II-VI Inc (IIVI) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the II-VI Incorporated fiscal year 2015 third-quarter earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Ms. Mary Jane Raymond, Chief Financial Officer. Ma'am, please begin.

Thank you, Liz, and good morning. I am Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our third-quarter earnings call for fiscal year 2015. With me today on the call is Francis Kramer, our Chairman and Chief Executive Officer; and Dr. Chuck Mattera, our President and Chief Operating Officer.

As a reminder, this call is recorded on Tuesday, April 28, 2015. Any forward-looking statements we may make during this teleconference are given in the context of today only. We do not undertake any obligation to update these statements to reflect events subsequent to today. With that I'll turn it over to Fran Kramer.

Thank you, Mary Jane; and thank you, everyone, for joining us. We had a solid quarter. Revenues of $182.7 million grew 5% over the third quarter of last year and 3% sequentially. All growth this quarter was organic.

EPS was $0.23, inclusive of $0.015 negative currency effects as well as restructuring costs. The laser solutions segment revenues of $73.3 million grew 16% compared to the third quarter of FY14. The operating margin was 19.2% compared to 6.3% in the third quarter of fiscal year 2014.

On the photonic segment, revenues of $64.3 million grew 10% compared to the third quarter of fiscal year 2014. And the operating margin was 0.9% compared to 0.3% in the third quarter of FY14 and includes the cost of restructuring actions, including consolidation of certain facilities which will continue to help the margins improve in fiscal year 2016.

In the performance products segment, revenues were $45.1 million and declined 6% sequentially and 13% compared to the third quarter of 2014. This was primarily due to lower demand in both the military and the semiconductor capital equipment markets. As a result, the operating margin of 6.7% is lower than the first half of fiscal year 2015, which averaged 8.4%.

However, we are continuing to have very good customer interactions. In fact, the book-to-bill revenue ratio in this segment was 1.13% for the quarter.

Amid a number of crosscurrents, we made a lot of progress this quarter -- especially in laser solutions, where many of our new products gained share and our existing products continued to make meaningful contributions. Across the Company our people are all engaged in continuous improvement plans to increase our momentum and as we monitor worldwide activity for signs of economic volatility and currency movement so we can react accordingly. I'll now turn the call over to Chuck to discuss some operating highlights.

Thank you, Fran. In the laser solutions segment, the sequential revenue increased 8% from Q2 to Q3. Though there is some seasonal inventory replenishment in these results, the real progress following a strong Q2 was due to very good execution by our operating teams to satisfy the growing demand for product throughout the segment.

We believe that CO2 laser utilization in the North American market remained strong in Q3. While we are aware that the growth in new, high-power CO2 laser deployments continued to be impacted by the adoption of the fiber laser, the utilization of the high-power CO2 laser installed base remained solid worldwide. And in addition, low-power applications continue to grow.

For example, low-power CO2 laser optics revenue increased 13% over Q3 of FY14. We had strong growth in the quarter for fiber laser welding heads and other high-power products for automotive applications. High-power fiber laser cutting applications also continued to drive demand for HIGHYAG products. In addition we experienced continued strong demand for our industry-leading high-power laser optics products for extreme ultraviolet, or EUV, applications. We are encouraged by the industry news of a recent order for 15 EUV systems and look forward to continued growth from this market segment.

In Europe, Q3 bookings and revenues increased from Q2. Demand for our CO2 laser aftermarket products were strong throughout the region, and our EUV customer continues to take as much product as we can currently deliver.

Turning to Asia, the material processing market continues to be a growth area for us in Japan, China, and Korea. China is moving the fastest towards the adoption of fiber laser technology. We are fielding increased inquiries around low-cost and low-power optics and are adding capacity to address additional demand from the region. We are committed to further increasing our market share in the low-power market, which is heavily weighted in China. There is strong competition there, too, and so we are adding resources in the region to better service our customers.

