(COHR) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the II-VI Inc.

Fiscal '21 Second Quarter Results Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Mary Jane Raymond, Chief Financial Officer.

Thank you.

Please go ahead.

Thank you, Raquel, and good morning.

This is Mary Jane Raymond.

I'm the Chief Financial Officer here at II-VI Incorporated.

Welcome to our earnings call today for the second quarter of fiscal year 2021.

With me today on the call are Dr. Chuck Mattera, our Chief Executive Officer; and Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Compound Semiconductor segment.

This call is being recorded on Tuesday, February 9, 2021.

Our press release and our updated investor presentation are available on the Investor Relations tab of the website, ii-vi.com.

Just as a reminder, any forward-looking statements we may make today during this teleconference are given in the context of today only.

They contain risk factors that 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 risk factors can be found in our Form 10-K for the year ended June 30, 2020, filed in August.

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.

Chuck?

Thank you, Mary Jane.

Good morning, everyone, and thank you for joining us today.

I am pleased to report that halfway through our fiscal year 2021, we are on track to deliver a strong year.

Our revenue for Q2 was $787 million.

It exceeded the top end of our guidance of $780 million, and grew 18% over Q2 of fiscal year 2020.

Among the many highlights this quarter were a book-to-bill ratio of 1.17 for the quarter, leading to a 1.12 book-to-bill ratio on a rolling 12-month basis.

We continue to execute on our ramp of 3D Sensing VCSELs and delivered against an exceptionally strong demand bringing shipments for the consumer end market to a record high of 15% of revenues.

In addition, we delivered excellent growth in life sciences, experienced continued recovery in industrial and saw a continued strength in communications, aerospace and defense, the semiconductor capital equipment market and in silicon carbide.

Our Q2 guidance contemplated a very strong 3D sensing quarter, and we delivered on that.

Our year-over-year growth in the consumer end market of over 200% was largely driven by 3D sensing.

And again, this quarter, we shipped VCSEL arrays in production volumes for front-facing, world-facing and emerging applications, as Giovanni will describe later.

Communications grew 5% over the prior year, including for both datacom and telecom.

Life sciences gained significant momentum.

It grew almost 50% sequentially and more than 80% compared to Q2 of last year, as our products are vital components to the COVID-19 testing ecosystem.

Industrial applications grew 10% sequentially across our product lines as we continue to see a brisk recovery driven by increased demand for automotive production.

Turning now to a focus on operational excellence.

We are well ahead of our plan to achieve our 3-year $150 million total synergy target set for the Finisar acquisition in September of 2019.

Our run rate synergies already exceed $100 million as a result of our integration work over the past 15 months.

We are now on track to achieve our $150 million total synergy target in 24 months.

We're 12 months ahead of schedule, and we are now increasing our 3-year total synergy target to $200 million.

Our faster delivery of our synergy plan is contributing to our strengthening margins and our strong cash flow and reflects our ability to execute and integrate large-scale acquisitions.

Our cash generation in Q2 was an all-time record for the company, amounting to $221 million of cash flow from operations and $176 million of free cash flow.

From the company's inception 50 years ago, we have strategically focused on identifying and capitalizing on irreversible mega trends from our core strength in materials and optoelectronic devices.

We have been successful in our organic and inorganic execution and growing by leveraging these trends.

The application of our strategy and II-VI values, our senior leadership team and all of our employees are among the reasons we've been able to make this much progress during an unprecedented macro environment in the first half of fiscal year 2021.

We look forward to the exciting opportunities ahead of us in the second half of fiscal year 2021 and for many years to come.

With that, I will turn it over to our Chief Strategy Officer and President of the Compound Semiconductor segment, Dr. Giovanni Barbarossa, to review our individual businesses while highlighting our product and technology leadership.

Giovanni?

Thank you, Chuck.

We appreciate our investors enthusiasm for our strategy and our successful track record of assessing long-term market opportunities, executing large-scale M&A and developing technology platforms aimed at addressing major market megatrends.

Augmented reality, autonomous driving and artificial intelligence are among those megatrends, which are enabled by 3D Sensing.

So this quarter, I'm pleased to report that 3D Sensing grew more than 140% sequentially.

We believe this is significantly faster than the market growth rate.

Both the Warren and Sherman sites are operating very efficiently due to very solid execution and contributed equally to our 3D sensing revenue in the quarter.

As Chuck said, 3D Sensing growth came from shipments of production volumes of VCSEL rates for multiple end customers, including for front-facing and world-facing applications as well as for other consumer electronics and automotive in-cabin sensing.

