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spk15: Good day and thank you for standing by. Welcome to the 2-6 Incorporated Fiscal Year 2022 Third Quarter Earnings 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, Chief Financial Officer. Please go ahead.
spk18: Thank you 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 third quarter of fiscal year 2022. With me today on the call are Dr. Chuck Matera, our Chair and 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, May 10, 2022. Our press release and our update and investor presentation are available on the investor relations tab of the website ii-vi.com. As a reminder, our remarks today may contain certain forward-looking statements. These remarks are given in the context of today only. they are subject to various risk factors and 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 to 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 contains those measures, such as the press release or the investor presentation. With that, let me turn the call over to Dr. Chuck Matera.
spk02: Chuck? Thanks, Mary Jane. Good morning, everyone, and thank you for joining. This past quarter and indeed the past couple of years have been exceptional in every conceivable way. While we continue to face unprecedented and dynamic challenges, relentless dedication to operational excellence is paying tremendous dividends. Our 126 team around the world continues to rise to the occasion every day and performs with extraordinary effort, resilience, determination, and success. In addition to our focus on operational excellence, our strategy of participating in markets underpinned by large mega market trends continues to lead to long-term transformative and sustainable growth. An unwavering commitment to our customers who serve these markets is creating deeper intimacy and even more opportunities yet for growth. From a financial point of view, in short, we delivered another exceptional quarter with $828 million of revenue, a 6% increase year over year, and above the top end of our guidance. our customers clearly want even more of what we offer. This was evident by the tremendous surge in demand as our global sales team again booked a record quarter with an amazing $1.2 billion of new orders. This represents an increase of 48% compared to a year ago, and our backlog of 2.1 billion grew 88% year over year with a substantial increase in bookings contributed by both segments. Looking at the quarter in more detail, we continued our disciplined cost controls and productivity improvements, which contributed to our solid non-GAAP earnings per share that was at the top end of our guidance. Driven by strength in our Datacom networking business for large enterprises, as well as for hyperscale data centers and supercomputing clusters that underpin the cloud and the metaverse, Photonic Solutions increased revenue to $568 million, or 12% compared to last year. Our growth was led mostly by Datacom, which was 40% of our business in Q3. Datacom grew 15% sequentially and 26% year over year. Most of our Datacom revenue comes from transceivers, and of those, just under half are now 200G and above, with 800G now just beginning to ramp meaningfully. I'm thrilled with the momentum that we've built since we acquired the Transceiver platform more than two and a half years ago. As we envisioned at that time, it has become an outstanding engine of growth for our business. The Datacom business is driven by the growing footprint of cloud computing sustained by large scale investments that our customers continue to pour in. Computing is moving to the cloud to a degree that is profoundly transforming many industries. It is enabled by high speed optical networks carrying data to and from consumer devices at the edge of the network and that are themselves increasing in computer power and sensing capabilities. We are witnessing the convergence of communications, computing, and consumer electronics, which is at the core of the megatrends driving our growth. As you know, 2-6 plays a leading role in the build-out of the global optical communications network. As a result, our broad portfolio of products remains in high demand and is growing. Currently, our ability to ship such products is highly constrained by the availability of semiconductors. Over time, we expect these constraints to ease. In the meantime, we continue to work hard in collaboration with our supply chain partners and our customers to mitigate the impact of these shortages, including focused product technology and manufacturing innovation efforts. We continue to advance our telecom transceiver technology, and we are also executing on a multi-site capacity expansion plan including significant capital investments to enable our future growth we fully expect the super cycle to continue in the face of broader economic challenges impacting other industries and these capacity expansion capital investments position us very well as the worldwide supply chain pressure eases in coherent transceiver technology we continue to make great progress In April, Windstream announced the completion of the industry's first 400G ZR Plus interoperability trials, enabled by our pluggable transceivers, which impressed with its industry-leading output power, thanks to its underlying indium phosphide device technology. Earlier today, we announced that we are first to market with a new node-on-blade platform that integrates an entire Rotem node into a single subsystem based on a unique wavelength selector switch, amplifier, and high resolution channel monitor technologies. This new platform promises to transform rotor networks by enabling them to be more compact, consume less power, be more flexible, and enable lower cost networks. Connected to the access network is the vast internet of things where an increasing number of sensors can sense the world around them. Optical sensing in consumer electronics is especially exciting with the coming of extended reality in the metaverse. These are also driving new use cases