Coherent Corp

NYSE:COHR

Earnings Call Transcript 2022-Q1

[Operator]

Good day. Thank you for standing by, and welcome to II-VI Incorporated Fiscal Year '22 First Quarter Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Mary Jane Raymond, Chief Financial Officer. The floor is yours.

[Mary Raymond, executive]

Thank you, Alex, and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our earnings call today for the first quarter of fiscal year 2022.

With me today on the call are Dr. Chuck Mattera, our Chief Executive Officer; and Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Compound Semiconductor segment. This call is being recorded on Tuesday, November 9, 2021. Our press release and our updated investor presentation are available on the Investor Relations tab of the website, ii-vi.com.

Just as a reminder, our remarks today may contain forward-looking statements. These remarks are given in the context of today only. They are subject to various risk factors and are subject to change, possibly materially. We do not undertake any obligation to update these statements to reflect events subsequent to today, except as required by law. A list of our known material risk factors can be found in our Form 10-K for the year ended June 30, 2021, together with our subsequent filings with the SEC. Our remarks today do not constitute an offer to sell nor do they constitute a solicitation of an offer to buy any securities. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the United States Securities Act of 1933 as amended.

Finally, with respect to today's call, we will also present some non-GAAP measures for which the reconciliations to GAAP are found at the end of each document that includes those measures such as the press release or the investor presentation.

With that, let me turn the call over to Dr. Chuck Mattera.

[Vincent Mattera, executive]

Thank you, Mary Jane. Good morning, afternoon and evening to all of our stakeholders from around the world, including our equity and debt investors, our dedicated employees and our valued customers and suppliers.

Fiscal year 2022 is off to a very strong start. Our backlog increased sequentially from $1.25 billion to $1.4 billion. Our revenue of $795 million represents very strong growth at 9% compared to Q1 FY '21 and was squarely inside our revenue guidance range, despite continuing supply chain headwinds which affected our ROADM business the most.

The shipments of those affected products have been rescheduled to subsequent quarters, and we are working to accelerate our recovery plans. Part of our action planning is to expand our investments in analog and digital ICs to improve the resiliency of our supply chains.

This will also help to maintain our market and technology leadership in the next generations of high-speed datacom transceivers while lowering our purchased material cost and establishing new component OEM market channels for us as well. Our gross margin for the quarter was 40%, up year-over-year and sequentially.

This was achieved through the launch of new products with higher margins, improved productivity and ongoing efficiency and it benefited from our sustained focus on the health and safety of our people first. These improvements are due to the well-synchronized efforts of our employees with key counterparts at customers and suppliers, taking the meaning of partnership to new levels.

We are experiencing sustained and sustainable demand. In Q1, revenue grew from contributions from virtually all of our end markets and leadership in the consumer market, where we saw the revenues increase 30% sequentially and 7% year-over-year.

Two important indicators of the strength of our organic growth are our fourth consecutive quarter of record backlog and the sustained growth we are seeing across our markets. I believe one of our most important core strengths is the unique diversity of the market segments in which we have chosen to operate.

In communications, our largest market today, we saw further evidence of a super cycle well underway for 200G and 400G datacom transceivers, 400G and 800G coherent telecom transceivers and acceleration of our customer-configured open line and optical transport solutions. Our results this quarter were achieved through a relentless amount of hard work and preparation that accompanies the sustained intensity of a winning team.

We made adjustments in the face of market realities as we continue to balance our raw materials cost increases against product price increases with longer-term and higher share commitments. Taken all together, these extraordinary efforts enabled us to deliver $0.87 non-GAAP EPS at the high end of our EPS guidance range.

Turning now to the future. I believe Q2 should be another strong quarter for us. And as you can tell from our guidance, we are still planning on growing sequentially in the quarter. I am excited about our potential this year and looking out past Q1, we see continued market momentum and strong interest from existing and target customers in our capacity expansions and R&D investments in technology and our new products.

Our targeted investments in R&D and capital are accelerating to support our exciting growth plans beginning in FY '23 and FY '24. In particular, we are stepping up our investments in important compound semiconductor platforms with silicon carbide and indium phosphide, which leverage core strengths of II-VI and the former Finisar.

