14 February 2022
II-VI grows revenue, despite supply-line and COVID-related constraints
For its fiscal second-quarter 2022 (ended 31 December 2021), engineered materials and optoelectronic component maker II-VI Inc of Saxonburg, PA, USA has reported revenue of $806.8m, up 1.5% on $795.1m last quarter and 2.6% on $786.6m a year ago.
“But for increased supply-line and COVID-related constraints that accelerated throughout the quarter, we would have cleared the high end of our revenue guidance [$790-840m],” says chair & CEO Dr Chuck Mattera Jr.
By business segment, Photonic Solutions revenue fell from $536m last quarter to $525m, whereas Compound Semiconductors grew from $259.1m to $281.8m.
Products for the industrial and communications markets led growth year-on-year. “The two largest drivers of the revenue gaps were from ROADMs and transceivers,” notes Mattera.
Revenue in the industrial market was up 6% sequentially and 47% on a year ago. “In Industrial, again we experienced sustained increases in orders and demand for our laser components, including for CO2 lasers and fiber lasers,” says Mattera. The firm shipped a 100MW of pump laser power for fiber lasers (a new quarterly output and utilization record for its 6-inch wafer platform).
“We experienced explosive increases in orders from the semiconductor capital equipment ecosystem [for which revenue was up 34% year-on-year], including from equipment OEMs and their tier-1 suppliers,” says Mattera. “The industry relies strongly on our highly differentiated materials, including polycrystalline diamond, reaction-bonded ceramics and metal matrix composite for extreme UV and deep UV lithography, as well as wafer stages and chucks for front-end fab equipment and specialty thermal management components, enabling advanced packaging and testing capabilities,” notes Dr Giovanni Barbarossa, chief strategy officer & president of the Compound Semiconductor segment. “Our differentiated position met accelerated demand from the OEMs in the semi cap equipment front-end and back-end wafer fab and laser-based inspection platforms. These expansions have spurred further increases in our already large manufacturing capacity investments, and these will accelerate throughout calendar year 2022,” Mattera says. “We maintain intimate partnerships with leading companies up and down this ecosystem, where we are providing unique and vital components, which are sourced solely from II-VI, including and especially for the EUV lithography tool supply chain. This is helping the leading IC producers have confidence in the returns on their investments, as they expand the much needed capacity in order to eventually clear the current IC supply-chain shortages,” continues Mattera. “Demand for our products is strengthening as we expected, because of the massive investments underway in new semiconductor wafer fabs worldwide,” says Barbarossa.
Silicon carbide (SiC) revenue grew 11%, both year-on-year and sequentially. “We saw very strong demand for power electronics applications, with revenue doubling sequentially and increasing by an order of magnitude compared to the same quarter in fiscal-year 2021,” notes Barbarossa.
Communications revenue grew 6% year-on-year, with most of the growth from datacoms (particularly high-data-rate transceivers).
Datacom business saw “exceptional” growth, up 9% sequentially. “We experienced increased demand for datacom transceivers and open-line systems driven by the cloud and large enterprise customers,” says Mattera. “The strong demand for transceivers in hyperscale data centers and artificial intelligence (AI) superclusters continues unabated… with exceptional progress on 200G and 400G output and our early ramps for 800G for a very large and growing strategic customer,” he adds. “200, 400 and 800Gb/s transceivers grew 25% sequentially (reaching a third of datacom revenue - ahead of schedule – up from just 2% a year ago), a “clear sign of share gain across all high-data-rate transceivers,” says Barbarossa. “We are very excited to be able to best support our customers with higher data rates, particularly hyperscalers in their build-out of AI superclusters in a market which industry analysts are projecting to grow by 20% in calendar 2022, and will continue to experience double-digit growth for at least another 3-5 years,” he adds.
II-VI also reported its first design win and revenue from its clock & data recovery (CDR) IC, a “clear sign of the competitiveness of our captive IC platform, which we made available to the merchant market as part of our integration of Finisar [acquired in September 2019],” notes Barbarossa.
“We also saw a strong increase in demand from the telecom equipment customers and a clear sign of the start of a ROADM demand ramp that we expect will accelerate during calendar year 2022 as the increased availability of ICs materializes from legacy supply lines and new ones that we are collaborating with closely along with our customers to accelerate qualification,” says Mattera. “The beginning of a multi-year upgrade of the US cable TV infrastructure provided for a large and long-term contract, and is also among our exciting growth drivers, based on major fiber-deep initiatives to improve rural broadband access in the USA,” he adds.
“With regard to transport networks, last quarter we announced our engagement with Windstream Wholesale,” says Barbarossa. “We are pleased to report the initial shipments of our 400G-ZR+ digital coherent optics (DCO) in the QSFP-DD form factor, the first of its kind to enable IP-over-DWDM, thanks to its 0dBm out power performed by our indium phosphide component technology,” he adds.
“Our Consumer business led our sequential growth [up 23%] and represented 9% of our sales this quarter, our third largest revenue by market,” notes Mattera. “The competitiveness of our VCSEL [vertical-cavity surface-emitting laser] platform continues to be a winning factor in the market, and we are pleased to report the third consecutive quarter of zero-defect parts per million shipped, a world-class quality performance achieved by our team in Sherman, Texas,” says Barbarossa. “On the sensing technology front, we’ve always emphasized the advantages of indium phosphide (InP) over gallium arsenide (GaAs) for some application-specific optoelectronics products. We are leading the consumer electronics and automotive market development with significant customer commitments and investment to date in our indium phosphide fabs,” he adds. “In the emerging metaverse or virtual- and augmented-reality applications, customer engagements are gaining momentum, opening up exciting opportunities for our broad spectrum of technology platforms. Specifically, a new customer for AR/VR applications has committed to fund us with about $50m for the development and production of a broad range of new products, including lasers, diffractive optics and advanced materials. Several strategic customers are beginning to realize the unique value of the one-stop-shop offering we provide with the depth and breadth of our portfolio and the promise of our long-range roadmaps.”
