Ladies and gentlemen, thank you for standing by, and welcome to the II-VI Incorporated FY '20 Third Quarter Earnings Call. [Operator Instructions]I would now like to turn the conference over to your speaker today, Ms. Mary Jane Raymond. Thank you. Please go ahead, ma'am.

Thank you, Kathy, and good afternoon. I'm Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our third quarter earnings call for fiscal year 2020. With me today on the call is Dr. Chuck Mattera, our Chief Executive Officer; and Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Compound Semiconductors segment. This call is being recorded on Monday, May 11, 2020. Our press release, 10-Q, and our updated investor presentations are available on the Investor Relations tab of the Web site, ii-vi.com.Just as a reminder, any forward-looking statements we may make today during this teleconference are given in the context of today only. They contain risks and factors that 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. A list of our risk factors can be found in our Form 10-K, and new risk factors arising in the current period can be found in the Quarterly Form 10-Q. We will also share some non-GAAP measures in our discussion and materials today. The reconciliations for these measures are found at the end of each document that uses those measures, such as the press release or the investor presentation.With that, let me turn the call over to Dr. Chuck Mattera. Chuck?

Thanks, Mary Jane, and good afternoon everyone. Before I discuss our quarterly, I would like to spend a couple of minutes discussing the extraordinary circumstances that we find ourselves in as a result of the COVID-19 crisis and our response here at II-VI. Let me begin first with a thought for our global healthcare professionals on the frontlines of the pandemic. Healthcare professionals and emergency responders around the world have faced the unprecedented and unexpected challenges of planning for and addressing the reality of the terrible toll that this disease has brought with professionalism, hard work, care, and bravery of theirs.As the contagion spreads in some places and recedes with economic recovery beginning in other places, and as it threatens to reemerge again, governments around the world are doing their best to ease the burdens on their healthcare infrastructure, their economies, their people, and businesses affected by the crisis. These government officials have been and remain in an unenviable position of deciding how to guide us all through these challenging times. On behalf of the II-VI family I would like to express our sincere thanks, thoughts, and prayers to all of the dedicated professionals in the emergency healthcare and government who are doing their very best to care for, protect, and guide us through these challenging times. My thoughts are also with all of you, your families, and your communities.According to Teddy Roosevelt, in any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing is nothing. Here at II-VI, our dedicated worldwide workforce of 22,500 have been doing things right and doing the right things, and demonstrate the advantage that accrues from the II-VI culture of preparation, alignment, and speed of execution around the world that underscores the integration progress that we have made. Since the very beginning of this crisis, our top three priorities have been clear, assuring the safety, security, and the wellbeing of our employees, ensuring the protection, continuity of sound operations and value of our business and its opportunity to continue to grow, and compliant fully with the government orders issued in response to COVID-19. We have executed precisely on our priorities, and are working hard every day to maintain this high II-VI standard of excellence. Our China teams, in collaboration with our global emergency response and business continuity planning team were able to bring all of our China facilities back to normal by the middle of March. It was a remarkable accomplishment, for which the whole team deserves great recognition.Meanwhile, countless other examples of leadership and sacrifice are being staged across the globe now as II-VI heroes and heroines alike are giving it their all and their best. In fact, I am incredibly humbled by and deeply thankful for the way that our One II-VI team has come together in response to this crisis, and I assure you that we will remain steadfast in our commitment to our II-VI mission and our impact on the communities and the world by providing products that enable all of us to be safer, healthier, closer, and more efficient. Our mission, together with our II-VI vision of a world transformed through innovative materials is vital to a better life today, and the sustainability of future generations provides clear evidence of how our focus at II-VI is increasingly relevant to the world.In addition to meeting our top three priorities, we delivered an extraordinary third quarter. For Q3, we booked $840 million of orders, and ended with a record backlog of $893 million. We delivered $627 million of revenue, and our margins on a GAAP and non-GAAP basis were strong. This performance is the result of growing and accelerating demand for our products across key end markets and continued success with our M&A integration efforts, that is in many facets at least 12 months ahead of plan. Our differentiated capabilities, expensive product and technology portfolio, global scale, and diversified footprint allowed us to demonstrate our leadership position while serving the optical communications market where strong demand led to our growth.As the global leader in optical components, modules, and subsystems, we experienced growth in demand in both telecom and datacom driven by transceivers and optoelectronic components, rotor modules and subsystems, combined with market share gains and the overall acceleration of legacy and 5G optical infrastructure buildout. This is the third consecutive quarter of strength we've recorded. So this trend started pre-COVID. The way the world works and delivers vital services, including telemedicine and distance learning is changing rapidly and permanently. This evolution in human behavior is clearly stressing both the wire line and wireless infrastructure, and it is driving cloud operators and service providers to commit to significant infrastructure upgrades.Our strong bookings growth in this market is evidence of our leadership position and the long-term value of the combination of II-VI and Finisar that we envisioned almost three years ago. Transceiver bookings were more than 40% above expectations, and ROADM bookings grew 50% sequentially. That demand profile contains large orders placed for as long as a year, and the delivery of those bookings over a year's period of time suggest that this is the beginning of a long-term sustainable demand driven by an accelerated need to deploy new infrastructure worldwide. Our ramp of new products for 5G has accelerated as over 80 carriers re-architect their networks to handle their five billion mobile subscribers who are quickly migrating to 5G.We've been told by one large OEM that U.S. traffic increased in the first week of the nationwide shelter-in-place orders by more than the increase for the entire prior year. I firmly believe that the beginning of a large and multiyear opportunity for II-VI is unfolding. In addition to the profound changes we are seeing in the optical communications market, silicon carbide for RF wireless applications grew 75% compared to last year. Adoption is accelerating, and as an example, we are shipping under our large agreement announced last quarter, at a faster rate than expected, driving a 5% growth sequentially.Our silicon carbide capacity expansion plans remain well on track for power applications as we believe that the market is still in early innings of a very long game. With 3D sensing, we had record shipments again from our operations that center around our Warren, New Jersey wafer fab. It is noteworthy that those shipments were even higher than our Q2 shipments, which we think is remarkable at this point in the annual cycle. As I look ahead it's helpful to look back to provide perspective. We have clearly achieved the vertically integrated technology objectives we laid out at the time of our earlier acquisitions to address the emerging 3D sensing market as we have demonstrated a sustained high degree of production efficiency based on our cumulative experience gained, while producing hundreds of millions of devices at very high yields and reliability.Our top integration priority was to leverage our 3D sensing experience in our state of the art Sherman, Texas compound semiconductor plant. I am pleased to announce that due to extraordinary examples of teamwork, collaboration, and communication in a seven-day-a-week form, since January 2, by our dedicated One II-VI team began shipping from Sherman, Texas for the bold plan that I laid out for the team and described during our earnings call, in November.Now, before I turn it over to Giovanni, I'd like to comment on the essential role of our emerging by vital life sciences business. Reliable diagnostic testing for COVID is based on a polymerase chain reaction, or PCR, process to replicate a small amount of DNA or RNA to generate a sample large enough for analysis. The II-VI Life Sciences business makes many of the key components for this equipment, including thin film optical filters, thermal electric, thermal cycling engines and related subsystems. We're proud to be able to support the rapid increase in the world's capacity for COVID testing to combat this pandemic.Now, I'd like to turn it over to Giovanni. Giovanni?

