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spk14: Good day and thank you for standing by. Welcome to the 2-6 fourth quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mary Jane Raymond, 2-6 Chief Financial Officer. Please go ahead.
spk16: Thank you, Regina, and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at 2-6 Incorporated. Welcome to our earnings call today for the fourth quarter of fiscal year 2021. With me today on the call are Dr. Chuck Matera, our Chief Executive Officer, Dr. Giovanni Barbarossa, our Chief Strategy Officer, and the President of the Compound Semiconductor Segment, and our President, Bob Bashaw. This call is being recorded on Tuesday, August 10th. 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 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. Our list of known material risk factors can be found in our Form 10-K for the year ended June 30th, 2020, together with our subsequent filings with the SEC, and the Form 10-K for fiscal year 2021 is expected to be filed on or about August 20th. Our remarks today do not constitute an offer to sell or the 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 United States 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 it over to Dr. Chuck Matera. Chuck?
spk02: Thanks, Mary Jane. Thank you all for joining us today and for your interest in 2.6. With the fourth surge of COVID clearly upon us, we remain concerned. focused on the basics to ensure employee and workplace safety. During the quarter, our supply chain and operations teams collaborated and again averted the potential impact of protracted supply chain issues. Once again, our employees made things happen and got the job done. Indeed, we delivered a great quarter and a great fiscal year. During today's call, we will elaborate on the excitement of last year and our strong long-term opportunities. Since we signed the merger agreement with Coherent and started our flywheels turning, I have met individually with over 25 of the senior leaders at Coherent. I am deeply impressed by their core competencies and longstanding contributions to the laser and photonics industries. Their respect for the challenges that had to be overcome with each successive generation of technology, their team orientation around innovation, and their sense of excitement about the opportunities to continue to transform the world are similar to 2-6, making the ingredients great ingredients for a great start. During fiscal year 2021, we celebrated the 50th anniversary since our founding. and we passed another important operating milestone, having achieved $3 billion in revenue only one year after passing the $2 billion mark, an amazing accomplishment despite the challenges, including those associated with operating during a pandemic. Our revenues and our non-GAAP net income both grew just over 30% over fiscal year 2020, and we exited fiscal year 21 with a record $1.25 billion backlog. Our growth is a testament to our market-focused strategy, our diversified global footprint, the endowment of acquired and developed technology, our agility around large customer intimacy, our ability to operate at scale, a disciplined approach to productivity improvements, and a focus on our talent. Now, turning from a summary of the last quarter and last year to a long-term view of our opportunity in the silicon carbide market, we are excited to announce the acceleration of our investments to scale the manufacturing of our silicon carbide substrates, devices, and modules to enable the acceleration of the electrification of the global transportation infrastructure. in fiscal year 2022, we plan to increase our investments to about $200 million in R&D and capital to continue to lay the foundation on which to grow the business to the next level. Our silicon carbide business, which today is less than 5% of our revenue, is targeted to become one of the largest businesses in our company inside 10 years. We believe that our investments and opportunities combined with our ability to execute will allow us to become well-positioned in this large market with attractive growth dynamics. Accordingly, we are planning incremental R&D investments of about 2 to 3 percent of revenue for the next few years. We anticipate investing around $1 billion over the next decade as Generation 3 semiconductors fabricated from wide bandgap materials, including silicon carbide, grow to underpin a number of important industry transformations and we are planning to establish a leadership position long-term. Giovanni, Bob, and Mary Jane will walk through the details of the quarter, and with that, I will turn it over to Dr. Giovanni Barbarossa, our Chief Strategy Officer and President of the Compound Semiconductors Sector. Giovanni? Thank you, Chuck.
