Q4 2019 Earnings Call
At this time all participants are in a listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time.
If anyone should require operator assistance during the call. Please press Star then zero on your question telephone as a reminder, this call is being recorded.
I would now like to introduce your host for today's conference Ms., Mary Jane Raymond Chief Financial Officer, you May begin.
Thank you Skyler and good morning.
On Mary Jane Raymond the Chief Financial Officer here are two steps incorporated welcome to our fourth quarter and year end earnings call for fiscal year 2019.
With me today on the call just off the shelf material, our Chief Executive Officer, and Dr. Giovanni Board Wirth, Our Chief Technology Officer for fiscal year, 19, and for fiscal year 20 or fiscal year, our new Chief strategy officer at the President of our new segment to be called compound semiconductor segment.
This call is being recorded on Tuesday August 13 2090.
Just as a reminder, any forward looking statements we may make today. During this teleconference are given in the context of today only.
We do not undertake any obligation to update these statements to reflect events subsequent to today with that let me turn the call over to Dr. Chuck Mattera Chuck.
Thanks, Mary Jane and good morning, everyone and thanks for joining our call to review some of the highlights of our fiscal year 19, and the perspective view of our first quarter fiscal year 2000.
Before we get into it I want to thank the members of the investment community for engaging us so much since November 9th and getting to understand our value proposition is core competencies sources of sustainable competitive advantage and more about our company culture I'd like to use a few minutes before I get into it to provide some context.
Fran Kramer and I transition that the president and CEO three years ago.
Since then we have carried on in the Twosix tradition of building long term shareholder value.
Employee value and customer value one day at a time.
It's been a remarkable three years as we embark on a recurrent transformative growth phase.
Our fiscal year 19 was punctuated by growing markets underpinned by large and the irreversible Mega trends that we believe will allow us to enable our growing list of customers to win in their markets.
Oh up against this backdrop, we not only delivered solid results.
We completed two acquisitions, each and the optical communications and aerospace and defense businesses, we completed a strategic collaboration to manufacture Gan on silicon carbide devices.
We received many distinguish service awards from key customers and we continued our leadership development and succession planning to be sure. The two six maintains a top talent pool to oversee the strengthening of our enterprise wide culture, and we continue to be a company to which people want to dedicate their time and talent.
Our pending acquisition of Finisar has added a substantial engagement with the finish to our team around the integration planning of another 30, plus year industry leader, who is engaged employees that the core remarkably the same as those into six.
They care deeply about the positive impact that they can still have on the big challenges that the world is confronting.
As you listen this morning.
It has become apparent that we are going to need more time to conclude the transaction.
Good things take time and diary, we remain optimistic and enthusiastic about the combination and to get the company ready to sustain substantially scale to its opportunities and aspirations and enable us to strike a sense of urgency to hit the ground running on day, one weve organized twosix on July 1st to get us into a more scalable structure.
There are two operating segments in core functions that cut across the enterprise.
These have the additional advantage as they are also ready to plug and play when finished sure Raj.
Joining me this morning are Mary Jane Raymond our Chief Financial Officer, and Dr. Giovanni Bob Burrows for the President of the compound semiconductor segment in first two six Chief strategy Officer, Sunny Sun is the president of the Photonics solutions segment.
In the fullness of time, we will make these structural and executive leadership changes simple and clear for the investment community by way of subsequent communications. Among other changes however, I want to acknowledge this morning, Gary Kapusta, who served as the Chief operating officer during the last few years.
Like many others Gary has a new leadership role in his case, the chief procurement officer.
We are lucky to six to retain his talent as we grow.
Now, let's turn to our report today, we will give you an overview of our quarterly and annual results and our Q1 and flight 20 outlook.
Regarding the transaction as I noted and as noted in our press release, we plan to re file our application for Sam or to extend the time for a successful completion.
Both to six in finished or have extensive operations in China. Some 12000 employees in China between our two companies and we serve a wide variety of customers in the China market.
During the fall of 2019.
Turning to the results and the outlook. It was another record year for two six.
For the fiscal year, our revenues grew to $1.36 billion or 18% annual growth our GAAP EPS of one dollar and 63 cents per share grew 21% with non-GAAP EPS of $2.54 a share growing 25%.
For the quarter revenue was a record at $363 million and grew 13% and non-GAAP EPS of 67 cents per share grew 29% year over year.
Leading the growth were our optical communications and our military end markets now called Aerospace and defense.
Beginning in F y 20.
Our revenue in these markets grew 35% and 63% respectively.
We estimate customers accelerated between 10 to 20 million of revenue of optical communications products in Q4 from Q1 to satisfy their strategic planning needs.
And industrial including automotive following 40% growth in Q4, F.Y. 18 year over year, we experienced about a 20% decline compared to last years fourth quarter.
And although it was about flat sequentially.