We are also making good progress expanding our customer base with additional wins, including in the Android ecosystem and personal computing platforms.

Given this phenomenal result, I believe it would be worthwhile to review our multiyear trajectory in 3D Sensing for the benefit of investors who might be new to our story.

Our 3D Sensing work began in 2013, after the acquisition of the gallium arsenide platform, which, among many things, came with some of the industry's best VCSEL technology, despite having 0 footprint in the emerging 3D Sensing market.

We started mentioning the 3D Sensing story publicly in 2016 to explain our acquisition of the wafer fab operations in Warren, New Jersey, and Champagne, Illinois, when we acquired the manufacturing foundation to strategically expand our gallium arsenide optoelectronics platform from 3 to 6 inch, for the large volumes required for the consumer electronics market.

We said in our Investor Day in 2017 that entering the 3D Sensing market with a vertically integrated 6-inch platform would prove to be the most long-term competitive and sustainable strategy.

Our conviction was rooted in our deep experience in the business of compound semiconductors.

When we acquired Finisar, some asked us which gallium arsenide fab we plan on closing.

Our answer was none, because we needed the capacity to gain share and become the market share leader by offering breakthrough solutions at scale.

The teams in Zurich, Warren, Champagne, Easton and Sherman worked together to get Sherman qualified and grant.

During the quarter, we accelerated our share gains, growing, we believe, faster than the market, and we are well underway to achieving the leading share of the global market.

As for the automotive market, we are shipping VCSEL rays for in-cabin sensing applications.

We are also engaged in many larger market opportunities as we have the broadest portfolio of products in the industry.

Unlike our pure-play laser competitors, we have an entire vertical integrated portfolio of both active and passive components made from our engineered materials that are critical for this next-generation LIDAR designs.

On the active side, our broad laser offerings include VCSELs, edge meter, laser bars, multi-juncture meters, pulse fiber-based sources, thermal electrics and laser drivers.

On the passive side, we provide a differentiated portfolio of optical components, including polygon scanners, galvo mirrors, lenses, filters, gratings and hydrophobic windows, to name a few.

We believe the LIDAR market is still in its infancy.

But with our strong customer traction and design engagements, we are well poised to take a large share of this market as it develops.

That said, the wide variety of LIDAR technology is being considered is quite characteristic of the market that is in very early stage.

More time will be required to shake out the winners.

We believe that the more immediate and eventually much larger opportunity in automotive is for our silicon carbide products for power electronics.

Recently, one of our Japanese silicon company subset customers was selected by Tier 1 Japanese automotive company, and we are excited to be a key partner in their supply chain.

We see that as a strong positive sign that our business in silicon carbide substrates for power electronics will resume growth after the slowdown caused by COVID-19 in 2020.

Meanwhile, we are continuing to execute on our multiyear plan to develop a product portfolio of wide Bandgap products across the value chain for the electrification of the transport infrastructure.

In the communications market, while telecom was impacted by the slowdown of new system installations due to COVID-19, our high data rate coherent transceivers are ramping up, adding bandwidth to both new and existing networks.

We are pleased to report that we are gaining meaningful share in this market with our quarterly revenue run rate of these products having more than doubled compared to a year ago, and we expect our share to continue to grow.

As part of the modules start to enable data center interconnects, I'm pleased to announce that our disrupted pluggable optical line system, or POLS, won the best product award for data center innovation at the European Conference on Optical Communications.

The POLS is the first product of its kind on the market and leverages to 6 significant breakthroughs in miniaturizing optical components for amplification and wavelength management, while, at the same time, improving performance and reducing power consumption.

We are also making steady progress towards growing our share in Datacom by ramping up our 200G and 400G products driven by increasing demand from hyperscalers, both in the U.S. and China.

In fact, our 200G and 400G products more than doubled sequentially.

We are also excited to announce that we have just sampled our Phase 800G transceivers to a large web scale customer who has already provided exciting feedback.

In industrial, we continue to see signs of recovery, driven by a strong increase in demand for capital equipment with our aftermarket business back to pre-pandemic levels.

In fact, we had record aftermarket revenue in December.

In the semiconductor capital equipment market, recent announcement of significant investments by TSMC and Samsung lead us to believe that our differentiated optics, ceramics and composites to benefit from a multiyear tailwind.

Finally, our Life Sciences business increased 80% year-over-year driven by the demand for our thermal electric and filter products that enabled COVID-19 PCR testing.

