II-VI Incorporated (IIVI) on Q2 2023 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to the Coherent Corp. FY2023 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to your speaker today, Mary Jane Raymond, Chief Financial Officer. Please go ahead. Mary Jane Raymond: Thank you, Kevin, and good morning. I’m Mary Jane Raymond, the Chief Financial Officer here at Coherent Corp. Welcome to our earnings call today for the second quarter of fiscal year 2023. This call is being recorded on Wednesday, February 8, 2023. With me today on the call is Dr. Chuck Mattera, our Chair and Chief Executive Officer. After our prepared remarks, both Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Materials Segment; and Dr. Mark Sobey, the President of the Laser Segment, will join us during the Q&A to discuss the unique benefits of our strategy, our results, and the exciting prospects across several broad markets. For today’s call, the press release and the investor presentation are available in the Investor Relations section of our website, coherent.com. Today’s results include certain non-GAAP measures. Non-GAAP financials are not a substitute for, nor are they superior to financials prepared in accordance with GAAP. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today’s documents. I remind you that during this call, we’ll make certain forward-looking statements. These include, but are not limited to, statements regarding geopolitical and macroeconomic trends, expectations for our revenue, our market trends, and our expected financial performance, including our guidance. In addition, we’ll discuss our progress on integration, including our delivery of the projected synergies. All forward-looking statements are based on today’s expectations, forecasts, and assumptions. They involve risks and uncertainties that could cause actual results to differ materially from our comments today. Our comments should be viewed in the context of the risk factors detailed in our most recent Form 10-K for the fiscal year ended June 30, 2022. Coherent assumes no obligation to update the information discussed during this call, except as required by law. With that, let me turn it over to Dr. Chuck Mattera. Chuck? Chuck Mattera: Thanks, Mary Jane. Thank you all for joining us today. Coherent Corp. posted a record revenue quarter of $1.37 billion, consistent with the midpoint of our guidance and grew 70% year-over-year and 2% sequentially. Looking close up at legacy II-VI. Impressively, organic growth was 23% year-over-year and 4% sequentially, while the consolidated pro forma growth was 15% year-over-year. Regarding the composition of our sales by the four major markets: industrial accounted for 33%, communications 44%, 15% from electronics, and 9% from instrumentation. Turning to the distribution of our revenues by region. The second quarter was similar to the first quarter. North America accounted for 55%; Europe, 18%; Korea and Japan combined were 13%; China was 11%; and 3% to the rest of the world. Our non-GAAP EPS was $0.95. We continued our disciplined approach to capital allocation during the quarter. We generated $220 million in cash from operations and invested $106 million in capital equipment for $114 million in free cash flow. We also paid off $133 million of the debt. Our investments in our silicon carbide platform were nearly half of our total capital investment as we execute our multiyear road map for the electrification of transportation and renewable energy infrastructure among our commitments to sustainability. Last week, during Photonics West, we had a strong showing of our broad portfolio of new products and technology innovations that are enabling a wide range of applications across our four end markets. Our thought leaders presented at various events, workshops, and technical sessions, and we had several significant new product announcements. These included the introduction of Python, our next-generation OLED-annealing solid-state laser targeted at new Gen 8 OLED fabs. This is the culmination of four years of innovation and development that retained Coherent’s position as the annealing process of record while improving performance and significantly reducing cost per panel. We believe our innovations in this system will drive adoption into more price-sensitive displays, such as tablets, laptops, and high-end monitors. To further secure our position as an industry leader in ultrafast cutting of OLED panels, we introduced two new ultrafast lasers. We also introduced our next-generation pump laser diodes for fiber lasers with the first semiconductor chip in the industry, to our knowledge, to achieve 50 watts of output power. And we showcased our fully automated contactless laser system for texturing and marketing implantable medical devices. Turning now to our performance by market. Our revenue in electronics grew 131% year-over-year and 11% sequentially, setting another record by hitting the $200 million quarterly mark. Growth was driven primarily from sensing and the seasonal tailwinds of a new product cycle, which we described on our last call. This is the second of the seasonally high two quarters, and in the second half of the fiscal year, we will enter the seasonally low period, during which we expect to have considerably lower revenue when compared to the first half. Our customer intimacy in this market gives us optimism that the future opportunity in consumer electronics is still much broader than just VCSELs for 3D sensing. We believe that sensing will become ubiquitous in metaverse hardware and wearables and LiDAR and other emerging applications. Our strategic engagements are growing across them all. For our silicon carbide power electronics and wireless semiconductor business, we continue to invest in silicon carbide substrate and epitaxial capacity to accelerate the pace of our shipments as demand continues to exceed our ability to supply. In the electric vehicle market, EVs represented 10% of all vehicles sold globally in calendar year 2022. As EVs continue to grow, industry estimates expect the adoption of silicon carbide electronics will also grow but at twice the rate of the overall EV market. We are steadily gaining share in what we believe will