In conjunction with these investments, our plans call for us to invest in new facilities and capital equipment, and we will incur increased costs beginning this quarter as we begin to hire a few hundred engineers and operators along with the start-up, proven and qualification of these new and expanded lines in the U.S. and in Europe.

I believe that collectively these strategic investments will enable us to be very well positioned to pursue exciting new growth opportunities in the years ahead. When I reflect on all we accomplished in the quarter, I also look back on the 2 years since we closed the Finisar acquisition, and I'm amazed by the ability of our people to efficiently integrate, deliver on the aggressive cost synergies, and leverage our complementary strengths, and portfolios to realize the power of the combination.

I believe that we've demonstrated through our new product leadership, operational excellence, and customer intimacy that we have achieved a substantially different scale and momentum during the last 2 years. But a good example of this is that our cost synergies for the Finisar acquisition originally targeted delivering $150 million in 3 years, and that has now exceeded $180 million after 2 years.

Another example of our growth strategy in compound semiconductors is our bold investment in silicon carbide materials and devices that will be required at a mega scale during the next decade. We're in the next phase of a large multiyear investment and aim to build a meaningful position in what we believe will become a $30 billion addressable market by 2030 while contributing to the carbon neutrality goals of the world.

So we have an exciting organic investment thesis focused on addressing the mega market trends underpinning mobile, intelligent, and electric. We will leverage our endowments from the past acquisitions and investments, combine with those we're making now, and we plan to make in the future. These efforts should provide us with exciting and sustained organic growth opportunities with market leading and innovative customers over the next few years and enable us to further strengthen our diversified base as we move beyond FY '22.

Turning now to the Coherent acquisition. We believe Coherent is the gold standard of laser technologies. And like II-VI has really great people and the unique position in the diversified markets it serves. Coherent is highly complementary and extremely valuable.

I believe that the auction process revealed that the high stakes were clearly understood by all 3 bidders. We have begun to work on the integration planning process, during which my team and I have been able to meet well over 100 of Coherent's senior leaders, and we're energized by the engagements and the common denominators of values and culture.

These engagements have given me extra confidence that we are in the process of creating something really special, really unique and really valuable. With the combination, it's not only going to be a bigger company, but we set our course on building an even better company together, aimed at accelerating the new opportunities that lie ahead, while we make our complementarities a strength to be leveraged.

Indeed, we have a lot to learn above and from each other. Coherent has a complementary business model to II-VI, and it will allow us to diversify, lower our exposure to any one of our market cycles and allow us to sustain a steady investment in R&D and capital over the cycle. After closing, we will be able to get busy on targeting revenue synergy opportunities as we work to leverage our increased scale and complementary capabilities to capitalize on new opportunities across our markets.

I am very confident in our people's ability to create real value in the years ahead. With that, let me turn it over to Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of our Compound Semiconductor segment to provide us with an update on our results. Giovanni?

[Giovanni Barbarossa, executive]

Thank you, Chuck, and good morning. In Q4, we delivered growth across our commercial end markets despite supply chain challenges. In Q1, we continue to build on that momentum. And as a result, our fiscal year 2022 is off to a strong start. All of our operations, including our global wafer fabs are running as planned, producing high yields and quality output.

In fact, I'm pleased to report that for the last quarter, we shipped all of our lasers for 3D sensing with 0 defects, our benchmark for the highest quality that we have been striving to set for the compound semiconductor industry. This is the result of a relentless multiyear investment in operational excellence, supporting the substantial increase in the volume of lasers that we are producing at our vertically integrated wafer fabs in Sherman, Texas and Warren, New Jersey.

Our communications revenue grew 4% year-over-year with most of the growth from datacom. Our 200, 400 and 800G products now represent 25% of our transceivers revenue from about 2% a year ago and grew nearly 70% sequentially. Thanks to our market-leading platforms, we expect to grow this portion of our datacom business to 1/3 of the total by the end of fiscal year '22.

It is worth noting that our optoelectronic components for datacom transceivers enjoy an all-time external revenue record in this quarter. I'm pleased to report that our IC-TROSA recently won the award for the most innovative product in optical integration at the European Conference on Optical Communications, demonstrating our leading innovations in coherent technology. Our IC-TROSA is the core engine of our 400G QSFP-DD coherent transceivers, which to the best of our knowledge, have the highest output power in the market.

