Ladies and gentlemen, thank you for joining us for the II-VI Incorporated Fiscal '21 Second Quarter Results Conference Call. All participants are currently in a listen-only mode. Following the speaker’s presentation, there will be a question-and-answer session. I will now turn the conference over to our speaker today, Mary Jane Raymond, Chief Financial Officer. Thank you. Please proceed.

Thank you, Raquel, and good morning. This is Mary Jane Raymond. I am the Chief Financial Officer here at II-VI Incorporated. Welcome to our earnings call today for the second quarter of fiscal year 2021. 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, February 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, any forward-looking statements we may make today during this teleconference are given in the context of today only. They contain risk 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 by law. A list of our risk factors can be found in our Form 10-K for the year ended June 30, 2020, filed in August. 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. Chuck?

Thank you, Mary Jane. Good morning, everyone, and thank you for joining us today. I am pleased to report that halfway through our fiscal year 2021, we are on track to deliver a strong year. Our revenue for Q2 was $787 million. It exceeded the top end of our guidance of $780 million and grew 18% over Q2 of fiscal year 2020. Among the many highlights this quarter were a book-to-bill ratio of 1.17 for the quarter, leading to a 1.12 book-to-bill ratio on a rolling 12 month basis. We continue to execute on our ramp of 3D sensing VCSELs and delivered against an exceptionally strong demand, bringing shipments for the consumer end market to a record high of 15% of revenues. In addition, we delivered excellent growth in Life Sciences and experienced continued recovery in industrial, alongside strength in communications, aerospace and defense, the semiconductor capital equipment market, and in silicon carbide. Our Q2 guidance contemplated a very strong 3D sensing quarter, and we delivered on that. Our year-over-year growth in the consumer end market of over 200% was largely driven by 3D sensing. And again this quarter, we shipped VCSEL arrays in production volumes for front-facing, world-facing and emerging applications as Giovanni will describe later. Communications grew 5% over the prior year including for both Datacom and Telecom. Life Sciences gained significant momentum. It grew almost 50% sequentially and more than 80% compared to Q2 of last year, as our products are vital components to the COVID-19 testing ecosystem. Industrial applications grew 10% sequentially across our product lines, as we continue to see a brisk recovery driven by increased demand for automotive production. Turning now to our focus on operational excellence. We are well ahead of our plan to achieve our three-year $150 million total synergy target set for the Finisar acquisition in September of 2019. Our run rate synergies already exceed $100 million as a result of our integration work over the past 15 months. We are now on track to achieve our $150 million total synergy target in 24 months or 12 months ahead of schedule. And we are now increasing our three-year total synergy target to $200 million. Our faster delivery of our synergy plan is contributing to our strengthening margins and our strong cash flow and reflects our ability to execute and integrate large-scale acquisitions. Our cash generation in Q2 was an all-time record for the company amounting to $221 million of cash flow from operations and $176 million of free cash flow. From the Company's inception 50 years ago, we have strategically focused on identifying and capitalizing on irreversible mega trends from our core strength in materials and optoelectronic devices. We have been successful in our organic and inorganic execution and growing by leveraging these trends. The application of our strategy and II-VI values, our senior leadership team, and all of our employees are among the reasons we've been able to make this much progress during an unprecedented macro environment in the first half of fiscal year 2021. We look forward to the exciting opportunities ahead of us in the second half of fiscal year 2021 and for many years to come. With that, I will turn it over to our Chief Strategy Officer and President of the Compound Semiconductor Segment, Dr. Giovanni Barbarossa, to review our individual businesses while highlighting our product and technology leadership. Giovanni?

