Q2 2021 II-VI Inc Earnings Call
Ladies and gentlemen, this is the operator today's conference call is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
[music].
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the two six incorporated fiscal 'twenty, One second quarter results conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you will need to.
Press Star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Mary Jane Raymond Chief Financial Officer. Thank you. Please go ahead.
Thank you for Cowen. Good morning. This is Mary Jane Raymond I'm, the Chief Financial Officer here at two six incorporated.
Welcome to our earnings call today for the second quarter of fiscal year 2021.
With me today on the call of our Doctor Chuck Mattera, Our Chief Executive Officer, and doctors Giovanni Barbarossa, our Chief strategy officer on the president of the compound semiconductor segment.
This call is being reported on Tuesday February nine 2021.
Our press release and our updated Investor presentation are available on the Investor Relations tab of the website II Dash V I dotcom.
Just as a reminder.
Any forward looking statements we may make.
Today. During this teleconference are given in the context of today only they contain risk factors that are subject to change possibly materially.
We do not undertake any obligation to update these statements to reflect events subsequent to today, except as required by law a.
A list of our risk factors can be found in our form 10-K for.
For the year ended June 30th 2020 filed in August.
We will also present, some non-GAAP measures for which the reconciliation to GAAP are 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 over the Doctor Chuck Mattera Chuck.
Thank you Mary Jane.
Good morning, everyone and thank you for joining us today.
I am pleased to report.
That halfway through our fiscal year of 2021.
We are on track to deliver a strong year.
Our revenue for Q2 was $787 million.
It exceeded the top end of our guidance of $780 million.
Grew 18% over Q2 of fiscal year 2020.
Among the many highlights this quarter.
The book to Bill ratio of 1.17 for the quarter.
Leading to a 1.12 book to Bill ratio on a rolling 12 month basis.
We continued to execute on our ramp of <unk> sensing vixens.
And delivered against an exceptionally strong demand bring.
Bringing shipments for the consumer end market to a record high of 15% of revenues.
In addition, we delivered excellent growth in life Sciences experienced continued recovery in industrial.
And saw continued strength in communications aerospace and defense, the semiconductor capital equipment market and in Silicon carbide.
Our Q2 guidance contemplated a very strong <unk> quarter, and we delivered on that.
Our year over year of growth in the consumer end market of over 200% was.
It was largely driven by three D sensing and again this quarter.
We ship Victual arrays and production volumes for front facing world facing.
And emerging applications as Giovanni will describe later.
Communications grew 5% over the prior year, including for both Datacom and telecom.
Life Sciences gained significant momentum.
It grew almost 50% sequentially and more than 80% compared to Q2 of last year.
Our products are a vital components to the COVID-19 testing ecosystem.
Industrial applications grew 10% sequentially across our product lines as we continue to see a brisk recovery driven by increased demand for automotive production.
Turning now to our focus on operational excellence we.
We are well ahead of our plan to achieve our three year $150 million total synergy target set for the finish of our acquisition in September of 2019.
Our run rate synergies already exceed $100 million as a result of our integration work over the past 15 months.
We are now on track to achieve our $150 million total synergy target and 24 months for 12 months ahead of schedule.
We are now increasing our three year total synergy target to $200 million.
Our faster delivery of our synergy plan is contributing to our strengthening margins and our strong cash flow and reflects our ability to execute and integrate large scale acquisitions.
Our cash generation in Q2 was an all time record for the company amounting to $221 million of cash flow from operations and 176 million of free cash flow.
From the company's inception, 50 years ago, we have strategically focused on identifying and capitalizing on irreversible megatrends from our core strength in materials.
And after of electronic devices.
We have been successful in our organic and inorganic execution.
And growing by leveraging these trends.
The application of our strategy and $2 six values.
Our senior leadership team.
And all of our employees are among the reasons, we've been able to make this much progress during an unprecedented macro environment in the first half of fiscal year 2021.
We look forward to the exciting opportunities ahead of us in the second half of fiscal year of 2021.
And for many years to come.
With that I will turn it over to our Chief strategy Officer, and President of the compound semiconductor segment, Dr. Giovanni Barbarossa to review, our individual businesses, while highlighting our products and technology leadership.
Giovanni.
Thank you Chuck.
We appreciate the all of investors in 2000 and for our strategy and our successful track record of assessing long term market opportunities executing large scale M&A and developing technology platforms aimed at addressing major markets make sense.
Well go ahead of the reality autonomous driving at artificial intelligence are among those makeup of planes, which are enabled by <unk> sensing.
So this quarter I am pleased to report the three D sensing group more than 140% sequentially.
We believe these changes into the faster.
Then the market growth rate.
Both of the Walgreens ensure months' hubs operating very efficiently due to really solid execution and contributed equally to our previous guidance in diabetes in the floor.
