Q4 2020 II-VI Inc Earnings Call
Earnings Conference call at this time, all participants I know this and only mode. After the speaker presentation. The question and answer session.
That's good question during this session you'll need to customer one on your telephone.
Please be advised that todays conference is being recorded if you acquire any further assistance. Please press star zero haven't knowledge and the confidence your speaker today.
Hi, Jane Raymond Chief Financial Officer. Please go ahead man.
Thank you, Joe well and good morning America name brand and the Chief Financial Officer here I to six incorporated.
Welcome to our earnings call Tonight for the fourth quarter and the yearend for fiscal year 2020.
With me today on the call are Dr. Chuck Mattera.
Our Chief Executive Officer, Dr., Giovanni Barbara So, our chief strategy Officer, and the President Oh, the compound semiconductor segment.
This call is being recorded on Thursday August 13 2020.
Our press release and our updated Investor presentation are available on the Investor Relations tab of the website I Dash <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 contain risks factors that are subject to change possibly materially.
We do not undertake any obligation to update these statements to reflect event subsequent to today, except as required by law.
Let's talk about risk factors can be found in our form 10-K for the year ended June Thirtyth 2019, as well as in the form S. Three filed with the FCC on June Thirtyth 2020.
We will also presents some non-GAAP measures, which the reconciliations to GAAP.
Found at the end of each document that includes those measures such as the press release or the investor presentation.
With that let me turn the call or Richard Dr., Chuck Mattera Chuck.
Thank you Mary Jane and good morning, everyone. What are you.
Our employees came together really accomplished a lot in a short time.
Quoting coping with a pandemic.
Hi, I'm very pleased with our performance and our progress on a number of fronts.
On a consolidated basis for fiscal year its warnings warning.
We delivered revenue of 2.4 billion.
With a non-GAAP return on sales of 11% in record cash flow from operations of 297 million.
And record free cash was 160 million.
Where do we received approval to complete the finished short transaction, we hit the ground running.
Leverage the best fitness or into six had to walk.
As one to six we began serving our end markets and customers were great results.
Among our many achievements in a short period of time.
We enhanced our billion dollar Datacom transceiver business and delivered strong operating performance underscored by improved margins.
We began shipping indium phosphide based devices to the OEM market a year ahead of schedule.
We're on track to deliver double our knowledge cost synergies by the end of our first 12 months.
We strengthened our long term market position in silicon carbide devices by continuing to ramp our capacity for silicon carbide substrates.
And by pursuing strategic partnerships that enable our vertically integrated technology platforms.
Our sales and procurement organizations drove profound improvements in the organization simplifying our processing is expanding the scale and implementing successful change programs, they're contributing to our top and bottom line results.
Well teams dedicated one to six employees worldwide confronted a worldwide dynamic and sustain compliant safe and secure operations in every country that we operate in.
Underlying these accomplishments for solid quarters of the kind of heavy lifting that a competitive market requires.
Our fourth quarter count this trend of strong achievement with revenue coming in above our June thirtyth revised guidance.
Driven by strong sequential growth, especially in communications and Threed sensing.
We delivered fourth quarter revenue of 746 million.
810 million, a new orders and ended the year with merely a billion dollars in backlog.
Thanks to our global operations teams, the consolidated revenue and talk to covert 19 in the quarter was not material.
As the digital transformation accelerated we achieved a 25% increase sequentially in the communications market, which drove the majority of our growth.
Revenue was split about 50 50 between telecom and Datacom.
Trenching work learn and play from home.
Celebrated with covert 19.
Turning to fuel what many believe is a strong multiyear upgrade cycle.
Began on folding even before the pandemic.
This acceleration is driving growth in all parts of the network.
Including intra data center insert pay the sensor metro and long haul submarine and of course Fiveg access.
Our Datacom business grew 20 grew over 20% sequentially.
We believe this growth was driven by business is moving their enterprise applications to the cloud at a brisk pace to reduce their opex.
As well as carriers accommodating an increased number of subscribers working from home.
A trend we believe will continue for some time.
Our broad portfolio and diverse customer base combined with great execution.
Incremental in the delivery of our strong performance in this competitive Sutton.
We also believe our customer intimacy enabled us to grow our datacom business with some of our legacy finish our customers who are taking a cautious posture prior to the acquisition, but returned to us in our second quarter.
Finally, we have also started to see the benefits of our integration and synergy plans as they relate to the Datacom components business, which we believe will put us on a trajectory to capture over the next few years about a 40% sure what we estimate to be greater than a 400 million dollar indium phosphide ways.
The device merchant market like 2022.
Our telecom business grew 29% sequentially driven by strong demand for our roads Dwt I'm components in sub systems, and our portfolio old undersea components.
Our industrial waves that business mitigated the impact of Cobras, 19, well delivering sequentially flat Robyn with upticks in the one micron laser market.
Sequentially, we're seeing encouraging signs of overall recovery in the industrial laser market led by customers in China.
Our semi cap equipment materials business grew 6% in the quarter compared to the previous here.
The industry continues to offer <unk> next generation Fabs with advanced technologies, including easy and we saw strong demand for those products.
Well travel restrictions due to covert 19 have slowed the ramp of some fabs longer term outlook remains strong.
Our vital our emerging and vital life Sciences business grew 12% sequentially.
It has also more than doubled its booking sequentially as it continues to provide critical materials based components to customers engage in a design and production.
Reliable diagnostic testing and instrumentation, including those used for covert 19.
At this point, we had 50% board of coverage for fiscal year 2021.
Turning to Threed sensing growth was exceptionally strong at 32% sequentially.
For the year, we will report record revenue well above our plan.
Thanks to the competitiveness of our vertically integrated platform and the successful execution of our integration and synergy plans.
All of our three D sensing operations are performing well and it's exciting to be shipping to our largest threed sensing customer from all of our locations.
As it relates to E.S.G.
We are increasingly recognized as a company that is advancing the goals and clean energy and operations.
I would like to acknowledge our teams sustainability efforts, including those that enabled us to be included an apples clean energy program.
Announced in July we were recognized by up being committed to powering all of our production for them with 100% clean energy.
Advancing our broad goals around clean energy is what makes the GE partnership so excited.
This partnership will enable us to combine our existing capabilities with GE east technology to produce silicon carbide based devices and margins that will ultimately expand the widespread deployments of clean power.
