II-VI, Inc. (IIVI)’s Fiscal Year 2015 Second Quarter Earnings Conference Call Transcript

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As we look forward to areas we can further improve upon. We will focus on our epitaxial growth in wafer fabrication platforms and contract manufacturing assembly yields.Retuning these manufacturing steps with increases in automation and process control as well as beginning to bring them in-house and under our strict quality and cost controls will be a key initiative over the next 12 months to 24 months for Laser Enterprise. Across all markets and regions our one-micron and related product revenues from this segment reflects sequentially what we’re up 40% compared to Q2 FY 2014. Capacity has been added and we have built inventory in all locations to improve our customer service. We initiated a campaign to increase market share through close cooperation with our leading customers to develop a new portfolio of products. Our II-VI Photonics segment consists of two market focus groups.

The first is our Optical Communications Group, where it designs, manufactures and markets a broad range of optical components, modules and subsystems. We are a leading supplier to customers in the traditional undersea long-haul and metro-telecom markets, and are targeting increased intersection with the emerging growth market segments stemming from data centers, enterprise networks and Web 2.0 applications.The second, the Photop Group is also a vertically integrated business which provides crystals, advanced optics, display products and precision optical assemblies for industrial fiber laser, life sciences and consumer display applications.Photonics bookings of $66 million were up 27% over last year’s second quarter and flat sequentially while revenues of $60.9 million were up 11% to last year’s same quarter and down 4% sequentially. The increases relative to last year are mainly attributable to the timing of acquisitions compared to Q2 of FY 2014.

The sequential revenue decline can mostly be attributed to a weaker demand for our optical amplifiers for optical transmission systems, as customers work through inventory issues and confront the delayed network deployments. We cooperated with our customers to help them manage on forecasted demand changes during December. We also experienced weaker demand than we had forecasted for our products associated with new network deployments, and understand that this was partly affected by constrained wireline investment and project delays the two awards North American carries.  Other products such as pump lasers and optical components for telecom, crystals and laser optics for fiber lasers and optical coating filters for fiber to the X broadband network architectures, as well as data center application showed growth over the prior quarter.In particular, the fiber laser market, which has been growing rapidly in China and also in Japan continues to show a strong demand for fiber laser optics, including our micro optics fiber laser pump combiners and filters for a high-power isolators.

The overall market remains strong for QSFP+ and other transceiver products for data centers and enterprise networks, as well as EDFAs and WDM components for cable optical networks. We’re in the final stage of product qualification and are initiating the volume production ramp up of our 40G QSFP+ transceiver products. We are able to leverage our internal technology in micro-optic platform advantages to deliver differentiated solutions, and we’ll continue to invest in QSFP+ transceiver products for 40G and 100G client-side transceivers that will support bandwidth growth, opportunities, in which we will further our ability to serve our data center customers and their cloud applications.

Customer engagements and feedback continue to be positive. We have experienced the significant increase in the number of design in projects with customers across multiple applications and have achieved several design wins associated with new product sales expected to phase in, in the coming 6 to 12 months. Additionally, we were awarded share allocation increases from key customers during the annual share negotiations that concluded this quarter. Finally, in our II-VI Performance Products segment, Q2 bookings of $53.2 million were flat year-over-year and up 17% sequentially. Revenues of $48.2 million were down 9% year-over-year and down 2% sequentially. Bookings were up significantly in our silicon carbide semiconductor device substrate and thermoelectric businesses, both year-over-year and sequentially. Increases were driven by our new Air Force Research Labs contract focused on the development of 150 millimeter and larger diameter silicon carbide semiconductor device substrates and the continued growth and demand for our semi-insulating products enabling the cost effective deployment of 4G wireless base stations around the world.

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