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spk12: good day thank you for standing by and welcome to two six incorporated physical 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 to ask a question during that session you will need to press star 1 on your telephone keypad if you require any further assistance please press star zero. Thank you. I would now like to hand the conference over to your speaker today, Ms. Mary Jane Raymond, Chief Financial Officer. The floor is yours.
spk14: Thank you, Alex, 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 first quarter of fiscal year 2022. 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, November 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, 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 known 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 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 the call over to Dr. Chuck Matera.
spk18: 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 FY21 and was squarely inside our revenue guidance range despite continuing supply chain headwinds which affected our Rotem 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 purchase 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 increase 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 are 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. and 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 continued 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 87 cents 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 FY23 and FY24. In particular, we are stepping up our investments in important compound semiconductor platforms of silicon carbide and indium phosphide, which leverage core strengths of 2,6 and the former FinnoSor. 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 two years. A good example of this is that our cost synergies for the Finisar acquisition originally targeted delivering $150 million in three years, and that has now exceeded $180 million after two 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 FY22. Turning now to the Coherent acquisition, we believe Coherent is the gold standard of laser technologies and, like 2-6, has really great people and the unique position in the diversified markets it serves. Coherent is highly complimentary and extremely valuable. I believe that the auction process revealed that the high stakes were clearly understood by all three 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 were energized by the engagements and 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 the combination, it's not only going to be a bigger company, but we've set our course on building an even better company together, aimed at accelerating the new opportunities that lie ahead while we make our complementarities a strength to be leveraged. Indeed, we have a lot to learn about and from each other. Coherent has a complementary business model to 2-6, 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?
spk00: Thank you, Chuck, and good morning. In Q4, we delivered growth across our commercial end market despite supply chain challenges. In Q1, we continue to build on that momentum, and as a result, our fiscal year 2022 is off to a strong start. All of our operations, including our global wafer fabs, 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 zero defects, our benchmark for the highest quality that we have been striving to set for the compound semiconductor industry. This is the result of a relentless multi-year investment in operational excellence, supporting the substantial increase in the volume of lasers that we are producing at our vertically integrated wafer fabs in Sherman, Texas, and Warren, New Jersey. Our communications revenue grew 4% year-over-year, with most of the growth from Datacom. Our 200, 400, and 800G products now represent 25% of our transceiver's revenue from about 2% a year ago, and grew nearly 70% sequentially. Thanks to our market-leading platforms, we expect to grow this portion of our Datacom business to one-third of the total by the end of fiscal year 2022. 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 QSP-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 reduce 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 the external revenue for our tunable coherent components and modules acquired through Finisa, in which enables our coherent transceivers, increased 16% sequentially and more than doubled 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 a strong Q4. Growth was across all industrial applications and our revenue from components for 1 micron or fiber lasers are now 50% of our industrial business. As I noted in the last call, we believe 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, in part, to the economies of scale that we have achieved with our six-inch GaN 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, therefore requiring us to operate all of our fabs for 3D sensing at a high level of utilization for VIX 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 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 customers' 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 EUV, as we expect to see these numbers of those systems nearly double over the next 24 months. In our silicon carbide business, revenue grew 50% compared to Q1 of fiscal year 21, and 4% sequentially. As Chuck mentioned earlier, our investments in silicon carbide are underway and encompass a variety of applications and vertical end markets. We expect to see our substrate business to continue to grow and are proud to report that we have started pre-production of gallium nitride and silicon carbide on our 150-millimeter substrates at our Warren Fab in New Jersey with full production planned for the first quarter of calendar year 22. With that, let me hand it over to Mary J. Mary J.?
spk14: 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 cost to secure parts with suppliers, and these costs are expected to be realized over the next three to five 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. in these sustained good margins. Our record backlog of 1.4 billion consists of 914 million for photonics and 483 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 consider 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 $168 million, or 21% of revenue. 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 two mark. In addition, we have formally launched the coherent synergy planning process. Quarterly GAAP EPS was 50 cents and non-GAAP EPS was 87 cents, 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 in COGS, and 19 million in OPX. 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 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 30th 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. 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 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 30th, 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 ability to use other tax credits and FDII deductions to offset GILTI income. We expect the tax rate to be between 18 and 20% for fiscal year 22. We had $12 million in total costs for M&A integration and other costs largely for Coherent with some for Finisar. Turning to the outlook for Q2 FY22. Our outlook for revenue for the second fiscal quarter ending December 31st, 2021 is expected to be $790 to $840 million and earnings per share on a non-GAAP basis at $0.75 to $0.95. The share count is $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 and 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 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 three synergies for Finisar. 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 forecasts 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 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-ups, as we would like to try to get everyone in during today's call. We expect to end this call not later than 10, 15 a.m. Alex, you may open the line for questions.