We also announced yesterday, our intention to acquire two important technology companies.
The first is ask Itron, a leading innovator in silicon carbide, epitaxial wafer and power electronic devices.
The second is in Auvi on a leader in ion implantation as well as semiconductor fabrication services for engineered materials and devices.
Clearly we are continuing to build a key elements of this exciting technology platform.
Oh this will accelerate by a number of years, our work to expand into silicon carbide based devices.
Well this expanded platform will take a few years to fully develop we're aiming to be positioned as a strong market player and what we believe will be a long term secular growth trend driven by global emissions regulation and the convergence of electrification and renewable energy.
Regarding our silicon carbide centric business revenue grew 26% sequentially.
Driven by wireless as we continue on our path to increase capacity five to 10 times over the next three to five years to support our exciting growth targets.
Finally regarding the overall market conditions. The world is still dealing with an incredible number of cross currents in trade.
And market dynamics, including possible changes in the geopolitical landscape and widespread effects of appealing done.
Since our inception.
We have positions our company to develop products that bring innovations to the broadest number of customers possible across all geographies.
We are therefore, very well positioned to accommodate our customers who are now increasingly diversifying their global footprint.
In mitigating their risks.
Well strategizing on the most sustainable way to manage their operations.
All of this is consistent with our vision.
The world transformed through innovative materials vital.
To a better life today, and the sustainability of future generations.
With that let me turn it over to July Giovanni.
Thank you talked and good morning.
Sorry, <unk> percent the most extensive opportunity to seeks has experienced for some time.
Oh, I'm busy selling to deposit portfolio.
Components modules.
And some systems that have deployed into all parts of the network.
We continue to grow driven by the mindful side you services.
Starting at the base stations almost silicon carbide subs.
Oh, well gallium nitride on silicon carbide don't be fires in partnership with Sandy.
Sent a great growth opportunity.
In the wireless markets.
Our optical transceivers enabled by our own flops ones full lasers, the Texas optics and integrated secrets connect the base stations to the stress points overall, good nation you'd be optical nytwo well, we offer an end to end.
That does integrated portfolio of transmission.
I'm pleased to occasion switching and monitoring products.
He is a bit exciting in markets with two seats.
With regard to the problem is should we say they did we previously announced the gallium nitride Silicon carbide program, which relies on all one one I'll live in 16 millimeter substrates diesel truck.
And I'll follow up you saw is a meeting the stringent requirements for Fiveg base station markets.
Well I want scheduled milestones to date.
Multiple qualification efforts underway and expect to be in Boulder pulled auction in the first how oh called into Ya Quincy 21.
We're excited about to talk has made to enable rapid adoption and scaling of political fiveg is supposed to actual we dowell basically it's a good blossom.
Our plant capacity expansion, so silicon carbide sobs fleets.
Also on base.
Oh, well internal and external demand for audits devices.
The competitive advantage Obama beat on Boulder did become transceiver business use moved it into differentiation Obama components and their integration.
These advantages that high simplifies device level technology platforms, such as Angel suppose fights gotten almost denied and I'm a little integrated secret design expertise dedicated to the transceiver products all developed since the close collaboration with Wolfe Clos.
Multi disciplinary team.
Well the Datacom can see the market is characterized by multiple suppliers medial dam merely perform assembly operations.
You talked about view the Tommy upgrade cycle from high speed optics, we also the competitive balance and CMO companies like Twosix that basically to do these and habit compelling to college in product roadmap. This halted from innovation at all levels of do come see live design.
You know beachfront in optical and it's all these components technology, along with advanced packaging and simply automation that enable new levels of performance it integration.
We become essentially.
As the industry migrates to higher data rates in shrinking form factors.
For example, we've been investing in high performance Indium phosphide <unk> got the most of my devices, including 100, G Datacom pixels, which enable 400 gigabit decently transceivers for different features.
Led by our CTO keys coping with.
With that I'll have embraced the mensing wafer level these additional blocks homes.
Silicon Photonics.
And if significantly increased our investments in integrated secret technology, which we believe these critical well a hold them up and competitiveness.
In telecom, we're seeing strong customer demand for our 20 side you tunable transceivers for the Fiveg wireless phones hole.
And for our modem solutions, which grew 78% quarter over quarter.
Even try mildly by strong growth in pump Liza.
And our wavelength selective switch well do lines.
From Oems and multi lead to GE goes well also ramping production Obama components for the GE coherent optics.
I'll walk highly integrated tunable tells me to receive an assembly.
Looking beyond the communications markets.
Aerospace and defense business grew over 20% in fiscal year 20 for the full year.
Hey, Bill space and defense is increasingly turning into a significant growth markets loss.
You know diesel global longstanding contribution to the F 35 aircrafts.
This that's usually blossoms this football vitalbeam pathogens, subagents reconnaissance and thought you'd be applications.
We are father positioning to seeks to address exciting new opportunities and I personics and directed energy as well as satellites and contested states.
Oh, what three D sensing business once again grew sequentially ending the seasonally lower warranty.
This month, we began.
Oh volume shipments in this important supply chain that stopped it I'll stress treatments for MABA Wogan plans.
We've also extended the batesville debate on mental Pablo Nexgen additional devices to increase our competitiveness by strengthening our time to market the them, Florida.
The emergence of Wolf seizing the same so so smartphones and tablets underlines the strategic importance of three D sensing.
We believe the won't see seems like they'll say installs will enable several applications dive into mindful TD sensing functionality in multiple end markets.
We also believe it will increase the dollar content the device it would be one of the growth gross booking any sensing this year.
We continue to be parcel of key next generation three decide she's saying three D sensing design engagements and not a nickel seasonal p. supply beats up all those sumbawa entirely U.S. base basically to Jamie let's see difference.
With respect to continue to grow our beats a business and to gain market share in depth called me called them cycle by leveraging our state of the often manufacturing operations in Sherman wish with qualified thus, Florida and went well the auction continues to run.
Finally, as it relates to our announcement yesterday.
I just like sling almost started yet they mostly the ability to identify and execute on viable long term investments.
We sold the log in an opportunity it'd be ballston sovaldi plantations years ago.
We've made up more regionally based them in any navient in fiscal year 2018.
Yesterday, we announced our appliance to acquire all dumpster, Andy insights on the owners of the pot and there'll be no.
