Coherent, Inc. (COHR) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the II-VI Fiscal Year 2018 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to turn the call over to Mary Jane Raymond, Chief Financial Officer. You may begin.

Thank you, Michelle, and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our first quarter earnings call for fiscal year 2018. With me today on the call are Dr. Chuck Mattera, our President and Chief Executive Officer; Dr. Giovanni Barbarossa, our Chief Technology Officer and the President of the Laser Solutions segment; and Gary Kapusta, our Chief Operating Officer. This call is reported on Tuesday, October 31, 2017. Just to remind us for today, our company has been a designing partner for our customers for over 40 years. We have earned that position with many customers by the quality of our designs and collaborations and by our commitment to honor confidentiality obligations. Consistent with our past progress, we intend to keep our customers confidential information confidential. We will not be giving information on this call about customers' designs, applications or future products except as permitted or as required by the disclosure regulations. Secondly, 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 subsequent to today. With that, let me turn it over to Dr. Chuck Mattera. Chuck?

Thank you, Mary Jane. And thanks to everyone for joining us. Before we get into our report, I would like to thank the employees at our Santa Rosa, California, and Port Richey, Florida facilities who rose to the occasion in the phase of substantial challenges from the devastating storms and fires that affected the country during the quarter. Thanks in large measures to their determination and dedication, any impact to our business, was mitigating. I also commend the leaders of the relevant businesses for their extensive efforts in caring for the needs of our affected employees. Now turning to our results, fiscal year 2018 got off to a great start with first quarter revenue of $262 million, 18% over Q1 FY 2017 and was just 4% lower sequentially with minimal effects of the typical Q1 seasonality. Our year-over-year growth was 15.5% organic and 2.5% from acquired companies. We maintained our solid backlog and we experienced double-digit revenue growth in all three segments as compared to last year. From a major market perspective, the communications end market revenue grew 13%, industrial and semiconductor capital equipment end market grew 12%, and the military end market grew 16%. In addition all of our new markets demonstrated sequential growth including VCSELs for consumer and automotive electronics, optics and ceramics for EUV lithography tools, fiber laser components, and silicon carbide substrates. The integrations of our two new acquisitions namely IPI or Integrated Photonics into the Photonics Segment and the UK fab now hold the compound semiconductor division into the laser solution segment are on track. Immediately after the acquisition IPI began contributing stronger revenue and earnings when compared to our internal plan and actually exceeded its Q1 forecast. In addition, with the positive customer input on the growing market opportunity, we promptly began adding new capacity to meet the increasing demand in backlog. Turning now to our core businesses, the industrial and semiconductor capital equipment markets continued our net growth trajectory and accounted for $104 million of our revenue. In fact we experienced sustained demand in all regions of the world. In China, we continue to see a trend of increasing amounts of backward integration by many laser tool manufactures who were beginning to make their own laser engines. That trend is driving demand for our differentiated laser and optics components portfolio of products. Demand was also broadly distributed by end markets. Revenue in nearly all product lines grew in the first quarter over Q1 of FY 2017. Orders and revenue for EUV applications more than doubled compared to the same period last year. The CVD Diamond and CO2 laser optics production lines in Saxonburg have been driven to full capacity by the surging demand in EUV. In order to quickly expand our production lines, we will soon be relocating about 100 staff employees to a new office space near Saxonburg. Some recent industry reports put the combined backlog and production outlook for EUV tools to be close to $6 billion. We estimate that the value of our content to be about 1% to 2% of the machine's selling price. Needless to say, we are very excited about the growth of this product line over the next one to three years. The communications market continued to be stable for us with a $109 million in revenue in the quarter. Revenues from the communications market grew 13% overall compared to Q1 FY 2017 and remains steady sequentially. We continue to see the benefits of our longer-term agreements built on deep customer intimacy and our ability to quickly add capacity and evolve our product portfolio to new markets and applications. Our shipments in Q1 continued with no evidence of double bookings or de-bookings. In fact in some cases some customers have requested and continued to push for earlier delivery dates resulting in our Q2 order coverage being among the highest levels we've seen. Silicon carbide substrate sales activity increased again. Revenues grew more than 35% over Q1 FY 2017 and there continued to be increased numbers of customer engagements. Silicon carbide substrates for wireless base stations are now in demand for growth outside of China, and then, increasing percentage of our increase are from poly device customers who are now requiring 150 millimeter substrates instead of 100 millimeter substrates as the overall end-market demand increases. As we indicated last quarter, we believe that the substrate TAM is forecasted to be about $300 million over the next five years and so we are investing to maintain our advantage and leadership position. We expect to continue to be a leader in this fast growing market especially as we install new capacity and introduce manufacturing innovations to improve yielded throughput and manufacturing cost. With that, I would like to turn the call over to Dr. Giovanni Barbarossa to highlight some of the activities and successes of our increased R&D investments and a few examples of our technology and product roadmaps. Giovanni?