As Chuck said the defensive growth came from shipments of production volume So beach, the luxuries for multiple customers.
Including for front facing.
Well the <unk> applications.
As well as for other consumer electronics and automotive in cabin sensing.
We are also making good progress expanding our customer base with the additional wins, including in the Android the ecosystem and personal computing platforms.
Given these phenomenal results I.
I believe it would be worthwhile to if you meet the trajectory into the same thing for the benefit of investors who might be new to our story.
How about <unk> sensing work began in 2013 after that we see some of the gallium arsenide lots of them.
Which are among the many things came with some of the industry's best speaks of technology.
Despite having zero footprint, India messaging pretty sensitive markets.
We started mentioning the television same thing story publicly in 2016 to explain our up you see some of the with a pub operations in one of the new GNC and Champaign, Illinois, when we acquired the manufacturing Foundation.
Strategically expand our gallium arsenide optoelectronics Blackstone.
So on three to six each for the large volume slick water for the consumer electronics market.
We said in our Investor day in 2017, the entering the TD since the market with the vertical integrated the 16 spots for them would prove to be the most long term competitive and sustainable strategy.
Of our conviction was rooted in our deep experience in the business of compound semiconductors.
When we acquired the <unk> saw.
Some of stuffs, we still do most of the large top we plan on closing.
Our answer was not because we needed the capacity to gain share and become the market share leader by offering breakthrough solutions at scale.
The teams in Julie Walgreens, something Keystone in Sherman.
Walk together to get chairman of qualified income.
During the quarter, we accelerated our share gains going on we believe faster on the market and we're well on their way to achieving the leading share of the global market.
As for the automotive market, we are shipping big celebrity spoke of in cabin sensing applications. We're also engaged the many lives on market opportunities.
We have the broadest portfolio of products in the industry.
Yes.
Unlike our pure play laser compared to the dose.
We have an entire vertical integrated portfolio of both active and passive components made the put more engineered materials that are critical for this next generation of lot of the designs.
On the active side.
Hello, Lisa offerings include big sales edge of meet the laser.
Laser baas multi John truly meet those pulse fiber based sauces Tam of electric and lives of drivers.
On the positive side, we provide the deep couldnt see the portfolio of optical components, including Walid on scanners Goldbloom mirrors lenses field sales great things is that of all of the windows to name a few.
We believe the lie the market is still in its infancy, but our strong customer traction and design engagements, we are well poised to take the large share of this market as it develops.
That said the bahar the wide variety of lot of the technologies being considered is quite <unk>.
Of the market that is a very early stage.
Time will be required to shake out of the windows.
We believe that the more of immediate individually much larger opportunity in automotive it's for our silicon carbide products for power electronics.
Recently, one of our Japanese sales woke up a subset of customers was selected by tier one Japanese automotive company.
And we are excited to be of keep monitoring the supply chain.
We see that as the store.
On positive sign that our business of Silicon carbide substrates for power electronics, we've assumed group after the slowdown caused by COVID-19, the trend in 'twenty.
Meanwhile, we have continued to execute on our multiyear plan to develop that part of the portfolio of wide bandgap products across the value chain for the electrification of the transport infrastructure.
In the communications market, while telecom was impacted by the slowdown in the new system installations due to COVID-19 of.
The high data rate and so on.
The <unk> ramping up.
Bandwidth to both new and existing networks.
We are pleased to report the we are gaining meaningful share in this market with our quarterly revenue run rate of this part of the saving more than doubled compared to the year ago, and we expect our share to continue to grow.
I snuck up on coherent modules talk to enable data center Interconnects I am pleased to announce that our disruptive plausible optical line system. All Poles one of the best of all of the awards for data Center of innovation on the European Conference on optical communications.
The pulse is the first of all of its kind on the market and leverage is two six significant breakthroughs you mean actualizing optical components for amplification and Waveland management, while at the same time.
Improving performance of it using power consumption.
We are also making steady progress towards growing our share in data for them by ramping up our two on the G and so on the Jeep products driven by increasing demand from Hyperscale is both in the U S and China.
In fact, our 200 G and so on did you put all of those more than doubled sequentially.
We're also excited to announce that we've just sample of our phase eight times of entry of Transceivers to a large web scale customer who has already provided exciting feedback.
And in the hospital, we continue to see signs of a recovery driven by strong increase in demand for capital equipment with our after market business back to pre pandemic levels. In fact, we had record aftermarket revenue in December.
In the semiconductor capital equipment market.
Since the announcement of significant investments by TSMC and Samsung lead us to believe that our balance sheet is optics ceramics, and composites to benefits from the multiyear tailwind.
Finally, our life Sciences business increase the 80% the year over year.
Driven by the demand for our thermal electric and filter products the.