And we are proud to have been able to contribute in such a way to the fight against the pandemic.

With the progress we are making, the cost of our material and device platforms driving top line growth and strong margin expansion, we are very bullish on our diversified business model.

With that, let me turn it over to Mary Jane.

May Jane?

Thank you, Giovanni, and good morning.

Our non-GAAP gross margin was 42%, and the non-GAAP operating margin was 22%.

The non-GAAP gross margin is 380 basis points ahead of the last II-VI reported pre-acquisition gross margin of 38.2%.

And the non-GAAP operating margin is 630 basis points of the last II-VI reported pre-acquisition operating margin of 15.7%.

These margins were driven especially by our synergies of strong mix, improvement in transceiver margins and increased fab utilization.

At the segment level, the non-GAAP operating margins were 17.4% for Photonics and 29.3% for compound semiconductors.

Similar to last quarter, compound semi margins were driven due to strength in 3D Sensing shipments and increased fab utilization.

Our backlog was a record $1.08 billion and consists of $680 million in Photonics and $400 million in compound semiconductors.

The backlog contains orders that will ship over the next 12 months.

GAAP operating expenses, which our SG&A plus R&D, were $204 million.

Excluding amortization of $21 million, $24 million in stock comp and $1.3 million of M&A and integration costs, non-GAAP OpEx was $158 million.

Non-GAAP OpEx is 20% of revenue and just over 500 basis points -- and 500 basis points below the OpEx percentage of revenue just prior to the close of the acquisition when it was nearly 26% for II-VI and Finisar combined with amortization, stock comp and transaction costs excluded.

Quarterly GAAP EPS was $0.73 and non-GAAP EPS was $1.08 with non -- with after tax non-GAAP adjustments of $43 million in total.

The share count for the GAAP results was 115 million shares.

For non GAAP, the share count was 124 million.

The GAAP and non-GAAP EPS calculations are in the last 2 tables of the earnings release.

Stock comp was $28 million for the quarter, $4 million in COGS and $24 million in OpEx.

This is $11 million over the estimate of $17 million due to the increase in the II-VI stock price.

The stock price is relevant to the valuation of our equity-based cash paid instruments.

We use these instruments to incent our non-U.

S. global leaders who are also essential to our team of leaders, thinking and acting like owners of II-VI.

Using our December 31, 2020 stock price, we expect stock comp for FY '21 to be approximately $88 million or $16 million for Q1, $28 million for Q2 and $22 million for each of Q3 and Q4.

Cash flow from operations was $221 million and free cash flow was $176 million.

We paid down $49 million of our debt in addition to the required payment of $16 million, and the interest expense in the quarter was $15.6 million.

This payment allowed us to reduce our net debt leverage ratio to 0.9x at December 31, compared to 1.3x at September 30.

Capital expenditures this quarter were $46 million.

For the year, we expect CapEx to be between $180 million and $220 million to support an increase in capacity for compound semiconductor materials and devices.

Depreciation, was $47 million in the quarter, and we expect our forward depreciation expense to be about $46 million to $50 million a quarter.

The FX loss in the quarter was $7.5 million, primarily driven by the Swiss franc and the RMB.

The effective tax rate in the quarter was 17%.

We expect the tax rate to be between 19% and 22% for the year.

The tax rate to be used for the non-GAAP items is 19%.

The tax rate moderated from our prior range of 22% to 26% due to renewals of high-tech status and super R&D deductions in addition to increased stock option exercises and changes in the mix of income around the world.

Both the Ascatron and INNOViON acquisitions are now consolidated in our results.

The Ascatron acquisition closed on August 20, and the INNOViON acquisition closed on October 1 both in 2020.

For the 2 combined, we had $8 million in revenue, $2 million additional OpEx and breakeven non-GAAP EPS in the 12/31 quarter.

Our non-GAAP results exclude a $7 million gain on the INNOViON acquisition resulting from the fair value measurement of the previous equity investment.

Turning to the outlook.

Revenue for the third quarter ending March 31, 2021, is expected to be between $760 million to $780 million and earnings per share on a non-GAAP basis at $0.81 to $0.91.

This is at today's exchange rate, which includes a weaker dollar compared to September 30, an estimated tax rate of 19% and 126 million shares.

For the non-GAAP earnings per share, we add back to the GAAP earnings pretax amounts of $21 million in amortization, $22 million in stock comp and $2 million in transaction and integration costs.

The estimated Q3 share count is 117 million shares for GAAP and 126 million shares for non-GAAP.

