II-VI Inc (IIVI) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to your II-VI Incorporated fiscal year 2014 first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session, and instructions also be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Craig Creaturo. Sir, you may begin.

Thank you Said. Good morning everyone. I am Craig Creaturo, Chief Financial Officer and Treasurer of II-VI Incorporated. Thank you for participating in the first quarter fiscal year 2014 II-VI Incorporated investor teleconference. As a reminder, this teleconference is being recorded on Tuesday, October 29, 2013.

The forward-looking statements we may make during this teleconference speak as of today, and we do not undertake any obligation to update these statements to reflect events or circumstances occurring after today.

Thank you Craig. I am Francis Kramer, President and CEO of II-VI Incorporated. The first fiscal quarter of fiscal year of 2014 was extremely busy on a number of fronts. We are pleased with the financial results that we delivered for the quarter, the operational improvements that we experienced at several of our units, and with our recent acquisition activity. We believe that these actions have placed us on a pathway for sustained profitable growth.

For today's call, we have asked our Executive Vice President, Chuck Mattera to join us to provide our investors with information on the Semiconductor Laser business that we acquired last month, and the Fiber amplifier and micro optics business that we about expect to close later this week. Chuck is responsible for the new reportable segment that will reflect the results of these two businesses, and the acquisition processes for both transactions.

Today I will shorten my prepared comments on our first four reportable segments to allow Chuck time to discuss the recent acquisitions. My comments will start as usual with our Infrared Optics business. During the first quarter, bookings were consistent with the first quarter of the prior fiscal year. For our IR Optics business in the Americas, OEM orders increased 3% versus last year, while shipments to our OEMs increased 10% year-over-year. Laser utilization rates were steady in the first two months of the quarter, and off slightly in the third month, reflecting vacation shutdowns, especially in Europe. European bookings were therefore down in the first quarter, partially from the summer holiday period when production rates are slower. We have seen a lull in the activity levels surrounding the EUV photo lithography systems, but we expect this to recover in the second half of fiscal year 2014.

Asian bookings were down 6% for the first quarter of fiscal year 2014 in spite of the weaker yen helping Japanese manufacturers to be more competitive and sell more systems internationally. China and Singapore business is down with decreases coming from reduced consumption of via hole drilling machines for semiconductor markets, as well as variable radius mirrors used in high power cutting systems targeted for the pipeline industry. The aftermarket continues to grow in China as we price products to win market share.

At HIGHYAG during the quarter, we increased our ownership from 75% to 100% for $8.8 million. We continue to see long term growth in one-micron welding, beam delivery, and one-micron laser cutting markets, and we are investing in this growth with the construction of a new 55,000 square foot manufacturing and office facility near Berlin, Germany.

Now in the Near-Infrared optics segment, bookings for the first quarter decreased by 3% quarter-over-quarter to $40.8 million,while segment revenues were down 4% quarter-over-quarter to $39.9 million. The bookings decrease was a reflection of a diversified business mix and the timing of certain orders. During the quarter, we did see a recovery in the telecom component business, and a continued technology focus on 100G data centers and enterprise networks. We are investing more resources in our new product development in our 100G and datacom product portfolio, and on new product introduction projects on advanced optics and optomechanical assemblies.

Compared to the first quarter of FY 2013, overall Near IR bookings were up 16%. This was mainly attributable to the increasing demand of advanced optics for telecom, instrumentation and lasers, and the acquisition of Photop advanced thin film coating center that occurred during the second quarter of FY 2013. Compared to the first quarter of FY 2013, overall Near IR revenues were down 2%, due to a green diode laser contract coming to a conclusion. The Near-Infrared optics business results remains strong in the first quarter, with growing demand for advanced optics for lasers for instrumentation, in addition to the increased demand of crystals and optical products and advanced optics products for data common data centers applications.

For the fiber-to-the-home filter business, the revenues remain soft due to the broadband China project rollout delay the and slowdown of fiber-to-the-home and on passive optical network markets in China. The recently-acquired coating filter business which we call the Photop advanced coating center, continued to perform well in the main application markets of life sciences and telecom. We continue working with life science customers, supplying filters and moving forward towards supplying optical assemblies. We are driving business growth by adding more coders to increase the capacity, and expanding the high end filter product offerings and the capability of optical assembly.

For the first quarter, our military and materials business segment, bookings of $21.8 million increased 23% from the same period last year, primarily as a result of the LightWorks optics business acquisition. Revenues for the first quarter of $27.4 million increased 15% from the same period last year, this increase was also due to the LightWorks optics acquisition. The integration of LWOS business development, engineering, and manufacturing function is progressing as we merge the Exotic team with the recently acquired LightWorks team. Consolidation of diamond turning operations from the LightWorks of vista location into Murrieta was completed ahead of schedule. The Vista facility is now closed, and the lease commitment ends February, 2014.