On a non-GAAP basis for fiscal Q2/2022, gross margin was 40.3%, down on 42% a year ago but up from 39.8% last quarter.
Operating expenses (OpEx) were $166m (21% of revenue). Cost synergies for the Finisar acquisition, originally targeted at $150m, have now reached nearly the $200m stretch target six months early. Savings in both the cost of sales and OpEx contributed to the over-delivery and have contributed to the rise in margins this year so far.
“This cost control in turn required a continuous optimization of the supply chain, including building inventories at strategic points along our vertically integrated supply chain,” says Mattera. “This resulted in our inventory levels increasing again in the quarter, as we continued our focus on serving our customers in the face of COVID and to mitigate the impact of the extended lead times and other related disruptions from the supply chain.” There was hence a strategic inventory build of $50m in the quarter ($100m for the first half of the fiscal year) to support growth beginning in fiscal second-half 2022.
Operating margin was 19.7%, down on 22% a year ago but up from 18.9% last quarter. By business segment, Photonic Solutions operating margin has fallen further, from 17.4% a year ago and 15.7% last quarter to 14.6%, whereas Compound Semiconductors rose from 25.6% last quarter to 29.2% (almost level with 29.3% a year ago).
Net income was $124.1m ($0.92 per diluted share), down on $131.2m ($1.08 per diluted share) a year ago but up from $117.7m ($0.87 per diluted share) last quarter - and near the top end of the guidance of $104-128m ($0.75-0.95 per diluted share) - enabled by a strong focus on controlling cost increases and on ratcheting of factory utilization and output. Return on sales was up from 14.8% of revenue to 15.4%.
Operating cash flow was $188m. Capital expenditure (CapEx) was $55m. Free cash flow was hence $133m.
During the quarter, II-VI paid down $30m of debt, and retired the remainder of the Finisar 2036 notes. The net cash position is now $329m. Liquidity at end-December 2021 was $3.1bn.
“We continue to see greater opportunities with a broader set of products in an expanding range of depth sensing applications, in consumer electronics, industrial and automotive markets,” says Mattera.
For the first time, order bookings exceeded $1.1bn. Order backlog has hence risen to a record $1.7bn (consisting of $1.22bn for Photonics Solutions and $484m for Compound Semiconductors) - up by more than 20% ($300m) from about $1.4bn last quarter and by 58% ($600m) from $1.08bn a year ago - due to rising demand, particularly from the industrial end-market and across the communications end-market.
For fiscal third-quarter 2022 (to end-March 31), II-VI expects revenue of $785-825m and earnings per share of $0.75-0.95.
“Backlog is supported by our capacity additions, along with the planned launches of new products from both segments,” says Mattera. “This gives us confidence in our double-digit growth projections beyond this fiscal year.”
For fiscal 2022, II-VI now expects CapEx to be $325-375m, driven largely by its expansion of silicon carbide and indium phosphide to address the growth in power devices, communications and consumer applications. “Our capital allocation of R&D and CapEx this year is more heavily weighted to the compound semiconductor segment, given our growth aspirations for fiscal-years 2023 and 2024,” says Mattera. “We expect the totality of the company’s investments to contribute to the sustained growth in fiscal-year 2022, and we expect to significantly drive our target of double-digit organic growth in both 2023 and in 2024 by a combination of continued market growth and share gains across our Photonics Solutions and Compound Semiconductors customers,” he adds.
“We expect to see our substrate business continue to grow,” says Barbarossa. “We have started pre-production of gallium nitride on silicon carbide (GaN-on-SiC) amplifiers on our 6-inch substrates in our Warren, New Jersey fab, with full production planned by the end of March,” he adds.
Also, II-VI recently qualified its own 1200V silicon carbide MOSFET product platform to automotive standards using 150mm SiC substrates and the device technology that it licensed from General Electric [in June 2020]. “I am excited about this important milestone that we met ahead of an aggressive schedule. We expanded our relationship with GE to accelerate the next phase of commercialization in industrial, renewable energy, and automotive,” says Mattera. “We will continue to focus on shortening our time to market and underpinning this platform with capacity and diameter expansions to help position our company as a market leader,” he adds. “Our investments in silicon carbide are underway and encompass a variety of applications and vertical end-markets,” says Barbarossa.
Also: “We are pleased to have recently kicked off an exciting partnership with Element Six to complement our world-leading polycrystalline diamond platform with a single-crystal capability that will considerably broaden the range of advanced applications we will be able to sell,” adds Barbarossa.
Finally: “We were excited to receive the 2021 Supplier Award from Han’s Laser in recognition of our world-class products for fiber laser applications, which will continue to drive our growth, particularly after the merger with Coherent.”
The pending acquisition of Coherent of Santa Clara, CA, USA (which provides lasers and laser-based technology for scientific, commercial and industrial applications) has received the approval (or indication of imminent approval) from three out of four global anti-trust regulatory authorities, which are conditions to the closing of the transaction. “In China (the remaining jurisdiction) II-VI and Coherent are continuing to work constructively with the State Administration for Market Regulation (SAMR), and now anticipate closing the acquisition by the middle of the second calendar quarter of 2022,” concludes Mattera.