The actual dollar amount of non-GAAP items, the tax rate, the exchange rates and the share count, all are subject to change.

Before we go to the Q&A, just as a reminder, our answers today may contain forecast from which our actual results may differ due to a variety of factors, including, but not limited to, changes in product mix, customer orders, competition, changes in regulations and general economic conditions.

(Operator Instructions) I'd also like to turn it back to Chuck Mattera for 3 minutes at the end, and we do expect to end the call at 10:00 a.m.

Raquel, you may open the line for questions.

(Operator Instructions) Our first question comes from the line of Mark Miller with The Benchmark Company.

Congratulations on another record quarter and the significant gains in the 3D Sensing area.

Just have 1 question.

Other expense, could you give us kind of a feeling for what it will be next quarter?

Because it's jumped around the last 2 quarters.

In the other income and expense?

That line?

Generally speaking, I think it should really probably only be the FX with a little bit of the equity earnings from our equity investments.

But the major driver that caused it to change a lot this quarter was the INNOViON gain.

Gain.

So $7 million, $8 million?

I'd say it's probably similar to Q1.

Your next question comes from the line of Jed Dorsheimer with Canaccord Genuity.

Congratulations on the quarter.

My 1 question, I guess, is if I look at the if I look at the strategy around compound semis, it seems that what we're seeing and what you're benefiting from is really a renaissance in the semiconductor industry that kind of takes us back or takes me back to the late '70s, early '80s on the silicon side but today on the compounds.

So I'm just wondering, as you kind of think through the end markets from a silicon carbide, sapphire, indium phosphide, all of which are kind of manufactured on various platforms, how do you -- how can you help investors think through the cost curves in terms of those cycles?

Jed, this is Chuck.

Thanks for you question.

It really is an exciting time for compound semiconductors.

In general, the materials and devices have been around for many decades, as you know.

And every time they have been invested in, they've been invested to enable new applications or overcome challenges that the incumbent technology have that cause a -- either a constraint or an assented in performance.

So they are enabling.

And the value proposition ultimately has to be taken at the system level.

When there's a clear enabling by the material and the component of the system itself, then there's generally a pull by the ecosystem to be able to drive this technology, and it happened in the early days of gallium arsenide for HEPS and HBTS and on around the radar infrastructure that was ultimately put in place, and it led to the world that we see today, and that volume spilled over into the handset market.

We see the benefit of that coming with GaN on silicon carbide, even indium phosphide based electronics as the advent of the design, for example, of even 6G communications networks will rely and be enabled by such innovative devices that will come from the compound semiconductor market.

I think that's probably all I can get into.

Giovanni, would you like to add anything to that?

Oh, that's perfect, Chuck.

Your next question comes from the line of Paul Silverstein with Cowen.

I guess we focus on 3D Sensing.

Chuck and Giovanni, obviously, it's ramping nicely.

Can you give us any additional insight on the demand outlook, especially in terms of the breadth of demand beyond just Apple, what you're looking at and your ability to continue to drive this type of growth?

Obviously, a lot of large numbers is going to get harder as you go forward.

And 1 other related question.

I assume we should expect further margin uplift with the benefit of ongoing volume in 3D Sensing.

Okay.

Paul, definitely, the number of user cases and the interactions with a broad set of customers are increasing.

We have -- as we said in the script, we have some design wins in Android platforms.

Volumes are growing.

We are all surprised they are not growing as fast as they should, but we are very, very bullish about long-term opportunities for the application as they especially, it's a necessary function to enable those megatrends that we discussed, such as autonomous driving and artificial intelligence and so forth.

So we are very confident that the demand will continue.

So having the -- a vertically integrated platform is going to be, as we said, sustainable advantage that we have.

And then yes, definitely, volumes help on the margin side.

But I'll let -- maybe I'll let Mary Jane comment on that part of the question.

Mary Jane, would you like to add some?

I think 3D sensing continuing to gain volume is positive for the margins.

Do keep in mind that the quarters across the year are not steady for 3D Sensing.

And typically, this past quarter, the 12/31 quarter is the strongest quarter.

That is what we have seen in the past.

That may change, as Giovanni says, as we get an increase in other deployments.

But for right now, I'd say, volume definitely helps, but it is not the same volume in every quarter.

Your next question comes from the line of Jim Ricchuiti with Needham & Company.

Maybe just to follow-up on that comment, Mary Jane.

In terms of seasonality, what should we be thinking about in terms of the puts and takes with respect to the March quarter just in terms of the larger verticals?

