Q3 2022 II-VI Inc Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the two six incorporated fiscal year 2022 third quarter earnings Conference call. At this time, all participants are in a listen only mode.
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 Chief Financial Officer. Please go ahead.
Thank you and good morning, I'm Mary Jane Raymond the Chief Financial Officer here at two six incorporated.
Welcome to our earnings call today for the third quarter of fiscal year 2022.
With me today on the call our Doctor shut material, our chair and Chief Executive Officer, and Dr. Giovanni Barbarossa, our Chief strategy Officer, and the president of the compound semiconductor segment.
This call is being recorded on Tuesday May 10 2022.
Our press release and our updated Investor presentation are available on the Investor Relations tab of the website.
I actually I dot com.
As a reminder, our remarks today may contain certain forward looking statements. These remarks are given in the context of today only.
They are subject to various risk factors and subject to change possibly materially we.
We do not undertake any obligation to update these statements to reflect events subsequent to today, except as required by law.
Most of our new material risk factors can be found in our Form 10-K for the year ended June 30th 2021, together with our subsequent filings to the SEC.
Our remarks today do not constitute an offer to sell nor did they constitute a solicitation of an offer to buy any securities.
No offering of securities shall be made except by means of a prospectus meeting the requirements section 10 of the United States Securities Act of 1933 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 contains those measures such as the press release or the investor presentation with that let me turn the call over to Dr. Chuck Mattera Chuck.
Thanks, Mary Jane.
Morning, everyone and thank you for joining us.
This past quarter and indeed, the past couple of years has been exceptional in every conceivable way.
Well, we continue to face unprecedented and dynamic challenges.
<unk> dedication to operational excellence is paying tremendous dividends.
Our one to six team around the world continues to rise to the occasion every day.
Pro forma with extraordinary effort resilience determination and success.
In addition to our focus on operational excellence, our strategy of participating in markets underpinned by large mega market trends.
Continuous to lead to long term transformative.
A stable growth.
And unwavering commitment to our customers who serve these markets is creating deeper intimacy and even more opportunities for growth.
From a financial point of view in short we delivered another exceptional quarter with $828 million of revenue, a 6% increase year over year and above the top end of our guidance.
Our customers clearly want even more of what we offer.
This was evidenced by the tremendous surge in demand as our global sales team again booked a record quarter with an amazing $1 $2 billion of new orders.
This represents an increase of 48% compared to a year ago.
And our backlog of $2 1 billion grew 88% year over year with a substantial increase in bookings contributed by both segments.
Looking at the quarter in more detail, we continued our disciplined cost controls and productivity improvements, which contributed to our solid non-GAAP earnings per share that was at the top end of our guidance.
Driven by strength in our Datacom networking business for large enterprises as well as for Hyperscale, Datacenters and supercomputing clusters that underpin the cloud in a matter versus.
Photonics solutions increased revenue to $568 million or 12% compared to last year.
Our growth was led mostly by Datacom, which was 40% of our business in Q3.
Datacom grew 15% sequentially and 26% year over year.
Most of our Datacom revenue comes from Transceivers and of those just under half are now 200 G and above with 800 G. Now just beginning to ramp meaningfully.
I'm thrilled with the momentum that we've built since we acquired the transceiver platform more than two and a half years ago.
As we envisioned at that time it has become an outstanding engine of growth for our business.
The Datacom business is driven by the growing footprint of cloud computing sustained by large scale investments that our customers continue to pour it.
Computing is moving to the cloud to a degree that is profoundly transforming many industries.
It is enabled by high speed optical networks carrying data to and from consumer devices at the edge of the network and that are themselves increasingly computer power and sensing capabilities.
We're witnessing the convergence of communications computing and consumer electronics, which is at the core of the Mega trends driving our growth.
As you know $2 six plays a leading role in the buildup of the global optical Communications network.
As a result, our broad portfolio of products remains in high demand and is growing.
Currently our ability to ship such products is highly constrained by the availability of semiconductors.
Overtime, we expect these constraints to ease.
In the meantime, we continue to work hard in collaboration with our supply chain partners and our customers to mitigate the impact of these shortages, including focused product technology and manufacturing innovation efforts.
We continue to advance our telecom transceiver technology.
We are also executing on a multi site capacity expansion plan.
Putting significant capital investments to enable our future growth.
We fully expect the super cycle to continue in the face of broader economic challenges impacting other industries and these capacity expansion capital investments position us very well as the worldwide supply chain pressure eases.
And coherent transceiver technology, we continue to make great progress.
In April Windstream announced the completion of the industry's first 400 G zero plus interoperability trials enabled by our applicable transceivers, which impressed with its industry, leading output power. Thanks to its underlying indium phosphide device technology.
Earlier today, we announced that we are first to market with a new node on blade platform that integrates an entire rotem node.
Into a single sub system based on a unique wavelength selective switch amplifier and high resolution channel monitor technologies.
This new platform promises to transform roto networks by enabling them to be more compact consume less power being more flexible and enable lower cost networks.
Connected to the access network is the vast internet of things.