Anticipated synergies for the combined operations are on track. LWOS won two new programs from military and commercial customers that would not have been available for either company individually. The advanced optical design and engineering capabilities of LightWorks optics combined with the solid manufacturing capabilities of Exotic Electrooptics and the financial stability of II-VI is viewed as a significant competitive advantage to these customers.

Earlier this month, we announced that LWOS was awarded a second contract from Lockheed Martin for the production of infrared focus assemblies, which are integral to the IRS T sensor system. This award represents $50 million worth of business extending into 2016, and together with a series of other related contract awards totals over $42 million in booked commitments associated with a US foreign military sales contract. In our Materials business, PRM has been redefined and is exiting the tellurium and selenium chemicals business, which we announced in early August. PRM achieved positive net earnings for the quarter, which was the first time since September of 2011. As of September 30th, production of these products have stopped, and most customer orders have been filled. The sale of remaining inventory is progressing, and we expect these product lines will be completely discontinued by December 31, 2013.

Production of our rare earth element products has been solid. During the quarter, we achieved record level production with revenue in excess of $2 million, and a positive financial return. Based on our current order and customer demand, we expect this rate of production to continue through FY 2014. Our selenium production line is now nearly fully dedicated to supplying the II-VI Infrared business, and therefore does not generate external revenue. This capability provides a competitive advantage for our Infrared Optics business by providing a zinc selenide recycling capability to recover unused selenium.

Now moving into the Advanced Products Group. Our Marlow Industries group bookings for the first quarter increased 20% year-over-year due to strong orders for our new products in the personal comfort market. This strong performance was slightly offset by decreases in bookings from our defense customers, telecom customers, and others, and orders from the medical marketplace. Revenues for the first quarter decreased 4% year-over-year, due to declines in gesture recognition, telecom and automotive markets, exceeding the high demand in the personal comfort market.

The personal comfort market continues developing with receipt of our second production order, and new prototype products shipping to customers. The Climatherm product line is selling well in Europe, where we had design wins again this quarter, in the power generation market we received additional development order for waste heat recovery operations. Now at our Wide Bandgap division, both bookings and revenues were on target for the first quarter of FY 2014. Bookings in Q2 are projected to be up significantly as interest in commercial applications and wireless infrastructure continues. The demand for 100-millimeter and 150-millimeter diameter N-type substrates continues to grow, driven by the promise of more energy efficient products for power applications.

During the first quarter we achieved full manufacturing qualification of our 100-millimeter N-type product at a major European OEM. We continue to see the 150-millimeter diameter as the key to expanding the potential market size for silicon carbide devices, and remain focused on utilizing our 150-millimeter diameter technology to grow our overall market share moving forward.

At our M2 Technologies division, first quarter bookings were up 49%, or first quarter revenues were up 7% quarter-over-quarter. Semiconductor component sales at our precision products division were stable during the quarter, driven by lithography inspection, metrology, tool sales servicing both the logic and memory sectors. We are seeing signs of increased semiconductor tool purchases from our traditional 300-millimeter customers in this second quarter, primarily driven by expansions supporting ramps at the 20-nanometer node. Work on the 450-millimeter product platforms continue, albeit at a slower pace than expected.

Our Ceramic Materials group saw strengthening in the LCD display sector in the first quarter of FY 2014, mainly supporting GA fab expansions. We believe that this situation will continue to improve in FY 2014, with a focus on select fab expansions in China and Korea. On the defense side of the business, we enjoyed a new design win and prototype orders in the body armor sector.

This concludes my prepared remarks, and Chuck will provide commentary now on the recent acquisition activities. Chuck.

Thank you Fran. I would first like to make some general comments and observations about our most recent acquisitions, and how they fit into our overall II-VI growth strategy. Since our founding in 1971, II-VI has been serving its markets with products based on engineered materials and optoelectronic components. We are proud of our heritage and of our people who have created the market leader in CO2 laser optics, and we are aware of the role that we continue to play in providing new and world-class products that enable our customers to succeed in their marketplace.

Until recently, our business and product portfolio has been expanded by organic investments and complimentary acquisitions that continue to sustain our growth by offering high performance products that are based mostly on passive optical and functional materials, and components that are manufactured with various crystal growth, fabrication, and thin film coating platforms across the Company. While the industrial laser markets began to adopt additional laser technologies beyond just CO2, we have been positioning ourselves in the recent past to continue to serve our customers, and we have acquired businesses with key strategic technology platforms, to serve the broader market of high power lasers for material processing applications.

