Good day. Thank you for standing by and welcome to II-VI Incorporated Fiscal Year '22 First Quarter Earnings Call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to your speaker today, Ms. Mary Jane Raymond, Chief Financial Officer. The floor is yours.

Thank you, Alex and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our Earnings Call today for the First Quarter of fiscal year 2022. With me today on the call are Dr. Chuck Mattera, our Chief Executive Officer, and Dr. Giovanni Barbarossa, our Chief Strategy Officer, and the President of the compound semiconductor segment. This call is being recorded on Tuesday, November 9, 2021. Our press release and our updated investor presentation are available on the Investor Relations tab of the website, ii-vi.com. Just as a reminder, our remarks today may contain forward-looking statements. These remarks are given in the context of today only. They are subject to various risk factors and are subject to change, possibly materially. We do not undertake any obligation to update these statements to reflect events subsequent to today, except as required by law. A list of our no material risk factors can be found in our Form 10-K for the year ended June 30th 2021, together with our subsequent filings with the SEC. Our remarks today do not constitute an offer to sell, nor do they constitute a solicitation of an offer to buy any securities. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933 as amended. Finally, with respect to today's call, we will also present some non-GAAP measures for which the reconciliations to GAAP are found at the end of each document that includes those measures, such as the press release or the investor presentation. With that, let me turn the call over to Dr. Chuck Mattera.

Thank you, Mary Jane. Good morning, afternoon, and evening to all of our stakeholders from around the world, including our equity and debt investors, our dedicated employees, and our valued customers and suppliers. Fiscal year 2022 is off to a very strong start. Our backlog increased sequentially from $1.25 billion to $1.4 billion. Our revenue of $795 million represents very strong growth at 9% compared to Q1, FY’21 and was squarely inside our revenue guidance range, despite continuing supply chain headwinds, which affected our ROADM business the most. The shipments of those affected products have been rescheduled to subsequent quarters, and we are working to accelerate our recovery plans. Part of our action planning is to expand our investments in analog and digital ICs to improve the resiliency of our supply chains. This will also help to maintain our market and technology leadership in the next generations of high-speed Datacom transceivers, while lowering our purchased material cost, and establishing new component OEM market channels for us as well. Our gross margin for the quarter was 40%, up year-over-year and sequentially. This was achieved through the launch of new products with higher margins, improved productivity, and ongoing efficiency, and it benefited from our sustained focus on the health and safety of our people first. These improvements are due to the well-synchronized efforts of our employees with key counterparts at customers and suppliers, taking the meaning of partnership to new levels. We are experiencing sustained and sustainable demand. In Q1, revenue grew from contributions from virtually all of our end markets and leadership in the consumer market, where we saw the revenues increased 30% sequentially and 7% year-over-year. Two important indicators of the strength of our organic growth are our fourth consecutive quarter of record backlog, and the sustained growth we're seeing…

Thank you, Chuck, and good morning. In Q4, we delivered growth across our commercial end markets despite supply chain challenges. In Q1, we continue to build on that momentum and as a result, our fiscal year 2022, it's off to a strong start. All of our operations, including our global [Indiscernible] are running as planned, producing high yields and quality output. In fact, I'm pleased to report that for the last quarter, we shipped all of our lasers for 3D sensing with 0 defects, our benchmark for the highest quality that we've been striving to set for the compound semiconductor industry. This is a result of a relentless multiyear investment in operational excellence supporting the substantial increase in the volume of lasers that we're producing at our vertical integrated wafer fabs in Sherman, Texas and Woodward, New Jersey. Our communications revenue grew 4% year-over-year, with most of the growth from Datacom. Our 200 G, 400 G and 800G products now represent 25% of our transceivers revenue from about a 2% a year ago. It grew nearly 70% sequentially. Thanks to our market leading platforms, we expect to grow this portion of our Datacom business to 1/3 of the total by the end of fiscal year '22. It is worth noting that our optoelectronic components for Datacom transceivers, enjoyed an all-time external revenue record in this quarter. I'm pleased to report that our IC-TROSA recently won the award for the Most Innovative Product in Optical Integration at the European Conference on Optical Communications, demonstrating our leading innovations in Coherent technology. Our IC-TROSA is the core engine of our 400G QSFP-DD Coherent transceivers which, to the best of our knowledge, have the highest output power in the market. Our remarkably high output power is enabled by our tunable laser and modulator technology…