We are an increasing number of sensors consensus the world around them.
Optical sensing and consumer electronics is especially exciting with the comment of extended reality in the med diverse.
These are also driving new use cases for our broad portfolio of products and the compound semiconductor segment.
Fluids semiconductor lasers driver electronics metal lenses high index wave guides and advanced materials.
And three D sensing for smartphones on the heels of a substantial increase in share over the last two years, we are on track to achieve design ins with new customers.
While our revenues in consumer electronics were down in Q3 as expected due to seasonality.
It was offset by the explosive revenue growth in semiconductor capital equipment and industrial markets that include Silicon carbide.
In the semi cap market global shortages in semiconductors have become a meaningful opportunity for us as well.
Revenues in semi cap grew 34% year over year.
The tens of billions of dollars that the industry is investing to build new fabs are driving the increased demand for immersion lithography tools as well as the most advanced semiconductor fab technology, such as E UV lithography.
We are aware of our responsibility as an extremely important part of the supply chain.
So we are investing in manufacturing capacity to keep with the pace of demand.
Our revenue and industrial grew 13% year over year fueled by Silicon carbide.
Our silicon carbide wafer, finishing line in Fuzhou is now operating at full capacity.
And our vision of establishing a leadership position in a wide bandgap electronics is on track.
Thanks to our customer engagements that are expanding rapidly in the U S Europe and Asia.
We are becoming increasingly embedded in the global automotive supply chains.
As the transition to electric vehicles paves, the highways with green and clean transportation networks.
No I would like to conclude with a few comments specifically about our supply chain.
And our pending merger with coherent.
First on the supply chain.
Revenues in the third quarter were $65 million lower due to the supply chain constraints.
Our Q4 guidance anticipates the gap growing to about 100 million as the rate of demand accelerates even faster than our increased rate of supply.
In fact, we expect that our full demand for semiconductors will continue to outstrip our suppliers capability.
At least through this calendar year, even as they add capacity.
I would like to acknowledge all the hard work by our <unk> team, our suppliers and our customers and mitigating the impact of unprecedented supply chain challenges.
Thanks to our close collaboration with our strategic supply chain partners.
Extensive coordination with our customers and the strong dedication of our global operations teams.
We continue to effectively manage our way through these complex challenges.
Regarding the coherent acquisition, we have completed a major integration planning tasks.
As you have seen by now we refiled the U S. Hart Scott Rodino clearance on May 2nd and continue to have cooperative discussions with Sandra.
We anticipate closing the acquisition before the end of June .
Like the 206 people.
Coherent team is truly exceptional.
It has been a pleasure to work with them as we plan our future together.
We really look forward to the combination and the opportunities to unlock value.
With that let me turn it over to Dr. Giovanni Barbarossa Giovanni.
Thank you Chuck and good morning, everyone.
We are pleased to report that we continue to make progress with our silicon carbide based devices for power electronics.
And our engagements with customers in the U S and Asia I expanding rapidly.
We sampled our first automotive qualified MOSFET devices, and where Washington, Atlanta loosely to secure our first design wins.
We have also begun shipments of gallium nitride on silicon carbide devices for wireless applications.
Our substrate sales were robust for both power and communications applications.
We're at about 70, and 30% of the substrate sales in the quarter respectively.
Sales for power, that's only increased 17% sequentially.
Our expansion in capacity for the manufacturing of indium phosphide based devices.
<unk> emails and the D M ALS for Datacom and telecom is proceeding according to plan to support both internal and external customers.
As a result of this expansion, we expect to start generating incremental revenue from our newly expanded sites in the second half of the calendar year.
During the quarter, we sustained that high level of production for the 19 nanometer pump product line to support the current demand and the strong fully cost for them and amplifier products in the second half of the calendar year.
Revenue in the industrial market grew 13% year over year and after market sales for laser components reached an all time record in Q3 in North America, while sales in March with an old time of vehicles globally. Indeed.
Indicating a high level of days of usage in the installed base good toxic for industrial activity overhaul.
In Q3, we experienced a gain what we believe is evidence of a multiyear demand cycle for semiconductor capital equipment enabled by our differentiated composite materials and Daimon baseball does.
And so new wafer fabs being built around the world are driving our customers to request incremental output and to continue to expand our manufacturing capacity, which generated record bookings and it had been it was last quarter.
We are proud to be doing Gaba box to help the semiconductor and electronics industry to increase production of worldwide as part of a global effort to eliminate the integrated cichlids shortage.
While our consumer business sales with <unk>.
Typical for the seasonally low Q3.
The qualification of all new products is on track.
And we expect the strong revenue growth in the second half of the calendar year as a result of the incremental investments in technology and Capex, we have been making to scale new platforms for new applications.
Clearly our results this quarter demonstrate that our strategically diversified part of the portfolio office long term release resilience to market dynamics and generates multiple vectors of growth in fast growing segments of the markets we serve.
With that let me turn this over tomato things eight months from AG.
Thank you Giovanni and good morning.
End market and geographic breakdown of our $828 million of revenue can be found on the fourth page of the investor presentation.