Thank you, Chuck. We are glad to report that in Q1 we begin deliveries of qualified products from our vertically integrated six-inch VCSELs platform as expected and we're on track with our manufacture is on plan. I'd like to thank our optoelectronics group for their hard work and achievements to become qualified on a very tight 16 month timeline. In such a challenging timeline, our team integrated tool positions, expanded the manufacturing capacity with new tools, and transferred, developed, integrated, and qualified new equipment and policies required for the manufacturing of VCSELs for 3D-sensing and other optoelectronic devices of six-inch vehicles a major feet from our legacy three-inch platform. During this time we continued to engage with several customers and develop new products to meet to this specific requirement. We expect output from these operations to accelerate during the remainder of our fiscal year and we expect the optoelectronics group to be a valuable contributor to our sequential growth during the second quarter. We will continue to invest to scale our vertical integrated operations since in our opinion VCSEL technology and 3D-sensing applications are both still very early in terms of product development and market adoption. We can see this for mainly active customer engagement that we have underway and by participating in the broad consumer electronics and automotive markets. We are also really excited about the first phase of investments that we are making at our compound semiconductor division. The recently acquired Aycliffe end wafer fab in the United Kingdom. We believe that we are well-positioned in the compound semiconductor materials and device market with the emergence of several mega trends such as Industry 12.0, the Internet of Things, 3D-sensing, autonomous vehicles, power electronics for the rapidly developing electric vehicle ecosystem, and the promise of increased connectivity to 5G radio frequency and optical backhaul and front haul networks. These are all excellent strategic fit with our existing cost competencies and differentiated our strategies to our customers. As a result, we believe, we are building momentum with increasingly larger accounts who are transforming the markets. Turning now to our new products in our major core markets. In the industrial materials processing market we built on the momentum that we generated in June when we demonstrated a new seam-tracking technology integrated with our remote laser welding heads at the Laser World of Photonics Show in Munich. The seam-tracking feature is ideal for inch assemblies such as corridors, foots, and trunks. Our automotive customers some of the leading brands for North America and Germany are currently working with us to introduce our seam-tracking into their production lines. In the military market we leveraged our highly reliable gallium arsenide laser technology to develop 2,000 watt actively cool laser bars and multi kilowatt facts for new directed energy weapons. These products were developed under a military program and formally launched in September at the Directed Energy Systems Symposium in Montgomery, California. These laser bars and facts are uniquely differentiated in their ability to operate at extremely low temperature conditions such as those experienced by airborne vehicles. In the optical communication market, we announced in September, our new Flexible Structure Optical Module platform for EDFAs or Erbium Doped Fiber Amplifiers at the 2017 European Conference on Optical Communication. This product is a breakthrough in enabling high performance optical amplifiers to be customer fit to the narrow spaces within grade and transceiver models that continue to be designed into smaller and smaller compactors. Such a product has received broad interest by the major manufacturers of coherent transceivers, transponders and line cards, and already ramping up production. This should position us well for the anticipated strong demand for 100, 200, and 400G in major applications worldwide, particularly in China and North America. It is also an ideal technology for the Next Generation Coherent transceivers designed to operate beyond 1 terabit per seconds. In the data center interconnect market; we expanded our product portfolio with introduction of our Optical Line Subsystem that was demonstrated at the same conference together within Inphi 100G PAM4 based transceivers. The combined capability offers cloud service providers and enterprise customers, a direct detection DWDM solution with a combined transmission rate of up to four terabits per second over a 20 kilometers reach for campus and data center interconnect applications. Such a solution is significantly lower cost than incumbent [indiscernible] solutions or grey optics solutions in fiber exhaust situations. In the intra data center interconnect market, our sales of VCSELs and detectors grew about 75% year-over-year. Sales of our Miniature Z-block precision assembly MAX, D-MAX experienced a 34% growth driven by the demand for LAN, DWDM, and CWDM intra data center transceivers as well as client transceivers both in CFP and QSFP form factors. Our Z-block MAX, D-MAX is based on our thin-film filter technology that leverages our recent investments in manufacturing capacity. With that I would like to turn the call over to Mary Jane who will provide the details of our first quarter results and Q2 FY 2018 guidance. Mary Jane?