Laser diode shipments continue to be strong and margins have increased for both our high-power laser diode assemblies as well as our high-volume components, largely VCSELs. Several next-generation laser diode products are in various stages of development and qualification that target near-term and longer-term growth opportunities. We have started an aggressive plan to add capacity; retool our manufacturing lines to increase automation and increase our yields; and bring critical processes in-house, where we can control the quality and cost structure.

Across the Company our operations in both laser solutions and photonics are driving our growing position in the 1 micron laser and related products for industrial materials processing applications. Revenues in Q3 were a record, and up over 10% sequentially and up nearly 50% over Q3 FY14.

In our photonics segment sequential revenue growth was 6%. During the quarter we experienced increased demand for optical filters for data center and life science applications. Market demand was also strong for our optical communications components and modules for CATV networks as well as for our high-reliability pump lasers for submarine networks.

However, we continue to experience softer-than-anticipated demand in amplifiers for optical transmission systems due to delays in new network deployments by our main customers. At the annual OFC Conference in March we demonstrated multiple new platforms, with a particular focus on applications for the high-growth 100G coherent transceiver market, such as tunable filtering and compact amplification.

The value of these unique solutions, enabled by our unmatched vertical integration, was recognized by multiple Tier 1 customers and carriers. We continue to invest in key products to support the ever-growing bandwidth trends in data center and cloud applications, including the development of 40G and 100G transceivers.

In order to better serve our key customers, increase our global market share in critical growing segments, and to further improve our competitiveness and profitability, we have streamlined resources and operations in our optical communications group. Mary Jane will discuss this further in her section.

Our dedicated and focused efforts on our key customer engagement programs over the past 18 months has resulted in increased RFIs and RFQs and associated design-in activities. New product sales from these programs are expected to phase in gradually over the next 12 months.

Finally, in our performance products segment, we saw sequential bookings and revenue declines of 4% and 6%, respectively. The reduction in bookings in this segment was primarily driven by delays of legacy military programs and technical challenges on new programs in our military business.

The decline follows a quarter where military bookings were up sequentially but still reflects that defense spending on products in our portfolio remain flat and difficult to forecast. However, most of the FY15 delayed military bookings are expected to be recovered in Q4, with only some programs shifting to the next fiscal year. While military bookings were down in Q3, we did receive additional orders in March for sapphire windows for the F-35 Joint Strike Fighter, with a requirement of accelerated deliveries over the next fiscal year.

Elsewhere in the performance products segment, advanced materials bookings were up significantly for our high-quality silicon carbide substrates due to continued strong demand in the RF and power electronic device markets. The RF product increase is being driven by demand from the continuing growth of 4G wireless base station deployments around the world. And demand is also growing for our 150-millimeter substrates at power electronic device OEMs, who are planning to migrate to 150-millimeter platforms.

Additionally, in our silicon carbide ceramic business, we experienced a sharp increase in orders for semiconductor capital equipment applications. We are expecting the semiconductor demand to continue to improve as we move into FY16.

I will now turn it over to Mary Jane to walk us through a review of our overall financial performance. Mary Jane?

Thanks, Chuck and Fran. Our third-quarter book-to-bill ratio was 1.07%, and that reflects a new backlog record of $241 million. This compares to last quarter's backlog of $228 million. This $241 million consists of $72 million in laser solutions, $62 million in photonics, and $107 million in performance products.

The currency effect on our revenue was almost $5 million. The euro falling nearly 12% from December 31 and growth in our businesses at HIGHYAG in Berlin and Laser Enterprise in Zurich, both of which have euro-based revenues, really changed the profile of our currency exposure in Q3. The effects were more muted on the EPS, since nearly all of HIGHYAG's costs are in euros. And we have reduced the exposure on the intercompany short-term loans since the beginning of this fiscal year.

Despite the currency effects on revenue, the gross margin of 36% improved 450 basis points compared to the third quarter of last fiscal year. The year-over-year margin increase is all operating improvements, particularly in laser solutions.

