Good day and thank you for standing by. Welcome to the II-VI Incorporated Fiscal Year 2022 Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mary Jane Raymond, Chief Financial Officer. Please go ahead.

Thank you, Catherine. Good morning. I’m Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our earnings call today for the fourth quarter of fiscal year 2022. With me today on the call are Dr. Chuck Mattera, our Chair and 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 Wednesday, August 24, 2022. For today’s call, the press release and the investor presentation are available on the Investor Relations tab of our website, ii-vi.com. Today’s discussion includes certain non-GAAP measures. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today’s documents. I remind you that during this call, we will be making certain forward-looking statements. These forward-looking statements are based on current expectations, forecasts, and assumptions and involve risks and uncertainties that could cause actual results to differ materially from these statements made today. Our comments should be viewed in the context of the risk factors detailed in our most recent 10-K filing for the fiscal year ended June 30, 2021, and our subsequent SEC filings. Our Form 10-K for the fiscal year ended June 30, 2022 is expected to be filed on August 29th. II-VI assumes no obligation to update the information discussed in this conference call, except as required by law. With that, let me turn the call over to Dr. Chuck Mattera. Chuck?

Thank you, Mary Jane. Welcome, everyone, and thanks for joining us today. FY22 was truly extraordinary in every conceivable way, starting with our financial results. We completed our fourth fiscal quarter of 2022 with revenue of $887 million, an increase of 7% over the third quarter in 2022, and an increase of 10% over the fourth quarter of fiscal year 2021. We achieved operating income in Q4 FY22 of $114 million and non-GAAP diluted EPS of $0.98. These results are new records for fourth quarter revenue, strong quarterly year-over-year growth numbers and reflect sustained demand across our businesses. Our quarterly results reflect our resilience to a challenging operating environment, including the ongoing impact caused by the pandemic, a dynamic regulatory environment and persisting supply chain challenges. In the face of these headwinds, our global team rose to the occasion every day with extraordinary effort and care for our employees and achieved incredible success. There is an undeniable link running from the Finisar acquisition and our collective long history of dedicating ourselves to excellence, as reflected in the results we report today. We completed the Finisar acquisition on September 24, 2019, right before the effects of the pandemic were first felt by the world. At the time, we believed that the depth and breadth of the technologies and manufacturing scale of the newly combined company would enable our growth by addressing the long-term mega trends in our markets, including cloud computing and the advent of 5G wireless networks. We were right in our beliefs, and so we turned our intense focus to executing on our strategy leveraging our technology and worldwide manufacturing platforms, identifying and closing gaps, delivering against our synergy targets and improving our operating leverage. As a result of the acquisition, we became the largest component and subsystem supplier in the optical communications market as well as a leader in Photonic Solutions and Compound Semiconductors. All of these actions led to a truly stunning fiscal year with record $3.3 billion in revenue, 7% top line growth and record bookings of $4.3 billion. We also demonstrated our ability to generate strong operating cash flow results while investing strategically for the future and facing unprecedented operating challenges, closing the year with $413 million of operating cash flow. Our strong performance throughout the year is the result of our deep customer relationships, decades of investments in technology, sophisticated manufacturing platforms and leading-edge products. Our diversified global footprint has allowed us to operate resiliently and continue to capture expanding opportunities across all end markets. Turning now to Coherent, after years of assessing the possible trajectories of a changing landscape, about 18 months ago, we announced our strategy to rebalance the diversification of the Company. Our strategy, combined with our market and technology insights, pointed us to Coherent, a long-standing innovator and the gold standard for laser systems technology. Through our process of mutual discovery and our joint planning over the last year, which took place at a brisk pace, our integration teams worked collaboratively to create a flawless day one experience, which occurred on July 1st, when we began a new and transformative chapter. We were off to the races from the very first day. Now, everywhere we turn across the Company and with customers and employees alike, sparks of excitement are flying around this next chapter of a remarkable transformation. We have begun to engage with our new colleagues in earnest and are focused on executing on the synergies already. It’s an incredible team of people well-suited to our culture, and I could not be more excited about the days ahead. We remain confident and committed to our cost synergy targets and timeline, and over the next several quarters, expect to share more about the revenue synergies. On September 8th, 2022, we will transition to our new name, Coherent Corp. We’ll launch our new brand and begin trading with a new ticker symbol, Nasdaq: COHR. We chose the name Coherent because it has the universal meaning of bringing things together, with an appeal that we believe will expand our brand recognition and create value. The broader meaning of the word Coherent represents our diversity of thought, distilled into a common purpose, our unity in action, and our broader sense of engagement and connection to our mission, vision and values. Going forward, we will simplify our segment names and the description of the end markets we serve. The new segments will be materials, networking and lasers. In addition, we will report revenues by four end markets: Industrial; Communications; Electronics; and Instrumentation. The Company now addresses a combined total addressable market of $65 billion. Our long-range plan anticipates that the markets we serve will have a composite compound annual growth rate of mid-double digits. So, I believe that we are very well positioned in each of the end markets to take advantage of opportunities available to us while delivering on the promise of our transformative acquisitions through sustained dedication to organic investments. Turning to Q1 FY23: Our guidance anticipates that we will grow the top-line by over 50% sequentially, including the acquisition and over 10% organically for legacy II-VI. We expect continued sequential growth from the consumer market due to both, meaningful share gains in the sensing market, including 3D sensing, as well as continued demand in components for semiconductor capital equipment and communications overall. I will return to wrap up after Mary Jane’s section. But for now, let me turn it over to Dr. Giovanni Barbarossa, who in his capacity as the Company’s Chief Strategy Officer, will provide color for the quarter and about our emerging technologies. Giovanni?