Thank you, Giovanni and good morning. Our Q1 revenue of $795 million was geographically distributed as follows; 50% in North America, 21% in China, 20% in Europe, 6% in Japan, and 3% in the rest of the world. The end market revenue distribution was 67% in communications, 13% in industrial, 7% in consumer, 6% in aerospace and defense, and 7% for other end markets. Our non-GAAP gross margin was 40% and the non-GAAP operating margin was 18.9%. None of the supply chain costs or COVID costs were excluded in arriving at non-GAAP results. We incurred $4 million of COVID expenses in the quarter and $2 million of costs to secure parts for our customers. The Company has committed about $17 million of additional costs to secure parts with suppliers, and these costs are expected to be realized over the next 3 to 5 quarters depending on the availability of contracted components. At the segment level, the non-GAAP operating margins were 15.7% for photonics and 25.6% for compound semiconductors. New products were instrumental and these sustained good margins. Our record backlog of $1.4 billion consists of $914 million for photonics and $483 million for compound semiconductors. The backlog consists of orders that will ship over the next 12 months. We continue to have many orders that extend beyond 12 months as customers attempt to secure capacity for what many considered to be a super-cycle well underway. GAAP operating expenses, which are SG&A plus R&D, were $221 million in Q1, excluding $20 million of amortization, $23 of stock comp, and $12 million of M&A and integration costs. Non-GAAP OpEx was a $168 million or 21% of our avenue, this includes our silicon carbide investments. Cost synergies for the Finisar acquisition, originally targeted at $150 million, have now reached $180 million at the…

[Operator Instructions]. Your first question comes from the line of Ananda Baruah from Loop Capital. Your line is now open.

Good morning, guys, and thanks for taking the question, and congrats on all the progress and a lot of all the exciting stuff that's going on. So, Chuck, I want to add -- any of you can jump in on this one, obviously, but in the prepared remarks, you had mentioned along with some ASP increase implementation, something about longer-term and higher share commitments. And so, I just wanted to see if -- I want to give more context on that and see if that's something that we should keep in mind as we think about the go-forward. Thanks.

Good morning, Ananda. Thank you for your question. Well, we're always trying to position ourselves with customers to continue to drive value for them too by scheduling long-term commitments and higher share awards that we can make the most efficient use of our factories on their behalf, and I think that as we continue to feel the pressure of increasing costs, as Mary Jane referred to in the supply chain, we are trying to balance all that out with the best position we can be in with customers for long-term, larger orders. Okay.

I got it. And should we think of this as being potentially incremental to the current revenue run rates across these businesses?

Yes.

Awesome. Thank you, guys.

Your next question comes from the line of Paul Silverstein from Cowen. Please go ahead.

Thanks guys. I guess all focus is on supply chain impact, and I appreciate you discussed it during the call, but I'm hoping to Chuck, Mary Jane, that you all can give us some quantification of how much was the impact on revenue. It would seem to be significant given the 55% year-over-year growth in backlog and 12% sequential growth along with your extremely strong bookings. But let me ask you the direct question. How much of an impact was there on revenue? How much of an impact are you expecting this December quarter and same question with respect to margins?

Okay. Hey, Paul. Good morning. Thanks for your question. If -- if you see the high end of the guidance that we gave for Q1, we were sure at aiming to do the maximum. And I would say that we hadn't had a few contributors to it, but number 1 was our supply chain, number 2 was the supply chain of our customers. So, it's a balancing act, but it would not be reasonable to say that all of it was just the supply chain. It's just the overall logistics of scheduling and running complicated and complex factories that we do. And I think we did a great job at it. As far as this quarter goes, we are working diligently with our supply chain partners to be able to do the very best we can to close the gap. All of us, it's been an all-hands-on deck effort, including me with discussions with the CEO of nearly half a dozen of our key suppliers, electronics, and integrated circuit suppliers. And we're going to do the best we can to pull things forward, but the uncertainty still exists and we're not going to know about it until we actually get through -- at least through the early parts of the middle of December as to how it's going to affect us this quarter. But we've given our best shot at the guidance, and just like we did in the first quarter, we are aiming to get to the high-end.

So, can I just ask for a clarification relative to the 43% bookings growth. Is there any concern -- do you feel that's an accurate reflection of demand trends or is there any concern that that reflects over ordering on the part of customers?

Well, Mary Jane can add to it. I am not sensing or assessing any over-ordering in the patterns that we have been able to observe. And in discussions with customers, there's no indication of that whatsoever. Would you like to add to that, Mary Jane?

I think that's really right. We've talked before. We watched certain patterns in our bookings to be sure that we can detect items that could be double ordering. And as Chuck made the most important comment, the amount of time that we have spent both with our customers and suppliers to be sure that we're shipping everything we can to them amid the supply chain shortages, there is I think a good sense on our part that we are not experiencing double ordering.