The operating margin of 9.7% improved 470 basis points compared to last year's quarter. This is also the result of operating improvements, with the majority of the progress in laser solutions.

For example, at Laser Enterprise, last year's acquisition, the fab is increasing its yield and output, partially from increased demand for pumps in photonics and is generating materially improved margins as a result. The adjusted EBITDA margin percentage of 15.8%, which excludes the $7.6 million of income from the settlement we discussed last quarter, improved 220 basis points over the year-ago quarter.

The material difference between the improvements in the operating margin and those in the EBITDA margin is found in the non-operating expenses this quarter. The EBITDA margin includes $1.9 million for a trade name write-off in our photonics unit, $600,000 negative currency effect from balance sheet items, and $400,000 for vesting of stock for employees who reached the age of 65.

The trade name and vesting are one-time items, and they affect the EBITDA margin about 125 basis points. With the negative one-time items included, this margin may be a little bit challenged on the 250 basis point improvement; but nonetheless, the operating margin, which does not include these, continues to do very, very well.

The trade name is part of a larger set of restructuring actions we took this quarter, totaling $3.2 million, all included in the results. One set of actions is for the consolidation of our military-focused operations into the California location. We incurred $340,000 this quarter, primarily for people and equipment transfers. In the first half of fiscal year 2015, we incurred $380,000, which was primarily for severance. The other set of actions is for the optical communications group in photonics, where we are streamlining the number of locations and aligning similar types of work together.

The total charge this quarter for OCG was $2.9 million, the largest component of which was this $1.9 million write-off of the intangible asset that was recorded for these trade names, Aegis and AOFR. While we still leverage those good technologies, we no longer use the trade names. We also incurred $250,000 for severance this quarter and $700,000 for other asset write-offs, with no charges in the first half of fiscal year 2015 for these OCG actions.

Just to finish on restructuring, in the fourth quarter our outlook includes costs of $2.4 million. For OCG we expect to record between $600,000 and $700,000 for severance and $1.2 million in lease terminations and other costs. For the military-focused operations, we expect to record $600,000 in the fourth quarter for the completion of the move to California.

Turning to EPS, the EPS in this quarter was $0.23 and includes the effects of currency restructuring and the trade name write-off. The EPS year to date is $0.67 without the $0.11 of the favorable settlement we discussed last quarter, and at $0.67 has already surpassed the EPS of last year of $0.60 for the whole of fiscal year 2014.

Turning to our cash and capital expenditures, our cash flow from operations was $36 million this quarter compared to $13 million for Q3 of last year. Year-to-date cash flow from operations is $86 million compared to $69 million last year year-to-date. We paid down $2.4 million of our debt this quarter, bringing our debt level to $188 million.

With $155 million in cash, our net debt position is $33 million net debt, a reduction from $57 million net debt last quarter. We repurchased $1.4 million of stock, or about 82,000 shares, for an average price of $17.60. Our share buyback year to date is $12.7 million compared to $11 million year to date this time in fiscal year 2014.

We invested $8.6 million in capital equipment this quarter. We expect to invest about $45 million altogether for fiscal year 2015 on CapEx, not including the $13 million for the purchase of the building in Germany during the first quarter. Our equity-based compensation in the quarter was $3.6 million. For the full year we expect the equity-based compensation to be $12 million to $13 million.

Our year-to-date effective tax rate was 13.6%. We had about $1.5 million in a FIN 48 release this quarter. We expect the year's tax rate to be between 14% and 16%. This range compares to last year's rate of 16%, which also benefited from the R&D tax credit.

Turning to our revenue outlook for Q4, we expect revenue to range from $185 million to $193 million. This compares to $187.9 million for Q4 of fiscal year 2014. Our EPS is expected to range from $0.20 to $0.24 per share, inclusive of $2.4 million in restructuring, and that compares to $0.20 per share in Q4 for fiscal year 2014.

