Q1 2022 II-VI Inc Earnings Call

November 9, 2021

Good day. Thank you for standing by, and welcome to II-VI Incorporated fiscal year '22 first quarter earnings 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 that session you will need to press star one on your telephone keypad. If you require any further assistance, please press star zero.

Thank you. I'd now like to hand the conference over to your Speaker today, Ms Mary Jane Raymond Chief Financial Officer. The floor is yours.

I'd now like to hand, the conference over to your Speaker today, Ms Mary Jane Raymond Chief Financial Officer, Sir the floor is yours.

Thank you Alex and good morning. I'm, Mary Jane Raymond the Chief Financial Officer here at II-VI Incorporated. Welcome to our earnings call today for the first quarter of fiscal year 2022.

With me today on the call our Doctor Chuck Mattera, our Chief Executive Officer, and Doctor Giovanni Barbarossa, Our Chief strategy Officer, and the president of the compound semiconductor segment.

This call is being recorded on Tuesday November 9th, 2021. Our press release and our updated Investor presentation are available on the Investor Relations tab of the website II-VI.com

Our press release and our updated Investor presentation are available on the Investor Relations tab of the website I dashed V I dotcom.

Just as a reminder, our remarks today may contain forward-looking statements. These remarks are given in the context of today only they are subject to various risk factors and are subject to change possibly materially.

These remarks are given in the context of today only they are subject to various risk factors and are 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 no material risk factors can be found in our Form 10-K for the year ended June 30th, 2021, together with our subsequent filings with 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 up 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 includes those measures, such as the press release or the investor presentation. With that, let me turn the call over to Dr. Chuck Mattera.

With that let me turn the call over to Dr. Chuck Mattera.

Thank you, Mary Jane, and good morning afternoon, and evening to all of our stakeholders from around the world. Including our equity and debt investors, our dedicated employees and our valued customers and suppliers. Fiscal year 2022 is off to a very strong start.

<unk>, our equity and debt investors, our dedicated employees and our valued customers and suppliers fiscal.

Fiscal year 2022 is off to a very strong start.

Our backlog increased sequentially from $1.25 billion to $1.4 billion. Our revenue of $795 million represents very strong growth at 9% compared to Q1, FY '21. And we're squarely inside our revenue guidance range, despite continuing supply chain headwinds, which affected our [ROADM] business the most.

Our revenue of $795 million represents very strong growth at 9% compared to Q1, FY 'twenty, one and we're squarely inside our revenue guidance range, despite continuing supply chain headwinds, which affected our roto business. The most.

The shipments of those affected products have been rescheduled to subsequent quarters and we are working to accelerate our recovery plans.

Part of our action planning is to expand our investments in analogue and digital ICs to improve the resiliency of our supply chains. This will also help to maintain our market and technology leadership in the next generations of high speed Datacom Transceivers.

This will also help to maintain our market and technology leadership in the next generations of high speed Datacom Transceivers.

While lowering our purchase material costs, and establishing new component OEM market channels for us as well.

Our gross margin for the quarter was 40% up year over year and sequentially. This was achieved through the launch of new products with higher margins, improved productivity and ongoing efficiency.

This was achieved through the launch of new products with higher margins improve productivity and ongoing efficiency.

And it benefited from our sustained focus on the health and safety of our people first. These improvements are due to the well-synchronized efforts of our employees with key counterparts at customers and suppliers taking the meaning of partnership to new levels.

These improvements are due to the well synchronized efforts of our employees with key counterparts at customers and suppliers.

taking the meaning of partnership to new levels.

We are experiencing sustained and sustainable demand. In Q1, revenue grew from contributions from virtually all of our end markets. And leadership in the consumer market, where we saw the revenues increased 30% sequentially and 7% year over year.

In Q1 revenue grew from contributions from virtually all of our end markets.

And leadership in the consumer market, where we saw the revenues increased 30% sequentially and 7% year over year.

Two important indicators of the strength of our organic growth for our fourth consecutive quarter of record backlog and the sustained growth we are seeing across our markets.

I believe one of our most important core strengths is the unique diversity of the market segments in which we have chosen to operate.

In communications, our largest market today, we saw a further evidence of a super cycle, well underway for 200, G and 400 G Datacom Transceivers, 400 G and 800 G coherent telecom transceivers and acceleration of our customer configured open line and the optical transport solutions.

408 hundred gig coherent telecom transceivers and acceleration of our customer configured open line and the optical transport solutions.

Our results this quarter were achieved through a relentless amount of hard work and preparation that accompanies the sustained intensity of a winning team.

We made adjustments in the face of market realities, as we continued to balance our raw materials cost increases against product price increases with longer-term and higher share commitments.

Taken altogether, these extraordinary efforts enabled us to deliver 87 since non-GAAP EPS at the high end of our EPS guidance range.

Turning now to the future I believe Q2 should be another strong quarter for us and as you can tell from our guidance, we are still planning on growing sequentially in the quarter.

I am excited about our potential this year and looking out past Q1, we see continued market momentum and strong interest from existing and target customers in our capacity expansions and R&D investments in technology and our new products.

And our new products.

Our targeted investments in R&D and capital are accelerating to support our exciting growth plans beginning in FY '23 and FY '24.

In particular, we are stepping up our investments in important compound semiconductor platforms with silicon carbide, and indium phosphide, which leverage core strengths of II-VI and the former [Finisar]. In conjunction with these investments, our plans call for us to invest in new facilities and capital equipment.

