II-VI Incorporated

Q2 2021 Earnings Conference Call

2/9/2021

spk16: Ladies and gentlemen, thank you for standing by and welcome to the 2-6 Incorporated Fiscal 21 Second Quarter Results Conference 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. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mary Jane Raymond, Chief Financial Officer. Thank you. Please go ahead.
spk13: Thank you, Raquel, and good morning. This is Mary Jane Raymond. I'm the Chief Financial Officer here at 2-6 Incorporated. Welcome to our earnings call today for the second quarter of fiscal year 2021. With me today on the call are Dr. Chuck Matera, 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, February 9th, 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, any forward-looking statements we may make Today, during this teleconference, are given in the context of today only. They contain risk factors that 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 risk factors can be found in our Form 10-K for the year ended June 30, 2020, filed in August. 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 Matera. Chuck?
spk06: Thank you, Mary Jane. Good morning, everyone, and thank you for joining us today. I am pleased to report that halfway through our fiscal year 2021, we are on track to deliver a strong year. Our revenue for Q2 was $787 million. It exceeded the top end of our guidance of $780 million and grew 18 percent over Q2 of fiscal year 2020. Among the many highlights this quarter were a book-to-bill ratio of 1.17 for the quarter leading to a 1.12 book-to-bill ratio on a rolling 12-month basis. We continued to execute on our ramp of 3D sensing VIXLS and delivered against an exceptionally strong demand, bringing shipments for the consumer and market to a record high of 15 percent of revenues. In addition, we delivered excellent growth in life sciences, experienced continued recovery in industrial, and saw continued strength in communications, aerospace and defense, the semiconductor capital equipment market, and in silicon carbide. Our Q2 guidance contemplated a very strong 3D sensing quarter, and we delivered on that. Our year-over-year growth in the consumer and market of over 200%, was largely driven by 3D sensing, and again this quarter, we shipped Vixel arrays in production volumes for front-facing, world-facing, and emerging applications, as Giovanni will describe later. Communications grew 5% over the prior year, including for both Datacom and Telecom. Life sciences gained significant momentum. It grew almost 50 percent sequentially and more than 80 percent compared to Q2 of last year as our products are vital components to the COVID-19 testing ecosystem. Industrial applications grew 10 percent sequentially across our product lines as we continue to see a brisk recovery driven by increased demand for automotive production. Turning now to a focus on operational excellence, We are well ahead of our plan to achieve our three-year $150 million total synergy target set for the finish of our acquisition in September of 2019. Our run rate synergies already exceed $100 million as a result of our integration work over the past 15 months. We are now on track to achieve our $150 million total synergy target in 24 months We're 12 months ahead of schedule, and we are now increasing our three-year total synergy target to 200 million. Our faster delivery of our synergy plan is contributing to our strengthening margins and our strong cash flow and reflects our ability to execute and integrate large-scale acquisitions. Our cash generation in Q2 was an all-time record for the company, amounting to $221 million of cash flow from operations and $176 million of free cash flow. From the company's inception 50 years ago, we have strategically focused on identifying and capitalizing on irreversible megatrends from our core strength in materials and optoelectronic devices. We have been successful in our organic and inorganic execution and growing by leveraging these trends. The application of our strategy and 2-6 values, our senior leadership team, and all of our employees are among the reasons we've been able to make this much progress during an unprecedented macro environment in the first half of fiscal year 2021. We look forward to the exciting opportunities ahead of us in the second half of fiscal year 2021 and for many years to come. With that, I will turn it over to our Chief Strategy Officer and President of the Compound Semiconductor Segment, Dr. Giovanni Barbarossa, to review our individual businesses while highlighting our product and technology leadership. Giovanni?