Our remarkably high output power is enabled by our tunable laser and modulator technology based on indium phosphide. And it is truly game changing as it enables IP over DWDM networks, which significantly reduced cost of ownership by eliminating an entire layer of equipment.

Network service providers such as Windstream and data center operators have already started to take advantage of our differentiated offering to streamline their deployment of 400G services with significantly less cost, power consumption and network complexity.

It is worth noting that the external revenue for our tunable coherent components and modules acquired through Finisar and which enables our coherent transceivers, increased 16% sequentially and more than doubled versus Q1 fiscal year '21, a clear sign of the competitiveness of our tunable laser platform and our successful market penetration.

Moving to the industrial market. Our revenue grew 53% over Q1 fiscal year '21 and was flat sequentially, following a strong Q4. Growth was across all industrial applications, and our revenue from components for 1 micron of fiber lasers are now 50% of our industrial business.

As I noted in the last call, we believe we are now delivering more aggregate pump laser power than any other maker of fiber laser components or systems in the world. This is due in part to the economies of scale that we have achieved with our 6-inch gallium arsenide platform by serving multiple markets, including industrial, communications, automotive and consumer electronics.

Revenue from our consumer electronics market, most of which is 3D sensing was a record for Q1 as it grew 7% compared to Q1 of fiscal year '21 and more than 30% sequentially. During the quarter, the forecast for our global 3D sensing demand increased by 19% for the year, therefore requiring us to operate all of our fabs for 3D sensing at a high level of utilization for VCSEL production.

In addition, having been selected as a partner of choice by several of our customers, we are in the process of increasing our investments, particularly in research, development, manufacturing, including hiring for nearly 500 dedicated jobs to support the incremental growth from future products, which we believe will enable novel functionalities in our customers' products.

Components for the semiconductor capital equipment market grew 18% year-over-year. And the demand for these products continues to remain strong. This is partly why we've been successful in increasing prices to support our investments required to expand capacity in response to the strong market demand.

We expect to see the demand expand as COVID restrictions relax and global fab operators can resume production and commissioning of new systems, including for EUV as we expect to see these numbers of those systems nearly double over the next 24 months.

In our silicon carbide business, revenue grew 50% compared to Q1 of fiscal year '21 and 4% sequentially. As Chuck mentioned earlier, our investments in silicon carbide are underway and encompass a variety of applications and vertical end markets. We expect to see our subset business to continue to grow and are proud to report that we started preproduction of gallium nitride on silicon carbide on our 150-millimeter substrates at our Warren fab in New Jersey with full production planned for the first quarter of calendar year '22.

With that, let me turn it over to Mary Jane. Mary Jane?

[Mary Raymond, executive]

Thank you, Giovanni, and good morning. Our Q1 revenue of $795 million was geographically distributed as follows: 50% in North America, 21% in China, 20% in Europe, 6% in Japan and 3% in the rest of the world.

The end market revenue distribution was 67% in Communications, 13% in Industrial, 7% in Consumer, 6% in Aerospace and Defense and 7% for other end markets. Our non-GAAP gross margin was 40%, and the non-GAAP operating margin was 18.9%.

None of the supply chain costs or COVID costs were excluded at -- in arriving at non-GAAP results. We incurred $4 million of COVID expenses in the quarter and $2 million of costs to secure parts for our customers. The company has committed about $17 million of additional cost to secure parts with suppliers, and these costs are expected to be realized over the next 3 to 5 quarters, depending on the availability of contracted components.

At the segment level, the non-GAAP operating margins were 15.7% for photonics and 25.6% for compound semiconductors. New products were instrumental in these sustained good margins. Our record backlog of $1.4 billion consists of $914 million for photonics and $483 million for compound semiconductors. The backlog consists of orders that will ship over the next 12 months.

We continue to have many orders that extend beyond 12 months as customers attempt to secure capacity for what many consider to be a super cycle well underway. GAAP operating expenses, which are SG&A plus R&D, were $221 million in Q1. Excluding $20 million of amortization, $23 million of stock comp and $12 million of M&A and integration costs, non-GAAP OpEx was $168 million or 21% of revenue.

