Coherent, Inc. (COHR) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the II-VI Incorporated FY18 Fourth Quarter Conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn conference over to Ms. Mary Jane Raymond, Chief Financial Officer. Ma'am, the floor is yours.

Thank you Ashley, and good morning. I am Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our fourth quarter and year-end earnings call for fiscal year 2018. With me today on our call today is Dr. Chuck Mattera, our President and Chief Executive Officer; Dr. Giovanni Barbarossa, our Chief Technology Officer and the President of our Laser Solutions segment; and Gary Kapusta, our Chief Operating Officer. This call is being recorded on Tuesday, August 7, 2018. Just as a reminder, 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 thank you to everyone who is joining us this morning, including Cowen & Company who initiated coverage on II-VI since our last earnings call. Today I will give you an overview of our results and our prospects, Gary will focus on our operational initiatives and plans, Giovanni will discuss the key technologies driving our growth, and Mary Jane will explain our results and guidance. II-VI had a great ending to a great year. For FY18 our company surpassed the $1 billion revenue mark for the first time in it's 47-year history, thanks to strength in every one of our end markets that drove overall top line growth of 19%. This growth validates that our diversification and differentiation strategies including deeper customer relationships, investments in technology, product leadership and increasing scale continue to take hold. The new markets of 3D sensing, EUV lithography and silicon carbide semiconductor substrates drove nearly half of our growth, while a strong demand from the other end markets was extremely well served by our teams around the world. They worked tirelessly to deliver our results and they set a number of records doing so throughout the year. For the fourth quarter revenues grew 17% compared to last year and we set another record for revenue in backlog. The industrial communications and semiconductor capital equipment end markets achieved all-time high revenues, and we did not experience any slowdown throughout the quarter from any of these markets. Collectively, these three markets accounted for about 80% of our Q4 revenues. Of our $321 million of revenue in the quarter the robust industrial market demand was the largest contributor to our year-over-year or 62% of our overall growth. Infrared optics sales for CO2 lasers deployed in the materials processing and EUV lithography markets actually grew a solid 20% in the quarter while components for fiber lasers and direct diode lasers also increased 20%, and silicon carbide substrates for poly-electronics applications grew by 225% as our additional capacity came online to serve the rapidly growing demand. Our revenue from the communications end market was strong; sales to customers in that end market drove the highest book-to-bill ratio at 1.18, grew revenue 13% sequentially, and 11% compared to Q4 of last year, and despite challenging market conditions we actually ended the year with 6% annual growth. We saw 20% sequential growth in Datacom driven by the cloud and rotor [ph] customers, we ended the year with a record backlog position us well we believe for an exciting FY19. In fact I am really excited that the demand from optical communications market accelerated through the quarter and into July which started the year off with a record monthly bookings. Our revenues for the customers in the military market grew 30% for the year as the military market is in the midst of a number of technology and product transitions involving high power semiconductor lasers and precision after mechanical assemblies. We believe there is a longer term trend forming that suggests that the market is moving rapidly towards our platforms and so we are accelerating investments in this area during FY19 to meet the growing opportunities. We can also feel the momentum increase as our sales into the semiconductor capital equipment end market grew 10% in the quarter, with EUV lithography product revenues growing over 30% in the quarter, and a very strong 65% for the year. We believe that the addressable market for EUV tools over the next 36 months will increase to about $7 billion dollars. EUV lithography component shipments are now about 3% of our revenues and our manufacturing operations at multiple locations had service market will have new capacity coming online during FY19. Our 3D sensing end market demand for Q4 was consistent with what we communicated last quarter and with typical consumer electronics seasonality, and we continue to invest significantly in new product development and qualification processes during Q4. The market continues to present us with attractive growth characteristics, market reports from various sources forecast the addressable market for consumer VCSELs to range from $1 billion to $3 billion by 2023 expanding our market leadership and serving a growing number of end markets and applications enabled by semiconductor lasers is a priority for the company. As a result we continue to be engaged in numerous 3D sensing in light of our design and efforts aimed at increasing our customer base and driving increased functionality of the end applications. Turning now to the strategically diversified distribution of our full year FY18 revenue by end market; 39% was in communications including wireless and optical communications, 30% was in industrial, 10% was in military, 8% was in semiconductor capital equipment, and the remainder was in consumer electronics or automotive and life sciences. FY18 sales were also geographically diverse; 43% in North America, 21% in Europe, 20% in China, 8% in Japan and 8% for the rest of the world. In 2018 we executed well against our market strategies, realized 16% organic growth, broadened our customer relationships, enhanced our product offerings and invested scale in technology including the acquisition of CoAdna and I'm excited to welcome the CoAdna team to II-VI around September 1. We closed the year with a record backlog, a number of our manufacturing centers operating at capacity which we will selectively invest in during FY19 to me the anticipated customer demand, we achieved a record cash flow from operations in the last quarter and positive free cash flow after two years of investment. I'm really excited about our prospects and I would like to thank all of our employees around the world who are well underway covering the ground quickly in order to deliver another exciting year. With that, I would like to turn the call over to Gary to focus on some of the highlights for the quarter. Gary?