spk18: Despite all challenges we faced during the past 12 months, FY21 was an exciting year for us, having experienced growth, in all of our markets. 3D sensing posted the highest annual growth, more than doubling to just under 10% of sales, which allowed us to achieve our market penetration and share gain about one year ahead of plan. This journey will continue as we accelerate our innovation roadmap, including multi-junction pixels, photodiodes, metal lenses, and driver electronics. and delivering new module functionalities through wafer-scale co-packaging. These modules will provide a compelling value proposition in multiple end markets, including in automotive, where driver and occupancy monitoring systems are increasingly recommended or required by U.S. and European transportation safety regulators. The momentum in the communications market continued with a strong 6% growth sequentially, and strong bookings in the quarter. In Datacom, products for 200 and 400G grew 60% in Q4 sequentially, driven by hyperscale data center upgrades. As the super cycle unfolds, we expect the demand for higher speed transceivers to be strong for the next five years. We believe the super cycle will benefit those of us we've been investing for decades and can continue to sustain investments required to remain competitive in complex optoelectronic subsystems. At OSC 2021, we demonstrated our 400 and 800G transceivers for next generation 25.6 and 51.2 terabit per second switches, respectively. While we continue to contribute to industry standards, We are already engaged with strategic customers for the development of 1.6 terabit per second transceivers, which will rely on our breakthrough semiconductor laser technologies capable of operating at 200 G per lane for all standard Datacom reaches. Q4 bookings for Rodan products were a record, and critical IC shortages for Rodan modules and line cards were overcome during Q4 to post a 9% sequential increase in revenue. Our Telecom 980 pump lasers also experienced record sales in FY21. Demonstrating the resilience of our diversification strategy, our industrial laser optics businesses hit an all-time record high for quarterly revenue growing by 50% in Q4 over the prior year and accounted for 11% of our consolidated revenue. Growth was strong in both CO2 and fiber laser components. Our aftermarket business for industrial lasers posted the highest revenue month in June in our entire 50 years history, and presently holds a record backlog with bookings back to pre-COVID levels. The record growth in industrial was enabled by a number of factors, including the recovery of the global industrial market, our market leader optics, the competitiveness of our six-inch semiconductor laser platform, and the collaboration that we began with Coherent in December of 2020. Our partnership with Coherent co-markets their adjustable ring-mode fiber lasers with our remote laser processing heads. two best-in-class products that together provide state-of-the-art performance for welding of batteries for electric vehicles. While global IC shortages have been constraining the record growth of some of our product lines, they have, on the other hand, become a multi-year tailwind for our semiconductor capital equipment business. Our semi-cap revenue grew 12% sequentially in the quarter. With the super-strong bookings and multi-year visibility, we recently increased our forecast for fiscal year 2022 and beyond with corresponding investments in capacity. This is driven by our expectation of a sustained super-cycle build-out of wafer fab capacity over the next few years to enable supply to catch up with demand. and to support increased investments in the onshoring of wafer fab capacity. We witnessed a healthy demand in this market with customers offering substantial price premiums to secure capacity of our metal matted composite and ceramic based products and to help us accelerate our new product developments. We expect this market to contribute significantly to our growth for the next few years. And so we are committed to supporting our customers through continued investments in R&D and capacity. Our revenue in aerospace and defense, despite the backdrop of moderating market demand, hit the record in FY21 and in Q4, with about 15% annual growth in a down market. With the new defense budget, we expect that the demand for components for new systems to address emerging threats will be increasing. Regarding silicon carbide, as we expand our capacity, we expect to take a meaningful share of the market by introducing products that are competitive in cost, performance, and reliability, while investing to expand our product offering from substrates to epitaxial wafers to chips, devices, and ultimately modules over the next few years. Any which way we look at it, FY21 was just an amazing year. We look forward to what's to come in FY22 as we start our next 50 years. And soon to be joined by our career and colleagues, we are of a like mind in believing that the best is yet to come. With that, let me turn it over to Bob. Bob?