In conjunction with these investments our plans call for us to invest in new facilities and capital equipment.

And we will incur increased cost beginning this quarter as we begin to hire a few hundred engineers and operators along with the start-up proven and qualification of these new and expanded lines in the US and in Europe.

I believe that collectively these strategic investments will enable us to be very well positioned to pursue exciting new growth opportunities in the years ahead.

When I reflect on all we accomplished in the quarter, I also look back on the two years since we closed the finish our acquisition and I am amazed by the ability of our people to efficiently integrate, deliver on the aggressive cost synergies and leverage our complementary strengths and portfolios to realize the power of the combination.

Combination.

I believe that we have demonstrated through our new product leadership, operational excellence and customer intimacy that we have achieved a substantially different scale and momentum during the last two years.

A good example of this is that our cost synergies for the finish our acquisition originally targeted delivering $150 million in three years. And that has now exceeded 180 million after two years.

And that has now exceeded 180 million after two years.

Another example of our growth strategy in compound semiconductors is our bold investment in silicon carbide materials and devices that will be required at a mega scale during the next decade.

We're in the next phase of a large multi year investment and aim to build a meaningful position in what we believe will become a $30 billion addressable market by 2030, while contributing to the carbon neutrality goals of the world.

So we have an exciting organic investment thesis focused on addressing the mega market trends underpinning mobile intelligent and electric.

We will leverage our endowments from the past acquisitions and investments combined with those we're making now and we plan to make in the future.

These efforts should provide us with exciting and sustained organic growth opportunities with market leading and innovative customers over the next few years, and enable us to further strengthen our diversified base as we move beyond FY '22.

Diversified base as we move beyond FY 'twenty two.

Turning now to the Coherent acquisition, we believe Coherent is the gold standard of laser technologies and like II-VI has really great people and a unique position in the diversified markets it serves. Coherent is highly complementary and extremely valuable.

Coherent as highly complementary and extremely valuable.

I believe that the auction process revealed that the high stakes where clearly understood by all three bidders.

We have begun to work on the integration planning process during which my team and I have been able to meet well over 100 of Coherent senior leaders. And we're energized by the engagements and the common denominators of values and culture.

These engagements have given me extra confidence that we are in the process of creating something really special, really unique and really valuable. With the combination it's not only going to be a bigger company, but we set our course on building an even better company together. Aimed at accelerating the new opportunities that lie ahead. While we make our complementarity as a strength to be leveraged.

Really unique and really valuable.

With the combination it's not only going to be a bigger company, but we set our course on building an even better company together.

Aimed at accelerating the new opportunities that lie ahead.

While we make our complementarity as a strength to be leveraged.

Indeed, we have a lot to learn about and from each other. Coherent is a complementary business model to II-VI and it will allow us to diversify lower our exposure to any one of our market cycles and allow us to sustain steady investment in R&D and capital over the cycle.

Coherent is a complementary business model to two six and it will allow us to diversify lower our exposure to any one of our market cycles and allow us to sustain steady investment in R&D and capital over the cycle.

After closing, we will be able to get busy on targeting revenue synergy opportunities as we work to leverage our increased scale and complementary capabilities to capitalize on new opportunities across our markets.

I am very confident in our people's ability to create real value in the years ahead. With that, let me turn it over to Dr. Giovanni Barbarossa, our Chief Strategy Officer. And the president of our compound semiconductors segment to provide us with an update on our results. Giovanni.

With that let me turn it over to Dr. Giovanni Barbarossa, our chief strategy Officer.

And the president of our compound semiconductors segment to provide us with an update on our results Giovanni.

Thank you, Chuck, and good morning. In Q4, we delivered growth across our commercial end markets despite supply chain challenges. In Q1, we continue to build on that momentum and as a result, our fiscal year 2022 is off to a strong start.

In Q4, we delivered growth across our commercial end markets. Despite supply chain challenges in Q1, we continue to build on that momentum and as a result, our fiscal year 2022, it's off to a strong start.

All of our operations, including our global [inaudible] are running as planned producing high yields and quality output.

In fact, I am pleased to report that for the last quarter, we shipped all of our lasers for 3D sensing with zero defects.

Our benchmark for the highest quality that we have been striving to set for the compound semiconductor industry.

This is a result of our relentless multiyear investment in operational excellence, supporting the substantial increase in the volume of lasers that we are producing at our vertically integrated wafer fabs in Sherman, Texas and Walter New Jersey.

Our communications revenue grew 4% year over year with most of the growth from Datacom. Our 200, 400 and 800 G products now represent 25% of our transceiver as revenue from about 2% a year ago. They include nearly 70% sequentially.

They include nearly 70% sequentially.

Thanks to our market leading platforms, we expect to grow this portion of our Datacom business to one side of the total by the end of fiscal year '22.

It is worth noting that our opt electronic components for Datacom Transceivers and enjoyed an all time external revenue record in this quarter.

I am pleased to report that our IC-TROSA recently won the award for the most innovative partners in optical integration at the European Conference on optical communications, demonstrating our leading innovations equally Rem technology.

Our IC-TROSA is a core engine of our 400 G. CUSIP PDD coherent transceivers, which to the best of them knowledge have the highest output power in the market.

Our remarkably high output power is enabled by our tunable laser and modulator technology based on indium phosphide.

