For years, demand for lasers has been on the upswing. With a wide range of uses for various types of lasers, companies like II-VI (IIVI +6.34%) have been able to grow dramatically as they flesh out their product lines and provide the equipment that their customers have come to depend on in order to make their own operations as efficient as possible. Yet last month, weak performance from some of II-VI's peers made it seem as though the good times were over for the laser industry.
Coming into Tuesday's fiscal fourth-quarter report, II-VI investors had cooled down their expectations for the laser maker's performance. Yet II-VI was able to avoid the poorer performance that some of its competitors suffered, and that helped to reassure investors that favorable conditions could continue.
Image source: II-VI.
A strong end to II-VI's fiscal year
II-VI's fiscal fourth-quarter results left no doubts about the state of the company. Sales were up 17% to $321.1 million, easily topping the 10% top-line rise that most of those following the stock were expecting to see. Adjusted net income climbed to $33.7 million, higher by 8% from year-ago levels and producing adjusted earnings of $0.52 per share. That was well above the $0.44-per-share consensus forecast among investors.
From a revenue standpoint, all of II-VI's divisions contributed to the company's growth. The biggest gains came from the laser solutions business, where segment sales were higher by 21%. Yet gains of 20% in performance products and 12% in photonics weren't too far behind and produced balanced growth.
Profitability gains weren't quite as ubiquitous. Although laser solutions posted an impressive 70% gain in operating income, bottom-line figures for the photonics and performance products segments were down slightly from year-earlier levels. Overall operating margin for the company fell by more than a percentage point to 11.9%, showing the shift of product mix that narrowed profit measures.
On a forward-looking basis, II-VI cooled off just a bit from three months ago. A book-to-bill ratio of 1.03 still showed good prospects ahead, but most of the order activity came from the photonics segment. Ratios below 1 for both laser solutions and performance products signaled a possible slowdown for those business units.
CEO Chuck Mattera gave some more color to the successes for II-VI. "Our growth markets of automotive, consumer and semiconductor capital equipment collectively more than doubled," Mattera said, "contributing about half of the full year growth." In addition, the CEO pointed to strategic investments to grow the scale of its manufacturing operations and to make greater use of technology as paying off during the period.
Can II-VI stay hot?
II-VI also has a lot of optimism about the new fiscal year. In Mattera's words, "We experienced momentum across our end markets as we started FY19," and expectations are high that key areas like the industrial and military sectors will continue to outperform even as lagging areas like communications seek to catch up.
The soon-to-close acquisition of CoAdna will provide additional opportunities. Announced in March, the $85 million purchase will bring CoAdna's wavelength switch technology in-house for II-VI, further strengthening the laser maker's vertically integrated business model. In particular, the companies hope to take greater advantage of rising demand for 5G wireless infrastructure products by combining forces, and II-VI believes that the transaction could close as soon as this month.
Finally, II-VI's near-term outlook was favorable. The laser maker expects revenue of $305 million to $315 million in the fiscal first quarter, with adjusted earnings of $0.54 to $0.60 per share. Both numbers are well above what investors were looking to see, and business conditions will need to be strong in order for II-VI to attain its projections.
II-VI shareholders celebrated the news, sending the stock up 12% in morning trading following the announcement. The move pushed shares back to their levels from before II-VI's competitors started to give more troubling news. At least at II-VI, the laser revolution appears alive and well, and investors who stuck with the company are getting rewarded for their patience.
