Q4 2022 II-VI Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Okay.
Good day, and thank you for standing by and welcome to the two six incorporated fiscal year 2022 fourth quarter earnings call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one one on your telephone.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker today, Mary Jane Raymond Chief Financial Officer. Please go ahead.
Thank you Catherine good morning.
I'm Mary Jane Raymond the Chief Financial Officer here at Tuesday incorporated welcome to our earnings call today for the fourth quarter of fiscal year 2020.
With me today on the call our Doctor Chuck Mattera, our chair and Chief credit 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 Wednesday August 24th 2022.
For today's call the press release and the Investor presentation are available on the Investor Relations tab of our website.
Gosh V I dot com.
There is discussion includes certain non-GAAP measures a detailed reconciliation of these non-GAAP measures to our GAAP results is included in todays documents I remind you that during this call we will be making certain forward looking statements. These forward looking statements are based on current expectations forecasts and assumptions.
And involve risks and uncertainty that could cause actual results to differ materially from these statements made today.
Our comments should be viewed in the context of the risk factors detailed in our most recent 10-K filing for.
For the fiscal year ended June 30th 2021, and our subsequent SEC filings.
Our Form 10-K for fiscal year ended June 32022 is expected to be filed on August 29.
Two six assumes no obligation to update the information discussed in this conference call, except as required by law with that let me turn the call over to Dr. Chuck Mattera Chuck.
Thank you Mary Jane welcome everyone and thanks for joining us today.
FY 'twenty two is truly extraordinary and every conceivable way starting with our financial results.
We completed our fourth fiscal quarter of 2022 with revenue of $887 million.
An increase of 7% over the third quarter of 2022, and an increase of 10% over the fourth quarter of fiscal year of 2021.
We achieved operating income in Q4, FY 'twenty two of $114 million and non-GAAP diluted EPS of <unk> 98 cents.
These results are new records for fourth quarter revenue.
Strong quarterly year over year growth numbers and reflect sustained demand across our businesses.
Our quarterly results reflect the resilience to a challenging operating environment, including the ongoing and profound in quarter impact caused by the pandemic.
A dynamic regulatory environment.
And persisting supply chain challenges.
In the face of these headwinds our global team rose to the occasion every day.
With extraordinary effort and care for our employees and achieved an incredible success.
There is an undeniable plum line running directly from a finished <unk> acquisition and our collective long and deep history of dedicating ourselves to excellence, including as reflected in the results. We report today.
We completed the finish of our acquisition on September 24, 2019, right before the effects of the pandemic, where first felt by the world.
At the time, we believe that the depth and breadth of the technologies and manufacturing scale of the newly combined company would enable our growth by addressing the long term megatrends in our markets, including cloud computing and the advent of <unk> wireless networks.
We were right in our beliefs and so we turned our intense focus to executing on our strategy leveraging our technology and worldwide manufacturing platforms identifying and closing gaps.
Delivering against our synergy targets and improving our operating leverage.
As a result of the acquisition, we became the largest component and subsystem supplier and the optical communications market as well as a leader in photonics solutions in compound semiconductors.
All of these actions led to a truly stunning fiscal year with record $3 3 billion in revenue, 7% topline growth and record bookings of $4 3 billion.
We also demonstrated our ability to generate strong operating cash flow results, while investing strategically for the future and facing unprecedented operating challenges closing the year with $413 million of operating cash flow.
Putting a finer point on it revenues from industry, leading customers in the communications market led the way driving 13% growth in Datacom. Thanks to a banner year of market share gains and the exciting new product launches that serve the largest hyperscale.
The award winning Photonics solutions segment.
Business that had less than $100 million in annual sales when we acquired them in 2010 reached a phenomenal $2 2 billion in revenue this year growing 9% year over year.
This performance despite our best efforts was negatively impacted by $130 million due to supply chain issues.
Its partner the compound semiconductors segment delivered a record $1 1 billion in revenue thanks to a 29% annual growth in sales of components for semiconductor capital equipment, including growth from differentiated and sole source <unk> components.
The 26% growth in industrial applications across the board contributed as well.
Our silicon carbide materials devices and modules business grew considerably our top and bottom lines, while investing in the growth capacity required to meet the insatiable demands of customers for the best products that money can buy from a sustainable source of high quality silicon carbide power semiconductors at scale.
These materials devices and modules underpin a technological revolution, the electrification of transportation as well as critical components for renewable energy infrastructure and in the future vital upgrades to an aging grid.
Our strong performance throughout the year as the result of our deep customer relationships decades of investments in technology sophisticated manufacturing platforms and leading edge products.
Our diversified global footprint has allowed us to operate resilient and continues to capture expanding opportunities across all end markets.
Turning now to coherent after years of assessing the possible trajectories of a changing landscape.
About 18 months ago, we announced our strategy to rebalance the diversification of the company.
Our strategy combined with our market and technology insights pointed us to coherent.
A longstanding innovator and the gold standard for laser systems technology.
Through a process of mutual discovery and our joint planning of the last year, which took place at a blistering pace.
Our integration teams work collaboratively to make for a flawless day, one experience, which occurred on July <unk>, when we began our new and transformative chapter.
We were off to the races from the very first day.
Now everywhere, we turn across the company and with customers and employees alike. Sparks of excitement are flying around this next chapter of our remarkable transformation.
We have begun to engage with our new colleagues in earnest and our focus on executing on the synergies already.
It's an incredible team of people well suited to our culture and I could not be more excited about the days ahead.
We remain confident and committed to our cost synergy targets and timeline and over the next several quarters expect to be able to say more about the revenue synergies.
On September eight 2022, we will transition to our new name coherent Corp.
We'll launch our new brand and began trading with a new ticker symbol Nasdaq.
Oh HR.
We chose the name coherent because it has the universal meaning of bringing things together.