Thank you, Chuck. We appreciate our investors’ enthusiasm for our strategy and our successful track record of assessing long-term market opportunities, executing large scale M&A and developing technology platforms aimed at addressing major market mega trends. Augmented Reality, Autonomous Driving, and Artificial Intelligence are among those mega trends which are enabled by 3D sensing. So this quarter I am pleased to report that 3D sensing grew more than 140% sequentially. We believe this is significantly faster than the market growth rate. Both the Warren and Sherman fabs are operating very efficiently due to very solid execution and contributed equally to our 3D sensing revenue in the quarter. As Chuck said, 3D sensing growth came from shipments of production volumes of VCSEL arrays for multiple end customers, including for front-facing and world-facing applications, as well as for other consumer electronics and automotive in-cabin sensing. We're also making good progress expanding our customer base with additional wins, including in the Android ecosystem and personal computing platforms. Given these phenomenal results, I believe it would be worthwhile to review our multi-year trajectory in 3D sensing for the benefit of investors who might be new to our story. Our 3D sensing work began in 2013 after the acquisition of the gallium arsenide platform, which, among many things, came with some of the industry's best bits of technology despite having zero footprint in the emerging 3D sensing market. We started mentioning the 3D sensing story publicly in 2016 to explain our acquisition of VCSEL fab operations in Warren, New Jersey, and Champaign, Illinois, where we acquired the manufacturing foundation to strategically expand our gallium arsenide optoelectronics platform from three to six-inch for the large volumes required for the consumer electronics market. We said in our Investor Day in 2017 that entering the 3D sensing market with a vertical integrated six-inch platform would prove to be the most long-term competitive and sustainable strategy. Our conviction was rooted in our deep experience in the business of compound semiconductors. When we acquired Finisar, some asked us which gallium arsenide fab we planned on closing. Our answer was none because we needed the capacity to gain share and become the market share leader by offering breakthrough solutions at scale. The teams in Zurich, Warren, Champaign, and Sherman worked together to get Sherman qualified and granted. During the quarter, we accelerated our share gains, we believe, faster than the market. And we are well underway to achieving the leading share of the global market. As for the automotive market, we are shipping VCSEL arrays for in-cabin sensing applications. We're also engaged in many LiDAR market opportunities as we have the broadest portfolio of products in the industry. Unlike our pure play laser competitors, we have an entirely vertically integrated portfolio of both active and passive components made from our engineering materials that are critical for these next-generation LiDAR designs. On the active side of our laser offerings, we include VCSELs, edge emitters, laser balls, multi-junction emitters, pulsed fiber-based sources, thermal access, and laser drivers. On the passive side, we provide a differentiated portfolio of optical components, including polygon scanners, galvo mirrors, lenses, filters, gratings, and other windows to name a few. We believe the LiDAR market is still in its infancy, but with our strong customer traction and design engagements, we are well poised to take a large share of this market as it develops. That said, the wide variety of LiDAR technologies being considered is quite characteristic of a market that is in a very early stage; more time would be required to identify the winners. We believe that the more immediate and eventually much larger opportunity in automotive is for our silicon carbide products for power electronics. Recently, one of our Japanese silicon carbide substrate customers was selected by a Tier 1 Japanese automotive company. And we are excited to be a key partner in their supply chain. We see this as a strong positive sign that our silicon carbide business for power electronics will resume growth after the slowdown caused by COVID-19 in 2020. Meanwhile, we are continuing to execute on our multi-year plan to develop a broad portfolio of products across the value chain for the electrification of the transportation infrastructure. In the communications market, while telecom was impacted by the slowdown in new system installations due to COVID-19, our high data rate coherent transceivers are ramping up adding bandwidth to both new and existing networks. We are pleased to report that we are gaining market share in this space with our quarterly revenue run rate of these products having more than doubled compared to a year ago. And we expect our share to continue to grow. As part of our coherent modules, we are pleased to announce that our disruptive pluggable optical line system, or POLS, won the best product award for data center innovation at the European Conference on Optical Communications. The POLS is the first product of its kind on the market and leverages significant breakthroughs in miniaturizing optical components for amplification and wavelength management while at the same time improving performance and reducing power consumption. We're also making steady progress to grow our share in Datacom by ramping up our 200G and 400G products driven by increasing demand from hyperscalers both in the U.S. and in China. In fact, our 200G and 400G products have more than doubled sequentially. We are also excited to announce that we have just sampled our first 800G transceivers to a large web-scale customer who has already provided positive feedback. In industrial, we continue to see signs of recovery driven by a strong increase in demand for capital equipment, with our aftermarket business back to pre-pandemic levels. In fact, we had record aftermarket revenue in December. In the semiconductor capital equipment market, the recent announcement of significant investments by TSMC and Samsung led us to believe that our differentiated optics, ceramics, and composites will benefit from a multi-year tailwind. Finally, our Life Sciences business increased 80% year-over-year driven by the demand for our thermoelectric and filter products that enable COVID-19 PCR testing. We are proud to have been able to contribute in such a meaningful way to the fight against the pandemic. With the progress we're making across our material and device platforms driving top-line growth and strong margin expansion, we are very optimistic about our diversified business model. With that, let me turn it over to Mary Jane.