for our broad portfolio of products in the compound semiconductor segment that includes semiconductor lasers, driver electronics, metal lenses, high index wave guides, and advanced materials. In 3D sensing for smartphones, on the heels of a substantial increase in share over the last two years, we are on track to achieve design-ins with new customers. While our revenues in consumer electronics were down in Q3, as expected due to seasonality, it was offset by the explosive revenue growth in semiconductor capital equipment and industrial markets that include silicon carbide. In the semi-cap market, global shortages in semiconductors have become a meaningful opportunity for us as well. Revenues in semi-cap grew 34% year-over-year. The tens of billions of dollars that the industry is investing to build new fabs are driving the increased demand for immersion lithography tools as well as the most advanced semiconductor FAP technology, such as EUV lithography. We are aware of our responsibility as an extremely important part of this supply chain, and so we are investing in manufacturing capacity to keep with the pace of demand. Our revenue in industrial grew 13 percent year over year, fueled by silicon carbide. Our silicon carbide wafer finishing line in Fuzhou is now operating at full capacity. And our vision of establishing a leadership position in wide bandgap electronics is on track. Thanks to our customer engagements that are expanding rapidly in the US, Europe, and Asia, we are becoming increasingly embedded in the global automotive supply chains as the transition to electric vehicles paves the highways with green and clean transportation networks. Now, I would like to conclude with a few comments specifically about our supply chain and our pending merger with Coherent. First, on the supply chain, revenues in the third quarter were $65 million lower due to the supply chain constraints. Our Q4 guidance anticipates the gap growing to about 100 million as the rate of demand accelerates even faster than our increased rate of supply. In fact, we expect that our full demand for semiconductors will continue to outstrip our suppliers' capability at least through this calendar year, even as they add capacity. I would like to acknowledge all of the hard work by our 126 team, our suppliers, and our customers in mitigating the impact of unprecedented supply chain challenges. Thanks to our close collaboration with our strategic supply chain partners, extensive coordination with our customers, and the strong dedication of our global operations teams, we continue to effectively manage our way through these complex challenges. Regarding the coherent acquisition, we have completed our major integration planning tasks. As you have seen by now, we refiled the U.S. Hart-Scott-Rodino clearance on May 2nd and continue to have cooperative discussions with SAMR. We anticipate closing the acquisition before the end of June. Like the 2-6 people, the coherent team is truly exceptional. It has been a pleasure to work with them as we planned our future together. We really look forward to the combination and the opportunities to unlock value. With that, let me turn it over to Dr. Giovanni Barbarossa. Giovanni?
spk19: Thank you, Chuck, and good morning, everyone. We are pleased to report that we continue to make progress with our silicon carbide-based devices for power electronics. and our engagements with customers in the U.S. and Asia are expanding rapidly. We sampled our first automotive-qualified MOSFET devices and we are working relentlessly to secure our first design wins. We have also begun shipments of gallonitride on silicon carbide devices for wireless applications. Our substrate sales were robust for both power and communications applications, and were about 70 and 30% of the substrate sales in the quarter respectively. Sales for power electronics increased 17% sequentially. Our expansion in capacity for the manufacturing of indium-phosphide-based devices, including EMLs and DMLs for Datacom and Telecom, is proceeding according to plan to support both internal and external customers. As a result of this expansion, we expect to start generating incremental revenue from our newly expanded sites in the second half of the calendar year. During the quarter, we sustain a high level of production for the 980 nanometer pump product line to support the current demand and the strong forecast for rodent and amplifier products in the second half of the calendar year. Revenue in the industrial market grew 13% year-over-year, and aftermarket sales for laser components reached an all-time record in Q3 in North America, while sales in March were an all-time record globally, indicating a high level of laser usage in the installed base, a good proxy for industrial activity overall. In Q3, We experienced again what we believe is evidence of a multi-year demand cycle for semiconductor capital equipment enabled by our differentiated composite materials and diamond-based products. Tens of new wafer fabs being built around the world are driving our customers to request incremental output and to continue to expand our manufacturing capacity which generated record bookings and revenues last quarter. We are proud to be doing our part to help the semiconductor electronics industry to increase production worldwide as part of a global effort to eliminate the integrated circuits shortage. While our consumer business sales were typical for the seasonally low Q3, the qualification of all new products is on track and we expect a strong revenue growth in the second half of the calendar year As a result of the incremental investments in technology and CapEx, we have been making to scale new platforms for new applications. Clearly, our results this quarter demonstrate that our strategically diversified product portfolio offers long-term resilience to market dynamics and generates multiple vectors of growth in fast-growing segments of the markets we serve. With that, let me turn it over to Mary Jane Zaymond. Mary Jane?