spk19: Giovanni Barbarossa Thank you, Chuck. We appreciate our investors' enthusiasm for our strategy and our successful track record of assessing long-term market opportunities, executing large-scale M&A, and developing technology platforms aimed at addressing major market megatrends. Augmented reality, autonomous driving, and artificial intelligence are among those megatrends which are enabled by 3D sensing. For this quarter, I'm pleased to report that 3D sensing grew more than 140% sequentially. We believe this is significantly faster than the market growth rate. Both the Warren and Sherman FABs are operating very efficiently due to very solid execution and contributed equally to our 3D sensing revenue in the quarter. As Chuck said, 3D sensing growth came from shipments of production volumes of Vixel arrays for multiple end customers, including for front-facing and wall-facing applications, as well as for other consumer electronics and automotive in-cabin sensing. We're also making good progress expanding our customer base with additional wins, including in the Android ecosystem and personal computing platforms. Given this phenomenal result, I believe it would be worthwhile to review our multi-year trajectory in 3D sensing for the benefit of investors who might be new to our story. Our 3D sensing work began in 2013 after the acquisition of the Gallo Master Night platform which, among many things, came with some of the industry's best VIXR technology, despite having zero footprint in the emerging 3D sensing market. We started mentioning the 3D sensing story publicly in 2016 to explain our acquisition of the WaferFab operations in Warren, New Jersey, and Champaign, Illinois, when we acquired the manufacturing foundation to strategically expand our GalloMass NI optoelectronics platform from 3 to 6-inch for the large volumes required for the consumer electronics market. We said in our investor day in 2017 that entering the 3D sensing market with a vertically integrated 6-inch platform would prove to be the most long-term competitive and sustainable strategy. Our conviction was rooted in our deep experience in the business of compound semiconductors. When we acquired Finisa, some asked us which Garnier Master Night Fab we planned on closing. Our answer was none, because we needed the capacity to gain share and become the market share leader by offering breakthrough solutions at scale. The teams in Zurich, Warren, Champagne, Easton, and Sherman worked together to get Sherman qualified and ranked. During the quarter, we accelerated our share gains, growing, we believe, faster than the market, and we are well underway to achieving the leading share of the global market. As for the automotive market, we are shipping big cell arrays for in-cabin sensing applications. We are also engaged in many LiDAR market opportunities as we have the broadest portfolio of our products in the industry. Unlike our pure-play laser competitors, we have an entire vertically integrated portfolio of both active and passive components made from our engineered materials that are critical for these next-generation LiDAR designs. On the active side, our broad laser offerings include pixels, edge emitter, laser bars, multi-junction emitters, pulse fiber-based sources, thermoelectrics, and laser drivers. On the passive side, we provide a differentiated portfolio of optical components, including polygon scanners, galvan mirrors, lenses, filters, gratings, and hydrophobic windows, to name a few. We believe the LiDAR market is still in its infancy, but with our strong customer attraction and design engagements, we are well poised to take a large share of this market as it develops. That said, the wide variety of LiDAR technologies being considered is quite characteristic of a market that is a very early stage. More time will be required to shake out the winners. We believe that the more immediate and eventually much larger opportunity in automotive is for our silicon carbide products for power electronics. Recently, one of our Japanese silicon carbide subset customers was selected by Tier 1 Japanese automotive company. And we are excited to be a key partner in their supply chain. We see that as a strong positive sign that our business in silicon carbide subsidies for power electronics will resume growth after the slowdown caused by COVID-19 in 2020. Meanwhile, we are continuing to execute on our multi-year plan to develop a product portfolio of wide bandgap products across the value chain for the electrification of the transport infrastructure. In the communications market, while telecom was impacted by the slowdown on new system installations due to COVID-19, our high data rate coherent transceivers are ramping up, adding bandwidth to both new and existing networks. We are pleased to report that we are gaining meaningful share in this market, with our quarterly revenue run rate of this product having more than doubled compared to a year ago, and we expect our share to continue to grow. As pluggable coherent modules start to enable data center interconnects, I'm pleased to announce that our disruptive pluggable optical line system, or PULSE, won the best product award for data center innovation at the European Conference on Optical Communications. The PULSE is the first product of its kind on the market and leverages two significant breakthroughs in miniaturizing optical components for amplification and wavelength management while at the same time improving performance and reducing power consumption. We are also making steady progress towards growing our share in Datatom by ramping up our 200G and 400G products, driven by increasing demand from hyperscalers both in the US and China. In fact, our 200G and 400G products more than doubled sequentially. We are also excited to announce that we have just sampled our first 800G transceivers to a large web-scale customer who has already provided exciting feedback. In industrial, we continue to see signs of a recovery driven by a strong increase in demand for capital equipment with our aftermarket business back to pre-pandemic levels. In fact, we had record aftermarket revenue in December. In the semiconductor capital equipment market, recent announcement of significant investments by TSMC and Samsung lead us to believe that our differentiated optics, ceramics, and composites could benefit from a multi-year tailwind. Finally, our life sciences business increased 80% year-over-year, driven by the demand for our thermoelectric and filter products. that enable COVID-19 PCR testing. And we are proud to have been able to contribute in such a way to the fight against the pandemic. With the progress we are making across our material and device platforms, driving top line growth and strong margin expansion, we are very bullish on our diversified business model. With that, let me turn it over to Mary Jane. Mary Jane?