Thank you, Giovanni, and good morning. Our non-GAAP gross margin was 42% and the non-GAAP operating margin was 22%. The non-GAAP gross margin is 380 basis points ahead of the last II-VI reported pre-acquisition gross margin of 38.2%. And the non-GAAP operating margin is 630 basis points over the last II-VI reported pre-acquisition operating margin of 15.7%. These margins were driven especially by our synergies, a strong mix, improvement in transceiver margins, and increased fab utilization. At the segment level, the non-GAAP operating margins were 17.4% for photonics and 29.3% for compound semiconductors. Similar to last quarter, compound semiconductors margins were driven due to strength in 3D sensing shipments and increased fab utilization. Our backlog was a record $1.08 billion and consists of $680 million in photonics and $400 million in compound semiconductors. The backlog contains orders that will be shipped over the next 12 months. GAAP operating expenses, which are SG&A plus R&D, were $204 million excluding amortization of $21 million, $24 million in stock-comp, and $1.3 billion of M&A and integration costs. Non-GAAP operating expenses were $158 million. Non-GAAP operating expenses are 20% of revenue and just over 500 basis points below the operating expenses percentage of revenue just prior to the close of the acquisition when it was nearly 26%, for II-VI and Finisar combined with amortization, stock-comp, and transaction costs excluded. Quarterly GAAP EPS was $0.73 and non-GAAP EPS was $1.08 with after-tax non-GAAP adjustments of $43 million in total. The share count for the GAAP results was 115 million shares. For non-GAAP, the share count was $124 million. The GAAP and non-GAAP EPS calculations are in the last two tables of the earnings release. Stock-comp was $28 million for the quarter, $4 million in COGS and $24 million in operating expenses. This is $11 million over the estimate of $17 million due to the increase in the II-VI stock price. The stock price is relevant to the valuation of our equity-based cash-paid instruments. We use these instruments to incentivize our non-U.S. global leaders who are also essential to our team of leaders thinking and acting like owners of II-VI. Using our December 31, 2020 stock price, we expect stock-comp for fiscal year '21 to be approximately $88 million, or $16 million for Q1, $28 million for Q2, and $22 million for each of Q3 and Q4. Cash flow from operations was $221 million and free cash flow was $176 million. We paid down $49 million of our debt, in addition to the required payment of $16 million, and the interest expense in the quarter was $15.6 million. This payment allowed us to reduce our net debt leverage ratio to 0.9 times at December 31 compared to 1.3 times at September 30. Capital expenditures this quarter were $46 million. For the year, we expect CapEx to be between $180 million and $220 million to support an increase in capacity for compound semiconductor materials and devices. Depreciation was $47 million in the quarter, and we expect our forward depreciation expense to be about $46 million to $50 million a quarter. The FX loss in the quarter was $7.5 million, primarily driven by the Swiss franc and the RMB. The effective tax rate in the quarter was 17%. We expect the tax rate to be between 19% and 22% for the year. The tax rate used for the non-GAAP items is 19%. The tax rate moderated from our prior range of 22% to 26% due to renewals of high-tech status and super R&D deductions, in addition to increased stock option exercises and changes in the mix of income around the world. Both the Ascatron and INNOViON acquisitions are now consolidated in our results. The Ascatron acquisition closed on August 20, and the INNOViON acquisition closed on October 1, both in 2020. For the two combined, we had $8 million in revenue, $2 million additional OpEx, and breakeven non-GAAP EPS in the 12/31 quarter. Our non-GAAP results exclude a $7 million gain on the INNOViON acquisition resulting from the fair value measurement of the previous equity investment. Turning to the outlook, revenue for the third quarter ending March 31, 2021 is expected to be between $760 million to $780 million and earnings per share on a non-GAAP basis at $0.81 to $0.91. This is at today's exchange rate, which includes a weaker dollar compared to September 30, an estimated tax rate of 19%, and 126 million shares. For the non-GAAP earnings per share, we add back to the GAAP earnings pre-tax amounts of $21 million in amortization, $22 million in stock-comp, and $2 million in transaction and integration costs. The estimated Q3 share count is 117 million shares for GAAP and 126 million shares for non-GAAP. The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, and the share count all are subject to change. Before we go to the Q&A, just 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 regulations, and general economic conditions. We would also ask that each firm limit its questions to one question with no follow-ups as we would like to try and get everyone in during this call. I'd also like to turn it back to Chuck Mattera for three minutes at the end. And we do expect to end the call at 10 A.M. Raquel, you may open the line for questions.

