II-VI Closes Fiscal 2019 With Doubts About the Future

The laser maker saw strong results, but will 2020 be as good?

Dan Caplinger
Dan Caplinger
Aug 13, 2019 at 2:03PM
Technology and Telecom

The laser industry is increasingly important to the global economy, as lasers have applications across multiple industries. II-VI (NASDAQ:IIVI) has done an extremely good job of taking advantage of all the opportunities in the laser market, and smart strategic moves have helped II-VI unearth even more potential growth. Yet as concerns about the broader economy rise, some have grown more nervous about II-VI's long-term prospects.

Coming into Tuesday's fiscal fourth-quarter report, II-VI investors were hoping the company would be able to keep growing revenue at a healthy pace and get some good news on the long-awaited deal to buy out Finisar (NASDAQ:FNSR). II-VI's results were solid, but some of its guidance wasn't as strong as many had wanted to see, and the laser maker also said it would take steps to provide regulators with enough time to complete their review of the proposed Finisar acquisition.

II-VI lights it up

II-VI's fiscal fourth-quarter results were generally favorable. Revenue climbed 13% to $362.7 million, which was much faster than the 8% growth rate most of those following the stock had anticipated. Adjusted net earnings were up by more than $10 million to $43.8 million, or $0.67 per share. That topped the consensus forecast among investors for $0.66 per share on II-VI's bottom line.

A robotic arm with a laser at the end, with the II-VI logo on it

Image source: II-VI.

Yet even though II-VI's headline numbers looked good, there was some weakness in the underlying fundamental metrics. II-VI's book-to-bill ratio finished the quarter at 0.91, below the key level of 1 that signifies balanced new orders and fulfillments. The ratio was the lowest investors have seen in several quarters, falling from the year-ago level of 1.03. Moreover, gross margin was weaker, falling almost two percentage points to 38.2%.

A look at II-VI's segments revealed some of the cross-currents the business is facing. Revenue in the photonics segment was up considerably, lifting adjusted operating income by nearly 60%. The performance products business also did well, including a 23% jump in revenue and improved adjusted operating income of 44%. However, on the downside, the laser solutions segment saw almost 20% declines in segment sales, and that translated into adjusted operating income that was 36% weaker than it was a year ago. Book-to-bill ratios in all three segments were below 1, though, with the photonics segment seeing the biggest drop year over year from 1.17 to 0.96.

CEO Chuck Mattera tried to put the results in perspective. "We completed our fiscal year 2019 by delivering another strong operating performance," Mattera said, "driven by record quarterly and full year revenues." The CEO pointed to optical communications customers as driving performance in photonics, while electric vehicle manufacturers helped spur more demand in performance products.

What's next for II-VI?

II-VI still hasn't completed its acquisition of Finisar, and that has some investors nervous about the prospects for the deal. Yet II-VI tried to reassure investors that the process is going well. Mattera said the laser maker would refile an application with Chinese regulators in order to keep things moving forward, but it expects work on the original application to continue as well. II-VI missed its projected mid-2019 closing date, but it now believes the deal will close during the fall months.

Not everyone was happy about II-VI's future guidance. The company sees revenue for the fiscal first quarter coming in between $320 million and $345 million, which would represent growth of just 2% to 10% compared to the year-ago quarter. Adjusted earnings of $0.55 to $0.65 per share suggest that II-VI's earnings could actually decline from the $0.56 per share it brought in during last year's fiscal first quarter.

Shareholders weren't entirely pleased at that news, but after initially falling on that outlook, II-VI shares were higher by more than 2% at midday following the announcement. Even if some short-term pressures hold the laser maker back, II-VI's long-term prospects look strong -- especially if it can finally get the Finisar acquisition behind it.