For the full year Fynineteen optical communications grew 36% aerospace and defense grew 29% semiconductor capital equipment grew 12% consumer grew 9% in the industrial market remained flat to the peak achieved an F.Y. 18, when the market grew 20% overall annually.
Silicon carbide substrate sales represented 6% of our total revenue and grew 51% compared to Fyeighteen.
Across our end markets, we had 26 customers that each fought over $10 million and accounted for about 50% of our overall sales.
In optical communications.
Components for ROADM systems led the growth for Fyeighteen at 60% over or I beg. Your pardon led the growth for F Y 19 at 60% over F.Y. 18.
Access submarine and wireless all grew between 10% to 15% only datacom declined for the year overall at about 15%, although we saw some nice growth of over 20% sequentially from Q3 to Q4.
In aerospace and defense our work on New program qualifications in Fyseventeen and 18 are showing the results of the 29% growth for the year, 21% was organic 8% was from the acquisitions, we completed during the year.
We have begun to experience initial demand for our different differentiated products in the high energy laser systems applications.
And semiconductor capital equipment, and we have significantly expanded our CBD diamond growth capacity to serve the 27% unit growth. We had for fly 19. This method of advanced Florida lithography is taking hold with customers as a broader number adopt multiple use systems due to increase investments in logic components.
The seasonal threed sensing ramp is well underway and we expect to record Threed sensing revenue for fiscal year 2000.
We have a number of new designs and development and are excited for the expansion of functionality in calendar year 2020.
With respect to our China business as we noted earlier in the year, we examine the rules and requirements carefully and we served our China Chinese customers to the fullest extent allowed under the current regulations.
As we look toward the first quarter of F. Y 20, our guidance includes the potential for some ongoing geopolitical geopolitical tension. So our customers have continued to engage with us on long term supply planning sold supply chain planning.
As is typical we expect Q1 seasonality of about 10% revenue decline from Q4.
We believe that fiscal year 2020 will be another exciting and transformative year for two six.
And we look forward to updating investors on our progress with that I'd like to turn the call over to Joe wanting to focus on some of the other highlights of the quarter Giovanni.
Thank you talked and good morning, 2019 continue and as a great deal of growing demand for several of our engineered material platforms.
Seated on carbide substrates soon and Donald optical windows and semiconductor lasers were in high demand and other than that broad range of rapidly growing applications, such as data Center Communications Fiveg wireless you in following up the including sensing and late in the day bowls and high energy laser systems.
It is now being 20 years since we began walking on seasonal carbide, leading into the introduction in 2015, although woltz for US 200 millimeter substrates.
This year, we began to ship. These large sops. These on the pull down founded by the European Union tasked with developing an ecosystem.
For Silicon carbide based power devices for use on broadly millimeter wafers to set of buyers markets.
Including delayed could be equals.
Revenue from Silicon carbide cloud space now constitute 6% of our total revenue and continues to grow rapidly.
Last quarter, we enter the second phase for the development of our six inch gallium nitride all season long call by recent propagation capability in wall in New Jersey.
Some of the high performance RF market.
At the same time, we see where again expanding the manufacturing capacity of almost seems to leave incentive on carbide substrate to meet the new internal and external demand.
For all silicone carbide sagas that adoption, we have doubled the capacity three times in the last five years.
We have also begun to explore gallium nitride on DIAM on the RF electronics for managing applications such as in satellite communications.
As the demand the broke down when I tried on diamond materializes, we will be able to leverage our dime on manufacturing capacity, which we perfected and scale to full field a five year agreement that we announced this year with a major customer in the supply chain for you've been involved began pigment.
Our CBD Diamond technology platform, demonstrating our pipelines for technology investments, which will enable differentiated followed us for a number of market growth opportunities that will manage over time.
In material processing to six products enable manufacturers to make the lighter end the fall more fuel efficient vehicles with advanced laser processing head the patrols wells with minimal it to sex materials in April Sassy's closures and bought the assemblies.
We also expect that all tied strengthen lightweight box will increasingly be produced by Liza added in manufacturing.
And growing market for our products used in industrial leases, which in turn is driving the demand for condom upside for which we develop that patent pending at quality and process from waste streams.
Despite weakness in the memory chip market the pooled for you'll be rebook topic systems continues.
Driven by next generation logic chip settlement should rely on the UBI defaulted in demand for this technology, which includes significant content of two seats products.
And ladies sensing we've been involved in production for two years on the vertically integrated 16 weeks their manufacturing platform.
We are in early stages of a market that is growing rapidly. It will continue to do so over multiple years.
The competitors of computing communication and sensing will enable consumers to experience high quality and real time appliances reality on smartphones smart glasses and card windshields.
In addition to the ramp for three D. Sensing that Chuck mentioned, we recently signed a partnership agreement with a high volume Optoelectronics packaging leader this will leverage a newly as the platform for mobile applications that we will announce in the future.