Thanks, Giovanni, and hello to everyone on the call. Regarding our Q1 reported financial results, just as a reminder on the second page of the press release which shows segment results, this page details by segment the book-to-bill ratio, revenue, operating income, and the operating income margins. The distribution of our Q1 revenue by end markets was 42% in communications including wireless, optical, and data communications, 40% in industrial and semiconductor capital equipment, and 10% in military. Our Q1 sales were geographically distributed 45% in North America, 23% in Europe, 19% in China, 7% in Japan, and 6% for the rest of the world. China remains a strong market for us in the first quarter from both an industrial and communications perspective. The company's overall gross margin for Q1 was 40.5% and exceeded the fourth quarter gross margin due to increase of shipments of our new investments and a one-time inventory valuation of about 100 basis points in one product line. The operating margin for this quarter was 11.4% expanding 70 basis points compared to 10.7% for Q1 of FY 2017 inclusive of our recent investments. The EBITDA margin was 18.9% for this quarter compared to 18.1% for Q1 of FY 2017. The acquisitions of IPI and the UK Fab contributed $6 million of revenue combined in the fourth and were dilutive by $0.06 inclusive of the amortization of the inventory step-up that is typically amortized within the first two quarters after an acquisition. The IPI acquisition is integrated into the Photonics segment and the UK Fab has been integrated into the laser solutions segment. With respect to the segment operating margins the inclusions of the UK Fab acquired in August in the laser solutions segment drove the lower operating margin for that segment. The one-time cost of deal fees and the inventory step-up accounts for 220 basis points and the operating dilution accounts for 300 basis points. If these two added back, the laser solutions margin is consistent with the sequential acquired quarter's margin of 8.7% in Q4 FY 2017. As for the photonics operating margin it was higher than the historical margin levels and included some one-time inventory valuation adjustments affecting the margin by about 250 basis points. We finished the quarter with $390 million in backlog down only $9 million from Q4 and 26% higher than Q1 of FY 2017. This consists of $135 million in photonics, $145 million in performance products, and $110 million in laser solutions. The backlog contains order that will ship over the next 12 months. The backlog in photonics decreased as we expected just as the lower book-to-bill ratio was as we expected. As in Q4 FY 2017 our photonics backlog had grown 40% in a year and we expected to ship off that backlog in Q1 even now our photonics backlog is 18% higher than Q4 of FY 2016. We had $6.3 million in shared-based compensation for Q1 an increase of 77% over the Q4 expense of $3.5 million due to the share price for the new FY 2018 equity plan approved in the late August. We expect the annual expense for share-based compensation to be about $20 million for FY 2018. Some of you have asked us to breakout the amortization from the D&A total since all of our amortization is acquired. This is the amortization of acquired intangible assets. Amortization in Q1 was $3.6 million. Generally speaking amortization is about 20% of the D&A total. The company had other income of $700,000 primarily contributable to currency gains, with a smaller amount from equity earnings. The total capital expenditure this quarter were $37 million. The Q1 FY 2018 tax rate was 28.5% and we expect the ratio for this year to be between 18% and 21%. The reported EPS in the quarter was $0.32 a share and $0.35 was after one-time acquisition effects. This compares to $0.26 a share at Q1 FY 2017 on our reported basis just to correct, our tax rate in the quarter was 21.5% and we expect rate to be 18% to 21% for this year. Our cash is $241 million and our net debt position of $230 million. We completed our convertible debt offerings for $345 million, with a 33.5% conversion premium and a 25 basis point coupon to diversify our sources of liquidity. We used $50 million for specially authorized one-time final payment for share repurchased. We expect the proceeds from the convert to be used for our investment programs as those needs and opportunities arise. In the meantime, we paid down $252 million of our higher interest rate debt on the revolver. Our revolver now has $40 million outstanding and the term loan is at $80 million at quarter end. The quarter ended 9/30 and a $75 million outstanding now. Interest and debt amortization expense in the quarter was $3.6 million compared to $1.2 million in Q1 of FY 2017 when we had no amortization for instruments like to convert of the -- for no amortization and the lower amounts drawn. So we had lower amounts drawn in the revolver at this time last year. For Q1, trade interest was $2.6 million and the amortization for the convert discount and cost was $1.1 million. Going forward at this debt level on a quarterly basis the total interest expense will be about $5 million with cash interest being about $1 million and non-cash amortization about $4 million. We will determine the final method to account for the convert but for the convert offering during this current quarter, the Q2 quarter of FY 2018. Turning to the outlook. The outlook for the second fiscal quarter ending December 31, 2017, is revenue of $272 million to $282 million and GAAP diluted earnings per share of $0.35 to $0.38. The EPS range contains $0.06 of total interest and amortization expense for our fiscal debt, $0.05 of which is non-cash or about $0.02 greater than Q1 FY 2018 and $0.04 greater than Q1 FY 2017. The EPS range also includes $0.04 to $0.05 operating dilution for the net of our recent acquisitions. The diluted share count is now 65,283,000 shares. For comparison to last quarter, the results for the second quarter ended December 31, 2016, were revenues of $232 million and GAAP diluted earnings per share of $0.37. Remember the Q2 FY18 EPS included $0.04 of positive one-time items included a positive $0.5 million positive foreign currency gain offset by inventory and earn-out valuation increases. For more information on our company, II-VI will hold first ever Investor Day at NASDAQ market site in Times Square, New York City next Wednesday, November 8, 2017. The webcast will begin at 9.30 in the morning. For those of you who wish to join onsite registration is required for security reasons and we ask registered guest to please arrive by 9 O'clock in the morning. We hope you can join us. Now as we turn to Q&A for this call, remember that our actual results may differ from these forecast due to a whole variety of factors. Those include but are not limited to product mix, customer orders, competition, and general economic conditions. I'll also remind you that our answers to your questions today may contain certain forward-looking statements which are based on our best knowledge today and forward actual results may differ materially. In addition during our Q&A we will abide by our obligation to protect our customer's confidential information and as a result we may only answer your questions to the extent allowable. Michelle, you may open the line for questions.