spk12: As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. Again, that is star 1 on your telephone keypad. Your first question comes from the line of Ananda Baru from Loop Capital. Your line is now open.
spk13: Hey, good morning, guys, and thanks for taking the question, and congrats on all the progress and all the exciting stuff that's going on. So I guess, Chuck, I wanted to add, you know, any of you jump in on this one, obviously, but in the prepared remarks you had mentioned, along with some ASP increased implementation, something about longer-term and higher share commitments, and so I just wanted to see if I wanted to get more context on that and see if That's something that we should keep in mind as we think about the go forward. Thanks.
spk18: Hey, good morning, Ananda. Thank you for your question. Well, we're always trying to position ourselves with customers to continue to drive value for them, too, by scheduling long-term commitments and higher share awards that we can make the most efficient use of our factories on their behalf. And I think that as we continue to feel the pressure of increasing costs, as Mary Jane referred to in the supply chain, we're trying to balance all that out with the best position we can be in with customers for long-term, larger orders. Okay?
spk13: I got it. And should we think of this as being potentially incremental to the current revenue run rates across those businesses? Yes. Awesome. Thank you, guys.
spk12: Your next question comes from the line of Paul Silverstein from Cohen. Please go ahead.
spk02: Thanks, guys. I guess I'll focus on supply chain impact. And I appreciate you discussing during the call, but I'm hoping Chuck and Mary Jane that you all can give us some quantification of how much was the impact on revenue. It would seem to be significant, given the 55 percent year-over-year growth in backlog and 12 percent sequential growth, along with your extremely strong bookings. But let me ask you the right question. How much of an impact was there on revenue? How much of an impact are you expecting this December quarter? And same question with respect to margins.
spk18: Male Speaker Okay. Hey, Paul. Good morning. Thanks for your question. If you see the high end of the guidance that we gave for Q1, we were sure aiming to do the maximum. And I would say that we had a few contributors to it, but number one was our supply chain. Number two was the supply chain of our customers. So it's a balancing act, but it would not be reasonable to say that all of it was just the supply chain. It's just the overall logistics of scheduling and running complicated and complex factories that we do. And I think we did a great job at it. As far as this quarter goes, we are working diligently with our supply chain partners to be able to do the very best we can to close the gap. All of us, it's been an all-hands-on-deck effort, including me, with discussions with the CEO of nearly a half a dozen of our key suppliers, electronics and integrated circuit suppliers, and we're going to do the best we can to pull things forward. But the uncertainty still exists, and we're not going to know about it until we actually get through, at least through the early part to the middle of December, as to how it's going to affect us this quarter. But we've given our best shot at the guidance, and just like we did in the first quarter, we're aiming to get to the high end.
spk02: Chuck, can I just ask for a clarification relative to the 43% bookings growth? Is there any concern? Do you feel that's an accurate reflection of demand trends, or is there any concern that that reflects overordering on the part of customers?
spk18: Well, Mary Jane can add to it. I'm not sensing or assessing any overordering. in the patterns that we have been able to observe. And in discussions with customers, there's no indication of that whatsoever. Would you like to add to that, Mary Jane?
spk14: I think that's really right. I mean, we've talked before. We watch certain patterns in our bookings to be sure that we can detect items that could be double ordering. And as Chuck made the most important comment, the amount of time that we have spent both with our customers and suppliers is to be sure that we're shipping everything we can to them amid these supply chain shortages, there is, I think, a good sense on our part that we are not experiencing double ordering.
spk02: Male Speaker 2 All right. In the difference between that bookings growth and your revenue, your guidance in terms of revenue growth, I assume that clearly is a supply chain driven impact.
spk14: Female Speaker 2 Yes, we need to move on. But as we've also mentioned a few times, the increase in bookings is not an indicator of exactly what will ship in the next quarter. We do try to indicate that it's over 12 months for a reason. But, yes, you have that right. We should probably move on.
spk04: Thank you.
spk12: Your next question is from Samik Chatterjee from J.P. Morgan. Your line is now open.