Based on these and subsequent investments, we are positioned with a diverse product portfolio that many of our businesses now offer into the one-micron fiber laser and direct diode markets. Because of the successful development of high performance and high reliability semiconductor laser components for optical communication networks during the last 30 years, is beginning to enable new and cost-effective applications of these laser components. We are excited about our most recent strategic acquisition of the II-VI laser enterprise business from Oclaro, which combined with the pending acquisition of the Oclaro optical amplifier business, both compliment our broad and growing portfolio of products and capabilities across the rest of the Company. During the first 19 days since our September 12th closing that we operated with II-VI laser enterprise business segment, we realized $3.5 million in bookings, $4.8 million in revenues, both of which met our expectations.

As we reported on September 12th, the laser-based business is made up of three major product lines which rely on high performance and high reliability, semiconductor laser chips that are fabricated at our world-class wafer fab in Zurich. The first of these laser component product lines that we refer to as HPL for high powered lasers, today is serving the broad industrial laser market for fiber lasers and direct diode lasers which are being deployed in materials processing applications, including welding, cutting, marking, and drilling, as well as applications that include medical and elective cosmetic procedures, and high performance digital offset printing, and other print on-demand applications. The Zurich based HPL platform has developed over the years a unique combination of power and reliability performance that enable our customers to offer laser solutions that beat competition by, for example, offering several years longer warranties than fiber laser OEMs are offering. Early feedback from the HPL customers we have spoken to has been enthusiastic, as they begin to understand our commitment to being as a full line supplier to their component needs.

The second end market leading laser component product line that we call HVC, for high volume components, includes a broad family of semiconductor laser chips called VCSELs, which stands for vertical cavity surface emitting lasers, and also low power edge emitting lasers. The special optical characteristics of VCSELs, including the small wave length shifts over temperature, narrow spectral line lifts, and high speed modulation properties, make them ideal light sources for advance sensing and data communications.

Although the market for such chips requires a low average selling price, our II-VI laser enterprise business is established among the world's leading high volume suppliers of VCSELs to many current consumer electronics applications, such as laser computer mice, and optical finger navigation. And with the rapid pace of the development and deployment of mobile devices, large data centers and smarter consumer electronic product, we expect to continue to be well-positioned to enable our consumers in the future in high volume applications. The Zurich team's multi-year experience with high volume laser components that have been manufactured in hundreds of millions for consumer applications is a valuable asset that will enable their cost and reliability competitiveness in high power laser applications. The third and market leading laser component product line is built on the 980-nanometer pump laser components, which are used in optical amplifiers for optical communication networks, and which predominantly serves the telecom customers who make their own optical amplifiers, and it includes as the second largest customer, the optical amplifier division of Oclaro that we are acquiring. In addition, they are also serving key OEMs in the high reliability segment of the undersea telecommunications repeater market.

Overall, these products are built off of a broad and deep portfolio of IT, and the laser technology platform and product line has its roots in IBM, and is widely regarded as one of the best in the industry. The technology, leadership, and manufacturing discipline required to succeed in the optical communications market, particularly in the market for pump lasers for submarine applications, is a highly differentiated asset to our customers that are concerned not just about cost and performance, but also about high reliability and world-class quality. Now briefly, the optical amplifier business, which offers a wide range of optical networking solutions, is made up primarily of amplifiers and subsystems, but also includes micro optics components, amplifier modules include conventional board mounted products with different levels of control, from game blocks to controlled amplifiers, and also subsystems, which include a wide range of products from rack mountable units, to highly sophisticated line part solutions, which include full fast Lean integration into system vendors and network equipment.

These capabilities are complimented by our micro optics solutions capability and a versatile hardware and software control platform that can include interface modules for back plane integration. The business has introduced a number of new products that will enable the next generation of optical networks, including high performance Raman and hybrid Raman EDFAs, as well as a broad range of solutions for 100G applications from ultra-small form factor and low power consumption microamplifiers to line cards and ultra compact arrayed amplifiers. We believe that the business that we are acquiring is well-matched to the future needs of network equipment manufacturers, and the carriers that they serve.

In fact, Infonetics Research recently reported a tripling of 100G ports shipped year-over-year as 100G has been adopted quickly, and the industry is now considering network architectures which can support even higher bandwidth, while also minimizing the operational challenge, and the cost of managing these increasingly complex networks. Looking forward, while 100G networks already rely on Raman amplifiers in some deployments, high performance Raman amplifiers will be needed even more pervasively in upgradeable network architectures that will support network operations of up to 400G and higher. 100G transponders often use booster amplifiers to ensure operation on deployed fiber plants that was originally designed for 10G systems, and this has driven a strong growth in micro amplifiers and is expected to continue growing by increased deployments of 100G, as well as higher data rate systems in the future.

