Q2 2020 Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the six incorporated as well so when you second quarter earnings Conference call.
At this time, all parties, who pass or E mail isn't the only melt.
Later, we will conduct question answer session and instructions will follow at this time.
The other once you require assistance during the conference. Please press Star and then zero on your touched on telephone.
As a reminder, this conference call it used to being recorded.
I wouldn't like to turn the conference over to your host Ms. Mary Jane Raymond Sure Financial Officer.
Thank you Carl and good afternoon, I'm Mary Jane Raymond the Chief Financial Officer here, a twosix incorporated.
Welcome to our second quarter earnings call for fiscal year 2020.
With me today on the coal from our Silicon Valley Regional headquarters in California is Dr., Chuck Mattera, our Chief Executive Officer, and Dr. Giovanni Barbosa, Our Chief strategy Officer under President of the compound semiconductor segment.
This call is being recorded on Monday February 10th 2020.
Our press release 10-Q, and our updated Investor presentation are available on the Investor Relations tab of the website.
Oh, My Gosh V <unk> dot com.
Just as a reminder, any forward looking statements we may make today during this teleconference or given in the context of today only.
They can train risks and factors that are subject to change possibly materially.
We do not undertake any obligation to update these statements to reflect even subsequent to today, except as required.
Most of our risk factors can be found in our form 10-K.
A new risk factors are rising in the current period can be found in a quarterly 10-Q.
We will also share some non-GAAP measures.
The reconciliations for these measures.
Or typically found at the end of each document that uses them such as the press release for the Investor present.
With that.
Let me turn to fall over to Dr., Chuck Mattera John.
Thanks, Mary Jane.
Afternoon, and thank you to everyone for joining us today.
Our second quarter performance was strong on many fronts.
This performance is the result of Roaring customer demand for our products.
Chris key end markets and continued success with our M&A integration efforts.
We made it our first priority to seize the right opportunities to deepen customer trust and the increased the mindshare over our high value customers, who seek strategic partners like to six with a track record of delivering market, leading technology and compound semiconductor devices in photonics solutions.
Those who operate in a global footprint and have the financial stability to deliver innovations over the long term.
As a result of the acquisition, we're seeing customers increasingly leaning on US now that we possess the broadest product portfolio applications expertise and scalable manufacturing capabilities in the optical communications industry.
Customers realize that our business is built on enabling technology platforms abroad to IP portfolio inexperienced people, who can take on the toughest challenges and be merged with differentiated products.
Our optical communications end market was very sure.
Our growth was driven primarily by three factors increased demand for our transceivers and related components.
The continued strength of the wrote them components combined with market share gains and the overall emergence of Fiveg.
Our ramps of new products were Fiveg has accelerated as over 80 carriers re architect their networks to handle the transition from Threeg and Fourg as 5 billion mobile subscribers today begin to migrate to fiveg.
We believe that a large in multiyear opportunity for Twosix is unfolding.
During the quarter, we saw the Datacom market began to recover driving robust performance for Transceivers this quarter feeding our revenue expectations by 40 million.
The organic growth of Datacom pixels was 30% year over year and 38% sequentially.
These are not only great results.
But they validate our components and modules strategy.
We expect this strategy to also drive indium phosphide loser component revenue by leveraging our existing sales channels and our world class technology platforms.
Wrote them sub systems and components continue to be strong, 16% organic sequential growth.
Sales were very strong of amplifiers line cards, and all enabling components, including passive optics wavelength selective switches, which experienced record demand and 90 nanometer pumps, which also experienced extremely strong demand for undersea applications.
In fact, when accounting for the accelerating demand for Fiveg. Most of these manufacturing lines were sold out.
In addition, the success of our earlier acquisitions are enabling our success and our low report card little power consumption, we weren't selective switches at the edge of the network, where we're seeing a lot of interest and early adoption.
Moreover, advancements in operational excellence has significantly improved margins for these products.
Our silicon carbide business grew 77% sequentially and 14% year over year.
We're continuing to diversify our customer base and gain long term contracts in both RF and power electronics, our capacity expansion is also well on track.
For Threed sensing, we had record shipments from our fab and Warren New Jersey.
More than doubled both sequentially and year over year.
Ongoing operational excellence in quality improvement initiatives at warrant have resulted in the manufacturer Vixel arrays at high volumes with sustained high yields and high reliability.
We are bringing all of our experienced a beer on the launch of new products at Warren and to position Sherman as a world class compound semiconductor device Rob.
They are well underway and I'm excited about the work we're doing to qualify our vixel manufacturing line Sherman.
Our target remains to complete the qualification inside this quarter and I am optimistic about it given the progress we've made.
We believe that the sustained investment to establish an in house vertically integrated six inch platform will enable us to achieve the most competitive and long term viable cost structure give me industry for manufacturing advanced compound semiconductor devices at scale.
In aerospace and defense our businesses continue to grow nicely as we signed some large contracts during the last quarter.
Aerospace and defense is increasingly turning into a new growth market for two six with 13% sequential growth this quarter.
Advanced materials electro optic components and sub systems platforms combined with the semiconductor laser are central to our growth strategy and this end market as we align our capabilities with our high value customers to enable them to when we.