Thank you, Chuck. Our strategy to target investment in selective growth markets with transformative applications will require our differentiated material platforms as resulted in accelerated growth; much of this from our largest and fastest growing customers. As one important measure, we ended fiscal year '18 with 26 customers contributing over $10 million in annual revenue, a major difference compared to fiscal year '15 when we had three customers contributing revenues greater than $10 million. All of these greater than $10 million customers bought products from more than one division of product line, about two-thirds bought from more than one segment and collectively they account for over 50% of our fiscal year '18 revenue. During fiscal year '18 we did not have any customer that accounted for 10% of our sales. Total customer demand and long range planning for future demand drove our fiscal year '18 investment of $153 million in capital equipment. We invested $50 million in our compound semiconductor material and device platforms, initially the main driver for [indiscernible], $35 million for CO2 and fiber laser and direct diode laser materials components and subsystems, $27 million for silicon carbide substrate technology in capacity expansion, $18 million for our optical communications components, $13 million for EUV lithography components, and $6 million for military materials and precision optical assemblies. Since our end market contributor experienced strong demand, we expect the fiscal year '19 CapEx to remain in $140 million to $170 million to accommodate our anticipated longer range growth. We also invested about $3 million during fiscal year '18 to begin the consolidation of some of our global operations to improve efficiencies. With an increasing number of our customers buying components made by multiple product lines across the company, we also continue to unify our global sales force including consolidating the back office functions of our customer service operations. The consolidation of our European sales operations into one location enabled us to centralize inventory, improve our customer service, and overtime we expect to reduce our costs to serve and to increase our sales. We also expanded some of our manufacturing sites in order to consolidate other sites to leverage synergies and improve productivity, this including included upgrading systems that allow multiple divisions to operate from one side. We've now done this in the Philippines and Vietnam, and we have worked underway for similar outcomes in China [ph]. We continue to examine our options to make further improvements across the company and are working with urgency to do so. Finally, regarding our pending acquisitions of CoAdna, many of the required steps are completed and we are planning for a September 1 close. CoAdna will be integrated into the plutonic [ph] segment. The terminus grade -- our customers are excited and we believe CoAdna will be a great addition to II-VI. Will look forward to being able to satisfy our customers requirements for more integrated solutions incorporating wavelength selective switches. With that, I turn it over to Giovanni for the rest of our highlights this quarter.

Thank you, Gary. 2018 was a great year for several of our engineered material platforms in the company has invested for as long as 20 years as we experienced a growing demand driven by a number of major trends. Silicon carbide substrates, CBD diamond optical windows, optical isolator materials, pump lasers were in a high demand enabling a broad range of rapidly growing applications in data center communications, extreme EUV lithography, 3D sensing, 5G wireless, and electric vehicles. During 2018, they've contributed significantly to our growth and we believe they will continue to fuel our growth for many years to come. Silicon carbide substrates now constitute 5% of our revenue and are growing rapidly. Silicon carbide semiconductors are in strong demand in our performance wireless applications due to their thermal efficiency in gallium nitride based devices. The demand for silicon carbide semiconductors is even stronger in power electronic applications due to their wide vanguard properties enabling high electrical power conversion efficiencies in electric vehicles, industrial motor drives and other applications driven by the demand for clean and renewable energy. In 2018 we expanded many of our manufacturing operations including CBD diamonds, precision mathematics composites, and natural components for CO2 lasers, particularly for extreme EUV lithography. This latter category which grew 65% on an annual basis in 2018 improves the manufacturing efficiency of 7 nanometer nodes and will enable 5 and 3 nanometers process nodes in the future. VCSELs sales came in to greater prominence this year for their option in previous applications. VCSELs and other compounds semiconductor components for Datacom grew nearly 50% sequentially and 66% year-over-year. VCSELs for 3D sensing and Datacom are now about 5% of our revenue, and we expect to sustain growth driven by data center investment and broader adoption in consumer electronics. Sales of fiber and diode laser components grew 20% in the quarter. The industrial pump laser components in particular grew 160% year-over-year as we enable more than 30 fiber laser makers in the world, most of them in China. Our high power laser beam delivery systems also showed impressive strength with a growth of 40% for our IPower fiber cables. In communications, the demand for our pump lasers exceeded, this apply for most of the year, even as we continue to increase manufacturing capacity and most of the industry was challenged throughout the year. Our optical isolator materials delivered just over $20 million of revenue for the year from our acquisition of IGI, about 15% above our expectations. These materials are used in optical transceivers to prevent light reflections into the lasers, they are also core to optical circulators that enable Datacom transmission over one fiber instead of two greatly reducing the number of cables in data centers. Our R&D spending this year increased 21% compared to FY17 from both organic and inorganic investments. About 60% of the increase came from our recent acquisitions which added to our capabilities in optical circulators and isolators and the expansion of our 60-inch compound semiconductor device manufacturing platform as our state-of-the-art fiber in the U.K. We also made significant investments to expand our laser diode product portfolio to a broader spectrum applications beyond 3D sensing in consumer electronics, as well as in innovation to increase manufacturing throughput of silicon carbide substrates. With that, let me turn it over to Mary Jane.