This is all at prevailing exchange rates. Our forecast internally anticipates the exchange rate for the Swiss franc, the yen, the RMB, and the euro to be stable at the end of the third quarter to the level at the end of the third quarter.

Before we open the line for questions, our fourth-quarter earnings release date is slated for Tuesday, August 4, 2015. This concludes the prepared remarks. And as we turn to the Q&A, I'll just remind you that our answers to your questions may contain certain forward-looking statements which are based on our knowledge today and for which actual results may differ materially. So with that, Liz, if you'd like to open the line?

(Operator Instructions) Jim Ricchiuti, Needham & Company.

Just a question on the consolidation of the facility in Florida into California. Where are you now on that? When do you anticipate that being completed?

So the military action to consolidate the facilities actually began in the first quarter. We always expected the second half to be the more material part of the charge with respect to movements and equipment. So as I mentioned, we had about $300,000 and change of restructuring this quarter, and we'll have in the neighborhood of $600,000. So I'd say we have begun the move. And we'll then begin to settle the things in place -- move the final things, get them up and qualified, in the fourth quarter.

And so as we look out to the September quarter, you should be fully operational there?

I think we will be 80%, 90% operational. We'll try to get it all done in June, but there will be some little lags that will come in in July. So we'll have some first quarter, but not a big deal.

Yes. I think the main things that will happen into the first fiscal quarter are product qualifications for things in the new location.

Okay. And just if I could just switch gears for a second, it looks like within laser solutions, you are seeing very good business overall in HIGHYAG -- as well as, it sounds like, in parts of the CO2 business. I wonder if you can comment just in general about your fiber exposure with HIGHYAG?

I think -- as we mentioned, I think we are making very good progress on the HIGHYAG acquisition. They have had, really since the fourth quarter of 2014 year, increasingly improved quarters. We continue -- as Chuck said, we continue to see that business growing sequentially. We see it growing quickly year over year.

The team is not only very engaged -- it's done a very good job, as Chuck mentioned, last quarter; but I think increasing their yield, increasing their market penetration, increasing their reach outside of Germany. All around, I think we consider that the position that we are building in the aggregate 1 micron business, both from HIGHYAG and other parts of the Company is actually good and growing. Do you want to add anything, Chuck?

I would say that we are aligned with all of the key OEMs in our addressable market. And the interest is now also spilling over into China. So I would say the demand and the enthusiasm for our products remains high.

What is this business growing at? Can you say?

Well, I think Chuck did say.

I may have missed it -- I apologize.

No, no, no. It's really fine.

I think, Mary Jane, if I could -- I think maybe a better way, because we like to keep it up at the segment level as much as we can -- but I think we were addressing a question that we had received last call, which was -- how much of our total Company revenues were focused on the high-power 1 micron laser market for industrial materials processing.

But I made some comment today on the call about how that business has grown. I could add to it, just in terms -- give you a feel for it today, that roughly 15% to 20% of our total sales across the Company are into this 1 micron high-power laser market.

Okay. That's helpful. And then, presumably, a year ago it was a good deal lower. Is that -- I'm trying to get a sense -- you know, it sounds like this is becoming a bigger part of the business.

I gave a reference point, Jim, in my prepared comments that compared to the third quarter of fiscal year 2014 that those revenues have increased by about 55%.

Yes, Okay.

And up 10% sequentially.

Got it. Okay. Thank you very much. Thank you.

Before we take the next question, let me just correct one thing I said. I had talked about the debt being paid down at $2.4 million. In fact, obviously, as many of you already detected, we paid down $24.5 million of our debt in the third quarter. So, sorry. There you go.

Mark Douglass, Longbow Research.

Fran, I may have missed it -- well, I probably did miss it -- on some of your discussion on performance products. It's nice to see the book-to-bill still high, but bookings and sales keep trending lower. I think you said some of the softening is because of -- well, a lot of it is in defense. Could you just go into that a little bit more?

