Q4 2021 II-VI Inc Earnings Call
Good day, and thank you for standing by and welcome to the 2.6 fourth quarter 2021earnings call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press the star 1 on your telephone please.
The advice of today's conference is being recorded I would now like the hand, the conference over to Mary Jane Raymond 2.6 Chief Financial Officer. Please go ahead.
Thank you Regina and good morning, I'm Mary Jane Raymond the Chief Financial Officer here at 2.6 incorporated welcome to our earnings call today for the fourth quarter of fiscal year 2021.
With me today on the call our Doctor Chuck Mattera, our Chief Executive Officer, Dr. Giovanni Barbarossa, our Chief strategy Officer, and the President of the compound semiconductor segment and our President Bob Bash on this call is being reported on Tuesday August 10.2021.
Our press release and our updated Investor presentation are available on the Investor Relations tab of the website.
Dash the 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 are subject to various risk factors and are subject to change possibly materially.
We do not undertake any obligation to update these statements to reflect events subsequent to today.
As required by law.
Our list of known material risk factors can be found in our form 10-K for the year ended June 30 of the 2020 together with our subsequent filings with the SEC.
And the form 10-K for fiscal year 2021 is expected to be filed on or about August 20th.
Our remarks today do not constitute an offer to sell or the solicitation of an offer to buy any securities.
No offering of securities shall be made except by means of the prospectus meeting the requirements of section 10 of the United States Securities Act of $19.33 as amended.
Finally, with respect to todays call. We will also present, some non-GAAP measures for which the reconciliations to GAAP are found at the end of each document that includes those measures such as the press release for the Investor presentation with that let me turn it over to Dr.
Chuck Mattera Chuck.
Thanks, Mary Jane Thank.
Thank you all for joining us today and for your interest in 2.6.
With the force surge of Covid clearly upon us.
We remain focused on the basics to ensure employee and workplace safety.
During the quarter, our supply chain and operations teams collaborated and again avoided the potential impact of <unk>.
The attracted supply chain issues.
Once again, our employees main things happened and got the job comment.
Indeed, we delivered a great quarter and of great fiscal year.
During today's call, we will elaborate on the excitement of last year and our strong long term opportunities.
Since we signed the merger agreement with coherent and started our fly wheels turning.
I have met individually with over 25 of the senior leaders of coherent.
I am deeply impressed by their core competencies and longstanding contributions to the laser and photonics industries.
The respect for the challenges that had to be overcome with each successive generation of technology.
The team orientation around innovation and their sense of excitement about the opportunities to continue to transform the world for similar to 2.6.
The ingredients great ingredients for a great start.
During fiscal year 2021, we celebrated the <unk> anniversary since of ophthalmic.
And we passed another important operating milestone having achieved $3 billion on revenue.
The 1 year after passing the $2 billion Mark and.
An amazing accomplishment despite the challenges.
Putting those associated with the operating during a pandemic.
Our revenues and our non-GAAP net income both grew just over 30% over the fiscal year of 2020, and we exited fiscal year 'twenty, 1 with a record $1.25 billion backlog.
Our gross is a testament to our market focused strategy.
The diversified global footprint.
The <unk> dominant of the acquired and developed technology.
On the agility around large customer intimacy.
Our ability to operate at scale.
Disciplined approach to the productivity improvements and the focus on our talent.
Now turning from a summary of the last quarter and last year 2 of long term view of our opportunity on the silicon carbide market. We are excited to announce the acceleration of our investments to scale the manufacturing of our silicon carbide substrates devices and modules.
To enable the acceleration of the electrification of the global transportation infrastructure.
In fiscal year 2022.
We plan to increase our investments to about $200 million on R&D and capital.
To continue to lay the foundation on which the grow their business to the next level.
Our silicon carbide business, which today is less than 5% of our revenue is targeted to become 1 of the largest businesses in our company inside 10 years.
We believe that our investments and opportunities combined with our ability to execute we will allow us to become well positioned in this large market with attractive growth dynamics.
Accordingly, we are planning incremental R&D investments of about 2% to 3% of revenue for the next few years.
We anticipate investing around $1 billion over the next decade as generation III semiconductors fabricated from wide bandgap materials, including Silicon carbide grow to underpin a number of important industry transformations Andrew.
And we are planning to establish a leadership position long term.
Giovanni Bob and Mary Jane will walk through the details of the quarter.