Thank you, Chuck, and good morning, everyone. We had a great fourth quarter with meaningful growth in communications and industrial. Communications revenue grew 8% compared to Q4 of last year and 4% sequentially. Our datacom business grew 14% compared to Q4 of last year, with strong growth in transceivers, modules and photonic components. Our growth is a testament to our technology leadership supported by proactive supply chain management and collaborative long-range planning with a broad customer base. For the market studies we have conducted, the datacom market is expected to grow in the next five years at a 12% compounded annual growth rate, despite current macro sentiments. The double-digit growth is in line with recent analyst reports that forecast global data center capital expenditure spend to be quite robust, growing to over $370 billion by 2026, with hyperscalers accounting for more than half of that amount. Shipments to hyperscalers of our higher data rate transceivers at 200G and beyond were four times higher than in fiscal year 2021 and drove the majority of the growth of our datacom business in fiscal year 2022. As the cloud and hyperscale data center market transition to 25 and 50 terabits per second, the demand for our 800G transceivers is picking up. In fact, we are now shipping meaningful volumes of 800G transceivers. We are confident that our industry-leading 200G indium phosphide lasers and detectors will become the components of choice for this upgrade cycle. Our 200G per lane lasers and detectors will be needed in reducing cost and energy per bit and will serve as a solid foundation for our next-generation 1.6 terabit per second transceivers. We are pleased to report that we had record revenue for our datacom VCSELs, which was driven by a successful ramp of the latest generation of our 50G VCSELs for PAM4 modulation format. Our telecom business grew 10% sequentially, driven by continued share gain in coherent transceivers and the growth of our subsystems business. Last quarter, we unveiled our organic DSP platform, which is in line with our vertical integration strategy that we have been investing in since 2019. Our purpose-built Steelerton DSP is a key enabler of our industry’s first 100ZR QSFP28 pluggable coherent transceiver for the network edge, a market that analysts estimate to be $750 million by calendar year 2026. With our DSP and our transceiver technology, service providers can now benefit from the simplicity and robustness of coherent technology and the access network, and proceed to upgrade millions of 10G Ethernet links to 100G seamlessly. Our ROADM business, which was the most affected by supply chain issues over the past year, was flat for the full year but grew 12% sequentially as we have made good progress in procuring components in short supply. Our Industrial business achieved record revenues, growing 6% in the quarter compared to Q4 of last year and 5% sequentially. Across the year and continuing in the fourth quarter, revenue was driven by consumables for both, CO2 and fiber laser systems, significant growth from optical components for short part lasers, and double-digit growth for our portfolio processing heads for cutting and welding. Sales of many of our industrial products exceeded market growth as we continue to gain market share through our differentiated products, which are underpinned by a very competitive cost structure and performance. Looking forward, this will only be enhanced with the Coherent acquisition, particularly in the fast-growing market for electric vehicles, where the combination of our fiber lasers and processing heads provides uniquely differentiated solutions for battery welding. Revenues for the semiconductor capital equipment market grew 30% compared to Q4 last year and 9% sequentially. We had a record quarter and a record year with an annual growth of 29%, driven by strong demand for advanced materials for both the front and the back end of the line applications and some critical design wins as the envelope of our applications continues to expand. Demand for advanced lithography, including EUV, continues to grow, and our EUV business hit both annual and quarterly records in revenue, consistent with significant expansion plans announced by our key customers. Our consumer market revenues hit record in Q4, a quarter that is typically the lowest seasonally with 36% growth compared to Q4 of last year and 34% sequentially. The importance of short-wave infrared wavelengths for consumer electronics is starting to be well recognized. We recently announced a joint demonstration of a next-generation 3D camera with longer range and higher resolution than standard cameras operating at shorter wavelengths that will greatly enhance the user experience in the metaverse. Our Life Sciences business had a record year, climbing over the $100 million mark in annual revenue. While carbon-related revenues are stabilizing, our optics and electric sales into life sciences applications hit a quarterly revenue record. Finally, shipments of silicon carbide substrates in Q4 were 65% for power electronics and 35% for wireless communication, including our initial shipment of gallium nitride and silicon carbide devices and representing 4% of our revenue. We recently reported signing meaningful and long-term contracts to supply silicon carbide substrates to two leading customers, Infineon and Tianyu. As we continue to make progress with our devices for power electronics, silicon carbide grew 23% in Q4 over the same period last year, and our engagement with customers in the U.S. and Asia are expanding rapidly. We have now sampled our first automotive qualified MOSFET devices, and we are working relentlessly to secure our first design wins. With that, let me turn it over to Mary Jane. Mary Jane?