Thank you, Chuck, and good afternoon. Indeed, the qualification of the Sherman plant was a major milestone for our Compound Semiconductor segment. We are pleased to report the first production shipments for 3D sensing applications, and expect the ramp to accelerate from this point forward and gain a meaningful share of the market. With our qualified epitaxial growth and wafer fabrication capacity, we're now well-positioned as the only U.S. based vertically integrated supplier or big seller for 3D sensing on six-inch platform. Moreover, we have adequate capacity to serve the majority of what we understand the market demand to be.Our communications business in the quarter was strong on all fronts. In datacom, revenue for our components increased 63% compared to last year's quarter and remained steady sequentially. As we execute on our acquisition strategy to penetrate the merchant market with our previously captive products, we're pleased to report that we have received our first production order for indium phosphide components, which we have already begun shipping this quarter. By executing on our strategy, we have the factory increase our sum by about $2 billion and we just began to gain our share of such a market. As evidenced by the strength of the demand and the unfulfilled need for scalable indium phosphide and IC components, we accelerated the market introduction and qualification of our products for which I'm pleased to report is very exciting pipeline of designing activities.Revenue for transceivers was flat compared to the prior-year and declined 9% sequentially. 100G remains the mainstay of the market today, representing almost 70% of the $3 billion high speed transceiver market. As the transceiver market leader, these ease and will continue to be a large portion of our business as we expect to see growth in 100G for at least the next five years. We believe that we were the fastest supply for 100G Datacom transceivers to the industry and as we continue to invest in that technology, we expect to secure a major portion of their market segment as it grows.The center pieces of our telecom revenue are ROADM subsystems and components, which were also strong in the quarter. Sequentially, we only saw a 10% decline in revenue due to COVID, only 50% increase in orders. Demand was strong across the board for amplifiers, line cards, and all enabling components including passive optics and wavelength selective switches. In addition, 980 nanometers pumps, and wavelength selective switches also experienced extremely strong demand for undersea applications. In fact, as we witnessed the acceleration of orders for our products for 5G applications in data center infrastructure, most of these manufacturing lines continue to be sold out.Products for semiconductor capital equipment overall continue to be in high demand, growing 12% sequentially driven by the global largest semiconductor market and undaunted by COVID. We expect to see the growth will continue over the next 12 months as our customers build the next generation fabs worldwide. With our technologies and products, we're enabling the transformation of the back end of the line of these fabs as we also expand our materials offering from EUV Optics into motion control components for the front end of the line. Our team keeps innovating and delivering high performance products to this market segment, irrespective of COVID.In aerospace and defense, our revenue grew 25% year-over-year and was stated sequentially. Our advanced materials, electro-optical components and subsystem platforms combined with semiconductor lasers essential to our growth strategy in our aerospace and defense segments, namely satellites, contested space, hypersonics, and directed energy. It is also worth mentioning that we were honor to receive the Raytheon 2020 Supply Excellence Award. Industrial remain state of it all on a sequential basis. The mandatory key enabling proudest particularly laser engines grew 17% sequentially for new laser system builds where the aftermarket was somehow soft. We were pleased to see at assumption new laser builds in spite of the incredible impact of COVID on many industries such as automotive. This is likely due to continued activity in those companies that were considered essential and continue to open it.With that, let me turn it over to Mary Jane.