We believe that the combination of the 980 pump laser product line that was part of the business we acquired on September 12th, and Photop's broad passive component portfolio, along with the optical amplifier technology and IP portfolio that we are acquiring, will allow us to be uniquely positioned to serve this growth market over the long run. Oclaro's optical amplifier business has consistently been among the market leaders for more than a decade, and has extensive customer relationships with all of the top system OEMs that buy optical amplifiers on the merchant market, to terrestrial networks in 2003, according to Infonetics Research.

As a result of this acquisition, we will acquire about 150 new employees, and a patent portfolio of over 400 patents. We believe that these acquisitions will improve our Company's long-term growth prospects, as we add a semiconductor laser component platform for the emerging fiber laser and direct diode laser markets, and other non-telecom markets while gaining a broader and deeper telecommunications component and subsystems portfolio. We are pleased that our new leadership team comes to the business with considerable experience and determination to revitalize the business. We are approaching these acquisitions like we have approached all of the other investments we have made, with a responsibility to strive for the long-term opportunity, and we intend to continue to invest working capital and human capital to improve the customer intimacy, product leadership, and operational excellence required for the business.

This is a short-term challenge for us since when we acquired the business, the back end or assembly and testing operations of Oclaro, were in the middle of a major factory transition and realignment from its in-house manufacturing center in Shenzhen, to a going forward and complete reliance on contract manufacturers in Malasia and Thailand. So we are relying temporarily on Oclaro to provide contract manufacturing services for the products that are built in these distributed factories.

We are also counting open our Photop division to interface with Oclaro in Shenzhen and to take the leadership on the key aspects of integration planning of an efficient and immediate improvement to the sales channels and customer service, and a longer term and more cost-effective supply chain by leveraging our existing businesses, infrastructure, and global footprint. Ultimately, as the integration progresses, we expect our Photop division to assume the leadership responsibility for the 980 pump product line and the optical amplifier businesses that serves the telecommunication markets. In the meanwhile, the entire II-VI global team is committed to making the best long-term decisions for our customers and shareholders, while balancing the short and medium term, operational and tactical approaches by doing the right things in the right places at the right time.

Craig, that completes my prepared remarks.

Thank you, Chuck. The next portion of this call will be dedicated to some financial highlights, and we begin this section with the review of our bookings and backlogs. As described in today's press release, consolidated bookings for the quarter ended September 30th, 2013 were $143.5 million, which was 25% higher than the same quarter last fiscal year. When the impact of the three acquisitions we completed in the December 2012 quarter, and the semiconductor laser business we acquired in the just completed quarter are removed, the bookings growth for the quarter would have been 5%. The beginning backlog of the semiconductor laser business of $24 million, was not included in the bookings for the quarter.

Total Company backlog at September 30, 2013 was $200 million. The components of the backlog at September 30, 2013 were Infrared Optics at $40 million, Near-Infrared Optics at $35 million, Military and Materials at $63 million, Advanced Products Group at $39 million, and Active Optical Products segment at $23 million. Today's press release contained in addition to our segment reporting in the form of a fifth segment, the active optical products segment. For the just completed quarter, this new segment captured the results of the semiconductor laser business since the date of the acquisition which was September 12, 2013.

On the segment loss for the quarter, $3.5 million related to transaction expenses for this acquisition, the remainder of this segment loss was a result of the impact of purchase accounting as the underlying business that we acquired operated at a breakeven level for the first 19 days we owned them. Beginning with the December 2013 quarter, the active optical products segment will also include results of the optical amplifier and micro optics business we plan to acquire on November 1, 2013.

The gross margin for the quarter was 37.3%, and was 36.9% for the same quarter last fiscal year. The main driver for the gross margin improvementis the stronger contribution from our peer end business, which last year encountered some significant challenges with its rare earth material refinement, as well as its selenium and tellurium businesses. During the just completed quarter, we had about $400,000 of negative gross margin impact from the write-up of the semiconductor laser inventory to fair market value for purchase accounting, that amount will increase to about $2 million during the December 2013 quarter, and when combined with the fair value impact that we expect we will encounter for the optical amplifier business acquisition, this will push down our gross margins in the December 2013 quarter by about 150 to 200 basis points. This is one of the reasons that our EPS expectation that for that quarter will be tempered. As we move into the March 2014 quarter, this impact will lessen, and by the time we reach the June 2014 quarter it will not impact our financial statements.