spk19: Thank you, Giovanni. I will give you a short update on our COVID protocols, supply chain management, facilities planning, and our coherent integration plan. Our global pandemic response teams, our corporate and business leadership, and all of our worldwide employees are doing a great job maintaining their vigilance and ensuring the safety of all of our employees. Among our many safety protocols that we have had in place since the beginning of the pandemic, we have continued regular PCR and antigen testing of all onsite employees. We require employees and visitors to wear masks in all of our facilities, and we maintain social distancing and cleaning protocols in all our operations worldwide. Our worldwide local pandemic response teams meet regularly at all of our 70-plus facilities worldwide, and our corporate pandemic response teams meet at least weekly with our site leaders to offer information, provide guidance, and ensure that all of our facilities and people have the resources that they need. We have also retained and consult regularly with healthcare professionals in an effort to understand the current dynamics associated with this terrible disease. Because all of our operating plants are considered essential, we remain fully operational in all locations in the world, while most of our administrative staff are still working from home. Supply chain challenges remain daunting. and we are being managed 24-7 as an all hands on deck effort to secure our fair share of capacity at our suppliers. Thanks in part to some of our strategic suppliers who have worked very closely with us during Q4, we overcame the effects of shortages that could have affected revenue as much as $40 million by our estimates. We have been a good customer for many years and actually contributed to the development of many of our strategic suppliers whom we brought together in January to lay out our requirements in anticipation of the current challenge. As we confront the challenges of the fourth surge, our operations in Asia, particularly in the Philippines, Vietnam, and Malaysia, are experiencing extended quarantine and isolation periods, which in addition to supply chain constraints could have an impact on near-term production capacity, including Q1 FY22. Besides the potential COVID impact on our ability to produce, we are absorbing about an additional $3 million per quarter than our baseline supply chain costs for components and freight. With respect to our expected growth, we have been actively evaluating our global footprint to accommodate among other initiatives that forecasted growth in our silicon carbide electronics business. As we approach the end of the second year of the Finisar integration, we achieved 16% top line growth, advanced the margins from our Finisar standalone position, and delivered $165 million of cost and expense synergies on an annualized basis a year sooner than planned. less than half of the anticipated investment cost to achieve them. We are excited to apply our playbook now as we turn to the coherent acquisition for which planning has commenced in earnest. With respect to the regulatory process, the applicable antitrust waiting period in the U.S. has already expired, and all of our other regulatory filings are submitted in the required countries, with caseworkers having been assigned to all. Our exchanges of information have been constructive and typical of our experience. We expect the processes to conclude in an orderly manner. Our current view is that our closing will be during the first fiscal calendar quarter of year 2022, as opposed to the fourth quarter of calendar year 2021. This is based on a better understanding of the agency's current caseloads and their timelines. We have also begun our integration and synergy planning. The top U.S.-based leaders from both companies have been meeting. We've learned a lot about each other's jobs, and we are planning to conduct similar networking events in Europe and Asia in the next few months. Throughout 2.6 and Coherent, we are excited for the promise that this combination will realize. With that, I will turn it over to Mary Jane. Mary Jane?
spk16: Thank you, Bob, and good morning. First of all, a sincere thank you to all of our customers whose faith in 2.6 is the underlying driver of our growth. We are honored to support your strategic goals. Our Q4 revenue of $808 million was geographically distributed as follows. 48% in North America, 23% in China, 20% in Europe, 6% in Japan, and 3% in the rest of the world. For the full year, The geographic distribution was 50% North America, 22% China, 18% Europe, 7% Japan, and 3% for the rest of the world. In the quarter, end market revenue distribution was 67% in communications, 13% in industrial, including automotive, 7% in aerospace and defense, 5% in consumer, 4% for semiconductor capital equipment, 3% in life sciences, and the remainder is in other end markets. Our non-GAAP gross margin was 38.6%, and the non-GAAP operating margin was 18.4%. The non-GAAP gross margin and the non-GAAP operating margin remain well ahead of the margins 2.6 achieved right before the acquisition of Finisar closed. We incurred $4 million of COVID expenses in the quarter, of which $2 million is included in the non-GAAP. This total includes lost work time and overtime, and collectively these costs put downward pressure on the gross and operating margins in the quarter. We also incur 3.3 million of costs to deal with supply chain shortages, including expedited freight and unusual