I made the comment that it's split -- military and semiconductor capital equipment, Mark. Both had been slower in the quarter. Book-to-bill was 1.13%.

However, we have a few good news things, certainly. And I think Chuck mentioned it -- this order we took [a little late] in the quarter, Joint Strike Fighter -- additional add-ons there, which was good. We have a couple others that look promising here coming in the first quarter.

So military is doing just as we said. It's been delaying, and we keep on it. The semiconductor equipment business is at a down point right now. That is forecast to gradually come back, but it won't be heavy in the first quarter.

When you look at your semi-cap equipment business, does it lead or lag some of the more visible data, like the semi data, like by a quarter or two, or by a few months? Or how can we think about your semi-cap equipment business relative to some of the larger data that's available?

Mark, this is Chuck Mattera. I would say that this is relatively new business for us. We've been watching it for a couple years. We are getting to know the marketplace better. We are paying a lot of attention exactly to that kind of an insight -- or an insight that could be derived from that. I would say, based on the latest sets of SIA book-to-bill results that are published every quarter, it would appear to me that we may be lagging one to two quarters.

Okay. That's helpful.

That is a current view. And you've got to remember that that market is a huge market.

Right, yes.

And we have very important niches in that market. Maybe that's about all I could say. Okay?

No, that's helpful. And then looking at photonics, still struggling on the margin line. What's necessary -- what has to continue to move forward to get at, say, mid-single-digit-type margin level? Is it really a volume effect at this point? Or what kind of steps of further integration are still required to get photonics up and moving?

Well, first of all, let's be clear. In a company like ours that's vertically integrated, volume always matters. So that certainly helps.

I would say that probably the biggest challenge that we are now tackling very aggressively -- and I would say that the team has been tackling over the last year -- is really dealing with the little bit more far-flung nature of the places in which the product development is done and also the manufacturing footprint around the world.

So the consolidation actions that we took with more vigor this last quarter are really designed to bring the product development team to similar products in closer proximity; to really look at the list of new products that we are working on and be sure that we are really optimizing the resources in the right place to maximize both the time-to-market advantage as well as where we think we have a competitive advantage; and finally, from a location point of view, just really looking at the number of places that we are doing things to be sure that we are not losing time and efficiency just in the communication around the world.

I think that the photonics team has worked very, very hard on this. And I think that as we continue to improve, including improving the efficiency in the fab in Zurich -- that has the potential to have synergistic effects, as well, on the photonics unit as we go into next year.

Mark, I'll just add to what Mary Jane had to say. And certainly, it has to do with pricing. And as we fight to raise prices, we run the risk of losing volume. And you have to know that's going on, because the difficulty in that business is -- how do you get the margins up quickly, volume, if it doesn't arrive?

So we have had and we are continuing to work on the pricing. And we missed an order or two that we counted on because of that. That might slow the rate at which we can increase our volume, but that's our strategy.

Okay. Part of your strategy, too, was being seemingly more vertically integrated in that division, particularly the telecom side, right, so you could actually see improved pricing. Is that still a ways off?

We are still working at it. But to say that we've realized those synergies to the extent we'd expected -- not yet, because it's a long pipeline to get our own components in and approved before we can really start producing in volume. So we're in the pipeline of trying to move our components in, but it's a little longer than you might think.

Okay. So another at least year, maybe two years?

I wouldn't go as long as two years, but --

Okay.

-- but we are trying to set up different facilities. So the move from where we've been to other facilities, it takes time. And then qualification at the new facilities -- so it's lengthy.

Okay. And then final question on your high-powered diodes out of Zurich -- are you seeing orders outpacing sales? Is it still growing nicely?

I think it's growing nicely, but I wouldn't say orders are outpacing sales. We have the capacity to do this little gain that we've had in this past quarter, and we can take on some more gains.