spk18: Thank you, Giovanni, and good morning. The end market and geographic breakdown of our $828 million of revenue can be found on the fourth page of the investor presentation. Our Q3 non-GAAP gross margin was 40.6%, and the non-GAAP operating margin was 20.8%. The results include approximately $7.5 million of progress payments on development programs being partially supported by customers. Supply chain costs and COVID costs, a total of $14.5 million, are not excluded to arrive at non-GAAP results. At the segment level, the non-GAAP operating margins were 14.4% for photonics and 34.7% for compound semiconductors. Our record backlog of $2.1 billion consists of $1.57 billion for photonics and $560 million for compound semiconductors. As we have stated, this increase in backlog is a function of demand, partly from the industrial, semiconductor capital equipment, and communications and markets. Gap operating expenses, SG&A plus R&D, were $215 million in Q3, excluding $10 million of amortization, $17 million of stock compensation, $13 million in startup costs, and $12 million of M&A and integration costs, non-GAAP OpEx was $163 million, or 20% of revenue. Quarterly GAAP EPS was $0.28, and non-GAAP EPS was $0.95, with after-tax non-GAAP adjustments of $80 million in total. The increase in the non-GAAP adjustments compared to last quarter include a whole quarter of interest and fees, or $33 million, related to the place debt to finance the coherent transaction. The diluted share count for the GAAP results was 117 million shares, and for non-GAAP, the share count was 126 million shares. The GAAP and non-GAAP EPS calculations are in the ending tables of our press release. Pre-tax interest was $43 million. This includes $10 million of our underlying interest and $33 million of interest and fees on the debt for the coherent transaction. Cash flow from operations in the quarter was $36 million, free cash flow was a use of cash of $59 million, including CapEx of $94 million and a build of strategic inventory of $60 million in the quarter, $183 million for the first nine months of the fiscal year to support our growth and customer request to accelerate deliveries from the backlog. For FY22, we now expect CapEx to be at or above the top end of our range of $325 to $375 million driven by by our expansion in silicon carbide and indium phosphide. We paid down $16 million of our debt in Q3, and our net cash position is $288 million. The company's liquidity at March 31 was $3.1 billion. The effective tax rate in the quarter was 22%, and we expect the tax rate to be between 18% and 20% for fiscal year 22. Turning to the outlook for Q4 fiscal year 22. Our outlook for revenue for the fourth fiscal quarter ending June 30, 2022, is expected to be 840 to 880, and earnings per share on a non-GAAP basis of 85 cents to $1. The share count is 126 million shares for the whole of the guidance range. The EPS calculation, including the dividend treatment, is detailed on Table 8 of the press release for the low, mid, and high points of the guidance. 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 19 million in amortization, 17 million in stock comp, 48 million in transaction, integration, startup, and other related costs. The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, and the share counts are all subject to change. Before we go to the Q&A, just as a reminder, our answers today may contain certain forecasts from which our actual results may differ due to a variety of factors, including but not limited to changes in mix, customer changes, supply chain shortages, both upstream and downstream, competition, changes in regulations, COVID-19 protocols, and global economic conditions. We welcome your questions and expect to end this call not later than 10 o'clock this morning. You may open the line for questions. Thank you.
spk15: 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 Ananda Baru from Loop Capital. Your line is now open.
spk14: Hi, good morning you guys. Um, yeah, listen, congrats on the strong execution and on the, on the nice results. Um, I, a couple of, I could chop, uh, just in the press release and in your fair remarks, you characterize, uh, what you saw as a tremendous surge in demand. And so we just love kind of context around, uh, you know, sort of, is that stronger than you thought it would be 90 days ago? And did you see it, like, I guess, any context around sort of the linearities you went through the quarter? And that would be great. Then I have a quick follow-up. Thanks.
spk02: Thanks, Ananda. Good morning. Yes, indeed, it was stronger than we forecasted, and it accelerated throughout the quarter.
spk14: And, Chuck, to the backlog, I mean, tremendous strength in new orders and tremendous growth in backlogs. I know that I believe it was in sort of like second half of last year when backlog became sort of a hot topic. You guys gave us some context around the why you thought the backlog was of high quality. I'm going to sort of paraphrase this maybe poorly, but you were sort of building, you were shipping the capability to build, and as a result of that, you felt that was like a pretty solid way to sort of check the backlog quality. Could you just speak to the backlog quality now that it's as substantive as it is and how you guys feel about that? That's it for me. Thanks a lot.
spk18: First of all, thanks, Ananda. Yes, first of all, on the one hand, with the supply chain shortages accelerating, many of our customers have increased the visibility that they are giving us in order to allow us to put longer-term orders forward. on our suppliers. So that's the first thing. And then when we receive those longer-term orders, we do verify with them what they are expecting in terms of deployments on their side. And we particularly do that if there is a capital investment required because we wouldn't put the capital in if we thought we were just building for somebody's inventory not to be deployed. Beyond that, of course, we also watch the backlog. We watch the dates. to see if the dates are moving. That is a very early sign. We obviously look at de-bookings very, very carefully, and de-bookings are reported every day. There aren't that many of them. And then finally, in cases where we have inventory as part of an agreement that's gone on for years, it's a normal practice to have some of our inventory sitting at the customer site. We watch that area that's typically referred to as a cage. We watch the cage to be sure that we understand whether that is moving, that inventory is actually moving. And those are the main signs that we use. But the main reason that the backlog is growing, as I indicated, is really demand. And in order to give the correct picture of demand to the supply chain, many of our customers have worked collaboratively with us to have a longer dated visibility.
spk14: That's really helpful, Mary Jane. Thank you guys so much. Appreciate it.
spk18: And then just before we go to the next question, I just want to let you all know Chuck will be with us until about 10 minutes of 10, and then Giovanni and I will be here through to 10 o'clock. But let's go to the next question.
spk15: Thank you. Our next question comes from the line of Paul Silverstone from CalWIN. Your line is now open.