The effective income tax rate for the quarter was 25.1%, which was slightly higher than the 24.2% rate for the first quarter of last fiscal year, and slightly lower than thefull-year rate of 26.5% from last fiscal year. The quarterly rate approximates our full year fiscal2014 expectation. This projected rate could be reduced if there is an extension of the US researchand development tax credit. As of September 30, 2013, outstanding borrowings on our credit facility and yen loantotaled $211 million, up $97 million from June 30, 2013, as a direct result of the semi conductor laser transaction.

As we previously announced on September 12, 2013, our new credit facility consists of a $225 million unsecured line of credit, and a $100 million unsecured term loan. The term loan is payable in quarter installments of $5 million, the first of which was paid on October 1, 2013. The current credit facility provides us with enough capacity to complete the optical amplifier transaction, while leaving us with adequate capacity for our working capitol needs. The interest rate on our borrowings at September 30, 2013 was approximately 1.7%. Our operating cash flow generation for the quarter was strong at over $24 million, an increase of 5% over the same period last fiscal year. Our overall cash balance increased by approximately $10 million during the quarter, and was $195 million at September 30, 2013, the highest mark in our history.

Fran and Chuck, this concludes the prepared remarks we will make for today. Before we begin thequestion and answer session, I would like to mention that these comments and answers to certain questions contain forward-looking statements which are based on current expectations. Actual results could differ materially. For information about factors that could cause the actual results to differmaterially, please refer to the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2013. We are ready to begin the question and answer session.

Thank you. (Operator Instructions). Our first question comes from Avinash Kant from D.A. Davidson.

Good morning, Fran, Craig, and Chuck.

Good morning.

Good morning.

A few quick questions. Looks like of course this year in fiscal year 2014 there is going to be a significant impact from the acquisition and everything else, but if you could give us some idea in terms of where do you think the model will kind of turn out in fiscal year 2015 once these acquisitions are already assimilated, and where do you think, if you could talk a little bit about gross margin, operating margin profile of the Company, and that will give us some idea in terms of how to model?

I would say again our guidance that we have officially given or given during today's press release will carry us through FY 2014. If we look a little bit longer term as we move into FY 2015, we would have a full year obviously of the two acquisitions, the one that we have recently completed and the one we expect to complete later this week. I would expect that you will see some noticeable gross margin improvement even at the end of FY 2014. In my prepared comments I noted that we will still have some purchasing accounting items that will impact our gross margins by somewhere between 150 to 200 basis points in the December of 2013 quarter, and then we should see an improvement there after.

I think it is realistic to expect that you will see a steady evolutionary improvement in our gross margin in FY 2015. I think we balance that out though against some of the comments that Chuck made, noting that we do have some things for the recent acquisition, some things that we will need to invest in and change, and make some adjustments relative to certain of the manufacturing processes, but I would say that you should see some steady, slight increases in gross margin, and I think that would be ratable throughout FY 2015.

So eventually, Craig, do you expect to see your FY 2015 gross margin to get to the same level as you were in FY 2013 prior to these acquisitions?

Yes, I think that is possible, Avinash. Again in FY 2013, we also had some impact of three acquisitions and the purchase accounting for that, but I think when you strip those out, I think that the underlying businesses that we have, or the core businesses are performing well. We do expect to continue to see some yield improvements and margin improvements from those businesses, and so I do believe we could get back up into the FY 2013 range.

I think Avinash, we are really not prepared to go much further from what Craig has already said. We are trying to close at the end of the week on the amplifier business, and we have put out as best we can at this moment, the longest term view as we can. I think Craig's general comments were good. We will sure fill that in, in another quarter.

Right, right, I understand it is pretty hard to kind of look out that far, but I am just thinking about the rationale behind the acquisition, how do you see synergies coming out of this acquisition, because my understanding was that the businesses that you are buying should have had lower margins than what you have had on a corporate basis, and I am sure you have some plans to improve that going forward, so that is what I was trying to get some clarity on?

Yes, I think you are right. They are lower margins than what our main company achieves. We do have some synergies and some thoughts to improve them. We will have to work it a little bit more detailed in order to give you more detail than what Craig just laid out.

And one question more on the non-acquisition related stuff. The Infrared Optics bookings have been down sequentially in a meaningful way, and flattish year-over-year. Where do you see that trending in the December quarter, the guidance that you are giving?

It is not going to be much different than the quarter we just experienced. I agree with you, they are a little soft and I think for us as we guide, we see the third and fourth quarter to be the upbeat period. I made the comment about the EUV diamond products being off in the quarter, that is true, we see it in the second quarter, but third and fourth quarter will be better. I think the laser utilization patterns that we have been watching for the last two to three years have showed us, changed it a little bit, where the second quarter, the one we are in now is the lightest quarter and it comes out better than the third and fourth, so that is what we are guiding toward in the guidance that we just gave you.