Thank you, Giovanni and good morning again. Regarding our press release, you will see that on the first page we share the total company numbers for the quarter and the full year including an expanded definition of adjusted EPS to include the charges for the Tax Reform Act and the company's subsequent actions, share-based compensation, amortization and one-time M&A costs. The details of these items by financial statement cash in are on Table 9 for the quarter and Table 10 for the full year. Then on the second page we have our standard segment table; the company's overall gross margin for Q4 four was 39.7% and 39.8% overall for the year. The operating margin was 11.9% for the quarter and 11.7% for the year. Operating margins did not improve materially from FY17 either in the quarter or for the year due largely to about a $2.7 million negative effect of currency on the quarter compared to Q4 FY17 or about 80 basis points and $7.3 million negative effect of currency for the whole of FY18 compared to fiscal year '17 or 60 basis points. The reported quarterly revenue growth rate in the quarter was 17.3% and the organic growth rate was 15.5%. Regarding the segment operating margins, all segments reported double-digit margins this quarter. Compared to the prior year fourth quarter later solution saw the benefit of 3D sensing, EUV and growth in Datacom. Photonics withstood the brunt of the currency impact reducing their operating margin by about 240 basis points. Performance products operating margin of 11.9% was below last year's high of 15.3% though their last Q4 was exceptionally strong as we said at that time. The quarter's backlog of $451 million consists of $163 in photonics, a $162 in Performance Products, and $127 million in laser solutions. The backlog contains orders that will ship over the next 12 months. We had $4.4 million in share-based compensation for Q4, a sequential and year-over-year increase due to the rise in the stock price. Annual share-based compensation expense was $19.7 million compared to the FY17 total of $16 million and then $12 million for FY16. The company had other income of $1 million primarily from equity earnings from our investments. Capital expenditures this quarter were $37 million and $153 million for the year. Our depreciation expense was $19 million in the quarter or about 21% higher than Q4 of FY17 driven by our capacity and portfolio investments. With respect to interest and amortization on our convertible debt, Table 7 on Page 4 of the press release lays this out. Because the effect of the convert is slightly anti-dilutive after considering the effect of our equity compensation on the diluted share count we now do not need to add back any aspect of the convert to the EPS calculation. The Q4 FY18 tax rate was 20.6%, this included a reduction to the expense of implementing the Tax Act of $1.3 million, the total impact associated with the Tax Act and the company's related actions was $8 million. Please note, that under the SEC guidance for U.S. public companies implementing the new Tax Act companies have all of calendar year 2018 to finalize their estimates. For II-VI now with our full year earnings in hand, we believe we have the majority of the effects of the new Acts recorded, excluding this impact in Q4 our tax rate would have been 24%. We now expect the tax rate for FY19 to be between 19% and 23%. The reported EPS in the quarter was $0.42 a share and $0.52 per share on an adjusted basis compared to $0.50 in Q4 of FY17 and $0.48 on an adjusted EBITDA basis. Our EPS this quarter was not materially affected by currency due to hedging and there was about a $0.02 per share tax expense for the change in the mix of the taxable income around the world. Our cash was $247 million and our net debt position is $250 million. We did not repurchase any shares this quarter and still have $31 million remaining on our authorization. Turning to the outlook; the outlook for the first fiscal quarter ended September 30, 2018 is revenue of $305 million to $315 million, and EPS on a GAAP diluted earnings per share basis of $0.36 to $0.42 including $0.04 for CoAdna, onetime expenses. We expect CoAdna to be EBITDA breakeven for the quarter and the year. On an adjusted basis, the EPS is $0.54 to $0.60 share which includes adding back $0.04 for the onetime costs for CoAdna as I just said, $0.06 for amortization expense and $0.08 for share-based comp but excluding any refinements to the transition tax as the company monitors any further guidance on the implementation of tax reform. This is all at today's exchange rates and we do not forecast the currencies on this guidance. The weighted average share count of 66 million shares this quarter as the convert is slightly dilutive we do not need to add back the 7.2 million shares. For comparisons to the prior period, the results of the first quarter ended September 30, 2017 with revenues of $261.5 million and GAAP diluted earnings per share of $0.32. This $0.32 EPS includes $0.03 for M&A costs, $0.09 for stock comp and $0.05 for amortization. Now as we turn to the Q&A for this call remember that our actual results may differ from these forecasts due to a variety of factors including but not limited to changes in product mix, customer orders, competition and general economic conditions. I also remind you that our answers today 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. In addition, during the Q&A we will continue to abide by all of our customer confidentiality requirements. Ashley, you may open the line for questions.