spk13: Thank you, Giovanni, and good morning. Our non-GAAP gross margin was 42% and the non-GAAP operating margin was 22%. The non-GAAP gross margin is 380 basis points ahead of the last two six reported pre-acquisition gross margin of 38.2% and the non-GAAP operating margin is 630 basis points ahead of the last two six reported pre-acquisition operating margin of 15.7%. These margins were driven especially by our synergies, a strong mix, improvement in transceiver margins, and increased FAB utilization. At the segment level, the non-GAAP operating margins were 17.4% for photonics and 29.3% for compound semiconductors. Similar to last quarter, Compound semis margins were driven due to strength in 3D sensing shipments and increased fab utilization. Our backlog was a record $1.08 billion and consists of $680 million in photonics and $400 million in compound semiconductors. The backlog contains orders that will ship over the next 12 months. operating expenses, which are SG&A plus R&D, were $204 million. Excluding amortization of $21 million, $24 million in stock comp, and 1.3 of M&A and integration costs, non-GAAP OPEX was $158 million. Non-GAAP OPEX is 20% of revenue and just over and 500 basis points below the OPX percentage of revenue just prior to the close of the acquisition when it was nearly 26% for 2.6 and Finisar combined with amortization, stock comp, and transaction costs excluded. Quarterly GAAP EPS was $0.73 and non-GAAP EPS was $1.08. with after-tax non-GAAP adjustments of $43 million in total. The share count for the GAAP results was 115 million shares. For non-GAAP, the share count was 124 million. The GAAP and non-GAAP EPS calculations are in the last two tables of the earnings release. Stock comp was $28 million for the quarter, $4 million in COGS and $24 million in OPEX. This is $11 million over the estimate of $17 million due to the increase in the 2-6 stock price. The stock price is relevant to the valuation of our equity-based cash-paid instruments. We use these instruments to incent our non-U.S. global leaders who are also essential to our team of leaders thinking and acting like owners of 2-6. Using our December 31st, 2020 stock price, we expect stock comp for fiscal year 21 to be approximately $88 million, or $16 million for Q1, $28 million for Q2, and $22 million for each of Q3 and Q4. Cash flow from operations was $221 million and free cash flow was $176 million. We paid down $49 million of our debt in addition to the required payment of $16 million and the interest expense in the quarter was $15.6 million. This payment allowed us to reduce our net debt leverage ratio to 0.9 times at December 31st compared to 1.3 times at September 30th. Capital expenditures this quarter were $46 million. For the year, we expect CapEx to be between $180 and $220 million to support an increase in capacity for compound semiconductor materials and devices. Depreciation was $47 million in the quarter, and we expect our forward depreciation expense to be about $46 to $50 million a quarter. The FX loss in the quarter was $7.5 million, primarily driven by the Swiss franc and the RMB. The effective tax rate in the quarter was 17%. we expect the tax rate to be between 19 and 22% for the year. The tax rate to be used for the non-GAAP items is 19. The tax rate moderated from our prior range of 22 to 26% due to renewals of high-tech status and super R&D deductions, in addition to increased stock option exercises and changes in the mix of income around the world. Both the Ascotron and Inovion acquisitions are now consolidated in our results. The Ascotron acquisition closed on August 20th, and the Inovion acquisition closed on October 1st, both in 2020. For the two combined, we had $8 million in revenue 2 million additional OPEX and break even non-GAAP EPS in the 1231 quarter. Our non-GAAP results exclude a $7 million gain on the Inovion acquisition resulting from the fair value measurement of the previous equity investment. Turning to the outlook, Revenue for the third quarter ending March 31, 2021, is expected to be between $760 to $780 million, and earnings per share on a non-GAAP basis at 81 to 91 cents. This is at today's exchange rate, which includes a weaker dollar compared to September 30th, an estimated tax rate of 19%, and 126 million shares. For the non-GAAP earnings per share, we add back to the GAAP earnings pre-tax amounts of $21 million in amortization, 22 in stock comp, and 2 million in transaction and integration costs. The estimated Q3 share count is 117 million shares for GAAP and 126 million shares for non-GAAP. The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, and the share count all are 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, competition, changes in regulations, and general economic conditions. We would also ask that each firm limit its questions to one question with no follow-ups, as we would like to try and get everyone in during this call. I'd also like to turn it back to Chuck Matera for three minutes at the end, and we do expect to end the call at 10 a.m. Raquel, you may open the line for questions.
spk16: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mark Miller with the Benchmark Company.
