II-VI Incorporated (IIVI) on Q1 2023 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Coherent Corp. FY '23 First Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to your host, Mary Jane Raymond, Chief Financial Officer. You may begin. 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 first quarter of fiscal year 2023. This is our first earnings call as Coherent Corp., and the call is being recorded on Wednesday, November 9, 2022. With me today on the call is Dr. Chuck Mattera, our Chair and Chief Executive Officer. After our prepared remarks, both Dr. Mark Sobey, President of the Laser segment; and Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Materials segment, will join us during the Q&A to better explain the unique benefits of our strategy, the results we are reporting today as well as the exciting prospects we have to expand our footprint in our broad markets as we go forward. For today's call, the press release and investor presentation are available in the Investor Relations section of our website, coherent.com. Our fiscal year '22 ESG report for legacy II-VI is also on the website. It highlights key points of our Board and employee diversity, namely the 46% of our Board are women and are persons of color and that 49% of our workforce are women as well as our investments to support STEM and educational advancement. The report also details our products that are critical to improvements in global energy efficiency and the increasing sustainability of our locations that produce them. In fiscal year '22, 29% of our legacy II-VI energy consumption came from renewable resources. 100% of our European legacy sites are on renewable energy sources, and we exited this year purchasing approximately 38% of our electricity from renewable sources in our legacy facilities. I think you'll like this report when you get a moment to read it. Today's results discussion includes certain non-GAAP measures. Non-GAAP financials are not a substitute for nor 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 be making certain forward-looking statements, including, but not limited to, statements regarding macroeconomic trends, expectations for our products and technology, trends in our markets and our expected financial performance, including our guidance. In addition, we will discuss expectations regarding the recent acquisition of Coherent Inc., including market opportunities and expected synergies. All 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 the statements made today. Our comments should be viewed in the context of the risk factors detailed in our most recent Form 10-K filing 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? Dr. Chuck Mattera: Thank you all for joining us today. Nearly 18 months ago, when we were selected as the winner of an intense 3-way competition to acquire the company that was long seen as the industry's gold standard of laser technology, we embarked on a new chapter of our bold strategy to diversify and expand our exposure and participation in growth markets that are inflecting due to irreversible mega trends. These include Industry 4.0 in the technology and scale transitions that are underway in mobile and intelligent networks out to the edge; the Internet of Things to support AR and AI services; and also those consistent with our vision of a world transformed through innovations vital to a better life today and the sustainability of future generations, including our silicon carbide and battery materials that enable the electrification of transportation, an important long-term contributor to the reduction of global CO2 emissions. So with the acquisition of Coherent finally having closed on July 1, when we enthusiastically got underway, it is from this new base of unique technology endowments, a deep penetration into multiple ecosystems, strong customer intimacy, new business models that include products and service, and the addition of a huge influx of extraordinary and diverse talent to the broad base we had before that we endeavor to deliver sustainable long-term shareholder value. On September 8, 2022, we transitioned to our new name, Coherent Corp., launched our new brand and began trading with a new ticker symbol COHR. We adopted the name Coherent because it has the universal meaning of bringing things together. And I believe that a great excitement that stems from some of our really cool stuff will emerge as we bring our extraordinary talent closer together. We hit the ground running together, and we haven't skipped a beat since. The first 90 days together were super exciting as we follow our well-honed integration game plan that we laid out together for over a year prior to the close. We moved quickly into the first phase of our organizational integrations within the quarter with a focus on the worldwide sales and service organization so we could deepen our understanding of our position and prospects at our largest strategic accounts. Many of these accounts became even larger and have even greater opportunities than either company understood before the acquisition closed. I'll next share some highlights of our performance by our four major markets. In addition to the numbers Mary Jane will report briefly on the substantial progress we made on the start of the integration activities, I encourage the analysts who participate in the Q&A to direct your questions about the segments to Giovanni for materials and networking and to Mark about lasers. Before we get into the details, though, I'd like to first acknowledge the extraordinary Coherent team that