Fran, you would say that the utilization rate that you are seeing kind of are similar to what you would have seen last year on a seasonal basis, right?

Correct. Yes. That is what I meant. The first quarter, okay. Second quarter, a little light. Third and fourth quarter came back nicely.

And any reason to believe that would not be the case this year?

No. I think we believe the pattern, but a lot of it does go on consumer spending, and it just seems to follow that pattern, and aggregate around the world, and that seemed to be the low point, manufacturing of what was what people were spending their money on at Christmas time, was produced in the first, second and third quarters, and the fourth quarter was light. It looks that way again this year, but we can't predict all of that, because it is such a long supply chain.

Okay, thank you so much.

Thank you. Our next question comes from Jiwon Lee from Sidoti & Company.

Yes, staying on the IR Optics front. Could you give us a little color in addition to the vehicle drilling and the pipeline business being a little bit slow, what you see the high power versus the low power? Thanks.

The low power business is hanging in there very nicely. It seems like it had a pick up here during the summer and we expect it to continue. Well, it is price competitive that is what I will have to say and we are pricingto win more business in China, where a lot of low power work is going on. We are actually working to have more low power optic choices, because it is so price competitive, we expect to have a product that will be even lower priced than what we have been pricing the product, like right now as some of the lasers that we tend to work on in the low power be 80 to 100 watts, that is where we can do pretty well, but price is down in the 60 Watt, and 40 watts are even lower than what we like, so we will come out with a lower cost product to serve that business. Marking, engraving, all of those type of productsare going well right now in China, and that is the place they are being produced, and those products sent out to the rest of the world. I think low power, good, maybe stronger. High power is the one that is dealing with all of the goods, durable goods and so on, and just the utilization and that is what is driving our business right now, is CO2 laser utilization starting to be off a little bit, and if it has trended like last year, it will continue that way over this quarter and picking up in the beginning of next year.

That is helpful. Talking about your fiscal 2014 revenue guidance, correct me if I didn't understand this right, but it looks like even the Oclaro business that you are factoring in, you are anticipating a little bit slower ramp into the December quarter, and a little bit better ramp in the second half. Could you give us a little bit of a logic and whether or not there are some other dynamics, such as the optical telecom businesses, or the IR optics that that also effects the revenue guidance? Thanks.

I think you are picking up the general pattern there, Jiwon. I think we do have a little bit of a stronger second half of the fiscal year expected, and that really is pretty much across the board for our businesses. I would say maybe with one exception, our more consistent military and materials business really not showing much of a change when you look first half versus second half, but the other businesses do experience as well as our most recent acquisition, we are expecting them to increase in the second half of the fiscal year. I think it is just a pattern that we have seen. Part of it is coming off of a lighter bookings quarter summertime here and moving into the end of the year, usually that third and fourth quarter usually typically stronger for most of our businesses, and we think that is also the same pattern we will see for the new acquisitions that we have for this fiscal year as well.

Out of that $2 million in the December quarter for that purchase accounting, are there anything else that is baked into your EPS guidance?

There are other purchase accounting items in there other than that. Jiwon, I pointed that one out just as more of an example. Obviously, the step-up in the basis for any intangible assets that we have, and the rest of the increase in the fair value of the tangible assets, the PP&E that we would acquire, we baked all of that into the forecast and that has been included into the guidance that we gave, not only for the December quarter but also for the June fiscal year-end. We know it gets a little tricky to kind of pull those pieces out.

For instance, in the quarter we just completed, our guidance if you go back to August 1st was that we would do $140 million to $145 million in revenues, and when you back out the benefit that we got from the laser enterprise business, we did just a little bit better than that. We did over $146 million in revenues, by the same token for earnings per share back on August 1st, again before any of the acquisitions, we said $0.18 to $0.23, and you can see some of the pro forma detail that is in the back half of our press release, but we basically did $0.21 when you add back not only the $0.05 of transaction costs, but also the operating results of the laser enterprise business. So we are pleased with kind of where we have been able to project on a quarterly basis, and we have tried to include the best we can all of the impact of the financial transactions, purchase accounting, fair valuing, et cetera, that we expect to encounter here in the December quarter.