spk08: Thanks, guys. I apologize if you said I missed it, but what was the margin impact from supply chain in March, and what are you expected to be in June? I heard your comment about revenue.
spk18: So the supply chain costs this quarter were about $8.5 million. The COVID costs were about $6 million, so that's the composite of this $14.5 million. So it's about one percentage point.
spk07: And that's what you're expecting for June as well?
spk18: I'm sorry?
spk07: That's what you're expecting for June?
spk18: I would say that it's probably not less than that. It could be higher, but... It's probably not less than eight and a half.
spk08: Mary Jane, I think virtually every company in networking, com equipment, optical components this quarter cited an impact somewhere in the 200 to 300 basis point range in average impact margins. Some somewhat better, some somewhat worse. Any thoughts for, you seem to have done a very fine job. Any thoughts for where margins can go given the significant increase in costs over the past, what appears to be over the past 90 days, any thoughts for where your margin structure can go over the next year?
spk18: Well, first of all, I think when comparing supply chain costs between any of the companies in our sector, I'm sure that everyone who is giving you a number is giving it to you very accurately, but it may not actually be the same content. So in our case, we just gave the actual excess cost to try and get parts above what it would have normally cost to try and get them in the door. Other people may be including, we didn't, but we could also do it. They may be including what's the revenue they couldn't have shipped and the margin impact of that, which is also not trivial. But in any event, if you did that for us, that's probably another, at least one basis point, if not two. So just so that when you hear the different numbers from people, you just check the content. But as for where the margins will go, I mean, first of all, the demand has remained very, very strong. Myths obviously always can affect us and We're not completely out of the woods either on supply chain or plants that could be temporarily shut down by us or by customers due to COVID. For example, the COVID issues that we saw during the calendar first quarter, I don't think we expected necessarily. So while we may be able to ship, they may not be able to receive. That's what I mean about customers having plant effects. But generally speaking, I would say that given the great work of all of our colleagues around the world, I think we still could continue to see the margins inch forward. But I would say, as we've said before, every day is a new day, and it's kind of hand-to-hand combat on supply chain, which we expect is going to continue for the rest of this calendar year.
spk08: And Mary Jane, just to clarify, you're not expecting a meaningful adverse impact in June?
spk18: I don't know that we aren't. I mean, we could have an adverse impact in June. I mean, first of all, again, just normal things in the margins, such as mix, could affect it. But I would say that we will do what we did this quarter, which is fight very hard, because I probably gave the same answer last quarter when we reported that yes. I mean, I didn't think necessarily the margin we were on was the absolute floor. I think we're just going to work very, very hard to try and offset that, which is why I say it's hand-to-hand combat every day.
spk08: All right, I appreciate the response. Thank you.
spk15: Thank you. Our next question comes from the line, Mark Miller from Benchmark Company. Your line is now open.
spk05: Congratulations on another great quarter. I was just wondering in terms of the supply chain impact, specifically what's the major components that are being impacted? Is it rotums and what else?
spk18: The main part that is short is integrated circuits. And the primary end product for us that's being affected, yes, is in the Rotem area, though this quarter we did have some impacts in the transceiver area.
spk05: Okay. Backlog, is it pretty linear? Is it back-end loaded backlog? And what about the margin profile of the backlog? Is this similar to what you're seeing?
spk18: I would say that the margin profile is similar to what we're seeing. And when you talk about the backlog being back-end loaded, I would say if you're asking about how is the entire backlog timed, We do have more that might be in the third and fourth quarter than perhaps we would have seen a year ago. But generally speaking, the backlog tends to be more weighted to the first and second quarters immediately following the reporting here.
spk05: Okay. What about transceiver margins? Are you seeing some progress there, or have they been fairly stable?
spk18: Well, I mean, considering the tremendous progress the company made on the transceiver margins in the last quarter, I think they are now being affected by supply chain shortages as well. Thank you.
spk15: Thank you. Our next question comes from the line of Richard Shannon from Craig Hallam. Your line is now open.
spk03: Well, Craig, thanks for taking my questions. Mary Jane, maybe the first one for you. Looking at the operating margins for compound semis, both before and after the Adjustments for startup costs are pretty impressive here. Maybe if I can look at it, even including the startup costs that you're reporting in the press release, you did about 29% in the just reported quarter with revenues that aren't record. And those margins are well above what you've reported in the last few quarters, even with the investments going on here. Can you describe what's going on here? Is this mostly from gross margins or other dynamics coming in here? And what does this say about the future margin structure for this segment?
