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Coherent Corp
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Good day ladies and gentlemen and welcome to Coherent's Third Quarter Fiscal Year 2018 Financial Results Conference Call hosted by Coherent Incorporated. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct 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. You may begin your conference.
Thank you, Prince, and good afternoon everyone. Welcome to today's conference call to discuss Coherent's results from its third quarter fiscal 2018.
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 benefits if any such trends. These forward-looking statements may contain such words as project, outlook, future, expect, will, anticipate, intends or referred to as guidance.
These forward-looking statements reflect believes, estimates and prediction as of today and Coherent's expressly assumes no obligation to update any such forward-looking statements. These forward-looking statements are only predictions that are subject to substantial risks, uncertainties and assumptions that are difficult to predict that 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 for our products, customer acceptance and adoption of our products, the worldwide demand for flat panel displays and adoption of OLED for mobile displays. The demand for and use of our products in commercial applications our and our customers' exposure to risks associated with worldwide economic conditions, our customers ability to cancel long-term purchase orders, the ability of our customers to accurately forecast their own end markets and our ability to accurately forecast future periods.
For a detailed description of these and other risks and uncertainties, which could impact these forward-looking statements, you should review Coherent's periodic SEC filing including its most recent Form 10-K, Form, 10-Q and Forms 8-K including the risk 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. I'd like to welcome everyone to our third fiscal quarter conference call.
Before discussing the most recent quarter, I'd like to offer our views on the flat panel display industry, the opportunity within materials processing, and a first glimpse of fiscal 2019.
From our vantage point there is no OLED demand problem, handset manufacturers would prefer the performance advantages and design flexibility provided by flexible OLED display, but availability and pricing is constraining market proliferation. Panel manufacturers other than Samsung are working to master evaporative deposition and encapsulation. Capabilities around TFT annealing are sufficient at the current time, but will require a refinement once the other processes are mastered.
Recent conversations with panel manufacturers about the investment outlook again confirmed that more than 20 OLED fabs are planned between now and 2023. Mobile displays are expected to dominate investment into 2021. For our actual and projected OLED revenue, fiscal 2018 is the current peak and fiscal 2019 will likely be down 15% to 20% before recovery starts in fiscal 2020. Systems and service are included in these projections.
We expect most of the new fabs will install Gen 6 hardware. The customer base will be much more diverse than the first phase of the build out that was driven by a single large customer. The modest investments that we made in optics and testing capacity allows us to ramp quickly and reduce line beam 1500 lead times to approximately six months versus the 15 to 18 month lead times during the first phase of line beam 1500 production.
We have continued to make inroads into materials processing market, which was one of the motivations behind the Rofin-Sinar acquisition. The two largest opportunities are in fiber lasers and components for cutting and welding and in laser-based tools for electronics, automotive and medical device manufacturing.
Fiber lasers and components will account for roughly $250 million in fiscal 2018 sales. And based upon our current forecast are poised to grow by more than 20% in fiscal 2019. On the tools side, we have been realigning and augmenting the portfolio to address high growth opportunities, while deemphasizing one-off custom tools. We are especially pleased with the level of customer interest in OR laser, our recent acquisition in the additive manufacturing space. We believe this will deliver attractive long-term growth.
Distilling this down, our current expectation for fiscal 2019 is that growth in other markets will largely offset FPD headwinds. We project fiscal 2019 revenue to be within 5 percentage points of fiscal 2018 sales. FPD fab utilization improved in the June quarter in support of new handset launches. This was consistent with prior projections, but did not translate into corresponding increase in FPD service revenue due to customers burning off service spares in a cash management move.
Our semiconductor CapEx business continues to perform at record highs. Market drivers are unchanged. Investment is in its advanced nodes, domestic spending in China, automotive and IoT have offset slower spending on memory. The trends are projected to hold into 2019.
EUV also appears to be improving, but the very limited number of inspection tools will probably utilize plasma-based EUV sources rather than lasers. The long awaited rollout of 5G networks has begun in select test cities. So it's a good time to review the opportunity for the laser industry.
