II-VI Incorporated (IIVI) on Q1 2022 Results - Earnings Call Transcript
Operator: Good day. Thank you for standing by and welcome to II-VI Incorporated Fiscal Year '22 First Quarter Earnings Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to your speaker today, Ms. Mary Jane Raymond, Chief Financial Officer. The floor is yours. Mary Jane Raymond: Thank you, Alex and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our Earnings Call today for the First Quarter of fiscal year 2022. With me today on the call are Dr. Chuck Mattera, our Chief Executive Officer, and Dr. Giovanni Barbarossa, our Chief Strategy Officer, and the President of the compound semiconductor segment. This call is being recorded on Tuesday, November 9, 2021. Our press release and our updated investor presentation are available on the Investor Relations tab of the website, ii-vi.com. Just as a reminder, our remarks today may contain forward-looking statements. These remarks are given in the context of today only. They are subject to various risk factors and are subject to change, possibly materially. We do not undertake any obligation to update these statements to reflect events subsequent to today, except as required by law. A list of our no material risk factors can be found in our Form 10-K for the year ended June 30th 2021, together with our subsequent filings with the SEC. Our remarks today do not constitute an offer to sell, nor do they constitute a solicitation of an offer to buy any securities. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933 as amended. Finally, with respect to today's call, we will also present some non-GAAP measures for which the reconciliations to GAAP are found at the end of each document that includes those measures, such as the press release or the investor presentation. With that, let me turn the call over to Dr. Chuck Mattera. Dr. Chuck Mattera: Thank you, Mary Jane. Good morning, afternoon, and evening to all of our stakeholders from around the world, including our equity and debt investors, our dedicated employees, and our valued customers and suppliers. Fiscal year 2022 is off to a very strong start. Our backlog increased sequentially from $1.25 billion to $1.4 billion. Our revenue of $795 million represents very strong growth at 9% compared to Q1, FY’21 and was squarely inside our revenue guidance range, despite continuing supply chain headwinds, which affected our ROADM business the most. The shipments of those affected products have been rescheduled to subsequent quarters, and we are working to accelerate our recovery plans. Part of our action planning is to expand our investments in analog and digital ICs to improve the resiliency of our supply chains. This will also help to maintain our market and technology leadership in the next generations of high-speed Datacom transceivers, while lowering our purchased material cost, and establishing new component OEM market channels for us as well. Our gross margin for the quarter was 40%, up year-over-year and sequentially. This was achieved through the launch of new products with higher margins, improved productivity, and ongoing efficiency, and it benefited from our sustained focus on the health and safety of our people first. These improvements are due to the well-synchronized efforts of our employees with key counterparts at customers and suppliers, taking the meaning of partnership to new levels. We are experiencing sustained and sustainable demand. In Q1, revenue grew from contributions from virtually all of our end markets and leadership in the consumer market, where we saw the revenues increased 30% sequentially and 7% year-over-year. Two important indicators of the strength of our organic growth are our fourth consecutive quarter of record backlog, and the sustained growth we're seeing across our markets. I believe one of our most important core strengths is the unique diversity of the market segments in which we have chosen to operate. In communications, our largest market today, we saw further evidence of a super cycle well underway for 200G and 400G Datacom Transceivers, 400G and 800G coherent telecom transceivers, and acceleration of our customer-configured open line and optical transport solutions. Our results this quarter were achieved through a relentless amount of hard work and preparation that accompanies the sustained intensity of a winning team. We made adjustments in the face of market realities, as we continue to balance our raw materials cost increases against product price increases with longer-term and higher share commitments. Taken all together, these extraordinary efforts enabled us to deliver $0.87 non-GAAP EPS at the high end of our EPS guidance range. Turning now to the future, I believe Q2 should be another strong quarter for us. And as you can tell from our guidance, we are still planning on growing sequentially in the quarter. I am excited about our potential this year, and looking out past Q1, we see continued