For the enable COVID-19 PCR testing.
We're proud of being able to contribute in such a way to the side the gains of the pandemic.
With the progress, we're making the cost of on material in the device platforms driving topline growth and strong margin expansion. We are very bullish on our diversified business model.
With that let me turn it over to Mary Jane.
<unk>.
Thank you Giovanni and good morning.
Our non-GAAP gross margin was 42% and the non-GAAP operating margin was 22% the.
The non-GAAP gross margin of 380 basis points ahead of the last two six reported.
Pre acquisition gross margin of 38, 2% and the non-GAAP operating margin of 630 basis points.
For the last two six reported pre acquisition operating margin of 15, 7%.
These margins were driven especially by our synergies are strong mix improvement and transceiver margins and increased fab utilization.
At the segment level, the non-GAAP operating margins were $17 four per cent for photonics and 29, 3% for compound semiconductors.
<unk> two last quarter compound semi margins were driven due to strength.
In <unk> sensing shipments and increased fab utilization.
Our backlog was a record $1.08 billion and consist of $680 million in photonics and $400 million in compound semiconductors.
The backlog contains orders that will ship over the next 12 months.
GAAP operating expenses, which are SG&A, plus R&D were $204 million, excluding amortization of $21 million.
24 million and stock comp and 1.3 of M&A and integration costs.
GAAP Opex was $158 million.
Non-GAAP Opex is 20% of revenue.
And just over 500 basis point, and 500 basis points below the op X percentage of revenue just prior to the close of the acquisition when it was nearly 26% for two six and finished our combined with amortization stock comp and transaction.
On cost.
Excluded.
Quarterly GAAP EPS was <unk> 73, and non-GAAP EPS was $1 eight.
With non with after tax non-GAAP adjustments of $43 million in total the share count for the GAAP results was 115 million shares for.
For non-GAAP the share count was $124 million.
The GAAP.
And non-GAAP EPS calculations are in the last two tables of the earnings release.
Stock comp was $28 million for the quarter $4 million in Cogs and $24 million in Opex.
This is $11 million over the estimate of $17 million due to the increase in the <unk> stock price.
The stock price is relevant to the valuation of our equity based cash paid instruments. We use these instruments to incent, our non U S. Global leaders, who are also essential to our team of leaders thinking and acting like owners of two six.
Using our December 31.
2020 stock price, we expect Scott comp for fiscal year, 'twenty, one to be approximately $88 million or $16 million for Q1 28 million for Q2.
And $22 million for each of Q3 and Q4.
Cash flow from operations was $221 million and free cash flow was $176 million.
We paid down $49 million of our debt. In addition to the required payment of $16 million.
And the interest expense in the quarter was $15 6 million.
This payment allowed us to reduce our net debt leverage ratio to 0.9 times at December 31.
Compared to one three times at September 30th.
Capital expenditures this quarter were $46 million.
For the year, we expect capex to be between 180 and $220 million to support an increase in capacity for compound semiconductor materials on devices.
Depreciation was $47 million in the quarter and we expect our forward depreciation expense to be about $46 million to $50 million of quarter.
The FX loss in the quarter was $7 $5 million, primarily driven by the Swiss franc and the RMB.
The effective tax rate in the quarter was 17%.
We expect the tax rate to be between 19 and 22% for the year.
The tax rate to be used for the non-GAAP items is 19.
The tax rate moderated from our prior range of 22% to 26% due to renewals of high tech status and Super R&D deductions.
In addition to increased stock option exercises and changes in the mix of income around the world.
Both of the ask of tranche and the novae on acquisitions are now consolidated in our results.
The <unk> acquisition closed on August 20th and they can know the on acquisition closed on October 1st.
In 2020.
For the two combined.
We had $8 million in revenue.
2 million additional opex.
The breakeven non-GAAP EPS in the 12 31 quarter.
Our non-GAAP results exclude a $7 million gain on the Adobe on acquisition, resulting from the fair value measurement of the previous equity investment.
Turning to the outlook.
Revenue for the third quarter ending March 31.
2021 is.
It is expected to be between $760 million to $780 million.
And earnings per share on a non-GAAP basis at.
At 81 to 91 cents.
This is at today's exchange rate.
<unk> includes a weaker dollar compared to September 30th.
An estimated tax rate of 19%.
And of 126 million shares.
For the non-GAAP earnings per share.
We add back to the GAAP earnings pre.
Pre tax amounts of $21 million of the amortization 22, and stock comp and $2 million in transaction and integration costs.
The estimated Q3 share count as of 117 million shares for GAAP and 126 million shares for non-GAAP.
The actual dollar amount of.
Non-GAAP items, the tax rate the exchange rate and the share count all are subject to change.
