II-VI Inc (IIVI) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the II-VI Incorporated fiscal 2016 fourth-quarter conference call.

(Operator Instructions) As a reminder, the conference is being recorded.

I would now like to hand the floor over to Mary Jane Raymond, Chief Financial Officer. Please go ahead.

Thank you, Karen, and good morning. I am Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our fourth-quarter earnings call for fiscal year 2016. With me today on our call is Francis Kramer, our Chairman and Chief Executive Officer; Dr. Chuck Mattera, our President; and Gary Kapusta, our COO of six months, whom we warmly welcome, and our finance leaders.

As a reminder, this call is recorded on Tuesday, August 2, 2016.

Any forward-looking statements we may make during the 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, let me turn it over to Fran Kramer. Fran?

Thank you, Mary Jane. Thank you, everyone, for joining us. 2016 was a big year for II-VI Incorporated. We had record bookings and shipments as well as margin improvement contributed by all segments. Photonics specifically had another record quarter in bookings in revenues. Their progress validates the value of the strategic acquisitions and R&D investments we have made in the last few years.

As we discussed, we acquired two companies this year for $127 million. In June, we sold some of the commercial assets, including the legacy product lines, and one of those companies for $50 million and we entered into an agreement to supply the buyer with fabricated wafers.

This sale alone allowed us to significantly improve the cost structure of the former ANADIGICS. These two acquisitions significantly expanded our semiconductor laser capacity and laid the foundation for a broad optoelectronic product offering and expand the II-VI addressable market.

We believe this expanded capability positioned us well to supply components for the growing number of 3-D consumer sensing applications. Our fourth-quarter revenues of $241 million in non-GAAP EPS of $0.40 per share were above the high end of the range issued on April 26. Our GAAP EPS of $0.23 per share includes $0.17 of operating losses and one-time charges associated with our acquisitions, the sale of the commercial assets, and the resultant restructuring at the former ANADIGICS.

I am excited about the long-term growth prospects for II-VI, so in fiscal year 2017 we will increase our R&D and capital investments. Our corporate wide R&D spending is expected to grow to $23 million to $25 million per quarter, and our capital expenditures are expected to grow to also about $25 million to $30 million per quarter.

We believe these investments will position us to be a competitive market player in several large and growing markets over the next few years. Our investments are already underway.

As I indicated in the press release, I am pleased to announce that our Board has appointed Dr. Chuck Mattera to be our next CEO with his appointment effective September 1, 2016. It is most effective to draw a highly qualified successor from inside the organization and Chuck has the right experiences and skills gained cumulatively within II-VI and his prior leadership positions outside of the Company.

Chuck represents the next generation of leadership that will chart a continued and renewed philosophy to grow II-VI. As a leader, Chuck knows the constant challenges of executive life as he has displayed by always rising to the challenges he faces.

Chuck is up to the task, and I believe he will continue to build a stronger team and Company.

For my part, let me tell you I have really loved what I have done here for this period of time, which by most measures is a full career. I am grateful to our Board, our employees, our customers, and our shareholders for the privilege to have the opportunity to contribute at this level of leadership. It has been my honor to serve with the people who built this Company, many of whom are still here. I will continue to guide the Company as Chairman with shareholder and Board approval.

I believe in the Company and I believe in every person here as they take on the exciting mission and strategy that are before us. Chuck, would you take it from here?

Thank you, Fran. Our fourth quarter concluded an exciting year. Organic revenues grew 10% and organic operating margin grew 46% as we leveraged the benefits of substantially increased volumes, timely capacity expansions, new product introductions, our vertical integration, supply chain optimization and quality and productivity improvements. For fiscal year 2016, the composition of our revenue associated with our top three end markets was 36% into industrial, 36% into communications, and 13% into military.

On a regional basis, the distribution of our revenues was 46% from North America, 22% from Europe, 17% from China, and 15% from the rest of the world.

In our photonics segment, bookings were a third consecutive record at $106.5 million. Revenues were up 23% sequentially, and 38% over Q4 of last year.

This was led by key trends that strengthened about the year. The North American buildout of the Metro, cable TV and data infrastructure builds, the China broadband initiative, and the continued expansion of undersea networked deployments.

With the current bookings for Q1, we are confident that these demand trends will continue. Our products addressing these growing market segments include our industry-leading terrestrial and undersea 980 pumps, high performance optical amplifiers, embedded network monitoring modules, advanced passive interconnect solutions, and differentiated custom micro-optics and filters.