Along with the team and global footprint inaugural we make at least a decent wobbled distant untreated the called U Blox films.
We see me literally see significant long term baidu engine for initiation you ask that's on silicone carbide you'd be taxi and device technology.
Got it side to fill them to become an integral part of two seeks to.
With that let me talk a little bit too many jade managing.
Thanks, Giovanni and good morning.
We closed our here with a strong performance that demonstrates our experience in integrating acquisitions and picking our market spots very well.
On a pro forma basis, our revenue grew 12% in the quarter compared to Q4 fiscal year 19.
And was flat for the entire here.
The pro forma measurement gives effect to the finished our revenue that was present at the same period last year prior to the acquisition.
Our non-GAAP gross margin was 42.3%.
And <unk> and 38.3% for the year.
Nearly at or above the two six non-GAAP gross margin for fiscal year 19.
Our GAAP non-GAAP operating income margin was 16.7% for the quarter and 13.6 for the year.
We delivered $160 million the free cash flow for fiscal year 20 exceeding the original business case that assumed breakeven cash flow for the first year.
We are tracking well against our target of $150 million, an annual cost synergies within three years after the close the transaction.
The delivery of our synergies through June Thirtyth for nine months into the first year is $50 million.
We still expect to reach $70 million or double the first 12 month estimate.
During the quarter.
Total revenue of $746 million, let's split 72% in communication, 9% in industrial.
6% in aerospace and defense.
6% in consumer.
<unk> percent in semiconductor capital equipment and the rest is in other markets.
For the year. The total revenue of $2.4 billion was split 67% in communications.
12% in industrial.
7% in aerospace and defense.
6% and consumer.
5% in semiconductor capital equipment and the rest in other markets, we had no 10% customers.
From a gross perspective in the quarter sequentially Communications grew 25% consumer grew 27% life Sciences grew 12% Aerospace and defense group side.
Semiconductor capital equipment group or with the remainder of our end markets think slot.
Growth in the quarter came primarily from China, the U.S. in Japan.
Geographically for the quarter revenue was 48% in North America, 27% in China.
16% in Europe, 7% in Japan, and 2% for the rest of the world.
Quarterly GAAP EPS was 53 cents, a non-GAAP EPS $1.18.
After tax non-GAAP adjustments $67 million in total.
The Q4, GAAP and non-GAAP, yes, we're significantly affected by a tax benefit for the final yearend tax rate.
We had 102 million diluted shares in the quarter.
Because the 2022 convertible debt was completed in the quarter.
For the full year fiscal year 20.
The share count was 84.8 million the weighted average of the shares outstanding for the full year.
For the quarter gap return on sales were 6.9% and non-GAAP returns sales.
15.8%.
At the segment level, the non-GAAP operating margins were 17.2% for photonics.
And 15.6% for compound semiconductors.
So tonics benefited from operating efficiencies and a very rich mix, including nearly doubling its submarine pump sales again this quarter compared to the same quarter last year.
Compound semi.
Also benefited from strong sales of three D sensing arrays and demand for Datacom component.
For operating expenses or are.
The total for the quarter was $235 million on a GAAP basis, and 191 billion on a non-GAAP basis compared to 154 million in the third quarter fiscal year 20, mostly due to incentive compensation.
We expect our run rate depreciation to be 44 to 48 million a quarter. That's the current fixed asset level for fiscal year.
21.
The one year measurement period for purchase accounting will conclude on September 20, Threerd 2020.
Stock comp was 24 million in the quarter and transaction expenses, including severance.
5.3 million.
Comp for fiscal year, 21 is expected to be about $68 million for about 17 million a quarter.
No this valued johnsbury with the stock price for some components.
Our June 30 backlog wasn't remarkable $957 million, consisting of 500, an 87 million in photonics and 370 million in compound semiconductors.
This compares with last year's consolidated backlog.
Oh.
This compares with last quarter is consolidated backlog of 893 million was $518 million photonics and 375 million in compound semiconductors.
The backlog can change orders that will ship over the next 12 months.
Capital expenditures this quarter were $29 million.
For the full year Capex was 137 million.
For fiscal year 21, we expect capex to be between 190 million and 240 million.
The FX loss in the quarter was 6.3 million and 14.4 million for the year.
Second our the extreme fluctuations in currency during the January to June period interest expense for the quarter was $25.5 million.
The tax rate in the quarter with a 26% benefit and for the full year. It was a 5% expense.
The explanation of the fiscal year 20 tax rate is complex due to purchase accounting.
The strong operating performance in Q4 improved the full year tax rate and the adjustment of the first nine month year to date tax expense to the final fiscal year 20 tax rate drove a large tax benefit in the fourth quarter.
Your next year, we expect the tax rate to be between 20 and 30%.
Turning to our capital markets race completed on July 2nd.
The company raised a total of $920 million and after all see the company, reaching proceeds of $882 million.
Shortly after settlement.
We paid off the balance of the term loan b of about $715 million checking our net debt leverage ratio on the basis of our credit facility to two times.
The forward interest expense is expected to be about 16 million a quarter or about 64 million a year, including the amortization of remaining space.
Q1 fiscal year 21.
We'll have a 24 million dollar onetime noncash write off for the bank fees incurred to raise the term loan b in September of 2019 or Q1 of last year.
The share count to be used for fiscal year 21, it's 116 million shares.
This assumes that our 2020 to convert is dilutive.
The preferred equity is anti dilutive.
That's we include the 7.3 million shares for the 2020 to convert and we do not include the maximum 9.2 million shares for the preferred equity.
In calculating the beyond.
The $28 million of annual dividends that will be paid on the preferred equity or about $7 million per quarter need to be deducted from the net income.
All right at the net income available to common shareholders.
The preferred equity will be mandatorily converted to common shares in July of 2024.
The conversion will be between 7.75, and 9.3 million shares the conversion price is 50 160 share.
At June 30 at June 30, yearend prior to any effects of the capital markets transactions.
Our cash was $493 million.
Our availability on our revolver was 375 million, including outstanding letters of credit.
And our net debt position was 1.9 billion.
Our net debt leverage ratio on the basis of our credit facility was 3.3 times at June Thirtyth.
Regarding our announced intention to acquire ask Itron as well as all of the outstanding is interest of the owners of the parent company and though the on.