We have four major market segments of the market that we're allocating our capital too and to complement the capabilities of our most recent acquisitions. Those four segments are F 35 satellites and contested space Hypersonics and directed energy.
Our integration is off to an excellent start the cost reductions anticipated argument major priority for us.
We need to align our cost with market realities and deliver not only synergies, but improved long term operating performance.
Our new values underscore our commitment to drive efficient allocation of capital improved cash flow and sustained long term returns.
Our sales and global procurement organizations accelerated quickly into delivering synergies right on track.
Our segment and corporate leaders have led by example, and all have contributed to creating the tone and tempo at the top around delivering the cost synergies and operating performance achieved to date.
Finally, I'll spend a minute on the evolving corona virus outbreak.
First we are committed to protecting the health and safety of all of our employees, while delivering for our customers.
I am proud of our worldwide leaders, who have collaborated from the offset to provide a business continuity and emergency management plan and who are carefully tending to their needs of our employees.
We have been in daily communications with our China based employees and the local governments, where we operate to be sure. We are fully knowledgeable of the changing landscape and fully compliant with the requirements.
Beginning today about a third of our China workforce returned to work.
Our operating model for the quarter contemplates that they will all be back to work within the next several weeks.
As we reported in today's press release, our financial outlook for the current March quarter is expected to be affected and has been reflected in our guidance.
Mary Jane will provide some additional color on this winter as it relates to the short term impact.
Regarding business continuity planning I would like to remind everyone that we are also have a major manufacturing footprint in Asia outside China.
So we're working closely with our strategic customers to shift some demand through our factories in Malaysia, and Vietnam to mitigate any impact to their supply lines.
Before I turn it over to Giovanni I'd like to thank our customers our business partners and our employees for enthusiastically aligning around our strategy as we work to position to six for the tremendous growth opportunities ahead of us and in particular I wish all of our China employees good health while.
We thank them in advance for their hard work is stay return Giovanni.
Thank you Chuck and good afternoon.
The multiple market drivers of our growth this quarter undisclosed in doing logic of our strategy.
Which relies on engineered materials differentiated performance and operational excellence to provide our customers vertically integrated solutions with a high barriers to entry.
Prior to the acquisition.
Two six establish a strong business in components for Datacom, transceivers, which represents to be 15%, although organic refinish communications business.
These reduction to the Metro markets.
Obviously captive finished our components seems to be will time.
Since we just so our organic business pick up 20% sequentially.
24% year over year.
In fact, we've been a few months of closing deposition.
We are leaving that also multiple qualification engagements full engine for site based components.
Additionally to support the anticipated market growth.
We just announced they named US the first six inch wafer manufacturing platform will be back on digits.
We will get into based in part as a technology differentiation in lasers, including emails EMEA mills to get 80 for what we believe we see a strong uptick in their vehicle market in the second hall of calendar year two ended Wendy.
The 100 Preconceive abuse and is currently the largest fall off of the total addressable markets was very strong in the quarter.
Ahead of expectations.
Our goals the well under the GE was driven by Hyperscale data centers.
Which continue to upgrade the leaf spine intent on next Jones from 40 to 100 Jude.
So it seems a bit from our mutual customers is an indication of continued momentum in this market.
Regarding 200.
On the and 800, Jay did that can conceive us.
We are currently the market leader in founded G.
We'll be shipping for on did you pull those so sometime with several other design in qualification is underway and.
And we also had eight ontology modules in design.
We've got to earliest stage that full full on budget and eight on the G.
Well leaderships in leaves US all these any of the did sequenced design expertise we'd be volatile.
This is because we believe the diluted this steady excellence and leaves us off these in electronics is especially critical to accelerate our time to market into delivered the best performing felt seedless modules and components money can buy.
It's clear from these adoptions by competitive goes the merits of multidisciplinary call defense within the same company is a winning strategy to continue to lead in the big competitive market.
We have significantly increased our investments, including the optics, especially not indeed.
And I'm pleased with all this incomes meet this is a cboes, including tunable sub assemblies.
As well as interim CEO modules.
We have recently secured H design wins, we have started shipping production volumes and we at 15 designing qualifications underway.
Coherent optics now represents about 15% Wawa tuxedo business.
The silicon carbide run in the process of expand into physical footprint of our manufacturing infrastructure in additional capacity coming online according to schedule.
So good this quarter was largely in.
Let's turn to solve it ended June quarter.
While the mindful Pablo applications like elected vehicles is down year over year, we saw a nice pickup sequentially doubling since last quarter.
Industrial was flat sequentially boost is still below the prior year, we saw the beginning of a quarterly sequential in Asia overall, including China.
Likely indicating that assumption Elisa utilization.
Hopefulness will semiconductor capital equipment and wed in high demand continuing the spreads would involve the last quarter driven by the global logic semiconductor markets.
Our easily business, which was flat year over year end grew about 7% sequentially is now experiencing it assumption in globally them on and we expect this will continue over the next 12 months.
Hey, let's see some defense is really thinking Gulf.
We had built in both new and existing slowdowns and have a very healthy pipeline on new design into opportunities we have a significant.
Differentiate the end solution.