[Operator Instructions]. Our first question comes from Dave Kang of B. Riley. Your line is open.

Hi, Dave.

Yes, good morning. I guess first question is on the VCSEL. Can you give us what the revenue was, orders, and how should we -- what should we expect for us second quarter.

Well with respect to the first quarter we don't give revenue by product lines so we won't answer that. And as we indicated in the script, we do expect to see this was being a part -- a good part of our growth in the second quarter.

So nothing material included in the outlook is that a fair assumption.

I didn't say that. We don't forecast by platform.

Okay. What about on the optical communication side book-to-bill was 0.78 do you believe this is really the bottom here any color on China as well as North America.

So, first of all, I think as we said China continued to be a good market for us in optical but as well as in industrial as did North America. We look forward to having a very good year in optical whether or not this is precise at the bottom or not I guess I can't precisely say because we don't forecast book-to-bill but generally speaking we expect to have optical see growth -- the optical communication side see growth this year.

What about this quarter, can you just go over your outlook assumptions for second quarter then by segments if possible?

We don't forecast by segment. I mean I would expect to see as I said we expect for the year but to have communications growing in this year that's probably the extent that we can say since we really don't give guidance by segment.

Got it. What about in terms of gross margin and OpEx for your second quarter outlook.

Well, so first of all I think with respect to the gross margins we continue to focus everyday on improving the set of margins in the company starting first and foremost with the gross margin. I think as we continue to see our various growth markets continue to pick up fee, we will see positive contributions to the margin. So having the margin now at $40.5 million it just still a lot if the company crossed $40 million. So, I don't know it's necessarily going up by hundreds of basis points sequentially but we will look hard for this year to continue to see what we can do to improve that margin. I think that's probably what we can say on the margin. With respect to OpEx we do expect to continue to invest in our operations particularly from an R&D point of view. And we will look to ensure that to the extent possible we can reduce or monitor the SG&A to allow for this investments in aggregate in OpEx to be more funded in R&D than in G&A.

Okay. And then on the acquisitions IPI and Kaiam obviously they are having some impact in terms of dilution, when should we expect that to become at least neutral?

So with respect to the two acquisitions, obviously, we gave the numbers combined IPI today is accretive to earnings, most of the dilution due to the low levels of revenue or mostly with the Fed. As we indicated last quarter we will work through this year to try and minimize that impacts on the margins as much as we can as the year progresses and the revenue picks up.