As the press release says we expect both of these to close by the calendar yearend, if not sooner or.
Most of them or keep ability acquisition, both adding I take and key process technology to expand our epitaxial wafer platform.
The combined cash outlay for both it's under $40 million.
Close.
Both will be consolidated.
Into the compound semiconductors segment.
Revenue is immaterial from though for fiscal year 21.
Today, our shares in Adobe on our accounted for as an equity investment.
Transaction fees for both or about $2 million and we have included the 2 million dollar estimate for transaction fees in our non-GAAP item.
For the first quarter ended September Thirtyth.
Turning to the outlook revenue for the first quarter fiscal year 21, ending September Thirtyth 2020.
Its 700 million to 750 million and the EPS on a non-GAAP basis is 45 to 60 cents per diluted share.
This is that today's exchange rate and an estimated 25% tax rate.
The non-GAAP items any T.S. include 45 cents.
Including the pretax amount.
$20 million and stock comp.
$21 million in amortization.
23.6 or $24 million in debt extinguishment costs.
And $5 million in cost to facilitate the integration, including the transaction fees.
The share count to be used its 116 million shares.
Actual dollar amount of non-GAAP items, the tax rate and exchange rate.
Our all subject to change.
Before we go to the chairman I as a reminder, our answers today may contain.
Certain forecasts from which our actual results may differ.
Due to a whole variety of factors, including but not limited to changes in the product mix customer orders competition changes in trade and tariff regulation and general economic conditions.
We would also we ask that each firm limit its questions to one question and one follow up.
Joe well you may open the lines for questions.
Thank you so am I understanding the question you'll need to press star one on your telephone.
But try your question, Chris the Punky, please standby lobby somebody can do roster.
My first question comes from met emotional with Morgan Stanley. Your line is now open.
Great. Thanks, guys, maybe just a question on you know one of your competitors noted that they were filling of less directly so far away and diversifying with other customers could you just give us any insight into kind of what you're seeing and interplays with and.
Kind of customer sets within China that you're selling to and then maybe as a follow up question just some help with the kind of thinking about the operating margins in the guidance. Thanks.
You made that these giovanni here I'll.
First of all we have built mpus and constantly okay. So that that's clear we have oh quite diversified.
In general Oh, particularly in a in telecom and Datacom.
And so the.
There's no doubt that trying I was very strong at the moment.
The mindful, though.
Well, it's equally compound semiconductor devices, we've begun sadly not waddell <unk> first the engine first flight the leases in the Texas, the Oh to become a eventually all the time illegal in a gene or those products.
And and is the goals that we make from.
We don't sectors, which is to to amplify those two are not easy pumps.
And of course, and now they have a transceivers old you slowing demand.
But do we have a b quite balanced.
He generally oh across the leaders in the telecom and Datacom Wolf, So I can only see that.
We have not been affect his body sanctions for example.
But having said that I think we still have though.
Very good pools from from China, and so on the European as well as North American coastal myself I, let Mary Jane comment on the margin.
Right, so with respect to the guidance and the op margin. So first of all particularly your computer comparing into Q4. The first thing you need to do as reverse out the tax. So we if you remember set the guidance for Q4 with what we expected to be about 12% tax benefit and it was actually 25 and as we go in.
Into Q1, we are expecting about between 20 and 30. So we used 25% tax expense rate. So that's the first change the second change compared to Q4's the share count so instead of one until it goes to 116.
But with respect to the foundational part of your question with respect to operations. We had a very very very good mix in the core and we are being a little bit more cautious on that mix as we start the year because Q1. That's September 30 ended quarter is usually our smallest quarter after a year, especially.
In some of the more more margin rich products that use that so I will say, absolutely and setting the guidance, we're a little bit cautious on the op margin, but generally the biggest changes it especially are compared to Q4 or the tax rate on the share count.
Great. Thanks.
Thank you next question comes from semi Kenichi with JP Morgan Your line is open.
Hi, good morning, Thanks for taking my question.
If I can just talk with the strength that you're seeing in China. Unfortunately, I think Chuck you also mentioned.
Looking at your investments I can do and I think that's one of the questions that we keep getting often from investors.
The timing looking into the investments like particularly in China.
Just one last Q based on experience a previous cycles or what you're thinking about the length of the investments like video benefiting from.
Telecom and Datacom and then have a photo thank you.
So make a this this cycle may not be exactly like the last ones.
There's a lot of Ah there were a lot of fastest through this traditional.
Oh, our understanding and discussions with our customers in with our customers customers.
Is that we should expect is to be a multi year.
Investment cycle.
And I might actually have more than one phase through it.
So we're cautious.
To begin with.
And including if we look back because we can't ignore the past.
So our sensitivity and sensibilities are focused on.
Not getting swept up with the tide gun too carried away with.
Over the long term projections.
But we have to be conscious that there's a value proposition for the things that we do.
That are enabling lot of this to take place.
And that's that's only part of the things that are really exciting about this rush.
And of course, we can see it I'm ready to slow down.
And maybe be be confused that that a digestion phase.
If it if it were to come at the moment, we don't see that.
It's strong as our fourth quarter results suggest and the momentum that we have suggested is going to continue at least than in the near term.
Okay.
And if I can just following up made in good stead of reserves, but.
To me the most was the gosh blue and the strong gosh conviction that it's playing out.
How should we think sustaining that he got to conversion into next deal and <unk>.
Yes.
Because that's <unk>.
Thank you.
Yeah of course, thank you so well first of all we worked very hard on the cash flow a conversion. This year since it was the first year with I knew company and also as many of you have commented through this entire here you know we had a significant level of debt that we hadn't had before it at what's important to.
Yes.
To be sure that we were able to service.
A couple of things going forward first of all.
You know if you think about the Capex a range I gave up 190 to 240 during fiscal year 20 <unk>. The your work. We're just leaving we did two things one we were extremely cautious on capital.
Either because as we started the year, we weren't sure how trade was going to play out second of all then because I hope it.
The second thing was Chuck in particular, and Giovanni with our Photonics, President as well drilled the operations considerably strongly to move beyond.
Say 16 fight or in some cases, you know 10 seven in terms of operating hours to really being more across the board 24, six so our gross operations were always 24, seven but not everything was and we did that should be able to really start to.