And with that I will turn it over to Dr. Giovanni Barbarossa, our chief strategy Officer, and President of the compound semiconductors segment Giovanni. Thank you Chuck despite the old challenges we faced during the past 12 months FY 'twenty, 1 was an exciting year for us and then the experience goals.
In the all of our markets.
<unk> posted the highest honor of ghouls more than doubling to just under 10% of sales, which allowed us to achieve of our market penetration and share gain.
The 1 year ahead of the plan.
This journey will continue as the accelerates our innovation roadmap, including multi jumps from <unk> photo diodes made the latencies and type of end of tonnage and delivery of new module functionalities to wafer scale packaging.
These molecules will provide the compelling value proposition of multiple end markets, including in the automotive.
And the occupancy monitoring systems on.
The increasingly recommended OLED required by U S and European on transportation safety legal items.
The momentum on the communications market continued with the strong 6% growth sequentially and strong bookings in the quarter.
In the telecom products for <unk> and for under the G grew 60% in Q4 sequentially driven by hyper scale data center upgrades.
On the Super cycle unfolds, we expect the demand for higher speeds on T was to be strong for the next 5 years.
We believe the super cycle be benefited total loss would be on investing for decades.
And can continue on from sustained investments required to remain competitive and complex also lets call the subsystems.
It's always seemed to 2021, we demonstrated our full of Honda and based on Legit Transceivers for next generation on 25, 6 and 51, 2 terabits per se on switches respectively.
While we will continue to contribute to the industry standards.
We are engaged with strategic customers for the development of 1.6 terabits per second on seamless, which will rely on our breakthrough semiconductor laser technologies capable of operating at 200 Chipotle for all stand of data breaches.
Q4 bookings for wound on part of split on Henkel and critical IC shortages for all the modules and line cards will overcome the Julian Q4 to post a 9% sequential increasing the revenue.
Our telecom line of the pump lasers also experienced record sales in the FY 'twenty 1.
The most pleasing the resilience of our diversification strategy, our industrial laser optics businesses and on.
All time record high for quarterly revenue growing by 50% in Q4 over the value of E M.
On the accounted for 11% of our consolidated revenue.
Growth was strong in both steel and fiber laser components.
Of our after market based on those for industrial leaves us posted the highest revenue month in June in our entire 50 years of installation.
And presently holds the record backlog with bookings back to pre COVID-19 levels.
The risk of dose of the industrial was enabled by a number of factors, including the recovery of the global industrial market, our market, leading optics. The competitiveness of our 16 semiconductor laser platform and the collaboration that we began with coherent in December of 2020.
Our balance I shall we call year on co markets, then on adjustables being molded fiber lasers with our remote the lives of policy.
To best in class of products that together provide the state of the output for months for welding of by the risk for electric vehicles.
While global IC shortages of being constraining the risk of goes on some of our above the lines. They have on the other hand, the become a multiyear tailwind for <unk>.
Our semiconductor capital equipment business.
Our semi cap revenue grew 12% sequentially in the quarter.
With the Super strong bookings of multiyear visibility, we recently increased our force cost for fiscal year, 2022, and beyond with corresponding investments in capacity.
This is driven by our expectation of a sustained supersized for build out the width of fiber capacity over the next few years.
To enable supply to catch up with demand and to support the increased investments in the onshoring of wafer fab the capacity.
We witnessed the healthy demand in this market with customers offering substantial price premiums to secure capacity of Wawa mental math, it's compulsion and ceramic based products and to help us accelerate our Newport the developments.
We expect this market to contribute significantly to our growth for the next few years and so we are committed to supporting our customers through continued investments in R&D and capacity.
Our revenue in aerospace and defense, despite the backdrop of motivate the market demand hit the <unk>.
Record in FY 'twenty, 1 any of you Paul with about 15% on a growth in the down market.
With the new defense budget, we expect the demand for components for new systems to address emerging threats will be increasing.
Regarding the silicon carbide.
Expand our capacity, we expect to take a meaningful share of the market by introducing part of our competitive cost for the 12 months ended reliability, while investing to expand our part of the offering from substrates to EBITDA, so wafers to chips the advisors and ultimately modules.
Over the next few years.
Any which way we look at the FY 'twenty, 1 will just an amazing year.
We look forward towards to come in the FY 'twenty 2 as we start our next 50 years.
And soon to be joined by our Korean colleagues over the life of mine in believing that the best is yet to come.
With that let me turn it over to Bob Bob Thank you Joe Audi.