price increases above our costs in the ordinary course. This 3.3 million is included in the non-GAAP adjustments. At the segment level, the non-GAAP operating margins were 15.9% for photonics, and 23.7% for compound semiconductors. Similar to last quarter, CompSemi's margins were driven by a strong mix and optimized capacity utilization. Our record backlog of 1.25 billion consists of 827 million for photonics and 425 million for compound semiconductors. The backlog consists of orders that will ship over the next 12 months. We have, of course, many orders that extend beyond 12 months as customers attempt to secure capacity for what many consider to be a super cycle. GAAP operating expenses, which are SG&A plus R&D, were $211 million in Q4, excluding $21 million of amortization, $16 million of stock comp, and $12 million million of M&A and integration costs, non-GAAP OpEx was $162 million, or 20% of revenue, and 600 basis points below the OpEx percent of revenue just prior to the close of the acquisition when it was nearly 26% for 2-6 and Finisar combined, excluding amortization, stock comp, and transaction costs. These improvements are driven by our accelerated achievement of synergies, including productivity improvements and moving manufacturing to lower-cost areas of operation. Quarterly GAAP EPS was 59 cents and non-GAAP EPS was 88 cents, with after-tax non-GAAP adjustments of $35 million in total, including the reversal of the positive investment gains. The diluted share count for GAAP Results is 116 million shares. For non-GAAP results, the diluted share count was 125 million shares. The GAAP and non-GAAP EPS calculations are in the last two tables of our press release. Stock comp was $19 million for the quarter, $3 million in COGS, and $16 million in OPEX. We expect stock comp for Q1 to be $22 million. Cash flow from operations in the quarter was $127 million and free cash flow was $83 million. We paid down $15 million of our debt in Q4 and our net cash position is $175 million. The interest expense in the quarter was $14 million. For the full year, cash flow from operations was $574 million. Free cash flow was $428 million. DSO was 68 days, and the company's liquidity at June 30th was $2 billion. Capital expenditures this quarter were 42 million. For the year, CapEx was 146 million. For fiscal year 22, we expect CapEx to be between 325 and 375 million dollars. As part of the management of our strategic equity investment portfolio, the company reported a gain of $7 million on the sale of an equity investment in Sweden, and a 3.9 million gain on the IPO of a portion of another investment, this one in China. The 3.9 million gain relates to a minority position we took over a decade ago. Depreciation was $50 million in the quarter, and we expect our forward depreciation expense to be about $50 to $55 million a quarter. FX was a loss of $1.3 million, primarily driven by the Swiss franc and the RMB. The effective tax rate in the quarter was 12% due to ongoing benefits of renewed high-tech status in several countries, lower GILTI income due to the favorable mix of earnings around the world, and increased stock compensation exercises. We expect the tax rate to be between 19 and 21% for fiscal year 22. We had $12 million in cost for M&A, integration and other costs, largely for Coherent and Finisar. With respect to our Series B preferred stock issuance, we recorded a $10 million dividend in Q4 that will be deducted from net income in the same manner that the $6.9 million dividend is deducted for the Series A preferred stock. Turning to the outlook for Q1 fiscal year 22, our outlook for revenue for the first fiscal quarter ending September 30, 2021, is expected to be $780 million to $830 million, and earnings per share on a non-GAAP basis at 75 to 90 cents at 118 million shares. For Q1, we expect both the Series A and the Series B preferred stock to be anti-diluted, so you should deduct $17 million from your calculated non-GAAP net income to arrive at net income available to common shareholders. Then divide that by 118 million shares to arrive at non-GAAP EPS. This is how the above EPS range is calculated. This is today's exchange rate and an estimated tax rate of 20%. The EPS range also includes our investment of up to $20 million for silicon carbide expansion. For the non-GAAP earnings per share, we add back to the GAAP earnings pre-tax amounts of $21 million in amortization, $22 million in stock comp, and $11 to $15 million in transaction and integration costs. The estimated Q1 share count is 111 million shares for GAAP and 118 million shares for non-GAAP. The actual dollar amount of non-GAAP items, the exchange rate, the tax rate, and the share counts are all subject to change. Before we go to Q&A, just 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 product mix, customer orders, supply chain shortages, both upstream and downstream, competition, changes in regulation, ongoing requirements to combat the COVID-19 virus, and general economic conditions. We would also ask that each firm limit its questions to one question with no follow-up as we would like to try to get everyone in during this call. We expect to end this call not later than 10.15 a.m. Regina, you may open the line for questions.
spk14: At this time, if you'd like to ask a question, simply press star followed by the number one on your telephone keypad. Again, that is star one for any questions. Our first question will come from the line of Paul Silverstein with Cowan. Please go ahead.