Please stand by while we compile the Q&A roster. Our first question comes from Mark Miller with The Benchmark Company.

Congratulations on another record quarter and the significant gains in the 3D sensing area. I have one question regarding other expense; could you provide some insight into what it will be next quarter since it has varied over the last two quarters?

In the other income and expense?

Correct.

Generally speaking, I think it should really only be the FX with a little bit of the equity earnings from our equity investments. But the major driver that caused a change this quarter was the INNOViON gain.

Okay. And so $7 million, $8 million?

I'd say it's probably similar to Q1.

Sure.

Your next question comes from the line of Jed Dorsheimer with Canaccord Genuity.

Hi, thanks and congratulations on the quarter. My one question I guess is, if I look at the strategy around compound semiconductors, it seems that we're seeing and what you're benefiting from is really a renaissance in the semiconductor industry that takes us back or takes me back to the late 70s, early 80s on the silicon side, but today on the compounds. So I'm just wondering, as you think through the end markets from silicon carbide, sapphire, indium phosphide, all of which are manufactured on various platforms, how can you help investors think through the cost curves in terms of those cycles? Thanks.

Hi, Jed, good morning. This is Chuck; thanks for your question. It really is an exciting time for compound semiconductors. In general, the materials and devices have been around for many decades, as you know. And every time they have been invested in, they've been invested to enable new applications or overcome challenges that the incumbent technology have that cause either a constraint or an asymptote in performance. So they are enabled. And the value proposition ultimately has to be taken at the system level. When there's a clear enablement by the material and the component of the system itself, then there's generally a pull by the ecosystem to be able to drive this technology. And it happened in the early days of gallium arsenide. For Tencent and HBTs around the side of radar infrastructure that was ultimately put in place and it led to the world that we see today. And that volume spilled over into the handset market. We see the benefit of that coming with gallium and silicon carbide, even indium phosphide-based electronics, as the advent of designs for example, if even 6G communications networks will rely and be enabled by such innovative devices that will come from the compound semiconductor market. I think that's probably all I can get into Giovanni would you like to add anything to that?

Oh, that's perfect Chuck.

Okay, Jed, I hope that answered your question.

Thanks. It does. Thanks, guys.

Your next question comes from the line of Paul Silverstein with Cowen.

Thanks guys. I guess what it looks like 3D sensing, Chuck and Giovanni, obviously, it's ramping nicely. Can you give us any additional insight into the demand outlook, especially in terms of the breadth of demand beyond just Apple, what you're looking at and your ability to continue to drive this type of growth? Obviously, large numbers, it's going to get harder as you go forward. And one other related question, I assume we should expect further margin uplift with the benefit of ongoing volume in 3D sensing?

Okay, Paul, thanks for the question. Definitely, the number of use cases and the interactions with a broad set of customers are increasing. As we said in the script, we have some design wins in Android platforms; volumes are growing. We are surprised that they are not growing as fast as they should. But we are very, very, very bullish about long-term opportunities for the application as they especially it’s a necessary function to enable those mega trends that we discussed, such as Autonomous Driving and Artificial Intelligence and so forth. So we are very confident that the demand will continue. So having a vertically integrated platform is going to be, as we said, a sustainable advantage that we have. And then yes, definitely, volumes help on the margin side, but I'd let maybe I'll let Mary Jane comment on that part of the question. Mary Jane, would you like to add something?

I think 3D sensing continuing to gain volume is positive for the margins. Do keep in mind that the quarters across the year are not steady for 3D sensing. And typically, this past quarter, the 12/31 quarter is the strongest quarter. That is what we have seen in the past; that may change, as Giovanni said, as we get an increase in other deployments. But for right now, I'd say volume definitely helps but it is not the same volume in every quarter.