The deployment can be broken into two phases for transmission frequencies below and above 6 gigahertz. The initial below 6 gigahertz space will use technology similar to what's available in five gigahertz home Wi-Fi networks. In two to three years, the second phase above 6 gigahertz kicks in and various technology changes are necessary including an increase in PCB layers, glass substrates, and thinner copper. Collectively, they will drive significant changes in manufacturing beyond today's CO2 centric infrastructure. We expect solid state UV and ultra fast lasers to play a more important role in manufacturing.
Materials processing orders were lower following a record setting second quarter. Revenues and orders from automotive applications posted double-digit growth for battery related orders, and orders from medical device manufacturing, workstations for stent production and marking systems for product authentication and traceability were also up.
Component orders were slightly lower on the heels of a record performance in Q2. The quarter-to-quarter fluctuation notwithstanding the appetite for fiber laser components in China remains healthy as Chinese domestic fiber laser manufacturers put up impressive growth numbers. Orders from consumer good applications were also lower partly due to late qualification starts for certain consumer product cycles.
OEM instrumentation and components bookings hit an all-time high with a book-to-bill well above 1. Bio-instrumentation orders were very strong due to multiple large OEM orders as well as good organic growth from several smaller accounts. Flow cytometry and sequencing applications were the strongest contributors.
Record orders from aerospace and defense have doubled over the past year. We have seen a sizable uptick in defense spending for direct and energy programs and we have won a number of contracts for satellite optics. Our U.S. based R&D and manufacturing footprint put us in a great position for future wins. Medical OEM orders increased modestly from the usual user group in ophthalmic, dental, anesthetic procedures as well as surgical consumables.
So just to recap, we believe the long-term opportunity in OLED is largely unchanged. Based upon the current input from customers, FPD revenue will likely be reshaped from fiscal 2018 to fiscal 2020. Our diversity will help temper FPD headwinds as growth in other markets will largely offset the FP revenue delta in fiscal 2019. There are exciting opportunities in electromobility and advanced manufacturing that will continue to long-term growth.
I'd also like to confirm that we have completed the repurchase of $100 million of Coherent's common stock in the June quarter. We will continue to deploy cash to drive long-term shareholder returns through accretive acquisitions, share repurchases, or debt requirement.
I'll now turn the call over to Kevin Palatnik, our Chief Financial Officer.
Thanks John.
Today I will first summarize fiscal third quarter 2018 financial results, then move to the outlook for fiscal Q4. 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, restructuring costs, acquisition costs, purchase accounting adjustments, impairment charges, and the related tax adjustments.
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 third quarter 2018 financial results for the company's key operating metrics were total revenue of $482.3 million, non-GAAP gross margin of 46.4%, non-GAAP operating margin of 26.3%, adjusted EBITDA of 29.1%, and non-GAAP EPS of $3.51.
Net sales for fiscal third quarter were $482.3 million representing growth of approximately 4% year-over-year. Sales came in at the low end of our previously guided range primarily as a result of service revenues not ramping as fast as expected.
Our revenue mix by market for Q3 was micro-electronics approximately 54%, materials processing 28%, OEM components and instrumentation 11% and scientific and government 7%. Microelectronic sequential sales growth was virtually flat, raw materials processing declined by approximately 2%. While we're not satisfied with this result, the high-powered fiber laser within this end-market achieved sequential growth of approximately 17%.
Geographically, Asia accounted for approximately 63% of revenues in fiscal third quarter, the U.S. 16%, Europe 18% and rest of the world 3%. Asia includes two territories with revenues greater than 10% of total sales. Other product and service revenues for fiscal third quarter were $121 million or approximately 25% of sales. Other product revenue consists of spare parts related accessories and other consumable products and was approximately 22% of sales, revenue from services and service agreements was approximately 3% of sales.
