AES Semigas


25 May 2020

II-VI Inc reports record quarterly bookings of $840m, 22% above forecast

For its fiscal third-quarter 2020 (to end-March), engineered materials and optoelectronic component maker II-VI Inc of Saxonburg, PA, USA has reported revenue of $627m, above the $550-600m forecast (split 68% in communications, 11% in industrial, 7% in aerospace & defense, 6% in consumer, and 5% in semiconductor capital equipment).

Revenue is up 83% on $342.4m a year ago, but the latter was before the acquisition last September of fiber-optic communications component and subsystem maker Finisar Corp of Sunnyvale, CA, USA (whose results have been consolidated into II-VI’s Photonic Solutions and Compound Semiconductors segments for the quarters to end-December 2019 and end-March 2020).

Compound Semiconductors revenue has hence grown from $175.9m a year ago and $205.9m last quarter to $209.3m.

Photonic Solutions revenue was up from $166.5m a year ago to $417.7m (after falling back from $460.4m last quarter).

The total revenue of $627m is down just 5.9% on the strong $666.3m last quarter, so the impact due to the COVID-19 coronavirus pandemic was much less than the $50m expected.

“Our China teams, in collaboration with our global emergency response and business continuity planning team, were able to bring all of our China facilities back to normal by the middle of March,” notes Dr Vincent D. (Chuck) Mattera Jr.

“In this second full quarter of II-VI operations with Finisar included, we successfully continued our integration activities amid the COVID-19 pandemic,” says Mattera. “Despite significant operating challenges, the extraordinary commitment of our employees allowed us to address the steep ramps requested by our customers, and to exceed the high end of our revenue and EPS guidance [of $550-600m and $0.02-0.32, respectively], with record bookings at 22% above our forecast.”

“The performance is the result of growing and accelerating demand for the firm’s products across key end-markets and continued success with our merger & acquisition (M&A) integration efforts that is, in many facets, at least 12 months ahead of plan,” says Mattera. “Our substantial progress at integrating the Finisar acquisition after only two quarters is a result of our experience in assessing markets and acquiring complementary companies with great technology and potential,” he adds.

“Our communications business [Datacoms and Telecoms] in the quarter was strong on all fronts,” notes Dr Giovanni Barbarossa, chief strategy officer & president of the Compound Semiconductors segment.
In Datacoms, revenue for components rose 63% year-on-year and remained steady sequentially. “As we execute on our acquisition strategy to penetrate the merchant market with our previously captive products, we’re pleased to report that we have received our first production order for indium phosphide (InP) components, which we have already begun shipping this quarter,” says Barbarossa. “As evidenced by the strength of the demand and the unfulfilled need for scalable indium phosphide and IC components, we accelerated the market introduction and qualification of our products, for which I’m pleased to report a very exciting pipeline of design-in activities,” he adds.

Revenue for transceivers was flat year-on-year and fell 9% sequentially. “100G remains the mainstay of the market today, representing almost 70% of the $3bn high-speed transceiver market,” notes Barbarossa. “As the transceiver market leader, this is and will continue to be a large portion of our business, as we expect to see growth in 100G for at least the next five years… We were the fastest supply for 100G datacom transceivers to the industry and, as we continue to invest in that technology, we expect to secure a major portion of their market segment as it grows.”

“The centerpieces of our Telecom revenue are ROADM [reconfigurable optical add/drop multiplexer] subsystems and components, which were also strong in the quarter,” says Barbarossa. Telecom revenue fell only 10% sequentially due to COVID-19.

Revenue from silicon carbide (SiC) materials (for RF wireless applications) grew 75% year-on-year. “Adoption is accelerating and, as an example, we are shipping under our large agreement (announced last quarter) at a faster rate than expected, driving a 5% growth sequentially,” notes Mattera. “Our silicon carbide capacity expansion plans remain well on track for power applications, as we believe that the market is still in the early innings of a very long game.”

II-VI had a second consecutive quarter of record 3D sensing shipments from its operations in Warren, NJ and Easton, PA. “We have clearly achieved the vertically integrated technology objectives we laid out at the time of our earlier acquisitions to address the emerging 3D sensing market, as we have demonstrated a sustained high degree of production efficiency based on our cumulative experience gained, while producing hundreds of millions of devices at very high yields and reliability,” says Mattera. “Our top integration priority was to leverage our 3D sensing experience in our state-of-the-art Sherman, Texas compound semiconductor plant… We also successfully completed the qualification of our Sherman, TX facility as planned, and we have begun to ship production units as we continue our manufacturing ramp,” he adds. “With our qualified epitaxial growth and wafer fabrication capacity, we’re now well-positioned as the only US-based vertically integrated supplier or big seller for 3D sensing on a 6-inch platform,” says Barbarossa. “Moreover, we have adequate capacity to serve the majority of what we understand the market demand to be.”