Q3, non-GAAP gross margin was 46% and the non-GAAP operating margin was 28%.
The results include approximately $7 million of progress payments on development programs I think partially supported by customers.
Supply chain costs until the costs, a total of 14 and a half million dollars are not excluded to arrive at non-GAAP results.
At the segment level, the non-GAAP operating margins were 14, 4%.
Photonics and 34, 7% for compound semiconductors.
Our record backlog of $2 1 billion consists of 1.57 billion for photonics and $560 million for compound semiconductors.
As we have stated this increase in backlog is a function of demand.
Partly from the industrial semiconductor capital equipment and communications end markets.
GAAP operating expenses SG&A, plus R&D were $215 million in Keith's right.
Excluding $10 million and amortization of $17 million of stock compensation $13 million in startup costs and $12 million of M&A and integration costs.
non-GAAP opex was $163 million or 20% of revenue.
Quarterly GAAP EPS was <unk> 28 cents and non-GAAP EPS was <unk> 95.
With after tax non-GAAP adjustments was $80 million in total.
The increase in the non-GAAP adjustments compared to last quarter.
A whole quarter of interest and fees of $33 million related to the place debt to finance coherent.
Our transaction.
The diluted share count so the GAAP results with 117 million shares and for non-GAAP share Count was 126 million shares the GAAP and non-GAAP EPS calculations are in the ending tables of our press release.
Pre tax interest was $43 million. This includes $10 million of our underlying interest and $33 million of interest and fees on the debt for the coherent transaction.
Cash flow from operations in the quarter was $36 million and free cash flow was a use of cash of $59 million, including capex of $94 million and a build a strategic inventory of $60 million in the quarter of 183 million for the first nine months of the fiscal year to support our growth and customer request to accelerate.
Deliveries from the backlog.
For FY 'twenty, two we now expect capex to be at or above the top end of our range of $325 million to $375 million driven by our expansion in silicon carbide and indium phosphide.
We paid down $15 million of our debt in Q3.
And our net cash position is $288 million.
The company's liquidity at March 31.
It was $3 $1 billion.
The tax rate in the quarter was 22% and we expect the tax rate to be between 18 and 20% for fiscal year 'twenty two.
Turning to the outlook for Q4 fiscal year 'twenty two.
Our outlook for revenue for the fourth fiscal quarter ending June 30th 2022 is expected to be 840 to 80.
And earnings per share on a non-GAAP basis 85 cents to one dollar.
Share count is 126 million shares for the whole of the guidance range.
The EPS calculation, including the dividend treatment as detailed on table eight of the press release for the low mid and high points out the guidance.
This is at today's exchange rate and an estimated tax rate of 19%.
For the non-GAAP earnings per share, we add back to the GAAP earnings pre tax amounts of $19 million and amortization of $17 million in stock comp $48 million in transaction integration startup and other related costs.
The actual dollar amount of non-GAAP items.
Tax rate exchange rates and the share counts are all subject to change.
Before we go to the Q&A just as a reminder, our answers today may contain certain forecasts from which our actual results may differ.
To a variety of factors, including but not limited to changes in mix customer changes supply chain shortages, both upstream and downstream competition changes in regulations.
COVID-19 protocols and global economic conditions.
We welcome your questions and expect to end this call not later than 10 o'clock. This morning.
You May open the line for questions. Thank you.
Yeah.
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 Ananda Baruah from loop capital. Your line is now open.
Hi, Good morning, you guys, yeah listen can congrats on the strong execution and on the on the nice results.
I a couple if I could Chuck just in the press release and in your prepared remark you characterized a what.
What you saw is a tremendous surge in demand and so you just love kind of context around Oh, sorry is that stronger than you thought it would be 90 days ago, and and and did you see it like I guess any context around sort of the linearity through the quarter and that'd be great.
A quick follow up thanks.
Thanks, Amanda and good morning, yes, indeed, it was stronger than we forecasted Android accelerated throughout the quarter.
And.
Shop to the.
To the to the backlog.
I mean tremendous strength in new orders and tremendous growth in backlog.
I know that I believe was in sort of like second half of last year with backlog became keeps out of a hot topic, you guys gave us some context around it.
Why you felt the backlog with a high quality.
I'm going to sort of pay.
Paraphrasing, if maybe poorly but you were sort of building your shipping to be shipping capability to build.
And as a result of that you felt that was a pretty pretty solid way to sort of check the backlog quality could you just speak to the backlog quality now that now that it's it's it's absolutely look at it as it is and how you guys feel about that that's it for me. Thanks a lot.
Well first of all thanks.
No no no yeah.
Yeah first of all on the one hand with the supply chain shortages accelerating.
Many of our customers have increased their visibility that they are giving us in order to allow us to put longer term.
Orders on our.
Our suppliers. So that's the first thing and then when we receive those longer term orders, we do clarify with them what they.
They are expecting in terms of deployments on their side and we particularly do that.
If there was a capital.
Investment required because we wouldn't put the capital and if we thought we were just building for somebody's inventory not to be deployed.
Beyond that of course, we also watched the backlog we watched the data.