overcame many dynamic challenges and delivered a steady stream of industry-leading and award-winning products and services to our valued customers. We work tirelessly to do what we said we would do. And as always in our company, our commitment is evident in our aspirations, in our actions and especially in our results. Turning to Q1. We delivered for the first time over $1 billion in revenue in a single quarter. Regarding the lingering effects of the supply chain, we have seen improvements in lead times for some strategic components and moderation of shortages for others, but we are still affected by pockets of supply chain constraints that have yet to show any signs of moderation. Without these constraints, which totaled $64 million in the quarter, we would have shipped over $1.4 billion, the top end of our guidance. However, with the strong winds of demand at our backs, we carried on with determination and delivered $1.34 billion in revenue. We grew 69% year-over-year and 52% sequentially, and consistent with our recent strong growth projections, legacy II-VI's organic revenue grew 20% compared to Q1 FY '22. On a pro forma basis, the company grew 13% over Q1 FY '22. Turning now to the segments. In Q1 FY '23, the revenue contributions by segment was 44% from networking, 29% from lasers and 27% for materials. As increased market diversification was one of the major elements of our strategy to acquire Coherent, that rationale is perhaps most evident when looking at the size of our communications businesses. In Q1, we derived 44% of our revenue from the communications market, down from the previous 66% in FY '21 and '22 when we were a company only a little more than half the size we are today. With the increased scale and greater market and product breadth, we believe that we now have a much better balanced and sustainable portfolio to drive us into an exciting future. Regarding our revenues from the other three markets, we derived 34% from industrial, 13% from electronics and 9% from instrumentation. Our earnings delivery was ahead of plan in large measure due to a relentless focus on solid market share gains, appropriate pricing discipline, driving procurement costs down and increased productivity. These factors combined enabled us to deliver solid performance with non-GAAP diluted EPS of $1.04 per share. This was considerably higher than the midpoint of our guidance, and favorable FX contributed only about $0.07 in the quarter. Turning now to the communications markets. We continue to benefit from those customers continuing to make investments in telecom and cable TV infrastructure, and we are gaining share in those markets. Our revenue growth from telecom and datacom were both strong double digits year-over-year and are both forecasted to show additional gains from that base again in FY '23 compared to FY '22 with telecom forecasted to grow even faster than datacom. We continue to drive design wins with our industry-leading Coherent transceivers that are increasingly fully integrated into the equipment makers' routers, and we have strong growth projections for our Coherent pluggable products in FY '23 and beyond. Regarding our data center customers, we continue to forecast hyperscale growth in the second half of this year. We are optimistic about the future as we believe these telecom and datacom markets will be long-term resilient as the insatiable demand for products that consume and generate information move to the edge of the network as part of the digital transformation. In anticipation of sustained demand and evolving customer requirements driving our differentiated product road map, we continue to accelerate our investments in our semiconductor laser fabs in the U.S. and Europe, and our assembly and testing facilities throughout Southeast Asia. As a result of these strong communications drivers, we had record revenues in communications with strong performance in both datacom and telecom, where the split was 57% datacom, 43% telecom. Moreover, we had record revenues from our datacom business as we continue to gain share with the large hyperscalers while enabling them to realize the benefits of their shifts to higher data rate products. In the quarter, 43% of our high-speed transceiver shipments were at speeds of 200G and above, while our shipments of transceivers for 400G ramped up and our 800G deployments accelerated strongly. Even with the current macroeconomic backdrop, our ethernet transceiver revenue for cloud applications grew at twice the market growth rate. Given our backlog, our current visibility into our customers' projections and our supply contracts that give us confidence in being able to lead the high-speed upgrade cycle, we expect continued strong growth through FY '23. Finally, during the quarter, we received a number of customer and industry accolades. In but one example, we demonstrated our new 200G EML at the European Conference on Optical Communications in September. The 200G EML will enable next-generation, high-speed transceivers at 1.6 terabits per second. And to the best of our knowledge, we were the first to demonstrate error-free live traffic in public. The excitement for such an enabling product has been tremendous from both our customers and their customers alike. Turning next to industrial. Our year-over-year revenues for the pro forma company were down just slightly, though we did experience strong growth in some sectors, including semiconductor capital equipment, which was particularly robust, driven by strong demand for our products that underpin EUV and what we