Give you a short update on our Covid protocols supply chain management facilities planning and our coherent integration plan.
Our global pandemic response teams, our corporate and business leadership and all of our worldwide employees of doing a great job maintaining their vigilance and ensuring the safety of all of our employees.
Among our many safety protocols that we have had in place since the beginning of the pandemic. We have continued regular PCR and antigen testing of all on site employees.
We require employees and visitors to wear masks and all of our facilities.
And we maintain social distancing and cleaning protocols in all of our operations worldwide.
Our worldwide local pandemic response teams meet regularly.
All of our 70 plus facilities worldwide and our corporate pandemic response teams meet at least weekly with our site leaders to offer information provide guidance and ensure that all of our facilities and people of the resources that they need.
We have also retained and consult regularly with health care professionals in an effort to understand the current dynamics associated with this terrible disease.
All of our operating plants are considered essential we remain fully operational in all locations on the world. While most of our administrative staff are still working from home.
Supply chain challenges remain daunting.
And we are being managed and we are being managed 24.7 as an all hands on deck effort to secure our fair share of Fs of capacity at our suppliers.
Thanks in part for some of our strategic suppliers, who have worked very closely with us. During Q4, we overcame the effects of shortages that could have affected revenue as much as $40 million by our estimates.
We have been of good customer for many years and actually contributed to the development of many of our strategic suppliers, whom we brought together in January to lay out our requirements in anticipation of the current challenge.
As we confront the challenges of the fourth surge our operations in Asia, particularly on the Philippines.
And Malaysia are experiencing extended quarantine and isolation periods.
Which in addition to supply chain constraints could have an impact on near term production capacity, including Q1 FY 'twenty 2.
Besides of the potential COVID-19 impact on our ability to produce.
We are absorbing about an additional $3 million per quarter than our baseline of <unk> supply chain costs for components on freight.
With respect to our expected growth.
We have been actively evaluating our global footprint to accommodate among other initiatives the forecasted growth in our silicon carbide electronics business.
As we approach the end of the second year of the finish of our integration, we achieved 16% top line growth.
Advanced the margins from our finish our standalone position and delivered $165 million of cost and expense synergies on an annualized basis of year sooner than planned.
At less than half of the anticipated investment cost to achieve them.
We are excited to apply our playbook now as we turn to the coherent acquisition for which planning has commenced in earnest.
With respect to the regulatory process the applicable antitrust waiting period in the U S has already expired and all of our other regulatory filings are submitted in the required countries with caseworkers, having been assigned to all.
Our exchanges of information have been constructive and typical of our experience.
We expect the processes to conclude in an orderly manner.
Our current view is that our closing will be during the first fiscal calendar quarter of year 2022, as opposed to the fourth quarter of calendar year of 2021.
This is based on a better understanding of the agency's current case loads and their timelines.
We have also begun our integration and synergy synergy planning the.
The top U S base leaders from both companies have been meeting we've learned a lot about each other's jobs and we are planning to conduct similar networking events in Europe and Asia in the next few months.
Throughout 2.6 and coherent we're excited for the promise that this combination will realize with that I will turn it over to Mary Jane Mary Jane Thank you, Bob and good morning for.
First of all of a sincere. Thank you for all of our customers to say the 2.6 is the underlying driver of our growth we are honored to support your strategic goals.
Our Q4 revenue was 808 of $808 million plus geographically distributed as follows 40.
<unk>, 48% in North America, 23%, and China, 20% in Europe, 6% in Japan, and 3% in the rest of the world.
For the full year, the geographic distribution was 50% North America, 22% China.
18%, Europe, 7%, Japan, and 3% for the rest of the world.
In the quarter.
End market revenue distribution was 67% and communications, 13% in industrial including automotive.
7% in aerospace and defense.
5% of consumer for.
The 4% for semiconductor capital equipment, 3% in life Sciences, and the remainder is on other end markets.
Our non-GAAP gross margin was 38, 6% and the non-GAAP operating margin was 18, 4% the non-GAAP gross margin and the non-GAAP operating margin remained well ahead of the margins <unk> achieved right before the acquisition of <unk>.
We incurred $4 million of Covid expenses in the quarter of which 2 million is included on the non-GAAP.
This total includes the loss of work time and overtime and collectively these cost put downward pressure on the gross and operating margins in the quarter.
We also incurred $3.3 million of costs to deal with supply chain shortages, including expedited freight freight and unusual price on traces above our costs in the ordinary course.