Thanks, Giovanni. For these entire remarks, I will speak about legacy II-VI results only, unless otherwise noted. The quarterly and full-year end market and geographic breakdown of our $887 million of Q4 revenue and $3.3 billion of fiscal year ‘22 revenue can be found on pages 20 to 24 of the investor presentation. We show you fiscal year ‘22 complete by the legacy II-VI market breakdown and then by the new market breakdown. We also supply the mapping from the legacy markets to the simplified four end markets on page 23. For legacy II-VI only, networking and materials, Industrial was 21% of total fiscal year ‘22 revenue, Communications was 65%, Electronics was 10%, and Instrumentation was 4%. Including the former Coherent laser segment using their trailing 12-month revenue, the pro forma annual end-market fiscal year ‘22 breakdown is Industrial, 38%; Communications, 45%; Electronics, 7%; and Instrumentation 10%. Returning to II-VI results, our Q4 non-GAAP gross margin was 38.7%, and the non-GAAP operating margin was 19%. As a reminder, last quarter included $8 million of progress payments on development programs being partially supported by customers, affecting the gross margin by $4.4 million and the operating margin by $8 million total, with $3.6 million being an offset to R&D. Supply chain costs and COVID costs, a total of $8.6 million are included in our non-GAAP results. The margins are also affected by the typical costs associated with the initial launch of new products. At the segment level, the non-GAAP operating margins were 15.3% for Photonics and 26.6% for Compound Semiconductors. Our record backlog of $2.3 billion consists of $1.6 billion for Photonics and $0.7 billion for Compound Semiconductors. This increase in backlog is a function of demand, particularly from the industrial, semiconductor capital equipment and communications end markets. GAAP operating expenses, SG&A plus R&D, were $212 million in Q4, excluding $10 million of amortization, $13 million of stock compensation, $6 million in start-up costs, and $8 million of M&A and integration costs. Non-GAAP OpEx was $176 million or 20% of revenue. For the year, annual GAAP OpEx was $851 million, and non-GAAP was $671 million or 20% of revenue. Quarterly GAAP EPS was $0.23, and non-GAAP EPS was $0.98 with after-tax non-GAAP adjustments of $90 million in total. The diluted share count for GAAP results is 117 million shares, and for non-GAAP, the share count was 126 million shares. The GAAP and non-GAAP EPS calculations are in the ending tables of the press release. Pretax interest expense was $49 million. This includes $10 million of our underlying interest and $39 million of interest and fees on the debt for the Coherent transaction. Cash flow from operations in the quarter was $137 million, and free cash flow was $19 million, including CapEx of $118 million. For the year, cash flow from operations was $413 million, and free cash flow was $99 million. The strategic inventory build was $207 million, and the CapEx was $314 million, with an additional $53 million of CapEx committed. CapEx for fiscal year ‘23 is expected to be $500 million to $600 million. Our net cash at June 30th was $282 million. On July 1st, with the close of the Coherent transaction, our cash balance declined to $824 million from $2.58 billion, and we recorded $5 billion of total debt. On September 1st, our 2022 convertible notes will mature. We have $324 million still outstanding as of today. The Company expects to settle in stock. The effective tax rate in the quarter was 11% and 17% for the year. We expect the tax rate in fiscal year ‘23 to be between 22% and 24%, assuming no adoption of new or additional tax rulings. The increase in the tax rate is largely driven by M&A costs that are not deductible. With respect to the Coherent transaction, our debt increased to $5 billion. Our net debt position immediately after the transaction was $4.2 billion, and our annual interest is expected to be $274 million, about $114 million above our expectations when the transaction was announced. Approximately 40% of the debt is hedged. Using the estimated pro forma trailing 12 months of both companies at June 30th, the closing leverage was 3.6 times gross leverage and 3 times net leverage. A total of 23 million new shares were issued to Coherent shareholders. The funding from Bain Capital, the Series B preferred shares is $2.15 billion, and is equivalent to about 26 million common shares if converted. The income target for the entire Series B preferred shares to be dilutive is $189 million. Dividends for the entire 2.15 or 5% are $116 million a year or $29 million a quarter, payable in kind for the first four years and thereafter in kind or cash at our option. Turning to the outlook for Q1 fiscal year ‘23: Our outlook for revenue for the first fiscal quarter ending September 30, 2022, is expected to be $1.3 billion to $1.4 billion, and earnings per share on a non-GAAP basis to be $0.77 to $0.90. This excludes any effects of purchase accounting, which are still underway, other than the depreciation that is about $5 million in Q1. The share count is 142 million shares for the low end of the guidance and 151 million shares for the midpoint and the high end of the guidance. The EPS calculation, including the dividend treatment is detailed on Table 8 of the press release for the low, mid and high points of the guidance. This is at today’s exchange rate and an estimated tax rate in Q1 of 25%. For the non-GAAP earnings per share, we add back to the GAAP earnings pretax amounts of $265 million, consisting of $65 million in amortization, $30 million in stock compensation, $122 million for M&A, including fees for banking and financing and $48 million for the inventory step-up, which is preliminary. The actual dollar amount of non-GAAP items, the tax rate, the exchange rate, the purchase price accounting, and the share counts are all subject to change. As a reminder, our answers today may contain certain forward-looking statements from which our actual results may differ due to a variety of factors, including, but not limited to, changes in mix, customer changes, supply chain shortages, both upstream and downstream, competition, changes in regulations, COVID-19 protocols and global economic conditions. With that, I’ll turn it over to Chuck for a few final comments. Chuck?