With an appeal that we believe will expand our brand recognition and create value.
The broader meaning of the word coherent represents our diversity and thinking this spilled into a common purpose, our unity inaction and our broader sense of engagement by connection through our mission vision and values.
Going forward, we will simplify our segment names and the description of the end markets we serve.
The new segments will be materials networking and lasers.
In addition, we will report revenues by four end markets Industrial communications electronics and instrumentation.
The company now addresses a combined Tam of 65 billion.
Our long range plan anticipates that the markets. We serve will have a composite CAGR of mid double digits.
So I believe that we are very well positioned in each of the end markets to take advantage of the opportunities available to us while delivering on the promise of our transformative acquisitions through sustained dedication through organic investments.
The resulting depth and breadth of our team of dedicated employees technology platforms and manufacturing scale now with the addition of coherent will enable our growth by addressing the long term megatrends in our targeted markets.
Turning to Q1, FY 'twenty three our guidance anticipates that we will grow the top line by over 50% sequentially, including the acquisition and over 10% organically.
For legacy <unk>.
We expect continued sequential growth from the consumer market due to both meaningful share gains in the sensing market, including three D sensing as well as continued demands in components for semiconductor capital equipment and communications overall.
In FY 'twenty three we will continue to prioritize our capital allocations to debt reduction investments in capacity expansion and for next generation technology and product development as we simultaneously drive deleveraging and continued leadership in sustainable growth across all of our markets.
I will return to wrap up after Mary Jane's section, but for now let me turn it over to Dr. Giovanni Barbarossa, who in his capacity as the company's Chief strategy Officer, who will provide color for the quarter.
And about our emerging technologies Giovanni.
Thank you Chuck and good morning, everyone. We had a great fourth quarter with meaningful growth in communications and industrial <unk>.
Communications revenue grew 8% compared to Q4 last year and 4% sequentially.
Our datacom business grew 14% compared to Q4 of last year with strong growth in Transceivers modules and put on these components.
Our growth is a testament to our technology leadership supported by proactive supply chain management and collaborative long range planning with a broad customer base.
For the market studies, we have done the difficult market is expected to grow in the next five years at the 12% compounded annual growth rate thus.
Despite the current macro sentiment.
The double digit growth is in line with recent analyst reports that fully cost global data center capex spend to be quite robust.
<unk> tool with $370 billion by 2026 with Hyperscale is accounting for more than half of that amount.
Shipments to hyper scale is allow higher data rate transceivers at Swansea G and beyond.
Four times higher than in fiscal year, 'twenty to 'twenty, one and though the majority of the growth of our Datacom business in fiscal year 2022.
As the cloud and hyper scale data center market transition to 25, and 50 Terabits per second which is the demand for our 800 G. Transceiver is picking up in fact, we are now shipping meaningful volumes of 800 <unk> Transceivers.
We are confident that our industry, leading technology, indium phosphide lasers and detectors.
We'll become the components of choice for this upgrade cycle.
Our <unk> lasers in the Texas will be needed and reducing cost and energy per bit and would serve as a solid foundation for our next generation one six terabits per second Transceivers.
We are pleased to report that we had a record revenue for our <unk>, which was driven by successful ramp of the latest generation of our <unk> <unk> pump for motivational 12 month.
Our telecom business grew 10% sequentially driven by continued share gain and coherent transceivers standards of our sub systems business.
Last quarter, we unveiled our organic DSP platform, which in line with our vertical integration strategy, we have been investing gain since 2019.
Our purpose built <unk> DSP is a key enabler of our industry's first one on the ZR anticipate a plausible coherent transceiver for the network edge and.
A market that analysts estimate to be $750 million by calendar year 2026.
With our DSP and our transceiver technology service providers can now benefit from the simplicity of the robustness of coherent technology in the access network and proceed to upgrade millions of Teng Ethernet links to one of the G seamlessly.
Our wholesale business, which was the most affected by supply chain over the past year was flat for the full year, but grew 12% sequentially as we have made good progress info tooling components in short supply.
Our industrial business achieved record revenues growing 6% in the quarter compared to Q4 last year and 5% sequentially.
The cost of the year and continuing in the fourth quarter revenue was driven by consumables for both <unk> and fiber laser systems.
If we can build for optical components for short pulse lasers, a double digit growth for our portfolio of processing head for cutting and welding and a very solid year for our pump lasers.
Sales of many of our industrial products exceeded market growth as we continue to gain market share through our differentiated products, which are underpinned by very competitive cost structure and performance.
Looking forward this will only be announced with coherent acquisition, particularly in the fast growing market for electric vehicles, where the combination of our fiber lasers and processing head provide uniquely differentiated solutions for battery welding.
Revenues for the semiconductor capital equipment market grew 30% compared to Q4 of last year and 9% sequentially.
We had a record quarter and a record year with an annual growth of 29% driven by strong demand for advanced materials for both the front and the back end of the lineup locations and some critical design wins as the envelope of our applications continues to expand.
Demand for advanced lithography, including <unk> continues to grow and our <unk> business Heath to both annual and quarterly records in revenue consistently with significant expansion plans announced by our key customers.
Our consumer market revenues either equity in Q4.
Most of that is typically the slowest seasonally with 36% growth compared to Q4 of last year and 34% sequentially.
The importance of software inside wavelengths for consumer electronics is starting to be well recognized.
We recently announced a joint demonstration of our next generation TD, Canada with longer range and higher resolution than standard Canada's operating a shorter wavelengths that will greatly enhance the user experience in the metals.
Our life Sciences business had a record year climbing over the $100 million Mark in annual revenue.
While COVID-19 related revenues are stabilizing our optics and simulated sales into life Sciences applications hit a quarterly revenue record.