market momentum and strong interest from existing and target customers in our capacity expansions, and R&D investments in technology and our new products. Our targeted investments in R&D and capital are accelerating to support our exciting growth plans beginning in FY’23 and FY’24. In particular, we are stepping up our investments in important compound semiconductor platforms with silicon carbide and indium phosphide, which leverage core strengths of II-VI and the former Finisar. In conjunction with these investments, our plans call for us to invest in new facilities and capital equipment, and we will incur increased costs beginning this quarter as we begin to hire a few hundred engineers and operators along with the startup, proven, and qualification of these new and expanded lines in the U.S. and in Europe. I believe that collectively, these strategic investments will enable us to be very well-positioned to pursue exciting new growth opportunities in the years ahead. When I reflect on all we accomplished in the quarter, I also look back on the two years since we closed the Finisar acquisition, and I'm amazed by the ability of our people to efficiently integrate, deliver on the aggressive cost synergies, and leverage our complementary strengths and portfolios to realize the power of the combination. I believe that we've demonstrated through our new product leadership, operational excellence, and customer intimacy, that we have achieved a substantially different scale and momentum during the last 2 years. A good example of this is that our cost synergies for the Finisar acquisition originally targeted delivering $150 million in 3 years, and that has now exceeded $180 million after 2 years. Another example of our growth strategy in compound semiconductors is our bold investment in silicon carbide materials and devices that will be required at a mega scale during the next decade. We're in the next phase of a large multiyear investment and aim to build a meaningful position in what we believe will become a $30 billion addressable market by 2030, while contributing to the carbon neutrality goals of the world. So, we have an exciting organic investment thesis focused on addressing the mega market trends underpinning mobile, intelligent, and electric. We will leverage our endowments from the past acquisitions and investments, combined with those we're making now, and we plan to make in the future. These efforts should provide us with exciting and sustained organic growth opportunities with market-leading and innovative customers over the next few years, and enable us to further strengthen our diversified base as we move beyond FY’22. Turning now to the Coherent acquisition, we believe Coherent is the gold standard of laser technologies and like II-VI has really great people and the unique position in the diversified markets it serves. Coherent is highly complementary and extremely valuable. I believe that the auction process revealed that the high stakes were clearly understood by all 3 bidders. We have begun to work on the integration planning process during which my team and I have been able to meet well over 100 of Coherent’s senior leaders, and we're energized by the engagements in the common denominators of values and culture. These engagements have given me extra confidence that we are in the process of creating something really special, really unique, and really valuable. With that combination, it's not only going to be a bigger Company, but we set our course on building an even better Company together, aimed at accelerating the new opportunities that lie ahead, while we make our complementary a strength to be leveraged. Indeed, we have a lot to learn about and from each other. Coherent has a complementary business model to II-VI and it will allow us to diversify, lower our exposure to any one of our market cycles, and allow us to sustain a steady investment in R&D and capital over the cycle. After closing, we will be able to get busy on targeting revenue synergy opportunities as we work to leverage our increased scale and complementary capabilities to capitalize on new opportunities across our markets. I am very confident in our people's ability to create real value in the years ahead. With that, let me turn it over to Dr. Giovanni Barbarossa, our Chief Strategy Officer, and the President of our compound semiconductor segment to provide us with an update on our results. Giovanni? Giovanni Barbarossa: Thank you, Chuck, and good morning. In Q4, we delivered growth across our commercial end markets despite supply chain challenges. In Q1, we continue to build on that momentum and as a result, our fiscal year 2022, it's off to a strong start. All of our operations, including our global [Indiscernible] are running as planned, producing high yields and quality output. In fact, I'm pleased to report that for the last quarter, we shipped all of our lasers for 3D sensing with 0 defects, our benchmark for