And it is truly game changing as it enables IP over WAM networks with significantly reduced cost of ownership by eliminating an entire layer of equipment.

Network service providers, such as Windstream and data center operators have already started to take advantage of our differentiated offering to streamline their deployment of 400G services with significantly less cost power consumption and network complexity.

It is worth noting, that the external revenue for our tunable coherent components and modules [acquired to Finisar] and which enables our coherent transceivers increased 16% sequentially and more than doubled versus Q1 fiscal year '21.

To finish and which enables our coherent transceivers increased 16% sequentially and more than doubled versus Q1 fiscal year 'twenty one.

A clear sign of the competitiveness of our tunable laser platform in our successful market penetration.

Moving to the industrial market, our revenue grew 53% over Q1 fiscal year '21 and was flat sequentially. Following a strong Q4.

Growth was across all industrial applications and our revenue for components for one micron all fiber lasers are now 50% of our industrial business.

As I noted in the last call. We believe we are now delivering more aggregate pump laser power than any other maker of fibre laser components or systems in the world.

This is due impart to the economies of scale that we've achieved with our six inch gallium arsenide platform by serving multiple markets, including industrial communications automotive and consumer electronics.

Revenue from our consumer electronics market, most of which is 3D sensing was a record for Q1, as it grew 7% compared to Q1 of fiscal year '21. And more than 30% sequentially.

More than 30% sequentially.

During the quarter the forecast for our global 3D sensing demand increased by 19% for the year.

The fault requiring us to operate all of our [fabs] for 3D sensing at a high level of utilization and four weeks of production.

In addition, having been selecting us the partner of choice by several of our customers. We are in the policies will be increasing our investments, particularly in research, development, manufacturing, including hiring for nearly 500 dedicated jobs to support the incremental growth from future products.

Which we believe will enable novel functionalities in our customers' products. Components for the semiconductor capital equipment market grew 18% year over year. And the demand for these products continues to remain strong.

Components for the semiconductor capital equipment market grew 18% year over year.

And the demand for these products continues to remain strong.

This is partly why we have been successful in increasing prices to support our investments required to expand capacity in response to the strong market demand.

We expect to see the demand expand as COVID restrictions relax and global fab operators can resume production and commissioning of new systems, including EUV as we expect to see these numbers of those systems nearly double over the next 24 months.

In our Silicon carbide business revenue grew 50% compared to Q1 of fiscal year, '21 and 4% sequentially.

As Chuck mentioned earlier, our investments in Silicon carbide are underway and then compensated by higher use of applications and vertical end markets.

We expect to see our substrate business to continue to grow and are proud to report that we have started pre-production of gallium nitride on silicon carbide on our 150 millimetre substrates at our [inaudible] in New Jersey with full production planned for the first quarter of calendar year '22. With that, let me turn it over to Mary Jane. Mary Jane.

Walter and Fab in New Jersey with full production planned for the first quarter of calendar year 'twenty two.

Let me turn it over to <unk> <unk>.

<unk>.

Thank you, Giovanni, and good morning. Our Q1 revenue of $795 million was geographically distributed as follows. 50% in North America, 21% in China. 20% in Europe, 6% in Japan. And 3% in the rest of the world.

50% in North America, 21% in China 20.

20%.

In Europe, 6% in Japan.

And 3% in the rest of the world.

The end market revenue distribution was 67% and communications, 13% in industrial, 7% in consumer, 6% and aerospace and defense and 7% for other end markets.

With 67% and communications, 13% in industrial.

7% in consumer.

6% and aerospace and defense and 7% for other end markets.

Our non-GAAP gross margin was 40% and the non-GAAP operating margin was 18.9%. None of the supply chain costs or COVID-19 costs were excluded in arriving at non-GAAP results.

None of the supply chain costs, our COVID-19 costs were excluded in arriving at non-GAAP results.

We incurred $4 million of COVID expenses in the quarter and $2 million of costs to secure parts for our customers.

The company has committed about $17 million of additional cost to secure parts with suppliers. And these costs are expected to be realized over the next three to five quarters depending on the availability of contracted components.

About $17 million of additional cost to secure parts with suppliers and these costs are expected to be realized over the next three to five quarters defend it depending on the availability of contracted components.

At the segment level. The non-GAAP operating margins were 15.7% for photonics and 25.6% for compound semiconductors.

The non-GAAP operating margins were 15, 7% for photonics and 25, 6% for compound semiconductors new.

New products were instrumental in these sustained good margins. Our record backlog of $1.4 billion consists of $914 million for photonics and 483 for compound semiconductors.

Our record backlog of $1 4 billion consists of $914 million for photonics and 483 for compound semiconductors.

The backlog consists of orders that will ship over the next 12 months. We continue to have many orders that extend beyond 12 months as customers attempt to secure capacity for what many consider to be a super cycle well underway.

Well underway.

GAAP operating expenses, which are SG&A, plus R&D were $221 million in Q1, excluding $20 million of amortization 23 of stock comp and $12 million of M&A and integration costs, non-GAAP Opex was $168 million or 21% of revenue. This includes our silicon carbide investments. Cost synergies for the Finisar acquisition originally targeted at $150 million have now reached $180 million at the year to mark.

You can carve out investments.

Cost synergies for the <unk> acquisition originally targeted at $150 million have now reached $180 million at the year to Mark.