[Operator Instructions] Our first question comes from Tim Savageaux from Northland Capital.

First, I wonder if you might provide a little more color on the strength in photonics bookings that you provided some additional details on trends in China. Last quarter though I imagine your strength is pretty broadbased here; so as we look at the photonics book-to-bill of 1.18 do we assume that's principally driven by optical communications and are there any kind of product or geographic areas within that are worth calling out? I guess finally on that I'd imagine that would imply sequential growth in revenues on the photonic side in fiscal Q1 and declines across the rest of your segments where you did see it's lower book-to-bills below one?

So a couple of things just to level set. Number one, as you guys will all remember bookings can be lumpy, so the bookings in the quarter do not necessarily foretend [ph] exactly the Q1 revenue. The other thing I'll just remind you is that the Q1 period is normally the seasonally low period for industrial; so let's just make sure you'll all remember that part. I would say it's probably fair to say that with respect to photonics the growth was fairly broadbased. Giovanni in particular probably told you a little bit here as did Chuck about the growth we're seeing in Datacom but still I would say across the board we're seeing some pretty nice growth on the photonics segment.

If I could follow-up on that, you did announce capacity expansions which you refer to -- on the call on the amplifiers and pump laser side. In terms of the timing of that expansion is that -- does that contribute to revenues in the June quarter or will it for the outlook for September -- that increased capacity?

I'd say that first of all -- because pumps in particular are such a vital component broadly based in optical communications, I'd say that the most recent capacity that we just announced is probably not per say affecting Q4 but other capacity expansions that we've done probably are, and it will probably be roughly online in at least the first half of the year. Keep in mind that we when we do a capacity extension we're not necessarily laying out a whole line, the whole goal is to break bottleneck.

Looking at the overall kind of down sequential guide after a strong fiscal Q4 along with the laser solutions book-to-bill; now wouldn't seem to imply a big seasonal uptick on the 3D sensing side but I wondered if you could provide any comments there about what your expectations are for the second half of the calendar year?

First of all, again, with respect to the laser solutions book-to-bill, as we try to remind you that the book-to-bill which was 1.09 in the Q3 quarter -- bookings can be lumpy. I would also say that -- again, in some quarters -- in some years Q4 to Q1 we've had as much as $25 million of a difference between Q4 and Q1; so I would say again, it is the seasonally low quarter for industrial. And notwithstanding, all the great strength we're seeing in industrial and I would not necessarily read that as just about 3D sensing at all. Please, Giovanni.

I pretty much just want to mention this; we believe that our -- the second half calendar '18 revenue will be higher than the second half calendar '17 and so it will be -- it would be an upside for us best as last year.

Our next question comes from Troy Jensen from Piper.

I guess I just wanted to have a little bit into the industrial lasers business such with the book-to-bill that would just mentioned briefly. I mean, it sounds like you guys are extremely upbeat on the EUV business, so that was probably I'd imagine a book-to-bill about one within the segment, 3D sensing is expected to be up, so if you just talk about the industrial lasers within that? And I'm curious to know if you guys saw any weakness at the end of the corner, given all the trade chat here [ph]?

Regarding our commentary especially about the 20% increase in our sales to fire a laser and direct diode laser makers, we did not experience any slowdown throughout the quarter. We had a strong demand, Giovanni mentioned in his comments, we're serving today 30 solid fiber laser makers around the world. And our portfolio of both, optical components, laser components, deliver systems, cables -- I mean, we are a full line supplier and more and more people are coming into the marketplace it seems, and our value proposition is really a real good fit for those kinds of companies. So I would say it was just a solid -- overall solid quarter and it was just solid and steady quarter.

And about that -- Giovanni, could you repeat some of the growth rates that you said for the consumer excel business -- I apologize if I missed them.