All right. And the difference between that bookings growth in your revenue -- your guidance in terms of revenue growth, I am assuming that clearly is a supply chain driven impact.

Yes. We need to move on, but as we've also mentioned a few times, the increase in bookings is not an indicator of exactly what we'll ship in the next quarter. We do try to indicate that it's over 12 months for a reason. So -- but yes, you have that right. We should probably move on.

Thank you.

Your next question is from Samik Chatterjee from JPMorgan. Your line is now open.

This is Jo Cardoso, on for Samik. The one question for me is just, you highlighted a lot of investments in your prepared remarks, specifically around analog and digital ICs, as well as silicon carbide and phosphide. I was just curious if you could talk on the level of investments that's necessary to drive to those plans, and how should investors think about the timeline of when those investments begin to materialize? Thank you.

Thank you for the question. This is Giovanni here. So, we have 2 main investment directions as we said in the prepared remarks, really around silicon carbide, indium phosphide. Both of them are intended to support the multiple markets and multiple applications. This has always been our strategy to diversify our investments, to have -- to lower the risk of our investment. And there will be, as I said in the prepared remarks, there will be a combination of capital as well as human resources investments to prepare for, what I said, it was an incremental growth across both platforms and across multiple markets. And we don't believe that investments will materialize sooner than 2 quarters. So, we'll be -- in the beginning let's say mid of fiscal year 2023 that we'll see the effects of these investments materializing.

Your next question is from James Ricchiuti from Needham & Company. You may ask your question.

Thank you. Good morning. I was wondering if you could comment on the -- through seeing in the industrial segment of the business, both inside China and outside China only because there has been some mixed signals obviously, and the industrial laser business inside China. If you could maybe comment on that and just the outlook for that part of the business. Thank you.

Hi James, this is Giovanni. Thanks for your questions. Our Industrial business has been very strong. As I mentioned in the prepared remarks, we have seen a substantial increase in demand for our pump lasers, particularly from China, where we enable a number of fiber laser makers. We've been able to accumulate the demand over a number of years. We're probably very close to more than twice the bump power of the fiber laser incumbent out there, number 1 share. And so, we have -- we are enjoying a very strong demand for our component. Clearly some companies may lose share in some geographies. And so, we -- that means for us, gaining share on the cheap supply as these companies, through [Indiscernible] from the incumbent. So, we'd see it as a benefit to us.

Next is from Meta Marshall from Morgan Stanley. Your line is now open.

Great. Thank you. Giovanni, I wanted to follow up on your comments that either you're shipping everything you could out of service, and just to clarify whether you were kind of qualified on all kind of client platforms of the major 3D sensing customer. Thanks.

Yes, we're. We're shipping all products that we've been asked to ship and qualified and so forth. So that's absolutely the case.

Next question is from Jed Dorsheimer from Canaccord Genuity. Your line is now open.

Thanks for taking my question. I guess, maybe either Chuck or Giovanni, if you want to -- if you wouldn't mind just addressing on indium phosphide. It seems like that technology and the platform starting from a lower level of maturity in terms of the platform, yet it, particularly with coherent, seems like might be a very critical technology for 1550 and beyond. So, I was wondering if you might just provide some details in terms of how you see the scalability of that critical technology and the relative importance inside II-VI.

Thanks, Jed. Thanks for the question. Where we are actually -- if you recall when we announced the deal with Finisar, we did emphasize how the indium phosphide plots from the Finisar had walked on for more than 20 years, was really strategic to us and we mentioned a number of applications in markets that technology was going to be very powerful for. So, of course, when we acquired them, the focus was on Datacom and telecom lasers, photodiodes, modulators, photonic integrated circuits and so false. We should enable a number of modules and subsystems such as the IC tools which I mentioned in the prepared remarks. However, indium phosphide as a very unique wavelength, as you know, longer wavelength than gallium - arsenide. So, it's really very useful in a number of optical applications where eye safety is important, so that's one. And so, they could be in communication, sorry, in automotive, LiDAR application, could be in consumer applications, could be in industrial sensing application software, so there's a number of markets but that platform is very powerful. The other thing is -- that we want to mention is the electronics for base stations progress, and the speed and the frequency of going from 4G to 5G, eventually 6G progress. We believe that indium phosphide is one of the two technologies. It's probably the best technology that we will be counting on for 6G amplifiers. So, there's an effort we have to focus on that. Of course, it's going to happen 6-7 years from now, whenever they will take place., but we need to start now. And so, it's a very important investment for us. Again, it goes across multiple markets, multiple applications, leveraging our wafer fabs to reach a scale, unique, probably hopefully the largest in the world.