Thank you, Giovanni, and good afternoon. Since our last call, we've had some very notable achievements just to mention five of them, the strongest order book we ever achieved, only a 6% decline in revenue or about half of the minimum $50 million in revenue we anticipated for COVID, compared to our strong December 31 quarter's revenue. Excellent shipments from Warren, and the beginning of shipments from Sherman non-GAAP gross margin and non-GAAP operating margin at or above II-VI's standalone margins at the March 31, 2019 quarter and finally strong liquidity management ending in $746 million of available liquidity and $36.5 million of positive free cash flow in the quarter. We really do have a very dedicated team.During the quarter, the total revenue of $627 million was split 68% in communications, 11% in industrial, 7% in military, 6% in consumer, 5% in compound and in semiconductor capital equipment, and the rest is in the other markets. The margin progress was very good in the quarter. The non-GAAP gross margin was 38.3%, advancing 200 basis points and above the II-VI standalone gross margin of Q3 last year. The operating margin on a non-GAAP basis was 13.8%. We had a favorable mix this quarter affecting both margins and that does vary from period-to-period. GAAP EPS was $0.06, and the non-GAAP EPS was $0.47 with the after tax non-GAAP adjustments of $38 million in total. We had $93 million diluted shares in the quarter. GAAP return on sales was 0.9% and non-GAAP return on sales was 7%. The return on sales is lower than II-VI experienced standalone due to the unusual tax effects of purchase accounting in this quarter.At the segment level, the adjusted operating margins were 13.4% for Photonics, and 14.6% for Compound Semiconductors. Photonics benefited from operating efficiencies and the richer mix, including more than doubling its submarine pump sales again this quarter year-over-year. Compound Semi also benefited from its strong sales of VCSEL arrays, the qualification of the Sherman Texas fab, and the commencement of commercial operations in Sherman.For operating expenses or OpEx, the total was $177 million on a GAAP basis, and $154 million on a non-GAAP basis, compared to $168 million in the second quarter of fiscal year '20. Our focus on OpEx has been intensive and will continue and I'll talk more about synergies in a minute. In our non-GAAP adjustments, you will see a great deal of movement. This is due to the continuing work toward finalizing our purchase accounting.Amortization in the quarter was $5.7 million, the result of adjusting to the forward run rate of $20 million of amortization per quarter, down from our previous quarterly estimate of $33 million. We had $8.5 million of one-time depreciation benefit in the GAAP results that we excluded from the operating performance are shown in the non-GAAP table. We expect our run rate depreciation to be about $43 million a quarter on the current fixed asset level as compared to $53 million previously, but this will of course increase with the acquisition of additional fixed assets. These changes in amortization and depreciation were part of our continuing work to report the fixed assets, intangibles, and deferred income tax liabilities of the Finisar acquisition at fair value. At March 31, we were about halfway through the one-year measurement period that will conclude on September 23, 2020.Stock comp was $14.4 million in the quarter and transaction expenses, including severance were $5.9 million. Our quarter-end backlog was a remarkable $893 million, consisting of $518 million in photonics and $375 million in compound semiconductors. This compares to last year, last quarter's backlog of $681 million for the whole company with $346 million in Photonics and $335 million in Compound Semiconductors, the backlog contains orders that will ship over the next 12 months.Capital expenditures this quarter were $28 million. For the combined company for the year, we are expecting CapEx in the $125 million to $140 million range. Our operating leaders have done a great job on yield and shift expansion to allow us to moderate new capital expenditures across the company. Cash interest expense was $21 million and all debt-related expenses on the P&L were $28 million for the quarter, including the non-cash amortization of the convert option, and the fees to complete the financing. Debt decreased $21 million with repayments during the quarter on the revolver and term loans. The total expected debt service payments for the next quarter are $25 million, $19 million in cash interest and $6 million in non-cash related expenses. In addition, the required principal repayments will be $17 million in Q4. Our cash is $388 million. Availability on our revolver is $358 million, including outstanding letters of credit, and our net debt position is $1.9 billion.Our net debt leverage ratio, on the basis of our credit facility is 3.8 times. The tax expense and tax rate are both rather unusual in this quarter and will be for the rest of this year, as we threw up purchase accounting for the Finisar acquisition, including all of the tax attributes. For Q4, we expect the tax benefit of approximately 15% to 18%, on the quarter's income, and for next year, something more typical in the range of 16% to 19%.Regarding our work on synergies, we are tracking well against our target of $150 million in annual cost synergies within 3 years after the close of the transaction. At this point, we have realized $43 million compared to the expected $35 million halfway through the first year. Given the intensive focus on OpEx, we will likely deliver in the first year at least 50% more than the year one target of $35 million.Turning to the outlook, the revenue for the fourth fiscal quarter, ending June 30, 2020 is $650 million to $700 million and the EPS on a non-GAAP basis of $0.50 to $0.70. This is at today's exchange rate at an estimated, 12% tax benefit. The non-GAAP items in EPS totaled $0.48 including the pre-tax amount of $16 million in stock compensation, $20 million in amortization and $8 million in cost to facilitate the integration. The share count should be used is $95 million shares. The actual dollar amount of non-GAAP items, the tax rate and exchange rates are all subject to change.Before we go to the Q&A, as a reminder, our answers today may contain forecasts, from which our actual results may differ due to a variety of factors, including, but not limited to, changes in product mix, customer orders, competition, changes in trade and tariff regulations, and general economic conditions. We would also like to ask that each firm limit its questions to one question and one follow-up.Kathy, you may open the line for questions.