Finally shipments of Silicon carbide substrates in Q4, with 65% for power electronics and 35% for wireless communication.
<unk>, our initial shipment of gallium nitride on silicon carbide devices.
I represent 4% of our revenue.
We recently reported signing meaningful and long term contract to supply silicon carbide substrates to two leading customers in <unk> and Daniel.
As we continue to make progress with our advisors for power electronics Silicon carbide grew 23% in Q4 over the same period last year.
Engagement with customers in the U S and Asia I expanding rapidly.
We have now sampled our first automotive qualified MOSFET devices, and we are working relentlessly to secure our first design wins with that let me turn it over to managing Mary Jane.
Thanks Giovanni.
And these entire remarks, I will speak about legacy to fix yourself only unless otherwise noted.
The quarterly and full year end market and geographic breakdown of our $887 million of Q4 revenue and $3 3 billion of fiscal year 'twenty. Two revenue can be found on pages 20 to 24.
The investor presentation.
We show you 2000 fiscal year 'twenty to complete by the legacy <unk> market breakdown and then by the new market breakdown. We also supply the mapping from the legacy market to the simplified for end markets on page 23.
For legacy <unk>, only networking and materials industrial was 21% of total fiscal year 'twenty two revenue.
Communications was 65% electronics was 10% and instrumentation was 4%.
Including the former coherent the laser segment using their trailing 12 months revenue.
The pro forma annual and market fiscal year, 'twenty, two breakdown industrial 38% communications, 45% electronics, 7% and instrumentation, 10%.
Returning to two fixed results our Q4 non-GAAP gross margin was 38, 7% and the non-GAAP operating margin was 19%.
As a reminder, last quarter included $8 million of progress payments on development programs being partially supported by customers affecting the gross margin.
By $4 4 million and the operating margin by $8 million total with three six being an offset to R&D.
Supply chain costs, and Covid cost, a total of $8 $6 million.
We are not excluded to arrive at non-GAAP result.
The margins are affected by the typical cost associated with the initial launch of new products.
At the segment level. The non-GAAP operating margins were 15, 3% for photonics and 26, 6% for compound semiconductors.
Our record backlog of $2 3 billion.
Ken.
<unk>.
One 6 billion for Photonics, and 0.7 billion four compound semiconductors.
The increase in backlog is a function of demand.
In particular from the industrial semiconductor capital equipment and communications end markets.
GAAP operating expenses.
G&A plus R&D.
$212 million in Q4.
Excluding $10 million of amortization $13 million of stock comp $6 million in startup costs and $8 million of M&A and integration costs, non-GAAP , opex was $176 million or 20% of revenue.
For the year.
Annual GAAP Opex was 851 million and non-GAAP was $671 million or 20% of revenue.
Quarterly GAAP EPS was <unk> 23.
non-GAAP EPS was <unk> 98.
With after tax non-GAAP adjustments of $90 million in total the diluted share count for GAAP result is 117 million shares and for non-GAAP . The share count was 126 million shares.
The GAAP and non-GAAP EPS calculations are in the ending table of the press release.
Pre tax interest expense was $49 million. This includes $10 million of our underlying interest and $39 million of interest and fees on the debt for the coherent transaction.
Cash flow from operations in the quarter was $137 million and free cash flow was $119 million free cash flow was $19 million, including Capex at $118 million for the year cash flow from operations was $413 million in free cash flow was 99.
Millions.
That strategic inventory build was $207 million and the Capex was $314 million and additional $53 million of Capex has been committed cap.
Capex for fiscal year, 'twenty, three is expected to be $500 million to $600 million.
Our net cash at June 30 was $282 million on July 1st with the close of the coherent transaction, our cash balance declined to $824 million from 258 billion and we recorded <unk> 5 billion of total debt.
On the first of September our 2022 convertible notes will mature.
We have $324 million still outstanding as of today the.
The company expects to settle in stock.
The effective tax rate in the quarter was 11% and 17% for the year, we expect the tax rate in fiscal year 'twenty three to be between 22, and 24% assuming no adoption of new or additional tax rulings the increase in the tax rate is largely driven.
And by M&A costs that are not deductible.
With respect to the coherent transaction, our debt increased to $5 billion, our net debt position immediately after the transaction was $4 2 billion and our annual interest is expected to be $274 million about $114 million above our expectations when the.
Action was announced.
Approximately 40% attached.
Using the estimated pro forma trailing 12 months of both companies at June 30th the closing leverage was three six times gross leverage at three times net leverage a total of 23 million new shares were issued to coherent shareholders.
Funding from Bain capital the series B preferred shares if 215 billion and is equivalent to about 26 million common shares if converted.
The.
Income target for the entire series B preferred shares to be dilutive.
Is 180.
$89 million.
Dividends for the entire 215, or 5% or $116 million, a year or $29 million a quarter payable in kind for the first four years and thereafter in kind or cash at our option.
Turning to the outlook for Q1 fiscal year 'twenty three.
Our outlook for revenue for the first fiscal quarter ending September 32022 is expected to be one three to one $4 billion and earnings per share on a non-GAAP basis to be 77 to 90 cents.
This excludes any effects of purchase accounting, which are still underway other than the depreciation that is about $5 million in Q1.
The share count is 142 million shares for the low end of our guidance.
At 151 million shares for the midpoint and the high end of the guidance the EPS calculation, including the dividend treatment is detailed on table eight of the press release for the low net at high point of the guidance. This.
This is at today's exchange rate and at an estimated tax rate in Q1 of 25%.
For the non-GAAP earnings per share, we add back to the GAAP earnings pre tax amount of $265 million consisting.
Consisting of $65 million in amortization $30 million in stock comp $122 million for M&A, including fees for the banking and financing and $48 million for the inventory step up which is preliminary.
