II-VI Incorporated

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.

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.

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?