To see if the dates are moving.
That is a very early sign we obviously look at depot things very very carefully and deep bookings are reported every day, there arent that many of them.
And then finally in cases, where we have inventory as part of an agreement Thats gone on for years Thats, a normal practice to have some of our inventory sitting at the customer site, we watched that area. It's typically referred to as the kids. We watch the case to be sure that we understand whether that is moving that inventory is actually moving.
And those are the main funds that we use but the main reason that the backlog is growing as I indicated, it's really demand and in order to get the correct picture up demand the supply chain.
Many of our customers have worked collaboratively with us to have a longer dated visibility.
That's that's really helpful. Mary Jane. Thank you guys. So much appreciate it and then just before we go to the next question.
I just wanted to let you all know Chuck will be with us until about 10.
10 minutes of 10, and then Giovanni and I'll be here through April .
One o'clock, but let's go to the next question.
Thank you. Our next question comes from the line of Paul Silverstein from Cowen. Your line is now open.
Thanks, guys I apologize if you suddenly I missed it but what was the margin impact from supply chain.
In March what do you expect it to be in June I heard your comment about revenue.
So the supply chain costs this quarter were about $8 million.
The Covid costs were about six of that is a composite of this 14 in Manhattan. So it's about a little about one percentage point.
And that's what you were expecting.
Sorry.
So that's what you're expecting for Jim.
I would say that it's probably not less than that.
It could be higher but.
It's probably not less than eight and a half.
Mary Jane.
I think virtually every company in networking comm equipment optical close this quarter cited an impact.
Somewhere in the 200 to 300 basis point range and average margins some somewhat better so I'm somewhat worse.
Thoughts for you.
You seem to have done a very fine job any thoughts for where margins can go.
Given the significant increase in costs over the past what appears to be over the past 90 days.
Thoughts for where your margin structure could go over the next year.
Well first of all I think when comparing supply chain costs between.
Any of the companies in our sector Im sure that everyone, who is giving you a number is giving it to you very accurately but it may not actually be the same content. So in our case, we just gave the actual excess costs to try and get parts above what it would've normally costs to try and get them in the door. Other people may be including we didn't but we could also do.
They may be including what's the revenue they couldnt have shipped and the margin impact of that which is also not trivial.
But in any event.
If you did that for us.
It's probably another at least one basis point, if not too. So just so that when you hear the different numbers from people just check the content, but ask or where the margins will kind of let me first of all the demand has remained very very strong.
Mix, obviously always can affect us.
We're not completely out of them was either on supply chain or.
Plants that could be temporarily shut down by us or by customers.
Due to Covid for example, the <unk>.
Covid issues that we saw during the calendar first quarter I don't think we expected necessarily so while we may be able to ship. They may not be able to receive that's what I mean about customers having plants is that generally speaking I would say that given the great work of all of our colleagues around the world I think we still could continue to see the mark.
Inch forward.
I would say as we've said before every day is a new day, and it's kind of hand to hand combat on supply chain, which we expect is going to continue for the rest of this calendar year.
Emerging just to clarify you're not expecting a meaningful adverse impact in June .
I don't know that we arent I mean, if we could have we could have an adverse impact on January 1st of all again just normal things.
The margin such as mix could affect it but I would say that we will do what we did this quarter, which is fight very hard because I probably gave the same answer last quarter. When we reported that yes, I mean I didn't think necessarily the margin. We were on was the absolute floor.
We're just going to work very very hard to try and offset that.
Which is why I say, it's hand to hand combat every day.
Alright I appreciate the response thank you.
Thank you. Our next question comes from the line Mark Miller from Benchmark Company. Your line is now open.
Graduations on another great quarter.
Just wondering in terms of the supply chain impact.
Specifically, what the what's the major components that are being impacted as it wrote them and what else.
The main part that assure is integrated circuit.
The primary.
And product for us the thing affected youngsters in the red areas.
This quarter, we did have some impacts on the transceiver area.
Okay.
Our backlog is it pretty linear or is it backend loaded backlog and what about the margin profile of the backlog is similar to what you're saying.
I would say that the margin profile similar to what we're seeing.
And when you talk about the backlog being.
Back end loaded I would say if you are asking about how is the entire backlog timed we do have more that might be in the third and fourth quarter than perhaps we would have seen a year ago, but generally speaking the backlog tends to be more weighted.
To the first and second quarters immediately following the reporting here.
Okay, what about transceiver margins are you seeing some progress there or they've been fairly stable.
Well I mean, considering the tremendous progress the company made on the trends paper margins in the last three years I think they are as affected by they are now being affected by supply chain shortages as well.
Thank you.
Yeah.
Thank you. Our next question comes from the line of Richard Shannon from Craig Hallum. Your line is now open.
Great. Thanks for taking my questions Mary Jane maybe the first one for you looking at the operating margins for compound semi is.
Both before and after the adjustments for startup costs are are pretty impressive here, maybe if I can.
Look at it even excluding or including the startup costs that you're reporting in the press release, you did about 29% in the just reported quarter with revenues that arent record and those margins are well above what you've reported in the last few quarters, even with the investments going on here can you describe.