We do have -- our fab, as we call it, in Zurich drives and produces not just for the HPLs, but also for the 980 pumps and so on. So our capacity is nicely utilized. We can handle more, but we are kind of monitoring that, too, because every time we have to ramp up a little bit -- we haven't taken setbacks, but we are leery of that.

Okay. So most of the strong demand you spoke about in your 1 micron high-power fiber is driven by HIGHYAG?

No, no, no. We have them in the semiconductor laser side also.

Yes. Mark, it's made up primarily of HIGHYAG products, a chunk of the laser enterprise business and also from our Photop business inside the photonics segment. Those are the three -- and also in infrared optics, as well, we have a suite of high-power 1 micron components, even from the infrared optics [reference]. So we are addressing it, but if you ask the bulk of it, I would say HIGHYAG, laser enterprise, and Photop.

I think, Mark, if your question is also really around just book-to-bill in the Laser Enterprise group, it continues to be good. I mean, I think we are doing -- actually the team there is doing a very, very good job on the yield and the output to meet the demand. That's obviously materially up since last year.

So it has not reached the point, I think as Fran was asking, that the orders are so outpacing what we can do. Not at that point, certainly. But the best news is, over this last year, regaining customers that had been lost in the prior year and being able to serve them.

Okay. Thanks. Appreciate it.

(Operator Instructions) Ted Moreau, Barrington Research.

Thanks and congrats on another solid quarter, guys. Just kind of wanted to follow up on a couple of previous questions.

Can you remind us on the -- where you had the semiconductor capital equipment exposure? I know on the laser side, you are tied into the EUV programs. But then what kind of exposure do you have on the performance products group? Is it more like front-end, 16-nanometer, 14-nanometer type of leading edge node equipment? Or is it elsewhere within the semiconductor equipment space? If you could comment on that.

Okay, Ted; this is Chuck Mattera. For sure, EUV is a good place to start. It's an important place to start for us. Our next is -- and for EUV we are making at least four different components for EUV. And we are providing them through the infrared optics business as well as the M Cubed business in our advanced products group.

At M Cubed they are also making precision ceramic components for wafer stages, wafer tables, electrostatic chucks, and defectors for the backend. And there, the normal ebb and flow for the existing products in the marketplace and the growth in those products is what's pulling us along in that segment.

Finally, in our military materials business, part of our strategy to diversify and to leverage the competencies that we have developed in precision optical assemblies over the years in that group -- we are also leveraging, highly, opportunities that exist today for precision metrology equipment, including for existing 300-millimeter -- and in the future, 450 millimeter -- applications.

And maybe just to close on that, in our Photop group, Photop are also the key supplier to the semiconductor capital/metrology equipment makers that are the leading makers in the world. Okay?

Yes. That's helpful. Thank you for that. So given the EUV announcement last week, is there any way to get a feel for the magnitude of how it could impact you guys from a revenue perspective and what the time frame could be of that?

That's pretty hard for us to flow down. You know how there has been such a start and stop on EUV in the time and the delay. But we really probably shouldn't try to speculate on that at this moment, but as more of the news of that unwinds in the next two or three quarters, we'll share it if we get it. But we can say we are well tuned in on the EUV machine itself, and -- just what Chuck said. Critical components, the three or four that we make, they are critical for the machine.

Okay. Thanks. And then one final question, and then I'll switch gears. But is it primarily -- your EUV exposure primarily one player? Or are there other players in that market that you are benefiting from?

Mostly from one. That's for sure. Everybody knows that leader. But we do have some front-end tools -- people that we supply to and another person in the bigger space.

Okay. Thanks. So on the photonics group -- I've been under the impression that one of the drivers of possible margin expansion there is pending the introduction of several new products, but I may not have caught it here. Is that still a significant driver for margin improvement? And if so, could you give us a time frame on when you believe you'll be introducing these new products?