be an underserved market for many years to come, perhaps even through the end of this decade. Communications revenue grew 18% year-over-year and 3% sequentially, led by both telecom and datacom, each of which achieved record revenue. Telecom growth was led by broadband initiatives, which in turn drove demand in the metro edge to access networks. We are encouraged by the opportunity that we expect to result from the U.S.’ planned $65 billion investment in broadband access from the Infrastructure Investment and Jobs Act. We expect that it will be a major catalyst for optical communications and specifically our telecom business at all levels of the value chain. As access networks grow, they drive upgrades in the metro, long-haul and submarine networks, all requiring our Coherent transceivers and ROADM integrated product solutions. Our datacom business also hit a quarterly record. Our industry-leading position in 200G and above remains strong at 51% of our datacom transceiver business, compared to 33% a year ago. Our leadership in this area stems in part from our vertical integration of our high-speed lasers, optics, and electronics in our transceiver modules. In addition to our growth of 200G, 400G datacom transceivers, we continue to see accelerated deployments of 800G transceivers, enabling open AI and machine learning applications. We are ramping our full capacity to meet the growing customer demand over the next few quarters. Our optical communications business was honored yesterday ahead of the Optical Fiber Conference in March with awards for three of our products that the 2023 Lightwave Innovation Review singled out. First, our 100G ZR QSFP28, which will enable service providers to upgrade millions of 10G Ethernet links to 100G at the optical network edge; second, our 200G indium phosphide electroabsorption-modulated laser, which is critical for next-generation data center interconnects; and third, our Wavemaker 4000 programmable optical spectrum synthesizer. These awards showcase our innovation leadership across our broad optical communications portfolio. Revenue into the industrial market was mixed. EUV grew 38% year-over-year. Also, we achieved record revenues from products related to precision manufacturing of electric vehicle batteries. In flat panel displays, one less large Excimer line beam system shipment accounted for almost all of the quarterly change in the Laser Segment revenues. We saw sequential declines in the advanced packaging and interconnect markets, such as printed circuit board via hole drilling and back-end semiconductor applications such as marking. This was offset, however, by strength in the semiconductor front end where we set another quarterly record for shipments of lasers for wafer inspection, as well as wafer annealing for logic devices. We also delivered the first full laser and optics subsystem to an industry leader for an exciting new memory application, which had previously been a non-laser-based solution. We had a record quarter for our advanced materials and metal matrix composites into the front end of the semi-cap equipment market. These novel materials allow customers to push the performance limits of their wafer fab equipment, including for immersion and EUV lithography and for wafer stages and wafer chucks. We’ve worked hard throughout the last few years to scale our capacity and our output to allow our customers to mitigate the semiconductor shortages by increasing tool capacity. So, we were delighted to be recognized by Applied Materials, the world’s leader in wafer fab equipment, with their Supplier Excellence Award for a collaboration. We also had record Excimer laser revenues for a pulse laser deposition equipment, a rapidly growing product line serving the semi-cap equipment market. Customers are leveraging this new enabling technology for diverse applications from high-temperature superconducting tape for next-generation fusion reactors to 5G filters in mobile phones. We are a market leader and a pioneer in pulse laser deposition. This technology has the promise of enabling the production of novel semiconductor materials through the engineering of atoms and photons, a great example of the synergistic power of our combinations. Our instrumentation business sustained record levels, growing 2% sequentially. While PCR-based COVID testing is tapering off, our growth in bioinstrumentation from other applications allowed this market to maintain the higher level of revenue achieved during the growth for PCR testing. We also had strong revenue for our products in advanced imaging applications for neuroscience and disease studies. These applications require ultra-short pulsed lasers, part of our portfolio where we excel. Before I turn it over to Mary Jane, I imagine that you all have now seen our other exciting news today: our move to list our stock on the New York Stock Exchange on February 23rd. NASDAQ has served us well since our IPO on October 2, 1987, and we are very appreciative of that support. With our recent growth, our continuing aspirations to be the best at what we do and our global platform, we believe that the New York Stock Exchange complements our new Coherent brand and is the right place for us to be at this time alongside many of the world’s most prestigious companies. With that, I’ll turn it over to Mary Jane. Mary Jane? Mary Jane Raymond: Thank you, Chuck. Our revenue of $1.37 billion was negatively affected by $6 million from currency compared to Q1 FY ‘23 with immaterial effects on the EPS. Our backlog was $2.9 billion at 12/31 and remains solid as customers return to more normal patterns of ordering and inventory management. Our Q2 non-GAAP gross margin was 39.8%, and the non-GAAP operating margin was 20.3%, both negatively affected by $3 million in currency or 20 basis points compared to Q1. Supply chain costs were $10 million and are not excluded to arrive at the non-GAAP results. At the segment level, the non-GAAP operating margins were 19.4% for networking and 26.2% for materials and 15.7% for lasers. GAAP operating expenses, SG&A plus R&D, were $403 million in Q2. Excluding $90 million of amortization, $29 million of stock comp, and $16 million of transaction and integration costs, non-GAAP