What's going on here is this mostly from gross margins or other dynamics coming in here and what does this say about the future margin structure for this segment.
Well I think first of all why.
We have talked about the advancement of the margins in general we have talked about pretty consistently that as some of the newer growth areas, whether it be silicon carbide, the sensing market and even the return of industrial which is hardly a new market return to the new markets plus the return of industrial that Giovanni segment.
Had the best ability to really expand its margin and that's actually what we're saying here so with the color I think on the quarter and what we saw in giovanni's margins and the comps any margins even from last quarter.
Is the return of industrial which just keep in mind is a very very very strong margin and market.
The sensing market the ongoing probably efficiencies really the thing Don kind of here in the off season, and then the advancements and silicon carbide indium phosphide etcetera.
Et cetera, since the margins of comp semi as a general matter tend to be above the corporate average with respect to the source of them.
As we all know if you don't make money at the gross margin everything else is a deduction. So gross margin still need to be strong, but Chuck mentioned this in his remarks, which is I think the ongoing.
Cost control is actually very helpful for both segments.
Okay perfect that's great Mary Jane My follow on question on three D sensing.
<unk>.
I'm not sure if Giovanni or Chuck's remarks, we're suggesting a better than seasonal pattern here in the in this back half of the year, but maybe you can could you discuss what you're thinking there, even though even if throwing in thoughts on share share position would be great. Please.
Hey, Thanks for the question well.
Keep design.
I'm, sorry, if you keep winning new design wins.
And the applications of new partners, obviously, that's offset this as a model as the most complete.
Yeah.
In other words, if you feel.
Stock with your cotton design with that.
Seasonality, but if you increase your footprint in the market with some important design wins.
As we said we expected strong growth in the second half of the year, obviously that will improve our lease will increase this seasonality I don't know what to say, but.
There's still seasonal but the.
The bond is higher because we are we are piloting.
Apologize for the applications as I said in my prepared remarks.
Okay can you discuss whether those are with current or new customers Giovanni.
No sometimes as you know we don't even know what the application is because they don't tell us, but we expect <unk> sensing first of all not necessarily do the science. So I would talk about science and congenital include input assignment.
Okay perfect. That's all for me. Thank you.
Okay.
Thank you. Our next question comes from the line of Tom Meek Chatter gene from J P. Morgan. Your line is now open.
Oh hi.
Thanks for taking my questions I guess, if I can just start on the supply side and if I can get an update on New York facilities in China are removed last time sort of thing.
There was a COVID-19 outbreak, maybe John you had mentioned some inefficiencies coming into some of the facilities. Despite not being good I came back there. So just wanted to check sort of how are things on the ground there.
Quick updates in terms of what are you seeing an.
Nishu deficiencies.
Thank you.
Good morning. Thanks for your question this is Chuck.
As it relates to the situation in China.
As you know we have a great team in China.
And they have done an extraordinary job here.
Since the <unk>.
Since the situation changed in the last month or two.
We've been moving forward.
With very little impact to no impact in our factories in China.
And our design center in Shanghai.
Had.
Some impact, but even in the case, where people have been working from home. We've been allowed to have people go into the facility and we are.
Right on track for the milestones that we've laid out for the quarter.
Our employees have done an extraordinary job.
And if you asked me has there been an impact I would say for all intents and purposes.
For my follow up I know Mary Jane mentioned in relation to the composition of growth of the backlog in industrial is a big portion of that.
I wonder if they can do automotive in particular, particularly in relation to the opportunity that you're seeing in the backlog that you might be seeing from Madhu.
Materials processing as well as silicon carbide opportunities, if you could delve into that.
Great.
So it sounds like is your question what are the components of the bank.
Or what are you seeing in relation to backlog from the automotive market.
We don't have to specify the backlog by end market.
I would say that generally speaking from an industrial point of view, it's up across all markets that do any form of cutting welding and pricing.
And we have other components that do go into some of these end markets, but we didnt really break the back that backlog down by the by and industry.
Having said that it's Amit.
Automotive and sensors is below 10% of the total company footprint. So you could assume that the majority of the backlog is at all.
Data Comm Telecom and then maybe.
Semi cap equipment and in the hospital.
The major components definitely data common pattern.
Got it thank you.
That's great.
Okay.
Thank you. Our next question comes from the line of Tab Kang from B Riley. Your line is now open.
Alright, Thank you and good morning first question on <unk>, just wondering customer concentration he's the lead customer over maybe 90% of <unk> revenue and how should we think about fiscal 'twenty three.
Growth.
Okay.
Good morning, Dave Thanks for the question so.
I would say that.
Our leading cost is definitely the majority of the upward.
But I want to make sure that we expand that.
General market too.
Moving forward because I think we are seeing more and more.
Since these applications and proximity.
Deb skin sense and that's helpful. So the market is growing beyond three D and of course through these still philosophy is still low.
That portion of it but I would I would like to kind of move on from <unk> to a much larger market, we choose the science and the market for us.
And yes, I'll leave and constantly will be the majority of that.