Thank you, again, Mary Jane and Giovanni. I would like to close our fiscal year ‘22 earnings call with some special recognition. First and foremost, I would like to recognize and thank each and every one of our worldwide employees for your hard work, dedication to excellence in everything you do, and for caring so much for one another this past year. Without your daily dedication to excellence, we would not have been able to meet the extraordinary technical, operational and financial challenges and achieve the lofty goals we set for ourselves in FY22, while laying the foundation for an even brighter future. You are truly making the world a safer, healthier, closer, and more efficient place to live. I would also like to thank our thousands of dedicated suppliers for your support over the past several years and especially this last fiscal year. It’s been a truly challenging, dynamic, and unique business environment, and we really appreciate your help in achieving our goal of serving our customers. And to our customers, thank you for your continued confidence and support. It’s an honor to serve you and enable your continued success and to be an intimate part of building your future. I look forward to a tremendous future together, and we will do our absolute best to continue to serve you. Finally, I would also like to thank all of our shareholders and debt holders who have invested in us, entrusted us with your confidence and given us enormous opportunity and responsibility to succeed. We take your trust and confidence and our responsibility very seriously. For those on the call, we welcome your questions, and we expect to end this call not later than 10 a.m. Eastern Time this morning. Catherine, you may open the line for questions.

Our first question comes from Paul Silverstein with Cowen.

First off, again, the backdrop of what appears to be awfully broad strength, so, what’s the opportunity for great improvement from here with respect to revenue? And then, if I could have a follow-up, and the follow-up would be with respect to Coherent and industrial, in particular, what’s the exposure to macro?

Paul, I wasn’t able to hear. Can you just summarize the two? Is the greatest opportunity for revenue, was that the first part?

What is the greatest opportunity for improvement in terms of revenue by product market? Additionally, how much of the industrial business and Coherent's performance is influenced by macroeconomic factors, and how much operates independently of them?

Okay. Maybe Giovanni will take the question.

Yes. Hey Paul, thanks for the question. So when we announced the combination with Coherent, there were four markets we thought that would be very synergistic, not only in general for the cost structure of the two companies combined but also about the revenue. That’s what your question is about. So, we haven’t really quantified those, but those four are really around industrial, the semi cap and display markets, and then life sciences and aerospace and defense. We can go a little bit more into detail in industrial. We think there is an opportunity in the cutting market, which we are now currently serving from a fiber laser standpoint, but I think there is an opportunity to gain share there, thanks to the combined cost structure of the company. In the semi-cap and display market standpoint, I think we have an opportunity to leverage a combined portfolio that is pretty unique in the industry from a laser system standpoint as well as parts and component standpoint that we are supplying to similar customers. So, there are tremendous portfolio synergies to be leveraged. And then, life sciences, I think the most important of revenue opportunity really ultimately comes from the incredibly capillary and very well positioned sales force of Coherent in the market, which is substantially larger than what we had at II-VI before the combination. Lastly, aerospace and defense between energy, high-energy laser weapons, and other advanced applications, I think the two companies have a portfolio of products that is pretty unique, particularly to serve the U.S. market.