spk04: Congratulations on another record quarter and the significant gains in the 3D sensing area. Just have one question. Other expense, could you give us kind of a feeling for what it will be next quarter because it's jumped around the last two quarters?
spk13: In the other income and expense, that line? Generally speaking, I think it should really probably only be the FX. with a little bit of the equity earnings from our equity investments. But the major driver that caused it to change a lot this quarter was the Inovion gain.
spk04: Okay. And so $7 million, $8 million?
spk13: I'd say it's probably similar to Q1. Okay.
spk04: Thank you.
spk13: Sure.
spk16: Your next question comes from the line of Judge Dorsheimer with Canaccord Genuity. Okay.
spk12: Hi, thanks, and congratulations on the quarter. My one question, I guess, is, you know, if I look at the strategy around compound semis, it seems that what we're seeing and what you're benefiting from is really a renaissance in the semiconductor industry that kind of takes us back or takes me back to the late 70s, early 80s. on the silicon side, but today on the compounds. So I'm just wondering, as you kind of think through the end markets from silicon carbide, sapphire, indium phosphide, all of which are kind of manufactured on various platforms, how can you help investors think through the cost curves in terms of those cycles? Thanks.
spk06: Hi, Jed. Good morning. This is Chuck. To answer your question, it really is an exciting time for compound semiconductors in general. The materials and devices have been around for many decades, as you know, and every time they have been invested in, they've been invested to enable new applications or overcome challenges that the incumbent technology have that cause either a constraint or an asymptote and performance. So they are enabling. And the value proposition ultimately has to be taken at the system level. When there's a clear enabling by the material and the component of the system itself, then there's generally a pull by the ecosystem to be able to drive this technology in. It happened in the early days of gallium arsenide for hemp and HBTs around a around the radar infrastructure that was ultimately put in place, and it led to the world that we see today, and that volume spilled over into the handset market. We see the benefit of that coming with GaN on silicon carbide, even indium phosphide-based electronics, as the advent of the design, for example, of even 6G communications networks will rely and be enabled by such innovative devices that will come. from the compound semiconductor market. I think that's probably all I can get into. Giovanni, would you like to add anything to that?
spk18: Oh, that's perfect, Chuck.
spk06: Okay. Chad, I hope that helps.
spk12: Thanks. It does. Thanks, guys.
spk16: Your next question comes from the line of Paul Silverspin with Cowan.
spk02: Thanks, guys. I guess I'll focus on 3D sensing. Chuck and Giovanni, obviously it's ramping nicely. Can you give us any additional insight on the demand outlook, especially in terms of the breadth of demand beyond just Apple, what you're looking at and the ability to continue to drive this type of growth? Obviously, we'll have large numbers. It's going to get harder as you go forward. And one other related question. I assume we should expect further margin uplift with the benefit of ongoing volume in 3D sensing?
spk19: Okay, Paul, thanks for the question. Definitely, the number of user cases and the interactions with a broad set of customers are increasing. We have, as we said in the script, we have some design wins in Android platforms. Volumes are growing. We are all surprised. They are not growing as fast as they should, but we are very very bullish about long-term opportunities for the application. Basically, it's a necessary function to enable those mega-trends that we discussed, such as autonomous driving and artificial intelligence and so forth. So we are very confident that the demand will continue. So having a A vertically integrated platform is going to be, as we said, a sustainable advantage that we have. And then, yeah, definitely volumes help on the margin side. But maybe I'll let Mary Jane comment on that part of the question. Mary Jane, would you like to add something?
spk13: I think 3D sensing continuing to gain volume is positive for the margins. Do keep in mind that the quarters across the year are not steady for 3D sensing, and typically this past quarter, the 1231 quarter, is the strongest quarter. That is what we have seen in the past. That may change, as Giovanni says, as we get an increase in other deployments, but for right now I'd say volume definitely helps, but it is not the same volume in every quarter.
spk02: Okay, thank you.
spk16: Your next question comes from the line of Jim Ricciutti with Needham and Company.
spk07: Hi, good morning. Maybe just to follow up on that comment, Mary Jane, in terms of seasonality, what should we be thinking about in terms of the puts and takes with respect to the March quarter, you know, just in terms of the larger verticals?
spk13: Yes, I would say, first of all, we already, let's do the first half of the year. Q1, we still expect to be our smallest quarter. Q2, 1231 was strong for 3D sensing, as we just saw. We do expect to see the 331 quarter probably a little bit down on the 1231 quarter, some for Chinese New Year. We can't forget that. And also because I don't think 3D sensing will be as high exactly as it was in 1231. And then The 630 quarter for us, which has historically been our strongest quarter, we had such a good quarter this quarter, it may be on par or a little bit higher. But for right now, I'd say generally speaking, I think just basically do not forget Chinese New Year in the 331 quarter.