spk08: Hi, this is Joe Cardoso on for Samik. Yeah, so the one question for me is just, You know, you highlighted a lot of investments in your prepared remark, you know, specifically around analog and digital ICs, as well as silicon carbide and indium phosphide. I was just curious if you could talk on the level of investment that's necessary to drive those plans, and how should investors think about the timeline of when those investments begin to materialize? Thank you.
spk00: Thank you for the question. This is Giovanni here. So we have... two main investment directions, as we said in the prepared remarks, really around silicon carbide and indium phosphide. Both of them are intended to support multiple markets and multiple applications. This has always been our strategy to diversify our investments to lower the risk of our investments. There will be, as I said in the preferred marks, there will be a combination of capital as well as human resources investments to prepare for what I said was an incremental growth across both platforms and across multiple markets. And we don't believe that the investments will materialize sooner than two quarters. So it will be in the beginning, let's say, mid of fiscal year 2023, they will see the effects of these investments materializing.
spk12: Your next question is from Jim Ricciuti from Needham & Company. You may ask your question.
spk04: Thank you. Good morning. I was wondering if you could comment on the you're seeing in the industrial segment of the business, both inside China and outside China, only because there's been some mixed signals, obviously, in the industrial laser business inside China. So if you could maybe comment on that and just the outlook for that part of the business. Thank you.
spk00: Hi, Jim. This is Giovanni. Thanks for your questions. Our industrial business has been very strong since As I mentioned in the PREPARE MAX, we have seen a substantial increase in demand for our pump lasers, particularly from China, where we enable a number of fiber laser makers. We've been able to accumulate the demand over a number of years. We're probably very close to more than twice the pump power of the fiber laser incumbent out there. number one share. And so we are enjoying a very strong demand for our components. So what, you know, clearly some companies may lose share in some geographies. And so that means for us gaining share on the chip supply as these companies do take shares from the incumbent. So we see it as a benefit to us.
spk12: Next is from Meta Marshall from Morgan Stanley. Your line is now open.
spk16: Great. Thank you. Giovanni, I wanted to follow up on your comments that you were shipping everything you could out of Sherman and just clarify whether you were kind of qualified on all kind of current platforms of the major 3D sensing customer. Thanks.
spk00: Yes, we are. We're shipping all products that we've been asked to ship and qualify and so forth, so that's absolutely the case.
spk12: Next question is from Jed Dorsheimer from Canaccord Genmity. Your line is now open.
spk07: Hi, thanks for taking my question. I guess, and maybe either Chuck or Giovanni, if you want to... if you wouldn't mind just addressing on, uh, Indian phosphides, you know, it seems like that technology and the platform starting from, uh, you know, a lower, um, level of maturity in terms of, uh, uh, the platform yet it, um, particularly with coherent seems like might be a very critical, um, technology for 1550 and beyond. So I was wondering if you might just provide some details in terms of how you see the scalability of that critical technology and the relative importance inside 2.6.
spk00: Thanks, Jade. Thanks for the question. Well, we actually, if you recall, when we announced the deal with Finisa, we did emphasize how the Indio Phosphide platform that Finisa had worked on for more than 20 years was really strategic to us. And we mentioned a number of applications and markets that the technology was going to be very powerful for. So, of course, when we acquired them, the focus was on datacom and telecom lasers, photodiodes, modulators, photonic integrated circuits, and so forth, which have enabled a number of modules and subsystems, such as the ICTROSA, which I mentioned in the prepared remarks. However, indium phosphide has a very unique wavelength as you know, longer wavelength than gallium arsenide. So it's very useful in a number of optical applications where eye safety is important. So that's one. And so that could be in automotive, LiDAR applications, could be in consumer applications, could be in industrial sensing applications, so forth. So there's a number of markets where that platform is very powerful. The other thing that we want to mention is, as the electronics for base stations progress, and the speed and the frequency of going from 4G to 5G, eventually 6G, progress, we believe that inium phosphide is one of the two technologies, probably the best technology that we'll be counting on for 6G amplifiers. So there's an effort we have to focus on that. Of course, it's going to happen six, seven years from now, whenever that will take place, but we need to start now. And so it's a very important investment for us. Again, it goes across multiple markets, multiple applications, leveraging our wafer fabs to reach a scale unique, probably, hopefully, the largest in the world.
spk12: Next question is from Richard Shannon from Craig Hallam. Your line is now open.