This $3.3 million is included in the non-GAAP adjustments.
At the segment level. The non-GAAP operating margins were 15, 9% for photonics and 23, 7% for compound semiconductors.
Similar to last quarter comp semi margins were driven by a strong mix and optimize capacity utilization.
Our record backlog of $1..2 5 billion consists of $827 million for photonics and $425 million for compound semiconductors. The.
The backlog.
<unk> of orders that will ship over the next 12 months.
We have of course, many orders that extend beyond 12 months as customers attempt to secure capacity for what many consider to date of Super cycle.
GAAP operating expenses, which are SG&A, plus R&D for $211 million in Q4.
Excluding $21 million of amortization of $16 million of stock comp.
And on $12 million of M&A and integration costs, non-GAAP op ex was $162 million or 20% of around Covid.
And the 600 basis points below the Opex percentage of revenue just prior to the close of the acquisition when it was nearly 26% for <unk> and finesse, our combined excluding amortization of stock comp and transaction costs.
These improvements are driven by our accelerated the achievement of synergies, including productivity improvements and moving manufacturing to lower cost areas of operation.
The quarterly GAAP EPS was <unk> 59 of non-GAAP EPS was <unk> 88.
With after tax non-GAAP adjustments of $35 million in total, including the reversal of the positive investment gains.
The diluted share count for GAAP result is 116 million shares for non-GAAP results. The diluted share count was 125 million shares.
The GAAP and non-GAAP EPS calculations are in the last 2 tables of our press release.
Stock comp was $19 million for the quarter $3 million on comps and $16 million in Opex.
We expect stock comp for Q1 to be $22 million.
Cash flow from operations in the quarter with $127 million and free cash flow was $83 million, we paid down $15 million of our debt in Q4, and our net cash position is $175 million.
The interest expense in the quarter was $14 million.
For the full year.
Cash flow from operations was 574 million free cash flow was $428 million DSO was 68 days at the company's liquidity at June 30 was $2 billion.
Capital expenditures this quarter for $42 million.
For the year Capex was $146 million for fiscal year 'twenty, 2 we expect capex to be between 325 and $375 million.
As part of the management of our strategic equity investment portfolio. The company reported a gain of $7 million on the sale of an equity investment in Sweden and of $3.9 million gain on the IPO of a portion of another investment. This 1 in China, the $3.9 million gain.
Relates to a minority position.
Over a decade ago.
Depreciation was $50 million in the quarter and we expect our forward depreciation expense to be about $50 million to $55 million per quarter.
FX was the loss of $1.3 million, primarily driven by the Swiss franc and the RMB.
The effective tax rate in the quarter was 12% due to ongoing benefits of renewed high tech status in several countries lower guilty income due to the favorable mix of earnings around the world and increased stock compensation exercises we.
We expect the tax rate to be between 19 and 21% for fiscal year 2002.
We had $12 million in cost for M&A integration and other costs largely for coherent and finished.
With respect to our series B preferred stock issuance, we've reported a $10 million dividend in Q4 that will be deducted from net income in the same manner at the $6.9 million dollar dividend is deducted for the series a preferred stock.
Turning to the outlook for Q1 fiscal year 'twenty 2 our outlook for revenue for the first fiscal quarter ending September 32021 is expected to be $780 million to $830 million and earnings per share on a non-GAAP basis.
At 75 to 90.
At 118 million shares.
For Q1, we expect both of the series I under series D preferred stock to the anti dilutive. So you should deduct $17 million from your calculated non-GAAP net income to arrive at net income available to common shareholders. The divide that by 118 million shares to arrive at non-GAAP EPS.
This is how the above EPS range is calculated.
This is of today's exchange rate on an estimated tax rate of 20%.
The EPS range also includes our investment of up to $20 million for Silicon carbide expansion.
For the non-GAAP earnings per share, we add back to the GAAP earnings pre tax the amounts of $21 million and amortization of $22 million on stock comp and 11% to $15 million in transaction and integration costs. The.
The estimated Q1 share count as of 111 million shares for GAAP and 118 million shares for non-GAAP the.
The actual dollar amount of non-GAAP items, the exchange rate the tax rate and the share counts are all subject to change.
Before we go to Q&A.
Just as a 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 product mix customer orders supply chain shortages, both upstream and downstream competition changes in regulation.
Ongoing requirements to combat the COVID-19 virus and general economic conditions.
