximate percentage of the extra week?

Yeah. It's the latter Mark. It will scale up from 13 to 14 weeks that impacts the functions across all functions if you will. So, it will scale in the quarter. And then the following quarters back to a 13-week quarter. So, we should see some efficiency there.

Okay. But both SG&A and R&D will scale, approximately the same?

Well, they're different absolute amounts. But yeah they will scale because of that additional week.

Okay, thank you.

This will conclude today's question-and-answer session. I would now like to turn the conference back over to Mr. John Ambroseo for any closing remarks.

Thanks, Sean. And I'd like to thank everybody for participating. And we look forward to doing this again, in a few months.

The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.