spk18: Well, I think, first of all, when we have talked about the advancement of the margins in general, we have talked about pretty consistently that as some of the newer growth areas, whether it be silicon carbide, the sensing market, and even the return of industrial, which is hardly a new market, return to the new markets plus the return of industrial, that Giovanni's segment had the best ability to really expand its margins. And that's actually what we're seeing here. with the color, I think, on the quarter and what we saw in Giovanni's margins, in the CompSemi margins, even from last quarter, is the return of industrial, which, just keep in mind, is a very, very, very strong margin and market. The sensing market, the ongoing, probably, efficiencies, really, that's being done kind of here in the off-season, and then the advancements in silicon carbide, indium phosphide, et cetera, since the margins of CompSemi, as a general matter, tend to be above the corporate average. With respect to the source of them, as we all know, if you don't make money at the gross margin, everything else is a deduction, so gross margins do need to be strong. But Chuck mentioned this in his remarks, which is I think the ongoing cost control is actually very helpful for both segments.
spk03: Okay, perfect. That's great, Mary Jane. My follow-on question on 3D sensing. I'm not sure if Giovanni or Chuck's remarks were suggesting a better than seasonal pattern here in this back half of the year, but maybe you can discuss what you're thinking there, even throwing in thoughts on share. Share position would be great, please.
spk19: Hey, Richard, thanks for the question. Well, if you keep winning new design wins and you add applications and new products, obviously that offsets the seasonality positively, right? In other words, if you are stuck with your current design wins, they have seasonality. But if you increase your footprint in the market share with some important design wins, as we said, we expect that strong growth in the second half of the year, that obviously that will improve or at least will increase the seasonality. I don't know how to say it, but in relative terms, it's still seasonal, but the The bar is higher because we are adding new products for new applications. As I said in my prepared remarks.
spk03: Okay. Can you discuss whether those are with current or new customers, Giovanni?
spk19: No. Sometimes, as you know, we don't even know what the application is because they don't tell us. But we expect it's only in sensing for sure, not necessarily 3D sensing. So I would talk about sensing in general, including 3D sensing. Okay. Perfect. That's all for me. Thank you.
spk15: Thank you. Our next question comes from the line of Samik Chatterjee from JP Morgan. Your line is now open.
spk09: Hi. Great. Thanks for taking my questions. I guess if I can first just start on the supply side and if I can get an update on your facilities in China. I remember last time there was a COVID outbreak. Mary Jane, you had mentioned some inefficiencies coming into China. some of the facilities despite not being directly impacted. So I just wanted to check sort of how are things on the ground there, any quick updates in terms of what you're seeing in relation to efficiencies as well, and then I will follow up. Thank you.
spk02: Samik, good morning. Thanks for your question. This is Chuck. Samik, as it relates to the situation in China, as you know, we have a great team in China, and they have done an extraordinary job here since the since the situation changed in the last month or two, we've been moving forward with very little impact to no impact in our factories in China. At our design center in Shanghai, we've had some impact, but even in the case where people have been working from home, we've been allowed to have people go into the facility, and we're right on track for the milestones that we've laid out for the quarter. Our employees have done an extraordinary job. And if you ask me, has there been an impact, I would say for all intents and purposes, no.
spk09: For my follow-up, I know Mary-Jane mentioned in relation to the composition or growth of the backlog, industrial is a big portion of that. But I wanted to dig into automotive in particular, particularly in relation to the opportunity that you're seeing and the backlog that you might be seeing from both materials processing as well as silicon carbide opportunities, if you could delve into that a bit.
spk18: So, Sonic, is your question what are the components of the benchmark?
spk09: No, sorry. What are you seeing in relation to backlog from the automotive markets?
spk18: We don't tend to specify the backlog by end markets. I would say that, generally speaking, from an industrial point of view, it's up across all markets that do any form of cutting, welding, and bracing. And we have other components that do go into some of these end markets, but we didn't really break the backlog down by end industry.
spk19: Yeah, having said that, I mean, Samik, you know our automotive intensive share is below 10% of the total company footprint. So you could assume that the majority of the backlog is around Datacom, Telecom, and then maybe Semicap Equipment, and industrial. I mean, those are the major components. Definitely data commentary. Thank you.
spk09: Excellent.
spk15: Thank you. Our next question comes in the line of Tab Kong from B. Riley. Your line is now open.
spk11: Thank you. Good morning. First question on 3DS. Just wondering, customer concentration is the lead customer over maybe 90% of 3DS revenue. And how should we think about fiscal 23 growth?
spk19: Okay, Dave. Good morning, Dave. Thanks for the question. So I would say that our leading customer is definitely the majority of the 3D sensing revenue. But I want to make sure that we expand that revenue general market to sensing moving forward because I think we are seeing more and more, you know, sensitive applications in proximity, presence, depth, skin sensing, and so forth. So the market is growing beyond 3D. And, of course, 3D is still, for us, is still a large portion of it. But I would like to kind of move on from 3D to a much larger market, which is the sensing market for us. And yes, our living cost will be the majority of that in the next few quarters. Got it.
spk11: And then regarding CapEx, how should we think about for next fiscal year?
spk18: I would imagine that we would expect to see next fiscal year also being a year of investment. So if If we think about this year in that kind of 350 or 375 range, I think it's probably not less than that going forward. At least that's our current view at the present moment. It could be higher as well. I mean, I think it could be $400 million. And, of course, keep in mind as the company progresses and is possibly larger, that's speaking just to the two-stick space platform, not the combined company that we potentially could have by then.