We would also ask that each firm limited's questions to 1 question with no follow up as we would like to try to get everyone. In during this call. We expect to end. This call not later than 10.15 a M.
Regina you May open the line for questions.
At this time, if you'd like to ask the question simply press Star followed by the number 1 on your telephone keypad again that the star 1 for any questions. Our first question will come from the line of Paul Silverstein with Cowen. Please go ahead.
That's gross.
I was hoping you could give us some insight on what you're seeing in China. Both during the quarter more importantly, looking forward given some concerns of the bulk of close.
Paul on your question wise, you'd like to have US give you some insight on what we are seeing in China.
Hum.
And the second part was in particular in light of.
The first of the market for some of your peers.
Yes, so Paul the thanks for your question is job on the here so.
Particularly in the hospital.
We have seen.
Pretty much all of our fiber lasers customers as an example.
The strong demand we believe the are gaining share of on the.
In the.
World market and has.
It has been.
Oh.
As I explained in my commentary has been the window of record the <unk>.
In many ways from the optics for the bumps and so.
So we are being the benefiting from those customers taking share.
So China has been very strong for US now moving forward of course, the some uncertainty about the.
The the evolution of the body of those like everyone else, but the we have not seen so far.
The slowdown in the demand for components of <unk>.
Equally for fiber lasers.
Guys on the optic side I assume with the budget awards now how the good food or for you.
Speaking of pick up.
The demand on your comms business.
In China.
Yes likewise.
Yes, absolutely the same save is similar.
Thank you.
Your next question will come from the line of Ananda Baruah with loop capital.
Hi, guys. Congrats on the so on execution this quarter and I appreciate you taking the question.
I mean somewhat related just in general of core business.
He has really good momentum this quarter.
And it sounds it feels like there might be a pickup in some of the debt markets a little bit sooner than expected.
Is that accurate I guess is that your guys' core view as we head into September quarter here.
And.
And if so what do you see as the key drivers as you go through the the next 6 months of the year appreciate it. Thanks.
Well the separately.
The chart on it.
Definitely.
The Super cycle unfolding for upgrades, the close of the world, particularly in the automated to which we're participating.
The explained in my commentary about with the 2 onward for on the next generation of <unk> and even the bump was instead of bids.
For the second the transceiver so the.
Of the mine the will continue.
At least for the next 5 years the cycle will continue for quite a long time.
I think in the hospital, it's coming back pretty strong we have seen.
Pick up in.
General demand demand for of our laser components again, particularly fiber lasers.
And.
Seeing the power of the comments I believe of bi.
The vehicles of adoption of silicon carbide devices of modules.
And so I think the.
Those are going to be the.
For the strongest of the high that we see also as I mentioned on in the.
In the prepared remarks, we think of the despite the defense budget these kind of.
Almost flat year over year, but we think that the theres going to be an increased number of the less.
Demand for new designs, new products for the medicine.
And so we will participate with debt.
The growth in the magnitude.
Giovanni of you're seeing it like the is it is demand demand backdrop of little bit stronger today than maybe you thought it would have been 90 days ago.
Yes.
I am sorry, we need to move to the next.
Thank you thank analysts thank you.
Your next question will come from the line of Jim Ricchiuti with Needham <unk> Company.
Hi, Thank you Yeah, I think I heard in your opening presentation that you you overcame some of the component issues that would have impacted revenues by about $40 million I'm wondering if there is if you can give us any sense as to what you might have been able to ship in terms of revenue had it not been for the <unk>.
On the constraints and with respect to your fiscal Q1 guidance what type of revenue headwind are you assuming for components and some of the supply chain constraints. Thank you.
So for the Q1 guidance I would say that we're looking at probably the same quantum.
In the first quarter of that we were looking at in the fourth quarter.
So that's that's 1 thing to answer and I think secondly.
As Bob has already said overcoming 40 million and pretty much.
A day to day hand to hand combat.
It's it's the certainly the demand is there you can see that really in the in the book to Bill.
Would you have a view on this Bob.
I agree completely the Mary Jane.
A lot of the supply chain challenge has really come from the integrated circuit.
Supply chain constraints and the team has really done a nice job outside of Ics and a real nice job with the.
With getting our IC supply chain.
Requirements for Marine.
I agree completely.
Do you see any improvement as you look out over the balance of fiscal 'twenty 2.
From from the standpoint of supply chain.
Okay.
I'm sorry.