[Operator Instructions] And your first question is from Tom O'Malley of Barclays. Tom O'Malley: Hey, guys, thanks for taking my question, and congratulations on some really strong results, particularly in these times. I guess my first question was around the really strong backlog you had in the quarter, clearly a lot of strengths from Photonics, and within that the transceiver business. What gives you the confidence that these really strong orders are long-lived for the remainder of the year, and not just a function of people trying to get product now? And can you describe the health of your supply chain as well as your customers with regard to everything that's going on with COVID there? Thank you.

Tom, good afternoon, thanks for your question. Yes, I'll take it in two parts. The first part of your question, we have great confidence based on our engagement with our customers that the order book that we see today, and in discussions with them about their longer-range forecasts, we have every reason to believe it will continue. Now, we have a whole set of challenges to be able to work through to be able to keep pace with such a large ramp. One of them is in the supply chain. And as the largest optical communications components and subsystems supplier we have a great supply chain management organization, and a great set of strategic suppliers that are doing business with us, and it's going to be the usual when you're going up a ramp like this, there will be some shortages and some rework that needs to be done, and the full utilization of our capacity to have the maximum service to our customers and the maximum generation of revenue and profit is what we're focusing. Tom O'Malley: Thanks. And then as just a follow-up, congratulations again on getting the Sherman facility up and running. In terms of margins, you guys had previously talked I think about an $18 million headwind to operating margins just based on that facility. Can you talk about where you see margins trending given that's up and running. Clearly it's going to be a big tailwind. Can you just talk about what that's going to do for your business here in the second-half in particular?

Well, first of all, we had some very, very nice margins in this quarter that on one quarter of strong margins it's tough to extrapolate and say that's where we'll stand. But generally speaking, when you look at the things that should affect our margins going forward, obviously mix is one of them, and that's subject to change, but shipping from plants that had not been shipping, so in this case Sherman, that's a big lift on margins. The continued strength in silicon carbide is helpful as well. And then I'd say the next thing that would be in the mix that would potentially lift margins, though it may not be quite with us yet, is the pickup in the industrial market given the strong margins in that segment overall. Generally speaking though, I would say that with respect to our overall photonics business and communication, we have been able to post, and we saw this in 2016 and '17, good margins in our business on extremely good utilization when the volume is high. So I would imagine that probably if you think about the margins last quarter, [indiscernible] margin, which was a 36, it's probably a range somewhere between 36 and 39 as we go forward. Tom O'Malley: Great, thanks and congrats again, guys.

Thank you, Tom.

The next question is from Mark Miller of The Benchmark Company.

Thank you for your question. Congratulations on your quarter. I'm glad everyone has been staying safe. You mentioned you had some market share gains. Can you provide a little color about that?

Mary Jane, do you want to take that one?

Sure. Well, I think obviously market share gains are always challenging with respect to being very, very precise about them, but as Chuck mentioned when he was asked the question about what makes us confident that the bookings we have aren't just as stock inventory next quarter. I'd say that the engagement that we have with our customers and our understanding of increases in share awards give us an indicator that we believe that we are beginning to gain share in some areas. Giovanni, do you want to add anything to that, or Chuck?

Yes, I can say that the growth rate that we have experienced in 3D Sensing over time, we believe that's due to share gain, because we don't think the market is growing that fast. So that's another area I would mention.

Okay. And the follow-up question, your competitor mentioned last week, in the 3D sensing area there was some program delays. I'm just wondering if you can comment on that, or is that an opportunity or what's that a reflection of?

Mark, I'll take that. I'm not aware of program delays. I mean at least for what we are concerned we are engaged with, so everything is as planned. At least we have no official communication by anybody about anything being delayed.

Thank you.

The only thing I would say is, as a general matter, the 3D sensing market, as we've talked about many, many times before, has been developing more slowly than might have been anticipated when people first started thinking about it. But beyond that, of course Giovanni has hit the nail on the head.

Thanks for your question, Mark.

Your next question is from Tom Diffely of D. A. Davidson.

Yes, good afternoon. Just curious, when you looked at the Warren and the Sherman facilities, are there products that -- are you doing the same products from each of those facilities; is there overlap or a redundancy? How do we view those two different facilities going forward?

Okay. So, yes, [indiscernible] even if in Warren, we also still make amplifiers [indiscernible], RF amplifiers, and also, I want to remind that the Sherman facility is also producing high-speed VCSELs for datacom, but with regard to, generally speaking, 3D sensing, we do have a small overlap which will disappear over time.