Moderate the curve.
On Capex spending I think as we go forward into fiscal year 21 first of all as we just talked about a lot of progress that we're seeing we will have some capacity expansion that's needed.
So that's the first thing the second thing is I think on the working capital elements.
You know the two companies coming together in the emerging of particularly inventory practices, probably helped us to get some good savings on the inventory side as well as cleaning up kind of past due receivables. Those as you know don't actually keep happening right sort of get them cleaned out to get to a more steady.
That said I would still say the cash flow is going to remain very very important to the company and while I don't think this will quite be that conversion.
I do think that the company will well strives to be sure that you know somewhere in the neighborhood.
You know what good call it 30% to 40% of the free cash flow of the cash from operations. It is coming up you know available free cash flow. So that's just an estimate right now as we look at the capacity increases for this year and the investments, particularly silicon carbide based devices that could obviously, but those would be the main drivers and that's the main story on.
When you are twice.
Great. Thanks for the kind of thing for the Needham <unk>. Thank you.
Thank you Sir our next question comes from Tom differently with D.A. Davidson. Your line is open.
Thank you first merging talked about how the cost synergies were coming in faster than initially planned I'm curious are you seeing additional cost synergies that you weren't expecting or is it really just an acceleration of what you had plan from the beginning.
I would say, Tom if I were really kind of going to call collyn, its probably 70% getting the existing ones, we thought out faster.
And maybe 3% some cost synergies, we hadn't thought out.
But generally I wouldn't before you take my 150 again.
Multiply it by 30%, 30% I would say that that's the.
Part of the synergies in the in the third year are the more complicated ones that come from process reengineering right. So getting everybody on the same system all that sort of jobs as we start that because that starts in the first year. We see other things that are potentially possible to do in the supply chain, which is the large.
As part of the Cogs synergies.
You don't always know exactly what you're going to find on so generally speaking I would say, it's really mostly receiving them faster and so at this point I would not move the $150 million, we're still not all the way a whole year into this yet, but generally speaking the best way.
Just think about our company as we never met a synergy we didn't like.
[laughter] Yep, Okay, then it makes sense.
A follow up a g. bother you talked about working on the next generation three D sensing device or their capabilities you need to add or is this more they you know efficiency cost reduction effort.
No. We know aveo, we're really much vertically integrated it does you know there's no a father couple of either we need to others, it's a window about.
Oh designing new devices.
Typically higher speed.
Rise is so does our lives on the the worked at the high speed, So that's where the the a the new challenges but.
Particularly when you have a stronger.
Experience and and share in the market was Ah.
You know I speed, they become Oh lasers, I think it's a the the the task is a little bit yuzu thing. So us the maybe for others. So I think we'll we'll we'll see some too.
Uh Huh, let's see if you can show that application too.
Okay. Thanks for your time today.
Thank you.
Thank you and your next question comes from Paul Silverstein from Cowen. Your line is now open.
Good morning spoken devoted to know her military.
Yes, good morning, Paul Thank you.
Thank you two questions when it first off on the multiple components, how big an impact.
Quickly.
And you have now that you're starting to ship into the market and then if I could return to the wall. We'd question I recognize it hasn't been 10% wasn't 10% of Tenda SAR.
But if we think it's a wall, we'd not just while we direct but all of those.
Oh subsystem component suppliers, the phones will walk away. Many if not all of whom you sold one soon but ultimately the sale is going to a wall way system, that's being deployed.
Mostly within China, but also by non Chinese caught off guard non Chinese service providers and others.
Which is that exposure for all the to find and how much does that factor into your.
Her future revenue.
There's a lot of questions Paul I'm <unk>, let me Oh.
All in one.
Let me, let me try to limit trying to take it take it this way.
I have a substantial echo on my plan.
I Hope you can hear me.
Okay fall on the that's the China market itself continues to be a are an important market for two six.
And with regard to a your specific question about far away.
The band.
Indirect sales to walk away.
And as our business groups.
We're attempting to be to be able to invest in managing growth for the wide.
Wide variety in a wide diversity of customers.
And.
We have because we operate at three levels of integration materials components and sub systems.
We have business and serving into a large ecosystem.
We don't have the kind of full visibility.
That said I think that you're you're asking if we do.
But for sure.
Back to the simple answer to a complicated question is that China is an important market for us.
I think Mary Jane said that represented in our fourth quarter, 27% of our sales.
And there are large players today in the market and we expect that that a smaller companies who are innovators are going to represent even bigger opportunities for us in the future I Hope I answered your question Paul.
Yeah.
It appears that would be I sooner position at Nokia Sienna and the other metro optical suppliers since they were to pick ups. Your from wall way outside of China, I assume you have equally if not exact same position, but in a strong position in each of those as well.
We we have a leading leading position.
And into that marketplace pool, and the supply chains as they as they become reordered.
Over time.
As the supply chains become rewarded.
Our our enthusiasm.
For sure serving all the large OEM equipment. So far is into the optical communications market is going to continue to remain strong.
And so we have okay. If we have a handful of.
Extremely important customers.
And we will continue to enable them to grow and whichever markets. They are participating in.
Regionally okay.
Chuck will be optical components, how far how fast.
Data com.
Let's see can you repeat the question Paul.
Yeah, now that you're shipping optical components into data com.
For the threaten done historically held for how fast in terms of impact.
<unk> okay.
Yes, you want to lessen wanting to take that one Paul.
So the up the disease, there was no doubt that he's oh folders of quite a strong demand out there. So we have been up if you want it couldn't be oh.
Good couldn't be a but the timing for us to really penetrates and getting set and the markets. So as I mentioned of doing in the script, we we have already.
Started selling a fly the in and shifting in Ah you quite high volume.
New plus five lasers.
The and and detectors and.
Oh of course Realty shipping all the they've become big so.
And ER and other kind of of course of the Subcomponents like.
The whole tito's and alike, and but the most important wants with Lilly those that.
We Oh, we Oh, you know applied we've seen so and as you know that being the leading there's been a leading platform, but people even post wise for years.
For the you know and so penetrated the market with existing.
Devices, so really qualified with the use of years old, but the diabetes the data.
You know very competitive bloxom, given the volumes of did Sentinel Oh, the internal consumption I think it's been pretty.
For the state full works and when the demo C. things the validity of our strategy.