Okay. Thank you.

Your next question comes from the line of Jim Ricchiuti with Needham & Company.

Hi, good morning. Maybe just to follow up on that comment, Mary Jane. In terms of seasonality, what should we be thinking about in terms of the puts and takes with respect to the March quarter? Just in terms of the larger verticals?

Yes, I would say first of all, we've already been through the first half of the year. Q1 is still expected to be our smallest quarter. Q2 12/31 was strong for 3D sensing, as we just saw. We do expect to see that 3/31 quarter probably down a little bit compared to Q2, partly due to Chinese New Year; we can't forget that. Also, I don't think 3D sensing will be as high exactly as it was in 12/31. And then the 6/30 quarter for us, which has historically been our strongest quarter, may be a bit harder to forecast because of the strong quarter we had this quarter. But for now, I'd say generally speaking, we should keep in mind Chinese New Year for the 3/31 quarter.

And it's 3D sensing, industrial, and the optical communication seasonality in the March quarter. I'm wondering how we should be thinking about that?

Well, I'm not sure we can give it to you exactly. Generally, we don't see it for industrial; the first quarter, the 9/30 quarter tends to be the weakest quarter. Communications can sometimes be a tossup between 12/31 and 3/31. But generally speaking, it is Chinese New Year, so I think you should calculate that in. The other markets are probably less subject to specific seasonality in any given exact quarter.

Yes. I want to add to what Mary Jane mentioned. The seasonality is sometimes balanced out by market realities. For instance, we expect to ship more than double the megawatts in the second half of the fiscal year compared to the first half. This significant increase in megawatts for industrial applications, especially for fiber lasers, is primarily due to a strong resurgence in China, which we are benefiting from.

Got it. Thank you for that color.

Let me just clarify one answer I gave Mark. He was asking us about non-Op income and expense. I forgot that in the first quarter, we had a write-off of the debt costs. Generally speaking, it's probably somewhere between $2 million and $3 million positive. We can take the next question now.

Your next question comes from the line of Vivek Arya with Bank of America Securities.

Thanks for taking my question. I was hoping you could give us a quick update on your silicon carbide franchise. How much does silicon carbide account for as a percentage of sales? What are the next milestones we should be looking forward to? And recently, one of your competitors spoke about increasing their investments in 200 millimeter capability. I was wondering how that impacts the competitive landscape going forward? Thank you.

So silicon carbide is between 3% and 4% of the revenue, and I'll give the second part to Chuck.

Okay, thanks Vivek for your question. As we've indicated, there's a long-term growth opportunity for us. We're playing it just like you would play a golf course, one hole at a time. We have the end in mind that we've described to investors pretty clearly; we have a scalable silicon carbide substrate platform, which was demonstrated to be capable of supporting a 200 millimeter technology about five years ago. So we're investing in scaling that capability of our silicon carbide substrate. A considerable amount of our capital investment that Mary Jane referred to earlier is focused on adding equipment for silicon carbide crystal growth, epitaxial wafer growth, ion implantation tools, to provide a clear technology roadmap for electronic devices and ultimately for modules. This is a multi-year platform investment. The best way for investors to think about it is the same way Giovanni gave a retrospective view of how we thought about the six-inch gallium arsenide vertically integrated platform development over five years ago. It's going to take us some time to put all the pieces into place that we envision, but we have the talent, the team, the technology, and now we have to get the infrastructure in place and get to the scale that we ultimately aim to be. And that's all line of sight inside our near-term and long-range plans. I think that's probably the best way to say it, Vivek.

Okay. Thank you, Chuck.

Your next question comes from the line of Richard Shannon with Craig-Hallum.

Well, thanks guys for taking my questions. A question focused on Datacom probably two-part here. I heard some comments about your 200 gig and 400 gig transceivers doubling sequentially; can you help us understand what's going on there? And then kind of looking forward, broadly speaking across the space for both web-scale and 5G, how do you see this calendar year developing?

Okay, Richard, this is Giovanni. Thanks for your question. What's going on? We're gaining share, obviously, pretty fast too. I think the team has done an incredible job with these new platforms, and it's very exciting. I'm sorry; what was the second part of the question on 5G?

Dynamics in Datacom going forward through the year, especially the web scale and 5G; some of your peers in the market talk about having a slower start to the year but accelerating as 5G starts to ramp in the latter half of the year?