Before we go to the Q&A Justice of reminder, our answers today may contain forecasts from which our actual results may differ due to a variety of factors.
Including but not limited to changes in product mix customer orders competition.
Changes in regulations and general economic conditions.
We would also ask the each firm limited's questions to one question with no follow ups as we would like to try and get everyone. In during this call I'd also like to turn it back to Chuck Mattera for three minutes at the end and we do expect to end the call at 10 a M.
Help you May open the line for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Yeah.
Our first question comes from the line of Mark Miller with the benchmark company.
Alright, congratulations on on the here another record quarter in the <unk>.
Significant gains in the three D sensing the hernia.
Just have one question other expenses.
Could you give us kind of of all feeling for what it'll be next quarter, because it's jumped around the last two quarters.
In the other income and expense for Atlanta.
Generally speaking I think it should really probably only be the.
The FX.
With a little bit of the equity earnings from our equity investments, but the major driver of the cost to change a lot this quarter.
What's the Adobe on a game.
So $7 million to $8 million.
I'd say, it's probably similar to Q1.
Thank you.
Sure. Your next question comes from the line of Jed <unk> with Canaccord Genuity.
Hi, Thanks.
Congratulations on the on the quarter.
My one question I guess is.
If I look at the.
If I look at the strategy around compounds semis it seems.
Debt, whereas what we're seeing and what you're benefiting from is really a renaissance in the.
Semiconductor industry, the kind of takes us back or it takes me back to the late seventies early eighties on the silicon side, but today on the compounds. So I'm just wondering as you kind of think through the end markets from a silicon carbide Sapphire indium phosphide all of <unk>.
Or kind of manufactured on.
Various platforms.
How do you how can you help investors think through the cost curves.
In terms of those those cycles.
Hi, Jud.
Good morning. This is Chuck Thanks for your question. It really is an exciting time for the compound semiconductors in general they.
Materials and devices had been around for many decades as you know in.
Every time they have been invested in they've been invested to enable new applications or overcome challenges that the incumbent technology hub.
On the cause.
Either of constraint or an asymptote.
In performance so they are enabling.
And the value proposition of ultimately has to be taken at the system level.
When there is a clear enabling by the by the material and the component of the system itself.
Generally of pool.
By the ecosystem to be able to drive this technology and it happened in the early days of gallium arsenide for.
For Thompson and the Hps.
Around day.
Around the side of a radar infrastructure that there was the ultimate we've put in place and that led to the world that we see today.
On that volume spilled over into the handset market we.
We see the benefit of that coming with Gan on silicon carbide, even indium phosphide based electronics as the advent of the design for example of even six G.
Communications networks will rely on and be enabled by such innovative devices that will come from the compound semiconductor market I think that's probably all I can get into of joining would you like to add anything to that.
Oh, that's bad for sure.
Okay, John I hope that helps thanks.
It does thanks guys.
Your next question comes from the line of Paul Silverstein with Cowen.
Thanks, guys I guess I'll focus on through the system.
Trucking Giovanni obviously, it's ramping nicely can you give us any additional insight on the demand outlook, especially in terms of the breadth of demand beyond just the Apple.
What you're looking at and the ability to continue.
Ciena drive this type of growth, obviously wallboard numbers, just kind of get harder as the fourth.
<unk>.
And one other related question I assume we should expect for the margin uplift with the benefit of ongoing volume.
And through the center.
Okay Paul.
For the question.
Definitely the.
Number of abuse of cases, and the interactions with the.
It's the whole set of customers on increasing we have as.
As we said the in the script so we have.
Some design wins.
You know Android platforms.
Themselves are going on.
You know, we're all surprised that I know of Bluelinx of Spice of what they should but we have plenty.
Really oh these are bullish about the long term opportunities for the <unk>.
For the application of the as these basically so it's a it's a niche of the.
The function to enable.
Of those make us the things that we discussed such as though it's.
The tone of those diving in.
Of the future these guys.
Vincent so fault so.
So we are very confident that the demand will continue on so having go.
Betsy can lead to do the platform.
I'm just going to be.
Oh.
Said, the sustainable advantage that we have.
And then yes definitely the volume so.
L. A on the module side, but the I'll, let the maybe I'll, let maybe Jane comment on the on debt on debt.
On the part of the question would you like to add some.
I think I think three D sensing continuing to gain volume is positive for the margins do keep in mind that the quarters across the year are not steady for three D. Sensing and typically this past quarter of the 12 31 quarter is the strongest quarter that is what we have seen in the past that may change as Giovanni says as we get an increase.
And other deployments, but for right now lets say volume definitely helps but it is not the same volume of every quarter.
Okay. Thank you.
Your next question comes from the line of Jim Ricchiuti with Needham <unk> Company.
Hi, Good morning, maybe just to follow up on that comment Mary Jane in terms of seasonality.