Okay, that's helpful. And then Mary Jane, when you look at the $45 million in cost synergies to date, and you're above your expectations, where are most of those coming from, is it COGs or OpEx?

Well, first of all, we've made great progress on the COG synergies, which many of you will remember are largely in the supply chain. Often times so that in terms of work with suppliers, that's moved along quite a pace. Having said that, it does take time to materialize into the P&L, so notwithstanding some very excellent work there, that's probably less, what's affecting the P&L, it's more an OpEx right now. Obviously some of it has been in the reduction of staff in Chuck's new organization, as well as just looking at more efficient ways to do things, helped along here a little bit by even rethinking what we might have thought as synergy targets based on how we've all learned to work pursuant to COVID. So I'd say, at this point, in terms of realized synergies they're probably -- there are absolutely some in the COGs, but it's probably more in the OpEx.

Okay. And then your long-term view of that $150 million, same percentage split between COGs and OpEx as you had before or has that changed?

Yes, I think for now, yes. I think obviously, as I just said, it's so interesting to have all been forced almost to learn to work a different way, that may change what we elect to do as time goes on, but we've never met a synergy we didn't want to take. So we'll keep you abreast of what that split is over time.

Okay, thanks for your time.

Sure.

Your next question is from Jim Ricchiuti of Needham & Company.

Hi, thank you. Just a couple of questions on the industrial business, I was struck by the comment, if I heard it correctly, that you saw good growth in new industrial laser deployments. But it sounds like the aftermarket was weaker. So it seems like that suggests lower utilization rates. I'm trying to square that.

Okay, I'll take since I heard that part, Jim. So thanks for the question. So, the strength primarily comes from China. So, when we say new laser builds, we are primarily referring to China, where we sell optics and laser pumps, [indiscernible] lasers, and all kind of other products, and those are -- obviously these are new products, so they are mainly for new laser builds, so clearly it's about new laser builds. On the other hand, the aftermarket, which is by the way, still primarily dominated by CO2 lasers, we see -- we have experienced a decline over the past couple of months, which has normally surprised, I guess because probably as you can imagine laser utilization is lower for some of these factories that utilize lasers. So, the two kind of balance each other a little bit, but again, some products go into new lasers, there's no doubt about it, and the farther they go in existing lasers deployed aftermarket has declined, but the new products are definitely for new laser builds.

You answered that question. The second question?

With respect to, we've been hearing anecdotally of some disruption in the Malaysian electronics supply chain, I'm wondering, just given the fact that you have a fairly large facility there. Have you seen any impact on your operations there, or you deemed an essential supplier to that market and have been largely unaffected?

Largely unaffected, Jim.

Okay.

Not largely, but unaffected. The teams there in Malaysia also have done an extraordinary job. So, we're full speed ahead.

Got it. Thanks a lot. Congrats on the quarter.

Thank you, Jim.

Your next question is from Dave Kang of B. Riley FBR.

Thank you, good afternoon. My first question is regarding Sherman qualification, can you tell us your bets are with North American customer?

This is Giovanni here. I think we have a number of customers in desktop. So, I don't want to specify which one we will qualify, but these are large customers, probably the largest.

Got it. And then, regarding fiscal fourth quarter revenue growth, can you just go over some of the assumptions between com, industrial, [indiscernible], and within com maybe if you can break it up between Telco versus datacom? Thank you.

Well, so we're actually not going to do the guidance by end market. I would say if you just think about what we have here in the third quarter, given the strength that we saw in communications from a bookings point of view, and I think typically what we see in the communications infrastructure when that market is rising, it does tend to rise without a ton of seasonality. So, it's probably reasonable, you would expect to see growth there. With respect to again what has been a typical pattern, Q4 has not actually historically been a big market on the consumer. That could change, we'll see, and then I think the rest of it just really depends on kind of how people see seasonality and how much they may be in a position to recover from any diminution of activity they saw in the third quarter, but generally speaking, given that we saw some nice bookings largely across the board, I'd say it really comes down to what individual customers think they're prepared to do and able to do as they begin to emerge from COVID to address demand, they're seeing.

Your next question is from Paul Silverstein of Cowen.

Thanks, good evening, ladies and gentlemen. If you all address the fully prepared remarks, I apologize, I know you spoke about communications, but I'm hoping that you could give us the organic growth either looking at II-VI and Finisar performed as if they were together a year-ago. Alternatively, just looking at apples to apples at II-VI's historical business and obviously I'm referring to the breakdown in datacom and telecom, what type of growth that will look like on an organic basis in the quarter before give you a follow-up. Thanks, guys.

So I actually missed the first couple of words, you're asking us the split the growth between organic?

I'm trying to look at on an apples-to-apples basis, so whether you look at combined Finisar and II-VI as if they were combined a year-ago and look at the growth for datacom and separately the growth for telecom or alternatively, just if I just isolated II-VI, I assume you can isolate out II-VI data telecom from the telecom piece of Finisar. So we looked at the growth, I don't know if you looked at it this way, but looking at the growth, as if the two companies were combined, what would growth have been for telecom, what growth would have been for datacom? Thank you.