Actual dollar amount of non-GAAP items, the tax rate the exchange rate the purchase price accounting and the share counts are all subject to change.
As a reminder, our answers today may contain certain forward looking statements from which our actual results may differ due 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 with that I'll turn it over to Chuck for a few final comments Chuck. Thank you again, Mary Jane and you're wanting I would like to close our fiscal year 'twenty two earnings call with some special recognition for us.
And foremost I would like to recognize and thank each and every one of our worldwide employees for your hard work dedication to excellence in everything you do for carrying so much for one another this past year.
Without your daily dedication to excellence, we would not have been able to meet the extraordinary technical operational and financial challenges and achieve the lofty goals, we set for ourselves in FY 'twenty, two while laying the foundation for an even brighter future.
We're really making the world a safer healthier closer and more efficient place to live.
I would also like to thank our thousands of dedicated suppliers for your support over the past several years and especially this last fiscal year.
Been a truly challenging dynamic and unique business environment, and we really appreciate your help and achieving our goal of serving our customers.
And to our customers. Thank you for your continued confidence and support its an honor to serve you enable your continued success and to be an intimate part of building your future.
I look forward to a tremendous future together and we will do our absolute best to continue to serve you.
Finally, I would also like to thank all of our shareholders and debt holders, who have invested in us entrusted us with your confidence in giving us enormous opportunity and responsibility to succeed we take your trust and confidence and our responsibility very seriously.
For those on the call. We welcome your questions and we expect to win this call not later than 10, a M. Eastern time. This morning, Catherine you May open the line for questions.
Thank you as a reminder to ask a question you need to press star one on your telephone please standby, while we compile the Q&A roster.
Our first question comes from Paul Silverstein with Cowen Your line is open.
Hey, guys. Thanks for taking the questions first off against the backdrop of what appears to be off with broad strength.
So what's the opportunity for greatest improving from here, but your revenue.
And then if I could have a follow up.
It would be with respect.
And industrial in particular.
Your exposure to macro.
Uh huh.
Paul and I wasn't able to hear can you just summarized it too is the greatest opportunity for revenue was that the first part.
Greatest opportunity for improvement, obviously, youre discussing broad strength.
Where is the greatest opportunity for improvement.
From a revenue perspective.
Product market, However, you want to frame it.
What's the how much of the industrial business that was built for.
Macro leverage versus how much of it is relatively flat.
Okay, maybe drawing them to take the first of April . Thanks for the question. So when we announced the combination with Cleveland There were four markets. We felt that we're gonna be loosing logistics.
Not only in general for the cost structure of the two companies combined.
Mostly about the bill.
Have any of that.
Fits with your first question is about so we haven't really quantified those by those for a really long in the hospital.
Jamie cap and display markets, and then life Sciences, and aerospace and defense.
You know we.
We can go a little bit more in details in industrial we think there is an opportunity on the cutting market.
Which we all know really currently suffering from a fiber laser standpoint, but I think there is some opportunities to gain share there. Thanks to the combined post tax for the company.
In the semi cap and display market standpoint, I think we have an opportunity to leverage our combined portfolio is pretty unique.
And the industry from a laser system standpoint, as well as Boston components standpoint, we are supplying to similar possible now so there's a tremendous tremendous.
All those synergies to be language.
And then life Sciences I think the.
The the most important revenue opportunity to really ultimately comes from incredibly copy Larry.
Very well.
Position Salesforce of Cleveland in the market, which is substantially larger than.
We had the two <unk> should be for the combination and last but not least aerospace and defense between energy.
Energy laser weapons.
And other advanced applications I think the two companies.
Our portfolio of products that are pretty unique, particularly to the U S market.
Okay, well maybe for the second part of your question for sure more than half of it I would say about 70%, perhaps but I wanted to make clear that that part even the part which is which is connected to the macro as you as you outlined.
They've done a really solid job of even in some parts of the economy, where theres been a slowdown they still haven't been successful in penetrating with differentiated products that footprint is extraordinary the service component.
As also a capillary component of the business.
I would look back and just point out that.
Maybe 18 months ago, when we when we modeled and had an expectation for what they could do an hour our fiscal year 'twenty two.
I'm in right in line with it.
Despite some softness in some parts of the economy. So leveraged maybe maybe 70% that's a rough rough estimate, but very very strong and differentiated within it.
Sure.
Plus we're still putting out new business, obviously was trending significantly positive.
Since the deal is for Sundar can.
Can you share any insight in terms of what youre seeing with respect to orders that you were seeing on the industrial side. It doesn't sound like there's been a downturn relative to macro or otherwise with that.
Two questions.
Yeah, no not really I mean, the only softness that we saw over the past 12 months was within China, and that's picking up.
So you'll have a down year over year.
Because of China, but not Q4.
It's actually picked up digging up the China as a market of about 7% and is distributed between the industrial mostly in the hospital and then some communications and life Sciences. So that's it's very very encouraging and <unk> and then with respect to your view of the rest of the world North.
I'd say that I think could be.
As we have said the doctors be very strong across the board the component level subsystem levels.
Consumable deal after market numbers are still very strong, which indicate a very strong lifting utilization for durable goods manufacturing.
Thanks very much appreciate it.
Thank you Paul.
Thank you and we have a question from.
With loop capital your line is open.
Hi, Good morning, guys, Hey, congrats on getting this done and I know.
The strong June quarter execution, and thanks for all the great detail today really appreciate it I just have I just have one if I could.
Yeah.
Just with legacy coherent could you guys give us some sense.
Where they are.
And there are micro electronics.
Display cycle since they haven't been comments around that for a while and in that context.
How we should think of that where they are in their profitability cycle as well as the tracking with with consistent cycles for where they are at this point in the cycle and that's it for me really appreciate it.
And thank you for your question I would I would come back across the board and just reiterate what I said.