spk11: Got it. Thank you.
spk15: Sure. Thank you. Our next question comes from the line of Jim Richardi from Needham. Your line is now open.
spk06: Hi, thank you. It's just a question on the booking strength that you saw. The book-to-bill, obviously very high. Can you give any color on the book-to-bill photonics versus the compound semi?
spk18: Sure. The book-to-bill was good in both of our segments. As Chuck said in his remarks, both of the segments contributed to the increase in the book to bill for the company for the quarter. And as Giovanni did mention, the fact that probably numerically speaking, the largest increase in the backlog was in Datacom and Telecom. But generally speaking, proportionately, both of them were very strong.
spk06: And on the industrial side, um, I think you said up 13%. And, um, that was driven, uh, by Silicon carbide. Clearly that was strong. Is it still around 5% of revenues? What are you seeing Giovanni? You alluded to some of the activity you're seeing in the aftermarket, but just in general, if you were to parse out, uh, that part of the, the, uh, the business, what are you seeing in the market right now?
spk19: Yeah, well, uh, Jim, thanks for the question. Basically, our industrial definition encompasses a pretty broad set of applications, including laser-driven applications, specifically fiber lasers like welding, cutting, and so forth. For example, we had record bookings for our cutting heads, as an example. We mentioned zero carbide being the largest, The industrial definition in that case of steel and carbide is steel and carbide used for power electronics that goes into industrial applications. So we distinguish from power that goes into electric cars versus power that goes into industrial applications. So we make that distinction depending on what the customers ultimately are going to use the wide band gap materials for. But the industrial, generally speaking, on the, let's say, manufacturing of durable goods, if you want to define that way, it's very strong for us. And we continue to enjoy the advantages of our scale, for our pump production, our optics, and so forth, particularly in China. And then the other one is the welding applications for batteries, still strong, even if we we probably will continue to grow. We're not at the record numbers, but we expect new records in the second half of the year with welding, particularly body welding applications.
spk06: Thank you.
spk15: Thank you. Our next question comes from the line of Simon Leopold from Raymond James. Your line is open.
spk04: Thanks for taking the question. First, I wanted to clarify Giovanni's comments on the sensing growth in the second half of the year, whether that was a reference to first half over second half or whether that was year over year or both of those. And then the question I wanted to ask was, particularly on the 200 gig and above rates for data center transceivers, I want to get an understanding of whether or not those in particular are supply chain constrained and how big is your hyperscale exposure as a percent of total revenue today? Thank you.
spk19: Simon, thanks for the question. So first, to respond to your first question, it's both. So with respect to year over year and then first half versus second half of the calendar year. So it's both. The second question is, as we said, the majority of our supply chain challenges are really around telecom, not datacom. Now, having said that, there are some for datacom. And you had a third question, which was around our presence with web scaler and so forth. I would say that one-third of the total data is concentrated in one or two hyperscalers. And then one-third is about, let's say, other cloud service providers and so forth with, I would say, something like maybe 20 to 30 customers. And then one-third is actually a very long tail of over couple of hundred, maybe 300 customers, which are mostly enterprise, small customers, and so forth. So that's kind of the distribution of the data on numbers.
spk04: That's very helpful. Thank you.
spk19: Thank you.
spk15: Thank you. Our next question comes from the line of Harsh Kumar from Piper Sandler. Your line is now open.
spk13: Yeah, hey, question for Giovanni. Giovanni, you mentioned in the commentary that you're sampling your first MOSFET device for automotive. I was curious, you know, that's exciting stuff. I was curious if you could give us an idea of kind of what kind of interest in design wind level activity or sampling are you seeing? And then my second question, I'll ask that up front. Mary Jane or Chuck, maybe you guys could clarify respect to guidance. How are you thinking about your two segments and just color that you might be able to provide on those?
spk18: Well, with respect to the second one, I would expect both segments to contribute positively to the growth in the upcoming fourth quarter. How about you?
spk19: Yeah, Harsha, I think it's a good question. I think, obviously, it's a new market for us, so we have no design wins at this point in time. So everything that we'll be able to accomplish will be, in a way, a market share gain for us. So we're looking forward to that. We definitely increased with a qualified product. It's easier. to engage customers and increase our chances. So that was the first step, which announced last time, last quarter. And this quarter we are saying, well, now we have samples in the hands of some automotive makers, which again, it's pretty exciting considering that we are a newcomer. So I think it all goes without saying that the reason we are interested is because of our performance and the quality that we have demonstrated, deriving from, as you know, mostly from Avionics applications, given our collaboration with GE, which were really the original market for those designs. So it's a really, really great exchange with these automotive makers, and we hopefully will get the design win sometime soon.
spk13: Great, guys. Congratulations. Thank you.
spk12: Thank you. Our next question comes from Meta Marshall with Morgan Stanley. Your line is now open.