Yes, got it. Okay, so first of all, in the 10-Q on Note 3 is the pro forma footnotes. So you guys can all see that, and because you have Q2 last quarter, it's a little bit easy for you to back in, there's just a little bit of math you need to do but net-net on a pro forma basis sequentially, the combined communications business was down 8%.

I appreciate that, but Mary Jane, perhaps the bridge so far, but I'm hoping that you could give us datacom separately from telecom, what the year-over-year growth would be, would have been?

So let's just view year-over-year for the combined business, for the combined business pro forma, it would be about 12. I don't know that we can do the split between datacom and telecom. Let me take a look and see, but Giovanni already talked about some of the growth in components, most of which would be organic, right. So if you took the growth in components that he talked about, and back that out, that would probably get you to a good number, a reasonably good number on what was organic. But at this point, I'm not actually in a position to tell you that.

Well, let me ask the follow-up, which tries to go to the same place. If we look at demand versus supply chain constraints versus the supply chain impact, clearly the qualitative takeaway from your commentary is that demand is very strong pretty much across the board. So I'm hoping we could get some more insight on that issue in terms of how much the supply chain taking, what the supply chain limitations, how much has that taken away from both the quarter you just reported, more importantly and the quarter looking forward? How much is that impacting your ability to recognize the demand that is out there, and if we just isolate on demand, it sounds like it's very healthy, but I want to confirm that.

Okay, Paul this is Chuck. Good afternoon, Paul. Mary Jane, I'll take it up. With regard to Q3, if I understand your question is to what extent any supply chain shortages impacted our ability to deliver in Q3, was that your question, Paul?

Correct and more importantly, what's it going to impact in Q4, Chuck, let me say something.

Yes, I would say again I want to really acknowledge our supply chain, global supply chain organization, it has done a fantastic job, they were able to along with our strategic suppliers which I also greatly appreciate, they were able to limit to a very small number, low single-digit millions of dollars of revenue that we were not able to fulfill because of the supply chain issues, and also our customers have been fantastic with us working through the constraints with us, so that we can maximize the utilization of our assets and to maximize the benefit for our customers as well. In Q4, Paul, we're halfway through Q4 and based on our shipments in April and the overall tempo through our global factories right up until last night. We always have a chance that we may have some, some pick-up and we may blow a tire I guess, based on a supply chain issue, but at the moment, we're staying focused on being able to deliver within the guidance that we announced tonight, and that guidance does take into account some, let's call it supply chain uncertainties.

Okay, I appreciate that. Thank you.

Yes, you're welcome.

And your next question is from Meta Marshall of Morgan Stanley.

Great, thanks guys. Maybe there's one last question on that, just given supply chain constraints for others around the space understanding you're not seeing some of the same issues but do you think some of your strength in telecom is from share gains others, or you just kind of expect that, you just -- this is what true demand would have been. And then, maybe second for Mary Jane, just diving into a gross margin uplift, understanding your ahead of synergy targets, but just any sort of split between -- how much of the uplift either quarter-on-quarter -- year or -- I guess a quarter-on-quarter always through the synergy's mix and then just getting facilities up or just any ballpark there would be helpful. Thanks.

Okay. So, starting with the last question first, I'd say, I'm not sure I can give it to you a hyperlink precisely, but I would say, generally speaking, we're probably seeing mix as the main driver of the gross margin that the supply chain synergies are absolutely beginning to come in, but they do take a while to get as I said through the P&L. I would also say that one of the other things that's probably benefiting too, is the which would be permanent, is how we thought about the ongoing depreciation from a person's accounting point of view on the margin which, as we said is probably a drop on an ongoing basis in the neighborhood of about $10 million. So that's the input with respect to the margin. With respect to the share gains, shall I give that to you Chuck?

Yes, absolutely. Thank you, Mary Jane. Good afternoon, Rita. I would say that maybe in a few categories. One, in our ROADM line card components, I believe that the strength of our customer's business, and the strength of our portfolio have contributed to what you're seeing in telecom. Also, our undersea qualified portfolio was of both pumps and receivers and passive components including wavelength selector switches, as really shines in Q3. So that's the second one, and our transceiver team especially as it relates to our order book is really coming on strong, both in telecom and datacom.

Got it. That's helpful and Congrats. It sounds fair.

Thank you.

Your next question is from Simon Leopold of Raymond James.

Thanks for taking the questions. I want to see if you could talk a little bit about your expectations for how your 3D sensing business might trend through the year in that I'm thinking about normal seasonality of such a thing were to exist as down in June, strong in September and then down in December, but this year seems to be clearly very different and you're ramping, the production of Sherman. So I'm wondering whether or not you expect up in June up in September up again in December or whether there's some seasonal aspect we should be taking into account? Thank you.

Okay, Simon. Thanks for the question. It's Giovanni. First of all, forecasts do change. So what we expect, to me, may just be different and what's going to happen of course. At this point, we don't anticipate anything different than the past that let's say the past year, so the past labs, our focus is in gaining share. Our focus is to execute again in share, and go through the volumes that the customers are forecasting to us. So it's a really a short-term kind of view of the market in my opinion and looking at one month or two months, so we are here for the long run and we want to be the leader in this market and we will take some time to get there, but so far we're moving one direction only.