Yes.

I would say, first of all, we already looked through the first half of the year.

Q1, we still expect to be our smallest quarter.

Q2, 12/31 was strong for 3D sensing as we just saw.

We do expect to see the 3/31 quarter, probably a little bit down on the 12/31 quarter.

Some for Chinese New Year, we can't forget that.

And also because I don't think 3D sensing will be as high exactly as it was in 12/31.

And then the 6/30 quarter for us, which has historically been our strongest quarter.

We had such a good quarter this quarter.

It may be on par or a little bit higher.

But for right now, I'd say, generally speaking, I think, just basically do not forget Chinese New Year in the 3/31 quarter.

And that's 3D Sensing, industrial in the optical communications seasonality in the March.

I'm wondering how we should be thinking about that?

Well, I'm not sure we can give it to you exactly.

But generally, we don't see it in the -- for industrial, the first quarter, the 9/30 quarter tends to be the weakest quarter.

Communications can sometimes be a toss-up between 12/31 and 3/31.

But generally speaking, it is Chinese New Year, so I think you should calculate that in.

And then I think the other markets are probably less subject to specific seasonality in any given exact quarter.

(inaudible).

Yes.

Jim, I want to add, Mary Jane.

Yes, the seasonality sometimes are offset by market reality.

I will give an example.

We anticipate to ship more than double the megawatts that we ship in the second -- sorry, in the first half of the fiscal year in the second year.

So we'll double our megawatts in the second half of the year for industrial applications, particularly, of course, fiber lasers.

So that's really a substantial increase in the second half, which is not necessarily linked to any seasonality.

It's just specific to China coming back very strong with fiber lasers, which we are benefiting from that growth.

Let me just clarify one answer I gave, Mark.

He was asking us about non-op income and expense.

I forgot in the first quarter, we had the write-off of the debt cost.

Generally speaking, it's probably somewhere between $2 million and $3 million positive.

Your next question comes from the line of Vivek Arya with Bank of America Securities.

I was hoping you could give us a quick update on your silicon carbide franchise.

How much does silicon carbide account for as a percentage of sales?

What are the next milestones we should be looking forward to?

And recently, one of your competitors spoke about increasing their investments in 200-millimeter capability.

And I was wondering how that impacts the competitive landscape going forward?

So silicon carbides between 3% and 4% of the revenue, and I'll give the second part to Chuck.

Okay.

Vivek, as we've indicated, this is a long-term growth opportunity for us.

And we're playing it just like you would play a golf course, 1 hole at a time.

We have the end in mind.

We've described that to investors.

We think pretty clearly.

We have a scalable silicon carbide substrate platform, which was demonstrated to be capable of supporting the 200-millimeter technology about 5 years ago.

So we're investing in scaling that capability of our silicon carbide substrate, a considerable amount of our capital investment that Mary Jane referred to earlier is focused on adding equipment for silicon carbide, crystal growth, epitaxial, wafer growth, ion implantation tools and to provide a clear technology road map for electronic devices and ultimately, for modules.

This is a multiyear platform investment, and I think the best way for investors to think about it is the same way in which Giovanni gave a retrospective view of how we thought about the 6-inch gallium arsenide vertically integrated platform development back more than 5 years ago.

It's going to take us some time to put all the pieces into place that we envision, but we have the talent.

We have the team.

We have the technology.

And now we have to get the infrastructure in place and get to a scale that we ultimately aim to be at.

And that's all line of sight inside our near-term and long-range plan.

I think that's probably the best way to say it, Vivek.

Your next question comes from the line of Richard Shannon with Craig-Hallum.

A question focused on datacom and probably a 2-parter here.

I heard some comments about your 200G and 400G transceivers doubling sequentially.

Can help us understand what's going on there?

And then kind of look forward, broadly speaking, across the space for both webscale and 5G, how do you see this calendar year developing?

Okay.

Richard, this is Giovanni.

Thanks for your question.

What's going on?

We're gaining share.

Obviously, pretty fast, too.

I think the team has done an incredible job with these new platforms, and it's really exciting.

I'm sorry, what was the second part of the question on 5G?

Dynamics in Datacom going forward through the year, especially the web scale and 5G.

I've heard some of your peers in the market talk about the slower start to the year but accelerating as 5G starts to accelerate the later half of the year.

Yes.

Well, the reality is that because of COVID, a lot of deployments worldwide is actually -- they've actually been slowed down.

I mean, that doesn't mean that the trend is any different than before, still an important megatrend for us.

