Good day ladies and gentlemen and welcome to the II-VI Incorporated FY17 Third Quarter Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Mary Jane Raymond, Chief Financial Officer. Ma'am, you may begin.

Thank you, Scala and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our third quarter earnings call for fiscal year 2017. With me on the call today is Dr. Chuck Mattera, our President and Chief Executive Officer. And as a reminder, this call is recorded on Tuesday, May 2, 2017. Any forward-looking statements we may make today during this teleconference are given in the context of today only. We do not undertake any obligation to update these statements to reflect events that are subsequent to today. With that, let me turn it over to Dr. Chuck Mattera. Chuck?

Thank you Mary Jane, and thank you everyone for joining us. Our third quarter was terrific. The industrial and communication end market were very strong for us across the all three segments. Our revenues of $245 million set a new record, probably EPS of $0.35 per share was in the top end of our guidance. So our Q3 bookings of $281 million also hit an all-time record for II-VI. Regionally, our revenue distribution was 45% in North America, 21% in Europe, 18% in China, 8% in Japan and 8% for the rest of the world, very similar to the FY16 annual percentages. By end market, our revenue split this quarter was 45% in communications, 37% in industrial and semi-cap and 10% in military. The comparative full year of FY16 split was 37%, 42%, 13% respectively and $827 million of revenue. In the communications market we had $110 million in revenue this quarter, 82% of which was in photonics, 10% in laser solutions and 8% in performance products. Revenues into the communications market grew overall 50% year-over-year and 5% sequentially. All main market drivers we've been discussing are reflected in the strong bookings and revenues, specifically, China broadband, the 100G metro upgrade, CA-TV infrastructure investments, the expansion of the data center communications market, and the growth in undersea fiber optic networks. Communication products deployed in metro and [indiscernible] network builds including data center interconnects were approximately 67% of our communication sales. CA-TV network builds for another 10% and then 6% from sub-renetworks, 6% from Datacom including intra datacenter communications and 10% from products used in wireless base stations where our wide gap electronic materials enabled the rapidly growing 4G base station market and paving a way for next-gen 5G deployments. More than 51% of our communications product revenue in the quarter…

Thanks, Chuck. As a reminder, on the second page of our press release … of our press release, we show the segment details. This page details the bookings revenue and operating income by segment. The company's overall gross margin of approximately 40% is the result of another strong quarter of operating performance. Currency fluctuations positively contributed about 100 basis points to the gross margin compared to Q3 of fiscal year 2016. But the sequential affect was actually pretty minimal. The operating margin for this quarter was 11.8% compared to 9.5% of Q3 of FY 2016 and would have been 15.3% without this year's investment in our optoelectronic device platform. The EBITDA margin was 18.8% for the quarter, as expected it would lower the last quarter Q2 FY 2017, since last quarter had about $4 million net positive onetime items amounting to about 170 basis points. We finished the quarter with a $389 million backlog and solid order coverage for Q4. The backlog consists of $159 million in photonics, 129 million in performance products, and $101 million in laser solution. Nearly half of that backlog is scheduled to ship in Q4. Our R&D investment this quarter was about 10% of revenue. We invested $8.5 million pretax on our manufacturing readiness programs for VCSEL volume production. The capital cash flow has been about $57 million for this program year-to-date. As part of our drive to improve profitability, we exercise good control over our SG&A expenses, which were consistent both sequentially and year-over-year, despite an increase in revenue of 6.19%. The company has other income of $2.2 million made up of a number of smaller onetime items, these include a gain on the sale of one of our facilities in Florida, as part of a facility consolidations in our military business that we…

[Operator Instructions] And our first question comes from Jim Ricchiuti with Needham & Company, your line is now open.

Thank you, good morning. Chuck, I will try to let you save your voice, Mary Jane if you want to answer that's fine, but if we -- if we look at the guidance and in terms of how you're characterizing the optical communications market for the June quarter the conservatives, we can't parse through that, how much of that is related to China verses some of the other segments of the market.