This includes our silicon carbide investments. Cost synergies for the Finisar acquisition originally targeted at $150 million have now reached $180 million at the year 2 mark. In addition, we have formally launched the Coherent synergy planning process.

Quarterly GAAP EPS was $0.50 and non-GAAP EPS was $0.87, with after-tax non-GAAP adjustments of $43 million in total, including the reversal of positive FX of $5 million. The diluted share count for the GAAP results was 116 million shares. For the non-GAAP results, the diluted share count was 125 million shares.

The GAAP and non-GAAP EPS calculations are in the ending tables of our press release. Stock comp was $23 million for the quarter, $4 million in COGS and $19 million in OpEx. We expect stock comp for Q2 to be $19 million.

For nonoperating income or expense, the company had $8 million of nonoperating income in this quarter, including $5 million of the previously mentioned positive foreign exchange or $3 million of nonop income, excluding FX. We expect the normal run rate of nonoperating income or expense to be $1 million of nonoperating income going forward.

Pretax interest was $12.2 million. This is a decline from the previously prevailing $14 million at June 30 due primarily to a change in how convertible debt is accounted for. For the convertible debt only, the add back for the EPS calculation should now be $600,000 after tax instead of the $3.1 million after tax we've used before.

This doesn't affect the EPS calculation since the add-back is only $600,000, not 3.1, the starting income is also $2.5 million higher because the go-forward interest on a run rate basis is $11.2 million, not $14 million.

This quarter also has approximately $700,000 of a onetime interest charge that will not recur. This change in accounting for the convertible debt also makes our standard diluted share count for EPS 116 million shares at our current levels of income.

Cash flow from operations in the quarter was $52 million and free cash flow was $5 million. We made a conscious decision to build about $50 million of inventory, consisting of nearly finished goods and, in some cases, critical components to be able to ship goods to customers as soon as delayed critical parts are available.

We paid down $16 million of our debt in Q1, and our net cash position is $184 million. At September 30, the value of our convertible debt moved to the current portion of long-term debt as it matures in September of 2022. The company's liquidity at September 30 was $2 billion.

Capital expenditures this quarter were $48 million. For fiscal year '22, we expect CapEx to be between $325 million and $375 million or about $70 million to $100 million per quarter. Thus far, we have committed $95 million of CapEx for silicon carbide.

Depreciation was $49 million in the quarter, and we expect our forward quarterly depreciation expense to be about $50 million to $55 million. FX was a gain of $5 million, primarily driven by the Swiss franc. The effective tax rate in the quarter was 18% due to ongoing benefits of renewed high-tech status in several countries and the availability to use -- the ability to use other tax credits and FDII deductions to offset GILTI income.

We expect the tax rate to be between 18% and 20% for fiscal year '22. We had $12 million in total cost for M&A, integration and other costs, largely for Coherent with some for Finisar.

Turning to the outlook for Q2 FY '22. Our outlook for revenue for the second fiscal quarter ending December 31, 2021, is expected to be $790 million to $840 million and earnings per share on a non-GAAP basis at $0.75 to $0.95. The share count is 116 million for the low end and 125 million for both the midpoint and the high end.

The EPS calculation, including the dividend treatment is detailed on Page 16 of the press release. This is at today's exchange rate and an estimated tax rate of 19%. For the non-GAAP earnings per share, we add back to the GAAP earnings pretax amounts of $21 million in amortization, $19 million in stock compensation and $21 million to $26 million in transaction, integration and other related costs.

The transaction costs are expected to be higher as we accelerate the planning for Coherent, including placing the debt. And we complete the final year 3 synergies for Finisar. The actual dollar amount of non-GAAP items, the tax rate, the exchange rates and the share count are all 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, supply chain shortages, both onstream and downstream, competition, changes in regulation, ongoing requirements to combat the COVID-19 virus and general economic conditions.

We would also ask that each firm limit its questions to 1 question with no follow-ups as we would like to try to get everyone in during today's call. We expect to end this call not later than 10:15 a.m. Alex, you may open the line for questions.