Ted, this is Chuck. For sure new products are the lifeblood of the business, and that's both for sustained revenue growth as well as for profit improvement. At OFC I think you maybe were aware and saw a suite of new products which I referred to today, including our OTDR modules that perform optical time domain reflectometer measurements in both the central office and outside plant, allowing carriers to reduce OpEx and bring up advanced networks reliably.

We should start to generate revenue from prototypes in this current quarter, and we expect the production revenue would begin to kick in by the end of the first half of next year. And as an example, I would expect in FY16 it would be a low single-digit million dollars of opportunity.

On tunable optical filters that we talk about, this is a very compact -- in fact, it's the smallest tunable optical filter in the market. It dramatically reduces the noise from erbium-doped fiber amplifiers -- that is the amplified spontaneous emission noise. These products, or these tunable optical filters, will be used in CFP2 100G transceivers.

Lead customers have already designed them in and qualified. We expect limited prototype revenue in the next couple of months. And again, we might expect by maybe the second half of 2016 to be on the low single-digit millions a year run rate.

Regarding our high-power pump lasers, we will be launching in a couple weeks -- that means next month -- the industry's leading 1-watt 980 pump laser, which has the lowest power consumption, the highest power output. And we expect that EDFA manufacturers will be quite interested in designing those in. We expect that even though we'll launch it beginning sometime in May that in FY 2016, again, low single-digit millions of sales in 2016.

We demonstrated the new nano-amplifier platform for next-generation optical amplifiers. That platform that you probably saw at OFC generated a lot of interest and a lot of enthusiasm by both OEMs and some carriers. That's a platform. The products that we built based off of that platform -- we will not be able to generate revenue in 2016, but we expect the revenue will come in 2017 based on both completion of the platform, getting it ready to manufacture.

So I tried to give you a sense for some of the things that are happening. Of course, in our existing optical communications business, new products with new specs -- high-density array iridium-filled fiber amplifiers and the like -- these are considered and expected by our customers to be rolling. As part of the price we are keeping the revenue where it's at and being able to grow it. So it's kind of a replacement as well as a growth, if you will. I hope that gives you a feel, Ted.

Yes. That was very helpful. Thanks for the color on that. So final question, Mary Jane, just wondering if you could provide us an update -- are you keeping margin targets that you have previously disclosed for fiscal 2016?

They've been out for a while. I think we may take the bottom end down a little bit just to overlap more with the end of the 2015 range. But having said that, we continue to have improvement in our margins -- you know, an important part of our ongoing strategy.

Okay. And by taking down the lower end just a little bit, is that partially because of the currency issues that are out there? Or is it not really related to that?

It is partially because of the currency. On the last call, when we talked about currency, I said that's not really a huge exposure for us. And it historically has not been.

But some of our most recent acquisitions -- that are also going beautifully and adding to our product portfolio going forward -- do have more euro-based revenue than we are used to and, as I say, has changed the margin profile. So the currency is the main driver, yes.

Okay. Helpful. Thank you very much and congrats on the great execution.

Jim Ricchiuti.

You gave some color on bookings in Europe being up. I wonder if you could just talk in terms of what you are seeing in the various geographies, just from a demand standpoint?

Jim, are you talking about the whole Company, or are you talking about --?

Just in general, Chuck, yes. Just because you guys are so diverse, and you've got exposure across so many different markets -- this is just more of, I guess, a question from a macro standpoint of what you are seeing out there. And if you want to tie it into any specific vertical markets -- but just -- you mentioned that Europe was strong from bookings. Where was that being driven from? Primarily the industrial area?

Yes.

The comment Chuck made was in laser solutions (multiple speakers).

Yes. I could take a -- we certainly don't have a report today with our revenues broken out by region, but maybe just qualitatively I could take a shot at it --

That would be helpful.

-- if Mary Jane would like to. I would say that -- US, we have -- for our broad industrial base, it has a feeling of being strong. And so I would say US strong bookings for the business.