In addition, we have formally launched the Coherent synergy planning process. Quarterly GAAP EPS was 50 cents, and non-GAAP EPS was 87 cents.

We have formally launched.

A coherent synergy planning process.

Quarterly GAAP EPS was <unk> 50, and non-GAAP EPS was <unk> 87.

With after tax non-GAAP adjustments of $43 million in total, including the reversal of positive FX of $5 million. The diluted share count for the GAAP results was 116 million shares. For the non-GAAP results, the diluted share count was 125 million shares.

The diluted share count for the GAAP results was 116 million shares for the non-GAAP results. The diluted share count was 125 million shares.

The GAAP and non-GAAP EPS calculations are in the ending tables of our press release. Stock comp was $23 million for the quarter, $4 million in Cogs and $19 million in Opex, we expect stock comp for Q2 to be $19 million.

Stock comp was $23 million for the quarter $4 million in Cogs and $19 million in Opex, we expect stock comp for Q2 to be $19 million.

For non-operating income or expense, the company had $8 million of non-operating income in this quarter, including $5 million of the previously mentioned positive foreign exchange or 3 million of non op income excluding FX.

We expect the normal run rate of non-operating income expense to be $1 million of non-operating income going forward.

Pre-tax interest was $12.2 million. This is a decline from the previously prevailing 14 million at June 30th due primarily to a change in how convertible debt is accounted for. For the convertible debt only. The add back for the EPS calculation should now be $600,000 after tax instead of the $3.1 million after tax we've used before.

For the convertible debt only.

The add back for the EPS calculation should now be $600,000 after tax instead of the $3.1 million after tax we've used before.

This doesn't affect the EPS calculation since the add back is only $600,000, not $3.1. The starting income is also $2.5 million higher because the go-forward interest on a run rate basis is $11.2 million, not $14 million.

the go-forward interest on a run rate basis is $11.2 million, not $14 million.

This quarter has also has approximately $700000 of a one-time interest charge that will not recur.

This change in accounting for the convertible debt also makes our standard diluted share count for EPS 116 million shares at our current levels of income.

Cash flow from operations in the quarter was $52 million and free cash flow was $5 million. We made a conscious decision to build about $50 million of inventory consisting of nearly finished goods and in some cases critical components to be able to ship goods to customers as soon as delayed critical parts are available.

We paid down $16 million of our debt in Q1, and our net cash position is $184 million. At September 30th, the value of our convertible debt moved to the current portion of long term debt as it matures in September of 2022.

The company's liquidity at September 30th was $2 billion. Capital expenditures this quarter were $48 million. For fiscal year '22, we expect capex to be between $325 and $375 million or about $70 million to $100 million per quarter.

Capital expenditures this quarter were $48 million for fiscal year 'twenty, two we expect capex to be between $3, $25 and $375 million or about $70 million to $100 million per quarter.

As far we have committed $95 million of Capex for silicon carbide. Depreciation was $49 million in the quarter and we expect our forward quarterly depreciation expense to be about $50 million to $55 million. FX was a gain of $5 million, primarily driven by the Swiss franc.

Depreciation.

It was $49 million in the quarter and we expect our forward quarterly depreciation expense to be about $50 million to $55 million.

FX was a gain of $5 million, primarily driven by the Swiss franc.

The effective tax rate in the quarter was 18% due to ongoing benefits of renewed high tech status in several countries and the availability to use or the ability to use other tax credits and [FDII] deductions to offset guilty income.

We expect the tax rate to be between 18, and 20% for fiscal year '22. We had $12 million in total cost for M&A, integration and other costs largely for Coherent with some for Finisar.

We had $12 million in total cost for M&A integration and other costs largely for coherent with some <unk>.

Yeah.

Turning to the outlook for Q2 FY '22. Our outlook for revenue for the second fiscal quarter, ending December 31st, 2021 is expected to be $790 million to $840 million and earnings per share on a non-GAAP basis at 75 to 95 cents.

Our outlook for revenue for the second fiscal quarter, ending December 31, 2021 is expected to be $790 million to $840 million and earnings per share on a non-GAAP basis at 75 to 95.

The share count is $116 million for the low end and $125 million for both the midpoint and the high end.

The EPS calculation, including the dividend treatment is detailed on page 16 of the press release. This is at today's exchange rate and an estimated tax rate of 19%.

Of the press release. This is at today's exchange rate and an estimated tax rate of 19%.

For the non-GAAP earnings per share, we add back to the GAAP earnings pre-tax amount of $21 million in amortization, 19 million in stock compensation and 21% to $26 million in transaction integration and other related costs.

The transaction costs are expected to be higher as we accelerate the planning for Coherent including placing the debt. And we complete the final year three synergies for Finisar. The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, the share count are all subject to change.

And we and we complete the final year three synergies for <unk>.

The actual dollar amount of non-GAAP items, the tax rate the exchange rates.

the share count are all subject to change.

Before we go to the Q&A, just as a reminder. Our answers today may contain forecasts from which our actual results may differ due to a variety of factors, including but not limited to changes in product mix, customer orders, supply chain shortages, both upstream and downstream, competition, changes in regulations, ongoing requirements to combat the COVID-19 virus and general economic conditions.

Our answers today may contain forecasts from which our actual results may differ due to a variety of factors, including but not limited to changes in product mix.

Customer orders.

Supply chain shortages, both upstream and downstream.