Again this quarter, we booked unusually long customer commitments for as long as two or three quarters out. Moreover, we continue to expand customer engagements and design wins on highly integrated solutions, including ROADM and amplifier line cards, multifunction subsystems and ultracompact low noise amplifiers for CFP2 and future CFP4 high-speed transition modules.

Looking forward to FY 2017, the increased bookings backlog and customer pool for our differentiated product offerings, give us increasing confidence in our ability to sustain good performance in revenues and profitability for at least the first half of our fiscal year 2017. We expect to continue expanding our capacity on certain product lines to meet the orders on hand, plus our own forecast.

Turning to the laser solutions segment, Q4 bookings include $12.1 million of bookings from recent acquisitions. Organic bookings grew 3% from Q4 last year after a strong bookings quarter in Q3. Organic revenues in Q4 were up 5% from last year's same quarter and up 12% sequentially.

CO2 laser optics sales were higher sequentially due to a steady aftermarket business and our increased market share in advance low-power optics. In fact, Q4 was a near-record revenue quarter.

We also had a strong quarter in Asia, driven by gains in sales of low-power optics in China and the stronger yen in Japan. The US was steady, but we continued to see softness in Europe. We believe CO2 laser utilization remains unchanged and we continue to be aggressive about the prospects of our further market penetration.

In addition to those CO2 laser market dynamics, we also had a record quarter for our 1 micron components for the industrial materials processing market. We continue to gain new cutting and welding business in Korea and China, as our new laser solution salesforce increases its presence and visibility in these markets.

Finally, we are focused not only on building the legacy businesses, but also on integrating the two acquisitions we made during Q3.

EpiWorks provides us with a differentiating 6-inch epitaxial wafer growth capability and ANADIGICS, now called internally the optoelectronic devices division, or OED, provides us a world-class 6-inch gallium arsenide wafer fab. These platforms offer an increase in manufacturing scale, and a time-to-market advantage that complements the related products we presently manufacture at [Laser Enterprise] in Zurich.

During the quarter, we began our integration process in earnest and, as Fran mentioned, we divested certain commercial assets that were at ANADIGICS and immediately restructured the business to achieve the benefit of the increased operational efficiencies. We believe that we have an excellent foundation on which to invest in the development and qualification of our 6-inch pixel platform. This will enable us to offer customers a time-to-market advantage with a scalable platform for high-volume applications, such as in the consumer electronics market.

Turning now to our performance product segment, revenues were up 8% over both last quarter and Q4 of last year. The thermoelectric products in the silicon carbide substrate materials led to sequential growth, while specialty optics and precision optomechanical assemblies for military applications led to year-over-year growth.

For our outlook for this segment, for fiscal year 2017, is positive. Similar to FY 2016, we do expect the pattern of revenue to be a second half that is stronger than the first half.

Now, before I turn it over to Mary Jane, I would like to add that our FY 2016 results were enabled by the unyielding enthusiasm and determination of our worldwide employees to contribute to our success. Their dedication, commitment, innovations, and hard work made it possible for us to meet and even exceed customer expectations. They paved the way for our future growth with the development and introduction of new products, and initiatives to improve our overall quality and operating efficiency.

So I would like to acknowledge the contribution of all of our 9,000 employees worldwide who are already enthusiastically working to deliver on our expectations in fiscal year 2017. Mary Jane?

Thank you, Fran and Chuck.

As you can see from our press release and what you just heard from friends and Chuck, we have a lot of news today. The results really speak for themselves, so I will just hit the highlights for you.

In fiscal year 2016, we had organic bookings growth of $100 million. Our gross margin expanded 120 basis points to 37.8% for the year. And our full-year organic or non-GAAP return on sales exceeded 10%.

The major difference in our results between GAAP and non-GAAP is the effect of the acquisitions and divestitures. This includes the operating losses and the one-time costs to acquire and restructure two new companies. Together, the acquisitions were dilutive by $0.29 for the year, $0.17 in Q4 and $0.12 in Q3. The sale of the RF commercial asset reduces the ongoing operating losses considerably.

Apart from the $0.29 just mentioned, we had several entries to close year end in both our GAAP and non-GAAP results. These collectively, not including the $0.29, don't have a material effect on the EPS in the quarter. They include a $0.14 per share non-cash tax valuation reserve arising from the combination of the new acquisitions, the purchase accounting, and the divestitures all be incorporated into our total Company consolidated results. This is why you will see an unusual tax rate in the quarter of 49%, and for the year a rate of 27%.