Total service revenues were virtually flat year-over-year as the service utilization decreased in existing field systems offset the service utilization of new systems. We had one customer in South Korea related to large flat panel display manufacturing that contributed more than 10% of our fiscal third quarter revenues.
Fiscal third quarter non-GAAP gross profit excluding stock-based compensation costs, intangibles amortization, purchase accounting adjustments and restructuring was $224 million. At 46.4% of sales for the quarter, non-GAAP gross margin came into the low-end of the previously guided range. This was primarily related to a one-time warranty expense at the very end of the quarter.
Non-GAAP operating margin was 26.3% for fiscal third quarter and was slightly below the midpoint of the guided range. Operating expenses decreased approximately $6.3 million of which the weakness in the euro contributed approximately 700k. And as mentioned earlier adjusted EBITDA was 29.1% in fiscal quarter -- fiscal Q3.
Turning to the balance sheet non-restricted cash, cash equivalents and short-term investments were approximately $232 million at the end of fiscal Q3, a decrease of approximately $114 million compared to the end of last quarter. During the quarter, we repurchased shares in the amount of the total repurchase authorization of $100 million. We did not make a voluntary payment against our term loan debt.
The amount of outstanding term loan debt in USD is$ 434 million. International cash was $158 million or approximately 68% of the total cash and short-term investment balance; approximately 39% of the total cash and short-term investments denominated in dollars. Accounts receivable, DSO was 63 days compared to 59 days in the prior quarter. The net inventory balance at the end of fiscal third quarter was approximately $495 million an increase of $2 million from the prior quarter. And capital spending for the quarter was approximately $21 million or 4.4% of sales.
Now, I will turn to our outlook for our fourth fiscal quarter of 2018. Revenue for fiscal Q4 is expected to be in the range of $465 million to $485 million. We expect fiscal Q4 non-GAAP gross margin to be in the range of 46% to 49%. Non-GAAP gross margin excludes intangibles amortization of approximately $12.5 million and stock compensation costs estimated at $1.2 million.
Non-GAA operating margin for fiscal Q4 is expected to be in the range of 25% to 28%. This excludes intangibles, amortization estimated at a total of $15.1 million and stock compensation expense of a total of approximately $8.6 million.
Other income and expenses estimated to be an expense in the range of $6 million to $7 million. We do not include transaction gains and losses related to future changes in foreign exchange rates in our other income and expense outlook.
We expect our fiscal Q4 non-GAAP tax rate to be in the range of 27% to 28%. And finally given the share repurchases made in the quarter, we are assuming weighted average outstanding shares of approximately $24.5 million for the fiscal fourth quarter.
With regard to our participation at upcoming conferences, we'll be presenting at the Needham Industrial Technologies Conference on August 2nd in New York and Oppenheimer's Midwest Corporate Access Day in Chicago on August 15th.
I'll now turn the call back over to the operator for a Q&A session.
Thank you. Your first question comes from the line of Jim Ricchiuti from Needham and Company. Your line is now open.
Hi. Thank you. John, can you say whether you've seen any, experienced any cancellations or push outs on the display side of the business?
To-date we have not.
Okay. Is what you're seeing out there in terms of the customer base in display, are you seeing any variability in the investment plans by region? And by that I mean look we know in Korea, the outlook for investment is muted, but what are you seeing, can you say what you're seeing in China in terms of level of activity.
Let's see, I would say down to the last player in China, the desire to be -- have a meaningful role in the OLED market remains quite strong. A lot of the discussion is around how they go about solving certain production challenges that they're currently having. Many of those we can't help them with because we don't provide the equipment. We don't know those processes.
As I mentioned in my prepared remarks, the annealing step is currently good enough. We would expect them to want to refine that further once they solve the other challenges that they're having and they start to see yields move up in a meaningful way. But in terms of any of those players changing their posture, no, we haven't seen that.
Okay. With respect to the utilization that you're seeing among your existing customers, when would you anticipate that starting to impact your service business? In other words should we see a pickup in your service-related display business in the current quarter as the utilization rates at least we're hearing are moving up?