[Operator]

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

[Ananda Baruah, analyst]

And congrats on all the progress. And a lot of -- all the exciting stuff that's going on. So I guess, Chuck, I wanted to ask -- any of you jump in on that one, obviously. But in the prepared remarks, you had mentioned along with some ASP increase implementation, something about longer term and higher share commitments. And so I just wanted to see if -- I want to get more context on that and see if that's something that we should keep in mind as we think about the go forward?

[Vincent Mattera, executive]

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

[Ananda Baruah, analyst]

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

[Vincent Mattera, executive]

Yes.

[Operator]

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

[Paul Silverstein, analyst]

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

[Vincent Mattera, executive]

Okay. Paul, thanks for your question. If you see the high end of the guidance that we gave for Q1, we were sure aiming to do the maximum. And I would say that we had a few contributors to it, but number one was our supply chain. Number two was the supply chain of our customers. So it's a balancing act.

But it would not be reasonable to say that all of it was just the supply chain. It's just the overall logistics of scheduling and running complicated and complex factories that we do. And I think we did a great job on it. As far as this quarter goes, we are working diligently with our supply chain partners to be able to do the very best we can to close the gap. All of us, it's been an all-hands-on-deck effort, including me, with discussions with the CEO of nearly half a dozen of our key suppliers, electronics and integrated circuit suppliers.

We're going to do the best we can to pull things forward. But the uncertainty still exists, and we're not going to know about it until we actually get through at least through the early part to the middle of December as to how it's going to affect us this quarter. But we've given our best shot at the guidance. And just like we did in the first quarter, we're aiming to get to the high end.

[Paul Silverstein, analyst]

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

[Vincent Mattera, executive]

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

[Mary Raymond, executive]

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

[Paul Silverstein, analyst]

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

[Mary Raymond, executive]

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

[Operator]

Your next question is from Samik Chatterjee from JPMorgan.

[Joseph Cardoso, analyst]

This is Joe Cardoso on for Samik. Yes, so the 1 question for me is just -- you highlighted a lot of investments in your prepared remarks, specifically around analog and digital ICs as well as silicon carbide and indium phosphide. I was just curious if you could talk on the level of investment that's necessary to drive those plans? And how should investors think about the time line of when those investments begin to materialize?

[Giovanni Barbarossa, executive]

Thank you for the question. This is Giovanni here. So we have 2 main investment directions, as we said in the prepared remarks, really around silicon carbide and indium phosphide. Both of them are intended to support the multiple markets and multiple applications. This has always been our strategy to diversify our investments to have -- to lower the risk of our investments.

And there will be -- as I said in the prepared remarks, there will be a combination of capital as well as human resources, investments to prepare for what I said was an incremental growth across both platforms and across multiple markets. And we don't believe that investments will materialize sooner than 2 quarters, so will be in the beginning, let's say, mid of fiscal year 2023, that we will see the effects for these investments materializing.

[Operator]

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

[James Ricchiuti, analyst]

I was wondering if you could comment on the -- what you're seeing in the industrial segment of the business, both inside China and outside China only because there's been some mixed signals, obviously, in the industrial laser business inside China. So if you could maybe comment on that and just the outlook for that part of the business.

[Giovanni Barbarossa, executive]

Jim, this is Giovanni. Thanks for your questions. Our industrial business has been very strong. As I mentioned in the prepared remarks, we have seen a substantial increase in demand for our pump lasers particularly from China, where we enable a number of fiber laser makers.

We've been able to accumulate the demand over a number of years. We're probably very close to more than twice the pump power of the fiber laser incumbent out there, #1 share. And so we are enjoying a very strong demand for our components. So -- but the -- clearly, some companies may lose share in some geographies. And so we -- that means for us gaining share on the chip supply as these companies do take share from the incumbents. So we see it as a benefit to us.

[Operator]

Next is from Meta Marshall from Morgan Stanley.

[Meta Marshall, analyst]

Giovanni, I wanted to follow up on your comments that you were shipping everything you could out of Sherman. And just clarify whether you were kind of qualified on all kind of current platforms of the major 3D sensing customer?

[Giovanni Barbarossa, executive]

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

[Operator]

Next question is from Jed Dorsheimer from Canaccord Genuity.