We have continued to invest in the past.
Our system systems and serve blind vehicle markets as they continue to evolve and they have made progress in developing custom solutions in lasers optics and intervene in modules that rely on our scalable technology platforms.
Our R&D spending in fiscal year, 19 increased 19% compared to fiscal 18 from both.
WCS.
Our precision acquired last September for example was very timely.
We feel could just before a surge in demand for local count double assessing modem networks, particularly in China.
We have made significant investments in optical communication products, which provide connectivity to the global cloud infrastructures.
Including between continents to under ceilings.
This year, so the fast ever deployment, the multi core fiber technology Nanda see communication systems, which were enabled by our new 800, Milliwatts undersea pump lasers are the undersea deployments, including our local town Douglas test, which was the fast for two seats.
This year, we launched a new 400 million what version of our flagship Encore micro pump lasers still this model is on the market to enable coherent transmission ranging from 100 gigabit per second to one terabits per second and beyond.
We also extended our wheel in management and monitoring system for the platforms, leveraging our vertical integrated load them and monitoring component portfolio, such as optical channel monitors and time optical time domain that dominance.
We are excited by the opportunities as our new intelligent subsistence for CAD class optical monitoring inline transmission will be assigned to our expanding customer base, including Hyperscale data center operators, particularly in China.
Notwithstanding the data come as being soft in CF, we remain very confident in the cycle of those have been the centers driven by the cloud and Fiveg and we believe that Fiveg deployments, we boost our entire communications business in fact to meet the demand. We opened in November 2018, and additional 300000 square feet, Tom posts in Fujian, China to expand our manufacturing capacity and also our new regional headquarters in Asia with that let me turn it over to mitigate.
Thank you and good morning.
Our press release, following our usual format with a total company numbers for the fourth quarter and the full year on the second page and then the segment information followed on the third page.
We have updated all the operating margins for this segment and the company.
To adjust for all non-GAAP elements, not just acquisition related expenses.
These are now all adjusted for stock comp and amortization all south.
We are reporting our quarter and full year and our fiscal year 19 three segments.
The 10-K will be filed this way as well.
We will produce a historical results table for the new two segment by mid September .
Revenue growth of 13% in the quarter was 8% on an organic basis.
Revenue growth of 18% for the fiscal year 19, with 14% on an organic basis.
Regionally.
Correct why 19th.
North America was about 40% of the total Europe was 20% China was 22.
Japan was 9% and the rest of the World was nine.
All major regions grew in double digits during fiscal year 19, China led the growth regionally at 30% over fiscal year 18, Japan grew 28, Europe grew 14, and North America grew 11.
The Companys overall gross margin for Q4 was 38.2% and 38.3% annually.
The operating margin was 11.2 for the quarter on a GAAP basis, and 10.9% for the year, whereas the non-GAAP operating margin was 15.7% for the quarter and 15.4% for the year.
The Ensync 80, and 50 basis points, respectively compared to their same period last year.
Regarding the segment adjusted operating margins for fiscal year 19 laser solutions was 12.4% slightly higher than last year Photonics was 16.7% 40 points lower than fiscal year 18, and performance products was 16.5% 150 points ahead of last year.
The main non-GAAP adjustments in the quarter, our stock comp of $6.8 million.
Participation of $4.6 million and costs associated with acquisitions and acquisition related planning of $4.8 million.
Both stock comp and integration planning costs were lower in Q4 than we had forecasted for the year. These costs were $25 million for stock comp 16.6 for amortization and 19.4.
Million for acquisition and acquisition related planning.
Costs for the planning of the Finisar acquisition for the largest portion of the acquisition costs.
Our year end backlog was $500 million consisting of 221 in photonics.
$193 million in performance products and 86 in laser solutions. The backlog contains orders with firm ship date that will ship over the next 12 months.
It's probably worth noting that in our specific arrangements for threed sensing customers bookings tend to be recorded in the quarter of shipments.
Our 6.8 million in share based compensation for Q4, and 25 million for fiscal year 19, compared to the fiscal year 18 total of $19.7 million and 16 million for fiscal year 17.
The company had other income for the full year of $2.6 million.
Primarily from equity earnings from our investment and interest income on our excess cash reserves.
Capital expenditures this quarter were $29 million and $137 million for the year.
Full year Capex for laser solutions was $44 million for photonics was $45 million.
For performance products was $40 million and the remainder was for corporate operations and infrastructure.
By end market and growth products.
$24 million for Silicon carbide $24 million for pumps and other key comms communications components 20 million for Threed sensing 10 million for the CVD diamond and $9 million for precision ceramics.
The remainder is across all other divisions for a combination of capacity expansion maintenance capital and infrastructure upgrades.
With respect to amortization and interest expenses related to the convertible debt.
The convert remains slightly antidilutive after considering the effects of equity compensation on the diluted share count.