spk06: Thanks, guys. All right. I was hoping you could give us some insight on what you're seeing in China, but during the quarter, more importantly, looking forward, given some concerns out there in the marketplace.
spk16: Paul, your question was, you'd like to have us give you some insight on what we are seeing in China? And the second part was, in particular, in light of?
spk06: There have been concerns in the market raised by some of your peers.
spk18: Thanks for your question. This is Giovanni here. Let me comment on the industrial, if that's what you're referring to. Generally speaking, China has been a strong market for us, particularly industrial. We've seen pretty much all of our fiber laser customers, as an example. Very strong demand. We believe they are gaining share on the in the world market, and as I explained in my commentary, it's been the really record numbers in many ways, for the optics, for the pumps, and so we've been benefiting from those customers taking share. And so China's been very strong for us. Now, moving forward, of course, there is some uncertainty about the evolution of the virus like everywhere else. But we have not seen so far any slowdown in their demand for components, particularly for fiber lasers.
spk05: And guys, on the optics side, I assume with the 5G awards now having been made, are you expecting a pickup in demand in your comms business in China?
spk18: Yes, likewise. Yes, absolutely. Same, very similar. Thank you.
spk14: Your next question will come from the line of Ananda Barua with Loop Capital.
spk01: Hi, guys. Yeah, congrats on the strong execution this quarter, and appreciate you taking the question. I mean, somewhat related just in general, core business shows really good momentum this quarter, and it feels like there might be a pickup in some of those end markets. a little bit sooner than expected. Is that accurate? I guess, is that your guys' core view as we head into September quarter here? And if so, what do you see as the key drivers as we go through the next six months of the year? Appreciate it. Thanks.
spk18: Well, there's definitely a super cycle unfolding for upgrades across the world, particularly in North America to which we are participating as I explained in my commentary about with 200, 400, next generation 800, and even the 1.6 terabits per second transceiver. So that demand will continue at least for the next five years. The cycle will continue for quite a long time. I think industrial is coming back pretty strong. pick up in general demand for our laser components, again, particularly fiber lasers. And same in power electronics, driven by electric vehicles, adoption, silicon carbide devices and modules. And so I think those are going to be the strongest drives that we see. Also, as I mentioned in the In the prepared remarks, we think that despite the defense budget is kind of almost flat year over year, but we think that there's going to be an increase, nevertheless, in demand for new designs, new products for emerging threats. And so we'll participate to that growth in demand, too.
spk01: Giovanni, are you seeing it, like, is demand backdrop a little bit stronger today than maybe you thought it would have been 90 days ago?
spk18: Yes. But I'm sorry, we need to move to the next analyst. Thank you.
spk14: Your next question will cover the line of Jim Rashudi with Nita Mint Company.
spk04: Thank you. I think I heard in your opening presentation that you overcame the some of the component issues that would have impacted revenues by about $40 million. I'm wondering if you can give us any sense as to what you might have been able to ship in terms of revenue had it not been for the component constraints. And with respect to your fiscal Q1 guidance, what type of revenue headwind are you assuming for components and some of the supply chain constraints? Thank you.
spk16: So the Q1 guidance, I'd say that we're looking at probably the same quantum in the first quarter that we were looking at in the fourth quarter. So that's one thing to answer. And I think secondly, you know, as Bob has already said, overcoming $40 million in pretty much day-to-day hand-to-hand combat, certainly the demand is there. You can see that really in the book to bill. Would you have a view on this, Bob?
spk19: No, I agree completely, Mary Jane. You know, a lot of the supply chain challenges really come from the integrated circuit supply chain constraints, and the team's really done a nice job outside of ICs and a real nice job with getting our IC supply chain requirements. So I agree completely.
spk04: Do you see any improvement as you look out over the balance of fiscal 22? from the standpoint of supply chain?
spk18: I'm sorry.
spk16: Jim, your question was, do we see any moderation of the supply chain challenges forward? Yeah.
spk02: Hey, Jim. Yeah, thank you, Jim. This is Chuck. Hey, Jim. We don't have a crystal ball, and the challenge associated with it is, It's not only affecting us, but, of course, it's affecting our customers. And we have to take it. We have a long-term view. We have actions consistent with that long-term view. We have backup plans that we're trying to execute and keep in place. And at the end of the day, this is a job that has to be done every single day. And so I'm optimistic that it will eventually clear out But at the moment, it's not looking like anybody's going to be able to call exactly when. Okay.