Okay. Well, maybe for the second part of your question, for sure, more than half of it, I would say, about 70% perhaps, but I want to make clear that even the part which is connected to the macro, as you outlined, they’ve done a really solid job of even in parts of the economy where there’s been a slowdown, they still have been successful in penetrating with differentiated products. Their footprint is extraordinary. Their service component is also a capillary component of the business. And I would look back and just point out that maybe 18 months ago when we modeled and had an expectation for what they could do in our fiscal year ‘22, they came in right in line with it, despite some softness in some parts of the economy. So, leverage maybe 70%. That’s a rough estimate, but very, very strong and differentiated within it.

Sure. Just to clarify, based on the press release that they are putting out, their business obviously was trending significantly positive since the deal was first announced. Can you share any insight into what you’re seeing with respect to orders that they were seeing on the industrial side? It doesn’t sound like there’s been a downturn relative to macro or otherwise, but that’s the question.

Yes, the only area where we experienced some softness over the last year was China, but that market is now showing improvement. We were down year-over-year primarily due to China, but in Q4, we're seeing a rebound with about a 7% increase, spread mostly between industrial sectors, as well as some activity in communications and life sciences. This is very encouraging. In terms of Europe and other regions, including North America, we've observed that demand for inductors remains very strong overall, with robust numbers at the component and subsystem levels, along with strong performance in consumables and aftermarket sales. This indicates high laser utilization in durable goods manufacturing.

Thank you. And we have a question from Ananda Baruah with Loop Capital.

Hey. Congrats on getting this done and on the strong June quarter execution, and thanks for all the great detail today. I really appreciate it. I just have one, if I could. Just with legacy Coherent, could you guys give us some sense of where they are in their microelectronics and display cycle since there have been comments around that for a while? And in that context, how should we think about where they are in their profitability cycle as well? Is it tracking with consistent cycles for where they are at this point in the cycle? And that’s it for me, really appreciate it.

Ananda, thank you for your question. I want to reiterate what I previously mentioned. The model we developed during our analysis before the process finalized indicated that we expected performance across the four business market segments. They delivered as anticipated. Despite the challenges we all faced in operations, their performance met our expectations. I would describe the progress as very steady and solid, with no surprises. I expect this trend to continue.

That’s really helpful, Chuck. Any context on where in that cycle they are?

Well, Ananda, this is Giovanni. Thank you for your question. In the past, our leadership in the OLED market was exceptionally strong, and you can expect that our relationship with display manufacturers has continued to be solid over the years. The team is focused on next-generation displays, which are likely to surpass OLED, possibly through micro-LED technology and similar advancements. If you consider when these technologies will enter the market, it will take a few years. We need to prepare for that market demand as it starts to grow. From a development and technology perspective, as well as in product development and customer engagement, we are confident that we will maintain our leadership position, with strong interactions and uniquely differentiated technology platforms that will be ready for the increased production of micro LEDs at the right time. We mentioned previously that our laser platform offering is future-proof. Displays will remain important for a long time, and no matter the technology, laser processes will still be essential for manufacturing displays, whether they are OLED, micro LEDs, or others. We believe that the Coherent team, which is now part of our company, will set the standard in the market.

Thanks, Giovanni. Ananda, thanks for your question. I would only add, any such transitions when they happen, you can expect it will not only be there, but that we expect to lead this part of it.

Our next question comes from Dave Kang with B. Riley.

Just a question on Infineon. I believe they have signed a two-year supply agreement with Showa Denko last year. Just wondering if you are splitting Infineon with Showa or any kind of color as far as the terms of the contract?

Good morning, Dave. It’s Giovanni. Thank you for your question. I can’t discuss other agreements that our customers have. I can only share that we have signed a very compelling long-term agreement with them to support their growth. That’s all I can provide.

David, I appreciate your question, Dave. I want to highlight that the industry ecosystem includes companies that supply epitaxial wafers, and we are part of that segment. Please keep this in mind.

My follow-up on 3DS with the lead smartphone customer is whether it is still just you and Lumentum, or if there has been another supplier in that supply chain.

Thanks, Dave. It’s hard to say. We definitely believe we’ve been gaining significant market share year-over-year and quarter-over-quarter. Ultimately, what's important is that in a world where products must be replaceable, they need to be replaceable by competitors. The main differences lie in cost and quality, as well as the roadmap we have with our customers. From a cost structure perspective, considering our level of vertical integration, and from a quality perspective, we've reported zero DPPM shipments quarter-over-quarter. We welcome additional competition, but for now, our growth and market share gains, including new design wins, are reflected in the numbers we've reported.

We have a question from Mark Miller with Benchmark.

Congratulations on your record sales and closing the Coherent acquisition. Your Compound Semiconductors sales were up, but operating income was down, and so were margins. I was wondering if you can give us some color on that.