To be blunt about it, I referred to it in my prepared remarks, but I guess to reiterate, we had expected to see more of an uptick in the June quarter than we actually did. Utilization rates were up in June over March that didn't translate into a commensurate increase in service demand. Again, some of the customers are burning off inventory to help manage cash. We do expect that to continue -- utilization rates to continue to grow, and we would also expect to see service revenues respond at that point because they don't have an unlimited amount of inventory.
Okay. and last question for me, and I'll jump back in the queue to shifting gears a little bit just in light of concerns people have had about different areas of the industrial business, what would you characterize, how would you characterize the level of activity that you're seeing in the materials processing business and can you just clarify, did you say I may have misheard, but your fiber laser revenue expectations for fiscal '19, could you just repeat that?
So to reiterate the comments, in fiscal '18 we'll do about $250 million in total sales of fiber lasers and fiber laser components worldwide, and we expect that number that $250 million number to grow by more than 20% in fiscal '19. Again, it's for fiber lasers and fiber laser components. So that includes things like active fibers, transport fibers, combiners, pump diodes et cetera.
And as far as what we're seeing certainly there are concerns about what the current trade environment looks like. It's probably having more of an effect on small producers than it is on large producers at least at this juncture. However, some not all, but some of the opportunities that we're looking at are not in the traditional cutting space. We think they have more greenfield growth because of the applications that they're going into. I hope that answers your question.
It does. Just to clarify something that $250 million that cuts across some of your other market segments, so for instance that's not all obviously in materials processing, correct?
We capture all of that revenue within the materials processing bucket, whether it’s lasers that are sold into materials processing or components that are used to produce materials processing lasers. It all gets captured in the same bucket and that's the way we’ve always handled it.
Okay. I'll jump back in the queue. Thanks.
Sure.
Your next question comes from the line of Joseph Wolf from Barclays. Your line is now open.
Thank you. And thank you for some of those details. Question on just -- and I know it's early, but if you think about those mobile plans that you talked about and the projects being built and an uptick in 2020, is this the recovery off of even fiscal '18 numbers or should we look at fiscal '18 as a peak and there's just a recovery off of the trough when you think about demand utilization and what the future holds or is some of that just connected to the timing of the capability of your other customers to get yields and price in the right place?
Well, it's a combination of all of those things. There are new fabs that are going to be coming online that will require equipment. We are assuming that yield improvement at some of the non-Samsung houses will also increase and that will help the utilization rate, and that contributes to service revenue. I mean right now the total number of handset displays that can be produced covers maybe a third of the market and that's at today's average screen size, it looks like average screen sizes are going up not down, which would mean that is going to be even less than a third of the market, unless additional players are capable of shipping into those specs.
So yes, we expect more fabs to contribute more hardware. We expect utilization rates to improve that will drive service as those new fabs come online, that’s an additional kick to the service opportunity.
And I suppose the third number in addition to number of handsets, if we go flex then you have foldable kinds of things, screen area per device could also be significantly higher. Are you thinking about like that?
Absolutely, Joe. The way that we've always view this, it's a surface area argument. We know how many sheets can be produced on a monthly basis. You have to yield adjust that and then you divide it by the average screen diagonal and it tells you how many device screens you can make. If you go to a bi-fold or tri-fold screen, you have to decrease the number by half or a third depending on what the format is.
And just on cash flow. Thank you for that. On cash flow, you used up the whole buyback. If I understand correctly or I'm doing the math correctly, any sense on renewing that as you go into the new fiscal year or would that be a decision made with the K?
Yes, Joe. We did receive an authorization or got approval for an authorization in February for the $100 million worth of Korean shares. We executed that full authorization in the June quarter. But in terms of commenting on revamping that repurchase authorization. I'll hold comment on that.
Okay. Thank you.
Your next question comes from the line of Joe Wittine from Longbow Research. Your line is now open.