No, I didn't mention any number, just said in the second half of the calendar '18 will have a higher revenues than in the second half of the calendar '17; so we're consistent with our communications in the previous quarter, last quarter and two quarters ago we see that as being the case. So we anticipate higher revenue than last year, last calendar year and this second half of the calendar year.

It's also probably fair to say that we accept Q4 here with the highest laser utilization that we've seen in the last five years, and if you all will remember, it -- since we sell prices well into the aftermarket, the laser utilization is very important.

Mary Jane, one last one for you; just -- can you give us -- I think you will during the quarter but there was laser solution sales in the life sciences and consumer bucket?

Yes. So we will put forward the chart for you for sure but with respect to laser solutions in life sciences, automotive consumer and all those other small ones, they are probably in the neighborhood of about I'd $25 million or $30 million.

Our next question comes from the line of Meta Marshall from Morgan Stanley.

Two questions for you. One, you know the Datacom results kind of seem to be a significant step-up, and so I just wanted to get a sense of -- is there lumpiness to that market or are there kind of order based uptick that we could have seen this quarter that may not follow through the next quarter or are you kind of seeing an inflection there? And then second question, you mentioned all the areas where you're investing in, are there certain -- without divulging kind of what exactly your capacity constrained on, can you just give us a sense of maybe what categories your capacity constrained on today?

I'll take the Datacom, and let's take that one first. I think the best thing we can say -- the best thing we can do is look backward, and what I can tell you is that for the way in which we segmented the market and wind our product portfolio comparing to the same quarter last year and we experienced 80% growth. And then comparing it to the prior quarter, I mean Q3 of this year, we experienced the 21% growth. And over the last four quarters it hasn't been lumpy, it's been up into the right and we're working really really hard to position ourselves with an increasing number of customers, a broader portfolio of products, and I won't be satisfied even if the market is lumpy, I'm expecting to win a greater amount of share.

And then with respect the prior question about capacity constraints, I'll say probably silicon carbide and EUV are probably the most capacity constrained as we go forward. But Gary and I both talked about what we think the capital will be here; I think we will be watching this as the year goes along and as I mentioned earlier, our goal in capacity expansion is to break bottlenecks and so we do that on almost continuous basis.

Yes, let me just add to that because I think Tim was asking about capacity as well. EUV for sure, silicon carbide for sure as Mary Jane said, our communications market for sure -- both in the passive component for interim filters and around pumps and amplifiers, [indiscernible] filters, the whole suite of products that underpin the growth in the DCI market, the cloud -- the driving increases in the cloud and then routing deployments. So we have almost a symphony of constraints that we need to manage and we're managing them carefully, deliberately and absolutely with a great sense of urgency; so we quantify the investments to be sure that those investments are balanced and keeping pace with what our customer requires of us. And then as you heard from the rest of the narrative, it's been stepping up here in the last three or four months and we're stepping up our game at the same time.

Our next question comes from Richard Shannon from Craig-Hallum.

Quick question on the guidance; just to make sure -- I don't think you specified but I just want to make sure that you were not including CoAdna in the sales guidance for the September quarter, is that correct or are you including it?

No, it's very immaterial, it's not even going to come in until September 1.

Second question on 3D sensing; Chuck, I think you will remember the call you saying last quarter you expected substantial growth in the VCSELs racers 3D sensing in the calendar second half over the first half, I don't think I heard you reiterate that commentary. So just want to make sure -- or I guess, just get your latest thoughts on what you're expecting from 3D sensing in the second half of year?

Sure Richard, I'll give it to you this way -- let me give it to you qualitatively. In Giovanni's comments, he answered Tim's question I think by comparing our anticipated second half of this calendar year through the second half of the last calendar year. Your question is whether or not we're on-track to where we thought we would be 90 days ago with the second half of this calendar year being higher than the first half of the calendar year, and I can tell you substantially second half of this -- the first half of this calendar year, I expect will be up.

I guess just in the context of getting kind of following up on a couple of previous questions about your book-to-bill and the laser solutions business being a little bit below one and your commentary about industrial lasers being -- I guess solid yet seasonally down, I'm just trying to balance those two out and see why the book-to-bill is down and both of them look to be progressing well here. Any clarity you can offer on that Chuck would be great.

I think the best I can say is that the bookings in some of these markets including in the emerging markets can be lumpy and we've seen them to be watched [ph]. So that's our best view today, as we look out, we've given guidance for the first quarter but now you're asking to go out to the full rest of this calendar year and it's my best view today with all the facts that we have that we will be considerably higher in the second half of the year than what we were in the first half of the year. That's what I'm expecting, and that's what we're driving to Richard.

CapEx; did I catch the number correctly of 140 to 170 for fiscal '19? And whatever the number is, can you give us just a sense of any priorities you have for that CapEx especially if they're changing over fiscal '18?