Okay. And lastly on the clarification, what do you say that the number for shares for second quarter, why should we use for number of shares?

Sure. It's 65,283,000.

Our next question comes from Mark Miller of The Benchmark Company. Your line is open.

You are projecting -- hi you're projecting broad-based growth in fiscal 2018 I'm just wondering in terms of actual sales numbers if you could -- not given the exact numbers you're expecting of course are expected to happen, but in terms of what areas do you think the greater sales growth will come in terms of dollar amounts?

That -- it could be all over the math but as we saw last year, we saw our silicon carbide business double in the year; Giovanni has also just described to you the excellent growth that we are still seeing in EUV so because we don't forecast by segment it's tough to tell. But I would say that I do not think any of us and Chuck might have a better answer, would expect to see any major end market dramatically down. That's not given you a number by growth area but I do think we would expect to see fairly broad-based growth in the FY 2018 here.

Across all three segments.

I'm assuming that VCSELs is included with the silicon carbide and EUV?

Oh, certainly. Sorry I may not have mentioned that, it's just having a slightly better record for last year, so how the growth goes is always a little bit hard to predict which is the reason we don't give growth by segment. But as Chuck said, we would expect to see the contributed for the aggregate of the company contributed by all three segments.

Another firm shipping into the 3D-sensing market for VCSELs has projected that they expect the VCSEL margins to be above their corporate average. How the VCSEL margins look for you as you ramp through the year? They got to be above average, at average or below?

I don't say this. First of all we don't give gross margins and margins by product anywhere. But as a general matter, I think gross materials; materials and [indiscernible] tend to be generally better than margins that assemblies let's say which have a lot of assembled parts to that. As we said fairly consistently, we do not expect to see the VCSELs margins be dilutive.

Okay, helpful. Can't expect it to be down last two quarters, can you give a little more color on that?

Sure. Well first of all everyone will remember that in the 12/31 ended quarter which was second quarter of 2017 we saw fairly significant increase in the bookings as we secured longer-term agreements with customers. That then provided the orders that would normally have come in what would have can say three more months out or six more months out and that is why we actually say as I said that we expected the bookings to go down. We continue to see fantastic customer interest across our product lines including the more core product lines not just the newer ones Giovanni described. So I think again we expect to see the communications market should be a growth area for us coming into for the 2018 year.

I would add Mark there were no surprises in that for us based on Mary Jane's very excellent explanation. There we no surprises. Just two weeks ago while I was in China visiting some large customers I believe that that as we go forward that we will continue to see as Mary Jane said, the opportunity for us to grow in that business.

Okay. And just two more questions, could you remind me that where the VCSEL orders could come in or the laser solutions in the Photonics segment and then I'm sorry I missed the backlog breakup.

Sure. So first of all the VCSEL sales from laser solutions and delay the backlog breaks out right now, it's first of all $390 million in total. So it's $135 million in photonics, $145 million in performance products, and $110 in laser solutions. And as I noted that level of a backlog for photonics at $135 million, is still 18% higher than it was in Q4 of FY 2016.

And one more, wireless was roughly 40% sales or 42%?

Sorry say that question again, Mark.

Wireless sales were roughly what percent of total sales, was it 42% or 40%?

So sorry, so it’s 42% for the totality of communications which is wireless, optical, and data.

[Operator Instructions]. Our next question comes from Jim Ricchiuti of Needham & Company. Your line is open.

Just given the backlog and bookings trends in photonics, would you anticipate and I know you don't forecast segments, but just in light of this, would you assume that the photonics business would be flat in Q2 or up modestly?

Well as we said actually so thanks for that but we don't forecast by segment, I think it’s tough to tell just early in the year how we will actually breakdown as we said we expect to see growth across the end market drivers.

I would add. Hey good morning, Jim.

Good morning.

Jim I would add just a quick reminder that a double-digit percentage of our Photonics revenues are derived from selling into the fiber laser market, the life sciences market, and the UV office market. And in particular they continue to be operating at a very high level. So there is -- we're not exactly sure but just as Mary Jane said, we may see a little bit of trade well back and forth between the industrial part of the business and the communications part. But as Mary Jane said, there will be a little bit of a bounce between the two. Okay?

Okay. Going to guidance for what 4% to 8% sequential revenue growth, if I heard you correctly I think a fair amount of that sequential increase is going to come from the ramp up in the VCSEL business is that correct, did I understand that correctly?

No.