believe are strong prospects going forward. In the display market, display capital equipment had another solid quarter with strong and recurring service revenue derived from a substantial fleet of our Excimer laser systems deployed worldwide combined with the highest level of new system shipments in more than a year. Also, we continue to win the vast majority of laser lift-off opportunities and see continued very strong demand for ultrafast lasers for back-end cutting of OLED displays. We remain bullish on the opportunity for larger-sized laser-annealed OLED panels in the IT segment led by laptops and tablets and believe this aligns with reported new Generation 8 fab investments and will underpin our display business through the next five years. A recent industry report on the IT OLED panel opportunity forecasts a 5x increase in unit volumes over those next five years, which is also consistent with what we hear from customers. As another example of our enthusiasm about the long-term prospects of the display business, after nearly five years of investment in revolutionary technology, our prospects for laser-based tools for micro LED manufacturing are beginning to emerge. We now have more than 25 active customer engagements with a constant flow in and out of our applications [labs]. Customers are super excited about the results of trials on our 3-in-1 MicroLED demo tools both in Germany and China and for which we just began installing this week our first tool for revenue at a well-known customer in Asia. Revenue from our differentiated products for EV battery manufacturing grew 30% sequentially. Market excitement for our portfolio continues to build as we further integrate our comprehensive product lines of both legacy companies to offer more complete and efficient welding product and service solutions. We also broadened our successful cutting head portfolio, including our recently released high-performance 30-kilowatt cutting head and expect this capability to drive a renewal of growth opportunities. Turning to the electronics market. Our strong performance in Q1 was driven by a surge in demand and record revenue quarter for our sensing business. Multiple factors have contributed to this exceptional result. We were first to market with a new sensor technology platform that enables novel functionalities in consumer electronics products. Second, we grew total share by outperforming our competition in time to market. As in the past, we expect shipments to this market to moderate in the first half of calendar year 2023, while we continue to develop new products for adjacent markets. Moving to automotive electronics and our silicon carbide business. The electric vehicle industry has been shifting to 800-volt architectures driven by demand for lower-cost, fast charging and compact solutions. Silicon carbide power devices are a must-have for these applications. Analysts project that demand will outstrip supply for many years ahead, leading to sustained bottlenecks that few suppliers will be able to break. We believe that those who have control of the substrate manufacturing, like Coherent does, will be among those who will be able to grow faster than the market over the cycle. Our substrate customers have long recognized our competitive advantage and are now securing their supply through long-term agreements. So we are a leader in this industry, and we believe we are building a competitive capability in devices and modules as well and have tremendous growth prospects for this business, too. Finally, turning to the instrumentation market. Our instrumentation business delivered a solid quarter with revenues at sustained peak levels. Our portfolio of diversified products continue to see very strong demand, including for life science applications as revenue from these products hit a record last quarter. Customers are clearly excited about our combined portfolio as well as the opportunity to provide additional value and expand even further into the life sciences market at the subsystem level. Now I won't take time to come back on after the Q&A, so please allow me to make closing comments before I hand it over to Mary Jane. For over half a century, we remain committed to creating breakthrough solutions to solve our customers' most demanding problems while building an exciting, resilient, sustainable and valuable growth company. We have the opportunity of a lifetime in front of us. And despite the uncertainty about the future and the dynamic challenges we face every day, we are still aiming to achieve double-digit growth again this year in organic Coherent and the new Coherent, too, as you saw from our revenue guidance for the full year, which includes all of our foregoing comments. All of our employees are squarely focused on building long-term value for all stakeholders. From that, in a solid financial position, we will continue to do our very best to continue to earn your confidence and trust. With that, let me turn it over to Mary Jane. Mary Jane? Mary Jane Raymond: Thank you, Chuck. The Q1 FY '23 quarterly market and geographic breakdown of our $1.34 billion of revenue can be found on Page 8 of the investor presentation. It is worth pointing out the new geographic breakdown of the company. Q1 FY '23 revenue are now distributed by 53% in Americas, 18% in Europe, 14% in Korea and Japan combined, and 11% in China. Our Q1 non-GAAP gross margin was 40.3%, and the non-GAAP operating margin was 21.3%. Supply chain costs were $7 million and are not excluded to arrive at non-GAAP results. At the segment level, the non-GAAP