In the off the seasonal fees or at least one of the one of the reasons why we were.
So much interested combining between itself. So this has been pretty pretty fast they get we're shipping today in volume to a number of customers Oh, those that never be no on the metro markets useful.
Thank you thanks guys.
Thank you.
Our next question comes from Richard Shannon with Craig Hallum. Your line is open.
[noise] well, except for taking my questions Virgin I think you talked about extremely rich mix in the June quarter here with some very good gross margins here.
Well as well, we know that you're a summary pump laser business can be very lumpy you talked about telcel mix benefit he three D sensing datacom components, which I'd assume would still be a benefit here in the a in the September quarter. So are you, suggesting the mixes is going to.
Be less rich here going if so can you describe where that's coming from.
Well I think I said that we have baked into our guide for work that we may not have as richer mix, but I'm not going to break out in the mix by segment.
Generally speaking, we if you take the mix we had very very good operating efficiencies going into Q1 will need to start to expand capacity in some places as I say, we're just getting more conservatively on a on the margin.
Okay fair enough here, perhaps I'll fall off a follow up offline on that one of my second question is on your transceiver business for Datacom. Chuck I think you referred to that as a as a 1 billion dollar business. Obviously, the datacom market here is a positive but you're shifting more towards a component strategy can you tell us what are you expecting your trends.
See her business to grow at fiscal 21, and if so how does that how does that happen how do you see the mix there.
Okay. Richard Thank you for your question I'm expecting the transceiver business will grow in flight 21, but I'm not going to give you a forecast for that that transceiver business growth.
There's a lot of opportunity.
And as a leading leading supplier along with the differentiated platforms that you're wanting discussed.
I feel very very good.
Good about our prospects about the demand about our technology and daughter team.
And customers have have taken notice it.
And that's another very important 10th exciting.
A few through joint or would you like to add anything through it.
Hey, I I want to make sure that Oh.
Uh huh.
I clarify I don't believe we've ever said, we're going to sit from transceiver two components. We I believe by while our still has always been that we intend to become a matching supply for the number of both components optical and electronics that fitness then all have.
Well the seamless it was not standing on the mentioned in Moscow before but with no intention to.
To the diminish Oh decrease all was a investments and Oh God.
I believe Moscow leadership, we thought was obviously the bloxom platform as a matter of fact I think that.
We are investing as we said in the in the old the Neutrolin see will designs and and we believe that the most important value that we bring to the table and which has been though you know fitness aside is useful for many years and I think we have to a little bit by beside the June.
Maybe to have this a false oh functional a multi disciplinary team which itself whether unique onto one on the one who in the single company and is whether the pull obligation of the optical another calling these engineers as well as the packaging and the manufacturing.
The news all in the same company, creating some a.
New approaches to see the design and we we anticipate that in the next the five years the even the Seedless has we as we think about it now we'll probably change we will be a significant overtime.
Modification transformation over the phone five tools with immediate realizations and so for all driven by by speed that requires a completely different approaches that we'll use in the past so if in the past the assembly.
And number two components.
Flue cured of domestic markets was was busy busy are important and necessarily to believe that currencies I think as we move forward through more advanced solutions I think the close collaboration so the teams that I mentioned nothing is going to be we mono.
Hold on to establish the the University to control the markets and I think we are will be will fill season to do that thanks to both the.
Feeney saw into two six the team combines Oh I don't I'm the into seem confident.
Great. Thanks for all your thought so that's all the questions for me.
Thank you Richard.
Thank you.
Next question comes from Tim Savageaux with Northland Capital. Your line is open.
Hi, Tim.
Hi, good morning.
Well she didn't want to answer the transceiver question, we'll see how this one goes but <unk> chucking team you mentioned the year flat from upload pro forma basis, and that's where they are pretty.
Spectacular fiscal Q4.
No it looks like given what you're guiding to you're going to see probably double digit pro forma growth year over year [noise].
And I Wonder if you have a view toward you know what the medium to long term growth rate for two six ought to look like if you as your pad.
Three quarters of experience combined with fitness or should we be thinking about a double digit growth company here or I'd just be interested in your thoughts there.
So.
Couple of things you're right the wildcard on a pro forma basis, the company was flat year over year or.
The benefit of the great performance in Q4 is that first what had been a year to date trend of decline right. So that's the first thing. The second thing is back in our Investor day, when we thought about where the growth would come from in our company, we talked about two and a half the four times GDP and we were expecting if you remember the mega driver.
<unk> introduced at the time that Fiveg it would be one awesome. So in terms of being you know would we ever be a double digit growth company I think it would certainly be fair to say that that accompanies aspiration.
Great and if I could follow up just a.
With.
Maybe the puts and takes in terms of your your guide for Q1 on the topline.
Obviously, you had a much stronger than expected Q4, maybe digesting some of that.
And this is maybe I'll touch on a little bit before you're normally September quarters year, one where you see a sharp.
Strengths on the consumer side three D sensing I wonder if you might have seen some of that.
Earlier than expected in June.
Or you know, whether that's you know part of the forecast and and maybe your <unk> digesting some of the growth from MACOM side as you look at.
You know are modestly down guide from a very strong Q4.
Right. So, let's let's do a couple of them first of all even though it is not as big a percentage of our company as it used to be Q1 to September 30 quarter is usually the weakest for industrial.
Right. So that's one that you can come into number two while I understand there is a view that in a strong communications cycle, there should be ongoing sequential gross for the whole time. The truth is that even in our company going from Q4 16 to Q4 17, we had a little bit of death and communications, even though.
We delivered 34% growth and communications that here. So I look at it. It is true that we could see communications growth into the September 30 quarter, but it's actually kind of the toss up I think that's what Chuck met you know, what's not actually perfect every quarter. So we are looking at whether that might be a little bit flatter.
Three D sensing we did a very good Q3, Q4 surprisingly so and I don't know that were necessarily saying it will be down forecast for the nine three quarter, but as a factual matter right. I mean, it can be strong for consumer at 930, but it has historically been the strongest really at the 12 31 quarter, So what quarter.
Yes that falls in for the strong second half of the year, we're also trying to little bit.
Take a battle on that and then three Centseight excuse me a life Sciences, which is a very small market. It's true but had some very very nice growth in the quarter I'm of course, we would like to see that continue that it's an important small little market for us, but at the end of the day it might not be as strong as it was in Q4.