Should we be thinking about in terms of the puts and takes with respect to the March quarter, just in terms of the.
The larger.
Verticals.
Yes, I would say first of all we already for let's say the first half of their Q1, we still expect to be our smallest quarter.
Q2, 12, 31 was strong for three D. Sensing as we just saw we do expect to see the $3 31 quarter, probably a little bit down on Q2.
On the 12 31 quarter some for Chinese new year, we can't forget that.
And also because I don't think <unk> will be as high.
Exactly as it was in 12 31, and then the the 630 quarter for US, which has historically been our strongest quarter.
We had such a good quarter of this quarter it may be on.
On par of little bit higher but for right now I'd say generally speaking I think just basically do not forget Chinese new year, and the 331 quarter.
And that's three D sensing industrial the.
Optical communications seasonality in the March I'm wondering how we should be thinking about that.
Well I'm not sure we can give it to the exactly but generally we don't see it in the for industrial the first quarter. The the nine third quarter tends to be the weaker quarter communications can sometimes be a toss up between 12 31 of $3 31, but generally speaking it is Chinese new year. So I think you should calculate that in.
And then I think the other markets are probably less subject to specific.
The seasonality in any given exact quarter three.
Yes.
Came out of I wont do that.
Out of the many Jamie.
Yeah, the seasonality some time on the offsets by the market reality.
I'll give you. An example, we are we anticipate.
The two ships.
More than double the megawatts.
Shipping the cycle on the installed in the first half of the kind of of the fiscal year and the second one of your so we'll we'll gobbled up of megawatts in the second half of the year for industrial applications, particularly of course fiber lasers.
So that's the that's a it's a really.
Will the substantial increase in the second half, which.
It's not necessarily linked to any seasonality.
It's just specific to China coming back very strong with fiber lasers.
And we are benefiting from the growth.
Got it thank you for that color.
Let me just clarify one answer I gave the Ark. He was asking us about non op income and expense I forgot in the first quarter. We had the write off of the debt costs generally speaking, it's probably somewhere between.
On to one 3 million positive.
We can take the next question. Your next question comes from the line of Vivek Arya with Bank of America Securities.
Thanks for taking my question I was hoping you could give us a quick update on your silicon carbide franchise of how much does silicon carbide.
For as a percentage of sales what are the next milestones we should be looking forward to and recently one of your competitors spoke about.
The increasing debt investments and 200 millimeter capability on I was wondering how that impacts on the <unk>.
The of landscape going forward. Thank you.
The silicon carbide is between three and 4% of the revenue and I'll give the second part Chuck Okay. Thanks Vivek. Thanks for your question as we've indicated this is a long term growth opportunity for us and we're playing it just like you would play of golf course, one whole lot of time.
We have the end in mind, we've described to investors, we think pretty clearly.
We have a scalable.
Silicon carbide substrate platform, which was demonstrated to be capable of supporting the 200 millimeter technology about five years ago.
So we are investing and scaling that capability of our silicon carbide substrate.
A considerable amount of our capital investment the Mary Jane referred to earlier is focused on adding equipment for silicon carbide crystal growth epitaxial wafer growth ion implantation.
The tools.
To provide a clear.
Technology roadmap for electronic devices and ultimately for modules.
Multiyear platform investment and I think the best way for investors to think of Orange is the same way on which Giovanni gave of a retrospective view of how we thought of the six inch gallium arsenide vertically integrated platform developed in fact more than five years ago.
It's going to take us some time to put all of the pieces into place that we envision but we have the talent we have the team we.
The technology.
And now we have to get the infrastructure in place and get through of scale.
We ultimately aim to be on and that's all line of sight inside of our our near term and long range plan I think that's probably the best way to say of fever.
Okay. Thank you Chuck.
Your next question comes from the line of Richard Shannon with Craig Hallum.
Well, thanks, guys for taking my questions. A question of focus on Datacom in probably a two parter here I heard some comments about your of 204 hundred gig transceivers doubling sequentially. It can help us understand what's going on there and then kind of look forward broadly speaking across the space for both web scale and <unk>, how do you see this this calendar year developing.
Okay. Alicia this is Giovanni thanks for your question on what's going on.
We're getting share.
Obviously.
The pretty fast too I think of the the team has done the.
Incredible job with these.
New a new the new platforms and.
So it's really exciting.
Siding.
I'm sorry, what was the second part of the locational strategy.
The dynamics in Datacom going forward through the year, especially the web scale and <unk> for some of your of your.
Appears on the market talk about me of a slower start for the year, but accelerating as <unk> starts to what accelerates later half of the year.
Yeah, well a day.
The reality is the because of Covid that maybe below the deployments worldwide is actually they've actually been slow down I mean that doesn't mean that the.