So the potential share count associated with the convert does not need to be added back to calculate EPS.
The tax rate for the year was 16.5% for fiscal year 19.
The reported EPS in the quarter was 43 cents a share and 67 cents a share on a non-GAAP basis compared to 42 cents gap in fiscal in Q4 fiscal year 18.
And 52 cents on a non-GAAP basis.
Our cash is $205 million and our net debt position of $262 million.
During the year, our acquisitions and investments of $88 million were completed with cash.
We repurchased.
$1.6 million of stock for 50000 shares in the quarter.
We have 29.3 million remaining on our authorization.
Turning to the outlook the outlook for the first quarter ending September Thirtyth 2019, assuming no finished our transaction is revenue of $320 million to $345 million and the EPS.
On a GAAP diluted earnings per share basis is 33 to 43.
On an adjusted basis. The EPS range is estimated at 55 to 65 cents to which we have we add back six cents for onetime transactions seven cents for amortization costs and nine cents for stock compensation.
This is all at today's exchange rate.
The weighted average share count is 65.7 million shares outstanding.
For the comparison period result for the first quarter ended September Thirtyth, 2018, where revenues of $314.4 million and GAAP diluted earnings per share of 40 cents.
Now as we turn to the Q and eight for the call.
Remember that our actual results may differ from these forecast due to a variety of factors, including but not limited to changes in product mix customer orders.
Competition changes in trade and tariff regulations and general economic conditions.
I'll also remind you that our answers to your questions today may contain certain forward looking statements, which are based on our best knowledge today and for which actual results may differ materially.
Skyler you can go ahead and open the line for questions.
Ladies and gentlemen, if you have a question at this time please press the star and the number one key on your toes Shentel fan.
If your question is finance heading with share measure yourself from the queue. Please press the pound key.
Our first question comes from Sami Chatterji with JP Morgan Your line is now open.
Hi, Good hi, good morning. Thanks for taking my question can we just talk with the temperature check on the two key end markets could you.
For the industry are then.
The fiber optic wireless communication as you referred to it I mean, you mentioned the strength that you're seeing.
Optical communication as well as the aerospace and defense and Im just wondering given kind of.
Some of the weaker industrial metrics, we're seeing where are you seeing maybe pockets of weakness in those two.
So as we said I think.
I think your question is to then ellipse illustrate industrial so as we said industrial was relatively flat for the year.
If if if you remember last year during fiscal year 18, industrial saw some really serious unprecedented growth I mean is not typical for the industrial market to grow 20% for the year and we basically the market sort of hung out of that peak.
Generally I would say that.
As you have heard perhaps from others, there is a little bit less demand for new machines.
In in some geographies around the world, we are still seeing reasonably good laser usage, which in our case is typically the driver of the aftermarket sales.
But I would say that probably if you think about the growth. We saw in 2018, we have the world pretty much the adjusting the use of those systems Giovanni.
Yes.
Oh, Okay can you.
Maybe give me some color on Sun Similarly on the wireless communication side.
And we're seeing this trend could make kind of the infrastructure investments are you seeing any slowdown given kind of the sanctions on quality are you seeing any slowdown on that golf side of things.
So with respect to just options communications in general.
When we talk about our communications in general.
First of all it has been a very very good year.
And as we had noted back when the first restrictions on Wawa came out the restrictions or ruling they weren't the band and we were very very careful in looking at what we were able to do.
We wouldn't have said that we are seeing was that sort of growth that we are really in the beginning of the fiveg buildouts.
That looks to us to remain well on its way whether that in the future in the next few quarters starts to move.
Downward for other geopolitical tensions is what Chuck mentioned, but generally speaking it's been a very very good year in communications in General go ahead.
Yes.
Somebody else's Dumont here, well as Fourg to Fiveg.
The you know the drive for our technologies, which play into those markets I want to remind you we have assuming saloon. Soon goodbye stops blues that are useful amplifies the going base stations. We hope was to have all of the optical communication infrastructure that feeds into the Fiveg fourg wireless infrastructure and softball. So if you look at over the entire the mine.
For our products that feed into the fold you if I address those as being very very strong.
Got it cutting just have a quick follow up on the gross margin I see on the slide deck. If you have a full cost for improvement in gross margins in fiscal grainy Rafi go to 40, plus unlevered just how much of that should we think about being kind of okay.
An improvement driven by.
Utilization of three D sensing and if they are there any other drivers that the E com driving that improvement.
Okay. So I'm just wondering if this is chuck thanks for joining us on me I would say a view you hit it three D sensing the utilization of our fab and our three D sensing infrastructure will be a major contributor to the margin improvement.
Great. Thank you.
Yes.
I would like to add one new for the benefit of the of the.
Those on the call from a gross margin point of view one of the things. We noted was the very very nice growth, we're seeing in aerospace and defense.
Some of that particularly for newer systems, particularly high energy laser systems some of those.