Compound Semiconductors?

Thank you for your question, Mark. Let’s give it a second.

So, the operating margin for Compound Semiconductors was lower in the quarter because last quarter, which I imagine is your comparison, we had the $8 million of customer support payments for new development were all in that segment. If you look at $8 million on Compound Semiconductors third quarter, roughly $260 million in revenue, mid 3 points of margin. So, it’s a significant amount, almost four actually. Generally speaking, I would say that’s one thing. The second thing is that they, as Giovanni talked about, had launches of new products that you have seen the start-up costs in the past that launched in the quarter, and those early volumes usually have a dampening effect on the margin.

With companies like Western Digital and Micron significantly lowering their outlook for next fiscal year, are you concerned about datacom being very strong? I was just wondering about hyperscale CapEx over the next year. Are you worried about them cutting that because of weak consumer demand?

No, definitely not, Mark. As I said in the prepared remarks, demand for higher data rate transceivers, 200G and beyond is very strong. We said that demand increased fourfold year-over-year. So, it’s really strong. We just don’t see any of that in our customers’ demand. So, I can’t comment on those two companies that you mentioned.

Our next question comes from Jim Ricchiuti with Needham.

Mary Jane, I know there are a lot of puts and takes with respect to gross margins, but I’m wondering if you can provide any way to think about gross margins for the combined company, looking out in Q1, just given supply chain. And I don’t know if you want to provide some color as to what kind of revenue impact we might see from supply chain challenges.

Regarding the margin, we will provide a combined pro forma comparison for past quarters in the coming weeks. For Q1, we incurred launch costs for new products and did not benefit from the lift we saw last quarter, which was previously noted as a one-time effect. Looking ahead to fiscal year ’22, I believe the Company is well-positioned to maintain margins above 40%. We will finalize our model for a new range soon. Overall, Coherent is expected to positively impact our margins, and we are optimistic about the improvements as we progress, especially in Giovanni's segment, where his products have the highest potential to influence margins, whether it involves any type of laser or silicon carbide.

Got it. And just a quick follow-up. When you talk about that 70% of the Coherent business being macro-related, Chuck, you’re talking also about the excimer laser annealing and the ELA business, the OLED portion of the business. I wonder if you can characterize the line of sight you have to their bookings and backlog over the next two years, just given what we’re hearing about new fab capacity additions, particularly in China.

Yes. We won’t be able to comment or size what you’re looking for over the next few years on this call today, Jim. But suffice to say, we think there’s still a very good and strong opportunity, and we’re excited about it.

Our next question comes from Samik Chatterjee with JPMorgan.

Congrats from my side as well. I just have one quick one. I was hoping to dive a bit into the electronics market in which you’re outlining the strongest growth process, although I understand it’s sort of a smaller portion of your revenue right now. But, if you can sort of help me think about the $11 billion total addressable market that you’re outlining, how much of that is sort of the big buckets of electric vehicle sources, 3D sensing? And when I think about the 17% CAGR, is it going to be more back-end loaded because of electric vehicles, or I would think 3D sensing is a bit more front-end loaded in that time horizon? So, just trying to think about the implication of that 17% CAGR to your business? Any help there would be useful.

Thanks, Samik. Good morning. This is Giovanni. I appreciate your questions. The electronics segment now includes what was previously known as consumer electronics, which is the largest part of our growth included in our guidance and generally looking forward. The reason for this is the expansion of our addressable market beyond just 3D sensing into broader sensing. While we are continuing to gain market share in 3D sensing, a significant portion of the market relates to sensing, which includes definitions for 3D sensing. We are winning new designs, all related to photonics. Our product portfolio is unparalleled, with offerings in filters, diffractive optics, materials, lasers, photodiodes, and more. This positions us to grow in a much larger market than only 3D sensing. Regarding the automotive sector, our growth is primarily driven by our sales of silicon carbide substrates. We are consistently signing new long-term contracts. Currently, our growth is mostly constrained by our capacity rather than demand, which remains very strong. We are monitoring this closely and continue to expand our capacity. As a reminder, we announced a $1 billion investment over the next five years to enhance year-over-year growth. We are allocating capital to ramp up production quickly, but it’s not occurring fast enough to meet market saturation, so we have opportunities for growth as we bring new capacity online.

I would only add, Samik, maybe an awkward way to put a fine point on it. If you look at the second half of the decade, the opportunity that we see will really be driven by silicon carbide power electronics. As Giovanni said, the materials in the devices and modules will start to kick in and it will be driven in our model and then our forecast by the adoption of electric vehicles and other components that require high-voltage, high-reliability devices. We said that we expect to be at a level to offer into the marketplace about one million 6-inch equivalent substrates of silicon carbide per year beginning in about five years. It’s that second half that we’re looking at. That’s what we’re investing for and getting organized for now in addition to growing in the short term because the market is supply-limited.