OpEx was $268 million, or 19.6% of revenue. Our total stock comp is expected to be $30 million to $32 million per quarter for each of Q3 and Q4. Synergies have now reached $30 million on an annualized basis, and we are making good progress in all categories. Quarterly GAAP EPS was a loss of $0.58 and non-GAAP EPS was $0.95, with after tax non-GAAP adjustments of $217 million in total. The diluted share count for the GAAP results was 139 million shares. And for the non-GAAP results, the share count was 150 million shares. The GAAP and non-GAAP EPS calculations are on Tables 6 and 7 of our press release. Interest expense in the quarter was $71 million. And for the six months ended December 31, interest expense was $132 million. Our original outlook for interest cost in August was $274 million on the basis of the one-month LIBOR reaching 4.2%. It is now forecast on the yield curve to achieve 5.1%. Should that happen on the schedule expected, our goal, along with our debt repayments, will be to limit the change in our initial estimate to $5 million to $7 million for a total of $279 million to $281 million. Our December 31st balance of cash items was $913 million, an increase from the prior quarter of $15 million. After paying down $133 million of debt in Q2, our total debt position on December 31 was $4.6 billion. Using the trailing 12 months of adjusted EBITDA on a pro forma basis for the combined company at December 31, the gross leverage was 3.6 times, and the net leverage was 2.9 times without the synergy credit. Including the synergy credit of $235 million that is allowed by our credit facility definition, the gross leverage is 3 times and the net leverage is 2.4 times. Note that 15 million of synergies are already in the results. The effective tax rate in the quarter was 32%. The non-GAAP tax rate is 19%. We expect the tax rate for the remainder of fiscal year ‘23 to be between 18% and 22%, assuming the current mix of earnings and no adoption of new or additional tax rulings. Returning to – turning to the outlook for Q3 fiscal year ‘23. Our outlook for revenue for the third fiscal quarter ended March 31, 2023, is expected to be $1.32 billion to $1.37 billion and earnings per share on a non-GAAP basis to be $0.75 to $0.90 per share. With respect to our expectations on full-year revenue, we expect revenue to range from $5.35 billion to $5.55 billion. Our non-GAAP EPS estimate assumes the effects of purchase accounting, which are all still preliminary, will be added back to GAAP EPS other than the depreciation that is about $5 million in Q3. The share count is 152 million shares for the entire guidance range. The EPS calculation, including the dividend treatment, is detailed on Table 8 of the press release for the guidance range. This table also shows the earnings at which the Series B preferred stock is dilutive. All of the foregoing is at today’s exchange rates at an estimated tax rate of 19%. For the non-GAAP earnings per share, we add back to the GAAP earnings pre-tax amounts of $140 million to $145 million, consisting of $95 million in amortization, $30 million in stock compensation, and $15 million to $20 million for transaction integration and restructuring. The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, the purchase price accounting, and the share counts are all subject to change. As a reminder, our answers today during the Q&A may contain forecasts from which our actual results may differ for a variety of factors. These include changes in the mix, customer requirements, supply chain availability, competition, and economic conditions. With that, Kevin, you may open the line for questions. Operator: [Operator instructions] First question comes from Ananda Baruah with Loop Capital. Your line is open. Operator: One moment for our next question. Next question comes from Simon Leopold of Raymond James. Your line is open. Operator: Our next question comes from James Ricchiuti with Needham. Your line is open. Operator: Our next question comes from Dave Kang with B. Riley. Your line is open. Operator: Our next question comes from Samik Chatterjee with JPMorgan. Your line is open. Operator: Our next question comes from Mark Miller with The Benchmark Company. Your line is open. Operator: Our next question comes from Jed Dorsheimer with William Blair. Your line is open. Operator: Next question comes from Richard Shannon with Craig-Hallum. Your line is open. Operator: Our next question comes from Tim Savageaux with Northland Capital Markets. Your line is open. Operator: Our next question comes from Paul Silverstein with Cowen. Your line is open. Operator: Our next question comes from Vivek Arya with Bank of America. Your line is open. Operator: Our next question comes from Meta Marshall with Morgan Stanley. Your line is open. Operator: Next question comes from Tom O’Malley with Barclays. Your line is open. Operator: Our next question comes from Ruben Roy with Stifel. Your line is open. Operator: Our next question comes from Mike Genovese with Rosenblatt. Your line is open. Operator: And I’m not showing any further questions at this time. I’ll turn the call back over to Mary Jane for any closing comments. Mary Jane Raymond: We want to thank all of you for joining us today. Thank you for being patient with the time. Thanks to Chuck, Giovanni, and Mark. And we’ll talk to you soon. Have a good day. Operator: Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.IIVI Ratings Summary
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II-VI Incorporated Upcoming Q4 Earnings Preview
Analysts at Deutsche Bank provided their outlook on II-VI Incorporated (NASDAQ:IIVI) ahead of upcoming Q4 results, expecting healthy demand trends for the company's products on solid data centers and enterprise dynamics that should lead to continued revenue growth for its communications business.
The analysts also expect the backlog to continue to grow despite supply shortages appearing to have mildly improved. That said, the analysts believe slowing manufacturing activities and weakness in consumer electronics could be headwinds, and also expect gross margin recovery to be gradual on sustained inflationary pressures.
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