Arrangements or cost plus that does have the benefit that the effects of a little bit of downward pressure on the margin because their cost plus versus fixed price, but generally speaking chests answer still stands which is that the largest driver of the gross margin is three cents.
Go ahead please.
Our next question comes from Matt.
Tom Marshall with Morgan Stanley . Your line is now open.
Great. Thanks, guys.
First question just any change in kind of the makeup of the orders that you're receiving from talking to customers. I think we had heard from other market participants, perhaps for lower speeds or exceed perhaps slowdown in orders from not being able to get the full package anything that you were able to know kind of along what the make up of the orders were and then you know second question just given the departure of the finesse our CEO like was that expected or kind of any change to your kind of plans with fitness our post acquisition given management changes. Thanks.
Good morning, this is Chuck.
Well, let me say on the first one yeah, we were steady as we as we go in terms of the mix the demand and the supply chain managers that we interact with in China. So there we were worried that we might see a little bit of an interruption based on other people's reports of having suspended their sales.
What are our sales crews right along through the through the fourth quarter I think what we're what we're expecting is that we might see a shift to new products beginning in F y 20.
For for various various reasons. So we're stepping up our our investments to be able to assure that we have a new product platforms to offer their customers as well and then as far as Michael Roessner his departure.
The.
I would say that we have been able to thanks to the finish to our board and the executive team and Michael and so they've all been extremely supportive of our engagement for the planning that we need to do and I would say that.
And things on that front are going exceedingly well.
Okay, great. Thanks, guys.
Our next question comes from Jim Ricchiuti with Needham and company. Your line is now open hi, good morning.
A quick question Chuck I think you alluded to some acceleration from Q1 of 10 to 20 million in the I believe was the optical communications area I Wonder if you could just expand on that a little bit.
Well, we have a we have a portfolio of products, we can monitor and met with our interactions with the supply chain people in our customers and we have a good sense for how much they want from us.
Including for a few quarters are.
Because our sense is that that.
We were.
As to two sprint a marathon for the last three or four weeks in June .
And some of that were because we could.
And because we hadn't had a timely expanded our capacity we were able to serve them and we think that there was a little bit more than we were asked to do in the fourth quarter and then what we were expecting.
And we think that that's that probably came from simply a rebalancing on their side of demand from Q over Q1, two our Q4 and our judgment is just about $10 million to $20 million.
That's the best I can say.
Got it and then just turning to the industrial business Theres been obviously, a lot of focus about demand and pricing in the laser market in China and I'm wondering are you seeing any.
Any changing any changes in the pricing environment for the components that you supply customers in China, and the industrial laser business.
Hi, Jim This is Giovanni here nothing left side because of the.
Really a common no.
Trained in a price declines and and general of pressure from the market on the remaining competitive but.
I wanted to mention industrial that it's I would say the China, you will definitely weaker and none of them may pose actually strong. So we see when we see the general industrial market.
I would say as a whole it was as we said it was.
Could be.
And we'll see flat.
But it's a combination of in all geographies together because the those definitely have a productive quite been activity in North America with a boost on go make those on the call them.
Okay. Thank you.
Again, if you have a question. Please press star and then one our next question comes from Mark Miller with the Benchmark Company. Your line is now open.
Hi, good morning.
Good morning.
I just wonder if you could break out the Rotem wrote himself as a percent of total sales what was the euro year over year growth and if you give us a little more color on the impact of our way in the fourth quarter and what you expect this quarter.
So I think has.
Chuck indicated it's a sale or the growth in opinion allocation was largely dominated by the growth in the world and component so with respect to.
Overall growth I mean, I think as they were they grew probably in excess of 60% for the year as Chuck said and also in terms of their proportion of the absolute total they're probably in the neighborhood of about 55% to 60% of the.
General Communications.
Which is about where they've been for a while.
And what was the second.
Good morning, Good morning, Mark what was the second part of your question. Please.
A little more color on why wait and then what you're expecting this quarter and what happened last quarter.
Let's see we what we've said is that we are in a far way supply chains, but we have.
Not been able to say more than that.
They have been an important customer for for us inside that supply chain.
We are.
That that was a driver in the in the fourth quarter and I do expect.
It to slow down just a bit here as we enter into Q1 and that may be part of the story of this rebalancing or acceleration that I referred to earlier, that's the best I can do to give you some color.
Thank you.
Yep.
Our next question comes from.
With Deutsche Bank. Your line is now open.
Hi, Thanks, and good morning.
Hi, good morning.
What's the recourse tier silicon carbide wafer business I assume he also did not see any impact from the law way, while we issue, but have you seen an acceleration of orders from your customers that would indicate share gains for them versus their competitors and if so how do you plan on set a sign that demand.
Oh, Hey, good morning City. This is Chuck let me try that we have we believe as we look out into the semi insulating silicon carbide market underpinning not just one and not just too, but probably three or four major adopters of Gan on silicon carbide technology.