Got it thanks very much.
Thank you. Our next question comes from Cinryze shoot even Needham and company. Your line is okay.
Hi, Thank you. Good morning, I was wondering if you could provide a perhaps some additional color on the bookings say you saw the booking strength and also.
Or maybe discuss some areas of the business, where you might be capacity constraints.
Sure. So I would say across we probably had booking strength across the board.
The book to Bill, what's probably a little bit stronger in.
So tonics then in compound semi but generally speaking it was it was pretty good really across a across the board I was busy last quarter, telling you bookings that started with an eight work the new normal and here we go again.
So that's that's probably the first thing and your second part of your question was.
Let me again, there's interest.
Areas of the business, where you're just.
Passing will constrain newer that yep.
Yes, sorry, so first of all if you look at a little bit Cecity tends question.
We pushed a lot of the operations to you know increase their their production hours, but I would say, it's probably fair to say, we're we're constrained across all the laser devices.
Around the world, we continue to almost perpetually be constrained on pumps.
We have some needs and.
Even some of the smaller components were not always talking about circulator cetera.
And in some cases or some of the transceiver struck would you like to add anything to that.
Yeah, absolutely absolutely merging thanks for your question Oh by the way Jim Good morning.
I would say.
I'm going to repeat our wafer fabs are quite busy.
And our opportunity to sell lasers at the moment is exceeding our ability to make them.
Also and so we're doing something about that we're focused on the capacity expansions reflective in the capital, but we're also working diligently on productivity efficiency.
And the this the smartest use them of the utilization of the Fabs also.
Because of our module business is increasing and we are forecasting it to increase just too just to address Tim's Tim's question I was pretty quickly that I expect the transceiver business is going to grow.
And so we have have to through Unpledged, where we need to invest in knutsen automated final assembly and testing for our Transceivers.
The but that's basically it lasers and automated assembly and testing and then we have a host of other platforms that we need to continue to invest into drives our long term growth.
Across other markets and of course, all the technologies.
Chuck would you be willing to say, how big the silicon carbide business wasn't fiscal 2000, and the kind of broken so.
Oh I'm not sure Mary Jane did you did you disclose that many.
Uh huh.
Let me Oh, I think we didn't let me let me come back out, let's let's go on and I'll go ahead Danske Bank give me just thanks, a lot sure okay. Okay.
[noise], let's say, let's go next question.
Yeah.
I'll answer it don't worry.
Sorry operations, there I think we should probably go next question.
Yeah.
Thank you and as you well question.
And then a growing question comes and Dave Kang with B. Riley FBR. Your line is no okay.
Thank you good morning.
Good morning first question is I know you you only giving guy for one quarter, but in terms of a trajectory how should we think about fiscal second quarter.
Hi, Dave say, a little more what do you need.
For December quarter, how should we think about weather for September quarter.
How should we think about in terms of a trajectory.
Dave there, but the backlog that we they've started emerging there was a backlog that we have the backlog that we have.
The visibility that we have.
And the drive that we have to continue to grow.
We're not going to be able to give you a a forecast for the second quarter.
I can show kinda, ensuring that we're going to continue to drive growth in this company and that's what you could expect us to be doing.
Quarter over quarter.
It's driving for growth.
Got it.
Fair enough and then just on a going back to a first quarter.
Mary Jane you talked about Ah Ah Ah.
Mix being more conservative.
So should we be thinking of course margin to be high thirtys to maybe 40% is that how we should be thinking about of course margin for first quarter.
I'd say that I would imagine that the margin range. Overall, just generally speaking is probably between yeah, 38, 42, and I would expect it would come down that might not be a bad guess.
Okay, and that's just my last question going back to China.
China, It was about 27%, but no 10% customer so and there aren't that many Chinese customers have always easy to use that you mentioned fiber home in the presentation. So is it fair to assume maybe each of them, but maybe high single digit type of customer.
A couple of getting 27%.
Couple of things day, I mean, just keep in mind, we're not only talking about communications there right. So first of all China continues to be very good market for us in terms of other end markets, primarily industrial for sure and in fact was probably one of the first places our life Sciences pessimistic.
On to actually I give it so that's the first thing to tell you. It's it's not just communication, but the other thing is that while our or Wally for example is not a 10% customers. It's also not 9.9 north country. So you guys can estimate from there, but our China business is not yet.
<unk> communications.
As for let me just answer the Silicon carbide question. So the silicon carbide, it's probably north of about.
Uh huh.
A 4% of sales at this point and I'd say overall.
It was it was pretty modest growth in the in the year largely because while a wireless was was very very strong easy continued to be somewhat oh less than it had been in prior years.
Hey, Dave a these Giovanni I won't make a comment I I know you listed Oh, yes, I want to remind you.
That we are one of the most best easily the here the company in the states.
So every single semiconductor lasers needs a a governor facilities.
There's only so many companies they make those kind of devices, we make it into new Jersey.
And you can expect that we sell those kind of idea rotates those not to be Oems.
And so far so as major instead number one.
Talk to you about Oh in general trying to Moscow.
But then if you really want to about talk about just telecom.
<unk> L. Datacom I wanted it mines that Weve makes a lot of deposits, we make presumes gradings lance's, maybe those you name them, there's going to heavily.
Double to assess the weather will.
Wavelength selective switch the way I went off and so far so there's a mambo components.
We sell that go into Oh, though of all competitors for example.
And there's a lot of Oh, you know.
Modules and subsystem tussle, most in China, So that you need to calm dose and there's a lot of them.
Well I noticed that let me just add to that wasn't let's let's not forget wasn't let's not forget hyperscale data centers.
Including in China.
That makes sense. Thank you. Thank you. Thank you.
Oh gosh, we're going to try and get as many of you went to the Q when I hear a even though we're a little bit over time, so let's let's move on.
Thank you.
Next question comes from Christopher Rolland with Susquehanna International Group. Your line is now open.
Hey, guys. Thanks for squeezing me in I wanted to dig in more on the GE partnership and finished product silicon carbide I guess overall, how big do you see the Tam for finished product and then maybe if you can talk about where your clinical capabilities from this partnership.
Ultimately and of that Tam how much do you think you can address with this Ci acquisition and the two that you did on top of that most recently and then just lastly in this market would you ever consider getting into like on semi for example is actually going to get into.