spk07: And that's really sensing industrial, the optical communication seasonality in the March. I'm wondering how we should be thinking about that.
spk13: Well, I'm not sure we can give it to you exactly, but generally we don't see it. For industrial, the first quarter, the 9.30 quarter, tends to be the weakest quarter. Communications can sometimes be a toss-up between 12.31 and 3.31, but generally speaking, it is Chinese New Year, so I think you should calculate that in. And then I think the other markets are probably less subject to specific seasonality in any given exact quarter. Okay, thank you.
spk19: Yes, James, I want to add, Mary Jane. Yeah, the seasonality sometimes are offset by market reality. I'll give an example. We anticipate to ship more than double the megawatts that we ship in the first half of the fiscal year, in the second year. So we'll double our megawatts. in the second half of the year for industrial applications, particularly, of course, fiber lasers. So that's a really substantial increase in the second half, which is not necessarily linked to any seasonality. It's just specific to China coming back very strong with fiber lasers, which we are benefiting from that growth. Got it. Thank you for that, Kolar.
spk13: Let me just clarify one answer I gave Mark. He was asking us about non-op income and expense. I forgot in the first quarter we had the write-off of the debt cost. Generally speaking, it's probably somewhere between 2 and 3 million positive. We can take the next question now.
spk16: Your next question comes from the line of Vaivak Arya with Bank of America Securities.
spk17: Thanks for taking my question. I was hoping you could give us a quick update on your silicon carbide franchise. How much does silicon carbide account for as a percentage of sales? What are the next milestones we should be looking forward to? And recently, one of your competitors spoke about increasing their investments in 200-millimeter capability, and I was wondering how that impacts the competitive landscape going forward. Thank you.
spk13: So silicon carbide is between 3% and 4% of the revenue, and I'll give the second part to Chuck.
spk06: Okay, thanks, Vivek. Thanks for your question. As we've indicated, this is a long-term growth opportunity for us, and we're playing it just like you would play a golf course one hole at a time. We have the end in mind. We've described that to investors, we think, pretty clearly. We have a scalable silicon carbide substrate platform which was demonstrated to be capable of supporting the 200-millimeter technology about five years ago. So, we're investing in scaling that capability of our silicon carbide substrate. A considerable amount of our capital investment that Mary Jane referred to earlier is focused on adding equipment for silicon carbide crystal growth, epitaxial wafer growth, ion implantation tools, and to provide a clear technology roadmap for electronic devices and ultimately for modules. This is a multi-year platform investment, and I think the best way for investors to think about it is the same way in which Giovanni gave a retrospective view of how we thought about the six-inch gallium arsenide vertically integrated platform development back more than five years ago. It's going to take us some time to put all the pieces into place that we envision, but we have the talent, we have the team, we have the technology, and now we have to get the infrastructure in place and get to a scale that we ultimately aim to be at, and that's all line of sight inside our near-term and long-range plan. I think that's probably the best way to say it, Peabody. Okay. Thank you, Jeff.
spk16: Your next question comes from the line of Richard Shannon with Craig Hallam.
spk11: Well, thanks, Ash, for taking my questions. A question focused on data common, probably a two-parter here. I heard some comments about your 200 and 400 gig transceivers doubling sequentially can help us understand what's going on there. And then kind of look forward, broadly speaking, across the space for both web scale and 5G. How do you see this calendar year developing? Okay.
spk18: Okay, Alicia, this is Giovanni. Thanks for your question. What's going on? We're getting share.
spk19: Obviously, pretty fast, too. I think the team has done an incredible job with these new platforms, and it's really exciting. I'm sorry, what was the second part of the question of 5G?
spk11: Dynamics and data come going forward through the year, especially the web scale and 5G. I've heard some of your peers in the market talk about a slower start to the year but accelerating as 5G starts to accelerate the latter half of the year.
spk19: Yeah, well, the reality is that because of COVID, the low deployments worldwide, they've actually been slowed down. I mean, that doesn't mean that the trend is any different than before. Still an important megatrend for us I think we've seen channel ads being the dominant need for the end customers rather than new deployments. So that's a dynamic there. For example, I think we've seen more client systems being added and line systems being added. and so forth. So those are the dynamics in terms of the demand. I want to emphasize the growth that we're seeing in the datacom, a little bit stronger than telecom, and then remind this important point I made on the 800G. First 800G shipment that we made was very successful. So far, very exciting to add it to our portfolio. And all in all, I think we are going back to really nice growth with the Finisa team, which, you know, for over a year, a lot of customers were probably on the sideline waiting for the integration to happen. Now they feel more confident. as the numbers demonstrate that we are doing a pretty good job integrating the two companies. So that has been very key.