spk09: Hi, guys. Thanks for taking my questions. I guess mine is on 3D sensing and Vixel rays. I think you're talking about some investments here, both in capacity and R&D and kind of implying a growth track here. I think most people see that in longer term. But let me get your sense of how soon you're seeing that picking up and in what applications are you seeing it, an immediate one in mobile and And to what degree, what timing do you see in other applications like automotive as an example?
spk00: Hi, Richard. Thanks. This is Giovanni. Thanks for your question. So I want to make sure that we don't get confused. I did talk about incremental opportunity. This is unrelated to VIXLS. So I think I want to make sure that this is the case. And we have several applications that we are trying to target across multiple markets, again, And we just need to get ready for the demand to come. As I mentioned to Ananda, maybe three quarters from now we'll see the effect of those investments materializing.
spk12: Next question is from Mark Miller from Benchmark Company. You may ask your question.
spk01: You indicated that new products help boost your margins, and I'm just wondering in terms of the existing backlog, how does that margin profile compare to what you've been posting in recent margins?
spk14: I would say that the backlog is generally positive to margins. I don't take that as 200 basis points, but I would say as a general matter, especially if you think about most of the supply chain effects being on the Rotem side, it's probably contributory to the positive a little bit on margins. But again, it's not an enormous number, but more skewing in that direction than not.
spk12: Next is from Amanda Scarnati from Citi. You may ask your question.
spk15: Good morning. Can we just talk a little bit about the TANU silicon carbide deal that was announced yesterday? Can you maybe size what this looks like or give a little bit more detail on the opportunity there and other opportunities that you're starting to see within silicon carbide?
spk18: Okay. Good morning, Amanda. Amanda, it's another example of our ability both to market and position ourselves into what we think will be a large and growing supply chain. They've gone through a usual process of evaluating a number of suppliers. And we understand from the feedback that we received on our 150-millimeter substrates that we're best in class. And so we believe that on the basis of performance and scale that we're putting in place and our absolute determination to serve the market at multiple levels of integration that customers have come to us to be able to generate a long-term and secure supply chain.
spk12: Next is from Simon Leopold from Raymond James. Please go ahead.
spk06: Thanks for taking the question. I want to see if maybe you could drill down a little bit on the datacom trends. I think in the past you've indicated roughly a 50-50 split between datacom and telecom and the communications, but it sounds like it's moving the other way. And within this, if you could highlight the exposure to the hyperscalers, that sounds like an interesting trend that I'd like to hear more about. Thank you.
spk00: Hi, Simon. Thanks for your question. You got it. Absolutely. I think we are really gaining, we believe we're gaining share at the hyperscalers with this 200, 400, and eventually work going on on 800. It's a really great trend. It was really one of the reasons we were really interested in the Finisra platform, and the team is really doing a fantastic job gaining share back. And so it's a really, really great momentum for us. I think you got the picture.
spk18: I'd like to add to that, Giovanni. Simon, since we acquired Finasur, we've not only been able to optimize our global footprint, but based on the diversity of that global footprint, our diverse customers have asked us to align Finasur our output from multiple different factories for them. And I think there's really been a very strong attraction to these large and growing customers of 2-6.
spk12: Next question is from Tim from Northland Capital. Your line is now open.
spk03: Hi, good morning. Good timing. I had a question on Datacom as well to follow up Simon. So, you know, which looks to be kind of your single biggest business right now. So can you confirm that Datacom is now, you know, a solid majority or at least a decent majority of the communications slash photonics business? On the one hand, and as you look at that 200, 400 gig growth, 60% last quarter, 70% sequential this quarter, Do you expect those type of trends to continue and it looks like 100 gigs hanging in there, or do you expect that to remain stable? Thanks.
spk00: Hi, Tim. This is Giovanni. Well, we hope we continue to grow 70% sequentially forever, but it's not going to likely happen. So I think the growth rate will remain strong as we get more and more slots designed in And I think 100G is pretty stable. I think at 200G, there is not really many players. So we kind of probably have, for sure, the largest share there. And 400G is the beginning. We are catching up. There is no doubt. That's why the growth rate is higher than the market. So we believe we're getting share. So it's a very, very strong momentum. And as I said to Simon, the team has really done a fantastic job executing and delivering really best performance quality-wise from just a functionality standpoint and delivery standpoint, really doing a great job.
spk12: Next is from Vivek Arya from Bank of America. Please go ahead.