I would say in Europe, as I already mentioned, strong. Not exactly sure, but it seems that a lower euro maybe make some products more competitive in Asia. And that could be part of what we're seeing. But for sure, there is strength in Europe.

And Japan is strong. And I would say that's broadly across the Company and virtually in all markets that we are playing there -- industrial, communications, semiconductor capital equipment.

And in China -- China is an interesting place. I would simply say that both from the communications, from the industrial market that we've already reported, the fiber laser market seems to be -- continued super-hot, even though there may be some indications of it being a little less hot than it was 12 months ago. There seems to be on every corner somebody else turning up with either a fiber laser or a direct diode laser business. With the team that we have based there, we are pretty efficient at tracking and addressing their needs.

Great. That's helpful. Thank you.

I'd only add one more comment to it, and it's not a big deal. But certainly in our wide bandgap materials group, a big portion of our business right now is headed into Japan. And that business feeds the base station business, which has seemed to be doing some build out in China. Nice business for us right now.

Thanks, Fran.

Zachary Rodenbough, Sidoti.

I just have a question about the dynamics of the laser solutions operating margins. You might've mentioned this already, so sorry if I am repeating it.

But you have mentioned increasing pricing competition for the fiber products, specifically in China; but you've continued to grow margins up near 20% in this segment. Are these levels -- are you seeing these levels as being sustainable to the laser solutions group? I guess my real question -- are you expecting cost reductions here for these products to kind of continue to outstrip these pricing pressures?

I think it's a tricky question, and our answer is -- because we've changed our product mix somewhat. When we started with that business, we had a product we called a BMU that was built into some custom solutions and now we've gone more toward a standard product.

And the standard product -- it's going to be better for us. We won't be having the different batches of production that we had. But that's there. And at the same time, the foundry that we operate or the fab that we operate -- as we get more volume, it does generate a better margin picture. And we expect that will continue.

Okay. Yes, I'm not looking for a committal to any number. Thank you.

Ted Moreau, Barrington Research.

Just a quick question on the wireless base station business. You mentioned or referenced it's doing pretty well in China. Are you shipping to China, or are the products going into wireless networks that are based in China?

And then just kind of curious -- is this a new program, and that's why it's doing well for you? Because it seems like some of the wireless infrastructure suppliers out there have been reporting kind of soft numbers. So if you could just touch on that.

Ted, I'll take that. Our silicon carbide substrates enable high-performance, high-frequency, high-power, high-reliability gallium-nitride-based HEMT devices. Those devices go head-to-head with silicon LDMOS in this wireless base station market. And they have a value proposition which is allowing -- this is our understanding of the market dynamic through reading about the industry reports.

Our understanding is that the value proposition for price and performance are allowing the wide bandgap electronics to penetrate the existing market, which is growing. But our understanding is that wide bandgap electronics are penetrating the market and growing considerably faster than the SAM is growing. So it's kind of a -- we believe that our customers are in a position to be taking share from legacy technology LDMOS.

That's one theme. The other theme is 4G wireless base station growth continues. China is a hot market for it, but there are other markets that are expected to follow in their growth. Our understanding, again, from industry reports is that we could expect both India, Africa, and even Latin America in the next couple or three years to follow a similar trend. Okay?

Okay. Great. And so then your customers are based in China, or your customers are --?

Our customers' customer is in China.

Okay. So -- and network deployments are in China. Okay. Got it. Thank you so much.

I'm showing no further questions on the phone lines at this time. I'd like to turn the call back to Ms. Mary Jane Raymond, Chief Financial Officer, for closing remarks.

All right. Thank you very much for joining us today. I'll just give it to Fran for closing comments.

Thank you, everybody, for joining us. And we look forward to meeting again in the next quarter, which will be the end of our year, which -- we will complete a very good year, we expect. Thanks.

Thanks again. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone have a great day.