Let me probably to alert to managing.
Thank you hear Bonnie and good afternoon.
First to summarize all the growth and distribution by end market.
The company's reported.
Revenue growth was nearly 100% year over year since NSR was not in last year's results.
The better total company measure to use is pro forma including finished source result from similar prior period.
Using no three.
Of the 10-Q.
Thanks to Apple.
The companys.
The total companies year over year growth was flat organically praesidis, our year over year growth.
5%.
Year over year, the communications reported revenue growth was 200%.
Same reason for us, our Washington last year, but on an estimated pro forma basis.
Year over year in communications was down 4%.
Organically year over year communications grew 2%.
For the other end markets on a reported and organic basis consumer doubled year over year Aerospace and defense grew 20%.
Components to semiconductor capital equipment grew 6% and industrial declined 12%.
Sequentially.
On a pro forma basis. The total company grew 10% and communications grew an estimated 4%.
For the other end markets.
Consumer doubled sequentially as well aerospace and defense grew 13% and finally industrial in semiconductor capital equipment were flat.
During the quarter. The total revenue of 666 million was split 70% and communication, 11% industrial.
7% in aerospace and defense.
5% in consumer.
4% in semiconductor capital equipment and the rest is in the other end market.
Geographically or end market profile continues to be well diversified.
With 39% in North America, 19% and were up 14% in each of China and the rest of Asia.
8% in Japan.
And 6% in the rest of the world.
The non-GAAP gross margin was 35%.
Mostly due to the elimination of the 81 million dollar one time expense from the step up of the acquired inventory.
Operating margin, the non-GAAP basis with 9.8%, including.
The startup cost for Sherman, which were $19 million in the quarter.
Sherman cost added back would yield an operating margin of 12.6. So we are looking forward to putting those cost to work.
Non-GAAP EPS was 36 cents with the pretax non-GAAP adjustments of $144 million coming in very close to our estimated 149 million, though our tax attributes are now such that we need to tax effect. These items.
Non-GAAP return on sales was 5%.
At this segment level.
The adjusted operating margins were 12% for photonics and 5% for compound semiconductors photonics benefited from the pickup in the transceiver volume and richer mix, including more than doubling its submarine wholesale compound semi also benefited from strong vixel vixel race organically there.
Our results include the 19 million a startup costs for Sherman, which accounts for nine point of the segment operating margin.
Our quarter end backlog was $681 million, consisting of 333 million in photonics and 346 million in call until semiconductors.
This compares to last quarter of 721 million total with 386 in photonics and 335 million in compound semiconductors.
The backlog contains orders that will ship over the next 12 months.
Capital expenditures this quarter were $55 million.
For the combined company for the year, we are expecting capex.
In the 150 to 200 million dollar range.
Interest expense was 28 million for the quarter.
Debt decreased $80 million with repayments during the quarter on the revolver and the term loans.
The total expected debt service payments for the quarter or $30 million, an interest in 17 million in required prepayments.
Our cash is $376 million an hour net debt position, it's 1.92 billion.
Our net debt leverage ratio on the basis of our credit facility is 3.8 times.
We are still assessing the tax position of the company, but believe at this time of the tax rate will range from 9% to 12% for fiscal year 2020.
Regarding our progress on synergies, we're tracking well against our target of $150 million, an annual cost synergies within three years of the close of the transaction.
At this point, we have identified all of the targets synergies.
Along with these cost reductions we have also turned up our efforts on working capital improvements, including standardizing payment terms for common customers and suppliers and defining opportunities to streamline purchased services.
Regarding the trade agreement in December that was a welcome change to the heightened tensions and we hope that discussions progress favorably from there.
With regard to restrictions on specific customers further actions have been stayed at this time.
We continue to serve all customers within the bounds of the allowable trade compliance guidelines.
Turning to the outlook consideration of the Corona virus effects are included in our guidance.
The effects or potentially broad reaching.
Not only are many of our factories and employees dealing with a longer Chinese new year holiday. There also potential effects on the overall supply chain.
We expect to be moving back to full strength over the next several weeks.
We have therefore included a minimum of $50 million revenue reduction in our guidance to account for these conditions.
Guidance, then for the third fiscal quarter, ending March 31 2020.
As revenue of $550 million to $600 million.
On the EPS on a non-GAAP basis is two cents to 32 cents.
This is at today's exchange rate and at an estimated 10% tax rate.
The non-GAAP items in the EPS totaled 59 cents.
Including the pretax amount of $16 million and stock compensation 34 in amortization and 13 million in costs to facilitate the integration.
The share count to be used is 94 million shares the tax rate.
And exchange rates are subject to change.
We were pleased to see somebody dealer photonics west and our Investor meeting at OFC will be Tuesday March 10th at Fourfifteen Pacific time.
Now as we turn to the Kunaev for this call remember that our actual results may differ from these forecast due to a variety of factors, including but not limited to.
Changes in product mix.
Customer orders competition.
Changes in trade and tariff regulations.
Employee health issues and general economic conditions.
I'll also remind you that our answers to your questions today may contain certain forward looking statements, which are based on our best knowledge today and for which actual results may differ materially.
Kyle you May open the lines for questions.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your question telephone.