The inverter market is that a you know finished modules and in burgers is that something that you guys would consider as well.
Okay. Let me, let me take it Chris Thanks, a lot for your question talking about Inverters today is no not in the conversation.
Oh, so that that were four we're focused on laying down.
Still.
Competitive.
No vertically integrated platform to carry out the the growth of our substrate business.
Establishing a which were not well underway, establishing a silicon carbide.
It's actually a wafer business.
Through the past Buitron acquisition.
Making silicon carbide based devices.
And if someone them and in competitive silicon carbide, there's margins as I alluded to in my prepared comments today as well as a when we did the fundraising and announced the GE interaction.
These technology platforms take time to put in place. This is going to take place over the next few years, but why we're putting in place we intend to continue to grow our silicon carbide substrate business Epee wafer business and begin selling silicon carbide based devices.
As soon as we're ready you characterize well controlled and good cooking and excellent quality that meets that's a meet me so demanding especially vacations. So there's going to its got all unfold over the next few years and this market is going to be huge.
So that's I think that's the that's the key point, it's going to emerge and see it's going to continue to grow.
We think for decades.
And we think it's just an absolutely great time with a great set of assets and I couldn't be more exciting.
Welcoming the and Auvi on and ask Itron team into two six and melding emerging their capabilities with our substrate capabilities and they really exciting.
Partnership did you.
Okay.
Yep. Thank you Chuck and then quickly you know I assume that you believe the demand coming from telco and data center is different than perhaps a traditional boom part that we see of a shorter lived the optical upcycle here, maybe you can talk about the subtleties that you're seeing.
Versus other optical cycles that we've seen that you believe I'm kinda lends credence to our sustainability over the long term for a very long cycle.
Okay, well South Carolina, joining would you like to comment on that.
Yeah, I think the up the.
I would only talk about the capability of the Oh the.
Oh Gee base station network that.
He's he's mess and as soon as you increase.
Pfenex the number of base stations that are you need to connect.
The and then you do you get the sense of.
The amount of.
Input outflow to have a you know transmission and a reception liquid cooled my old those eventually to.
Opponents of Isaac Angel and as I mentioned in my script and so forth. So the the ER with talked about.
I see music on.
An increase in the mind of optical views because of the the requirements of the open architecture wasn't.
You know nicely for the previous generations.
The as you know the [noise].
It was a single G as being the football is thinking about maybe 10 years.
From you know from two to three G., so to fill the GE and so forth and many many expect that.
Maybe.
You know Fiveg will.
Go a little bit foster maybe eight years.
But Ah I encourage you to look at the.
The 60.
A white paper published by Samsung, which is a publicly available and to get the flavor on how.
So I won't facility moving the next step so when you talk about the cycle.
You know the cycles on on the next generation wireless connectivity hasn't really finished the fourg, yes, we've talked about Fiveg now and others. You know low people talk about 62, so it's not going to and quickly because of the need for from the TV. The.
<unk>.
Increases it continues to increase and the type of the new requirements that.
You know the the new solutions and so I I, there would be a ups and downs of schools. So over time, but I I think because the.
The the much.
Dan So [laughter] possible network on the TBT This if wise.
By the Fiveg infrastructure I think we've acquired its volume Oh volume deployments that we haven't obviously experience in the past.
And and of course, so with that all the data storage a increase in.
You know worldwide would also deployed.
An increased level of connectivity to the.
This wasn't the Pos so I think it could be a demand would be very healthy it will play sometime.
Thanks, guys.
Thank you and the interest this time, we ask that you. Please limit yourself to one question and question comes from Mark Miller with the Benchmark Company. Your line is now open.
I.
I wanted to talk about three D sensing typically september quarter strongest, but there's some belief that.
Some of this demand will be shipping into a slipping into the December quarter. That's your perception.
Well I join us.
Got you bye.
I'm sorry, you were talking about the two sensing yes, typically typically september strongest, but that's something that now might be shifting more into the suburban traditionally.
I I I don't know whites, the that's I don't see that but.
We had the multiple.
The design wins that are ramping and so.
I don't believe there will be a 80 80.
You know equal, though you know.
But oh shipments and so far the other than maybe we'll do we experienced in the past something some of the designs will balance with each other than 10, so the demand and be the pull them.
So I I, Oh, yeah, I think of it will be.
I would expect assuming a little happened to stimulate demand that was seen in the past just though I think a volume wise.
How soon would be I, we expect <unk> as we said we'd expect to continue.
Two gainshare.
Overtime, we had been doing it so as you can if you can validates with disclosed to the we'll look forward to Cordova quarterly year over year, obviously, we are well growing much faster than market much much faster than that so we expect that so he is an indication moved to show game and we continue to do.
With that.
Let me just to add to that before before we finish up and Mark I'll give you hear your follow up but at least for the last few years for our company.
Well, maybe for all the years mix shifts the 12 31 quarter has consistently been stronger than I'm sorry.
So that's what makes Q3 in Q4 331 at 630 being higher than the 12 31.
What kind of remarkable but generally speaking we have not actually seen all the shipments going out 930 quarter, sorry, Mark on that.
Last question. It for me is wrote them. So I assume that was strong can any color on that.
So yes, yeah, there was I would have to gradually.
Absolutely wrote them Oh, Geez is an integral part of Oh out in traffic to the physical layer as you know and as I said they'll be the new network architectures I'll data business, while we more flexibility.
Who will be on top because of high pleased with the high time.
Willy Nilly increases the mindful do they kind of products versus the previous a previous the natural hockey's extra shows as being very strong for us.
Thank you.
Thank you.
This concludes the question and answer session I would now like to tend to call back over to Chuck Mattera for closing remarks.
Thanks, Joel I'd like to thank everyone for joining and will close by summarizing our top four priorities for this year.
First is the care and safety of all of our employees.
Second is serving customers in delivering target operating performance.
Third is to focus our employee engagement.
Through our shared values of integrity collaboration accountability respect and enthusiasm or keeping an eye to the future as we continue to foster workplace that is open supportive and diverse.
And fourth is the balanced capital allocation strategically.
Following our prudent financial policy to enable both short term performance and to be well position to continue to drive long term shareholder value.
So with that I'd like to close todays call. Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
[noise].