For next year, FY 2017, we expect the tax rate in the mid-20s. Other reserve changes in the fourth quarter to offset this include a reduction in our inventory reserve based on the inventory usage in the fourth quarter to meet the demand. That's worth about $0.04. Our reduction in expense for that portion of our equity-based compensation that is evaluated based on the June 30 ending stock price, that's $0.05, and a reduction in our professional services expense of another $0.03.

So the entries affecting our reserves for tax, inventory access and obsolescence, the equity-based comp, and professional services are the group that, as I say, collectively don't have a material effect.

Our book to bill was 1.01 for Q4, and 1.06 for the full-year. Our backlog is $298 million, consisting of $76 million in laser solutions, $114 million in photonics, and $100 million in performance products. The $76 million for laser solutions is already reduced for the $13 million of backlog that was divested.

All segments made meaningful progress this quarter on the non-GAAP operating margins, especially laser solutions at 26%, helped by the recovering yen as well as additional revenue. We renewed our credit facility this quarter to expand our liquidity and supplement our cash. We expanded the facility of $425 million, supplementing our $218 million in cash. The facility has a five-year term. Our current debt is $236 million, and our net debt position is $18 million.

We have $26 million in CapEx this quarter, and $58 million for the year. For next year, fiscal year 2017, we expect capital to be close to $100 million, driven by new investments in capacity expansion.

We had $9.7 million in share-based comp for the year and we repurchased 6 million shares of our stock.

For FY -- $6 million worth of our stock.

For FY 2017, we expect share-based compensation to be between $14 million and $16 million, higher than our normal $12 million to $14 million. This is because in FY 2017, we will grant equity to a broader group of employees, something we've done in the past in II-VI, just about every four years. We have $31 million remaining on our $50 million share buyback, and we expect at this time to buy back our dilution.

The outlook for fiscal year ended September 30, 2016 is revenue of $210 million to $225 million, and earnings per share of $0.22 to $0.27. Included in this range is the increased R&D platform investment of around $0.10 a share for the quarter. This is all at prevailing exchange rates, and all earnings per share data referred to diluted shares.

Comparable results for the quarter ended September 30, 2015, so last year's first quarter, were revenues of $189.2 million, and diluted earnings per share of $0.27. As discussed in more detail below, actual results may differ from these forecasts due to a variety of factors, including but not limited to changes in product demand, changes in customer forecast, competition, and general economic conditions.

From a margin perspective, we are widening the range we had published for FY 2016 to accommodate in FY 2017 the R&D platform investments and to anticipate any potential changes that may occur in the current strength of the optical communications market.

The expected average annual ranges are for the year, not necessarily for every quarter. The gross margin range is 35% to 39%, the EBITDA range is 16% to 20%, and the op income range is 7% to 10%.

Again, going forward, the actual results may differ from these forecasts due to a whole variety of factors, not limited to the ones I just mentioned.

Before I ask Chuck to make our concluding remarks today, I will just let you know that our first-quarter earnings release date is slated for Tuesday, October 26, 2016. Chuck?

Thanks, Mary Jane. Fran, I am very grateful to you and the other members of the Board for your vote of confidence in my ability to next lead II-VI into the future. As only the third CEO of this great Company, with its rich 45-year history as a leading innovator of engineered materials and optoelectronic components that help make the world safer, healthier, closer and more efficient, I am excited to have this opportunity to lead and to serve.

Thanks in large measure to your vision and drive, II-VI has a strong base from which to continue to profitably grow.

While overseeing the globalization of our business for the last 33 years, including as the President and COO, and from 2007, the President and CEO, and since 2014 as the Chairman and CEO, Fran has had a long and extremely distinguished career that has served well the employees and communities in which we operate. He has also worked tirelessly to assure that the founding values of II-VI are central to the philosophy and fabric of the Company, including the drive for excellence in everything we do, and assuring a results-oriented culture that deliver sustainable shareholder value.

Fran, your unrelenting determination to grow revenues and profits faster than the market enable the Company to grow its revenues from $5 million in FY 1983 by a compounded annual growth rate of over 16% to reach the $827 million in a just completed record FY 2016. I deeply appreciate your partnership during the last 13 years, your support during this leadership transition, and for overseeing the tremendous transformation in the Company.