Yes. Thank you. John, I also appreciate the commentary on '19. Can you talk through the segment expectations for a theoretical down 5% in '19? And I was specifically curious on, what would that 15%, 20% decline for FPD imply for the overall ME segment as we provide [indiscernible]? Thanks.
Yes. Joe certainly understand the question. We've provided more visibility than we have in a long time and I'd prefer not to parse it any further than that.
Okay. Fair enough. I'm wondering you are skeptics to this OLED cycle, will wonder why '19 wouldn't be down by more. So can you give any discussion on whether you're targeting the 29 shipments to go to either geographically or by fab-in or are they mostly the one Chinese player. And specifically doesn't include any being from a large new fab from the leading player today or would that be 'gravy'.
So again, great question. 19, I think it's going to look an awful lot like '18 meaning that it's predominantly a non-Samsung year. If the market leader is going to take more equipment than A5 has for the occupied or ready for occupancy or ready for fab and that may or may not happen at the very tail end of '19. But our expectations assume that that's up beyond 2019.
As far as the mix, there are -- I'm going back to the question that was asked earlier about the investments in China. We are seeing continued investments in China. A number of fabs that had previously been announced will go fab-in during the year. That's going to consume or produce a shift in our consume but it's going to produce some of the revenue. And then, we expect to see a number of new installations arising from development programs for some of these players.
So again, it looks an awful lot like '18 being predominantly non-Samsung and a mix of existing fabs increasing capacity and new development opportunities in China.
Okay, thanks. And then, the last one for me. The service revenue stream related to FPD, is there a way to bridge the gap or give us some idea between the sales you're generating today, I call it the June quarter and what you would be generating if the equipment was running at 'full yields?'
Yes. The short answer to that Joe, this is Kevin, is if you look at the guide we gave for the current quarter, the midpoint obviously for 90, the delta to where we landed was pretty much all services and pretty much all in FPD.
Okay. Thanks a lot Kevin.
Your next question comes from the line of Patrick Ho from Stifel. Your line is now open.
Thank you very much. John maybe first-off on the fiber laser market opportunity and the details that you provided. Can you help me rationalize a little bit you're repositioning a lot of your product portfolio and your opportunities on the high-powered segment. But you also said that you're not going into the traditional cutting applications. What are some of these high-powered market opportunities that you are targeting that will help drive the growth that you're projecting.
So we've been doing a lot and as I mentioned electro-mobility and also in general automotive where we've been able to demonstrate some capabilities on the welding front that the customers and these are Tier-1 players in the automotive market haven't seen with any other white source which is obviously really encouraging. And that investment cycle is, I don't want to say indifferent to what's happening with respect to trade discussions around the world. But given what they're trying to achieve in terms of product quality, product reliability and production costs there's very good alignment there.
Great. That's helpful. And Kevin as my follow-up question and this is a very broad question. You've got a lot of moving pieces as we look towards fiscal year '19 with your commentary about OLED business you had the diode capabilities ramping up. How do we look at these moving pieces as it relates to overall gross margins kind of from a conceptual basis? I'm not asking for a number, but how do we look at all those moving pieces and how it may affect gross margins as we look at fiscal year '19?
Yes. Thanks. I appreciate that Patrick. In terms of what we look to in 2019, certainly the piece parts, right? We talked about OLED display being down 15% to 20% that includes both systems and service. From a systems perspective, we've talked about those being accretive to overall corporate margins. So that'll be a bit of a boat anchor whereas services we expect to increase in 2019 not offset the system decrease, but the margins on services are healthy.
And then, we've got materials processing as we move to internally sourced semiconductor chips or diodes in total that will help move margins. Those are the major pieces, major moving pieces as we look into '19. No, the accretiveness of FPD systems, services and its accretion, and then finally moving into an internal source those are the biggest pieces of the pie.
Great. Thank you very much.
Thanks Pat.
Next question comes from the line of Mehdi Hosseini from SIG. Your line is now open.