So for the next two quarters.
Got it and then.
Regarding capex, how should we think about for next fiscal year.
I would imagine that we would expect to see next fiscal year also being a year of investment so.
If we think about this year and that kind of $3 50, or $3 75 range I think it's probably not less than that going forward at least that's our current view at the present moment it could be higher as well I mean, I think it could be $400 million.
And.
Of course keep in mind as the company progresses and is constantly larger.
Just for the <unk> six based platform not a combined company that we potentially could have by then.
Got it thank you sure.
Yeah.
Thank you. Our next question comes from the line of Jim Ricchiuti from Needham. Your line is now open.
Alright. Thank you I was just a question on the the bookings strength that you saw.
The book to Bill obviously very high can you give any color on the book to Bill photonics versus the compound semi.
Sure.
The book to Bill was good in both in both of our segments as Chuck said in his his remarks, both of the segments contributed to the <unk>.
Increase.
And the book to Bill for the company for the quarter.
And if you wanted to make mention of the fact that probably it numerically speaking the largest increase in the backlog wasn't.
Datacom and telecom, but generally speaking proportionately both of them are very strong.
And on the industrial side I think you said it was 13% and.
That was driven by.
By Silicon carbide, clearly that was strong is it still around 5% of revenues what are you seeing.
Your body you alluded to some of the activity youre seeing in the aftermarket, but just in general if you will.
Sort of parse out that part of the business what are you seeing in the market right now.
Yeah well.
Jim Thanks for the question basically.
In our industrial distribution accomplishes, but the broad set of applications and.
And including laser driven applications, though specifically fiber lasers like welding constant. So for example, we had very.
Bookings for our Catherine Peds as an example.
We mentioned about us being the largest.
The industrial definition in decades, so soon goodbye goodbye useful power electronics that goes into industrial applications.
We have distinguished phone.
Powerful that goes into electric cars versus all of that goes into industrial applications, we make that that.
The distinction depending on what the customers will come on they're going to use the the.
The wide bandgap materials pool and.
The industrial generally speaking on the let's see.
<unk> durable goods.
If you want to define that was very strong for us and we continue to enjoy the advantages of our scale followup bump reduction of our Opex.
And so far particularly in China. So.
So.
And then the other one is.
The welding applications for Baidu is still.
Long even if.
No.
We probably will continue to grow but not at the vehicle numbers, but we expect the new vehicles in the second half of the year.
Welding, particularly bothered welding applications.
Got it thank you.
Hello.
Thank you. Our next question comes from the line of Simon Leopold from Raymond James Your line is open.
Thanks for taking the question.
It's just that I wanted to clarify giovanni's comments on the sensing growth in the second half of the year, whether that was a reference to first half over second half or whether that was year over year of both of those and then the question I wanted to ask was particularly on the 200 gig.
And above rates for datacenter transceivers.
I wanted to get an understanding of whether or not those in particular, our supply chain constrained and how how big is your hyperscale exposure as a percent of total revenue today. Thank you.
Simon Thanks for the question. So first you have to respond.
Your first question is both.
So with respect to <unk>, and then first half versus second half of the calendar year. So it's both the second question is.
As we've said the.
The majority of our supply chain challenges with it on telecom <unk> data.
Having said that at all.
Some for Datacom and.
The.
You had a third question which was around.
All of them.
The presence of a place.
Web scale and so forth.
I would say that once the.
Of the total data companies concentrated in one or two hyperscale is.
And then once he is about.
Let's see.
The.
Cloud service providers softball.
I would say, it's something like maybe 20 to 30 customers.
And then once this is actually a very long tail of over a couple of hundred maybe three arms with customers.
And so we saw mostly empathize small customers.
So far.
The kind of the distribution of the the data numbers.
That's very helpful. Thank you.
Thank you.
Thank you. Our next question comes from the line of harsh Kumar from Piper Sandler. Your line is now open.
Yeah, Hey, a question for Giovanni do you want to you mentioned in the commentary that you are sampling your first MOSFET devices for automotive I was curious you know that's exciting stuff I was curious if you could give us an idea of kind of what.
What kind of interest in design win level activity or sampling are you seeing and then my second question I'll ask that upfront Mary Jane or Chuck maybe you guys could clarify with respect to guidance. How are you thinking about your two segments and just color that you might be able to provide on those.
Well with respect to the second one I think.
We expect both segments to contribute positively to the growth.
<unk> fourth quarter, how are you.
Yes.
I think the hope is it's a new market for us. So we have no design wins at this point.
One time so everything.
You'll be able to accomplish in a way a market share gain for us. So we're looking forward will definitely increase with a qualified all the diseases.
Who.
Engaged customers and increase over time too. So that was the first that was announced last time last quarter and this quarter, we're saying well now we have samples in the hands of our.
Some some automotive makers.
It's pretty exciting considering that we have.
We have a new combo. So I think it all goes without saying that the reason I'm interested is because of our performance at the call. It is demonstrated.
As you know mostly from off the Onyx applications. So given our collaboration with GE, which was really the original.
Yes.