The trend the.
Any diesel and then before Zillow the important mega sense of loss.
I think we've seen.
We've seen a chart on the ads b.
The the the dominant the needs for the for the end customers other than June deployments.
So that's the dynamic that for.
For example, I think we've seen the mall of the.
The.
More of the client systems being added in the line systems being added.
So far so those are those of the dynamics in terms of the demand.
I want to emphasize the the.
The growth that we've seen in the datacom little bit stronger than the telecom and then the.
For the mind the.
This important point I made on the tons of G.
Firstly on the <unk> shipments that we made was really successful so far all of those really sizing the two added to our portfolio.
And the all in all of the things we all of the.
Going back to a really nice growth with the.
Can you sort of theme, which you know for the year low.
The customers will probably on the sidelines waiting for the integration to happen now the feel more confident.
Of the numbers demonstrate that we are doing pretty good job of integrating the two companies. So.
This has been very key.
Yeah.
Okay, great. Thank you.
Thank you. Your next question comes from the line of Ananda Baruah with loop capital.
Hi, Good morning, guys. Congrats on the solid solid deployments and thanks for taking the question.
I guess, just just the bigger picture one Chuck in the press release. This morning, you made mention of of all markets improving.
So I was just wondering if you could put some context.
Around the key ones, there and which market opportunities would you like us to.
Think of us, making the most significantly impact the.
Sure as you move through the year. Thanks.
I think I think we summarized pretty well in the script the dynamics in every one of the end markets, while the communications industrial semi comp life science of three D sensing et cetera, I think all of those markets have a great opportunity to really.
Make an impact on the year communications is obviously the largest three D. Sensing is ramping beautifully silicon carbide is coming up the curve. So I think really.
They they really all can.
Make a great contribution to the year on I think the ones you want to think about of either of the largest ones are the ones that are really starting to gain traction on the revenue.
And just just Mary Jane just a quick clarification on that the.
Chuck's comments in the press release about about market's improving so should we anticipate that the key market.
Is it the growth can be stronger as we go through the year.
How about how about some some context around that.
The three strongest Chen I think we already answered that question, we're showing very nice growth on the air across all of the markets. It's in the script and I think we'd probably unfortunately need to move on.
Your next question comes the line of John Marchetti with Stifel.
Thanks, very much for Mary Jane you guys identified an additional 50 million of synergies that you're expecting here over the next two.
12 months or so just curious with the scale now should we expect most of those are coming through additional cost synergies on the Opex line or are there additional opportunities that you still seem to the chop away and improve on the on the gross margin line.
In relation specifically to the 50 billion target.
I think it's both on the cost of sales and on the Opex.
And is that again, a function of larger scale or are you able to actually identify programs, where you can physically take some of those costs out.
Well the 11th.
Let me add John but we need to move on that.
Scale has a lot of benefit and we will have exact targets.
For both the cost of sales and for our overall expenses and we will we will achieve.
Yes.
Thanks Robert.
Your next question comes from the line of harsh Kumar with Piper Sandler.
Okay.
Your line is open.
Okay.
Harsh Kumar your line until Youre not Youre line is open.
Are you on mute.
Yes, sorry about that hey, guys. Congratulations on the strong results Chuck I wanted to ask you is your gross margin of 42% of that you've put up.
Of that the new paradigm is that how should we should be thinking about things.
The things going forward and then when we think about Opex for you guys you've done a great job containing it relative to expectations, but how should we think of the cadence going forward do you manage that as a percentage of business or do you manage that as a percentage of revenue just any color there.
That's it for me thanks, right the gross margin range for the year of 38 to 42.
And the Opex margin is in the low put it on the investor presentation, excluding stock comp as well, it's between 20 and 23 per cent of revenue.
Thank you.
Your next question comes from the line of stomach Chatterji with J P. Morgan.
Thank you. Thanks for taking the question I think primarily for Chuck.
Chuck because you've done.
Done a great job getting the leverage down since the <unk> acquisition and that gives you a lot of flexibility I'm. Just wondering do you see the need to further consolidate the market either be it for new platforms or certain end markets.
You can go get the greater.
The benefits from scale.
But what you have today and just wanted to get your thoughts on that thank you.
Okay. Thanks for your comments and for your questions.
We have had a long term.
Aspiration.
The change the world and we're doing it with the the.
The benefit of innovation.
And being able to identify the long term trends in the marketplace that will take full advantage of that innovation or being enabled by it.
We're not on investing.
We have a strategy.
Well well articulated.
And we have been executing on for decades, and the last five five years or so investors have really gotten to know that.
I don't see any any any any change to that and for sure no change to our discipline.
And our determination to build.
On a long term shareholder value and to have a profound impact.