Next question is from Richard Shannon, from Craig-Hallum. Your line is now open.

Hi, guys. Thanks for taking my questions. I guess mine is on 3D sensing and Vixel rays. I think you're talking about some investments here, both in capacity in R&D and kind of implying a growth track. I think most people see that longer-term, but love to get your sense of how [Indiscernible] you're seeing that picking up and in what applications are you seeing it an immediate one in mobile and to what you're -- you're what timing do you see another other applications like automotive as exams?

Hi Richard. Thanks, this is Giovanni. Thanks for your question. I was -- I want to make sure that we don't get confused. I didn't talk about incremental opportunity; this is unrelated to Vixels so I want to make sure that is the case. And we have several applications that we're trying to target across multiple markets again. And we just need to get ready for the demand to come. As I -- as I mentioned to Ananda, maybe 3 quarters from now we'll see the fact that those investments are materializing.

Next question is from Mark Miller from Benchmark Company. You may ask your question.

You indicated the new products help boost your margins. And I'm just wondering in terms of the existing backlog, how does that margin profile compare to what you imposed in in recent margins?

I would say that the backlog is generally positive to margins. I don't take that as 200 basis points, but I would say, as a general matter, especially if you think about most of the supply chain effects being on the [Indiscernible] side. It's probably contributory to the positive a little bit on margins, but again, it's not an enormous number, but more skewing in that direction than not.

Next is from Amanda Scarnati from Citi. You may ask your question.

Good morning. Can we just talk a little bit about the tenure silicon carbide deal that was announced yesterday. Can you maybe size what this looks like or give a little bit more detail on the opportunity there and other opportunities that you're starting to see within silicon carbide?

Good morning, Amanda. Amanda, it's another example of our ability, both to market and position ourselves into what we think will be a large and growing supply chain. They've gone through a usual process of evaluating a number of suppliers. And we understand from the feedback that we received on our 150-millimeter substrates that we're best-in-class. And so, we believe that on the basis of performance and scale that we're putting in place, and our absolute determination to serve the market at multiple levels of integration, that customers have come to us to be able to generate a long-term and secure supply chain.

Next is from Simon Leopold from Raymond James. Please go ahead.

Thanks for taking the question. I wanted to see if maybe you could drill down a little bit on the Datacom trends. I think in the past you've indicated roughly a 50-50 split between Datacom and Telecom and the communications, but it sounds like it's moving the other way. And within that, if you could highlight the exposure to the hyperscalers. That sounds like an interesting trend that I'd like to hear more about. Thank you.

Hi, Simon. Thanks for your questions. You got it. Absolutely, I think we are really gaining -- should we believe we're gaining share at the hyperscalers, whether this 200, 400 and eventually work going on 800. It's a really great trend. It was really one of the reasons we were really interested in the Finisar platform and the team is really doing a fantastic job gaining share back. And so, it's a really, really great momentum for us. I think you got the picture.

I would like to add to that, Giovanni. Simon, since we acquired Finisar, we have not only been able to optimize our global footprint. But based on the diversity of that global footprint, our diverse customers have asked us to align our output from multiple different factories for them. And I think there's really been a very strong attraction to these large and growing customers of II-VI.

Next question is from Tim Savageaux from Northland Capital. Your line is now open.

Good morning. Good timing. I had a question on Datacom as well to follow-up Simon, which looks to be your single biggest business right now. So, you can -- can you confirm that Datacom is now a solid majority or at least a decent majority of the Communications/Photonics business. On the one hand, and as you look at that 200, 400 gig growth, 60% last quarter, 70% sequential this quarter. Do you expect those types of trends to continue? And it looks like 100-gigs hanging in there or do you expect that to remain stable? Thanks.

Hi, Tim. This is Giovanni. Well, we hope we'll continue to grow 70% sequentially forever, but it's not likely to happen. So, I think the growth rates will remain strong as we get more and more slots designed in. And I think one other G is pretty stable. I think the 2 on the G, there is no really many players, so we kind of probably have for sure the largest share that and 400 G is the beginning. We're trying to cut, we are catching up, there's no doubt, that's why the growth rate is higher than the market. So, we believe we're gaining share. So, it's a very strong momentum. And as I said to Simon, the team has delivered on a fantastic job executing and delivering where the best performance, quality wise from just a functionality standpoints and delivery standpoint, really doing great job.