Industrial revenue remains steady sequentially. However, laser engines in particular grew 17% sequentially for new laser system builds.

Revenue for semiconductor capital equipment products continue to be in high demand, growing 12% sequentially, “driven by the global largest semiconductor market and undaunted by COVID,” says Barbarossa.

Aerospace & defense (military) revenue grew 25% year-over-year and was steady sequentially. “Our advanced materials, electro-optical components and subsystem platforms, combined with semiconductor lasers, are essential to our growth strategy in our aerospace & defense segments, namely satellites, contested space, hypersonics, and directed energy,” says Barbarossa.

On a non-GAAP basis, gross margin was 38.3% in fiscal Q3/2020, up from 36.2% last quarter and above II-VI’s standalone gross margin of 37.4% a year ago, aided by a favorable product mix.

Operating expense (OpEx) has been cut from $168m last quarter to $154m, due mainly to internal R&D expenditure being cut from $102.4m to $90.6m.

Operating income has risen from $73.6m last quarter to $86.5m (operating margin of 13.8%, up from 11% last quarter, and level with a year ago when II-VI’s pre-Finisar operating income was $47.3m a year ago).

At the segment level, the adjusted operating margins were 13.4% for Photonics (benefitting from operating efficiencies and the richer product mix, including submarine pump sales more than doubling again year-on-year this quarter) and 14.6% for Compound Semiconductors (up from just 4.9% last quarter, benefitting from strong sales of vertical-cavity surface-emitting laser (VCSEL) arrays, the qualification of the fab in Sherman, Texas, and the commencement of commercial operations and shipments in Sherman).

Likewise, net income has risen from $37.2m ($0.40 per diluted share) last quarter to $44.1m ($0.47 per diluted share), i.e. an increase in return on sales from 5.6% to 7%.

Capital expenditure (CapEx) was $28m (cut from $55m last quarter). Free cash flow was $36.5m. During the quarter, cash and cash equivalents rose from $376.8m to $388.1m. Availability on the firm’s revolver is $358m, including outstanding letters of credit. So, available liquidity is $746m. Debt was reduced by $21m with repayments during the quarter on the revolver and term loans. The firm’s net debt position is now $1.9bn (giving a net debt:leverage ratio of 3.8x).

“Regarding our work on synergies, we are tracking well against our target of $150m in annual cost synergies within three years after the close of the [Finisar] transaction,” comments chief financial officer Mary Jane Raymond. “We have realized $43m compared to the expected $35m halfway through the first year. Given the intensive focus on OpEx, we will likely deliver in the first year at least 50% more than the year-one target of $35m.”

Order bookings were a record $840m in fiscal Q3/2020 (22% above the forecast). “Demand in the communications market accelerated considerably throughout the quarter… We experienced growth in demand in both telecom and datacom, driven by transceivers and optoelectronic components, ROADM modules and subsystems, combined with market share gains and the overall acceleration of legacy and 5G optical infrastructure buildout,” says Mattera.

“This was most evident in our Transceiver business, where bookings far exceeded our expectations [by more than 40%] during the quarter and customer enthusiasm remained high,” says Mattera. “Our ramp of new products for 5G has accelerated, as over 80 carriers re-architect their networks to handle their 5 billion mobile subscribers who are quickly migrating to 5G.”

In Telecoms, ROADM bookings grew 50% sequentially. “Demand was strong across the board for amplifiers, line-cards, and all enabling components including passive optics and wavelength-selective switches (WSS),” notes Barbarossa. In addition, 980nm pumps and wavelength-selective switches also saw extremely strong demand for undersea applications. “In fact, as we witnessed the acceleration of orders for our products for 5G applications in data-center infrastructure, most of these manufacturing lines continue to be sold out,” he adds.

“That demand profile contains large orders placed for as long as a year, and the delivery of those bookings over a year’s period of time suggest that this is the beginning of a long-term sustainable demand driven by an accelerated need to deploy new infrastructure worldwide,” believes Mattera.

During the quarter, order backlog (of orders shipping over the next 12 months) rose from $681m ($346m in Photonics Solutions and $335m in Compound Semiconductors) to a record $893m ($518m in Photonics Solutions and $375m in Compound Semiconductors).

For fiscal fourth-quarter 2020 (to end-June), II-VI expects revenue of $650-700m and earnings per diluted share on a non-GAAP basis of $0.50-0.70. Gross margin is expected to range between 36% and 39% going forward.

For full-year fiscal 2020, CapEx is expected to be $125-140m (reduced from the previous estimate of $150-200m). “Our operating leaders have done a great job on yield and shift expansion to allow us to moderate new capital expenditures across the company,” comments Raymond.

Tags: Optical communications II-VI Inc



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