I think we're seeing -- we've seen a channel adds being the dominant need for the end customers other than new deployments.

So that's a dynamic there.

For example, I think we're seeing more client systems being added and line systems being added and so forth.

So those are the dynamics in terms of the demand.

I want to emphasize the growth that we've seen in the datacom, a little bit stronger than telecom.

And then remind the -- this important point I made on the 800G.

First, the 800G shipment that we made.

It was very successful so far, really exciting to add it to our portfolio.

And all in all, I think we are going back to a really nice growth with the Finisar team, which, for over a year, local customers were probably on the sideline waiting for the integration to happen.

Now they feel more confident as the numbers demonstrate that we are doing a pretty good job integrating the 2 companies.

So this has been very key.

Your next question comes from the line of Ananda Baruah with Loop Capital.

Congrats on the solid, solid take on the question.

I guess just a bigger picture one, Chuck, in the press release this morning, you made mention of all markets improving.

And so I was just wondering, because you put some context it's improving.

And so I was just wondering could you put some context around the key ones there?

And which market opportunities would you like us to think of as making the most significant impact this year as you move through the year?

Well, I think we summarized pretty well in the script, the dynamics in every 1 of the end markets, whether communications, industrial, semi comp, life sciences, 3D Sensing, et cetera.

I think all of those markets have a great opportunity to really make an impact on the year.

Communications is obviously the largest.

3D Sensing is ramping beautifully.

Silicon carbides is coming up the curve.

So I think really, they really all can make a great contribution to the year.

And I think the ones you want to think about are either the largest ones are the ones that are really starting to gain traction in the revenue.

And just, Mary Jane, just a quick clarification on that.

Chuck's comments in the press release about markets improving.

So should we anticipate that the key markets, that the growth can be stronger as we go through the year?

How about some context around that?

Can some of the (inaudible) be strongest?

I think we already answered that question.

I think we already answered that question.

We're showing very nice growth in the year across all the markets.

It's in the script.

And I think we probably, unfortunately, need to move on.

Your next question comes from the line of John Marchetti with Stifel.

Mary Jane, you guys identified an additional $50 million of synergies that you're expecting here over the next 12 months or so.

Just curious with the scale now, should we expect most of those are coming through additional cost synergies on the OpEx line?

Or are there additional opportunities that you still seem to chop away and improve on the gross margin line in relation specifically to this $50 million target?

I think it's both in the cost of sales and in the OpEx.

And is that again a function of larger scale?

Are you able to actually identify programs where you can physically take some of those costs out?

Well, let me add, John, but we need to move on.

That scale has a lot of benefits, and we will have exact targets for both the cost of sales and for our overall expenses.

And we will achieve them.

Your next question comes from the line of Harsh Kumar with Piper Sandler.

Yes.

Sorry about that.

Congratulations on strong results.

Chuck, I wanted to ask you, is your gross margin of 42% that you put up, is that the new paradigm?

Is that how we should be thinking about things going forward?

And then when we think about OpEx for you guys, you've done a great job containing it relative to expectations.

But how should we think of the cadence going forward?

Do you manage that as a percentage of business?

Or do you manage that as a percentage of revenue growth?

Just any color.

That's it for me.

Right.

The gross margin range for the year is 38% to 42%, and the OpEx margin is in the -- we put in the investor presentation, excluding stock comp as well, it's between 20% and 23% of revenue.

Your next question comes from the line of Samik Chatterjee with JPMorgan.

I think primarily for Chuck.

Chuck, you've got -- done a great job getting the leverage down since the Finisar acquisition, and that gives you a lot of flexibility.

I'm just wondering, do you see a need to further consolidate the market, either be it for new platforms or certain end markets where you have better -- you can get greater benefits from scale compared to what you have today?

Just wanted to get your thoughts on that.

Okay.

Thanks for your comments and for your questions, Samik.

We have a long-term aspiration to change the world, and we are doing it with the benefit of innovation.

And being able to identify the long-term trends in the marketplace that will take full advantage of that innovation or be enabled by it.

We're not done investing.

We have a strategy.

It's well articulated and we have been executing on it for decades in the last 5 years or so, investors have really gotten to know that.

I don't see any change to that.

And for sure, no change to our discipline and our determination to build our long-term shareholder value and to have a profound impact on the stakeholders all around this as a result.

We have lots of investing to do, lots of imagining to do and lots of executing could do, and we're going to do a combination of the 3.

Your next question comes from the line of Sidney Ho with Deutsche Bank.