And just as one follow-up, in terms of the opportunities you've talked about from 5G, particularly looking at the optics, not the silicon carbide portion, but the optics used in front hall, back hall. It sounds like that business is growing and gaining traction by faster than you expected. Can we get an update on how you see the contributions evolving over the next, let's say, one year or so?

Let me start, Simon. I'm not sure exactly what you said about our expectations, but maybe faster than what we thought. We've been in this -- we've been in a strong demand for 5G for micro-optics and faster components well before the acquisition of Finisar, we've been clear about the capacity investments and expansion we've made. Now, we have a wider portfolio and over the last six to 12 months in addition to our passive component portfolio now as a full line supplier, we are seeing the turn on since the early part of this calendar year in a step-up in demand around the world for 5G. We think it's just the beginning.

Thanks for taking the questions.

Your next question is from Sidney Ho of Deutsche Bank.

Great, thanks. Congrats on the good quarter and the outlook as well. Just to follow-up on the last question on 5G, obviously, you guys have done well there, but we've been hearing some mixed signals in terms of who is ramping, who is not ramping. Curious if the strength that you're seeing is more broad base, or is this more specific to certain regions, and how does that compare to your expectations maybe like a quarter ago?

I would say it's a global effect, and for sure, some parts of the world and some suppliers have been out in front, but this is not confined to one customer and one region.

Okay, that's helpful. So, my follow-up question, regarding the Department of Commerce rules, I don't know if you have a chance to look at that, just wanted to hear your thoughts to see how that may impact II-VI, and maybe as usual I ask about silicon carbide, a lot of the end demand will likely end up in China electric vehicle 5G base stations, but is there a potential military use angle there as well? We'd love to hear your thoughts on that. Thank you.

Giovanni, do you want to take that?

Yes, I wasn't sure about the question about the military and silicon carbide, but there is no doubt that China is a large market for us. So far, we have not really been affected for a number of reasons, and combination of location of our manufacturing, and location of our general infrastructure, R&D teams, and so forth. So, very hard at this point to see what is going to happen in the near future. We do plan to have some processing of silicon carbide in China as that we believe that will help our cost as well as our entry into the China market with a platform, but as you probably know, we will not be able to do anything other than that outside the United States. So, we'll be limited in terms of the growth to remain in the United States. So, if you can repeat the question, Sidney, about the military, I wasn't sure about the relationship between silicon carbide and military.

Yes, so the question on silicon carbide is obviously some of this could be used in military even though the customers you are dealing with right now, I talk to people using electric vehicles for our base stations, but based on the new rules, it's all based on the potential military use of that particular product. So that's how it come in and try to see if you're concerned about some of the products you may not be able to sell to China, because of this potential military use.

Yes, well, that's the general dual use risk, so many technologies, you mentioned silicon carbide, I got to mention our energy lasers. A high energy laser weapon is not involved in various low so-called swap industrialism, and so it's a challenge that we face, but I think our compliance team is helping us navigate into what we need to do to follow the law, and I think the U.S. market for those application, it's going to be very interesting. In fact, even our own gallium nitride and silicon carbide products that we'll make in collaboration with our partner in New Jersey could have a potential for the military market in the U.S. Of course, we ill not be able to sell them outside of the United States, but yes, there will be a limit of what we can do with the platforms we have, no doubt about it. I guess that's true for everybody that is in the United States.

Great, thank you.

Thank you, Sidney.

Thank you.

Your next question is from Samik Chatterjee of JPMorgan.

Hi, guys. This is actually Joe Gattuso on for Samik Chatterjee. My first question is regarding your realized synergies. Obviously, above the $35 million target that you guys put out there for the first year, I guess I just wanted to get a clarification around whether those incremental synergies, would you bucket those as pulling from year two or three, or are those incremental to your targets?

Probably a combination, I'd say.

And then, I guess just on a follow-up there, as of you stand today, are you comfortable with the $150 million target, or would you -- are you guys more comfortable raising that target in the future? I guess my question is like, if you guys are seeing more today, what is holding you back from raising that target?

So, we're comfortable with 150. I think given that some of the synergies are challenging to get, and frankly we're 2.5 years to go, I don't think I'd move the target now anyway.

Got it. And if I could just one last thing on the synergy, obviously, there is top line synergies that haven't necessarily been quantified, I am just curious on the progress that you've made or any like what new avenue you guys are exploring relative to top line synergies and if there's been any progress made on those?

I think Giovanni summarized those, especially in the main one that we had talked about since the time of the acquisition, which is the beginning of the selling of indium phosphide components, and as he reported during his remarks, we have actually begun shipping that. So, I think it's early to put up a target dollar value on that, but that is a big deal to have got qualified and start shipping the indium phosphide components as individual components this early in the acquisition combination. That's what Chuck meant about some aspects are as much as 12 months ahead.

Got it. Thanks, guys, and great results.

Thank you.

Thank you.

Your next question is from Christopher Rolland of Susquehanna International Group.

Hi, Chris.