The model that we had that we built during our diligence before the before the before.
Before the process settle down.
We expected them to have a performance across across the four four market segment business market segments.
They delivered in line.
And despite the challenges that we all had in operating they delivered in line with what we expected I would say, it's been very steady very solid progress and there have been no surprises.
Then I'm expecting it to continue to be along that same plum line.
That's really helpful. Chuck any any context on where in that cycle. They are.
Well.
I know this is giovanni thanks for your question I think.
Definitely the.
In the past leadership.
And all of that market standpoint, it was very very strong and.
You can expect that our relationship with display manufacturers continues has continued over the years and the team is walking on next generation displays which will unlikely be all of that will probably be micro OLED, driven and so forth and so as you think about the timing.
On a windows technology will come to market. It will be two years, and so we need to get ready for the market to pick up and.
You know create some strong demand for us and nothing from a development.
Apologies standpoint from a product development standpoint from a customer engagement.
Think of we believe there will still be the leader in the market.
Strong interactions pump technology.
Holmes.
<unk> uniquely differentiated in many ways that will go away.
Although lifetime for the for that.
For the production of Oh.
So I mean, we we said.
When we.
Talked about Korea, and we are used to at least this way.
Way too cockpit highs, we think that the ultimately the laser platform.
As an offering is future proof.
And displays are going to be at home for awhile and.
No matter the technology, you still will rely on laser processes to manufacture these places whether the OLED micro Leds et cetera, and I think the.
The reference for quite some time will be the coherent team that now it's part of the company and we think very very strong about.
The leadership market was from that standpoint, yeah. Thanks Giovanni.
Thanks for your question.
Any such transitions when they happen you can expect it will not only be there, but we expect to read this.
This part of it okay.
That's great context, thanks, guys.
Yeah.
Thank you.
Okay.
Can we have next question please.
Our next question comes from Dave Kang with B Riley Your line is open.
Hi, Thank you good morning.
A question on Infineon.
Yeah.
I believe they have signed a two year.
Supply agreement with show up Pimco.
Sure just wondering.
If you are splitting.
With the show or any kind of color as far as terms.
Of the contract.
Hey, good.
Good morning. This is Giovanni thanks for your question.
We are.
Two other agreements that are our customers they have.
No that we signed with <unk>.
A compelling long term and large agreement with them.
To support this growth.
That's all I can say.
David.
Dave Thanks for your question, Dave I would add.
<unk>.
The industry.
Ecosystem includes companies, who provide epitaxial wafers.
And.
Our suppliers to them.
Even to that element of the ecosystem I would only ask you to bear that in mind.
Thanks for your question Mike.
Yes.
My follow up on <unk>.
With this particular the lead smartphone customer is it just still.
<unk> momentum or is there.
Additional supplier in that.
Thank you.
Thanks, Dave.
It's hard to say we are we definitely are.
The numbers are.
Kind of can tell you that we believe we have been gaining significant share yield.
Year over year quarter over quarter.
And ultimately.
<unk> policies.
In a world with <unk>.
The product has to be replaceable has to be able to be replaced by competition than the major differentiation really come down to cost and quality.
And then the roadmap that we have with the customers. So we think that from a cost of practical standpoint, given our complete level of vertical integration and then from a quality standpoint, as we've reported over the past several quarters reporting quarter over quarter.
Zero D P P M shipments.
I think we are we welcome additional competition, but for now our growth and how about share gains, including some new design wins.
As demonstrated by the numbers that we've reported.
Okay.
Thanks, Dave.
Okay.
Could we have the next question please.
We have a question from Mark Miller with benchmark Your line is open.
Congratulations on your record sales and closing.
Acquisition.
Your compound semiconductor sales were up but operating income was down and so it was margins I was wondering if you have some color on that.
[noise] semiconductors. Thank you for your question Mark, let's give it a second so.
The operating margin for compound semiconductors was lower in the quarter, because last quarter, which I imagine is your comparison, we had the $8 million of customer support of payments for new development were all in that segment.
And if you look at $8 million on compound semiconductors third quarter, roughly 260 in our revenue mix three points of margin.
It's.
It's a significant amount almost four actually.
But generally speaking I would say that that's one thing and the second thing is that they as Giovanni talked about had launches of new products that for which you have seen the startup costs in the past that launched in the quarter and they usually that.
Those early our early volumes, usually have a little bit of a tempering effect on the margin.
Okay. Thank you with companies like Western digital.
And micron significantly lowering our outlook for next fiscal year, you're concerned datacom has been very strong.
Just was wondering about hyperscale capex over the next year or are you worried about they're going to cut that because of weak consumer demand.
So they're definitely not Moscow.
We as I said in the prepared remarks, the mindful though.
Higher data rates currency was trying to G and beyond is very strong.
We said.
Demand increased forex.
Year over year, so it's a.
Clearly strong and we just don't see any any.
Any of that in our customer's demand so I can't I can't comment on those two companies that you mentioned.
Thank you.
Thank you Mark.
Thank you. Our next question comes from Jim Ricchiuti with Needham Your line is open.
Alright, thank you.
Mary Jane I know there are a lot of puts and takes with respect to gross margins, but I'm wondering if you can provide any way to think about gross margins for the combined company looking out in Q1.
Just given supply chain.
I don't know if you want to provide some color as to what.
Kind of a revenue impact we might see from supply chain challenges.
So with respect to the margin first of all probably over the next.
Few weeks, we'll put out.
Our combined pro forma comparisons for task orders, but I would say.
Going into Q1, so in this quarter first of all.
We had the kind of launch costs that would take us up newer products starting up.
And we did have the absence of that.
On the left we had last quarter, but that was always called out it's a one time going into fiscal year 'twenty two for margins overall.