spk04: Thanks very much.
spk16: Sure. No problem. Just for our leaderboard, I'm sorry to have to ask you this, but just to try and get everyone in on the call, we probably can't have follow-ups. But feel free to jump back in line, and if we can do a second round, we'd be happy to.
spk14: Your next question will come from the line of John Marchetti with Stiefel.
spk10: Thanks very much. Mary Jane, I just wanted to ask, in terms of the fiscal 1Q guidance, you know, when we look at the midpoint of the ranges, we've got revenue essentially flattish. We've got EPS down, but on a lower share count. Can you help us just understand what we're thinking about in terms of gross margin and or the higher op-ex that you referenced in some of the prepared remarks?
spk16: Sure. So, first of all, John, You know, being a little newer to our company, the fact that the midpoint would be flat to Q4, Q4 has historically been our largest quarter and largest by a good mile. So historically, we have had Q1 down, even in very strong markets. In 2016, 17, and 18, Q1 was down of those years on the prior Q4. So first of all, the revenue is probably holding in very, very well. And then with respect to the midpoint of the guidance, As we described, we did not take out of the non-GAAP range roughly about $20 million that will be spent on the investments for silicon carbide. So, you know, if you tax effect that and do it, it's in the neighborhood of, you know, 12, 14 cents. So that is really the major difference going forward. And as well as we do expect, as Bob has already said, to continue to have costs to try and That'll supply chain shortages as well as dealing with COVID. But the major difference when you look midpoint to what we delivered in Q4 was the silt and carbide investment. Okay. Thanks. Sure.
spk14: Your next question will come from the line of Mark Miller with the Benchmark Company.
spk13: Congratulations on your record results. What can you say about you have very strong 200, 400 gig transceiver sales. What about pricing in that market? Is that pricing improving with the strong demand?
spk18: Pricing is the typical communication market pricing we've seen for the past 20 years. But we try to really focus on the high-end products. For example, on the ZR format, we're focusing on high power version, so we can eliminate, for example, the entire Layer 2, doing basically IP over DWDM. And that's enabled by our new FOSS5 technology. So we are trying to focus on those segments of the market that offer the best margins and pricing. But the dynamic HP reduction over time and so forth is pretty much unchanged. still lower pressure, but as I said, by focusing on the high end of the market, we can do better than average, I would say.
spk14: Your next question will come from the line of Richard Shannon with Craig Hallam.
spk09: Well, hi, guys. Thanks for taking my questions as well. A question for either Tucker Giovanni on silicon carbide here. You've mentioned listed out what looks like a pretty strong increased investment in silicon carbide, where you've already talked about this market for years here. You've built up a capability across the stack here. Can you talk about and characterize what's driven you to put in this increased amount of investment? Has this been improvements in internal product technology milestones or conversations with customers? et cetera, maybe just characterize why you're making an increased level investment on top of what's already been strong. Thanks.
spk02: Thanks, Richard. Yeah, actually, it's all of those things. Our confidence in the quality of our material at this point in time, combined with the investments that we've recently announced in the last 12 months and a very apparent acceleration in the need for silicon carbide, and the demand that's coming here inside the next five years. And we would like to be well-positioned, as I said in my remarks, to lead in this market. And so we're stepping it up. And it couldn't be more exciting for us. Okay?
spk14: Your next question will come from the line of Tom Diffley with D.A. Davidson.
spk11: Yes, good morning. On those same lines, when you look at the billion-dollar investment projected over the next 10 years, from a big-picture point of view, is the main focus going to be on increasing your capacity in the space, or is it going to be more on the R&D productization of different silicon carbide pieces?
spk02: Both, Tom. Thanks for your question, Tom. We have to do both. The demands over the next 5 to 10 years are going to grow exponentially. And so we need to be in a position to be able to scale everything that we're doing, but we need to get the device and the module technology and all the process technology that we have in place, we need to get that organized, we need to get it qualified, and we need to get the platform in place to scale. In the meanwhile, we'll be making a large, even larger investment than what we have been planning to get the silicon carbide substrate capacity in place for what we need and for also what the market needs as well. Okay?