First of all, as we discussed the markets around the world including China but including the U.S and Europe are important market to us. I would say that [indiscernible] in any market would have an influence on that. But I don't -- I wouldn't say that our guidance is set this quarter with emphasis primarily on only one major driver.

Okay, and just with respect to the industrial business, you gave some good color on that as well. And I may have missed it but was -- it sounds like this strength you're seeing in that market not only cuts across categories and technologies but also across geographies is that fair to say, was anyone geography particularly strong.

Okay, good morning Jim, this is Chuck. Jim it is broad based in every region.

Okay, and then two very short final question I know you can't talk necessarily about the timing of the VCSEL ramp, you gave some good color on that and I appreciate that. How should we think about the R&D levels associated with this. When would we expect levels to return to maybe normalize R&D levels going forward.

Okay. So first of all one of the things we've talked about with respect to this investment is that the normalization is more a function of the R&D as a percentage of sales that necessarily is a strict dollar value. The company has a history of keeping up with R&D investments as the revenue has grown over time. But I would say it's -- we've made the investment in anticipation of volume we would have expected it to moderate down in the 2018 fiscal year, but volume does matter. I think if we were to see some dramatic alliance some market for whatever reason we may reconsider that, but we would expect probably to moderate the 7% to 9% range down from 10%.

Having said that Jim, we're expecting more a growth company, we're expecting the revenues to grow, and our organic investment is a key part of our strategy. The company as we look out in the next two to three years has a great opportunity for transformative penetration into new markets, so we will continue to invest in this platform for successive generations of products.

Okay, fair enough, thanks very much, I'll jump back in the queue, thank you.

Our next question comes from Troy Jensen with Piper, your line is now open.

Hi, just a clarification first Mary Jane, for the 3D sensing business will that be reported in laser solution or the Photonics business.

Laser solution.

If you look at your Laser solutions booking is up fairly materially here in the in -- the on March quarter, did that include any 3D sensing bookings.

We do have some 3D sensing booking but I would not describe that as the majority of it, we have seen as Chuck described pretty extensively, very, very nice pick up in the industrial markets as well.

Great, okay, so most of it come from industrial that's fair. And if you just at your June guidance up slightly on sequential basis. Could you give us any color on Laser solution versus Photonics, are you expecting Photonics to drop significantly, modestly, relatively stable any color, any additional color will be helpful.

Sure, so first of all as you all know we don't give guidance by segment, but to give you some sense I think first of all as has been the case for the last several quarters there a number of things that are driving the company's results and it it's guidance in any given quarter, optocommunications is certainly one of them and as Chuck said, we're preparing to possibly more affected by the market factors that maybe we have been so far, but we also did a lot of work over the last several quarters to try and position ourselves not to have significant rapid fall offs. So we still see very nice contribution from photonics. In the legislation business the industrial markets are doing very, very nicely and began to show resurgence, even as early as September 30 end of quarter, so we expect to see some nice lift there. The other one in the performance products business is what we talk about for a while here which is the increasing demand silicon carbide product among other things it including military stepping up a little bit, but the performance products segment also is anticipating some nice growth both in silicon carbide by litigating by capacity in the military market.

Well, thank you, keep up the good work.

Our next question comes from Mark Miller with Benchmark, your line is now open.

Good morning, just going back to the R&D expenses again, you said [indiscernible] scale with sales but trend down to 7.9% of sales, what's kind of the relative time frame for that scaling.

Yes, first of all, I am sorry if I was not terribly clear. I said that they probably in the range 7% to 9% and as Chuck clarified, that's minority has come a hallmark of this company but in any event I think we would see maybe a little bit of a trend down in the 2018 year, it's a little bit relevant to one volume starts in certain quarters, again not just in VCSELs but silicon carbide etcetera. And then probably moderate a little bit over time, but I would say very similar to what Chuck has said, that the expansion of capability in a few quarters including in industrial and silicon carbide etcetera, as demand guards [ph] to increase for different types of applications, we would continue to have some investments, possibly not at this level as a percentage of revenue to exploit markets that really had not been that president before.