I would imagine that the company still has a very good shot at that margin being over 40, but in terms of having a finalized model on what we think to put out a new range and I'd say, we'll probably have that over the next.
A few weeks, but generally speaking.
Coherent is if positive and our margins and I think we look forward to the improvements that we'll see as we continue to go forward, especially with.
In July segment.
As his product launch they have as we've said many times before the most ability to move the margin whether that be any form of laser.
That we have or silicon carbide.
And then just quick follow up when you talk about that 70% of that coherent business being macro related Chuck you were talking also.
The excimer laser annealing BLA business, the OLED portion of the business.
I Wonder if you can characterize the line of sight you have to their bookings and backlog over the next two years, just given what we're hearing about new fab capacity additions, particularly in China.
Yeah.
We won't be able to comment their size, what you're looking for over the next for the next few years on this call today Jim.
But suffice it to say, we think theres still a very good and strong opportunity and we're excited about it.
Okay.
Thanks, a lot.
Thank you.
Our next question comes from Sumit Chatterji with J P. Morgan Your line is open.
Hi, Thanks for taking my question and congrats as well from my side as well.
I just have one quick one and I was hoping to dive a bit into the electronics market in Brazil.
The strongest growth forecasts on the understanding.
Smaller portion of your revenue right now, but if you can sort of help me think about B 11 billion.
Planning homeless of batteries.
The big Bucks or something that could be feed sources, <unk> sensing and when I think about 70% <unk> is it couldn't be more backend loaded because of electric vehicles or I would think three D. Sensing is a bit more front end loaded in that time horizon. So just trying to think about sort of how to.
Think about the condition of that.
People should keep it to your business or any help there would be helpful.
Useful thank you.
Thanks, Amit good morning, Giovanni Thanks for your question so.
We'll see on the electronics includes what used to be the consumer electronics and that's a very much a.
The largest portion of the calls that we are.
Included in our guidance as well as generally speaking for the future in the region.
Is it comes down to what we talked about in the past, which is an expansion of our.
This was a market beyond the same thing into sensing.
And so.
So that's.
While we gains we continued to gain share on three D sensing with a larger portion of the market, which is the same thing which includes in our definition of three D sensing, where we're gaining share and having new design wins.
Photonics related thanks.
Portfolio product, which is second to none.
Between filters.
The Baltics materials.
<unk> lasers photo diodes.
Et cetera.
There is an opportunity for us there too.
To grow in a much larger market than three D sensing.
And and then on the.
Auto the automotive side, it's all driven primarily by our Subsys sales, our silicon carbide substrate sales and we've continued to sign.
The new contracts long term contracts and.
Right now our growth is mostly limited by capacity not by demand the demand is very very strong.
We are continuing to add capacity.
We announced a billion dollar of investment over the next five years will spending capital to increase the.
The Bulls Pau.
Year over year, and that's coming online fast, but not fast enough to kind of saturated the market. So we have a we have a room for growth from that standpoint as soon as we bring but we bring capacity online.
So I would only add Sandra maybe maybe a way to put a really fine point on it if you look in the second half of the decade.
This this opportunity that we see will really be driven by silicon carbide power electronics as Giovanni said, the materials and the devices and modules will start to kick in and it will be driven in our model and there are forecast by the adoption of electric vehicles.
And other components that require high voltage high voltage high reliability devices.
We said that we expect to be.
At a level to offer into the market places so.
About five years from now a million six inch equivalent substrates.
Silicon carbide per year, beginning in about five years, so it's that second half.
That you know that.
Where we're looking at and that's what we're investing for and getting organized for now in addition to growing in the short term because the market is.
As supply limited okay.
Thank you. Thank you I'll pass it on thanks.
Thank you.
Our next question comes from Simon Leopold with Raymond James Your line is open.
Thanks for taking the question.
Wanted to just maybe dig a little bit deeper on understanding the trends for coherent.
That's your exposure, specifically and I think people maybe alluded to this earlier, but applied materials talked about some weakness in.
Flat panels, and I don't presume that coherent really has as much business from that market I think Giovanni talked about this as an opportunity longer term and I think it's more tied to smartphones.
And so if you could help us understand maybe some of those key drivers for the industrial aspects of coherent I think I'm looking out you know what's coming not not what's happened over the past year and then just as a quick follow up if you could.
Share with us roughly the mix shift in your Datacom Transceivers and how much of the revenue is 200 gig and above now versus let's say one year ago, and how you see that trending thank you.
Okay.
Great. That's all I want to make sure that.
It's probably one point.
In the in our definition is also is about manufacturing of durable goods like consumer electronics products.
So.
It's more on the what used to be called I believe microelectronics in the Queensland kind of market classification.
And now it's going to be called the basically industrial in our Costa Rica, So just to make sure theres not confuse the two because we used both in the hospital like fiber laser cutting in front of the board believes it.
The field to lasers, and so far and now we are we are.
Putting on the new industrial laser.
Including more let's.
Let's say the larger portion of the market.
So in terms of displays.
I kind of comment on what applied materials as reported I can tell you that the demand is.
Uh huh.
You know for those kinds of problems I would say, it's stable I think that the as I alluded earlier go will come significantly when new technologies and new.
They'll use cases will make into the market.
And and then I think the second question was I forgot it was about the consumer know about your Datacom transceivers.
Our understanding of how your mix has shifted to the higher performance products, maybe a year over year.
If you have that handy.
Yes, so the bus so we like to divide the market in three buckets in terms of the Hyperscale is the let's say the average.
Scales and then the the long tail, we have about let's say.
Market and that's important because the.
Hi, Dave It's all clearly they mostly go into Hyperscale is.
And then.
The long tail and it's all about.
<unk> and the ball off to two energy.
And therefore, so let's say that the Hyperscale is about one third of the total of the difficult mambo.
We have about 20 to 30 mid size.