On the stakeholders all around for US as a result, we have we have lots of investing to do lots of imagining to do and lots of executing for doing we're going to do a combination of two or three.
Thank you.
Your next question comes from the line of Sidney Ho with Deutsche Bank.
Thanks for taking my question and congrats on the very solid results on three D sensing business.
So my question is actually on the on the Comm side I think Chuck you mentioned last quarter. It was impacted by a slowdown of the newest system installation I'm curious if you start seeing the recovery of debt part of the business yet and if you look into the orders in backlog are the particular areas that you see strength of weaknesses over the next few quarters.
Thanks.
Citi can you repeat the first part of your question Mary Jane will comment on the backlog, but what was the first part of your question.
Yes, you were talking about the last quarter was impacted by a slowdown of new system installation I'm just curious what trends have you seen the recovery of ready.
And that business and then the second part of that is related of the backlog of orders debt.
Did you see anything of particular areas of strength of weaknesses coming out from the orders of backlog.
I think there's a I think there is a recovery underway.
Theres still spots around the world, where COVID-19 has has had and is having still an impact.
The effects of the profound effects of COVID-19 simply cannot be understated.
So that's happening and I would say the supply chain has been a lot of talk of off the integrated circuit supply chain and how that might be on overlay to the COVID-19.
And so that's another topic, but I'm proud to say that debt.
The hours hours global supply chain management team have really done a fantastic job in working with all of our vendors and mitigating the impact thus far so we have to watch that I always say the supply chain is what I'm gonna be looking out for in the next three to six months okay.
I don't think the balance.
The backlog down further than the by segment I don't know that there is of particular area of strength or not.
Thank you Sir thank you.
Your next question comes from the line of Tom <unk> with D. A Davidson.
Hey, good morning. Thanks for the question maybe for Giovanni how do you view of the long term opportunity in Lidar versus your current up to the three D. Sensing for the handsets and is your capacity for three D. Sensing fungible, the lidar or is it we can require some type of different technology as well.
Oh, no we have thanks for the question on that so absolutely.
With the greater opportunity for us, but I want to make sure. The this is clearly a lot of the market. Despite the.
You know all of the noise in the in the meat and cell phone is still in its infancy.
The advanced optical solutions, which includes lasers and all kind of on optics.
And so you could see them and so forth.
We as I mentioned in the script we have.
The board, probably one of the broadest portfolios for both actives and passives.
We have a different wavelengths different form factors for the lasers the fluent.
Oh, you know of.
The the.
Sub assemblies, and so forth. So we're well positioned to take advantage of the instead.
Interactions with the the.
The engagements that we have with the number of customers of different level of the.
The food chain.
And in terms of the of the technology I think we will really have a pretty much of all of it as needed.
The question on knees were really to put the bets because of the.
As I said in the script of.
So it's sometimes it's hard to predict for which the solution will be.
The largest volume.
Those are the only.
On the beliefs.
Believes out there in terms of what's the best approach to to give the best performance with the highest reliability and the best the.
Eventually price.
The price target for the automotive.
Oh, yeah, no customers, so he's going to take a while to to flush that out and.
As I said, we are right now we have.
Pretty much all of that the.
Market is asking us to the level, but the windows.
Tens of the adoption of this or debt after that so it will take time for debt to.
The play out into two happened so, but I think we are well position for debt.
Okay. That's helpful. Thank you.
Your next question.
Comes from the line of Tom O'malley with Barclays.
Hey, guys. Thanks for taking my question and congrats on the really nice results of my questions for Giovanni you you saw the industrial business trough in the September quarter, you feed the M&A going on in the in the space can you talk about whats going on there you mentioned you're going to double your megawatts in the second half of the year for fiber lasers is that just volume in China coming back or is the high end of the market a little bit.
Or any color on how that market's progressing off the bottom will be really helpful.
Well I mean is the thanks, Tom I mean, thanks for the questions on it.
Just the China is coming back a bit fast.
From the perspective as I mentioned then.
The large majority of.
All of our markets will lead the.
As you know as you know dues of many.
The laser makers in China, and we are benefiting from our design wins in the group so we're growing with them.
And I assume I believe the out sort of taking share for some from some of the.
Of the incumbents worldwide incumbent so the they are really making the great progress.
I I think it's the largest schools I believe this will lead for the.
Lisa.
Paul just think for the durable goods.
So I.
I think the micro pulses single such as.
<unk> gains on so far maybe debt so the smaller portion of the total anyway. So that's the that's some color.
The exciting W. We have.
The reason why weekend the.
We can for such a L. Wendy a great the mine that coming back.
Particularly from China is because we moved.
Also our 90 of the.
Multimode pumps through <unk>, so we have the capability and I'm the.
Can't say for sure, but hope to the I think we are the only one of the world that has such a.