So, on behalf of our Board, the global leadership team, and over 9,000 employees around the world, we thank you for all you have done for all of us, and we look forward to your continuing leadership and mentorship as the Chairman of our Board.

This concludes our prepared remarks. As we turn to Q&A, I will remind you that our answers to your questions may contain certain forward-looking statements which are based on our best knowledge today, and for which actual results may differ materially.

Karen, you may open the line for questions.

(Operator Instructions) Jim Ricchiuti, Needham and Company.

Fran, I wish you the best of luck, congratulations.

A question about the R&D step-up. Chuck, can you give us a better sense as to where this R&D is going to be -- these resources are going to be deployed and how we might think about the benefits of this and when we might see some of the returns on this investment?

Okay, Jim, thanks very much. Jim, as I mentioned, and we addressed in the press release, we are investing, stepping up the R&D investment in a few different areas. But in particular, we are investing to establish a scalable high-volume manufacturing platform for optoelectronic materials and devices that will expand our adjustable markets.

The markets that we are aiming at are large and growing. We are initially focused on the development of a manufacturing technology platform for VCSELs -- that is a vertical cavity surface emitting lasers -- initially for 3-D sensing applications. In addition, we are also expanding our wide band gap electronic materials platform as well as making targeted investments both in Laser Enterprise and our optical communications group product portfolio for what we see as a follow-on adoption of new products following this optical cycle that we're in.

But the largest single investment is to expand our capability for making VCSEL devices and optoelectronic devices. The investment will carry on for the next four to six quarters, Jim, at least. I won't have much to say about the market today, other than we believe the market is large, growing, and is anxiously awaiting this kind of a capability to be put in place in the industry.

We are expecting to lead in it. We will have more to say, I guess, as the quarters tick by.

Okay, well, just with respect to the VCSEL opportunity, if my memory serves me right, it sounded like you were anticipating revenues to begin scaling in that area, in the second half of 2017. Is that something you are still working toward?

In the second half of calendar 2017.

Okay. And is there anything you can say with respect to design wins or is that something you anticipate over the next couple of quarters?

Yes, I would not have any comment to make about it today, other than we are working very diligently in that direction.

Okay, thank you.

This is Fran. I just want to add to what Chuck said, that our investment for this platform that we are working on is certainly not just capital, but R&D. We don't want anybody to be misunderstanding. It's going to take both R&D money and capital. And that is quite a double-edged sword.

We are well-positioned to do it, so that is our focus, which is more than what we would usually take on.

Got it, thank you.

Christopher Longiaru, Sidoti & Company.

I will add my congratulations. It seems like your visibility, it continues to get better. Can you give us an idea of just what's going on with visibility, what your turns number is to the midpoint of your guide? And just some more clarity there?

I think first of all, yes, as Chuck said, we are seeing customers continuing to book out longer and at least for the last couple of quarters that we've seen that, and obviously past isn't prologue. But we have seen deliveries against the forecasts that we've had.

As is true in materials -- engineered materials companies, and ours is certainly probably the best example, volume helps. So, a lot of the margin that we saw here in the fourth quarter was due to the volume that we deliver out of the quarter. So I would say we would -- we are hoping to see the optical cycle still continue. We are not trying -- we are trying hard not to get ahead of our headlines on that.

Steady progress continuing in laser solutions, particularly in the materials processing, cutting and processing markets, and a steadiness to recovery in the performance products area. So, across the board, I would say we are actually expecting -- and do have the visibility to see that. It's just life can change in a heartbeat.

So we are really not saying tons about second half of the year until we have a little bit more even from where we are today.

Okay, that's fair. And then, just in terms of -- I imagine that that visibility and that demand is part of impetus for expanding the R&D effort and the facilities in general. Can you give us an idea of how flexible that plan is, in terms of the way you can adjust to any changes in how that demand plays out, maybe three or four quarters out?

Let's start with the capital. The capital is probably the first one. I think that while some capital that we will invest, in fact probably a decent part of it, is in anticipation of growth markets, the capital that we will invest, for example, to expand in the optic communications area, we have actually expanded our capacity through the 2016 year without a lot of hoopla. We are very -- as the team, which is very, very good at this and that particular segment builds out a new line, there is a lot of work that goes into increasing the productivity off the line as well.