Web scale operators, that's another lump them and then the last is actually almost 4000.
Customers of which probably three onward the bulk so that's the kind of the way to think about so if you think about high data rate I would say that I would call it like 30%.
All.
If the demand goes into Hyperscale is and.
And again that because again thats most mostly by.
The customers drive into the mindful two armed with the pull on that and now even <unk>, which we're shipping it so.
So I hope that gives you enough color.
All about hyper scale is driving higher data rates and the rest of the market driving let's say legacy 200 and below demand.
Yeah.
A fine point on your answer it's the Hyperscale or is that are driving your growth. The rest of the market you would characterize it as stable is that accurate.
No no not at all no it's driving the growth of the high data rate.
Okay.
Yeah.
The Hyperscale is a dive into both of the hybrid but the low data rate is also growing.
It's just not a necessarily a 200 and above.
And I think similar to the others.
Past I mean compared to the fourth quarter of last year. When it was already starting to move to about 12% of the total transceiver business.
The higher data rates now.
Yeah.
Okay.
Yeah.
Yeah.
Thank you.
Thank you Simon.
Yeah.
We have a question from meta Marshall with Morgan Stanley . Your line is open.
Okay.
A couple for me.
Just kind of speak to you know over the last 15 18 months.
That you were kind of evaluating that.
Coherent acquisition, just how your view of what cross sell opportunities are synergy opportunities have been you know are you more encouraged or kind of some really encourage as you were.
Last March.
And then.
Maybe second question.
You had mentioned last quarter that you were expecting three D sensing business to grow not necessarily from your lead customer, but from other expansion opportunities during the year clearly you're seeing expansion within your lead customer as well, but just are the other opportunities that you were at.
Expecting in three D sensing kind of played out as expected.
Okay, maybe I'll, let you want to take the second part.
As it relates to the first part of your question.
Compared to what we were thinking 18 months ago.
With regard to opportunities for for growth and the synergies.
We were not able to until the acquisition close we were not able to see.
Or to be exposed to any any aspect of the details of their revenues.
In the last few weeks now that we've had that chance.
Yes, I would say that we're even more excited than what we were before then.
The size of our largest customers and and leading customers that are coming up in the marketplace, who are investing to grow they're all on the list.
And the next phase of the integration.
Well it will actually be.
Fleet overhaul of our global sales organization, bringing the sales and service organization together that'll happen here in the next few weeks.
And when that happens, we will be able to begin to tie up.
Our efficient standard operating procedures and processes with legacy coherence together in a way that we the way that we both like to do.
And hit the road and start talking to these large large customers in the medium sized ones that we've targeted to grow with.
There is a it's a target rich environment.
I guess, that's all I'd say.
Okay.
Thanks Chuck.
Good morning so.
I would say that the first of all let me, let me comment generally the growth trajectory in our case as Willie.
It really comes down to three calls and they don't want to make sure that the.
I explained that first of all we are broadening our technology footprint.
In the sensing a pretty sensitive market. So in terms of actually the material that is being used to support those applications.
We reported.
So you've noted that you do have to go opposite muster.
Our broad portfolio of technology platforms to do that this one coordinate the second call Tonight.
The level.
Oh, the integration well offering we're partnering in some cases in some cases directly we try to offer all the level of integration with packaging, including drivers, which redesign all ourselves for lasers.
Those kinds of applications. So that's also important.
And the other one as I mentioned earlier is really around the expansion of the market that we're serving so we all focus in only a three D sensing, which we have demonstrated our ability to be very cost and.
Quality of the competitors in the market, which is obviously very price sensitive.
But we are expanding beyond that into sensing, which is a much larger market and where there is also I assume.
We see there is more competition, but because of our vertical integration the bulk portfolio.
The Oh offering.
I also think that it's not limited to chips, but it goes beyond semiconductor laser chips as I said earlier to optics into materials into Packers components. So far we are we expect the growth to be driven in those in those PTO coordinates as I said so yes. These are one.
One customers.
Definitely.
Driving most of the growth on.
The other hand, we are having significant new play in automotive.
Life Science is coming.
<unk>.
Biometric support Wearables and lights will eventually come we're very engaged in that you know for those kinds of applications and so it's a very much broader market than we've talked about in the past and so there is more room for growth than just the three D. Sensing even if I think of two things that we continue to gain share.
Okay.
Great. Thanks, so much.
Thank you Peter.
Okay.
Our next question comes from harsh Kumar with Piper Sandler Your line is open.
Yeah, Hey, guys first of all congratulations on the deal Chuck we are hearing from a lot of companies are the supply issues are now starting to get better.
I guess my first question is you had a pretty big amount of revenue left behind on the table last quarter I would be curious to see what youre seeing at this point in time, if you agree with the statement that you know that I just made the brake hearing from other companies or is it still pretty tight.
There, they're a we had a big opportunity a bigger opportunity than what we could deliver in the fourth quarter, we talked about it I mentioned it on my call in.
In my part of the script.
For sure I also said, we are seeing some moderation, but it's on a supplier by supplier product line by product line basis, five by five basis. So it's not a it's not a comment that you can make as a broad brush across the whole of the market.
The other the other aspect is that once once this problem became clear.
We got busy working on second sources, and redesigning and re spinning and re everything that we needed to and close partnership with our customers.
So part of the supply chain, a moderation is actually coming as a result of hard work and a deliberate.
Strategy to dual source or triple source, where we may have been only so double source. So it's a mix.
For sure.
For sure.
We can see some improvements coming in some quarters and then other parts that they cause the challenges that we're managing are about the same as they were 90 days ago.
Got it thanks Chuck.
And for my next one I know, we can look at Queens model and sort of put together gross margin pro forma in the opex number but I'd be curious if.