spk16: I would say on balance, in the $1 billion, it probably leans more to capital than R&D, but Chuck is perfectly correct that we need both of them.
spk14: Your next question will come from the line of Chris Rowland with Susquehanna.
spk03: Hey, guys, thanks for the question. Regarding consumer, it was great doubling for the year that you guys had there, but perhaps you guys can give us a little bit more color on some near-term trends and then your expectation as we move into the back half of the calendar year.
spk18: Hey, Chris, thanks. This is Jovan. Thanks for your question. So we expect the typical seasonality in the market. And we also expect to materialize some new design wins that will add up to the design wins we're currently serving. And so I think that there will be a pressure on price, for sure, like typically deriving from a combination of, you know, improvements in the experience curve as well as design improvements. And I expect that over time, as I mentioned in my prepared remarks, over time that market will continue to be a growth driver for us. So in the second half of the calendar year, we'll experience the typical seasonality trend, and then we'll continue to grow year over year as a result of our leadership in a number of parts. that support the market, lasers, metal lenses, drivers, modules, and so forth.
spk14: Your next question comes from the line of Sumit Chatterjee with JP Morgan.
spk17: Hi, good morning. I have a quick one for Mary Jane. Thanks for your comments about the incremental investment in the first quarter. Just wondering if you can give us some direction on the magnitude of incremental investments required in fiscal year 22 as we try to think about the margin progression here, particularly if you can also comment on what levels do you have to drive margin progression as you offset some of these incremental investments as well?
spk16: Right. So, first of all, with respect to fiscal year 22, Chuck spoke to about $200 million. The way that breaks down is around about $60 to $70 million in the R&D, particularly with respect to the design for manufacturability, and around about the balance of that $200 million that is in CapEx. Okay, so that's for this year. With respect to margin improvement overall, I mean, certainly one of the things we've seen through fiscal year 21 is particularly in Giovanni's segment, is the manifestation of growth in many of the markets in which we had been investing for a long time, whether that be consumer or silicon carbide, et cetera. So as those laser-based and material businesses, grown material businesses, accelerate through growth, we will see better air cover, so to speak, and better mix as it affects the growth margin For sure, I don't think our company has any less focus on the ongoing relentless focus on OPEX, particularly as with respect to G&A, that I think will continue to work to keep that flattish, so to speak, on growing revenue that also allows, you know, if you just think about percent of sales, that to not increase and maybe decrease a little bit as a percent of sales, this is the G&A, as the R&D is increasing, that will help deliver overall decent results for the company.
spk14: Your next question will come from the line of Amanda Scarnati with Citi.
spk15: Hi, just a follow-up question on, you know, margin accretion and how, you know, what's the bigger driver here of growing margins? Is it sort of fixing some of these supply chain issues that are somewhat out of your control, or is it more of a mixed scenario of And does it look like December quarter could be a step up in margins?
spk16: Well, first of all, make no mistake about it. Mix makes a big difference. And you can see that if you look at the margin profile across the four quarters of the year, whether you look at the gross margin or you look at the segment margins. So mix makes a big difference. I will say that certainly the fact that we are seeing a very nice renaissance here in industrial will continue to help. I mean, as much as we might think that's the oldest business in 2.6, it retains one of the best margins in the whole company. So that's a very positive thing. So any of the drivers using our grown materials or laser diodes are very positive additions to the mix. So that's probably the largest driver of the margin. With respect to the supply chain shortages, while we can obviously estimate increased freight or you know, premium pricing or increased long-term commitments to customers, those are things that are very easy to calculate. What isn't as easy to calculate is the literal all hands on deck where people are coming out of other functions to work on this that potentially, you know, take them away from other improvements that they may have been able to make. So I think as the supply chain eases and there's more focus on than just being able to ship product, I think that absolutely does help. we will always keep our employees safe. We could see an easing over time of the COVID cost, but generally speaking, I think that's probably not happening anytime soon. Ultimately, it really does come down to mix and operating efficiency.
spk14: Your next question will come from the line of Simon Leopold with Raymond James.