Your question has been answered all your with your move yourself from the Q. Please press the pound.
Your first question comes from the line of meta Marshall from Morgan Stanley. Your line is now open.
Great. Thanks, maybe two questions for me I'm on the Datacom Transceivers side of the business that seemed you know exceptionally strong can you just give a sense of you know whether you thought that those were market share gains or just kind of stronger demand in general unless that you know a tainted generation of speed that kind of drove that and.
Maybe second just on the Corona virus impact you know is how are you evaluated that kind of production ability or or demand. Currently it does any helpful as to whether that number was triangulated on supply or demand. Thanks.
Data. This is Chuck Thanks for your question on the Datacom side of the business, we think a student demand.
And we are positioning ourselves for market share gains, but we think this at this time around it was demand on the Corona virus I want to tell you that our our order book for the third quarter as we closed 12 31 was extremely strong.
And our our care and Carefulness here is just simply measured by our ability to get people back into a full we assess any holes that we may have in the supply chain.
And I can guarantee that we'll do everything we can with what we have but we're not limited by orders and based on the enthusiasm that we feel I think that if we could ship everything we've been able to take on even more business that we have scheduled for the fourth quarter.
Got it thanks.
Your next question comes from the line of Jim Ricchiuti from need have any company team. Your line is now open.
Hi, Thanks, good afternoon, so looking at that.
Shortfall that you're anticipating as a result of Corona virus is that 50 million should we think about eight again, mainly in that 70% bucket. That's optical communications are you seeing.
Some impact in industrial it sounds like it's more in that 70% portion of the business.
As we have some products from comp semi but that are processed in China, but generally speaking I would say that it's very very likely that you've got it exactly right.
Now if you look as you look at the supply chain, obviously, that's harder to I guess identify where there could be some issues that surface.
As a result of this what are what are you seeing so far out there in the supply chain or is it too early to tell where some of the issues may pop up.
I would say that yeah, given our.
Our full stream inventory, which we pay close attention to it was all the time, but especially at this time to be able to maximize our revenue and maximize our shipments to our customers. So we'll turn their immediately.
Both the raw materials, the wip and finished goods.
Having said that one on one of the great Yeah.
One of the great things that we observe here as a even throughout the the Chinese new year, and especially afterwards, our teams are our international procurement teams have been working from home. They have a pretty good view of it what we simply don't have a good view of yet is how to align the overall shipments that were going to need to make with the people that we have.
And how we're going to prioritize where we're going to do that and close collaboration with our customer I would say that we have a real good commanded a supply chain.
About that and little bit less than 50% of our total supply chain is inside China, and we've done that in part to balance and mitigate the risks. So I think we have a good grip of good grip on it you.
Okay last.
Just as we can.
Got it last question for me up or James you you I guess it reiterated the the cost savings that 150 million are you guys still on target just given the headwinds from the current a virus stood at 35 million in year one.
Yes in fact, I wouldn't be surprised if we didnt see that but we are well yes.
Thank you.
Your next question comes from the line of Troy Jensen from Piper Sandler John Your line is now open the first of all congrats on the revenue upside here nice job.
Thanks.
Hey, so check or do you think or do you see a third of the employees have returned to work in China and Mary Jane did you say that you expect to be full capacity within a couple of weeks.
Yeah, we believe that certainly probably by at least at the latest mid March is what we're thinking right now.
And we expect the increase in the strength in the plan to come to increase it increased each week.
Right, Okay make sense, how about just Mary Jane for you could you give us any any kind of help sequentially on where you think gross margins go our opex.
Assuming that has a decline on an absolute basis given at the synergies, we're talking about but any help would be great.
So again keep in mind, what we're looking at Harris the achievement of.
Synergies on an annualized basis from a gross margin point of view that is very tough to call. It really does depend on what the shipments are with respect to the Corona virus I would say that and setting the guidance we.
Assumed a little bit of a heavier fall through onto the P.S. simply because we could have.
Everybody dress up for the party I'm not able to ship for not having enough people in the factory, but the gross margin as an important priority for us and I would say that I would expect to see a study.
Contribution to the Synergic to the Opex as we go forward, but as for actually giving specific numbers on that I don't we typically don't give one item guidance, but we will also talk more about this it unless they generally speaking I would say, though that it has been a priority for us to both drive the synergies.
And preserve the cash one of which both of which together is leading to quite a very very tight.
Restriction on head count additions.
Understood.
Hi to keep up the good work.
Thats right.
Your next question comes from the Lions Cemig Chatterji from JP Morgan Cemig Caroline do you know.
Hi, Thanks for taking my question Chuck I, just wanted to see if you could give me a bit about going on would be qualification process for those children client involves is this qualification with a particular cost a mono too soon to bring in my critics and how does the qualification piece you in terms of business win with customers that you qualify the bandwidth.
We have a oh, we have basically two levels of qualification all the time.
One is our own manufacturing wind qualification that involves every aspect of manufacturing equipment materials processes. Our overall process control characterization and control and then in conjunction with with our customers in certain cases.
This this qualification plan is consistent with both.
And so we have a a track record of qualifying.
Exactly what it is that we need to do.
And we're working through it.