You have the number correct, we're targeting 140 to 170 in CapEx for the year. Our priorities will vary as we begin to get more clarity from our customers and lock-in some of our longer term agreements with them, but clearly, the areas that Chuck talked about earlier in terms of industrial EUV, diamond, silicon carbide, photonics pumps, and amplifiers as the top of the list also will have some capacity expansions really in all of our divisions across the board but at a much smaller level. As we see, growth really in all of our end markets.

I would add to that; I'm on field desire [ph], especially at the early start of the baseball game that we're in. In your revenue, profit and cash, and then as part of our service to our customers, and then a roadmap to be able to expand our capacity and capability to be able to enable the broadband service to all of our customers and at the same time be able to make money, that's what we're after.

Our next question comes from James Kisner from Loop Capital Markets.

I was hoping you can give us -- I know you don't really guide OpEx or gross margin but I was hoping maybe [indiscernible] erection obviously the EPS guidance is well above the street and the revenue is not near as -- not so much; I'm just trying to understand within that what you're expecting your gross margin -- are you expecting a pretty good improvement sequentially in OpEx as well? And maybe if could also just -- again, to touch on the share account and contribute [ph] to convert that you're anticipating in this coming quarter -- September quarter, is it -- are you using 65 million shares which we're billing if already test or running back interest and just kind of quickly go through that? Thank you.

So first of all, let me do the last question first. So as I said, the way that the calculation goes to deal with the convert it goes in order; first, you add back your share-based compensation and then you look at the effects of the convert. The convert is now for us a little bit anti-dilutive, so no, we do not add back the interest and amortization, and you do not add the 7.3 million share. So you would use the 66 million shares to calculate the EPS; so that's the first thing. I think the second thing is, with respect to margin we are not changing the margin range that we had out for 2018 and we'll hold it at the gross margin of 38.5 to 41, margin 11 to 13, and EBITDA margin 18.5 to 21; and be working to move to the top end of that range. So I think the way you want to think about it is, then with respect to OpEx is -- Gary spent a good amount of time talking about the work that we are doing to try and corral [ph] the OpEx to consolidate our operations now that we generally speaking have at least one or more in pretty much every country we operated. Now we're kind of about the size now where it's ripe for some consolidation; just of efficiencies and things where I think it will actually be easier on our employees; so that will be underway. I don't know that there is necessarily a significant downturn in the OpEx; I think it maybe perhaps on the way the share account is being used or the way the tax rate might have been calculated, I can't really explain that. But I'd say generally speaking we shouldn't see a market change just in one single quarter but I would say we continue to be very very focused on the OpEx management.

Now I don't think you said directly, you said you thought 3D sensing is going to be up in the second half year-over-year. Just talking about lean year, your efficiency revenue -- I mean you expected calendar Q4 to be bigger than calendar Q3 for example, or I'm just trying to get a sense?

Can you repeat the question? I didn't really understand the last part.

I think you didn't make -- I'm not sure if you've commented on the calendar Q3 -- fiscal Q -- it is a typical quarter outlook for 3D sensing, I mean what you did with the second half outlook for 3D sensing but I was trying to understand the linearity that this sort of -- are you expecting 3D sensing to ramp in calendar Q3 and then again in calendar Q4 or are you going to give that a little more granularity on that 3D sensing outlook?

I think we gave about as much as we can give and extended it out to the second half of the year. I wouldn't feel comfortable to give any more granularity James.

Just last one, I think you said photonics opening margin was down 240 bips year-over-year -- if I heard that right, I know that it was down, I think 275 sequentially. Is that also Forex there are another reason why operating margin in photonics was down sequentially, just want to clarify that.

So you're asking about the operating margin for photonics, is it mostly due to currency?

Yes, the sequential change. I think you made a comment about the year-over-year change that it was down sequentially if I think if I get the math right, 275 basis points, just wanted to understand what was driven that?

Yes, it still is currency. I think we've seen particular hit this year from the RMB.

Our next question comes from Dave King from B. Riley.

I just wanted for you to go over some of the assumptions for your fiscal first quarter revenue outlook, look like the midpoint revenue will decline about $11 million, what's driving that; is mostly industrial laser? And Mary Jane, you talked about seasonality, but what about some of the stuff like IPG talking about some pause from Chinese and European customers due to macro related uncertainties?