Yes. Thanks for squeezing me in. Kevin this is a follow-up to previous question. If your revenues are going to be within 5% of FY'19 revenue within 5% of FY'18. And your increase and sourcing is going to help with the Rofin margin profile, why should we think about the margin trend FY'18 to FY'10?
Yes. At this point Mehdi, I just going to give you the piece parts, I can't calibrate it for you. We'll do that quarter-by-quarter as we move into '19. But again, the big levers, systems has always been accretive and we've said that decreases as we move into 2019. The services piece will continue to grow in terms of its pro-rata share, its profitability is healthy. And then internally sourced diodes or chips will improve margins as well.
So depending on that mix as we move into '19, clearly that will influence gross margin but I won't calibrate it for you at this point.
Sure. Of those three factors, is internally sourced components the biggest wildcard?
It certainly that weighs heavy. Again, this is a forecast at this point. We do have good expectations for fiber and materials processing as fiber components I should say. As John mentioned earlier, as we internally in-source that those diodes or those chips as we've talked about in the past that should help margins and so that could be a swinger, yes.
Sure. And 20% growth for fiber legend component. How should I think about the revenue contribution of growth from existing customer versus perspective new customers that you highlighted a couple of quarters ago? And I have one more follow-up.
At this point, Mehdi, I just say 50:50, from existing and new that's our best estimate at this point.
Okay, 50:50. All right. And then, John, as you think about the V shape recovery that you talked about, should we assume that we hit the bottom part of the V halfway through FY '19. And as your key customers start to look into calendar '19 and they start implementing new CapEx projects that should help with the second half of your FY '19 to be relatively stronger than first half of FY '19?
Mehdi, again, it's a good question. We're still working out some details as to exactly when customers want us to deliver existing backlog. So there's a combination of existing backlog and then orders to fill out -- to fill out the year. I guess if you wanted to, if you wanted to spit fall it today saying lower first half, higher second half is probably a reasonable approximation. I'd like to have a little bit more data on that before I told you that's the way to think about it but from where we're sitting today, sure, it's a reasonable approach.
Okay. Thank you.
Sure.
Thanks Mehdi.
Your next question comes from the line of Larry Solow from CJS Securities. Your line is now open.
Great, thanks. Good afternoon. Just a couple of follow-ups. John, obviously, you remain as probably as confident in the long-term OLED and it seems like it's a when and not if. With some other production challenges and whatnot and not to pinpoint you on timeline. But you seem pretty confident that 2020 will be sort of the year when there are more vendors that can compete. What sort of gives you that confidence, is it just conversations with customers, are you seeing yield improve, what sort of some of the factors that give you that confidence?
While ago Larry, I talked about, and I'm going back a few years now. I said if you want to follow the market yet, you have to follow the fab bills. And these conversations with customers are telling us what they're planning and when they're planning to build fabs is part of what drives that.
Okay. So it's sort of, I guess the list of queue of fabs expected to open is seems only to grow all right. It's just everything seem to push to the right. But in terms of actual commercialization and yield but in terms of that demand it doesn't seem to have slowed at all, is that sort of fair to say?
We have not heard from any other customers. And we've done a high level review very recently. No one has changed their tenor. The question, it's fair to ask when you're going to be competitive. It's not an issue of whether or not they're committed to it.
Okay. Fair enough. Just one last question maybe a shortsighted one on -- just on the guidance for Q4, sales actually down looks like 2%, 3% at the midpoint. You mentioned service revenue expect the recovery there. So is that still part of that piece or is it from a high level, can you sort of give a little color on that?
Yes. Larry, it's Kevin. So certainly services we do expect some growth into Q4, but as we look at other product mix and so forth, it's a various set of products that drives it down a little bit. Like you said 2% or so.
So it's not on the OLED side per se or [flat-on] [ph] outsides, just display side, it's really just a mix of stuff and timing more than anything.
It's across most of the segments of the end-market.
But not an indication, it sounds like of any real slowness because the way you guys talk mostly markets are still doing rather well?