spk17: Great. Thanks. A couple questions. Maybe to start with, Mary Jane, you know, you're continuing to find a lot of OPEX efficiency, maybe kind of beyond where you guys guided to yet CapEx. It seems as if you're making some of the capital investments that you wanted to on silicon carbide. So, Just trying to get a sense of, you know, should we expect a step up in OPEX at some point as you kind of fill those facilities, or are you just kind of finding more efficiency with kind of some of the investments that you wanted to make there? Then I have a follow-up.
spk18: Okay. So overall, we are making all the investments that we had planned to make. With respect to OPEX, I do think that it will – probably trend up. And while we had indicated that it could go as high as 23, I think from the beginning I've indicated that it could go to, say, 21 to 21.5, which if you think about it, it's actually kind of a lot of money. With respect to OPEX efficiencies, though, we are never going to stop looking for those. I mean, I didn't necessarily expect that we would have $14.5 million this quarter between COVID and supply chain, but we did. And because that number is is a snitch away from our, you know, it steals the money off the margin line, the numbers we can control are in the OPEX. And so those are the ones we're really going after. I would say that the directives that Chuck and Giovanni and Sonny have sent out for their segments and for the company are really primarily focused in G&A. But nonetheless, our CTO and Giovanni spend quite a lot of time really making sure that we're spending our R&D as efficiently as possible, which has always been kind of a hallmark of the company. Great.
spk17: And then maybe just as a follow-up, you know, you guys had noted some select price increases that you were looking to put in place last quarter. Just an update on, you know, how those negotiations went or just if there's any, you know, when we should see some of the impact or if we can quantify the impact of those price increases.
spk02: Thanks. And that's it for me. Thank you, Mita. This is Chuck. It's going very well. And we're beginning to see the effect of it in this quarter for those conversations and those negotiations that were settled two or three quarters ago. So we're in the process of continuing this. We've been selective about it in terms of our priority and in terms of the value equation that we offer the customers. The conversations have gone very, very well. And when you look at the size of our backlog, on the other hand, we have agreements and contracts and purchase orders that were committed to certain pricing that are part of this backlog that we reported today. So as it's working out and working its way through, I expect the impact to accelerate over the next, let's call it the next three to four quarters.
spk12: Thank you. Our next question comes from Vivek Arya with Bank of America. Your line is now open.
spk10: Thanks for taking my question. I'm curious, Mary Jane, how should we think about gross margins heading into fiscal 23 relative to what you're expecting this year? You know, what would be the moving pieces and interplay between your segment mix? And what I'm particularly interested in is the depreciation from this rising capex. So just you know, high-level puts and takes of how we should think about gross margins going into the next year?
spk18: Well, I think the gross margins, the range that we have out is 38 to 42. While I don't know that it's impossible that someday it could have a 39 handle, just in a quarter, in a given quarter, I would expect that we would continue to work on the gross margin. But the main things that affect the growth margin in the photonics side would be, for example, the ability to relieve the supply chain shortages of integrated circuits, which help the Rotem products, and the Rotem products tend to be the more valuable among all of those in photonics. With respect to compound semiconductors, as we see the increase in the newer areas, both and silicon carbide, as well as continue to see strength on the industrial side, as well as the semiconductor capital equipment side to which we sell components, all those tend to have positive effects on the margin. So I think those are the main things. With respect to the CapEx, most of the CapEx probably is following a seven-year depreciation cycle, but there is probably at least 50 million of it, I would say is a rough average that is more infrastructure related and therefore probably follows about a 10 to 15 year depreciation cycle.
spk10: Very helpful. And then for my follow-up, I'm curious about what your ambitions are longer term in the silicon carbide space, you know, because there is a very large competitor who is investing five or six hundred million dollars annually in their substrate capacity you know building out a new fab and and so forth and there are a ton of incumbents on the device um side so you're coming at it from a very strong ip base but i'm curious that in terms of just your ambitions about you know market share and so forth um you know how will this play out over the next uh two to three years yeah thanks for the question well obviously we have uh
spk19: a lot of work to do, but we are investing a billion dollars over the next five years. As I said earlier, we're considering our footprint today in the device space. It's incredible that we've been able to get the attention of automotive makers, which are currently testing our device product. So clearly, there is a lot of upside for us in front of us in terms of gaining share in the market, as I said earlier. And I think the market is a very long, 50, 100 years long market. So there is room for many of us, and I think we'll have to play on differentiation. Obviously, having a silicon carbide substrate platform as competitive as the one that we have is going to be very important to ultimately be price competitive in the market. So we've begun. We have made a lot of good progress. We are sampling products. We expect some design wins in the near future. So it's all an upside for us in the next few years. And as I said, market is large enough. and will be even larger, that there is room for us too.
spk18: So we have about five minutes left, and there's three of you in the queue, so we'd like to try and get all three of you in.
spk12: Thank you. Our next question comes from Sydney Ho with Deutsche Bank. Your line is open.
spk16: Good morning. This is Gianmarco Vallon for Sydney. Thank you for taking my question. My first question is about supply constraints. I know in the past you mentioned the transceivers and rotums businesses being highly constrained. Are you seeing anything different this time around in terms of particular products or end markets as being mostly impacted?