Competition.

Changes in regulations.

Ongoing requirements to combat the COVID-19 virus and general economic conditions.

We would also ask that each firm limit its questions to one question with no follow ups, as we would like to try to get everyone and during today's call. We expect to end this call not later than 10:15 AM. Alex, you may open the line for questions.

Alex you May open the line for questions.

As a reminder to ask a question you will need to press star one on your telephone keypad. Again that is star one on your telephone keypad. Your first question comes from the line of Ananda Baruah from Loop Capital. Your line is now open.

Your first question comes from the line of Ananda Baruah from loop capital. Your line is now open.

Hey, good morning, guys, and thanks for taking the question and congrats on all the progress. And a lot of that all the exciting stuff that's going on. So I guess, Chuck wants to add, any of you jump in on that one obviously, but in the prepared remarks, you had mentioned along with some ASP increase implementation, something about longer term and higher share commitments. And so I just wanted to see if I want to give more context on that and see if that's something that we should keep in mind as we think about the go forward. Thanks. Hey, good morning. Thank you for your question.

And a lot of that all the exciting stuff that's going on.

So I guess, China wants to add.

Any of you jump in on that one obviously, but in the prepared remarks, you had mentioned.

Along with some ASP increase implementation.

something about longer term and higher share commitments. And so I just wanted to see if I want to give more context on that and see if that's something that we should keep in mind as we think about the go forward. Thanks. Hey, good morning. Thank you for your question.

We're always trying to position our sales with customers to continue to drive value for them too by scheduling long term commitments and higher share awards, if we can make the most efficient use of our factories on their behalf. And I think that as we continue to feel that pressure of the increase in cost as Mary Jane referred to in the supply chain.

Sales with customers to continue to drive value for them too.

By scheduling long term.

Commitments.

And higher share awards, if we can make the most efficient use of our factories.

On their behalf and I think that is.

As we continue to feel that pressure.

The increase in cost as Mary Jane referred to in the supply chain.

We're trying to balance all that out with the best position we can be in with customers for long term larger orders.

The best position, we can be in with customers for long term larger orders.

Okay.

Okay, got it. And should we think of this as being potentially incremental to the current revenue run rates across those businesses?

Yes. Awesome. Thank you guys.

Awesome. Thank you guys.

Your next question comes from the line of Paul Silverstein from Cowen. Please go ahead.

Thanks, guys, I guess I'll focus on supply chain impacts and I appreciate you discussed during the call, but I'm, hoping Chuck and Mary Jane that you all can give us some quantification of how much was the impact on revenue. It would seem to be significant given the 55% year over year growth in backlog and 12% sequential growth.

that you all can give us some quantification of how much was the impact on revenue. It would seem to be significant given the 55% year over year growth in backlog and 12% sequential growth.

Longer they're extremely strong bookings, but let me ask you a question how much of an impact was there on revenue? How much of an impact are you expecting this December quarter and same question with respect to margins?

Hey, Paul. Good morning. Thanks for your question. If you see the high end of the guidance that we gave for Q1. We were sure aiming to do the maximum. And I would say that that we had a few contributors to it but number one was was our supply chain number two was the supply chain of our customers. So it's a balancing act. But it would not be reasonable to say that all of it was just the supply chain. It is just the overall logistics and scheduling and running complicated and complex factories that we do.

If you see the high end of the guidance that we gave for Q1.

We were sure we were sure it aiming to do.

The maximum.

And I would say that that we had had a few.

Contributors to it but number one was was our supply chain number two was the supply chain of our customers. So it's a balancing act.

But but it would not be.

Reasonable to say that all of it was just the supply chain is just the overall logistics and scheduling and running complicated and complex factories that we do.

And I think we did a great job at it as far as this quarter goes. We are working diligently with our supply chain partners to be able to do the very best we can to close the gap. All of us, it's been an all hands on deck effort, including me with discussions with the CEO of nearly a half a dozen of our key suppliers, electronics integrated circuit suppliers. And we're going to do the best we can to pull things forward.

As far as this quarter goes.

We are working diligently with our supply chain partners to be able to do the very best we can to close the gap.

All of us, it's been an all hands on deck effort, including me with discussions with the CEO of nearly a half a dozen of our key suppliers.

Electronics integrated circuit suppliers, and we're going to do the best we can to pull things forward.

The uncertainty still exists and we're not going to know about it until we actually get through at least through the early parts of the middle of December as to how it's going to affect us this quarter. But we've given our best shot at the guidance and just like we did in the first quarter were aiming to get to the high end.

At least through the early parts of the middle of December.

As to how it's going to affect us this quarter, but we've given our best shot at the guidance and just like we did in the first quarter were aiming to get to the high end.

So can I just ask for clarification relative to the 43% bookings growth. Is there any concern do you feel that's an accurate reflection of demand trends or is there any concern that that reflects over ordering on the part of customers?

Is there any concern do you feel that's an accurate reflection of demand trends or is there any concern that that reflects over ordering on the part of customers.

Well Mary Jane, maybe Mary Jane can add to it. I'm not sensing or assessing any over ordering in the patterns that we have been able to observe and then discussions with customers. There is no indication of that whatsoever.

I'm not sensing.

Or assessing any over ordering.

And the patterns that we have been able to observe and then discussions with customers. There is no indication of that whatsoever.