No.

We said -- no, we expect to have a number of drivers driving the increase Q1 to Q2, VCSEL will be a part of it.

Okay. Looking at the range that you’re giving for revenues for the fiscal second quarter, can you talk about what the biggest contributors might be to the range of revenue that you're guiding to?

I think we will expect to continue to see increases in industrial for example. The industrial end market is probably generally speaking the one that has been newer pick-up. We already talked about the new products which will be a cost all the new areas VSCELS, EUV et cetera, and we would expect to continue to see some decent strength whether it's a major contributor of the growth, is I think we will see on time. Communications as a general metric will also be a contributor. So it's tough to breakdown exactly how it will come forward.

Okay. And then last question for me is just looking back at the quarter within the industrial business and you may have given this I may have missed it but can you say what talk a little bit about the performance of the CO2 business and the fiber-related business looks like you had a pretty good quarter in industrial over those two pieces in terms of whether you want to break it down by dollar amount or just increase?

Sure. I mean I said this way, I mean I think CO2, high power CO2 laser components and fiber laser components for high power laser applications continue to be about 15% to 18% of the company overall. In fact for CO2 we will be moving about 100 staff employees out of the Saxonburg location to prepare for the expansion that they need to do, some from industrial but also EUV. So as we have expanded the Saxonburg plant to 10 years, so that's kind of a major big deal here, and then the balance of the laser -- the industrial market would be for optics and other components from the industrial market for EUV and then the balance for the precision optics that tend to be used in applications like laser marking and engraving, so once that are lower power CO2 applications.

I would add that the momentum that we saw in particular in the fourth quarter and specifically in June as an accelerated broadly quarter that momentum is carried on for the CO2 laser optics business largely from Europe and the U.S. and maybe still down just in fact in Asia relative to that momentum from the fourth quarter, June.

Our next question comes from Richard Shannon of Craig-Hallum. Your line is open.

Hi Richard.

Hi guys, thank you for taking my questions. I want to start with a couple of quick ones on 3D-sensing, I think as you confirmed what you said the last quarter you expect to be up into full production by the end of this current quarter, can you talk to any degree of quantification or qualification about what kind of capacity do you expect to have in place and also whether you expect the gross margins to be kind of a mature level exiting this quarter as well?

Actually, no. So first of all we are producing across our capacity and I'm very, very happy to see the earliest claim with an excellent ramp up that the team did. But first of all massive improvement, increases in output, yield improvement goes on and every factor that fits everyday and the ability to do that continually will expand the capacity of the installed machine flows, we could see that very clearly last year as a different example and article when we expanded quite a lot in the 2016 and 2017 year even before we added capacity. So that will continue, from margins stop out in one quarter, I mean we are very early in this stage. This is hardly the first inning; I mean it seems to me like exciting process for this end market really developing an applications for 3D-sensing adoption really coming into their own. I would expect that we would continue to look for increasing margins improvement as time goes on here.

Okay. Fair enough. Second question on silicon carbide here, I guess question I have is as you move forward on getting large sized substrates, I wonder if you could talk about the progression within the industry and your ability to gain share in addition to the strong capacity growth you have here, when we might see that and kind of a secondary question on this topic, Chuck if you can characterize this, what -- could you give us a sense of the scale of your silicon carbide business today?

Okay. May be I will take the second one first and I will ask Gary Kapusta, our Chief Operating Officer to make some comments about the rate at which we are expanding our operations. I believe that we have at least being the largest independent infrastructure in place today from producing high quality semi-insulating and conducting large are diameter wafers for this market. And we’ve given some indication Richard, of the size of the market, we’ve given an indication of the size of our business and you can triangulate roughly where we were relative to the marketplace. I think what matters the most right now and as I just finished travelling between Europe, U.S. and Asia, every place I go there is a customer that would like to buy more from us and more what we can make. And so we have and Gary can talk about it just for a minute, we have one of our major capital expansion investment projects to being inside this business because we believe that our technology and our products are not only scalable but they are of such high quality that long-term they are going to be in demand even just others bring on additional capacity. So I feel very, very excited about it and I'm disappointed that we cannot source everybody as much as I want to here at the moment but I believe that situation is going to come more into balance here inside the next two to four quarters. Gary, what would you like to add?