Let's talk about laser users in general. I think Q4 first of all, is our year-end and as many of you know, part of what drives that is the implementation of lasers for various industrial applications that tend to be done in the June 30 quarter when the summer is kind of light. Having said that in the quarter ended June 30, we saw as I mentioned the highest laser utilization around the world that we've seen in the last five years; so we continue to see that market fairly strong. I would also say that while we've seen some industry reports, just keep in mind we are a components manufacturer, we are not necessarily tied to any one single maker of a laser system, we don't make the laser systems; and increasingly we've had customers as Giovanni discussed on the number of fiber laser companies that we're serving demanding components. So we continue to see it very strong. I would also just note that for our two largest industrial divisions, their book-to-bill, just those divisions individually fell between Q3 and Q4; so it normally does because in order to have most of the revenue achieved in Q4 you'll see those bookings in Q3 and the Q2 period, the Q2 book-to-bill which I appreciate is not in the press release is actually higher than it was even in Q3. So I just need to make sure you're all clear that what is the prior quarter's booking is not exactly what's driving the next quarter's revenue and I think we see the exact pattern that we expected in industrial to see lower bookings in Q4 in anticipation of -- generally speaking, this first half of the year being somewhat slower than the second.

Yes, let me just add to that if I could Mary Jane. As you know, our June quarter is -- has been historically our best quarter, even when the company was smaller and less diversified than it is today. And we had a great quarter in the fourth quarter, and even at that we ran overheated, a little bit harder and a little bit faster than what we thought when we started the quarter. And so the September quarter historically has been a little bit less busy for us than the prior quarter, and it's our judgment, that's why we put it this way that that's what we're going to do and we're going to go in to meet it or beat it, that's what we're at.

And then just sticking with the fiscal first quarter assumptions, I mean -- so can we assume that photonics and performance will be either flat to up, and then obviously lasers including 3DS will be down; is that a fair assumption?

We're not going to be able to give guidance either by segment or by product line.

But for sure -- I mean you just asked this 3D sensing down, I don't think that's what Chuck and Giovanni just said.

Yes, I just wanted to hear that from you guys. Sticking with 3DS, so since you said second half will be stronger than first half; can we assume that your facility will go into production in second half as your East Coast facility is pretty much getting filled up?

Listen, we have a lot of activity going on but I'm not prepared to comment about timing of qualification of various product lines that we have in the U.K.

And then on a Datacom strength, what are some key products because I mean you've been saying that -- you sell mostly [indiscernible] related parts and I'm not sure if they are really used in the Datacom networks, so what are some key products in the Datacom that's doing well? And is it really highly concentrated or is fairly broad strength within your Datacom customers?

Yes, you're right. I mean, we weren't always saying to vote on anything related to Widmer management for data compression [ph]. So part of -- remember we had high speed picture platform from 10G to 14G to 25G; as well as a number of assets that go into the -- directly into the data center, into the [indiscernible] for data center applications. So between the lasers and the photo diodes and the high speed laser and high speed photo diodes, and to talk about interim fields to mark -- so those altogether been pretty strong, they are the fastest those as being on the high speed VCSELs, we were -- we won major design wins that basically were deployed in large data centers in China and those developed very -- the sequential growth that we're seeing -- so 50% sequentially at 66% year-over-year. And as you know, those are much higher than the growth rate of the market. So clearly, we are gaining share. And one other components as I mentioned in my part of the call that the -- the other significant component which has been driving the Datacom business part out of the combination of [indiscernible] particularly as I mentioned is broad use of circulators to reduce the number of fibers in the data center. So that also was a very important growth engine for the Datacom market for us.

Just a couple of more; sticking with Datacom, your Datacom module suppliers; they've been talking about significant pricing pressure -- how is the pricing environment for components such as Datacom laser? And the second question is on EUV; who are your main competitors and what's your expected market share? That that will be for me. Thank you.

So on the ASP, I -- we have the most practical integrated supply chain, for example, for circulators. You recall that we acquired Integrity Photonics, it is only one of the two makers in the world of faraday rotators that go into the circulators, so have a very good cost structure, we don't really see basically the client has passed us, maybe some people may think; so it's actually pretty good -- we understand there is scarcity of especially good 25G VCSELs, so that's number one. And the same -- particularly the -- we think it's pretty steady. Regarding your price run rate, you'll be real soul sourced in a -- I would say, I don't know the exact number, I would say probably 90% of our supply into the EUV supply chain is basically soft served [ph]. As you know, we make a diamond windows with our proprietary diamond grow reactors and we understand that it's all sourced product -- there is a lot of things I said than other types of products that are going to shift to lasers which we believe we also sourced and there is other components which I can't disclose, they are also sourced. So overall, I think we are in very strong position that we've been from years and years of investments and based on in differentiated platforms that very much nobody can compete with.