spk18: I think what we've said is that it's rotums that are particularly constrained and commencing this quarter, we are seeing more on the transceiver side.
spk16: That's helpful. Thank you. And then my follow-up is, regarding your investments in silicon carbide and indium phosphide. In previous quarters, you also mentioned that you expect these expansions to sort of materialize towards the mid-fiscal 2023. And can you provide an update on the progress of these expansions? And have supply chain disruptions had any impact on the timeline of these ramps? Thank you.
spk18: So it's for silicon carbide that we said the product is probably coming to market. Actually, in 2024, And at the present moment, supply chain is not affecting those.
spk01: Thank you.
spk12: Thank you. Our next question comes from Christopher Roland with Susquehanna. Your line is open.
spk00: Hi there, and congrats on the strong results and guidance here. My question is around the hyperscale datacom business. I would love to know, is this kind of broad-based cloud or are these more AI applications? And what is the technology involved here? Are we beginning to see kind of the inflection for PAM4 or is this something else? Thank you.
spk19: Yes, definitely all of that. I mean, there is no – I wouldn't say there is a majority – you know, cloud versus AI. I mean, I don't even know where do you put the limit between the two. I mean, anyway, I think it's across the board, very strong demand. In terms of the technology, definitely, PAM is still very, very much preferred modulation format that is increasing the number of bits per board, and that will continue for quite some time. driving ultimately the reduction in dollar per bits transmitted. So that's something we have, and we're very competitive from that standpoint. And the share gains, I mean, if you think about the growth rate of the market and the growth that we've reported, we are clearly claiming a substantial market share back. I think that's helping the growth of the entire company.
spk00: Thanks, Giovanni. My second one is around 3D sensing. Your competitor talked about having majority share and then moving to a 50-50 split, but we haven't seen that in your numbers yet. I know you said it's a back-end loaded year, of course, with seasonality. But do you think we could get back to perhaps, you know, a quarter, whether September or December, in which you guys are doing north of $100 million quarterly with this 50-50 split?
spk19: Well, I don't know what the split is. You know, I could be different in 50-50. But what I wanted to emphasize is the – The fact that ultimately we are playing in the sensing market. And again, 3D is only part of that. So maybe even for 3D, we may have close to 50-50 displays. It may not be the same for the sensing market. So I will look into that. I already said earlier that we expect a strong growth in the second half. of the calendar year, and as I said, driven by new products for new applications, we think that is going to definitely offset the share to a larger number for us, I suspect, but we'll see. Thanks, guys, and congrats.
spk12: Thank you. Our last question comes from Tom O'Malley with Barclays. Your line is now open.
spk20: Hey, guys, thanks for sneaking me in. I appreciate it. Giovanni, this is more of just a clarification. I think you said this quarter that Datacom as a percentage of com was 40%, and then it was up 15% quarter over quarter. I think last quarter you said it was 60%. Did I hear that wrong? Could you just level set us on what Datacom was as a percentage of com last quarter?
spk18: First of all, Giovanni's comment that it was 40% is 40% of the whole company, not 40% of Datacom.
spk19: Yeah, I think, Tom, the – The comment on the 50%, I think there was about the high-speed transceiver, the 200, 400, 800. They now represent 50% of the total transceiver Datacom business. So we are shifting from, let's say, 100G being more than 50% to 100G and below being more than 50% to 100G and below being less than 50%. Therefore, the higher speed the higher data rate transceiver, now they are close to 50%. So it's kind of a shift in mix.
spk20: Gotcha. Yeah, no, the 40% as a function of the total business makes a lot more sense. Then just to follow up, just on the stuff that's below 200 G-speeds, I think Mary Jane called out that there was a lot of, on the transmission side, a little more supply chain shortages. How would you kind of characterize overall demand there, just given the fact that it sounds like a lot of people can't get product? Has that continued to improve throughout the year, or is that seeing any pockets of weakness? That would be really helpful. Thank you again.
spk19: Yeah, Tom, no, the demand is very strong. As I said, the only challenges we, as Mary Jane just said, again, we experience supply chain challenges on the road and telecom mostly. Now we're seeing a little bit of challenges also for the transceiver space. And as you can imagine that the volumes are typically higher at the lowest speed, right? So, and... And as Chuck said, we think the number could be anywhere between 75, up to $100 million better. Our guidance would have been $100 million better if it wasn't for the supply chain. And of course, data can be the largest portion of our revenue as a single market, as a single application. And obviously, those $100 million are mostly around transceivers.
spk20: Thanks again for sticking me on, guys. Appreciate it.
spk04: No problem.
spk12: Thank you. This does conclude today's question and answer session, and I would like to hand the call back to Mary Jane for any closing remarks.
spk18: Thank you very much, everyone, for joining us this morning, and we'll talk to you all soon, so have a good day. Bye-bye.
spk12: Thank you. This does conclude today's conference. You may now disconnect.
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