Correct.
Fair enough. Thank you.
Thank you.
We have a follow-up question from the line of Jim Ricchiuti from Needham and Company. Your line is now open.
Can you just remind us of the timeline, on the internal diode sourcing, what are some of the milestones we need to look for? And how quickly as you look at fiscal '19, when would this be incorporated in most of the product line?
Hey, Jim. It's Kevin. So we've always said that we'll deliver vertically integrated fiber in this fiscal '18 and we're on track to do that. But we also said that because of the mix of external sourced chips and internal sourced chips, it will see the majority of the margin benefit in fiscal 2019.
There's a bit of timing in terms of how we rapidly build if you will the internal source versus burning-off the third party inventory. So it'll take a little bit of time into fiscal '19 before we'll see that that true benefit -- that full benefit. But I'm talking months not quarters. So early into fiscal '19, we should see the benefit related to in-sourcing the chips.
Okay. And with respect to the other areas of the microelectronics business, sounds like you're still seeing fairly good demand in semiconductor. John I wonder if you could just elaborate on that, because we're hearing different things. I wonder if you could just talk a little bit about the semiconductor capital equipment market what you're seeing as well as the PCB portion of the business?
Sure. So in semi-cap, just as a reminder for everybody we are the premier supplier for lasers that are used in inspection of Metrology. We provide equipment that goes to both logic and memory, the past -- probably the past couple of years has been a memory overload. If I can be a little cheeky a solid state memory really took-off. And while that started to ease up, we're now seeing a step up in spending in China, continued strength on the logic side, which is really what's driving demand for new products. And just as importantly within our semi-cap business a good portion of that revenue is service for the installed base. And again, as a reminder, we have equipment installed that goes back generations. So when you see fab utilizations and semi at the levels they are today, they've been sustained at these very high levels for a long time. That's been driving very good service revenue for us.
As far as the packaging goes, packaging has been running sort of in the five year high range over the past few quarters, which is terrific. The key for us, and again, going back to my prepared marks, one of the keys for us is, what's going to happen in 5G and at least in the first phase of 5G, it's going to be more of the same in terms of capability.
And then, when you move into the second phase of the 5G market we're predicting that's when you'll see a potentially significant investment cycle because they'll have to change one or more of the process steps to be able to support these more advanced architectures.
Thanks. Thanks a lot.
Sure.
Thanks Jim.
We have a follow-up question from the line of Mehdi Hosseini from SIG. Your line is now open.
Thank you. John, I just want to better understand the dynamics of the market. There is a high resolution, high PPI display coming out in the second half, is that 300 to 350 PPI LCD which most likely has LTP has backplane, how should I compare opportunity there with rigid OLED opportunities?
On the hardware, Mehdi we're still agnostic because the hardware that's used for LCD is essentially identical to the hardware that used for OLED. The difference, however, is in the manufacturing process tolerance and OLED has a much tighter process window. So for the same number of displays we see greater service revenue coming out of the OLED market than we do with the LCD market.
Okay. All right. And then, Kevin just a quick follow-up. The one-time warranty expense to happen in the June quarter that's just one-time item, if that's correct? And also if you could also provide some color what was it?
Yes. Mehdi, it was one-time. There was a decision made. We have an internal metric called RTO, return operation when a machine fails. We measure ourselves on how quickly we bring that back up. We inherited some, well -- we have some older and existing field inventory that we made the decision to go out and refix and replace. So we didn't have to deal with some of those issues. So that's why we said it was a one-time and it happened late in the quarter. So it was a reasonable impact to the gross margins.
Okay. Thank you.
Thank you.
And at this time, we have no further questions in the queue. I will turn the call back over to John Ambroseo for any additional or closing remarks.
Thanks Prince. Again, everyone like to thank you for joining the call today. We hope we've provided some clarity around the opportunities that are ahead of us and we look forward to catching up with you during the next conference call.
This concludes today's conference call. Thank you for your participation. You may now connect.