Yes, well, the reality is that because of COVID, many deployments worldwide have actually been slowed down. I mean, that doesn't mean that the trend is any different than before and those are still important mega trends for us. I think we've seen a channel add being the dominant need for the end customers rather than new deployments; that’s a dynamic there. For example, I think we've seen more client systems being added and line systems being added and so forth. So those are the dynamics in terms of the demand. I want to emphasize the growth that we've seen in Datacom has been a little bit stronger than Telecom and then remind you this important point I made on the 800G. First 800G shipments that we made were really successful so far; we've excitingly added it to our portfolio. And all in all, I think we are going back to a really nice growth trajectory with the Finisar team with whom, for over a year, many customers were probably on the sidelines waiting for the integration to happen. Now they feel more confident as the numbers demonstrate that we are doing a pretty good job integrating the two companies, so that's been key.

Okay, great. Thank you.

Thank you.

Your next question comes from the line of Ananda Baruah with Loop Capital.

Hi, good morning guys. Congrats on the solid results. Taking the question. I guess, just a bigger picture on Chuck, in the press release this morning you made mention of all markets improving? I was just wondering because you provided some context to that. And so I was just wondering if you could provide some context around the key markets there? And which market opportunities would you like us to think of as making the most significant impact this year as you move through the year? Thanks.

Well, I think we summarized pretty well in the script, the dynamics in every one of the end markets, whether Communications, Industrial, Semiconductor Capital Equipment, Life Sciences, 3D sensing, etc. I think all of those markets have a great opportunity to really make an impact on the year. Communications is obviously the largest; 3D sensing is ramping beautifully; silicon carbide is coming up the curve. So I think really all can contribute to the year. The ones you want to think about are either the largest ones or the ones that are really starting to gain traction in the revenue.

And just Mary Jane, just a quick clarification on that. With Chuck's comments in the press release about markets improving, should we anticipate that the key market, the growth can be stronger as we go through the year? How about some context around that?

I believe we have already addressed that question. We are experiencing significant growth this year across all the markets mentioned in the script, and I think we need to move on.

Your next question comes from the line of John Marchetti with Stifel.

Thanks very much. Mary Jane, you guys identified an additional $50 million of synergies that you're expecting here over the next 12 months or so. Just curious with the scale now; should we expect most of those to come through additional cost synergies on the OpEx line or are there additional opportunities that you still seem to chop away and improve on the gross margin line in relation specifically to this $50 million target?

I think it's both on the cost of sales and in the OpEx.

And is that again a function of larger scale? Are you able to identify programs where you can physically take some of those costs out? Thanks.

Well, let me add John. But we need to move on. Yes, scale has a lot of benefits. We will have exact targets for both the cost of sales and for our overall expenses, and we will achieve it.

Thanks, Chuck.

Your next question comes from the line of Harsh Kumar with Piper Sandler. Your line is open. Harsh Kumar, your line is open. Are you on mute?

Yes, sorry about that. Hey guys, congratulations on strong results. Chuck, I wanted to ask you, is your gross margin of 42% that you put up? Is that the new paradigm? Is that how we should be thinking about things going forward? And then when we think about OpEx for you guys, you've done a great job containing it relative to expectations. But how should we think of the cadence going forward? Do you manage that as a percentage of business, or do you manage that as a percentage of revenue growth? Just any color? Yes, that's it for me. Thanks.

The gross margin range for the year is 38 to 42%, and the OpEx margin, excluding stock compensation, is between 20% and 23% of revenue.

Thank you.

Your next question comes from the line of Samik Chatterjee with JP Morgan.

Thank you, thanks for taking the question. I think primarily for Chuck. Chuck, you've done a great job getting the leverage down since the Finisar acquisition, and that gives you a lot of flexibility. I'm just wondering, do you see a need to further consolidate the market either for new platforms or certain end markets where you can get greater benefits from scale compared to what you have today? Just want to get your thoughts on that. Thank you.