We.
I mean, we have have been extremely busy expanding in shifting some of our capability to serve this semi insulating silicon carbide market.
Our view is that that across the board.
The the acceleration of the adoption of Fiveg infrastructure. In addition to a normal pace or build off we're forging but in particular five Jing is stimulating an awful lot of design in work around this technology Bye bye.
Quite a few large incumbents that help you.
Yes. That's helpful. Thanks, then maybe a follow up to that.
If you look at a let's say a over the next three to five years, what kind of cost improvement for Silicon carbide wafers, you expect on an annual basis.
The reason I asked that is because it does seem like there are more competitors entering the market. Just for example last week, we have a Taiwanese company coming in so maybe broadly how do you view the competitive landscape there.
I think first of all.
As we look out on the silicon carbide market and we we look at the demand we have from our customers a lot of which is.
Associated with long term agreements if not all of it we look at what our plans are for capacity expansion, which as we've talked about in the past comes in a number of ways.
Not just the addition of machine we would expect first of all to be able to maintain the margins over that period as the market matures.
While that probably has some interaction between the cost and the pricing as I said, it's the first thing that's important to understand is that the innovation on how you make silicon carbide Hum along with the market's increasing demand and that's important otherwise the world would not have enough capacity, but let me end average volume pickup from there yeah, we obviously have to.
To remain competitive.
Across the board you know for me, obviously cost perspective.
And the quality and capacity and softball, but I want to just the.
Steve.
Very important.
Factored the ultimately the quality of yield to substitute.
Dictates the quality and the for the yield of the final product and the process of qualifying the substance of it staying consuming is very long and.
Most of the customers, particularly the largest customers we have.
Don't want we believe they don't want to start work could end up being a very expensive cost deductions. So in other words the idea that it could be a competitive cost wise and stops that level.
Which end up being.
Not so profitable as the finished device level and the fall the subsurface probably not where.
The pressure is on cost, but it's actually more on the processing the first auction and so forth. So the cost is going to be pressure.
To be cost.
Competitive.
By the time it took us.
For example, with our most important customer to be designed in with our stabs studies. It was a co development. It took several years.
And it will take.
Even more years to be replaced by someone else has a very sticky process and as the market is ramping costa is always important but its probably not the most important.
Criteria to select.
Alternative suppliers. So we think that the the past as we went through with our customers.
Basically demonstrated the quality, particularly of our semi insulating.
Substrates, and we think of that.
That explains why we believe we have the larger share.
Of the.
RF market at this point with the seasonal classics.
That's super helpful. Thanks.
Maybe just switching gears.
On a two year lease Doug can you talk about the lead times of your products settles here.
Product shipping today are they related products shipped by your customers a quarter or two quarters out maybe even longer and have your dollar content change over time as it towards become more mature. Thanks.
Yes, certainly.
It's a great question.
We believe that our our lead times are probably among the shortest than the chain. When you look at the the entire supply chain for the for the many products that we make in multiple.
Sub systems of the tool itself.
Our understanding from publicly available are disclosed.
Communications by the by the end customer.
Is that the cycle time for building. These tools is really really quite a long time as long as two years or at least one to two years, including the burning times and.
So we are we have been ramping and we have said that we believe that roughly 1% to 2% of the the price of the tool is our share.
Both for initial components and then consumable components.
We believe that has not changed we think we think time will tell for example, whether or not we have either an increase or decrease in consumable content, but based on what we know 1% to 2% and and I don't think that we have because we talk we talk to both our intermediate customer and the end user.
And I think that we really don't have an idea as to how long. It takes for what we make to end up actually in somebody's wafer fab, but my guess is probably inside that one to two year time period. Okay.
Great. Thank you.
Yep.
Our next question comes from Dave Kang with.
B. Riley FBR. Your line is now open.
Thank you good morning.
My first question is regarding your fiscal first quarter outlook regarding a sequential decline of approximately 20 $530 million. Besides why that you talked about is there anything else that's driving the sequential decline.
Well I think first of all what we said about our outlook was more that we are.
Expecting.
That we may have some comments.
Effects of ongoing.
Kind of geopolitical tensions I believe we said, while we specifically about anything at all.
But I think generally speaking.
And for US industrial at General matter typically has a decline of that roughly 10% or more for industrial proper because a lot of that same dynamic that actually drives the fourth which is that.
Typically the machines going before the summer before the shop summer shutdown, so that that's one thing.
It also from a military pointedly starts at the end of the fiscal year, we have quite a bit of an increase in our aerospace and defense business and that may shift that seasonality a little bit.
But those are really the main factors and I think even in years, where weve been questioned when the optical cycle. After communications cycle has been growing about Atlanta, we shouldnt really see seasonality in Q1, we did have seasonality in Q1, the year still growth so.