And the joint or would you like to say something else about about our overall qualification giovanni's for good segment is really doing a great job.
Yes, I got is drawn again so of course, we have also be there's a big skills are lined up so so it's another blocks from the moving up to speed up the you know the shutdown of the Oh simplicity that that's also part of the of the overall qualification.
The flat I.
I think we all the we have we also believe on top of the the challenges them into as Chuck said, we believe.
That will be qualified by the end of this quote but due to watch.
Okay. If I can just follow up and you mentioned that you're seeing though it's kind of sequential improvement in the industrial market, although on the yodle, what you'll see us this might be still declining oh, how you're thinking about the remainder of the U.S. queue up from here at all in and does the go nobody this impact have the kind of Oh.
It's kind of detail, but it covidien back end market.
Well first of all let me just already into how how we tend to look at this from a from a growth and or decline normally when when the demand goes down for new machines, we sometimes see the aftermarket go off and as you will remember the aftermarket is about half of our industrial business and so what we said in the last call.
Order was that with the falling GDP is we had seen lower industrial production driving lower get laser utilization, what it looks to us like we're seeing now in the sequential pickup we seen its kind of a return of laser utilization and so that may well continue for a while that would be nice to see that pick up even more but we are not making any.
And on when and Chuck May have some thoughts to share here when we will expect to see on the larger industrial markets sales of new machine.
I would just had a sami our june quarter tends to be among our instruments.
So in the second half of this fiscal year, assuming it was the effects of the Corona virus are behind us and their supply chains are backup up and running we would be optimistic about the June quarter. The March quarter is a little bit harder to call given the situation and also we have been following that I've been talking about a here.
For some time the caution PMI index in China, We think it's a fairly good manufacturing index is a fairly good proxy for us and the Chinese government announced on February 7th they will not publish the the January results until March when they published January and February all at once so we're.
Expecting is gonna be some impact there.
Even though most of the impact that we have in the 50 million factored in is from communications.
Got it thank you.
Your next question comes from the line it seems to have a go from Northland capital markets seem your line is now open.
Hi, good afternoon.
My question is kind of on the pro for refocused on pro forma growth. When you went through a number of ER.
Metrics, there, but I guess.
Next thing out.
The impact of the Corona virus in your.
Fiscal Q3 guide.
It looks like you're on a pro forma basis, you're there will be down I know something on the order of three 4%.
Year over year, a pro forma.
Kind of generally accurate you mentioned flat year over year for the current quarter.
I'm just wondering what the kind of puts and takes our you made some pretty positive comments about growth in communication.
Datacom and telecom here.
I'm sorry, if you look at you know, what what's growing and what shrinking getting kind of addressed or give us some color on those dynamics and.
When you might expect the company to return to growth putting on a pro forma basis.
Thanks.
So first of all I think what we're trying to indicate for the total company is insofar as the communications contribution is concerned that it looks to be turning a corner that's the first.
Second of all this is the first a good quarter again sequentially that we have seen industrial perhaps also starting to turn the corner Giovanni talked a little bit about in a V, which after a little bit of a pause with also turning to great strides. So I don't think about it enough.
Certainly predict what quarter that we're going to see growth, but the company as it looks that its backlog as it looks at its order book and really the excitement of customers.
There are lot of very strong growth factors in front of us and I think there's no question that.
We are really beginning to see all aspects of fiveg beginning to pick up so let me say, if you're buying and jump on I think one.
That's great Mary Jane Thanks for your questions then.
Sure thing.
Your next question comes from the audience, Tim differently from D.A. Davidson team.
I'm sorry, Tom Your line is now open.
Okay.
Sometimes.
Hi, Thanks.
Hi.
Uh huh.
Okay. That's.
Right.
Right yes.
Tom I I'm not sure there seems to be a little bit of a bad connection on your line.
If if it would be possible for you, possibly the dial back in when you hit the tier we'll take your question right away.
I would like to answer for you, but I really couldn't hear it.
Your next question comes from the life Mark Miller from demand Smart Comping Mark Your line is now open.
Did you disclose bookings are book to build for the quarter.
Oh, we didn't we didn't say what it wants but it's one.
A couple was one okay.
You talked about you know record shipments from worn and the for three D. Just wondering if you could you talk a little about Android what do you see an Android is that the also a strong spot for you.
Mark I just wanted to know yet.
Okay.
And then finally <unk> the North American shipments was presented total.
North America as a percent total.
He is.
Notwithstanding it.
Certain 39%.
And what was Asia I'm sorry.
So Asia, we do in a few parts so China overall.
Was a 14, Japan was eight and the rest of Asia was 14.
Okay. Thank you sure.
Your next question comes from the lot of Simon Leopold from Raymond James Simon. Your line is now okay. Thank you very much for taking the question I wanted to ask to the first is it's just trying to double click on on the Corona virus estimation.
I understand the quarter's aren't necessarily linear, but rough math that 50 million deltas, roughly eight 9% of kind of the the midpoint of total revenue and that's about one week and already we know that the the Chinese new year holiday with extended one week. So it doesn't seem.
That conservative in terms of other headwind and I'm, just trying to get a better understanding of how you arrived at that 50 million sort of what what's your thinking given that.