Okay, thanks for your comments and your question, Samik. We have a long-term aspiration to change the world, and we're doing it with the benefit of innovation. By identifying the long-term trends in the marketplace that will take full advantage of that innovation or be enabled by it. We're not going to invest; we have a strategy that's well articulated, and we've been executing on it for decades in the last five years or so, investors have really gotten to know that. I don't see any change to that, and for sure, no change to our discipline and our determination to build long-term shareholder value and have a profound impact on the stakeholders all around as a result. We have plenty of investing to do, lots of imagining to do, and lots of executing to do. We're going to do a combination of those activities.

Thank you.

Your next question comes from the line of Sidney Ho with Deutsche Bank.

Thanks for taking my question, and congrats on the very solid results in the 3D sensing business. So my question is actually on the comm side. I think Chuck, you mentioned last quarter it was impacted by a slowdown in new system installations. I'm curious if you start seeing the recovery of that part of the business yet. And if you look at your orders and backlog, are there particular areas where you see strengths or weaknesses over the next few quarters? Thanks.

Sidney, can you repeat the first part of your question? Mary Jane will comment on the backlog, but what was the first part of your question?

Yes, you were talking about last quarter being impacted by a slowdown with new system installations. I'm just curious, what have you seen the recovery already in that business? And then the second part of that is related to the backlog of orders that, do you see anything particular areas of strength or not? Thank you.

I think there's a recovery underway; there are still spots around the world where COVID-19 has had and is having still an impact. The profound effects of COVID-19 simply cannot be understated. So that's happening, and I would say the supply chain has been a lot of talk about the integrated circuit supply chain and how that might be an overlay to COVID-19. That's another topic, but I'm proud to say that our global supply chain management team has really done a fantastic job in working with our vendors to mitigate the impact thus far. So we need to watch that. I would say the supply chain is what I'm going to be looking out for in the next three to six months.

I don't think that we break the backlog down further than by segment. I don't know if there's a particular area of strength or not.

Thank you, Sidney.

Thank you.

Your next question comes from the line of Tom Diffely with D.A. Davidson.

Hey, good morning and thanks for the question. Maybe for Giovanni, how do you view the long-term opportunity in LiDAR versus your current uptick in the 3D sensing for the handsets? And is your capacity for 3D sensing tangible for LiDAR, or is it going to require some type of different technology as well?

No, thanks for the question, Tom. Absolutely, it's a great opportunity for us. I want to make sure that this is clear: the LiDAR market, despite all of the noise in the media, is still in its infancy for advanced optical solutions, which includes lasers and various types of optics and electronics. As I mentioned, we have a very broad portfolio, likely one of the widest ranges for both actives and passives. We offer different wavelengths, various form factors for the lasers, and a variety of sub-assemblies and support. We are well positioned to take advantage of our interactions with numerous customers across different levels of the supply chain. I believe we have pretty much everything that is needed. The key question is really where to place our bets, because, as I stated, it can be challenging to predict which solution will yield the largest volume. There are differing opinions regarding the best approach to deliver optimal performance with the highest reliability and the best eventual price target for automotive customers. This will take some time to figure out, but I think we are well positioned for that.

Okay, that's helpful. Thank you.

You're welcome.

Your next question comes from the line of Tom O'Malley with Barclays.

Hey guys, thanks for taking my question and congrats on the really nice results. My question is for Giovanni. You saw the industrial business trough in the September quarter, and you see some M&A going on in the space. Can you talk about what's going on there? And you mentioned you're going to double your megawatts in the second half of the year for fiber lasers. Is that just volume in China coming back, or is the high end of the market a little bit better? Any color on how that market's progressing off the bottom will be really helpful.

Thanks for the question. China is rebounding quickly, which is significant since it's a large part of our market. There are many fiber laser manufacturers in China, and we are benefiting from our design wins and their expansion. We are growing alongside them, and they are also capturing market share from some global competitors. Their progress is impressive. The most substantial growth is occurring in laser processing for durable goods, while micro processing, like marking or coding, represents a smaller portion overall. It's an exciting time. Our ability to meet the strong demand, particularly from China, stems from our transition to six-inch 980 multimode pumps. We possess the capability to produce at a high volume scale, and I believe we might be unique in the world regarding this capacity to service their markets. We are taking full advantage of this situation.

Thanks, Giovanni.

Your next question comes from the line of Christopher Rolland with Susquehanna.