Some of your question was what do we see any contemplation of the supply chain challenges forward.
Yeah.
Yes. Thank you Jim this is Chuck.
Hey, Jim.
We don't have a crystal ball and the challenge associated with it is it's not only affecting us for of course is affecting our customers.
And we have to take it we have of long term view.
We have actions consistent with that long term view.
We have backup plans that we're trying to execute and keep in place and at the end of the day. This is a job that has to be done every single day.
And so I'm optimistic that it will eventually clear out.
But at the moment, it's not looking like anybody is going to be able to quote exactly 1.
Okay.
Thanks very much on just.
Sure No problem just for a later board on I'm, sorry to have to ask you. This but just to try and get everyone on the call. We probably can't have follow ups, but feel free to jump back in line and if we can do a second round we'd be happy to.
Your next question will come from the line of John Marchetti with Stifel.
Thanks, very much Mary Jane I, just wanted to ask in terms of the fiscal <unk> guidance. When we look at the midpoint of the ranges. We've got revenue essentially flattish, we've got EPS down, but I'm a lower share count can you help us just understand what we're thinking about in terms of gross margin and <unk>, but the higher opex that you.
From some of the the prepared remarks.
Sure. So first of all John.
You know being a little net to our company of the fact that the midpoint would be flat to Q for Q4 has historically been our largest quarter and largest by a good mile.
So historically, we have had Q1 down even in very strong markets on 2016, 17, and 18 Q1 was down of those years on the prior Q4. So first of all the revenue is probably holding in very very well and then with respect to the midpoint of the guidance as we described we did not take.
Out of the non-GAAP range, roughly about $20 million that will be spent on the investments for silicon carbide. So a.
If you tax effect of that and do it since in the neighborhood of <unk> <unk>.
<unk> 14 cents, so that is really the major difference.
Going forward.
And as well as we do expect as Bob has already said to continue to have cost to try and battle supply chain shortages as well as dealing with COVID-19, but the major difference when you look mid point to what we delivered in Q4 was the.
Silicon carbide investment.
Okay. Thanks.
Sure.
Your next question will come from the line of Mark Miller with the benchmark company.
Congratulations on your record results.
Can you say about you had a very strong 204 hundred gig transceiver sales of what about the pricing in that market as that pricing improvement with the strong demand.
On the pricing this of the typical.
Typical of communication.
Market pricing, we've seen for us for the year.
But we tried to.
Really focus on the high end products.
For example on the.
On the ZR for month, where portions of focusing on the high power.
The version so we can at least eliminates opposed simple do look inside of Alere to doing basically IPO of the DWP M. So when you fall and that's enabled by our indium phosphide technology.
So we are trying to focus on those.
Thanks, Sean the segment of the market that offer the best of.
Margins on pricing, but the dynamic a speed of adoption over time, and so forth pretty much unchanged still global question.
But.
As I said by focusing on the high end of the market, we can do better than.
An average I would say.
Your next question will come from the line of Richard Shannon with Craig Hallum.
Hi, guys. Thanks for taking my questions as well the question for you the trucker Giovanni on Silicon carbide here.
The.
Listen out some.
What looks like a pretty strong increased investment in silicon carbide, where you've already talked about this market for 4 years share you built up of the capability across the stack here can you talk about me characterize whats driven you to put.
The decrease the amount of investment as it has been an improvements in internal product technology milestones or conversations with customers et cetera on maybe just characterize why youre, where youre, making an increased level of investment on top of whats already been strong. Thanks.
Richard.
Actually it's all of those things are confidence in the quality of our material.
At this point in time combined with the investments that we've recently an announcement in the last 12 months.
And the very.
Parents.
Acceleration in the need for silicon carbide, and the demand thats coming here inside the next 5 years.
We would like to be well positioned as I said in my remarks to lead in this market.
So we are stepping it up.
And it couldnt be more exciting for us.
Okay.
Your next question will come from the line of Tom <unk> with D. A Davidson.
Yes. Good morning on those same lines. When you look at the 1 billion dollar of investment projected over the next 10 years for <unk>.
Big picture of point of view is the main focus is going to be on increasing your capacity in the space or is it going to be more on the R&D product hydration of different silicon carbide pieces.
Both Tom Thanks for your question Tom.
We have to do both of the demands for.
Over the next 5 to 10 years are going to grow exponentially.