Thanks. Hi, how are you? Thank you for the question, and congrats on the results and congrats on Sherman qualification, and regarding Sherman, perhaps you guys can talk about how you view the TAM for 3D sensing market, and what kind of share you guys think you can capture exiting this year and perhaps three years down the road? Thanks.

I don't know that we would necessarily predict share that far out, but I think pretty much what we've said fairly consistently is that we believe that the TAM from a consumer point of view for 3D sensing is in the neighborhood of $1 billion, and originally when we talked about that back in 2017, we expected that to be materializing in the 2020 year, and thus, our comments all along that the market has been developing more slowly than we expected, but we certainly would expect to at least have our fair share of that market. Giovanni, do you want to add anything?

Okay. Yes, I mean our investments are to become the leader in the market, so anything bigger than 50, I like that.

Okay. Yes, just any sort of updates towards the exit rate of this year and market share, which is great, but if you don't have that, that's fine, but as a follow-up, it did sound like you had some really nice booking trends here. So I guess I have two questions, first, was there anything about the linearity of the bookings, did it accelerate into April and May, or was it just consistently strong out there over time? Were there any irregularities? Thanks.

I wouldn't say so. We knew we would get from you guys, like the question of whether or not these bookings were all about restocking inventory. So, we spent a good amount of time looking at the timing of the bookings, which does tell us something about what they're likely for. Obviously, when you're a component manufacturer, to some extent, your knowledge of where your materials are going isn't perfect. So, generally speaking, I would say, it looked like what would normally be an acceleration for a market that was beginning to rise, and I would also say that, at least from what we can see, the April bookings are not walking back the trend, I don't know that we're going to have $800 million of bookings in the 6/30 quarter, but I would say that we didn't see a reversal significant de-bookings, any of that sort of stuff that would cause us to be spotting strange things in the bookings we just reported.

Great, thank you, Mary Jane.

Sure.

And your final question is from Jed Dorsheimer of Canaccord Genuity.

Hey, Jed.

Hi, thanks for taking my question, superb execution, really something to be proud of. I guess my first question on the silicon carbide, I'm just curious that landscape seems to have shifted a bit with Dow's sale to SK, curious what's your thoughts about the shifting landscape there, and then I have a follow-up.

Giovanni, would you like to -- Giovanni, Chuck, would you like to do that?

Yes, I'll let Chuck, you start, I'll finish. What about that?

Okay. Good afternoon, Jed. Thanks for joining us today. For us, the change in ownership doesn't add a dynamic to the marketplace in the short-term, but it could in the long-term, and we believe that this marketplace, like many, many people believe in, I think you do too, that in this century, the electrification is going to be a main driver for sustainability for the world, and in the short-term it is likely to be in my -- in our model and in my thinking likely to be some modest gains and possibly have the market move sideways, while automotive companies rethink their priorities in the short-term, but overall, our sense from talking with customers is that their interest and their activity that's focused on silicon carbide based power electronics is not wavering. So, for us, we're a great competitor and we love competition, and we think it'll be healthy for the marketplace, and it will only end up having to the overall effect of driving in our estimate greater demand. Okay?

That's helpful, thank you. With respect to the silicon carbide, just staying on that subject, it sounded if the demand in near-term is -- well, let me ask, how is the demand split between application for RF versus electrification or inverter type applications in EVs?

Giovanni?

Yes, this is Giovanni here. So, we had like in the last quarter, which we have experienced a decline in the conducting substrate in the power electronics, substrates for power electronics, and we were able to retrofit our closed reactors to go the same insulating substrates, and we're seeing that to continue over this just recent quarter, so that even if at some point in the future, we know that the power electronics demand will be much larger than data, if that's not the case today, and as we said during the script, in the script that the acceleration of 5G, I would say very worldwide, it's not just about China, but also other OEMs and other carriers worldwide can continue to get ready. And with this 5G deployments, we're seeing an increase in the RF, which has been really timed very well, because you may recall, you were sold out for several quarters in terms of capacity. So, the decline in power electronics, I mean, was not welcomed, but at least was timed perfectly to enable us to grow the RF business. So, all in all, I think we've been fortunate about the timing. So, we were able to refocus on quality improvement and all the other things that we need to do to be -- to continue to be ahead of the competition, even if it will come as you said, maybe from Korea in the future.

Great, thank you.

Sure. I think given the time, we should probably finish the Q&A at this point, and I'd like to just for a minute, turn the mic back to Chuck.

Okay, thanks again, Mary Jane. Thanks again, everyone for joining us. Overall for the quarter, it was a tremendous performance during this COVID outbreak. I'm proud of our worldwide leaders who put safety first, collaborated early on to provide a business continuity, and emergency management plan, both internally and with local officials until we were carefully attending to the needs of our employees. Finally, I would also like to thank the growing list of our customers who value our technology, scale, and differentiation, as well as all of our other business partners, investors, and especially our employees who are enthusiastically aligning around our strategy as we continue the hard work that's always associated with being a global market leader. We'll continue to position II-VI for the tremendous growth opportunities ahead for II-VI, while driving long-term shareholder value and while serving a vital role in the world. We look forward to updating you in August, and this ends our call today. Good night, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.