spk08: Thanks for taking the question. Just a very, very quick clarification for Mary Jane and then the question. I wasn't clear if you excluded some charges in your pro forma related to the COVID expenses or you just were highlighting those. But the question I really would like to ask is to get a little bit of quantification around the hyperscale business you've been doing. It sounds like that's been growing nicely. I just want to get a better idea of what portion of the revenue are you getting from hyperscale now and how does it compare to a year ago? Thank you.
spk16: So with respect to COVID, we incurred about $4 million or so, and we non-gapped $2 million of it. So the goal was to try and non-gap kind of the surge of it, and that's the same exact thing we did last quarter. With respect to the hyperscale, Giovanni?
spk18: Yeah, I would say that the number, the ratio is increasing. As we mentioned in the past, I think as a result of the... you know, the combination with Finisa and, you know, the deal pending, many customers kind of waited for the combination to happen. So they went on the sideline and we are kind of gaining share back because of that. Now, obviously, we are working together as one company and there is a very high confidence in the team, which is... doing a fantastic job getting share, particularly, as I mentioned earlier, with the high-end side of the products. And I would say that of the communication, let's say of the transceiver business, I would say that their number is close to 30% and growing. And over time, there may be a balance between maybe Datacom, Telecom, or Hyperscale, or Superscale, however you want to define them over time. But I think it just depends on what the definition of Hyperscale is, but I think 30% is a good guess.
spk14: Your next question will come from the line of Tim Savageau with Northland Capital Markets.
spk07: Hi, good morning. I wanted to come back on the... kind of question about the fiscal Q1 guide on a sequential basis. Because while appreciating historic seasonality, your seasonality has changed a bit. You should be seeing at least some degree of uplift in consumer. And it sounds like from a booking standpoint and just overall tone of business that data comm should be growing as well. So I guess I got a couple of questions. Should we look at kind of historic seasonality and industrial and other parts of the business is kind of seasonal offsets to that. And perhaps more importantly, you know, are you building in that $40 million component headwind to the guide and, you know, to overcome it as you've done this quarter would represent upside. Thanks.
spk16: So yes to the last question, because obviously the EPS guide goes with the revenue guide, right, on the same kind of range basis. So yes, if we were to be at the top end or over-deliver that by some excellent amount of work by our guys, I would imagine that we would be at the top end of the EPS as well. Second of all, while you are correct that the second half of the calendar year, hour Q1 and Q2, are stronger on consumer, there is still a seasonal downtick. And we had a very, very good consumer quarter last year, and it was still down on Q4. But all that to say that generally we do see a little bit of a step down in industrial, but at the end of the day, I think no matter how you cut it, we're probably looking at a pretty decent Q1 from a top-line perspective with the excellent work of all of our colleagues around the world. So I hope that answers the composite of your questions, Tim.
spk14: Once again, for any questions, please press star 1 on your telephone keypad. Your next question will come from the line of Amita Marshall with Morgan Stanley.
spk12: Great, thanks. Giovanni, I just wanted to circle back to your commentary on the 3D sensing market and just, you know, as you talk about growth in fiscal year 22, you know, is that design, like what, Just what drives that? Is it design wins outside of kind of your lead customer's ecosystem? Is that product expansion within that ecosystem or share gains? Like I know, obviously, it's tough to parse out, but if there was a leading factor in what would lead to the growth, that would be helpful.
spk18: Thanks. Thanks, Maeve, for the question. It's a combination. Yes, there is not a single reason. I think the share gain will continue, will eventually stabilize, over time in the next few quarters. And then there is new opportunities in cabin fencing for automotive. And then, as I said, new design wins. I think there is an expectation that over time the specific market will continue to grow for us. It's also, and there is another factor which I mentioned in my remarks, which is really what we are selling. Not only, so we are moving, we are increasing the offering from just lasers and filters, which we did in the past, to optics, IC drivers, and modules. So altogether, the addressable market is expanding for us, and therefore we expect the revenue to grow too.
spk14: And I will now turn the conference back over to management for any further remarks.
spk16: Thank you very much, Regina, and thank you to all of you who joined us today. We know this is a busy earnings season for you, and we look forward to talking with all of you as time goes on here. So thank you very much and have a good day.
spk14: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
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