spk10: Hi, this is Blake Freeman. I'm from Vivek. Thanks for taking my question. This builds off a previous question, but as you've highlighted on the call, there are several new strategic initiatives ahead, as well as continued integration from acquisitions that are providing synergies. So moving forward, I was just curious on the V1 long-term gross margins, if they can potentially be at the high end or above the 38% to 42% historical range. That's sustainable. Thank you.
spk14: So the company is very, very focused on improving its gross margin. In the long term, since most of the end markets that have the potential to really change their percentage in the total 100% of the company, the ones most likely to change their percentage tend to have a higher gross margin. I do think that in the fullness of time, the company will probably move its margin range at the present moment up.
spk12: Next question is from Dave Kang from B. Reilly. You may ask your question.
spk05: Thank you. Good morning. Just wondering if I could get some more color as far as your fiscal second quarter revenue assumptions in terms of Datacom, Telecom, industrial and consumer trends, whether they can be up or down sequentially?
spk14: Generally speaking, we would expect to see nearly all of them trending up from the first quarter because historically the first quarter has been the lowest quarter of the year. We may see some, as we've said earlier, supply chain or interesting seasonality in that 1231 quarter. Sometimes there's a little bit of a toss-up whether Christmas is a bigger effect than Chinese New Year. But generally speaking, I would say that we're expecting to see all of them generally moving sequentially up.
spk12: Next is from Christopher Roland from Susquehanna. Your line is now open.
spk11: Hey, guys. Thanks for my question. I did want to follow up on the Datacom angle, too, because I think there is some growing optimism around a really big 2020 here for everyone playing in the space. Can you talk about your supply situation there in particular? Do you have enough to support kind of outsized demand into next year. I know Lumentum was out saying they were internally constrained on this side. So I was wondering on that. And then, you know, on the supply front in general, what are the kind of biggest self-inflicted constraints that you see across your product set?
spk00: Thank you for your question. I honestly don't believe there is any self-inflicted constraint. I think we have capacity for our products, whether they are at component level, subsystem level, or system level. As Chuck mentioned earlier, we have a big advantage, which we are leveraging right now, having a diversity of supply locations. For example, we have... our high-volume manufacturing team in Malaysia, which is preferred by some of the hyperscalers, particularly in North America, as they want to avoid supply chain from China. And so that's a big advantage. But in terms of components, devices, which we procure, I want to remind you that we are substantially vertically integrated, including ICs, which we design. Of course, there are some challenges getting ICs from foundries that are our suppliers. But so far, as we said in the prepared remarks, the products which have been impacted the most are actually mostly telecom products, not datacom products. And as Simon, well, someone mentioned earlier, kind of shifting a little bit between datacom and telecom, as datacom is growing probably faster than telecom, primarily because we're gaining share particularly at hyperscalers, then that somehow mitigates the challenge of the supply chain affecting the telecom products. So I hope this gives you a better picture.
spk12: Next is from Tom O'Malley from Barclays. Please go ahead.
spk17: Hey guys, thanks for taking my question. In the prepared remarks, Chuck, you talked about digital IC investment, and Giovanni, in response to one of the questions, you talked about accelerating share gains at 400G. Either one of you, could you just talk about the importance of having a DSP at higher speeds? Is that something that you guys want to do internally, or do you think you can continue to gain share being a customer of a merchant vendor?
spk00: Hey, Tom. Hi. Thanks for the question. Both. I would say that our approach is both. We'll make or buy. We have some programs with some partners to develop our own DSP when it makes sense. In some other cases, it's better to buy. So for almost anything, we make. If we have a better solution out there which is attractive, then we just buy it. So I think our focus has really been on optical engines, such as the IC Trosa, which I mentioned, which can work with any DSP and offer really differentiated optical performance, as I mentioned, like the highest output power, which ultimately enables architectures which cannot be enabled otherwise. And so since we have IndioPhosphide in-house, we have automation and full assembly lines in-house and so forth, we can be not only cost competitive, but we can also supply to a large set of customers slash competitors, which will really see our products incredibly differentiated. So this has been really our focus. On DSP, as I said, we will... will approach, depending on the applications, both the make or buy decision, depending on timing, cost, and other factors.
spk12: That ends our question and answer session. I'll turn the call back over to the presenters for closing remarks.
spk14: 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 and our various interactions. We want to wish you all a very good day. Thank you so much for joining us. Bye-bye.
spk12: That concludes today's conference call. Thank you all for participating. You may now disconnect.
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