So obviously, we have worked hard to be sure as well that we have demand going into several customers that have several layers of various parts of the network. At the end of the day, I think we would have at least some decent ability to not invest too far ahead on that.

I think with respect to the build-up of the VCSELs both for the capital and the R&D, there is a little bit of an investing for the future here, whether or not it's on exactly the timeline we see. We can see that there are quite a lot of applications where the packaging side, the power of a VCSELs is very, very valuable. And as Chuck and Fran both said, we see the world looking for this kind of capability. But let me have Chuck add to that.

Thanks, Mary Jane. Chris, I would simply add that for both the R&D and the capital investment, we are putting a platform in place that takes time to put in place and qualifying it. And it needs to be put in place and qualified ahead of the ramp and products. Most of that effort at least as it relates to optoelectronic devices and high-volume VCSELs will take place in our fiscal year 2017, so that is number one.

We are also investing in Zurich and expanding our laser fabrication capability there in order to keep up with the growing demand in the optical communication market for 980 pump lasers where we make the devices itself. And also, for the large increase in forecasted demand for 25G VCSEL chips for the datacom and the data center markets for which we are a market leader.

So that investment is not a platform investment, but it's targeted for any year revenue expansion, where as the platform investment that we are talking about is for after FY 2017 revenue expansion.

That's very helpful, thank you, guys. That's all I have.

Ted Moreau, [Paris] Research.

Great quarter, guys, and would like to offer my congratulations to both Fran and Chuck for that matter, so good work. A couple of quick questions; obviously the visibility is really good.

Kind of curious. What percentage of your business was quick turns in the quarter and how does that compare with recent history?

I would say as a general matter we have business that is quick turns in the quarter probably more across laser solutions and photonics than we necessarily might in performance products. I think given how above the guidance we were, obviously there was perhaps more in this fourth quarter than we've historically seen. But the fourth quarter, it is the last quarter of the year. It is historically our largest quarter, so if I compare fourth quarter over fourth quarter, I don't know that we had massively material difference on quick turns in the quarter.

But certainly, we did have them and, as for a specific percentage of the revenue, I'm not sure we would really be able to give you that.

Okay, got it.

I would add that for sure in a couple of the divisions, including in laser solutions, we saw towards the end of the fourth quarter a very significant increase in quick turns business, especially around our 1 micron products and especially around demand from Asia.

So there are hotspots that come across in the market that -- and many of our divisions are accustomed to that quick turns business. But a big part of our story at least as it related in the fourth quarter was more about extended purchase orders and longer-term visibility in our photonics segment.

Got it, great. And on the photonics segment, kind of curious. Some suppliers out there have been talking about inventory buildup in the broadband PON market in China, but it doesn't sound like you are seeing that. So just kind of curious to what you're saying and why there might be a disconnect from some of the other players that are targeting that market.

Okay, Ted I can take that. We've been on a -- we are a key supplier for filters for the PON market in China. We are the leading supplier. So it's one that we have a good pulse on. It has been quite strong leading up until the fourth quarter. It's been quite strong for the prior -- I will call it four to six quarters before that, at least.

And we did experience a noticeable drop in demand in the fourth quarter, and I think that it will carry on here into the first quarter.

However, having said that, I think the demand is coming off of a peak and will be stable, maybe on a slightly lower demand than what we experienced in the first three quarters of last year. I think it will stabilize beginning this quarter and I think we will see that demand stay constant for the rest of the fiscal year, if not at least the next two quarters.

Got it. And so sequentially, guiding revenue down maybe about $20 million from the June quarter, so is that -- how much of that is seasonal given Q1 tends to be a little bit softer for you guys versus maybe photonics coming down -- I don't know if photonics is going to come down because of the China broadband sluggish or kind of inventory correction going on there, or how do we think about that?

Well, we had the revenue drop from fourth quarter of 2015 to the first quarter of 2016 almost $8 million last year, and we were I think by all accounts just at the beginning of the optical cycle. So I think we are -- we had, as Chuck described, I think some very quick turns, particularly in the 1 micron business.

But generally speaking, I would say that it is seasonal. We've had this conversation before. It can fall between Q1 and Q2, which are the -- which one is the weaker quarter of the year, and right now that's the visibility that we have, and of course whatever the demand in the customer requirements are for the quarter, we will deliver them. We've done that before.

Got it. And (multiple speakers) go ahead.

I would add that after four weeks here, that it seems to be that that seasonality seems to be right on par with what we would expect.