Congrats on the very solid results on the 3D Sensing business.

So my question is actually on the comp side.

I think, Chuck, you mentioned last quarter, it was impacted by a slowdown of new system installation.

I'm curious if you start seeing the recovery of that part of the business yet.

And if you look into your orders and backlog, are there particular areas that you see strength or weaknesses over the next few quarters?

Sidney, can you repeat the first part of your question?

Mary Jane will comment on the backlog, but what was the first part of your question?

Yes.

You were talking about last quarter was impacted by a slowdown of new system installation.

I'm just curious what can -- have you seen the recovery already in that business?

And then the second part of that is related to the backlog of orders that, do you see anything particular areas, strength or weaknesses, coming up from the orders of backlog?

I think there's a recovery underway.

There are still spots around the world where COVID-19 has had and is having still an impact.

The effects -- the profound effects of COVID-19 simply cannot be understated.

So that's happening.

And I would say the supply chain has been a lot of talk about the integrated circuit supply chain and how that might be an overlay to COVID-19.

And so that's another topic, but I'm proud to say that our global supply chain management team have really done a fantastic job in working with our vendors and mitigating the impact thus far.

So we have to watch that.

I would say the supply chain is what I'm going to be looking out for in the next 3 to 6 months, okay?

I don't think that -- we don't break the backlog down further than by segment.

I don't know that there's a particular area of strength or not.

Your next question comes from the line of Tom Diffely with D.A. Davidson.

Maybe for Giovanni, how do you view the long-term opportunity in LIDAR versus your current opportunity in 3D Sensing for the handsets?

And is your capacity for 3D Sensing fungible to LIDAR?

Or is it going to require some type of different technology as well?

No, we have -- Thanks for the question, Tom.

So absolutely.

It's a great opportunity for us.

I want to make sure that this is clear.

LIDAR market, despite all of the noise in the mid and so far, is still in its infancy, for advanced optical solutions, which includes lasers and all kind of optics and circuitry and so forth.

We -- as I mentioned in the script, we have a very broad, probably one of the broadest portfolios for both actives and passives.

We have different wavelengths, different form factors for the lasers, different type of subassemblies and so forth.

So we are well positioned to take advantage of the interactions with the engagements that we have with number of customers, a different level of the food chain.

And in terms of the technology, I think we already have pretty much all that is needed.

Question is where really to put the bets because of the -- as I said in the script, it's sometimes -- it's hard to predict which solution will be the largest volume.

There is different beliefs out there in terms of what's the best approach to give the best performance with the highest reliability and the best eventually price target for the automotive customers.

So it's going to take a while to flush that out.

And as I said, we are -- right now, we have pretty much all that the market is asking us to deliver, but the winners in terms of the adoption of this -- of that architecture, it will take time for that to play out and to happen.

So -- but I think we are well positioned for that.

Your next question comes from the line of Tom O'Malley with Barclays.

Congrats on the really nice results.

My question is for Giovanni.

You saw the industrial business trough in the September quarter, and you've seen some M&A going on in the space.

Can you talk about what's going on there?

You mentioned you're going to double your megawatts in the second half of the year for fiber lasers.

Is that just volume in China coming back?

Or is the high end of the market a little bit better?

Any color on how that market is progressing off the bottom will be really helpful.

Well, no.

I mean -- Thanks Tom.

I mean it's -- Thanks for the question, Tom.

It's just China is coming back very fast from that perspective, as I mentioned.

And that's the large majority of our markets, really the -- as you know, there is many fiber laser makers in China, and we are benefiting from our design wins and their growth.

So we are growing with them.

And I assume -- I believe they are also taking share from some of the incumbent, worldwide incumbents.

So they're really making great progress.

I think it's -- the largest growth, I believe, is really for the laser processing for the durable goods.

So I think the microprocessing or such as marketing and so forth, maybe that's a smaller portion of the total.

Anyway, so that's some color.

It is very exciting.

I mean, we have -- the reason why we can support such a really great demand coming back, particularly from China, is because we moved also our 980 multimode pumps to 6-inch.

So we have the capability.

And I'm not -- I can't say for sure, but on, I think we are the only one in the world that has such a volume, such a scale capability for -- to address that market.

So we are taking advantage of that.

Your next question comes from the line of Christopher Rolland with Susquehanna.

Congrats on the quarter, and I wanted to chime in on the one question policy and pace of the call.

I appreciate that.

So congrats on the 3D Sensing result, but perhaps, for us, at least, the Photonics and TC and DC was maybe a little bit light here.