You would be able to provide some color on how we should model those to the gross margin and the Opex number and if there's any difference you know now that you're wanting to come up I guess, a couple of weeks any difference to what you expected anything pleasant or unpleasant that yourself from the deal.
First of all in the second part of the question No I mean, I think the more we work with our new colleagues. It just becomes more and more exciting we're very very happy with the progress we're making in the market and the financial progress that they've made on their own from their own internal plans, which doesn't always happen in an acquisition.
Once the company knows it's going to be acquired by somebody else they sort of ignore that fact and got on with their their plan and they get a very wonderful job I would expect that.
That over the next couple of weeks, we'll probably put out but the combined backward model first of all and then you'll be able to see it from there, but I'd say generally speaking the company is still expecting to have the margins up.
In the <unk> I would expect that you should probably not do you know.
Much about 40 at this point until we have really had some time to look at all the ways. They reported various things that they're saying also on supply chain at this point too.
That's the first thing with respect to Opex.
We will continue to work on there on the on the combined opex between the two companies.
As we have been doing any dis synergies as we said.
Are very very important to where we're going to be here and I think conceptually. It's probably the same situation. We have a set of Saar, which it will say that we're going to try and get their numbers to the ultra six number as you know 20% of revenue for Opex et cetera.
At the end of the three year synergies and I imagine, we would probably do that somewhat.
Faster. So my general sense is that that's very likely that we will continue to make the same sort of progress we have with too. So generally speaking we will make progress on not just taking the two companies and adding them up between the synergies and I think the work that we'll be able to do together and leveraging both companies that survive.
Yes.
Thank you so much.
Sure.
We have a question from Sidney Ho with Deutsche Bank. Your line is open.
Okay great.
Great. Thanks for taking my questions two quick ones one on Silicon carbide 40, Infineon deal specifically is there any way you can help us think about the size of the contracted duration. The tightening of the revenue ramp and also curious if there is any commitment of timeline to deliver 200 millimeter wafers should I have Paul.
Thanks.
Yeah.
Okay. Thank you Sidney.
We will not be able to say any more than what what infineon and we released in our press release.
But I I I could add that in terms of the timeline the timeline is now.
So yes.
It's not the people are in need we're ready is now so where we're in the process of serving them.
And as it relates to the 200 millimeter.
Well, we as we have announced in 2016, we came to the marketplace with the first 200 millimeter silicon carbide capability.
Our our we are ready and we are absorbing it.
My view is that the 150 millimeter will continue to be the dominant.
Substrate for silicon carbide for sometime to come.
Okay. That's helpful. Thanks, Chuck maybe follow up question is kind of alluded to this but.
If you look at the fiscal 'twenty three capex guidance.
$500 million to $600 million, it's up quite a bit obviously you have a coherent in there, but I'm curious how what are the different components in terms of.
The increase how much of that is coming from silicon carbide extension and how much of that is coming from coherent and in other items. Thank you.
So coherent probably adds in the neighborhood of between say.
79.
$90 million, maybe 100, depending on what.
What they say in terms of new opportunities. So that's the first part of the answer and then the second part of the answer is we would expect to see Silicon carbide continue in 2024, very very similar to what we see that in 'twenty three very very similar to what we saw in 2000 22 billion.
The investment that we discussed.
Over the next 10 years actually it's rather concentrated in the first three I suppose for Capex.
Great. Thank you.
Thank you Sydney.
Yes.
We have a question from Thomas O'malley with Barclays. Your line is open hey.
Guys. Thanks for taking my question you gave some guidance in terms of organic two six sequentially and with that guidance. It implies coherent kind of flat to slightly down could you just talk about what's going better what's going worse than coherent as it is at the industrial laser side you guys have seen some strength there despite the weakness in China.
Or is it on the OLED side work that microelectronics any color on the moving parts, what's doing better what's doing worse there. Thank you.
I would say, it's very very steady and actually.
There is nothing going it works you already her coherent those comments last quarter about supply chain. So actually they are delivering very steady performance all things considered.
Okay.
Helpful and then in terms of the.
The Capex, we heard a competitor talk earlier last week about their efforts to start going after our DSP technology could you just give us an update on how that effort is going for you guys in.
The strategic importance of having a DSP and both the coherent market at higher speeds in the future. Thank you.
Hi, good morning, Thanks for the question, so well as I said in my prepared remarks, you started investing in 2019 that three years ago, we realize the strategic importance of the.
Our ability to design and our own.
And we are we started.
Introduced.
It's dedicated.
DSP for as I said for the one other.
<unk> G Ethernet links links, but particularly on the backhaul wireless bottles and so forth.
As I said, the almost like millions of ports that needs to be upgraded from 10 to 100 G and DSP is going to give us a incredibly.
Competitive cost talk show in addition to of course to the lasers and detectors and the basic.
Vertically integrated manufacturing lines that we have in China, and Malaysia, So bet.
That DSP.
Investment is continuing and we hope to see walking them.
All the functionalities are the reaches other applications and.
We will continue to beef up the team.
With tolerance to continue to support them.
Particularly with the cool you didn't side of the of the transceiver demand, which when we will need Oh.
To broaden the portfolio beyond what we already announced so anyway. So as I said, we did the vehicle both brands.
We decided to go with inorganic investments and so far it's been delivering according to plan and will be really really excited about it.
And I would add on that.
I would add that.
Our current supply chain partners, who have really done a great job for us at the same time.
So we have we have this dual approach here because we're thinking about the future.
Thank you Chuck I appreciate it.
You bet.
Thank you and that's all the questions we have I'd like to turn the call back to management for any closing remarks.
I want to thank all of you for being with us today.
We hope you have a good day and we look forward to seeing you in the future.
This concludes today's conference call. Thank you for participating you may now disconnect.
To raise your hand during Q&A you can dial one one.
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