Sure, okay. And given continued strong bookings on photonics, are you still capacity constrained there? Or is the end -- the investments go into other areas and new opportunities? Or do you still have to add capacity because of constraints?

I will -- I'm happy to take that on, Ted. I would like to give you a broad context for that. 2016 compared to 2015 for this business, we increased our capacity by 100% 2016 to 2015. And we did that on the heels of the acquisitions, positioning our product portfolio and getting us in line of sight with -- not with just long-term demand, but with absolute intimacy for short-term requirements for customers.

So when we put the capacity in place, and ramped up the labor to balance it, we were very confident at the time that would be a real good deal for us. As we look -- as I look in 2017 compared to 2016, we still need to add some additional capacity and we plan to do that.

However, it's not as much of the step up from 2015 to 2016 and we have a couple of lines that are running at 95% plus or minus 5% in terms of capacity, relative to demand. But our operating team, our global operating team has really done a fantastic job. And despite the fact that the leadtimes have pushed out a little bit, they have a clear path. They have the autonomy and they have to drive to be able to match as best as they can customer requirements so that they can expand the capacity slightly and I can assure you that we will add capacity this quarter and next quarter for what we see is a future opportunity for us.

Sure, sounds good. And final question, on the SG&A side, should we expect SG&A to remain at similar levels or does that -- or are there going to be any puts and takes on SG&A in the coming quarters?

If you are in the press release and you're looking at the full-year number, the full-year number for SG&A as reported, we will obviously consider continuing with quite a bit of these one-time expenses. So I think you should expect to see that the SG&A trends down more towards what it was for the full 15-year.

Full 15, got it. Okay. Sorry, final question -- how much revenue did you -- was contributed from the ANADIGICS business that was invested in the quarter? Was there any revenue from there?

Well, we did sell the commercial assets. So, we sold the revenue lines. We did not disclose that.

Okay, thanks very much. Congrats on a great quarter.

Dave Kang, B. Riley.

My congratulations as well. Going back to the photonics segment, how much were the filters in terms of overall photonics revenue? Is it fairly material?

We don't disclose it, Dave, but -- I'm not sure what else we can say about it. (multiple speakers)

Fair enough.

It's definitely in the minority of sales.

Going back to the decline -- sequential decline from fiscal fourth quarter to first quarter, I assume a lot of that is coming from the laser solutions segment. And on photonics, if you exclude the filters, I assume that's going to be down sequentially. Will the rest of the photonics will be what, flat, up? Just wanted to go over some of the assumptions in your -- regarding the outlook.

First of all, the laser solutions market tends to have a softer first quarter because of the summer, so they have part of the amount that is down. The second one is that in performance products, we had a pretty good shipment as scheduled, as forecasted in the fourth quarter in the thermoelectric products. That is not expected to repeat, based on the way to forecast is going. In other words, the delivery is very lumpy across quarters.

From a photonics point of view, generally speaking I think this is how you need to think about it. The photonics forecast may not be exactly perfectly flat with the fourth quarter, but it is still up rather a bit on the first quarter of last year.

Up year-over-year, but it could be flat sequentially?

No, I said it might probably wouldn't be flat sequentially. That's part of what we are forecasting, again just trying to balance when we will see the softness. Sometimes we haven't in photonics in the first quarter because of summer based on where our end customers are. Sometimes we have it (technical difficulty). So I'm not saying it's flat sequentially, but I am saying for sure, it is up over where it was not only in the first quarter, but even in the third.

Got it. And then when you say photonics, you're including the filters segment as well, correct? Just wanted to be clear.

Filters are in the photonics segment.

Yes.

Yes, yes, okay. Chuck, can you just talk about maybe what you see in the photonics visibility as far as a geography, especially what Infinera said last week about North America? Can you talk about what's going on in North America, China and Europe? That would be very helpful.

Yes, I can say for sure that all three regions, all three regions are in strong demand. At least as far as pools for our products go and (multiple speakers)

Even Europe, with Brexit and all that?

Even Europe. That's what (multiple speakers) in Europe. Either directly or (multiple speakers) for our customers who are serving into the European market, our demand is strong in all three regions.

Right. So I guess maybe -- somebody asked early, but are you experiencing some supply constraints or capacity shortages at this point? Some of your competitors are saying that they are still impacted by supply constraints and all that. Did you leave any revenues on the table last quarter?