It was nice to see backlog up here, but I would assume this really implies some sort of a supply issue.

Maybe talk about that.

Is it increasing the supply issues?

Where do we stand on new capacity and new supply?

Did 3D Sensing temporarily take some of that capacity?

Or are they held separate?

And is the CapEx like $40 million a quarter enough to solve some of these supply constraints?

Okay.

Chris, thanks for your question.

It sounded like there were 3 or 4 questions in one, but let me talk about the supply chain in the quarter.

Despite the fact that we had a view of what it could be, our supply chain people managed it to be pretty close to 0, the impact.

So we're watching it because we understand the challenges associated with the demand, especially in the snapback of the automotive production and the demand for integrated circuit capacity from other markets.

But we do have some constraints, and we'll continue to manage those in the supply chain.

And we're adding capacity so that our internal or intercompany supply chain can keep pace with the projections and the growth.

And as far as the 3D Sensing goes, we are increasingly utilizing the capacity we have.

So there's no impact at all from the supply chain of that.

Okay.

Your next question comes from the line of Meta Marshall with Morgan Stanley.

Great.

Just on the 3D Sensing portfolio.

You guys mentioned also having a passive kind of piece of the portfolio with the filters and other products.

I just wanted to get a sense of as you report 3D Sensing revenue today, is that primarily VCSELs?

And then just as you look forward to the next year, in the next 12 months, would you still expect growth to primarily be driven by share gains or kind of new platforms coming on?

Meta, thanks for the question.

This is Giovanni.

Go ahead, Giovanni.

Yes.

I'm sorry.

Yes, the -- Mary Jane, do you want to take it?

VCSEL is the majority of the volume.

I do think over the next year, we will see, as Giovanni already described, that there may be other platforms emerging.

But as he also said, it's a little bit dependent on the market demand.

But we're looking forward to seeing those opportunities materialize.

I think at this point, I'm sorry.

We have a little bit run out of time.

I just want to turn it back to Chuck for a few minutes.

And as all of you know, we have a scheduled call with all of you following this call.

Let me turn it back over to Chuck.

Okay.

Thank you, Mary Jane.

As 2021, the year of the Ox begins, my enthusiasm for our future is at an all-time high.

And we continue to look forward to leverage the best opportunities that arise from the most exciting and irreversible market megatrends we can address.

Although I acknowledge the sobering reality of COVID-19, a challenge to all humanity.

COVID-19 has affected the health, safety and economic security of a large number of people around the world.

However, I am confident that humanity will rise to this and the other important challenges facing our planet.

At II-VI, we realize that we must do everything we possibly can to protect our planet and carefully manage its precious and finite resources in order to ensure that future generations will inherit from us a world that's better and more sustainable.

In doing so, we expect that II-VI will play an increasingly significant role in enabling the world to become safer, healthier, closer and more efficient.

This is our mission to which I remain as firmly committed to as ever.

While we are executing well, we are doing so out of the strength of our sheer belief of our values of integrity, collaboration, accountability, respect and enthusiasm or as we say at II-VI, I care.

Beyond these values, I believe that we hold in common the belief that equality and affordable education provides opportunities to a better life today and a better world tomorrow.

Based on those shared principles, it's with great generosity the II-VI co-founder, Dr. Carl Johnson & his wife Margo Johnson, established in 2007, the II-VI Foundation.

Through their foundation, Carl and Margo have funded the college and university educations of many students around the world.

Many of them have joined II-VI, and some are now in key leadership roles within our ranks.

Today, we are very proud to participate in the II-VI Foundation's mission by contributing $1 million in 2021 to their inspiring project as part of our environmental, social and governance or ESG initiatives.

Our renewable commitment to the II-VI Foundation is, in part, the outcome of a growing conversation at II-VI of a desire to be part of something even bigger than just a growing and innovative company.

It's my intent to respond to this call with a greater awareness of our place in the world and to scale our intentions with actions.

Today, I take this opportunity to acknowledge our heritage and history as we reflect this month on black history as we do in the United States each February.

I would like to close with the definition of the word, innovation, which has its origin in the Latin word meaning to renew or to change, not simply to invent.

And despite all of our successes, in order to be ready to seize yet unseen opportunities that lie ahead but which are sure to come, we will continuously innovate and embrace change.

At II-VI, our vision is of a world transformed through innovative materials vital to a better life today and the sustainability of future generations.

That ends our call today.

And we thank you all for joining us.

Have a good day.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating.

You may now disconnect.