[Jonathan Dorsheimer, analyst]

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

[Giovanni Barbarossa, executive]

Thanks, Jed. Thanks for the question. Well, we actually -- if you recall, when we announced the deal with Finisar, we did emphasize how the indium phosphide platform, the Finisar had worked down for more than 20 years was really strategic to us. And we mentioned a number of applications in markets that technology was going to be very powerful for.

So of course, the -- when we acquired them, the focus was on datacom and telecom lasers, photodiodes, modulators, photonic integrated circuits and so forth, which have enabled a number of modules and subsystems, such as the IC-TROSA, which I mentioned in the prepared remarks.

However, indium phosphide has a very unique wavelength, as you know, longer wavelength than gallium arsenide. So it's very useful in a number of optical applications where eye safety is important. So that's one. And so that could be in communication -- sorry, in automotive, LiDAR application, could be in consumer applications, can be in industrial sensing applications and so forth.

So there's a number of markets, but that platform is very powerful. The other thing is that we want to mention is the -- as the electronics for base stations progress and the speed and the frequency of going from 4G to 5G, eventually 6G progress we believe that indium phosphide is 1 of the 2 technologies. It's probably the best technology that we'll be counting on for 6G amplifiers.

So this is an effort we have to focus on that. Of course, it's going to happen 6, 7 years from now, whenever that will take place, but we need to start now. And so it's a very important investment for us. Again, it goes across multiple markets, multiple applications leveraging our wafer fabs to reach a scale, unique, probably, hopefully, the largest in the world.

[Operator]

Next question is from Richard Shannon from Craig-Hallum.

[Richard Shannon, analyst]

I guess mine is on 3D sensing and the VCSEL raise. I think you are talking about some investments here, both in capacity and R&D and kind of implying a growth track here. I think most people see that in longer term, but I want to get your sense of how soon you're seeing that picking up and in what applications, are you seeing an immediate one to mobile? And to what period, what timing do you see in other applications like automotive as an example.

[Giovanni Barbarossa, executive]

Richard, thanks. This is Giovanni. Thanks for your questions. So I was -- I want to make sure that we don't get confused. I did talk about incremental opportunity. This is unrelated to VCSEL's. So I think I want to make sure that it is the case. And we have several applications that we are trying to target across multiple markets again. And we just need to get ready for the demand to come as I mentioned to Ananda, maybe 3 quarters from now, we'll see the effect of those investments materializing.

[Operator]

Next question is from Mark Miller from Benchmark Company.

[Mark Miller, analyst]

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

[Mary Raymond, executive]

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

[Operator]

Next is from Amanda Scarnati from Citi.

[Amanda Scarnati, analyst]

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

[Vincent Mattera, executive]

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

[Operator]

Next is from Simon Leopold from Raymond James.

[Simon Leopold, analyst]

I want to see if maybe you could drill down a little bit on the datacom trends. I think in the past, you've indicated roughly a 50-50 split between datacom and telecom and the communications, but it sounds like it's moving the other way. And within this, if you could highlight the exposure to the hyperscalers, that sounds like an interesting trend I'd like to hear more about.

[Giovanni Barbarossa, executive]

Simon, thanks for your question. You got it. Absolutely. I think we're really gaining -- we believe we're gaining share at the hyperscalers with this 200, 400 and eventually work going on 800. It's a really great trend.

It was really one of the reasons we're really interested in the Finisar platform. And the team is really doing a fantastic job of gaining share back. And so it's a really, really great momentum for us. I think you got the picture.

[Vincent Mattera, executive]

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

[Operator]

Next question is from Tim Savageaux from Northland Capital.

[Timothy Savageaux, analyst]

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

[Giovanni Barbarossa, executive]

Tim, this is Giovanni. Well, we hope we'll continue to grow 70% sequentially forever, but it's not going to likely happen. So I think the growth rate will remain strong as we get more and more slots designed in. And I think 100G is pretty stable. I think the 200G, there is not really many players, so we kind of probably have for sure, the largest share there. And 400G is the beginning.

We're trying to -- we are catching up. There is no doubt. That's why the growth rate is higher than the market. So we believe we're gaining share. So it's a very, very strong momentum. And as I said to Simon, the team has really done a fantastic job executing and delivering really best performance quality-wise, from just a functionality standpoint and delivery standpoint really doing a great job.