Let me take your question head-on, that for sure, in a complex supply chain for a company that sells products at the levels of integration we do, from time to time including this time, there are challenges with a supply chain with certain components that we buy in the outside.

Our teams are doing an extraordinary job. A lot of that supply chain, as you may know, is actually based in China. And our global photonics team, which is headquartered in China, does an extraordinary job of managing the supply chain from within China. They do a world-class job at that. The other aspect of our supply chain in the optical communications group, we are largely a vertically integrated company, and therefore the supply chain constraints that we have are actually the internal constraints that we need to manage.

That is a great challenge for us to have, and we embrace it across both the laser solutions segment and the photonics segment, where the teams in both of those businesses are cooperating with a great sense of urgency, and anticipation and cooperation, to assure that the outages that we might ordinarily experience are absolutely minimized.

Got it. And the last question is going back to the filter situation. My understanding is that the recent that the Chinese PON market is a little bit soft is it's going from 2.5 gig to 10 gig transition.

So I just wanted to know how you are positioned in the 10 gig side of the equation.

I believe that we are extremely well-positioned, Dave.

So when is the -- can you just walk over the transition from 2.5 gig to 10 gig? Is 10 gig starting to ramp or it's just 2.5 declining while 10 gig is maybe later this year? Is that why you're experiencing some softness and demand at this point?

Dave, I would say this. I don't want to make any other comments that would suggest some details or some information regarding our customers' plans. I can tell you that (multiple speakers) we're well-positioned in our portfolio to accommodate the step-up in demand for 10 gig and I do believe that this decrease that I mentioned, I think will be temporary, will stabilize and I think the demand will begin to increase sometime in the next two to four quarters.

Got it, thank you very much.

Mark Miller, Benchmark.

Congratulations, Fran and Chuck, congratulations also to you, and also for the quarter. It's a nice quarter. Chuck -- you mentioned China was strong, so I'm assuming both telecom and fiber laser components were strong in China. Is that correct?

That's correct.

Is it possible to get the year ending backlog in 2015? Do you have that on hand?

We will check, Mark. Mary Jane will check. While she is checking, if you have another question we can take.

Well, this might be one for her, also. What was cash from operations just for the quarter for the June quarter?

Could you repeat that, Mark?

What was cash from operations just for the June quarter, not for the year? You have the year in the report.

Okay, we're checking it for you, too.

It's in the neighborhood of $38 million.

Okay.

And the fiscal 2015 year ending backlog was [$242 million].

Okay.

And just let me make a quick correction to what I said on the script. I had said our backlog for this year was $290 million. It's $298 million.

I had $298 million, actually. Okay, thank you.

Jim Ricchiuti, Needham.

Chuck, as you step into this role as CEO, the Company has been very acquisitive over the last couple of years. I'm wondering as you look at the strategy going forward, is the near term going to be characterized by more of the integration of what you have acquired recently in trying to execute on some of these growth areas or do you -- are there some areas that you could see pursuing from an acquisition standpoint in the near term?

Okay, Jim, thanks a lot for your question. I would say that, for the core of our strategy going forward, I would take it just as a straight line for where we come from. It's typical for us as we did with the Oclaro acquisitions to go ahead and spend the time doing a real nice job planning it, getting it in-house, getting organized, getting it stabilized, putting the efforts into both the market and the product portfolio and the operations and then allowing the teams to grow. And I would say that that's pretty much where we are at, where the most recent acquisitions that we've done, we are stepping up our organic investments on the belief that the long-term prospects for devices that can be made on that platform is very, very strong for II-VI in the long term.

We need to stick to the knitting and make sure that we get things done, get them done on time, get things in place. However, we will continue to grow both by organic investments and by acquisition. That's my belief.

So, we won't take our eye off the ball, both strategic planning for the long-range, so it will be as determined as we ever were while Fran was the CEO to make sure that we do things right, we do the right things, and that we get the absolute best deal we can for the II-VI shareholder in the short term, and that we can make real good on in the long term.

I would say -- this is Fran. Certainly what Chuck said is just right. We think we are well-positioned. We do want to integrate what we've bought and work on the organic opportunity in VCSEL platform right now.

At the same time, there are other things that we could be acquiring. We are not right now imminent to do any. But there are a couple near us, so if you had to say how we are leaning, we are two thirds on integrating and fix, and one third to look at other acquisitions.

We have to do that. It's the type of business we are in. We are materials suppliers, merchant suppliers, have to keep our eyes open and will continue to do that.