Mary Jane indicated that sort of your worst case scenario suggest workers might not be fully up to speed for what could be more than a month I think mid March and just trying to understand thank you.
Well first of all what is <unk>. So the case it to six as we had a significant.
Amount of employees walk through Chinese new year.
They were registered with the local government. This was a loud we did that that's why Chubb says that we have a good handle on the supply chain because we could see the supply chain working during the Chinese new year period. So that's that's the first thing. The second thing is we have as Chuck said about a third of our employees back to.
Work so on the one hand, it's not 100 on the other here that's not zero.
So at this point you know what our discussions with the leaders of our factories in China, you know looking at all the factors looking at what's been produce looking at January and how we think the people will gradually come back over the next several weeks. That's how we arrived at the 50 million now do keep in mind, we did say it was at least 50.
And Ah if the timeline where to go on if there was some other extended set of National directive, yes that number could change, but basically that's how we got there.
And in terms of the employees you have in China. My rough Guesstimate was it's close to 70% of your your head count and that most of the locations if not all or considered I would say coastal cities could you just validate whether or not I've got that right.
So first of all the number of employees no. It's it's probably more like 45% of the employees 45 to 50 and second of all as to whether they are considered coastal cities, 80%, 80% of they they rose roughly 45% to 50% of our employees are low.
Located in around two mega facilities when I'm wondering.
And wonderful job.
None none of them are in the who pay province.
That's what I wanted to verify appreciate that and then just on on a different topic.
In terms of the strength of the WSS ROADM business it sounds like like good good demand drivers there.
Just wondering if you have any ability to assess how much of that might be related to team and Tories stocking by by Chinese customers and how much is is actually the end market demand is there any way to get get some insight on that thanks.
Simon It's a great question, where we've been asked that for three years now.
Now let me answer it every time the same way.
We believe that arc era customers place orders on us for both there and items demands and for the change in their inventory.
We don't have any indication any agreement or any believe there's anything outside the ordinary production plus inventory.
Change that's happening in our supply chain.
I do believe.
That that based on.
Our discussions with our customers that it's not only on the short term, but in the longer term they would like to see us increase our output virtually all of these components for Fiveg and all the rotem components and not only the ones, we make today, but the ones we haven't development as well.
Great. Thank you, we're taking the questions sorry. Thanks, So yes, I mean, we're not just this is not a one quarter game for US. This is a long game.
And anyway I hope we answered your question Simon I appreciate that thank you very much or <unk>.
A follow up question from Tim do you believe from D.A. Davidson Tom Your line is now open.
Yeah, hopefully can hear me better now concept.
Okay. So Mary Jane just quickly one that's another question on the.
They are in the Sherman startup costs. So right now called the compound semi margins were down a quite a bit sequentially. If you take out the 9.0 from the Sherman facility. There still down 300 400 basis points sequentially. Just wonder if you could go over the puts and takes there.
Well first of all.
With respect to last quarter sequentially, we would not have had.
Sherman in at all right. So we only had the men for 22 days that said so that's that's one aspect of it the compound semi group also includes the to a indium phosphide subs are both your fallout and freemont.
And then finally I would say that while we are probably sitting a little bit of a flattening on industrial I, just a little bit the sequential pickup in industrial it's it that's a very rich margin business I mean, those guys are really really.
Doing a great job I think holding their margin, but it's a little bit tough in a down market to hold it perfectly I say the same thing is true on easy where we're starting to see easy also start to pick up but after a period of Paul. So I think those are probably the factors.
Yes, indium phosphide components are to be sold we would then be able to see positive contribution from those are those factors into the segment.
Okay, so low teens and the good base, starting point and you know as volumes ramp you expect to see nice ramp in the margins.
Yeah, I exactly I think the one thing to keep in mind to us when we talk about the startup costs being added back at some point, we want to be selling these costs right. So we also need the larger those price, which helps us as well the operating margin.
Okay. Good and then finally did you disclose it S. A impacted the 50 million dollar revenue hit.
We we did that with the way I would tell you. The estimated is you know it we took a pretty heavy fall through on that probably you know as much as 50% because we could find that well all ready to go and then people can't come to work.
Okay. Thank you.
Your next question comes from the line of Dave Kang from B. Riley FBR James Your line is now open.
Thank you good afternoon.
Hi, Good question Hi questions on three D. as I was wondering if you can break out three D.S. revenue and I believe you said one double sequentially. Just wondering how did Sherman do on a pro forma basis and what's the mix between North America versus Android customers.
Hey, Dave as we said the Sherman.
Let's see if there is not fully fund yet.
So you you need to assume that all had meaningful to the sensitivities coming from.
The Lauren.
Well in Houston policies. It Okay got it got it and then what what's the no from warring what's the mix between North America was versions Android.
But I I as I told Moscow, we had no envoy having to get from one.
Got it and then under 50 million impact.
Are you assuming any kind of a the supply disruptions for a full for your three D. S.
So with respect to at least that's the 50 million of at least a so called the Florida effect.
That we would not necessarily expect to have a three D.S. effect actually.
As you know all of our laser diodes and grow materials into sex with the exception to our actually grown outside of China, they're growing made outside of China.