So we need to be in a position to be able to scale everything that we're doing but we need to get the device on the module technology and all of the process technology that we have in place we need to get that organized we need to get of qualified and we need to get the platform in place to scale in the Meanwhile, we will be making.
On a large even larger investments than what we had been planning to get the silicon carbide substrate capacity in place.
For for what we need and for also what the market needs as well, Okay. I would say on balance in the $1 billion of probably leans more to capital the R&D, but Chuck is perfectly correct that we need both of them.
Your next question will come from the line of Chris Rolland with Susquehanna.
Hey, guys. Thanks for the question.
Regarding consumer it was great doubling for the year. The you guys had there, but perhaps you guys can give us a little bit more color on some near term trends and then your expectation is as we move into the back half of the calendar year.
Hey, guys. Thanks. So this is javan. Thanks for your question on so we expect the.
The typical seasonality in the in the.
The market.
We also.
<unk> 2.
Materialize on new design wins that will add up to the the <unk>.
On the wins what kind of.
And so.
So I think the.
It will be.
For the pressure on price for sort of like typically bid on <unk> from a combination of.
The improvements in the experience curve as well as the design improvements.
And I expect that over time.
The mentioned in my prepared remarks over time the market the market will continue to vehicles the valuable for us.
So in the second half of the year will the of the Continental will experience. The typical seasonality trend and then will the will continue to grow year over year.
The results of our leadership in.
The number of bonds the support the.
The market's lasers.
The lenses divide those modules.
The fourth.
Your next question comes from the line of the MS Chatterji with J P. Morgan.
Hi, Good morning, I had a quick 1 for Mary Jane.
Thanks for your comments about being connect the investment in the fourth quarter. I was just wondering if you can give us some direction on the magnitude of and commenced the investments acquired in fiscal year 'twenty 2 as we kind of think about the margin progression here for the kidney. If you can also comment on what levels do you have to drive margin progression as you offset some of these incremental.
The investment as.
As well.
Right. So first of all with respect to fiscal year 'twenty 2.
Spoke to about $200 million of the way that breaks down is roundabout $60 million to $70 million.
The R&D, particularly with respect to the.
The design for manufacture ability and round about the balance of that 200 million medicine capex. Okay. So that's for this year.
With respect to.
Margin improvement overall, I mean, certainly 1 of the things we've seen for fiscal year 'twenty, 1, particularly on Giovanni's segment is the the manifestation of gross and many of the markets in which we had been investing for a long time, whether that be consumer of our silicon carbide etcetera. So as those.
Laser based and material business has.
Grown material businesses accelerate through growth, we will see better air cover so to speak.
And better mix as we on the.
For as it affects the gross margin for sure I don't think our company has any less focus on the ongoing relentless focus on opex, particularly as with respect to G&A.
That I think will continue to work to keep that flattish so to speak on growing revenue net all sell allows if you just think about percentage of sales.
That to not increase and maybe decrease a little bit as a percentage of sales. This is the G&A as the R&D is increasing that will help deliver overall decent results for the company.
Your next question will come from the line of Amanda <unk> with Citi.
Hi.
A follow up question on margin accretion and how and what's the bigger driver here of gross margins is it sort of fixing some of the supply chain issues that are somewhat out of your control or is it more of a mixed scenario.
You know what does it look like December quarter could be a step up in margins.
Right well first of all make no mistake about mix makes a big difference and.
You can see that if you look at the margin profile across the 4 quarters of the year, whether you look at the gross margin when you look at the segment margins. So.
Mix mix makes a big difference I will say that certainly the fact that we are seeing a very nice Renaissance here in industrial will continue to help I mean as much as we might think that's the oldest business into 6 it retains 1 of the best margins in the whole company. So that's the very part.
The thing so any of the drivers using our grown materials of our laser diodes are very positive additions to the mix.
So that's probably the largest driver of of the margin with respect to the supply chain shortages, while we can add obviously estimate inc.
Priest freight or Primo.
Premium pricing on our increased long term commitments to customers. Those are things that are very easy to calculate what isn't as easy to calculate is the literal all hands on deck, where people are coming out of other functions to work on this debt potentially.
Take them away from other improvements that they may have made been able to make so I think it's the supply chain eases and there is more focused on than just being able to ship product.
That absolutely does help we will always keep our employees safe.
We could see on easing over time of the Covid costs, but generally speaking I think that's probably not happening anytime soon ultimately it really does come down to mix and operating efficiency.
Your next question will come from the line of Simon Leopold with Raymond James.
Thanks for taking the question.