Okay, that's helpful. Mary Jane, just to go back -- I just want to make sure to clarify something. You gave some breakout of end markets earlier in the call, in your presentation. Was that for the fiscal year were or the fiscal fourth quarter, the industrial communications military pieces that you highlighted?

For the year.

For the year, okay. Maybe just -- looking at gross margins, a fairly wide range that you are talking about.

Is there -- can you give us some help as to how we might think about the margins beyond fiscal 2017 gross margins? And you may not be willing to do it just yet, but just given the investments you are making and given the way the profile of the business could change, looking out into the latter part of calendar 2017, any help on how we might think about gross margins?

Let me just first say this. In this Company, we are very, very committed to a lot of things that are kind of run the Company by the basics, and that starts with if the money isn't made of the gross margin level, it's basically not made.

So, a continued focus on the management improvement of the gross margin is really important to us.

So I would say that we take even small changes in the gross margin pretty seriously. And while I am actually not going to give you a range for the back half of 2017 or 2018, I would tell you the Company is very cognizant of the sorts of gross margins we've had in the past. We focus on new products to improve or certainly not dilute the gross margin.

But volume does matter. The single biggest thing that will affect gross margin is, aside from just natural yield, is what you sell off the yield. So those things do make a difference and I think as Chuck said, as we expand our capacity, our team that manages the manufacturing and engineering in this Company drop all the segments are very, very good at that. And they look to be sure that that capacity addition, if they've done as Chuck said with full view of how it's going to be used, productivity improvements, etc. So, while we do have a pretty wide range for a few different reasons, not the least of which is just trying to be cautious on exactly how the optical communications cycle could go for the whole year, all four quarters, we certainly would strive not to be living at the bottom of it, I would say.

Okay. And if I think about the -- looking at the end markets, the optical communications piece, is that the piece that there is just more variability just because of the activity you've seen over the past year and some of the recent developments?

I'm wondering how you are viewing the industrial piece of the business just given the puts and takes in that market.

First of all, we continue to view the industrial market very favorably. That's an important market to us. We are very good at that. But we are also very good at the rest of the markets.

I would say what makes optical communications more variable with respect to the gross margin is, in times such as we may be said to be seeing today, there -- where capacity is being constrained, orders are going out further, there may not be as much pressure on price decreases over time as we would typically see in a more down part of the cycle, where the quarterly reduction in prices is not only much more aggressive, it may not be limited to once a quarter.

So that, at the end of the day, it's really about demand. But I would say where we see the cycle rate at the present moment, at the very least, people are not having as much time or really just as much supply chain capacity to be able to be pushing prices down as they have in the past. Chuck, would you like to add to that?

I would say we continue with a very, very strong dedication and focus on the industrial market, Jim. As I mentioned in my comments, we had another record quarter for our 1 micron components, for the industrial materials processing market. China seems to be in the last quarter, and maybe half of this third-quarter and powerful fourth quarter, very, very strong.

The demand is strong. The demand for our current products was strong in the fourth quarter, and the demand for existing products at new customers, including for a very sophisticated beam delivery systems and cutting tools, has increased in the last two or three months beyond any interest in we've seen before that. So we have -- we've reorganized salesforce. We have increased our team both in China and Korea, and in Japan as well as supporting the team dynamics in Europe and in the US. It will continue to be a very important market for us to invest and manage and grow in.

Okay, that's helpful. Thanks, Chuck, and congratulations.

(Operator Instructions) Mark Miller, Benchmark.

I just wanted to see if I missed anything, especially about 2017 outlook. You gave a guidance range for gross margin of 35% to 39%, R&D $23 million to $25 million per quarter. Were there any other details given on the outlook for 2017 I might have missed?

No, not particularly. Obviously we do talk about the capital increasing, which to the extent that we have just say half of that in the beginning of the year, that will add to the depreciation, of course. But those are probably the main ones that really affect the margin growth for next year, other than just changes in the topline.

Did you just say the SG&A would be trending down to 2015 levels as a percentage of sales? Or do I have that right?

Yes. You have that right. There is $12.5 million at the very least in there, just on one-time expenses.

Okay, thank you.

That concludes our question-and-answer session for today. I would like to turn the conference back over to II-VI for any closing comments.

Okay, well, we want to thank you all for joining us today. Thank you for your support throughout this year, and we will see you on October 25. Thank you for joining us.

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