Sorry if I missed this, but again keen interest in VCSELs and the ramp from what's going on in New Jersey. Again I apologize if I missed it, but you've always in meetings I've had with you indicated it was more the 2018 opportunity, any changes there.

Good morning Mark, this is Chuck. We are still believing that our initial manufacturing ramp will take place by the end of the calendar year 2017, and that will be following on by a larger ramp in calendar year 2018. Still the same.

Okay, so coming up later this year and in the bigger ramps next year. Are you pleased with the progress of the transform in the Jersey facility for your own schedule.

No, Marl, I would say that it's not uncommon at this stage of an initial ramp that we have our challenges, I'm very pleased with the progress that we've made, I believe that will be successful in achieving the initial ramp. And we will continue to make improvements that we need to be ready to address the larger mines [ph] that come into the marketplace and will compete for in calendar year 2018.

I just want to check something, your backlog was $380 million or $389 million.

389.

Okay, thank you.

Our next question comes from Dave Kang with B. Riley, your line is now open.

Good morning, and Chuck, hopefully you feel better soon. Just on the optocom segment, is it mostly china as far as the slowdown, can you tell us how about the other markets and more specifically can you just talk about the products you highlighted some of the products that are enjoying strong demand, but what about on the flipside which products seems to be impacted by the slowdown the most.

Dave, let me try to take it. We are running our sample for us and our past components lines at 99% capacity. So from the point of view of a slowdown, when you say slowdown we're running pretty much quarter-over-quarter with our plan almost exactly as we expected. So we're not much seem more expecting any significant slowdown in any one part of the market that can't be made up mostly from another part. That's right, with regard to the access market where we have a very small part of our revenues, we have seen that the [indiscernible] to the home market in the third quarter was down 10% to 20% I would say a quarter before. But we did not have any material impact on our outlook in Q4, it does not.

Got it, then I may have missed it Mary Jane, but can you give out the CapEx outlook for the rest of this year so I can --I guess I can back out the first week quarters, of fiscal fourth quarter.

Yes, I said I thought it would be about $130 million.

Got it. Okay. And then on some of your competitors have had a quantified their opportunity, what do you think your market share, any preliminary expectation at this point.

We have not quantified expectations of market share and don't expect to, what I can say is that we have made significant investments in the capacity and the capability to be an important player in this market but ultimately the customer decide the timing, what product is launched and based on that type of variability that exists entirely in the customer's hands, we're not putting expected share numbers out there.

Got it, alright thank you.

[Operator Instructions] And at this time I am sure no further questions, I would like to turn the call over back to Dr. Chuck Mattera for closing remarks.

Hi, it is Mary Jane, I'll give you Chuck, a little bit of a rest on his voice, since his answers your questions are very important but I will say as we conclude our call today Chuck and I would both like to thank the increasing number of top industry analysts who chose to join the call, especially those of you who have to get up early to do, we're happy to have you here and thank you very much. And more importantly on behalf of the Holy LP [ph] we would like to say that our Q3 FY 2017 results were enabled by the absolutely unyielding enthusiasm sense of urgency and teamwork, by our over 10,000 employees, positively determined to contribute every day to the continued success of II-VI and all of our customers, their dedication, commitment, innovations and hard work, make it possible for us to deliver consistently not only our customer's expectations but our shareholders expectations. The entire II-VI global team continues to pave the way for future growth with our development and introduction of new products, and by initiating new programs to improve our overall quality and drive operating efficiencies. As of today nearly four weeks into the quarter. It feels like we're on track to deliver another good quarter ending in June and to cap off a great year, which will be a great estimate to all of the people throughout II-VI who have worked so hard for that. Thank you to all of you on the phone for your interest in II-VI, we work to position the company to deliver outstanding value to the customers, our shareholders and our employees. If there's nothing more Scala, this will conclude our call for today.

Ladies and gentlemen, thank your participation in today's conference this does conclude our call you may now disconnect. Everyone have a great day.