But then you foxconn cannot.
Produce now I guess, they they they're going to be delay for maybe a few weeks couple couple more weeks I mean doesn't that impact or three D.S. business, we can't comment on that.
Okay Fair enough and then just lastly on on Silicon Carbide, I know you well I guess, it was 6% last quarter or not with finesse I assume that number will be down is that what is another like maybe three four or 5%.
So just kind of looks like it's a silicon carbide.
Yes was 3% in the quarter.
And a growing over last quarter, which was about two.
Got it thank you.
Your next question caution to line up Jed Dorsheimer from Canaccord Genuity.
Yes, Sir your line is though.
Hi, Thanks for taking my question I guess first with respect to the 50 million and sort of.
Mid March target for full production if it works to extend longer I'm. Just curious are there any force majeure clauses.
In your umbrella policies or insurance policies that we should be aware of that might help to offset and then I have a follow up thanks.
So so far.
We've looked at our insurance policies, obviously, we would need to show.
Actually incurred business interruption financial losses, and if that would it be the case I'm sure. We would find our insurance companies to be co-operative within the bounds of Oh policies, we have.
Is there a way to gauge potential offset or how should we think about that I mean I'm sure.
A virus.
Would constitute something that's.
Actually got out of your control. So I'm just curious how we should be thinking about that.
I think if I I don't think there's a way to give you what the insurance offset potentially as early at this point, while we do think we have a $50 million at least a 50 million dollar impact from this at the end of the day. It is going to be gauged on what what is actually happening. So I don't think we can estimate insurance proceeds for you I think more likely than not with the company would do without.
Actually not try manage expenses in the meantime, as it is a great question or Jetta I Uh huh.
It is a very good question and I know I'm unfortunate that type of great team Rami. We're also asking that kind of a question just to be sure that we've we've covered all the basis.
I want to say that well that's happening in the backdrop as it should.
Our top priority is to take care and apart people get the factories up and running and to find a way to help our customers not skip a beat that's our first that's our first harbor of other people.
We're focused on [laughter].
Got it understood. Thank you and then my follow up question, just around silicon carbide or any commentary around capacity expansion.
It seems that the industry.
Remains fairly tight and I'm, just curious how you're thinking about capital allocation with respect to that business.
Oh, a jet out I'll take it we 90 days ago, we we said that.
We secured a.
The new facility to allow us to expand into should provide us with a significant runway as all the right characteristics close to our people are very low cost electricity and will allow us to scale and we said, we said that three to five times or can fast current capacity inside three years and could be faster.
Well the habit subject to the market. We have two initiatives underway one is to a while back capacity expansion to be assured as possible. So that we can respond quickly to warn forecasted.
Increases in demand and the second one is for us it's too.
Accelerate the pace of the technology improvements that we want to make the got ready for a <unk> no no the generation of high quality 200 millimeter subjects.
Great that's helpful and useful thank you.
Huh.
Your next question comes from the Idled, Richard Shannon from Craig Hallum Recharge. Your line is open.
Great. Thanks, Thanks for taking my questions, maybe a question on the Datacom space I apologize if I Miss the any detail in their prepared remarks here, but if you can give us a sense of how much of the pick up a that you saw was from kind of the mainstream 100 gig modules and components versus two and 400, and then or are we expecting any sort of pick up in the fiscal third quarter.
And if not when do you expect to see a bigger pick up from those higher speed 200 foreigner models.
I introduced to run so as we said in the state the one of the G.
It was up a sense of the largest.
Sure ill just over supposed to love. This will Mark you know and you go legal costs, how long do so.
This is a market. So there was no the of the largest oh.
The signs of the ultra cool.
Okay anyway, Germany, you can more characterize the the overall size. There is it I mean is 400 200 does that.
10% or more of the total datacom business today.
Oh I don't we don't we don't.
But for example is by far the lines as you know let alone speeds I think the these Doug glowing going fast.
But you know do you have those go the bulk of the the mine to school and one on the Gi and people as they say, we think rather leave them into one of the G.
And a 400 juice timing fast and we already and as I said Wells will walk you know maybe down would be a console and designs to be ready for that as well.
Okay fair enough. Thanks for that to US a follow on question on Aerospace and defense. So Chuck I think you mentioned do.
You think this is returning to more of a growth market and you said you signed a few large contracts when if you characterize where identify any of those and in the past you've talked about kind of high energy lasers as a key area I'm wondering if that's a fitting within the category the of any of the large contract you signed.
Let's see the we will not disclose today.
The nature or the customer for the large contracts.
Or the application.
And I outlined for major areas of investment directed energy is just beginning and I believe that our latest two acquisitions in combination with.
With our semiconductor laser technology platform is positioning us extremely well and the supply chains of the early adopters of directed energy.
Systems and components. So that's a really unexciting growth here at the moment at the moment, where you are making the largest investment we're making and people.
For for our expansion and these invested programs in the aerospace and defense business.
Okay. Thanks for those thoughts a quick follow on question for Mary Jane are emerging do you have any of startup costs for the Sherman fab built into your guidance for the current quarter.
Oh, yes.
Can you quantify how much.