Just a very very quick clarification for Mary Jane and then the question.
I wasn't clear if you excluded some charges in your pro forma related to the Covid expenses or you just we're highlighting those but the question I really would like to ask us to get a little bit of quantification around the hyperscale business you've been doing.
It sounds like that's been growing nicely I just wanted to get a better idea of what portion of the revenue are you getting from hyper scale now and how does it compare to a year ago. Thank you.
So with respect to Covid.
We we incurred about for $1 billion, or so and we non-GAAP $2 million of it said the goal was to try and non-GAAP kind of the surge of it and at the same exact thing we did last quarter with respect to the Hyperscale Giovanni.
Yes.
I would say that the number of <unk>.
There is increasing.
As we mentioned in the past.
I think because of its all of the.
The combination with Phoenix zone.
The deal pending.
Moving customers with kind of weighted for the combination to happen. So the weight on the sideline and we're kind of gaining share back.
Because of that and obviously, we all of them working together as 1 company in the us.
The high confidence in the team which is.
During the first consequent adjusted job of getting share, particularly as I mentioned earlier with the.
The high end.
Side of the deposits.
I would say that of the communications business.
The transceiver business.
I would say that the non booth is closer to 30% and building.
And over time.
There may be.
The bonds of between maybe.
Hum.
Datacom telecom.
I have the scale.
Super scale. However, you want the define them over time, but I think of it just depends on what the the Phoenician of <unk>, but I think that the person.
Centers of glucose.
Your next question will come from the line of Tim <unk> with Northland capital markets.
Hi, Good morning, I wanted to come back on the.
Kind of question about the Q fiscal Q1 guide on a sequential basis because you're.
While I appreciate the historic seasonality of the seasonality has changed a bit or you should be seeing at least some degree of uplift in consumer.
And it sounds like from a booking standpoint, and just the overall.
Tone of business that the Datacom and E comm should be growing as well.
So I guess I got a couple of questions should we look at kind of.
Historic seasonality in industrial and other.
Parts of the business is kind of seasonal offsets to that and perhaps more importantly.
Are you building in that $40 million component headwind.
On to the guide and to overcome but as <unk> done this quarter would represent upside.
Thanks.
So yes to the last question because obviously the EPS guide goes with the revenue guide right on the same kind of range basis. So yes. If we were at the at the top end or over deliver that by some excellent amount of work by our guys.
I would imagine that we would be at the top end of the EPS as well.
Second of all while you are correct that.
The second half of the calendar year, our Q1 and 2 on.
The stronger on consumer there is still a seasonal downtick in we had a very very good consumer quarter last year on it was still down on Q4, so but all of that to say that generally we do see a little bit of of stepped down in industrial but at the end of the day I.
I think no matter, how you kind of it we're probably looking at a pretty decent Q1.
From a top line perspective with the excellent work of all of our colleagues around the world.
So I hope that answers the composite of your questions Tim.
Once again for any questions. Please press star 1 on your telephone keypad. Your next question will come from the line of of meta Marshall with Morgan Stanley.
Great. Thanks, Giovanni I, just wanted to circle back to your commentary on the 3 D sensing market and just you know as you talk about growth in fiscal year 'twenty 2.
The design like what just what drives that is the design wins outside of kind of your lead customer of ecosystem is that product expansion within that ecosystem, our share of games like I know of.
It's tough to parse out, but if there was a leading factor in what would lead to the growth that would be helpful.
Yeah. Thanks for raising for the question of its a combination yes. There is not the simple. Please on I think is the.
The share gain will continue will eventually stabilize over time in the next 2 quarters.
And.
And then the these new opportunities.
In the.
In cabin sensing for automotive.
And then as I said, the new design wins.
I think the.
So the reason of expectation of the overtime the.
<unk>.
The specific market will continue to grow for us.
And it's also.
There's another factor, which I mentioned in my remarks, which is literally.
The we'll sell it no. The only so we are moving we are increasing the offering from just the lasers.
<unk> filters, which we did in the past 2 of.
It's.
I see the Valuers.
And modules so altogether the vessel market is expanding for us.
Therefore, we expect the revenue to go to.
And I will now turn the conference back over to management for any further remarks.
Thank you very much Regina and thank you to all of the who joined US today. We know this is a busy earnings season for you and we look forward to talking with all of the U S. As time goes on here. So thank you very much and have a good day.
Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
[music].
Yes.
Sure.
Yes.