Yes, thank you Chuck and I appreciate the question Richard and good morning everyone on the call. Yes absolutely, silicon carbide is a very exciting technology for us why I would say it’s time has come, we have prepared for it in terms of the technology, we continue to get very, very good feedback from our customers relative to the quality of our products. What we need to do is continue to go to expand our operations to address this ever increasing market and we’re doing that and we’re doing that at pace with some very, very comfortable for us very controlled for us in line with our customers' expectations. So we’re working with the customers to understand their long-term requirements to make sure we’ve got the right level of agreement in place, in place we add capacity, we’re doing it in a manner that's consistent with their needs as well as with level that we’re comfortable with. So we've basically now got us out in a position where we expanded capacity probably on those one from where we were a few quarters ago and we'll continue to add capacity as it makes sense on a go-forward basis.

Okay, thanks Gary.

Okay, thanks Gary. Okay, that’s helpful. Thank you for that Gary. One last question from me, I will jump back to the queue on the operating expenses and I may not have captured all some of the moving parts here especially related to the acquisition stuff with the OpEx hugely a bit higher than what I was anticipating, I think that’s kind of extending into the December quarter. Mary Jane wondering if you can give us a sense overall here of when we expect to see some leverage coming from the OpEx understanding obviously you’re investing in some very high growth markets but when can we start to see some of that leverage occur?

So I would say this, it’s important goal for this year for us to moderate the typically the G&A growth, I think as we do that some of that may move to engineered honestly and some of that will opposed to have as part of our as we said earlier on every margin improvement. But as we just indicated through we have UK acquisition into the quarter’s results which we didn’t have last time as well as some of the deal flow.

Okay, perfect. That’s all from me. I will jump out the line and thank you.

Sure.

Our next question comes from Tim Savageaux of Northland Capital. Your line is open.

Hi Tim.

Okay, good morning. Sorry about that. I want to make sure I’m unmated. I want to follow up on Chuck’s comments on the model of it was specifically on communication while I guess maybe it was with regard to a recent trip to China and just ask you to maybe amplify on that a little bit, we've had milestone recently with the Communist Party Congress over there it sounds like you may have been over there right at that time and at least maybe some indications early of increased activity after what’s been a pretty quiet 2017 although the impact on you guys has been I would say a little more muted than most. Although I think we do see some of that in the book-to-bill, in your commentary talking about coming back with a sense of growth potential for the year, are you mean to imply that there you’re seeing some sort of uptick or increase in activity in China either in the near to medium term on the optical comp side got to be my first question.

All right, Tim thanks for your question Tim. Tim there’s really two simple and straightforward always two components to my answer, one we were not surprised in the first quarter by our results. Given the negotiation that we did and the planning that we did inside our FY 2017 we weren’t surprised that’s number one. Number two I would not like to have you think I’m speaking broadly about the market or my view about it but I’m like in four years here what I have to say and I appreciate your question, I got a strong sense that our key customers in China value what we’re doing, they value the infrastructure we have in our product portfolio and my sense is that independent of how much their demand is going to grow and when that we will play a valuable -- continue to play a valuable position in their supply chain. And I’m pleased to report that.

Okay. And maybe if I could follow-up still in the communication side at least the last couple of quarters you’ve given some detail with regard to various end market breakdowns within the communication space. I don’t think I heard that this time but if you would or if you can sort of talk to trends whether they be across metro long-haul ROADM or intra or inter data center with regard to either revenues or bookings, anything kind of notable there from what we’ve seen recently.

Tim last minute change just to make a short summary comment but I think Giovanni’s comments about the VCSEL growth and the VCSEL business for year-over-year for the first quarter was one of the highlights of the quarter from our communications business. Yes, want to like to add to that, Giovanni?

Yes just – hi Tim, this is Giovanni here. So obviously you know the market is not growing at 75% a year. I mean that's not -- so clearly you can expect that we have some significant market share gain but the bottom line despite the fact that actually other platform is limited to in terms of temperature performance and so forth. So we have something working to authorize the limitation, so we expect to further expand our marketplaces in that market. So I think we will be pleased by the 75% yield in yield curve which is I believe it’s outstanding compared to the market rate.

Just to give you a little bit on the numbers roughly speaking there they are relatively the same as last quarter with the exception as Giovanni just said in datacom where it’s 70% of the makeup in the quarter compared to 30% in Q4.