Market for those designs. So it was a really really great.
Change with these.
Automotive makers and we hopefully will get the design win sometimes.
Great guys. Congratulations thank you.
Okay.
Thank you. Our next question comes from meta Marshall with Morgan Stanley . Your line is now open.
Great. Thanks, a couple of questions maybe to start with.
Mary Jane you are continuing to find a lot of opex efficiency, maybe kind of beyond where you guys guided to capex. It seems as if you were making some of the capital investments that you wanted to on Silicon carbide. So just trying to get a sense of it.
Or should we.
Spect, a step up in Opex at some point as you kind of fill those facilities or are you just finding more efficiency west kind of some of the investments that you wanted to make there and then I have a follow up.
Okay. So overall, we are making all the investments that we had planned to make.
With respect to Opex I do think that it will probably trend up and while we had indicated that it could go as high as 23 I think from the beginning I've indicated that it could go to say 'twenty, one to 'twenty, one and a half which if you think about this is actually kind of a lot of money.
With respect to Opex efficiencies, though we are never going to stop looking for that I mean, I didn't necessarily expect that we would have $14 $5 million this quarter between COVID-19 and.
Supply chain, but we did because that number.
<unk> is a snitch away from our sales then the money off the margin line the numbers, we can't control or in the Opex and so those are the ones who are really going after I would say that the directors that Chuck and Giovanni and selling you have set out for their segments and for the company are really primarily focused in G&A.
But nonetheless.
Our CTO and Giovanni spend quite a lot of time really making sure that we're spending our R&D as efficiently as possible, which has always been kind of a hallmark of the company.
Great.
And then maybe just as a follow up you guys had noted some select price increases that you were looking to put in place last quarter, just an update on how those negotiations went or just if there's any you know when we should see some of the impact or if we can quantify the impact of those price increases and that's it for me.
This is Chuck that's going very well.
And we're beginning to see the effect of it in this quarter for those conversations and those those negotiations that were settled.
Two or three quarters ago.
So we're in the process of continuing this.
We've been selective about it in terms of our priority.
In terms of the value equation that we work with our customers.
Conversations have gone very very well.
And when you look at the size of our backlog on the other hand, we have agreements and contracts and purchase orders that we are committed to a certain pricing part of this backlog that we reported today, so as it's working out and working its way through.
I expect the impact to accelerate over the next let's call. It the next three to four quarters.
Alright. Thanks.
Our next question comes from Vivek Arya with Bank of America. Your line is now open.
Thanks for taking my question I'm curious how should we think about.
Gross margins heading into fiscal 'twenty three relative to what you were expecting this year.
What would be the moving pieces and the interplay between your segment mix and what I'm, particularly interested in is the depreciation from this rising capex. So just high level puts and takes of how we should think about gross margins going into the next year.
Well I think the gross margin.
The range that we have out is 38 to 42.
While I don't know that it's impossible that someday it could have a 39 handle.
Just in a quarter in a given quarter I would expect that we would continue to work on the gross margin, but the main things that affect the gross margin.
Sonic side would be for example, the ability to relieve the supply chain shortages of integrated circuits, which helped the rotem products and the right products tend to be the more valuable among all of those.
Our photonics with respect to compound semiconductors.
As we see the increase.
In the newer areas, both fencing and silicon carbide as well as continue to see strength on the industrial side as well as the semiconductor capital equipment side to which we sell components.
All of those tend to have positive effects on the margin.
Those are the main things with respect to the Cath asked most of the Capex probably is following a seven year depreciation cycle.
But there is probably at least $50 million of it I would say is a rough average that is more infrastructure related and therefore, probably follows about a 10.
10 to 15 year depreciation cycle.
Alright, very helpful. And then for my follow up I'm curious about what your ambitions are longer term in the silicon carbide space. Because there is a very large competitor who is investing five or $600 million annually in their substrate capacity, you know building out a new fab and so forth.
Eric.
<unk> on the device.
Right, so you're coming at it from a very strong IP base, but I'm curious that in terms of just your ambitions about market share and so forth.
How will this play out over the next two to three years.
Yeah. Thanks for the question well, obviously, we have.
More work to do but.
It's basically a billion ball over the next five years as I said earlier.
Considering our footprint today in the device.
Space.
It's incredible that we have been able to good attention.
Automotive makers, we just.
Continental is testing our device costs.
So clearly.
There is a lot of upside philosophy in front of us in terms of gaining share in the market as I said earlier.
And.
I think the market is a very long 51 on the deal as long markets.
So there is room for many of US and I think we will have to play on differentiation.
Obviously, having its suitable cut by subsequent blocks as competitive as the one that we have.
To be really.
To ultimately be.
Hi, it's competitive in the market.
We've begun.
Maybe the law of good cargoes, we have.
No sampling products. So we expect some design wins in the near future.
So it's all upside for us in the next few years and.
As I said market is large enough.
And we will be even larger.
Wonderful.
So for us too.
So we have about five minutes left and there's three of you on the Q, so we'd like to try and get all three of the island.
Thank you. Our next question comes from Sidney Ho with Deutsche Bank. Your line is open.