I think thats really all there is still its just the typical seasonality that we are expecting.
Okay, we have.
Okay go ahead.
Sorry.
Okay. So just to be clear is because when Chuck was talking about like 10 to 20 million acceleration.
In the fiscal fourth quarter I thought maybe.
That may not repeat so that probably might be slowing down I thought that's what he said, but maybe not.
No what I said was that we believe that inside this very strong fourth quarter.
That supply chain managers accelerated their request for us to ship based on our extraordinary ability to scale in the fourth quarter and to satisfy their needs.
They asked us to to to ship, what we believe is roughly $10 million to $20 million that we think would have come ordinarily either from the schedule first quarter or most of its schedule first quarter, maybe a tad in the second quarter.
That's about it.
Okay understood and my second question is regarding Fiveg base stations.
I believe hallway was looking into Gan on Silicon carbide and also Gan on silicon have they decide which route they're going to go with.
Dave we believe that the Fiveg infrastructure.
The the largest build outs of fiveg infrastructure around the world because our belief.
We will contain.
We'll have the largest content of electronics baseline Gan on silicon carbide.
Okay, and my last largest sorry, not just one provider are not just one.
One service provider.
That's horrible Weve got it my last question is on any tariff impact either to us or to China.
Yeah give Mary Jane said here just to.
And then some water.
Okay, Mary Jane do you want to hear your risk is there any tariff impact sure.
I mean, when we commented.
Just the tariffs on the year on the quarters with not particularly material.
That is still the answer wasn't particularly material, but I would not like to leave you with a sense that there was zero.
I wouldn't say this though as well.
1234 things that are immaterial can still be collectively immaterial, if they keep going however, when kristina.
789, immaterial things that could start to add up but right now the impact of tariffs is relatively immaterial, if we take them collectively as they apply to assess whether imposed by China.
Got it thank you.
Sure.
Our next question comes from Paul Silverstein with Cowen. Your line is now open.
Hey, Paul Fred I appreciate taking the questions wording or some clarification before broader question first off merger in response to the previous question.
Your answer I think was largely backward looking the short question would be now the tariffs are going up to 25% does that change the equation going forward I Trust. The answer is still not meaningfully individually or collectively could have an impact and they've got sort of the club just a broader question. Yes, that's right. When we put the first comment out that we thought tariffs will be relatively immaterial we included.
What would happen if the tattersall into the 25.
Okay moving on.
Oh, you're photonics book to Bill in your performance products book to Bill like Trust from a previous commentary that youre not concerned by since original optic answered.
With the fact that the book to Bill used off quite a bit.
Is that the pull forward of the revenue that Chuck alluded to it and that's it.
Is that normal seasonality, what's going on there.
Yeah, I would say that basically there's three things that are affecting the book to bill across the segment one was.
Right on one hand, the revenue itself what high so that changes the math of the equation.
Oh really.
Book to Bill ratio itself. The fact that there were higher bookings, particularly strong performance products, we've seen so great.
Yes, we've always said bookings are a little bit lumpy button, but the bookings were huge and especially for performance.
In Q3, and then as Chuck said that roughly.
$10 million to $20 million of revenue that would have normally been in Q1.
Would have been in Q4 as the booking.
But in fact will be what we would call a book and ship it came in and we shipped.
Got it alright, so let me ask my broader question.
If we look beyond 90 day periods, when we look out through the through the full calendar Oh excuse me fiscal 20 and beyond.
What are the greatest upside opportunities and I recognize you all have a lot of irons in the fire. They always have and they seem to be growing but what are the greatest opportunities what are the greatest downside risks.
Well I think what we'll all that well.
Help you here.
I think generally speaking I mean, one of the things that's really exciting is.
That the growth markets that we targeted silicon carbide either decrease on things are really starting to move.
And we we continue to see again not only growth for example in silicon carbide in power, but we also are saying on a semi insulating I Ferrara. So those are going to take.
Our very nice for us after communications, obviously moving into the beginning Vijay.
It is super exciting given the potential for that to be a sustained trend.
In industrial as well I mean somebody gave a lot of really fantastic color on many of the innovations in advanced machining that are dependent on laser power. Notwithstanding there is on the fiscal year 19, with a little bit of a flatter year all of those things drive for countries around the world not just individual companies right the ability to advance a knowledge economy advanced industry 4.0 et cetera, So that ends up making us pretty excited about a lot of things.
Having said that.
Anything that disrupt trade.
It's disruptive and you can get to the point, where people are uncertain and therefore, just pause in how they are buying things our planet.
So consequently, we do worry about the ongoing political tensions and certainly look forward to them being.
Resolved satisfactorily.
And I think generally speaking.
That there's any number of things that can happen, we just talked about the competition geopolitical economics et cetera, but I'd say, we're fairly excited about all of them, but let me see what Jim I would like to add.
Yes I.