the highest quality that we've been striving to set for the compound semiconductor industry. This is a result of a relentless multiyear investment in operational excellence supporting the substantial increase in the volume of lasers that we're producing at our vertical integrated wafer fabs in Sherman, Texas and Woodward, New Jersey. Our communications revenue grew 4% year-over-year, with most of the growth from Datacom. Our 200 G, 400 G and 800G products now represent 25% of our transceivers revenue from about a 2% a year ago. It grew nearly 70% sequentially. Thanks to our market leading platforms, we expect to grow this portion of our Datacom business to 1/3 of the total by the end of fiscal year '22. It is worth noting that our optoelectronic components for Datacom transceivers, enjoyed an all-time external revenue record in this quarter. I'm pleased to report that our IC-TROSA recently won the award for the Most Innovative Product in Optical Integration at the European Conference on Optical Communications, demonstrating our leading innovations in Coherent technology. Our IC-TROSA is the core engine of our 400G QSFP-DD Coherent transceivers which, to the best of our knowledge, have the highest output power in the market. Our remarkably high output power is enabled by our tunable laser and modulator technology based on indium phosphide. And it is truly game changing as it enables IP over DWM networks which significantly reduced cost of ownership by eliminating an entire layer of equipment. Network service providers, such as Windstream and data center operators, have already started to take advantage of our differentiated offering to streamline their deployment of 400G services with significantly less cost, power consumption, and network complexity. It is worth noting that external revenue for our tunable coherent components and modules acquired to finish, in which enables our clear transceivers increased 16% sequentially, a more than double versus Q1 fiscal year '21. A clear sign of the competitiveness of our tunable laser platform and our successful market penetration. Moving to the industrial market, our revenue grew 53% over Q1 fiscal year '21 and was flat sequentially, following the strong Q4. Growth was across all industrial applications and our revenue for components for 1-micron on all fiber lasers are now 50% of our industrial business. As I noted in the last call, we believed we are now delivering more aggregate pump laser power than any other maker of fiber laser components or systems in the world. This is due impart to the economies of scale that we've achieved with our 6-inch gallium arsenide platform by serving multiple markets, including industrial, communications, automotive, and consumer electronics. Revenue from our consumer electronics market, most of which is 3D sensing, was a record for Q1 as it grew 7% compared to Q1 of fiscal year '21, and more than 30% sequentially. During the quarter, the forecast for our global 3D sensing demand increased by 19% for the year before requiring us to operate all of our fabs through 3D sensing, at a high level of utilization for biggest production. In addition, having been selected as the partner of choice by several of our customers, we are in the process of increasing our investments. Particularly in research, development and the manufacturing, including hiring for nearly 500 dedicated jobs to support the incremental growth from future products, which we believe will enable novel functionalities in our customer's products. Components for the semiconductor capital equipment market grew 18% year-over-year and the demand for these products continues to remain strong. This is partly why we've been successful in increasing prices to support our investments required to expand capacity in response to the strong market demand. We expect to see the demand expand as COVID restrictions relax, and global fab operators can resume production and commissioning of new systems, including for II-VI as we expect to see these numbers of those systems nearly doubled over the next 24 months. In our silicone carbide business, revenue grew 50% compared to Q1 of fiscal year '21 and 4% sequentially. As Chuck mentioned earlier, our investments in silicon carbide underway, and encompass a variety of applications in vertical end markets. We expect to see our substrate business to continue to grow, and are proud to report that we started pre -production of gallium nitride on silicon carbide on our 150-millimeter substrates at our Walden fab in New Jersey, with full production plans for the first quarter of calendar year '22. With that, let me turn this over to Mary Jane. Mary Jane Raymond: Thank you, Giovanni and good morning. Our Q1 revenue of $795 million was geographically distributed as follows; 50% in North America, 21% in China, 20% in Europe, 6% in Japan, and 3% in the rest of the world. The end market revenue distribution was 67% in communications, 13% in industrial, 