Okay. So that has come out was on VCSEL growth into Datacom applications which we would given the distances I assume would be focused inside the data center, so I think that one -- and last question from me and this is really focused on you mentioned your revenue contribution from recent acquisitions in the quarter, I think you’ll have I think that was sort of a full quarter of IPI, I don't know I guess the question is, is there any further kind of one-time revenue contribution contemplated in the Q2 guidance, I assume would be pretty minimal, if that were the case and if you could run through just really quickly that the dilution metrics for those deals for Q1 and Q2 forecasting and I think I missed some of the details there.

Right, so first of all from revenue we should expect I think this is what you just said that the revenue is not going to change materially from the first quarter going into second quarter so that's the first part. Second of all the way the dilution appreciable works to IPI is actually accretive, so it’s accretive by about -- will be accretive by balance of that dilution is UK Fab.

Got it. And well maybe I will take one more question here while we’re on the UK Fab and maybe this sort of relates to questions about capacity as well. I know when you announced that deal you talked about and I wouldn’t infer there is anything there related to the datacom strength that you just mentioned that would be your kind of core business. But what sort of expectations do you have there for revenue coming out of that new facility whether it’s datacom transceiver focused perhaps with Kaiam, any update on how that agreement that was referenced in the acquisition announcement has evolved and then I guess can you say is that facility or what's the timeline there for that facility to be prepared up and running from an acceleration standpoint assuming you're focused on adding capacity there as well.

Okay. Let me Tim this is Chuck, so thanks for your question as we indicated at the time of the acquisition during the last call, first of all it’s a great facility and it’s a plug and play facility, it’s got revenue, it’s got a suite of plenty of different products that we can make there, we’re going resonate -- pretty going resonate our market but we’re focused on keeping the line warm and running through those commercial products that we have more importantly we’re planning and we’re already beginning to execute a multi-purpose compound semiconductor device fab plant. Having said that over the course of the rest of this fiscal year we will continue to invest both in R&D and in capital to outline and weight out that facility not for end year revenue and large end year revenue and profit benefit but for the years beginning next year to come. So it will take us, as Giovanni discussed on telling you it took us 15 months to get what was into place in the upward try and improve. Our priority would be to do it a little bit faster and do it might be VCSELs to the extent that we’re going to expand our VCSEL array production capacity in the UK as well as the development of [indiscernible] based semiconductor devices, few tracks that we’re running in addition to sustaining the growth in the gallium arsenide market. In each case, they do require us to think and invest both in equipment and in technology and in qualification and we’ve laid out a fairly nice plan to be able to do that as part of our road plan for this fiscal year 2018. And the capacity that will come online, I believe we’ll come online beginning to come online in a meaningful way in the next fiscal year 2019.

Got it, thanks.

I do want to come back to one of the point because there was a question about our VCSEL ramp and our acceleration in the ramp in the second quarter, I do want to just point out because we said in our prepared comments about the growth implied by our second quarter guidance over the first quarter to have a meaningful or valuable component of it from 3D-sensing VCSELs in it and I just want to make sure that we would reiterate that, okay. And I think we have got time for -- are they more questions in the queue or okay.

There are no further questions. I would like to turn the call back over to Chuck Mattera for any closing remarks.

Okay, now I’d like to make some summary remarks. I believe the transformative and value changing forces or accelerating in our markets. I’m excited about the future and great people of II-VI who are helping me to leave the next reinvention this great company. Together we are positioning II-VI to participate in the next generation of information and communication networks. The add rent of autonomous driving and sensing network and the anticipating transitions in the electric vehicle market among others. These changes have being enabled by the rapid adoption of new technologies in emerging growth markets. Focused also on such transformative applications as virtual reality or method reality machine learning, artificial intelligence that new infrastructure is expected to enable. And so and as much are these are core to a whole new economy in the making, they are also for to our ambitious strategy. As we get ready from enable the evolution of the convergence of communications, computing and pursue electronics while driving long-term shareholder value, we are also mindful of our heritage and our commitment to service our longstanding customers. It also informs us our drive to scale on our infrastructure into continuously improve our operational excellence in quality. Therefore even in the short-term we remain as focused on our profitable growth. With that in mind, we endeavor across the company to deliver on the second fiscal quarter and drive part to identify and create sustain prospectus for the rest of this fiscal year. Michelle, this ends our call and let me say that we look forward to updating on your results for the current quarter and our outlook for Q3 both during our second fiscal quarter conference call now scheduled for January 31, 2018. Thank you very much.

Ladies and gentlemen thank you for participating in today's conference. This does concludes the program and you may all disconnect. Everyone have a great day.