Thanks for the question. Congrats on the quarter. I wanted to chime in on the one question policy and pay for the call; I appreciate that. So congrats on the 3D sensing result, but perhaps for us, at least, the photonics and TC and DC was maybe a little bit light here. It was nice to see backlog up here. But I would assume that's really implies some sort of a supply issue; maybe talk about that. Is it increasing supply issues? Where do we stand on new capacity and new supply? Did 3D sensing temporarily take some of that capacity, or are they held separate? And is the CapEx like $40 million a quarter enough to solve some of these supply constraints? Thanks.

Thanks for your question. It sounded like there were three or four questions in one. But let me talk about the supply chain. In the quarter, despite the fact that we had a view of what it could be, our supply chain people managed it to be pretty close to zero impact. So we're watching it because we understand the challenges associated with the demand, especially in the snapback of automotive production and the demand for integrated circuit capacity from other markets. But we do have some constraints, and we'll continue to manage those in the supply chain. We're adding capacity so that our internal or intercompany supply chain can keep pace with the expectations of growth. And as far as the 3D sensing goes, we're increasingly utilizing the capacity we have. So there's no impact at all from the supply chain to that.

Thanks, Chuck.

Yes, you bet.

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

Great, thanks. And just on the 3D sensing portfolio, you guys mentioned also having a passive kind of piece of the portfolio with the filters and other products. I just wanted to get a sense of, as you report 3D sensing revenue today, is that primarily VCSEL? And as you look forward to the next year, in the next 12 months, would you still expect growth to primarily be driven by share gains or kind of new platforms coming on? Thanks.

Hi, Meta, thanks for the question. This is Giovanni.

Go ahead, Giovanni.

Yes, the majority of the volume... I do think over the next year, we will see, as Giovanni already described, that there may be other platforms emerging. But as he also said, it’s a little bit dependent on market demand. We're looking forward to seeing those opportunities materialize. I think at this point, I'm sorry we have a little bit run out of time. I just want to turn it back to Chuck for a few minutes. And as all of you know, we have a scheduled call with all of you following this call. Let me turn it back over to Chuck.

Okay. Thank you, Mary Jane. As 2021, the year of the Ox begins, my enthusiasm for our future is at an all-time high. We continue to look forward to leveraging the best opportunities that arise from the most exciting and irreversible market mega trends we can address. Although I acknowledge the sobering reality of COVID-19, a challenge to all humanity. COVID-19 has affected the health, safety, and economic security of a large number of people around the world. However, I am confident that humanity will rise to this and the other important challenges facing our planet. At II-VI, we realize that we must do everything we possibly can to protect our planet and carefully manage precious and finite resources in order to ensure that future generations will inherit from us a world that’s better and more sustainable. In doing so, we expect that II-VI will play an increasingly significant role in enabling the world to become safer, healthier, closer, and more efficient. This is our mission to which I remain as firmly committed as ever. While we are executing well, we are doing so out of the strength of our shared belief in our values of integrity, collaboration, accountability, respect and enthusiasm or as we say, at II-VI, I care. Beyond these values, I believe that we hold in common the belief that equality and affordable education provide opportunities for a better life today and a better world tomorrow. Based on those shared principles, it's with great generosity that II-VI Co-Founder, Dr. Carl Johnson, and his wife Margot Johnson established in 2007 the II-VI Foundation. Through their foundation, Carl and Margot have funded the college and university education of many students around the world, many of whom have joined II-VI, and some are now in key leadership roles within our ranks. Today, we are very proud to participate in the II-VI Foundation's mission by contributing $1 million in 2021 to their inspiring project as part of our environmental, social, and governance or ESG initiatives. Our renewed commitment to the II-VI foundation is important, and the outcome of a growing conversation at II-VI of a desire to be part of something even bigger than just the growing and innovative company. It’s my intent to respond to this call with a greater awareness of our place in the world and to scale our intentions with actions. Today, I take this opportunity to acknowledge our heritage and history. As we reflect this month on Black history, as we do in the United States each February, I would like to close with a definition of the word innovation, which has its origin in the Latin word meaning to renew or to change, not simply to invent. Despite all of our successes, in order to be ready to seize yet unseen opportunities that lie ahead, but which are sure to come, we will continuously innovate and embrace change. At II-VI, our vision is of a world transformed through innovative materials vital to a better life today and the sustainability of future generations. That ends our call today, and we thank you all for joining us. Have a good day.

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