7% in consumer, 6% in aerospace and defense, and 7% for other end markets. Our non-GAAP gross margin was 40% and the non-GAAP operating margin was 18.9%. None of the supply chain costs or COVID costs were excluded in arriving at non-GAAP results. We incurred $4 million of COVID expenses in the quarter and $2 million of costs to secure parts for our customers. The Company has committed about $17 million of additional costs to secure parts with suppliers, and these costs are expected to be realized over the next 3 to 5 quarters depending on the availability of contracted components. At the segment level, the non-GAAP operating margins were 15.7% for photonics and 25.6% for compound semiconductors. New products were instrumental and these sustained good margins. Our record backlog of $1.4 billion consists of $914 million for photonics and $483 million for compound semiconductors. The backlog consists of orders that will ship over the next 12 months. We continue to have many orders that extend beyond 12 months as customers attempt to secure capacity for what many considered to be a super-cycle well underway. GAAP operating expenses, which are SG&A plus R&D, were $221 million in Q1, excluding $20 million of amortization, $23 of stock comp, and $12 million of M&A and integration costs. Non-GAAP OpEx was a $168 million or 21% of our avenue, this includes our silicon carbide investments. Cost synergies for the Finisar acquisition, originally targeted at $150 million, have now reached $180 million at the year 2 mark. In addition, we have formally launched the coherent synergy planning process. Quarterly GAAP EPS was $0.50 and non-GAAP EPS was $0.87 with after-tax non-GAAP adjustments of $43 million in total, including the reversal of positive FX of $5 million. The diluted share count for the GAAP results was 116 million shares. For the non-GAAP results, the diluted share count was $125 million shares. The GAAP and non-GAAP EPS calculations are in the ending tables of our press release. Stock comp was $23 million for the quarter, $4 million [Indiscernible] and $19 million in OpEx. We expect stock comp for Q2 to be $19 million. For non - operating income or expense, the Company had $8 million of non-operating income in this quarter, including $5 million of the previously mentioned positive foreign exchange, or $3 million of non-op income excluding FX. We expect the normal run rate of our -- of non-operating income or expense to be $1 million of non-operating income going forward. Pre -tax interest was $12.2 million. This is a decline from the previously prevailing $14 million at June 30, due primarily to a change in how convertible debt is accounted for. For the convertible debt only, The add-back for the EPS calculation should now be $600,000 after-tax instead of the $3.1 million after-tax we've used before. This doesn't affect the EPS calculation since the add-back is only $600,000, not $3.1 million. The starting income is also $2.5 million higher because the go-forward interest on a run-rate basis is $11.2 million, not $14 million. This quarter has -- also has approximately $700,000 of a one-time interest charge that will not recur. This change in accounting for the convertible debt also makes our standard diluted share count for EPS, $116 million shares at our current levels of income. Cash flow from operations in the quarter was $52 million and free cash flow was $5 million. We made a conscious decision to build about $50 million of inventory consisting of nearly finished goods and, in some cases, critical components to be able to ship goods to customers as soon as delayed critical parts are available. We paid down $16 million of our debt in Q1 and our net cash position is $184 million. At September 30, the value of our convertible debt moved to the current portion of long-term debt as it matures in September of 2022. The Company's liquidity at September 30th was $2 billion. Capital expenditures this quarter were $48 million. For fiscal year '22, we expect capex to be between $325 and $375 million, or about $70 to $100 million per quarter. Thus far, we have committed $95 million of capex for silicon carbide. Depreciation was $49 million in the quarter and we expect our forward quarterly depreciation expense to be about $50 to $55 million. FX was a gain of $5 million primarily driven by the Swiss franc. The effective tax rate in the quarter was 18% due to ongoing benefits of renewed high-tech status in several countries and the availability to use -- the ability to use other tax credits and FDII deductions to offset guilty income. We expect the tax rate to be between 18% and 20% for fiscal year '22. We had $12 million in total cost for M&A integration, and other costs, largely for coherent with some for Finisar. Turning to the outlook for Q2, FY '22. Our outlook for revenue for the second fiscal quarter ending December 31, 2021 is expected to be $790 million to $840 million and earnings per share on a