spk11: Okay, great. Thank you. Thank you.
spk16: Your next question comes from the line of Ananda Berua with Loop Capital.
spk14: Hi. Good morning, guys. Congrats on the solid take on the question. I guess just a bigger picture one. Chuck, in the press release this morning, you made mention of all markets improving. And so I was just wondering, could you put some context to improving? And so I was just wondering, could you put some context around the key ones there? And which market opportunities would you like us to think of as making the most significant impact this year as we move through the year? Thanks.
spk13: Well, I think we summarized pretty well in the script the dynamics in every one of the end markets, whether communications, industrial, semi-comp, life sciences, 3D sensing, et cetera. I think all of those markets have a great opportunity to really make an impact on the year. Communications is obviously the largest. 3D sensing is ramping beautifully. Silicon carbide is coming up the curve. So I think really they really all can – make a great contribution to the year, and I think the ones you want to think about are either the largest ones or the ones that are really starting to gain traction in the revenue.
spk14: And just, Mary Jane, just a quick clarification on that. Chuck's comments in the press release about markets improving, so should we anticipate that the key markets, that the growth can be stronger in As we go through the year, how about some context around that?
spk13: I think we already answered that question. We're showing very nice growth in the year across all the markets. It's in the script, and I think we probably, unfortunately, need to move on.
spk16: Your next question comes from the line of John Marchetti with Stifel.
spk08: Thanks very much. Mary Jane, you guys identified an additional $50 million of synergies that you're expecting here over the next 12 months or so. Just curious about With the scale now, should we expect most of those are coming through additional cost synergies on the OPEX line, or are there additional opportunities that you still seem to chop away and improve on the gross margin line in relation specifically to this $50 million target?
spk13: I think it's both in the cost of sales and in the OPEX.
spk08: And is that, again, a function of larger scale, or are you able to actually identify programs where you can physically take some of those costs out? Thanks.
spk06: Well, let me add, John, but we need to move on, that scale has a lot of benefits, and we will have exact targets for both the cost of sales and for our overall expenses, and we will achieve them.
spk16: Thanks, Charlie. Your next question comes from the line of Harsh Kumar with Piper Sandler. Your line's open. Harsh Kumar, your line's open. Are you on mute?
spk09: Yes, sorry about that. Hey, guys, congratulations on strong results. Chuck, I wanted to ask you, is your gross margin of 42% that you put up – Is that the new paradigm? Is that how we should be thinking about things going forward? And then when we think about OPEX for you guys, you've done a great job containing it relative to expectations, but how should we think of the cadence going forward? Do you manage that as a percentage of business or do you manage that as a percentage of revenue growth? Just any color, that's it for me, thanks.
spk13: Right, the gross margin range for the year is 38 to 42. And the OPEX margin is in the, we put in the investor presentation, excluding stock comp as well, it's between 20% and 23% of revenue.
spk09: Thank you.
spk16: Your next question comes from the line of Samik Chatterjee with J.P. Morgan.
spk00: Thank you. Thanks for taking the question. I think primarily for Chuck, Chuck, you've done a great job getting the leverage down since the Finisar acquisition, and that gives you a lot of flexibility there. I'm just wondering, do you see a need to further consolidate the market, either be it for new platforms or certain end markets where you have better – you can get greater benefits from scale compared to what you have today? Just wanted to get your thoughts on that. Thank you.
spk06: Okay. Thanks for your comments and for your questions, Samik. We have a long-term aspiration to change the world. And we're doing it with the benefit of innovation and being able to identify the long-term trends in the marketplace that will take full advantage of that innovation or be enabled by it. We're not done investing. We have a strategy. It's well articulated. And we have been executing on it for decades in the last five years or so. Investors have really gotten to know that. I don't see any change to that, and for sure, no change to our discipline and our determination to build long-term shareholder value and to have a profound impact on the stakeholders all around us as a result. We have lots of investing to do, lots of imagining to do, and lots of executing to do, and we're going to do a combination of two, three. Thank you.
spk16: Your next question comes from the line of Sidney Ho with Deutsche Bank.