I think that's really right I mean, we've talked before we watch certain patterns in our bookings to be sure that we can detect items that could be double ordering. And as Chuck made the most important comment, the amount of time that we have spent those with our customers and suppliers to be sure that we're shipping everything we can to them in mid day supply shortages. There is, I think a good sense on our part that we are not experiencing double ordering.

shortages. There is, I think a good sense on our part that we are not experiencing double ordering.

I think a good sense on our part that we are not experiencing double ordering.

Alright, and the difference between the bookings growth in your revenue, your guidance in terms of revenue growth I assume that clearly is a supply chain driven impact.

Yes, we need to move on but as we've also mentioned a few times the increase in bookings is not an indicator of exactly what will ship in the next quarter. We do try to indicate that that's over 12 months for a reason so but yes, you have that right. We should probably move on. Thank you.

We've also mentioned a few times the increase in bookings is not an indicator of exactly what will ship in the next quarter. We do try to indicate that that's over 12 months for a reason so but yes, you have that right we should probably move on thank you.

Yeah.

Your next question is from Samik Chatterjee from JPMorgan. Your line is now open.

Hi. This is Joe Cardoso on for Samik. Yes. So for one question from me is just you highlighted a lot of investments in your prepared remark. Specifically around the analogue and digital ICs, as well as silicon carbide and [engineering phosphide.] I was just curious if you could talk on the level of investment that's necessarily to drive to those plans and how should investors think about the timeline of when those investments begin to materialize. Thank you.

Specifically around the analog and digital Ics as well as silicon carbide and engineering Phosphide I was just curious if you could talk on the level of investment that's necessarily to drive to those plans and how should investors think about the timeline of when those investments begin to materialize. Thank you.

Thank you for the question. This is Giovanni here, so we have two main investment directions as we said in the prepared remarks really around silicon carbide indium phosphide. Both of them are intended to support the multiple markets and multiple applications. This has always been our strategy to diversify our investments to have, to lower the risk of our investments. And there will be as I said in the prepared remarks that would be the combination of capital as well as human resources investments to the fair. What I said that was an incremental growth across both platforms and across multiple markets.

Two main.

<unk> got actions as we said in the prepared remarks really around silicon carbide indium phosphide.

With all of them.

Are intended to support the multiple markets and multiple applications. This has always been our strategy to diversify our investments to have.

Sure.

To lower the risk of <unk>.

Investments.

<unk>.

There will be.

as I said in the prepared remarks that would be the combination of capital as well as human resources investments to the fair. What I said that was an incremental growth across both platforms and across multiple markets.

The combination of capital as well as human resources investments to the fair.

What I said that was an incremental growth.

Across both platforms.

Multiple markets.

<unk>.

And we don't believe that the investments will materialize sooner than two quarters. So it will be in the beginning let's say mid of fiscal year '23 that will see the effects of these investments materializing.

The investments will materialize sooner than two quarters. So it will be in the beginning let's say mid of fiscal year 'twenty two 'twenty three that will cease.

the effects of these investments materializing.

Materializing.

Your next question is from Jim Ricchiuti from Needham and company. You may ask your question.

Next question is from Jim Ricchiuti from Needham and company you May ask your question.

Thank you. Good morning, I was wondering if you could comment on what you are seeing in the industrial segment of the business both inside China and outside China. Only because there's been some mixed signals, obviously in the industrial laser business inside China. So if you could maybe comment on that and just the outlook for that part of the business. Thank you.

You are seeing in the industrial segment of the business both inside China.

And outside China, only because there's been some mixed signals, obviously EMEA industrial laser business.

Inside China. So if you could maybe comment on that and just the outlook for that part of the business. Thank you.

Hi, this is Giovanni, thanks for your questions. Our industrial business has been very strong. As I mentioned in the prepared remarks, we have seen a substantial increase in demand for our pump lasers. Particularly from China, where we enable a number of fibre laser makers.

Our industrial business has been very strong.

As I mentioned in the prepared remarks, we have seen.

The substantial increase in demand for our pump lasers.

Particularly from China, where we enable.

A number of our.

Fiber laser makers.

We've been able to accumulate the demand over a number of years.

We probably very close to more than twice the bump out of the fiber laser incumbent ALDA.

Long show and so we have we are enjoying very strong demand for our components. So what.

Yeah.

Clearly some some companies may lose share in some geographies.

And so we.

So that means for us gaining share on the chip.

Supply as these companies to take ships from the incumbent so we'd see it as a benefit to us.

Next is from meta Marshall from Morgan Stanley. Your line is now open.

Great. Thank you.

Giovanni I wanted to follow up on your comments that you were shipping everything you could add to Sherman.

And just clarify whether you were kind of qualified on all kind of current platforms.

A major data center customer.

Yes, we are we're shipping.

All.

Paul does that we've been asked to ship and qualified and so forth. So thats absolutely the case.

Next question is from Jed <unk> from Canaccord Genuity. Your line is now open.

Hi, Thanks for taking my question.

I guess and maybe either chocolate Giovanni if you want to add.

Okay.

Wouldn't mind, just addressing on indium phosphide.

Seems like that technology in the platform starting from.

Lower.

Level of maturity in terms of.

The platform yet.

Particularly with coherent seems like might be a very critical.

Technology.

For $15 50, an M.

And beyond so I was wondering if you might.

Just.

Provide some details in terms of how you see the scalability of that.