non-GAAP basis at $0.75 to $0.95. The share count is a $116 million for the low-end and $125 million for both the midpoint and the high-end. The EPS calculation including the dividend treatment, is detailed on page 16 of the press release. This is at today's exchange rate 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 $21 million in amortization, $19 million in stock compensation, and $21 million to $26 million in transaction, integration, and other related costs. The transaction costs are expected to be higher as we accelerate the planning for coherent, including placing the debt. And we complete the final year 3 synergies for [Indiscernible] The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, and the share count are all subject to change. Before we go to the Q&A just as a reminder, our answers today may contain forecast from which our actual results may differ due to a variety of factors, including, but not limited to changes in product mix, customer orders, supply chain shortages both upstream and downstream, competition, changes in regulations, ongoing requirements to combat the COVID-19 virus, and general economic conditions. We would also ask that each firm limit its questions to 1 question with no follow-ups as we would like to try to get everyone end, during today's call. We expect to end this call not later than 10:15 am. Alex, you may open the line for questions. Operator: [Operator Instructions]. Your first question comes from the line of Ananda Baruah from Loop Capital. Your line is now open. Operator: Your next question comes from the line of Paul Silverstein from Cowen. Please go ahead. Operator: Your next question is from Samik Chatterjee from JPMorgan. Your line is now open. Operator: Your next question is from James Ricchiuti from Needham & Company. You may ask your question. Operator: Next is from Meta Marshall from Morgan Stanley. Your line is now open. Operator: Next question is from Jed Dorsheimer from Canaccord Genuity. Your line is now open. Operator: Next question is from Richard Shannon, from Craig-Hallum. Your line is now open. Operator: Next question is from Mark Miller from Benchmark Company. You may ask your question. Operator: Next is from Amanda Scarnati from Citi. You may ask your question. Operator: Next is from Simon Leopold from Raymond James. Please go ahead. Operator: Next question is from Tim Savageaux from Northland Capital. Your line is now open. Operator: Next is from Vivek Arya from Bank of America. Please go ahead. Operator: Next question is from Dave Kang from B. Riley. You may ask your question. Operator: Next is from Christopher Rolland from Susquehanna. Your line is now open. Operator: Next is from Tom O'Malley from Barclays. Please go ahead. Operator: That ends our question-and-answer session, I will turn the call back over to the presenter for closing remarks. Mary Jane Raymond : Thank you very much, Alex. We want to thank everyone for joining us today. And we look forward to talking to you as time goes on here on our various interactions. We want to wish you all a very good day. Thank you so much for joining us. Bye. Operator: That concludes this Conference Call. Thank you all for participating. You may now disconnect.IIVI Ratings Summary
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II-VI Incorporated Reports Q4 Beat, Guidance Mixed
II-VI Incorporated (NASDAQ:IIVI) reported its Q4 results, with EPS of $0.98 coming in better than the Street estimate of $0.94. Revenue was $887 million, beating the Street estimate of $859.56 million.
For Q3/22, the company expects EPS in the range of $0.77-$0.90, compared to the Street estimate of $0.96, and revenue in the range of $1.3-1.4 billion, compared to the Street estimate of $1.02 billion.
Analysts at Deutsche Bank view management's positive commentary on demand dynamics as reassuring, specifically noting the strength in data centers spending and the recovery of industrial demand in China.
The analysts mentioned that they were also pleased with the company's execution in Compound Semis, and view the announced supply agreement with Infineon as an incremental positive for its SiC strategy.
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.
The analysts lowered their price target to $58 from $75, while reiterating their hold rating. While the analysts believe the company offers great exposure to secular growth themes, in the short term, they have yet to see a clear path for a potential re-rating of the stock given the increased cost of debt and risks to its industrial and consumer segments.
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.
The analysts lowered their price target to $58 from $75, while reiterating their hold rating. While the analysts believe the company offers great exposure to secular growth themes, in the short term, they have yet to see a clear path for a potential re-rating of the stock given the increased cost of debt and risks to its industrial and consumer segments.