spk03: Thanks for taking my question, and congrats on the very solid results on 3D sensing business. So my question is actually on the comm side. I think, Chuck, you mentioned last quarter it was impacted by slowdown of new system installation. I'm curious if you start seeing the recovery of that part of the business yet, And if you look into the orders and backlog, are there particular areas that you see strengths or weaknesses over the next few quarters? Thanks.
spk06: Sidney, can you repeat the first part of your question? Mary Jane will comment on the backlog, but what was the first part of your question?
spk03: Yeah, you were talking about last quarter was impacted by slowdown of new system installation. I'm just curious, have you seen the recovery already in that business? And then the second part of that is related to the backlog of orders. Do you see anything, particular areas of strength or weaknesses coming up from the orders or backlog?
spk06: Thank you. I think there's a recovery underway. There's still spots around the world where COVID-19 has had and is having still an impact. The profound effects of COVID-19 simply cannot be understated. So that's happening, and I would say the supply chain has been a lot of talk about the integrated circuit supply chain and how that might be an overlay to COVID-19. And so that's another topic, but I'm proud to say that our global supply chain management team have really done a fantastic job in working with our vendors in mitigating the impact thus far So we have to watch that. I would say the supply chain is what I'm going to be looking out for in the next three to six months. Okay?
spk13: I don't think the backlog, we don't break the backlog down further than by segment. I don't know that there's a particular area of strength or not. Thank you.
spk16: Thank you. Your next question comes from the line of Tom Diffley with DA Davison.
spk15: Good morning. Thanks for the question. Maybe for Giovanni, How do you view the long-term opportunity in LiDAR versus your current opportunity in 3D sensing for the handsets? And is your capacity for 3D sensing fungible to LiDAR, or is it going to require some type of different technology as well?
spk19: No, we have... Thanks for the question, Tom. So, absolutely, it's a great opportunity for us. I want to make sure that this is clear. LiDAR market, despite... all of the noise in the media and so forth is still in its infancy for advanced optical solutions, which includes lasers and all kinds of optics and circuitry and so forth. As I mentioned in the script, we have a very broad, probably one of the broadest portfolios for both actives and passives. We have different wavelengths, different form factors for the lasers, different type of sub-assemblies and so forth. So we are well positioned to take advantage of the interaction with the engagements that we have with a number of customers at different levels of the food chain. And in terms of the technology, I think we already have pretty much all that is needed. The question is where really to put the bets because, as I said in the script, it's hard to predict which solution will be the largest volume. There are different beliefs out there in terms of what's the best approach to give the best performance with the highest reliability and the best eventually price target for the automotive customers. So it's going to take a while to flush that out. As I said, right now we have pretty much all that the market is asking us to deliver, but the winners in terms of the adoption of this or that architecture, it will take time for that to play out and to happen. But I think we are well positioned for that. Okay. That's helpful. Thank you.
spk16: Your next question comes from the line of Tom O'Malley with Barclays.
spk05: Hey, guys, thanks for taking my question, and congrats on the really nice results. My question's for Giovanni. You saw the industrial business trough in the September quarter, and you see some M&A going on in the space. Can you talk about, you know, what's going on there? You mentioned you're going to double your megawatts in the second half of the year for fiber lasers. Is that just volume in China coming back, or is the high end of the market a little bit better? Any color on how that market's progressing off the bottom would be really helpful.
spk19: Well, no, I mean, thanks, Tom.
spk18: I mean, thanks for the question, Tom. It's just...
spk19: China is coming back very fast from that perspective, as I mentioned. That's the large majority of our market. As you know, there are many fiber laser makers in China, and we are benefiting from our design wins and their growth. We are growing with them. I believe they are also taking share from some of the the incumbents, you know, worldwide incumbents, so they're really making great progress. I think it's the largest growth, I believe, is really for laser processing for the durable goods. So I think the microprocessing or such as, you know, marking and so forth, maybe that's a smaller portion of the total. Anyway, so that's some color. It is very exciting. I mean, we have the reason why we can support such a really great demand coming back, particularly from China, is because we moved also our 980 multimode pumps to 6-inch So we have the capability, and I can't say for sure, but I think we are the only one in the world that has such a volume, such a scale capability to address the market. So we're taking advantage of that. Thanks, Giovanni.
spk16: Your next question comes from the line of Christopher Rowland with Cecil Kahana.