Obviously concerns about trade relations those those will notwithstanding we were still very excited about generally speaking in the optical communications the upside potential data across the board the Gsseven combines electric vehicles.
Hi image lasers, where we are.
We are we have been.
Gaining share there, but they're also the three D sensing.
I just want to remind everybody just a couple of years ago, we had seasonal strength.
So obviously someone's been losing share out there and weve been growing it and we will continue to grow our share.
In the end the duty Centermark and as we said in the script, we anticipate that unfold.
Beyond the fiscal 20.
Our three D sensing revenue will be higher than the fiscal.
19, so we'll keep going.
And.
We'll add up to what I, just said the other technology platforms, which we believe will be boosted by.
It will be called irreversible Mega trends, which we don't believe.
We slow down in the in the next two years.
Yes, Hey, Hey, Paul Good morning. This is Chuck I would like to.
In particular I'd like to come through the optical communications space make three points.
Number one we continue to see in in 20.
As well as did in 19 in 18, a really strong upcycle on under sea.
Communication network deployments and we believe that we are extremely well positioned with our portfolio.
We believe that we will see growth in 20 or even over 19, which was a strong year to begin with.
We're sold out as it relates to Fiveg.
Our our number of our lines, including.
Within fuel filter lines, which are going to be needed in very large volumes. We are sold out and we're looking now to be able to expand our capacity quickly.
To satisfy them and then finally, you looking beyond 20.
We're going to use this time period, where where other people may seem more uncertainty and we're going to position our portfolio in Germany alluded to it earlier, you will see us spending more time developing more software embedded products to be able to satisfy the evolving needs of our customers, including OTDR subsystems for Rotem subsystems and for all optical cross connect system. So this is a great great an exciting moment for us for.
I appreciate the responses. Thank you.
Our next question comes from Richard Shannon with Craig Hallum. Your line is now open.
Hi, Richard Hi, Good morning, Mary Jane to Chuck Thanks for taking my questions as well, maybe I will add to the topic of silicon carbide here I think if I caught your numbers right from prepared remarks Silicon carbide grew roughly a 50% last year wondering what do you can give us a sense of what your expectations are for growth there or maybe couched. It in terms of what's your capacity will enable and also if you can talk about the current position or mix of silicon carbide, that's the six inch and where that could go next year.
So with respect to some extent.
Well I think first of all.
We would expect to continue to see silicon carbide, continuing to grow whether it's exactly as they say I'm not sure I can say, but we certainly expect that to be among the elevated growth rates, we see in our north of north of 30 ish keep going I'm not saying, it's Larry I'm, just saying that if we expect it to be among the accelerated for hours and if you think about giovanni's remarks that we have doubled the capacity three times in five years.
We don't tend as a company to put out press releases when we in our capacity expansions, we just sort of get on with doing it but also capacity expansion happens in a lot of different ways. Not just the addition of new machines and so consequently, I would expect that for a good long time here to be having a significant part of the capex dedicated to silicon carbide as we've said before we now see demand in RF and power, particularly for electronic vehicles, but our view as a company I think as you now is that we do not expect the demand for power.
Yes.
Silicon carbide to be just limited to electric vehicles over the course of time Gotcha Yeah.
Good morning, Richard Richard I would just I'd add that.
We think that that the yielded throughput.
Large increases in yield in through yielded throughput need to accelerate as we look out. This is such a big market place that we are underpinning.
As we look out over the next three to five or even five to 10 years. The marketplace is woefully inadequate with supply capability of high quality silicon carbide substrates as the electric vehicle market.
Penetrate deeper and deeper into the traditional.
Internal combustion engine market the world is going to need a lot more capacity than what it has and we're intending to add more capacity to keep pace with our objectives, which is that this business will be one of the growth engines for two six for a long time to come.
Okay. Great second question on Capex can you give us a sense of what you're thinking for fiscal 2000 either.
A number or kind of relative to what you just spent for 19.
Well I think first of all generally speaking, it's probably in the neighborhood or lots of what we had this year.
We.
Obviously had some two or three years here of very elevated capex and I'll, just remind everyone that back in 2012, when our revenue was about $550 million. Our capex was $50 million. So capex for our company tends to run about 10% of the revenue, even though I know people look at that number now for us more than $100 million and think that that's still kind of elevated I think you want to think about that as being about 10% of the revenue. So I suspect that it may be at this level and some some bars around that plus or minus $10 million problem.
Okay perfect Thats all the questions from me. Thank you.
Thanks Richard.
I think at this point and that we have a lot of other call that other companies scheduled.
Today, we are at 10 o'clock I think we probably should move to close.
We really want to thank all of you who are with US today and thank you for all the questions. We look forward to updating you on the results of our first quarter call. Our first quarter of fiscal year 20 in the in the early part of November . Thank you. So much for joining and we'll talk to you said I'd like.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Everyone have a great day.