Our next question comes from Simon Leopold with Raymond James.

I wanted to just maybe dig a little bit deeper on the trends for Coherent, industrial exposure specifically. I think people alluded to this earlier, but Applied Materials talked about some weakness in flat panels. I don’t presume that Coherent really has much business from that market. I think Giovanni talked about this as an opportunity longer term, and I think it’s more tied to smartphones. So, if you could help us understand maybe some of those key drivers for the industrial aspects of Coherent. I think I’m looking at what’s coming, not what’s happened over the past year. And then, just a quick follow-up, if you could share with us roughly the mix shift in your datacom transceivers in terms of how much of the revenue is 200 gig and above now versus, let’s say, one year ago and how you see that trending? Thank you.

Hey Simon. First of all, I want to clarify one point. In our definition, industrial is about the manufacturing of durable goods, not consumer electronics products. It’s more on what used to be called microelectronics in the Coherent market classification. Now, it is going to be called industrial in our classification. Just to make sure that we don’t confuse the two, because we use industrial like fiber laser cutting, CO2 lasers, and so forth. In terms of displays, I can’t comment on what Applied Materials has reported. I can tell you that the demand for those products is, I would say, stable. I think that, as I alluded earlier, growth will come significantly when new technologies and new use cases make their way into the market. Your second question was about the consumer? We categorize the market into three segments: hyperscalers, average scalers, and the long tail. Our market consists of a significant portion driven by hyperscalers, as high data rates predominantly cater to them. We have approximately 20 to 30 mid-sized web scale operators, making up another third, while nearly 4,000 customers are in the last segment, with around 300 of them accounting for most of the business. Roughly 30% of the demand is directed towards hyperscalers, primarily influenced by customers requiring 200, 400, and even 800G, which we are already supplying. This illustrates how hyperscalers push for higher data rates while the remainder of the market is focused on the legacy 200 and below demands.

I think similar to the answer in the past, I mean compared to the fourth quarter of last year, we were already starting to move to about 12% of the total transceiver business. The higher data rates now are...

We have a question from Meta Marshall with Morgan Stanley.

A couple for me. One, if you could just kind of speak to, over the last 15, 18 months that you were kind of evaluating the Coherent acquisition. Just how your view of what cross-sell opportunities or synergy opportunities have been, are you more encouraged or kind of similarly encouraged as you were last March? And then maybe the second question. Giovanni, you had mentioned last quarter that you were expecting 3D sensing business to grow, not necessarily from your lead customer, but from other expansion opportunities during the year. Clearly, you’re seeing expansion within your lead customer as well. But just are the other opportunities that you were expecting in 3D sensing kind of playing out as expected? Thanks.

Okay. Meta, I’ll let Giovanni take the second part. Regarding the first part of your question, compared to our thoughts 18 months ago about growth opportunities and synergies, we weren't able to see any details of their revenues until the acquisition closed. Now that we've had that chance over the last few weeks, I would say we're even more excited than before. Our largest and leading customers who are looking to invest and grow are all on the list. The next phase of the integration will involve completely overhauling our global sales organization, merging the sales and service teams together. This will take place in the coming weeks. Once that's done, we will be able to combine our efficient standard operating procedures with those of legacy Coherent in a way we both appreciate, allowing us to engage with these large customers and target medium-sized ones for growth. It's a target-rich environment. I guess that's all I’d say.

So, I would say that overall, the growth trajectory in our case really comes down to three core coordinates that I want to explain. First of all, we are broadening our technology footprint in the sensing and 3D sensing market. If you consider the portfolio of technology platforms we have. The second coordinate is the integration level that we are offering, partnering in some cases, and in some cases directly, we try to offer a broader level of integration with packaging, including drivers, which we design ourselves for lasers and related applications. And the other one, as I mentioned earlier, is really around the expansion of the market we serve. So, we aren’t focusing only on 3D sensing, which we have demonstrated ability to be very cost-competitive and quality-competitive in a price-sensitive market. We’re expanding beyond that into sensing, which is much larger where we see more competition. But because of our vertical integration, the product portfolio is not limited to chips but extends to optics, materials, and packaged components. We expect the growth to be driven in those three coordinates. Yes, one customer is driving most of the growth. On the other hand, we have significant new plays in automotive and life sciences coming with biometrics for wearables and related applications.

We have a question from Harsh Kumar with Piper Sandler.

First of all, congratulations on the deal. Chuck, we’re hearing from a lot of companies that the supply issues are now starting to get better. I guess my first question is you had a pretty big amount of revenue you left behind on the table last quarter. I would be curious to see what you’re seeing at this point in time if you agree with the statement that I just made that we’re hearing from other companies, or is it still pretty tight?