Next is from Vivek Arya from Bank of America. Please go ahead.

Hi, this is Blake filling in for Vivek. Thanks for taking my question. This builds off a previous question, but as you've highlighted on the call, there are several new strategic initiatives ahead, as well as continued integration from acquisitions that are providing synergies. Moving forward, I was just curious on the view of long-term gross margins, if they can potentially be at the high-end or above that 38% to 42% score [Indiscernible] range, that's sustainable. Thank you.

So, the Company is very focused on improving its gross margin in the long-term since most of the products that over the most of the end markets that have the potential to really change their percentage in the total 100% of the Company. The ones most likely to change their percentage tend to have a higher gross margin. I do think that in the fullness of time the Company will probably move it's margin range at the present moment up.

Next question is from Dave Kang from B. Riley. You may ask your question.

Thank you. Good morning. Just wondering if I could get some more color as far as your fiscal second quarter revenue assumptions, in terms of Datacom, Telecom, industrial and consumer trends. Whether they can be up or down sequentially.

Generally speaking, we would expect to see nearly all of them trending up from the first quarter because historical the first quarter has been the lowest quarter of the year. We may see some as we've said earlier, supply chain or interesting seasonality in that 1231 quarter. Sometimes there's a little bit of a toss-up whether Christmas is a bigger effect than Chinese New Year. But generally speaking, I would say that we're expecting to see all of them generally moving sequentially up.

Next is from Christopher Rolland from Susquehanna. Your line is now open.

Hey, guys. Thanks for my question. I did want to follow-up on the Datacom angle too because I think there is some growing optimism around a really big 20-20 here for everyone playing in the space. Can you talk about your supply situation there in particular? Do you have enough to support, outsize demand into next year? I know Lumentum was out saying they were internally constrained on this side. So, I was wondering on that. And then on the supply front in general, what are the kind of biggest self-inflicted constraints that you see across your product set.

Thank you for your question. So, I honestly, I don't believe there is any self-inflicted constrained. I think we have a capacity for our products, whether they're at the component level, subsystem level, or system level. As Chuck mentioned earlier, we have a big advantage which we are leveraging. Right now, having a diversity of supply locations. So, for example, we have our high-volume manufacturing team in Malaysia, which is preferred by some of the hyperscalers, particularly North America. As they want to avoid supply chain from China. And so that's a big advantage. But in terms of components, devices which we procure, I want to remind you that we are substantially vertically integrated, including the ICs which we design. Of course, there are some challenges getting ICs from foundries that are wireless suppliers, and but so far, Bill, as we said in the prepared remarks, the partners which should be impacted the most are actually mostly Telecom partners not Datacom partners. And as Simon mentioned earlier, it's kind of shifting a little bit within Datacom and Telecom as Datacom is growing probably faster than Telecom, primarily because we're gaining share, particularly at hyperscalers, then that somehow mitigates the challenge of the supply chain affecting the Telecom pilots. So, I hope this gives you a better picture.

Next is from Tom O'Malley from Barclays. Please go ahead. Tom O’Malley : Hey guys. Thanks for taking my question. In the prepared remarks, Chuck, you talked about digital IC investment and Giovanni in response to some other questions you talked about accelerating share gains at 400 G. Either one of you, could you just talk about the importance of having a DSP at higher speeds. Is that something that you guys want to do internally, or do you think you can continue to gain share being a customer of a merchant vendor?

Hey, Tom. Hi. Thanks for the question. Well, I would say that while approach is bold, we'll make or buy. We have some programs with some partners to develop our own DSP when it makes sense. In some other case, it's better to buy. So, for any -- almost anything we may. If we have a better solution out there which is attractive, then we'll just buy. I think the -- our focus has really been on optical engines such as the IC tools which I mentioned, which can work with any DSP. And also, where the differentiated optical performance, as I mentioned, like the highest output power, which ultimately enable architectures which cannot be enabled otherwise. And so, since we have indium phosphide in-house, we have automation of full assembly lines in-house and so far, we can be not only cost competitive, but we can also supply to a large set of customers/competitors, which will really see our products incredibly differentiated. So, this has been [Indiscernible] On DSP as I said, we'll approach depending on the applications, both are make-or-buy decision depending on time and cost and other factors.

That ends our question-and-answer session, I will turn the call back over to the presenter for closing remarks.

Thank you very much, Alex. We want to thank everyone for joining us today. And we look forward to talking to you as time goes on here on our various interactions. We want to wish you all a very good day. Thank you so much for joining us. Bye.

That concludes this Conference Call. Thank you all for participating. You may now disconnect.