[Operator]

Next is from Vivek Arya from Bank of America.

[Blake Friedman, analyst]

This is Blake Friedman on for Vivek. This builds off a previous question. But as you've highlighted on the call, there are several new strategic initiatives ahead as well as continued integration from acquisitions that are providing synergies. So moving forward, I was just curious on the view on long-term gross margins if they can potentially be at the high end or above the 38% to 42% historical range. That's sustainable.

[Mary Raymond, executive]

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

[Operator]

Next question is from Dave Kang from B. Riley.

[Dave Kang, analyst]

Just wondering if I could get some more color as far as your fiscal second quarter revenue assumptions in terms of datacom, telecom, industrial and consumer trends whether they can be up or down sequentially?

[Mary Raymond, executive]

Generally speaking, we would expect to see nearly all of them trending up from the first quarter because historically, the first quarter has been the lowest quarter of the year. We may see some, as we've said earlier, supply chain or interesting seasonality in that 12/31 quarter. Sometimes there's a little bit of a toss-up whether Christmas is a bigger effect than Chinese New Year. But generally speaking, I would say that we're expecting to see all of them generally moving sequentially up.

[Operator]

Next is from Christopher Rolland from Susquehanna.

[Christopher Rolland, analyst]

I did want to follow up on the datacom angle too because I think there is some growing optimism around a really big 2020 here for everyone playing in the space. Can you talk about your supply situation there, in particular? Do you have enough to support kind of outsized demand into next year? I know Lumentum was out saying they were internally constrained on this side. So I was wondering on that. And then on the supply front, in general, what are the kind of biggest self-inflicted constraints that you see across your product set?

[Giovanni Barbarossa, executive]

Thank you for your question. So honestly, I don't believe there is any self-inflicted constraint. I think we have capacity for our products, whether they are at component level, subsystem level or system level. As Chuck mentioned earlier, we have a big advantage, which we are leveraging right now, having a diversity of supply locations. So for example, we have our high-volume manufacturing team in Malaysia, which is preferred by some of the hyperscalers, particularly in North America, as they want to avoid supply chain from China.

And so that's a big advantage. But the intents of components, devices, which we procure, I want to remind you that we are substantially vertically integrated, including ICs, which we design. Of course, there are some challenges getting ICs from foundries that are our suppliers. And -- but so far, as we said in the prepared remarks, the products which have been impacted the most are actually mostly telecom products, no datacom products. And as Simon -- well, someone mentioned earlier is kind of shifting a little bit between datacom and telecom as datacom is growing probably faster than telecom, primarily because we are gaining share particularly at hyperscalers than -- that somehow mitigates the challenge of the supply chain affecting the telecom products. So I hope this gives you a better picture.

[Operator]

Next is from Tom O'Malley from Barclays.

[Thomas O'Malley, analyst]

In the prepared remarks, Chuck, you talked about digital IC investment. And Giovanni, to -- in response to one of the questions, you talked about accelerating share gains at 400, either one of you, could you just talk about the importance of having a DSP at higher speeds? Is that something that you guys want to do internally? Or do you think you can continue to gain share being a customer of a merchant vendor?

[Giovanni Barbarossa, executive]

Tom, thanks for the question. Both -- I would say that our approach is both. We'll make or buy. We have some programs with some partners to develop our own DSP when it makes sense. And in some other cases, it's better to buy. So like for any -- almost anything we make, if we have a better solution out there, which is attractive, then we'll just buy. So I think the -- our focus has really been on optical engines, such as the IC-TROSA, which I mentioned, which can work with any DSP and offer very differentiated optical performance, as I mentioned, like the highest output power, which ultimately enable architectures, which cannot be enabled otherwise.

And so since we have indium phosphide in-house, we have automation and full assembly lines in-house and so forth, we can be not only cost competitive, but we can also supply to a large set of customers, large competitors, which we really see our products incredibly differentiated. So this has been really our focus. On DSP, as I said, will approach, depending on the applications, both make or buy decision, depending on timing, cost and other factors.

[Operator]

That ends our question-and-answer session. I'll turn the call back over to the presenters for closing remarks.

[Mary Raymond, executive]

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

[Operator]

That concludes this conference call. Thank you all for participating. You may now disconnect.