Critical technology, and the and the relative importance inside two six.

Okay.

Thanks Jade.

Thanks for the question.

Well, we actually.

As you'll recall when we announced the deal with finished we did.

Besides all the indium phosphide blocks on the finished.

Walks on for more than 20 years was really strategic to us and we mentioned a number of.

A number of.

Applications.

In markets that technology was going to be really powerful.

So of course the.

When we acquire them to focus on Datacom and telecom lasers photo diodes modulators.

Integrated systems, and so forth, we should be enabled a number of modules and subsystems such as the IC chose a which I mentioned in the prepared remarks, hopefully with indium phosphide.

Ken.

Very unique wavelength zillow as you no longer wavelengths than gallium arsenide is so it's really.

Very useful.

And in a number of optical applications with IC 50 is important so that's one and so that could be in communication is already in automotive lidar application could be consumer applications can be an industrial sensing applications and so forth. So there's a number of markets.

The platform is very powerful.

The other thing is.

But we wanted to mention is the.

As the.

Electronics for.

Base stations progress.

And the speed and the frequency of going from <unk> to <unk> eventually synergy progress.

We believe that indium phosphide is one of the two technologies is probably the best technology that would be counting on for CTG amplifiers.

So there is a there is an effort that we have to focus on that of course is what's going to happen six seven years from now whenever that will take place, but we need to stop now and so it's a very important investment for US again, it goes across multiple markets multiple applications.

<unk> wafer fabs to reach a scale unique probably hopefully the largest in the world.

Yeah.

Next question is from Richard Shannon from Craig Hallum. Your line is now open.

Hi, guys. Thanks for taking my questions I guess mine is on <unk> sensing in the VIX full raised I think you were talking about some investments here.

Both in capacity and R&D and kind of implying a growth.

Our growth track here I think most people see that longer term, but love to get your sense of Hudson and Youre seeing that picking up and what applications are you seeing it an immediate one to mobile and to what degree what timing do you see another other applications like automotive as an example.

Yeah.

Hey, Richard Thanks. This is Giovanni Thanks for your question so.

I want to make sure that we don't get confused I did talk about incremental opportunity.

Unrelated to <unk>.

I think it won't make sure that it is the case and we have several applications.

That we're trying to we're trying to target across multiple markets again.

And we just need to get 80 and for the demand to come.

I'd say as I mentioned to Ananda maybe.

Three quarters from now we'll see the effect of those investments.

Utilizing.

Okay.

Next question is from Mark Miller from Benchmark Company you May ask your question.

You indicated the new products helped boost your margins and I'm just wondering in terms of the existing backlog.

Does that margin profile compared to what.

Human posted in recent margins.

I would say that the backlog is generally.

Positive too.

Margins not I don't don't take that as 200 basis points, but I would say as a general matter, especially if you think about most of the supply chain effects thing on the <unk> side.

It's probably.

Contributory.

To the positive a little bit on margins, but again, it's not an enormous number but more scaling in that direction or not.

Next is from Amanda <unk> from Citi.

May ask a question.

Good morning can we just talk a little bit about that can you add.

Silicon carbide deal that was announced yesterday can you maybe size.

What this looks like or give a little bit more detail on the opportunity there and other opportunities that youre starting to see with silicon carbide.

Okay. Good morning, Amanda Amanda.

Another example of our ability.

Both the market and position ourselves into what we think will be a large.

And growing supply chain.

They've gone through a.

Usual for us.

Yes of evaluating a number of suppliers.

And we understand from the feedback that we received.

Our 150 millimeter substrates that we're best in class.

And so we believe that on the basis of performance.

And scale that we're putting in place and our absolute determination to serve the market at multiple levels of integration.

That customers have come to us.

To be able to generate a long term and secure supply chain.

Yeah.

Next is from Simon Leopold from Raymond James. Please go ahead.

Thanks for taking the question I wanted to see if maybe you could drill down a little bit on the datacom trends.

I think in the past you've indicated roughly a 50 50 split between Datacom and telecom and the communication, but it sounds like.

It's moving the other way and within this if you could.

Highlight the exposure to the hyper scalar that sounds like an interesting trend that I'd like to hear more about thank you.

Hey, Simon and thanks for your question <unk> got it absolutely I think we are really gaining should we believe we are gaining share the hyperscale is.

With these two on the 400 and eventually.

Work going on on <unk>.

It's a really great trend.

It was really one of the reasons, we are really interested in the Finnish platform and the team is really doing a fantastic job.

Gaining share back.

So it's a really really.

Great momentum for Us <unk> got the picture.

I'd like to add to that Giovanni.

Simon since we acquired <unk>.

We have not only been able to optimize our global footprint.

But based on the diversity of the global footprint for our diverse customers have asked us.

To align our output from multiple different factories for them and I think thats really finished very strong attraction.

So these large and growing customers with two six.

Next question is from Tim as Sava Shaw from Northland Capital. Your line is now open.

Hi, Good morning, good timing I had a question on Datacom as well to follow up Simon So.

Which looks to be kind of your single biggest business right. Now. So you can can you confirm that.

JD Com is now a solid majority or at least in the decent majority of the.

The communications Slash photonics business.

On the one hand, and as you look at that 200, 400 gig growth, 60% last quarter, 70% sequential this quarter do you expect those type of trends to continue and it looks like 100 gigs hanging in there do you expect that to remain stable.