So then all of this --

Jiwon, I would like to add to what Craig said about how our cycle or what we think the pattern will be as the next few years go forward when we have our new businesses. I am not 100% sure. We know the pattern of our businesses that we have been running, and the businesses we are buying are ones that we have carved out, and they are quite a carve out from what Oclaro had. Be able to tell you that we have got the data to know how it has behaved over a year in terms of seasonality, we sense there is some seasonality, but please don't hold us to that. What I want you to hold us to is that we are devoted to serving customers. What we think what we have done very well and we have a very high reputation, especially in our infrared optics business and in our military businesses, we are being customer centered and high quality, high ethics, and very good in terms of meeting commitments that customers have. That is the attitude we are taking to this business that we have just purchased from Oclaro. Those customers that we are about to become quite intimate with, really don't know II-VI like some of our other business people do, so we want to let them know right now we intend to be customer focused and do a high quality job, so if you can add that to your guidance, that would be great.

Alright, Fran, then let's stay on that strategy and talk a little bit about, there are two pieces of businesses basically. There are the telecom related businesses from Oclaro, and there are some laser related businesses. Talk a little bit about mid-term, sort of a growth trajectory for each of these businesses, where are you more excite about in terms of the revenue?

I want to say, first, I am excited about solving the dilemmas that are serving that business right now. We have bought in businesses that have some problems, so we are going to focus for the next six or 12 months, whatever it takes to get both the telecom product line and the high laser product line on stable production platforms, and I think we have got the management, and we can do it, but it is going to take time. That is number one I am excited to do and from that, I think you are going to see some earnings come right there, but we are excited on both, maybe I don't want to downplay either, the amplifier business looks to be a very good business with the 980 pumps that feed it, we like that business a lot, and at the same time we like the high power last business, HPL, the direct diodes, as they feed into people who are building fiber lasers. It is a very good opportunity for us because those are the customers, a good portion of that business are people that we know from being in the CO2 laser business. We like them both. I wouldn't want to you think one way or the other. We are going devote ourselves to both of them.

Perfect. Craig, all netted out, you are still expecting fairly earnings neutral contributions from all of these businesses, correct?

From the two acquisitions, I think we are fairly consistent, Jiwon, with the guidance we gave on the September 12th release that we had. We expected the laser enterprise business to be a little bit of a drag on earnings, somewhere between $0.08 to $0.12, that range included the transaction cost, and back on the October 10th guidance for the optical amplifier business, again, predicated on the expectation that that business will close on November 1st, and we would include them for eight months of our fiscal year. We thought that business would be pretty much neutral to earnings and would not impact earnings, even when we considered the transaction costs. I am saying both of those right now are pretty much right in the same range. I don't think we have really changed those drastically. Obviously, one of the things that influences those ranges is the allocation of the purchase price, and what goes to which buckets as far as items that are either depreciable or amortizable. But for right now we think both of those initial ranges, not only for the EPS ranges, but also for the revenue ranges we gave for those businesses, look like they are pretty solid, looks like there are not any significant changes there.

Thank you. I will step off for now.

Thank you. (Operator Instructions). Our next question comes from [Brad Moss] for Needham.

Hi, this is Brad filling in for Jim, how are you?

Hi, Brad.

First off, in terms of the total revised guidance, which includes the two Oclaro acquisitions. Can you say if there has been any changes to the full year guidance to the core business you provided after Q4?

There has been just a little bit there, Brad. I would say maybe to dovetail on some of Fran's comments, we have seen a couple of areas where it has been just a little bit lighter, and we would point out maybe in our advanced products group, just a little bit lighter than what our original expectation was, and to a lesser extent, a little bit softer in our HIGHYAG business. I think those are the two businesses we would probably point to, but really not anything drastic from the original guidance that we gave back in August, but we have touched that up and thought through that a little bit further with today's release.

In the early part of August in Q1, you eluded to strong order momentum in the infrared optics business. Did you see this slowdown in the last two months of the quarter?

Not really in the last month of the quarter, it has been down somewhat, and I think just what Craig said, because we consolidate and report the IR optics including our HIGHYAG group, we put the little slowdown in the IR optics business along with HIGHYAG, that is where we are seeing a slowdown.

Okay. Then just lastly, regarding the US government shutdown. How were military bookings leading into the shutdown, and during and since? Are you seen any disruption in the business?

I wouldn't claim anything associated with that. However, we are just a little bit off on our military as we look out into the future, just a little bit here in the third and fourth quarter, a couple of our programs that we were hoping to get shipping on and they are saying, no, we are not going ship right away on that program the I mentioned earlier, the IR First program.

There is no change in your expectations for modest growth and improving profitability this year?

No, on the core business, correct. I don't want to say no. It is a slightly lighter forecast for the core business, but not a big one.

I was referring to just the military?