We had a significant opportunity that we couldn't fully capitalize on in the fourth quarter. I mentioned this in my remarks. While we are experiencing some moderation, it's important to note that this varies from supplier to supplier and product line to product line. It's not a general statement applicable to the entire market. Additionally, once the issue became apparent, we focused on establishing secondary sources and reworking everything necessary in close collaboration with our customers. Some of the supply chain moderation is a result of our intentional strategy to dual or triple source in situations where we may have previously relied on sole or double sourcing. There are definitely signs of improvement in some areas, but in other sectors, the challenges we face remain similar to what they were 90 days ago.

Got it. Thanks, Chuck. For my next one, I know we can look at Coherent’s model and sort of put together gross margin pro forma and OpEx numbers. But I’d be curious if you would be able to provide some color on how we should model those two, the gross margin and the OpEx numbers. If there’s any difference now that you’ve owned it for a couple of weeks, any difference to what you expected? Anything pleasant or unpleasant that you saw from the deal?

First of all, the second part of the question, no. I think the more we work with our new colleagues, it just becomes more and more exciting. We’re very, very happy with the progress they’re making in the market and the financial progress that they’ve made on their own from their consumption plans, which doesn’t always happen in an acquisition, once a company knows it’s going to be acquired by someone else. They tend to ignore that faction and get on with their plans, and they did a wonderful job. I would expect that over the next couple of weeks, we’ll probably put out the combined backward model first of all, and then you’ll be able to see it from there. But I’d say generally speaking, the company still expects to have the margins in the 40s. I would expect that you should probably not do much above 40 at this point until we’ve really had some time to look at all the ways they report and the various things that they’re seeing on supply chain at this point too. That’s the first thing. For OpEx, we will continue to work on the combined OpEx between the two companies, similar to how we have been doing. The synergies, as we said, are very important to where we are going. Conceptually, it’s probably the same situation we have with Finisar, where we will say that we’re going to try and get their numbers to the II-VI numbers, 20% of revenue for OpEx, etc. At the end of the three years of synergies, I imagine we will probably do that somewhat faster. My general sense is that it’s likely that we will continue to make the same sort of progress we have with II-VI. So generally speaking, we will make progress on not just taking the two companies and adding them up, but leveraging both companies’ sets of assets.

We have a question from Sidney Ho with Deutsche Bank.

Two quick ones, one on silicon carbide. For the Infineon deal specifically, is there any way you can help us think about the size of the contract, the duration, the timing of the revenue ramp? Also curious if there is any commitment timeline to deliver 200-millimeter wafers. And I have a follow-up. Thanks.

Okay. Thank you, Sidney. We will not be able to say any more than what Infineon and we released in our press release. But I could add that the timeline is now. So, it’s now. People are in need. We’re ready. It’s now. We’re in the process of serving them. As for 200-millimeter, as we announced, in 2016, we came to the marketplace with the first 200-millimeter silicon carbide capability. We are ready, and we are serving it. My view is that the 150-millimeter will continue to be the dominant substrate for silicon carbide for some time to come.

A follow-up question is related to this. If you look at the fiscal ‘23 CapEx guidance, the range of $500 million to $600 million shows a significant increase. Coherent is part of that. I am interested in understanding the various components contributing to this increase. Specifically, how much is attributed to the silicon carbide extension, and how much comes from Coherent and other factors?

So Coherent probably adds in the neighborhood of between $70 million to $90 million, maybe $100 million depending on what they see in terms of new opportunities. So, that’s the first part of the answer. The second part of the answer is, we would expect to see silicon carbide continue in fiscal year 2023, very, very similar to what we saw in 2022. Of the $1 billion of investment that we discussed coming over the next 10 years, actually, it’s concentrated in the first three years as opposed to CapEx.

We have a question from Thomas O’Malley with Barclays.

You gave some guidance in terms of organic II-VI sequentially. With that guidance, it implies Coherent is kind of flat to slightly down. Could you just talk about what’s going better, what’s going worse than Coherent? Is it the industrial laser side? You guys have seen some strength there despite the weakness in China, or is it on the OLED side, where it’s the microelectronics? Any color on the moving parts, what’s doing better, what’s doing worse there? Thank you.

I would say, it’s very, very steady. Actually, there is nothing going worse. You already heard Coherent’s comments last quarter about supply chain. They’re delivering very steady performance, all things considered.

Thank you. And that’s all the questions we have. I’d like to turn the call back to management for any closing remarks.

I want to thank all of you for being with us today. We hope you have a good day, and we look forward to seeing you in the future. See you soon. Bye, bye.

This concludes today’s conference call. Thank you for participating. You may now disconnect.