operating margins were 19.7% for networking, 27.2% for materials and 18.3% for lasers. GAAP operating expenses, SG&A plus R&D, were $401 million in Q1. Excluding $35 million of amortization, $48 million of stock compensation and $61 million of transaction and integration costs, non-GAAP OpEx was $256 million or 19% of revenue. Total stock comp is expected to be $35 million per quarter in each of Q2, Q3 and Q4. The Q1 amount is affected by the vesting stock compensation of $18 million for change of control. Synergies were off to a good start in the quarter with $3 million in the quarter and $12 million on an annualized basis due to the retirement of several senior executives and the planned elimination of positions. Quarterly GAAP EPS was a loss of $0.56, and non-GAAP EPS was $1.04 with after-tax non-GAAP adjustments of $222 million in total. Currency accounted positively for $0.07 in the non-GAAP EPS primarily from the weaker euro and R&D. The diluted share count for the GAAP results was 133 million shares. And for the non-GAAP results, the share count was 149 million shares. The GAAP and non-GAAP EPS calculations are on Tables 6 and 7 of the press release. Cash flow from operations in the quarter was $80 million, and free cash flow was a loss of $59 million, including CapEx of $139 million. Onetime effects on the cash flow from operations included $60 million in payments for the acquisition, including $35 million in ticking fees, those paid at close, and $25 million in legal and consulting fees incurred by the laser segment pre-close and paid on the closing date. Pretax interest expense was $62 million. Our outlook of $274 million for the year included the 1-month LIBOR reaching 4.2%. It is now forecasted on the yield curve to reach 5.3%. Should that happen on the schedule expected, our goal, along with our debt pays down -- with our debt payments, 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 net cash at June 30 just prior to the close was $255 million. Our September 30 balance of cash and cash equivalents was $904 million. Our total debt position is $4.7 billion. We did successfully settle the $345 million of convertible debt in stock as we planned. Using the estimated trailing 12 months on a pro forma basis for the combined company at September 30, the gross leverage was 3.8x and the net leverage was 3.1x without the synergy credit. Using our credit facility definition, which allows synergy credit of $250 million, the net leverage is 2.6x. The effective tax rate in the quarter was 24%, and we expect the tax rate in fiscal year '23 to be between 22% and 24%, assuming no adoption of new or additional tax rulings. The increase in the tax rate is largely driven by a larger presence in Europe as well as M&A costs that are not deductible. Turning to our outlook for Q2 fiscal year '23. Our outlook for revenue for the second fiscal quarter ended December 31, 2022, is expected to be $1.34 billion to $1.4 billion and earnings per share on a non-GAAP basis to be $0.88 to $1 per share. With respect to our expectations on the full year revenue, we expect revenue to range from $5.25 billion to $5.55 billion. Our non-GAAP EPS estimate assumes that the effects of purchase accounting, which are all still preliminary, are added back to GAAP EPS other than depreciation. That is about $5 million in Q2. The share count is 151 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 and also shows when the Series B preferred stock is dilutive. All of the foregoing is at today's exchange rate and an estimated tax rate of 23%. For the non-GAAP earnings per share, we add back to the GAAP earnings pretax amounts of $183 million to $193 million, consisting of $83 million in amortization, $34 million in stock comp, $20 million to $30 million for transaction, integration and restructuring, and $46 million for the inventory step-up. 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 may contain forecasts 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, Kevin, you may open the line for questions. Operator: [Operator Instructions] Our first question comes from Ananda Baruah with Loop Capital. Operator: [Operator Instructions] Our next question comes from Paul Silverstein with Cowen. Operator: [Operator Instructions] Our next question comes from Dave Kang with B. Riley. Operator: [Operator Instructions] Our next question comes from Mark Miller with Benchmark. Operator: Our next question comes from Simon Leopold with Raymond James. Operator: Our next question comes from James Ricchiuti with Needham. Operator: Our next question comes from Samik Chatterjee with JPMorgan. Operator: The next question comes from Vivek Arya with Bank of America. Operator: Our next question comes from Sidney Ho with Deutsche Bank. Operator: Our next question comes from Richard Shannon with Craig-Hallum. Operator: Our next question comes from Tim Savageaux with Northland Capital Markets. Operator: Our next question comes from Meta Marshall with Morgan Stanley. Operator: Our next question comes from Tom O'Malley, Barclays. Operator: And I'm not showing any further questions at this time. I'd like to turn the call back over to Mary Jane Raymond for closing comments. Mary Jane Raymond: Thank you very much for joining us today. We look forward to speaking with you as time goes on here through the rest of the quarter, and we’ll talk to you again in February. So thank you so much for joining us, and we hope you have a very good day. Bye-bye. 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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