Oh, okay, military. We built into the good guidance just a little bit lighter, that is what I would say. I think to give a good overall comment, we told you the numbers in all four business segments in the past. Now we have a fifth one, but before we were talking about just a touch down on each one of them with the major being the two that Craig said.

Okay, great, thank you.

Brad, to your specific comment, I think back to Fran's point just to clarify. We are expecting growth within our military sector as well.

Oh yes.

Okay, thanks, guys.

Thank you. We have a follow-up question from Avinash Kant from D.A. Davidson.

Clarification. So the fiscal year 2014 guidance that you have given, Craig does it include like $0.15 in earnings Q1, or $0.21 in earnings in Q1?

It was obviously on the GAAP basis there, Avinash, off of the 15% that we reported, so both, that was on a GAAP basis, the $0.15, as well as our earnings per share guidance in our outlook section of the press release was also on a GAAP basis also. I didn't mean to confuse you on that point. I was trying to help our listeners reconcile back to including or excluding the impact of the recent acquisitions in there.

Do you have an idea how much will be in the transaction related expenses in the December quarter, how much should we--?

It will not be anywhere near as significant as what we reported during this quarter, Avinash again, for this quarter, bottom line tax effected, it was $3.3 million, or $0.05 of EPS. It will be a much smaller number than that, but it will be maybe a penny or so of an impact, something like that.

Perfect. Thank you so much.

Thank you. Our next question comes from Dave Kang from B. Riley.

Good morning. Sorry I joined late, but Fran, I think were you talking about fiber to the home or maybe pawn, and then you said something about it being slow. Can you just go over that, please, once more?

I will have Chuck answer that a little bit clearer probably than I can.

Good morning Dave, this is Chuck.

Good morning.

Hey, Dave. Yes, so overall, I am not sure when you cut in, but overall the business at Photop is moving right along, and quarter-over-quarter it will be roughly the same, but the comment that Fran made earlier was regarding our FTTH filter business, revenues were so off due to broadband China. Pushoff has been a little delayed, as you know we are a major supplier of fiber to the home filters for the passiveoptical network, and I think it is just a timing issue on broadband China.

So that is in the December quarter, you expect that to be down then?

Yes.

Okay. Alright. And then just the manufacturing transition timeframe from Oclaro as a CM to Photop. Can you give us a time frame? Are we talking a couple of quarters, one year?

I think it is very hard for to us give you that right now, just because we are about to close on the amplifier business, which is not really involved in the move of that facility, but all of the components, the pumps and the parts that we need to move throughout Asia. We are targeting to pull a tighter plan together, and we don't have as tight of a plan as I would like to report right now, so I have to keep it kind of open.

Okay. And then you have a bigger position in the optical component industry. What kind of pricing negotiation or pricing adjustment should we expect in the December/January months, when you start to negotiate for your optical components?

Dave, we won't make a comment about that now either. It is premature. You are right, the industry and all of that pricing has to be worked, but we won't make any comments about that today.

Okay. And then maybe Craig, can you give us like a CapEx plan for the near-term?

Sure. I would say that the quarter just completed where we did, where we had CapEx for the quarter, now this number only included just obviously that first 19 days of the laser enterprise acquisition, the quarter that we just completed, we were able to, we showed a little bit more than $6 million, $6.5 million of capital spending, that will pick up a little bit from that rate. That will pick up probably more into the $8 million-ish per quarter. Some of it is dependent upon how quickly some of these decisions that we make relative to the manufacturing, a little bit of an answer to your prior question that we can give is, what we decide as far as where we will manufacture, that definitely will drive some of the capital spending, but I think overall with our two new businesses added in there, the run rate around the $8 million level is probably a good place holder I think for each quarter of the rest of the fiscal year.

Okay. The last question is for Chuck. Obviously, you made some acquisitions, asset acquisitions, but you are still present on the transmission side, is that something that could be apart of II-VI going forward, not now but in the future?

Dave, I would say that we will make the best use of our technology platforms and the best way to serve our customers.

Okay.

We are focused, we have got a lot to do to integrate the businesses that we have, but we are thinking about our acquisitions more in terms of platforms, and how they might be able to evolve into products over the future.

Got it. Thank you. Good luck.

Yes. Thank you.

Thank you. I am show no further questions at this time, gentlemen.

If there are no more questions, we would like to thank for participating today. Our next earnings release for the quarter ending December 31, 2013, is currently scheduled for Tuesday, January 28, 2014 before the market opens, with a conference call to follow that same day at 9 AM Eastern Time. Thank you for participating in today's conference call.

Ladies and gentlemen, thank you for participating today's call. This concludes our program. You may all disconnect, and have a wonderful day.