Good morning. This is John Knopf cover along for Sidney. Thank you for taking my question. My first question is about supply constraints I know in the past you mentioned transceivers in rodents business as being highly constrained.
Are you seeing anything different this time around in terms of a particular product or end market.
Are you seeing.
Impacted I think what we've said is that it's wrote them that are particularly constrained and commencing this quarter. We are seeing more on the transceiver side.
That's helpful. Thank you and then my follow up is <unk>.
Regarding your investments in Silicon Carbide, then they deem classified and previous quarter as he also mentioned to you.
These expansions to sort of materialize towards the mid fiscal 2023 and can you provide an update on the progress of these expansions and have supply chain disruptions had any impact on the timeline of these ramps. Thank you. So it's important for silicon carbide that we said the product is probably <unk>.
Turning to market actually in 2024.
And at the present moment supply chain, it's not affecting us.
Thank you.
Thank you. Our next question comes from Christopher Roland with Susquehanna. Your line is open.
Hi, there and congrats on the strong results and guidance here.
My question is around the Hyperscale data com business.
Would love to know is this kind of broad based cloud or are these more AI applications.
And what is the technology involved here are we beginning to see kind of the inflection for Pam four or is there something else. Thank you.
Yes, no it definitely all of that I mean, there is no I wouldn't say there is a majority.
Yeah I'll call vessels.
I mean, I don't even know what where do you put the.
The limit fits into two I mean, any way I think it's across the board.
Very strong demand.
In terms of the technology is definitely <unk>.
<unk> still busy.
Marketplace.
<unk> four months.
Increasing the number of bids at the board and that will continue for quite some time diving ultimately be.
The docs on it.
And dollar per bit transmitted.
Something we have.
And we're very competitive from that standpoint.
The share gains I mean, if you think about the growth rate.
All of the market and the growth that we would have.
We are clearly claiming substantial.
Market share back.
And.
And I think that's helping the growth will come.
Company.
Thanks, Giovanni My second one is around three D. Sensing. So your competitor talked about having majority share and then moving to a 50 50 split, but we haven't seen that in your numbers yet.
I know you said, it's a it's a backend loaded year of course with with seasonality.
But do you think we could get back to a.
Perhaps you know quarter or whether September December and what you guys are doing north of a 100 million quarterly with the 50 50 split.
Well I don't know what the split is.
Hi.
It could be.
Different than 50, 50 about what I want to emphasize is the.
The fact that Oh.
Internally, we are playing in the same city market.
And again, the only part of that so maybe even see four three the we may have close to 50 50 split may not be the same for the sensing market. So I will look into that.
Said earlier that we expect this PON growth in the second half.
The calendar year.
And as.
As I said driven by new products for new applications, we think that.
He is going to.
Definitely offset.
Sure to a larger number for us.
I suspect, but we will see.
Thanks, guys and congrats.
Thank you our last question comes from Tom O'malley with Barclays. Your line is now open hey.
Thanks for sneaking me in I appreciate it do you view this as more of just a clarification I think you said this quarter that datacom as a percentage of <unk> was 40% and then it was up 15% quarter over quarter I think last quarter. You said it was 60% did I hear that wrong can you just level set us on what Datacom was as a percentage of com last quarter.
First of all first of all Giovanni's comments that it was 40% to 40% of the whole company.
Gotcha.
Data comp.
Yes, I think I think Tom the.
The comment on the 50% I think there was about the high speeds policy, but wanted to pull on the <unk> now represents 50% of the total.
<unk> Datacom business. So we are shifting from let's say 100 G being more than 50% to one of the just only one of the GM below being more than 50% to one of the gym below being less than <unk>.
Percent of the full the highest speed the higher data rate placebo now close to 50%.
Kind of a shift in mix.
Got you Yeah, no. The 40% is a function of the total business makes a lot more sense.
Just a follow up just on the on the stuff. That's below 200 G speeds I think Mary Jane called out that there was a lot of.
On the transmission side, a little more supply chain choices, how would you kind of characterize overall demand there just given the fact that it sounds like a lot of people can't get product and that continued to improve throughout the year or is that seeing any pockets of weakness that would be really helpful. Thank you again.
So the demand is very strong as I said, the only challenges we are.
He has made Jane just said again, we experienced supply chain challenges.
On the road in telecom, mostly all were seeing.
A little bit of challenges also for the.
In the transceiver space.
And as you can imagine that the volume so typically higher at the lowest speed.
So.
Sure.
<unk>.
As Chuck said.
We think the number could be anywhere between 75 up to $100 million.
But our guidance would have been $1 million, but if it wasn't for the supply chain and of course data can be the largest portion of our revenue.
And as a single market single application and obviously that those $100 million, mostly long term Cmos.
Thanks again for sneaking me in guys per Janet.
No problem.
Thank you. This does conclude today's question and answer session I would like to hand, the call back to Mary Jane for any closing remarks. Thank you very much everyone for joining us. This morning, and we'll talk to you often don't have a good day bye bye.
Thank you. This does conclude today's conference you may now disconnect.