Hi, Tim This is Giovanni.

We will continue to grow 70% sequentially forever, but it's not going to likely happen. So I think the.

The growth rate.

Remains strong.

We get more and more of the slots designed in and.

I think one of the <unk> pretty stable.

I think the 200 <unk> there is no really many players. So we kind of probably have four showed the largest show that <unk> is the beginning we're trying to we're catching up there is no doubt that's why the growth rate is higher than the market. So we believe we're gaining share so it's a very.

Strong momentum and as I said to Simon and the team has really done a fantastic job executing and delivering the best performance quality wise for me from a just a functionalizing standpoints and delivery standpoint, whether you're doing Rachel.

Okay.

Next is from Vivek Arya from Bank of America. Please go ahead.

Hi, This is Blake Friedman on for Zach Thanks for taking my question.

Builds off of previous question, but as the pilot on the call. There are several new strategic initiatives as well as continued integration from acquisitions that are providing synergies. So moving forward I was just curious on the view on long term gross margins.

If they can potentially be at the high end or above the 38% to 42% historical range that is sustainable. Thank you.

So the company.

Is very very focused on.

Improving its gross margin.

In the long term since most of the products that are most of the end markets that has the potential to really change their percentage in the total 100% of the company.

The ones most likely to change that percentage tests tend to have a higher gross margin I do think that in the fullness of time the company will probably move its margin range at the present moment.

Next question is from Dave Kang from B Riley you May ask your question.

Thank you good morning.

Just wondering if I could get some more color as far as your fiscal second quarter revenue assumptions in terms of Datacom telecom industrial and consumer trends, whether they can be up or down sequentially.

Generally speaking.

We would expect to see nearly all of them trending up from the first quarter because historically the first quarter has been the lowest quarter of the year. We may see some as we have said earlier, our supply chain or interesting seasonality in that.

At 12, 31 quarter, sometimes theres, a little bit of a toss up whether Christmas is a bigger effect the Chinese there, but generally speaking I would say that we're expecting to say all of them generally moving sequentially up.

Yeah.

Next is from Christopher Rolland from Susquehanna. Your line is now open.

Hey, guys. Thanks for my question.

I did want to follow up on the Datacom angle to it.

Because I think there is some growing optimism around a really big 2020 here for for everyone playing in the space can.

Can you talk about your supply situation. There in particular do you have enough to support kind of outsized demand into next year.

No lamentable was out saying they were internally constrained on this side.

So was wondering on that and then.

On the supply front in general what are the kind of biggest self inflicted constraints that you see.

Across your product set.

Okay.

Thank you for your question. So I honestly I don't believe there's any self inflicted constrained I think we have.

Capacity for our products.

Got it.

Boehner level subsystem level of system level.

As Chuck mentioned earlier, we have a big advantage, which we are leveraging.

Right now having a diversity of supply locations. So for example, we have.

<unk> high volume manufacturing.

Team in Malaysia, which is preferred by some of the Hyperscale is particularly in North America as they want to avoid.

Supply chain from China, and so that's a big advantage, but intensive components devices.

<unk> I wanted to remind you that we are substantially vertically integrated including the Ics, which redesign of course, there are some challenges getting.

Ics from foundries.

While our suppliers and but so far there.

We said in the prepared remarks.

Deposits, we should've been impacted the most actually mostly telecom partners know data composites and Simon.

Well.

<unk> mentioned earlier, it's kind of shifting a little bit within data come in telecom and Datacom is growing probably faster than telecom.

Generally because we're gaining share.

Particularly at Hyperscale has been then.

And somehow mitigates the challenge of the supply chain affecting the telecom pilots.

So I hope this.

But the picture.

Yeah.

Next is from Tom O'malley from Barclays. Please go ahead.

Hey, guys. Thanks for taking my question in the prepared remarks, Chuck you talked about digital IC investment and Giovanni to in response to one of the questions you talked about accelerating share gains at 400 G E.

He didn't want if you could you just talk about the importance of having a DSP at higher speeds is that something that you guys want to do internally or do you think you can continue to gain share being a.

A customer of a merchant vendor.

Tom Hi, Thanks for the question.

Both I would say that our approach is both.

We will make or buy we have some programs with some partners to develop our own DSP when it makes sense.

In some other cases, it's better to buy so like for almost anything we make.

But the solutions out there which is.

I'll talk to them it would just buy it.

So.

I think of the hour.

Our focus has really been on.

<unk>.

Optical engines, such as the IC, Chaucer, which I mentioned, which can work with any DSP.

And also really differentiate us.

Optical performance as I mentioned like the highest output power, which ultimately enable.

Enable architectures, which cannot be enabled otherwise and.

So since we have indium phosphide in house, we have.

Automation and full assembly lines in house, and so far we've can be not only cost competitive but we can also.

Supplier to a larger set of customers large competitors, which we really see our products incredibly.

Incredibly differentiated.

So this has been with our focus on DSP as I said, we will.

We'll approach.

Depending on the applications, both a make or buy decision depending on timing cost and all the other factors.

That ends our question and answer session I will turn the call back over to the presenters for closing remarks.

Thank you very much Alex we want to thank everyone for joining us today.

And we look forward to talking to you as time goes on here in our various at various interactions.

We want to wish you all a very good day. Thank you so much for joining us bye bye.

That concludes today's conference call. Thank you all for participating you may now disconnect.

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