Hi, it's probably in the same races were seeing right now.
The night, but it's sort of range.
Okay Fair enough that's all for me. Thank you.
Thanks Richard.
Your next question costs and a lot of Paul several Silverstein from Cowen Paul Your line is now open.
Thanks, I personally don't taking the questions all pause as it was dropped a little bit. So Paul just came up earlier oil gorgeous permanent cross when your comments are you still is the quality of life they read anymore.
Oh, yeah, well good after April good afternoon. This is Chuck I beg your pardon for interrupting you know.
But we're receiving everything you're saying is a muscle sound and we know this year, but we can't really just decipher what you're saying could you just start ever please.
Well my wife businesses Bridge, though [laughter] [laughter].
Oh.
With respect to serve the trust from your commentary about solely as a final as qualification, but you do not have revenue much revenue in the March guidance. The question is.
As you look out to June I appreciate its hard enough workouts and they need is out.
Well, it's true as Truman comes on stream is it possible for you to say how much incremental revenue were to give a range of the prospective incremental revenue out of that facility above and beyond what you already doing that's the first question. The second question is did you have any 10% customers any connection with that can you say.
Even if it wasn't 10% given all the focus and the concern over the past your two about walked away how big was why wait for the combined company to six plus and sort of schools.
Proper insilco who's responsible previous question that not concerned with respect to inventory build up by China I assume that extends specifically to always well, but I'm wondering if you have any you know.
Sure with us the type of insight Oh, you have in terms of what customers relative to some Kennedy Wilson.
Okay. There's a lot of questions in there Paul Thanks for your questions are number one on on the June quarter for three D sensing.
We're not going to be able to two discuss what we think.
The likely outcome is for revenue in the and they are more in the fourth quarter by anybody.
I hope I don't really be a subject oh commercial discussions.
So we can't say that today.
What what came after that was one of our whether or not we had any 10% customers yeah. When the last chance that we did the company or did not the combined company does not have any 10% customer. It's obviously as the revenue finalizes for the here a we'll assess that with the June 30 revenue, but so far a we do not.
Yeah.
We've been in <unk>, sorry double.
Please go ahead of wallet.
With regard to <unk>, Let me, let me also say that we reported.
That's a 14% of our revenues came from sales in China and total is a company.
Oh. So that's you know that's another data point and just regarding our direct sales.
To Chinese customers because that was the question I thought I was asked and the answer I gave was with regard to our direct sales.
<unk> customers in China.
To my knowledge the order pattern is consistent with the market demands and what what I believe we've come to to understand there's an enormous.
Pattern of of buying both for production.
And for inventory.
And that's with regard to ourselves directly to our customers in China.
To to what extent to what extent any other customers that we have.
That's a different story and it's just that it's just harder for us to be able to to discharge and to make comments on we think it's just an ordinary course.
Of of our our sales are being consumed in China and my my discussion was not about why waivers about all of our customers in China for.
Understood. It goes can squeeze in one last one from the from the face of your comments or in your numbers. It sounds like there's been a meaningful improvement across the border across most of the for sports your products and customer markets.
Commentary was very good let me ask digital question, though because it sounds like those boys better but again appreciate it's hard to forecast I know, you're not guiding beyond the quarter, but the data points shown working you know.
It sounds like that suggests that improvement pursuing more circular want filled nature as opposed to drills to quarter. So that's the question.
Well, we have a virus now and and the virus is going to interrupt.
We thing for us and quite honestly for for everybody's. It's that's the walks along the same path and it's gonna take us a little bit of time to sort that helpful.
And I think beyond that is be before that came I want to reiterate before that came over 12 31 order book that we had.
Had a very strong coverage for the third quarter.
Yeah, I would say any analysis that we did have a quarter that we have just reported there I'm, especially on the drivers that were stronger than we maybe anticipated actually in how we set the guidance that the the uptick does not seem to be limited to this quarter.
But given that a few of them are just starting you know, let's take an easier one <unk>. That's a resumption of some sequential growth in industrial we'd like to see it for a couple of quarters to say, it's really a trend, but it does not what we saw we spent a lot of time on to be sure was not one time.
Yeah, all right I mean.
Sorry go ahead.
Yeah that was is that presumably almost unless corona bars, the black played out as a transitory event.
Not to sell pass so I look out was the guidance.
So what going Chuck I'm sorry.
Oh, Thanks, a lot for I. I think we you know we tried to lay out or.
Mission here for the quarter as best as weekend with all the information we have haven't had today.
And our task is to get back to work and harness all the enthusiasm in power or the people of his company got them getting back to work safely and keep it that way and we have a whole host the customers that are interested in the best that we can do for them and that's what we're out to do.
Appreciate the responses. Thank you.
Thanks, Paul Yep.
Hi, going no further questions at this time I would like to turn the conference back to Mary Jane Raymond Chief Financial Officer.
Thank you very much Kyle this ends our call today.
We look forward to sing deal what LSC and we also look forward to updating you on our results for the third fiscal quarter a when we report that in early May. Thank you for joining us have a good day.
Okay.
Ladies and gentlemen, this concludes todays conference call. Thank you for your participation have a wonderful thing you may all disconnect.
[music].