The one thing I will say Dave just to answer your question a little bit on performance products kind of year-over-year, as Chuck said, not giving guidance necessarily on the segments but I think if you do look at '17 to '18, Q4 of '17 to Q1 of '18 you will see that performance products also tends to go down a little bit in the first quarter. So, the slower summer period doesn't just affect -- it affects industrial applications also that are certainly outperformance products, so just to keep that in mind. I think that's all your questions.

And our next question comes from Jim Ricchiuti from Needham and Company.

Just two quick questions and I don't know if it's worth noting, you provided some color on bookings in the photonics market in July. Is it worth noting what the industrial bookings activity was in July or is it just too seasonal Chuck to really and highlight it?

No, I don't have any comments about July, it's really the first time that I stepped into it, so -- it's just that it ran right into the -- from the fourth quarter, it was worth noting.

I think it's fair to say though that industrial is very seasonal through this first quarter; month to month is not necessarily an indicator.

With respect to the gross margin range that you're targeting, I'm just wondering given where the gross margins have been the last two years what are the puts and takes that might impact margins on the downside that we need to think about because the range -- if I think I heard you correctly is 38.5% to 41%?

Right. So, I think first of all, sometimes I think we'll give a range for the year and then we're looking for it every single quarter. So just trying to provide what might be a range if you're looking at it quarter-by-quarter, not that I'm saying that about any single quarter. I think currency is a big issue, obviously the hedge that we do in the company is all a non-op income, so it's not necessarily hedged at the gross margin level, that's the first thing. The second thing is what we've kind of talked about I think maybe in 3/31 core, maybe even 12/31 which is the rate at which the company is growing is causing it to be installing new capacity in a lot of places. And contrary to what I think people maybe thought that somehow there was a lot of idle capacity standing around that is not the issue, the issue is -- the activity level and the resources required to get the capacity in at the same time we are trying to expand it. So, I think that's another area. Obviously, ASP's can move, we have some markets that are very very ASP sensitive and you all know which ones they are. And not say obviously market variations; so those are probably the main things we're watching at the present moment that I'd say could potentially affect the margin.

Our next question comes from Mark Miller from Benchmark Company.

Checking the sales; what percent of China's sales or from China last quarter -- 20% roughly?

For the quarter, China sales were actually 20% for the year overall.

And 23% for the quarter, so you still think -- have you seen any changes in the China situation recently?

We continue to be busy there, that's for sure, if that's what you mean in particular. Well demanded by customers expansion of work with customers.

So no fall from geopolitical issues?

Not that we've seen so far, obviously that's something that's on everyone's mind in the industry in general and we're watching that carefully but not so far.

The only one we're talking about is EPE [ph] but that's the only one and we're back in business.

In terms of silicon carbide, did your sales for electric vehicles exceed the telecom sales in that space again?

EV was above wireless, yes.

And when do you see the ramp really coming from 5G, is that still six months a year out or is that just starting to occur?

I think I think some initial systems deployment will start, we'll hear about them this year. But I really think it's a '19 and '20 time, Mark.

And you said you had record cash from operations; could you -- I don't believe I got that cash flow from operations.

Right, so that cash flow from operations is on -- let me see here table -- Page 9 of the press releases so that cash flow from operations for the year was 161 and for the quarter it was 36% up.

It was up 36% year-over-year or quarter or sequentially?

Mark can you repeat your question?

Was it up 36% sequentially year-over-year cash flow from operations?

Year-over-year.

Our next question comes from Hal Silverstein [ph] of Cowen and Company.

My specific questions have been answered but let me ask you a general broad question. Given the broad based strengths throughout your business, what are the risks that could potentially derail the momentum? What are you worried most about and what can you do or are you doing to address them?

The prioritization is becoming an art form in this company. I think the number of things we have to invest in the number of areas where our materials are not only being demanded but an engineered material is important, it make things the amount of things we could be focusing on, almost limitless, so that's probably number one. I'd say number two as we just indicated earlier, observing the geopolitical environment is really important. We -- there is certainly a lot of different kinds of activities going on whether that's on individual customers or trades or tariffs or whatever, I think we're watching that very very carefully. I mean our company is a global company, we operate and have colleagues around the world, they are important to us, and the customers in those countries are important to us; so we look forward to seeing a little bit of easing of concern there but for sure we are monitoring that -- those are probably -- I'd say the main things at the high level. And with that I think we're out of time actually.

And in that case, I would like to turn the conference back to Ms. Mary Jane Raymond for closing remarks.

Thank you, Ashley. This ends our call today. We look forward to updating you on the results of our first fiscal quarter of FY19 on the conference call now scheduled for Thursday, November 1, 2018 at 9 o'clock in the morning. We thank you all for joining us. Great Q&A, sorry, we ran out of time and look forward to seeing you as we resume our investor relations activities. Take care, have a good day.

Thank you very much.

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