Such a volume of such a scale of capability for the market. So we're taking the advantage of debt.
Thanks for your products.
Your next question comes from the line of Christopher Roland with Susquehanna.
Yeah.
Thanks for the question and congrats on the quarter and I wanted to chime in on the one question policy and the pace of the call I appreciate that.
So ah congrats on on the three D sensing result, but perhaps for us at least.
On the Photonics and T C and D. C was maybe a little bit late here.
It was nice to see backlog up here, but I would assume that's really implies some sort of a supply issue maybe talk about that is it increasing the supply issues.
Where do we stand on on new capacity of new supply.
The three D sensing temporarily take some of that.
Capacity or are they held six separate.
And is the capex like $40 million of quarter enough to solve some of these supply constraints.
Sure Chris Thanks for your question it sounded it sounded like there were three of four questions in one but.
Let me talk about the supply chain.
In the quarter.
The fact that debt, we had a view of what it what it could be our supply chain people manage it to be pretty close to zero.
In fact.
So.
We're watching it because we understand the challenges associated with the demand, especially in the snapback of the automotive production and the demand for integrated circuit capacity from other markets.
But we do have some constraints and we'll continue to manage those in the supply chain and we're adding capacity so that our internal for intercompany supply chain can keep pace with the projections on the growth and as far as the the three D sensing goes.
Where we are increasingly utilizing the capacity we have so there's no impact at all from the supply chain of thought.
Okay.
Thanks Chuck.
You bet.
Your next question comes from the line of meta Marshall with Morgan Stanley.
Great. Thanks, just on the three D. Sensing portfolio you guys mentioned also having a passive kind of piece of the portfolio with the filters and other products I just wanted to get a sense of as you reported <unk> sensing revenue today is that primarily <unk> and then just as you look forward to the next year.
Sure.
In the next 12 months would you still expect growth to primarily be driven by share gains or kind of new platforms coming on.
I made the thanks for the credit.
Oh go ahead you are on it.
Yes, I'm sorry.
Yes.
Maybe Jay do you want to take it.
This was on the majority of the volume I do think over the next year, we will see as Giovanni already described that there may be other platforms emerging but as he also said, it's a little bit dependent on the market demand.
But we're looking forward to seeing those opportunities materialize.
I think at this point I'm, sorry, we have a little bit run out of the time I just want to turn it back to Chuck for a few minutes and as all of you know we have the scheduled schedule a call with all of you are following this call.
Let me turn it back over to Chuck.
Thank you Mary Jane.
As 2021 of the year of the Ox begins my enthusiasm for our future is at an all time high.
And we continue to look forward to leverage the best opportunities that arise from the most exciting and irreversible market Mega trends, we can address.
Although I acknowledge the sobering reality of COVID-19, the challenge to all of humanity.
COVID-19 has affected the health safety and economic security of a large number of people around the world. However.
However, I am confident that humanity will rise to this.
And the other important challenges facing our planet.
At $2 six we realized that we must do everything we possibly can to protect our planet and carefully manage is precious and finite resources in order to ensure that future generations will inherit from us.
That's better and more sustainable.
In doing so we expect it to six will play an increasingly significant role in enabling the world to become safer healthier closer and more efficient.
This is of our mission to which I remain is firmly committed to is up.
While we are executing well we are doing so out of the strength of our share belief of our values.
Of the integrity collaboration accountability respect and the enthusiasm or as we say of two six I care.
Beyond these values I believe that we hold on common the belief that our quality and affordable education provides opportunities to a better life today and a better world Tomorrow.
On the share principles, it's with great generosity of the $2 six co founder Dr. Carl Johnson and his wife, Margo Johnson established in 2007, the $2 six foundation.
Through their foundation crawling Margo have funded the college and University education of many students around the world.
Many of them have joined through six and some are now in key leadership roles within our ranks.
Today, we are very proud to participate in the $2 six foundations mission by contributing $1 million on 2021 for their inspiring project as part of our environmental social and governance or ESG initiatives.
Our renewable commitment to the $2 six foundation is in part the outcome of a growing conversation of $2 six of the desire to be part of something even bigger than just the growing and innovative company.
My intent to respond to this call with a greater awareness of our place in the world.
And to scale, our intentions with actions.
Today I'd take this opportunity to acknowledge our heritage and history as we reflect this month on black history as we do on the United States Each February.
I would like to close with the definition of the word innovation, which has its origin in the wattenberg, meaning to regroup or to change not simply to invert.
And despite all of our successes in order to be ready to seize yet on seeing opportunities that lie ahead, but which are assured of comp.
We will continuously innovate and embrace change.
At $2 six our vision is of the world transformed through innovative materials vital to a better life today and the sustainability of for future generations and ends of our call today and we thank you all for joining us kind of a good day.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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