spk10: Thanks for the question. Congrats on the quarter, and I wanted to chime in on the one-question policy and pace of the call. I appreciate that. So congrats on the 3D sensing result, but perhaps for us at least, you know, the photonics and TC and DC was maybe a little bit light here. It was nice to see backlog up here, but I would assume this really implies some sort of uh a supply issue maybe talk about that is is it increasing the supply issues uh where do we stand on on new capacity and new supply um did 3d sensing uh temporarily take some of that uh capacity or they held sick uh separate um and is the capex like 40 million a quarter enough to solve uh some of these supply constraints um thanks
spk06: Chris, thanks for your question. It sounded like there were three or four questions in one. But let me talk about the supply chain. In the quarter, despite the fact that we had a view of what it could be, our supply chain people managed it to be pretty close to zero, the impact. So we're watching it because we understand the challenges associated with the demand especially in the snapback of the automotive production and the demand for integrated circuit capacity from other markets. But we do have some constraints, and we'll continue to manage those in the supply chain. And we're adding capacity so that our internal or intercompany supply chain can keep pace with the projections and the growth. And as far as the 3D sensing goes, we're increasingly utilizing the capacity we have So there's no impact at all from the supply chain of that. Okay? Thanks, Chuck.
spk09: Yep, you bet.
spk16: Your next question comes from the line of Meta Marshall with Morgan Stanley.
spk01: Great, thanks. Just on the 3D sensing portfolio. You know, you guys mentioned also having a passive kind of piece of the portfolio with the filters and other products. I just wanted to get a sense of, as you report 3D sensing revenue today, is that primarily Vixels? And then just as you look forward to the next year, you know, in the next 12 months, would you still expect growth to primarily be driven by share gains or kind of new platforms coming on? Thanks.
spk18: Hi, Maida.
spk01: Thanks for the question. This is Jari in the audience.
spk13: Oh, go ahead, Giovanni.
spk18: Yeah, I'm sorry. Yeah, the major, do you want to take it?
spk13: Vixels are the majority of the volume. I do think over the next year we will see, as Giovanni already described, that there may be other platforms emerging. But as he also said, it's a little bit dependent on the market demand. But we're looking forward to seeing those opportunities materialize. I think at this point, I'm sorry, we have a little bit run out of time. I just want to turn it back to Chuck for a few minutes. And as all of you know, we have a scheduled call with all of you following this call. Let me turn it back over to Chuck. Okay.
spk06: Thank you, Mary Jane. As 2021, the year of the ox, begins, my enthusiasm for our future is at an all-time high. And we continue to look forward to leverage the best opportunities that arise from the most exciting and irreversible market megatrends we can address, although I acknowledge the sobering reality of COVID-19, a challenge to all humanity. COVID-19 has affected the health, safety, and economic security of a large number of people around the world. However, I am confident that humanity will rise to this and the other important challenges facing our planet. At 2-6, we realize that we must do everything we possibly can to protect our planet and carefully manage its precious and finite resources in order to ensure that future generations will inherit from us a world that's better and more sustainable. In doing so, we expect that 2-6 will play an increasingly significant role in enabling the world to become safer, healthier, closer, and more efficient. This is our mission to which I remain as firmly committed to as ever. While we are executing well, we are doing so out of the strength of our shared belief of our values of integrity, collaboration, accountability, respect, and enthusiasm, or as we say at 2-6, I care. Beyond these values, I believe that we hold in common the belief that a quality and affordable education provides opportunities to a better life today in a better world tomorrow. Based on those shared principles, it's with great generosity that 2-6 co-founder, Dr. Carl Johnson and his wife, Margo Johnson, established in 2007 the 2-6 Foundation. Through their foundation, Carl and Margo have funded the college and university educations of many students around the world. Many of them have joined 2-6, and some are now in key leadership roles within our ranks. Today, we are very proud to participate in the 2-6 Foundation's mission by contributing $1 million in 2021 to their inspiring project as part of our environmental, social, and governance, or ESG, initiatives. Our renewable commitment to the 2-6 Foundation is in part the outcome of a growing conversation at 2-6, of a desire to be part of something even bigger than just a growing and innovative company. It's my intent to respond to this call with a greater awareness of our place in the world and to scale our intentions with actions. Today, I take this opportunity to acknowledge our heritage and history as we reflect this month on black history as we do in the United States each February. I would like to close with a definition of the word innovation, which has its origin in the Latin verb meaning to renew or to change, not simply to invent. And despite all of our successes, in order to be ready to seize yet unseen opportunities that lie ahead but which are sure to come, we will continuously innovate and embrace change. At 2-6, our vision is of a world transformed through innovative materials vital to a better life today and the sustainability of future generations. That ends our call today, and we thank you all for joining us. Have a good day.
spk16: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.
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