Good day, ladies and gentlemen, and welcome to the II-VI Incorporated Fiscal Year 2019 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference, Mary Jane Raymond, Chief Financial Officer. You may begin..

Thank you, Sarah, and good morning. I am Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our first quarter earnings call for fiscal year 2019. With me today on the call is Dr. Chuck Mattera, our President and Chief Executive Officer; Dr.

Giovanni Barbarossa, our Chief Technology Officer and the President of our Laser Solutions Segment; and Gary Kapusta, our Chief Operating Officer. This call is being recorded on Thursday, November 1, 2018. Just as a reminder, any forward-looking statements we may make today during this teleconference are given in the context of today only.

We do not undertake any obligation to update these statements to reflect events subsequent to today. With that, let me turn it over to Dr. Chuck Mattera.

Chuck?.

Thank you, Mary Jane. Good morning everyone and welcome to our call today which we’re holding from our new II-VI Technology Center, Silicon Valley in Sunnyvale, California. We thank our new colleagues here at the former CoAdna site for hosting us today. We had a really great quarter and we ended the quarter with a record backlog.

Our revenue of 314.4 million grew 20% over the same quarter last year, and we had a book-to-bill ratio of 1.04. Our EPS of $0.40 per share grew 25% over the prior year and the non-GAAP EPS of $0.56 per share grew 12% compared to the same quarter last year.

Compared to Q1 FY’18, the communications end market grew 20%, our military business grew 30%, our industrial end market grew 10% and 3D-sensing grew over 200%.

Sales of silicon carbide substrates grew more than 50% and we continue to expand our manufacturing scale in order to position us to capture longer-term opportunities as 5G and electric vehicles that incorporate silicon carbide electronics begins to ramp.

Military growth was a particular highlight in the quarter with 30% year-over-year growth, we are beginning to see the benefits from the early ranch of multiple new programs that won one over the last 12 months. Many of these programs are part of strategic airborne and space platforms that enable surveillance, reconnaissance and targeting.

Increasingly, we’re seeing interest from military customers in the integration of high-power lasers and optical solutions for directed energy systems. To strengthen our platform portfolio for these emerging applications during Q1, we acquired Optonicus an innovator and phased array technology for coherent beam combining.

We expect this technology will enable and further differentiate our directed energy subsystem platform that we are evolving. We are also very proud of the strategic collaboration around wide band gap RF electronic devices that we announced on Monday.

We have already begun working with Sumitomo Electric Device Innovations or SEDI to develop and qualify our Warren, New Jersey fab to manufacture state-of-the-art GaN on silicon carbide high electron mobility transistors or HEMT devices that enable 4G and 5G wireless networks.

Market studies estimate that SEDI holds the number one market share for GaN RF devices and our market leading semi-insulating 150-millimeter substrates coupled with our epitaxial and wafer fab capabilities and SEDI’s technology leadership in GaN HEMP devices will allow us to expand and scale our vertically integrated 150-millimeter platform for these new compound semiconductor devices.

We are also excited that this coming Monday, we will host the opening ceremony for our new II-VI, Asia, regional headquarters in Fuzhou, China. This facility will house 300,000 square foot of additional new manufacturing space in order to assure our customers that we will have the product portfolio and manufacturing scale needed to serve their needs.

It’s really an exciting time for our company and our employees around the world. I look forward to participating in this event to celebrate and to discuss our planned future investments and capital allocation to support our growth plans.

Four years ago, we embarked on a multiyear commitment to transform our overall quality and dedicate ourselves to offering customers the best products that money could buy. Increasingly, we have been recognized by our customers for these efforts.

For example, we are proud to have one in October the 2018 Nokia Quality Awards Competition for Supplier Excellence held at Nokia's headquarters. This incredible achievement and honor is attributed to the II-VI teams worldwide and their relentless work over the last five years to grow and strengthen our partnership with Nokia.

Finally, with one month already behind us, we are really looking forward to a strong Q2. At this point in the quarter, we have nearly 90% order coverage for revenue and have over 11,000 fully engaged and energized employees worldwide focused on delivering and setting the stage for our continued growth. With that, I'll turn it over to Gary.

Gary?.

Thank you, Chuck. Our communications business experienced very strong bookings and revenue growth once again this quarter, particularly in products for ROADM systems. In the industrial business, Q1 bookings and revenues were solid with continued high usage of industrial laser systems and steady seasonally adjusted demand.

In fact, laser diode shipments for industrial applications increased 30% to prior year. In both, communications and industrial, the effect of tariffs on our order book and our results were immaterial, and we expect it’ll continue to be immaterial under the existing tariff structure.

For the quarter, as a function of our total revenue, communications was 40% of revenue, industrial including automotive was 30%, military was 11%, semiconductor capital equipment including EUV was 8%, and 3D-sensing in consumer were 5%. Silicon carbide across all end markets was 6% of revenue.

Geographically, Q1 revenue was distributed 39% in North America, 22% in China, 21% in Europe, 8% in Japan, and 10% in the rest of the world. We expect to invest 150 million to 170 million in capital this year.

A good part of this will go into capacity expansion, both equipment and facilities for 980-nanometer pumps, silicon carbide and diamond optics, among other components.

In fact, we just signed a five-year agreement with one of our major laser EUV component customers which has the potential to nearly double EUV-related revenue from this customer to nearly $70 million within five years.

We continue to work on our operational simplification, as noted in the press release, we finished integration of our optical isolator crystal growth into Performance Products and moved our laser systems group into Photonics since most of those operations are in China.

We continue to advance our integration approach and had about a $1 million in consulting expenses to drive simplification in our business systems platforms. With that, I turn it over to Giovanni for highlights of new products..

Thank you, Gary. We had a successful show at EuroBLECH last week where we introduced multiple products including our high motion 2D remote processing head for laser welding batteries including those for electric vehicles.

This innovative head which has a power rating up to 6 kilowatts enables high quality aluminum on aluminum welds required to produce reliable car batteries in volume manufacturing.

We introduced our direct process 900 direct diode laser engine with active rectangular beam shaping from micro material processing including non-contact localized soldering, bonding and annealing on microelectronic components.

We are investing in direct diode lasers which are intrinsically the most power efficient material processing tools, enabling unique beam geometries that delineate process areas precisely and are visually maintenance free. We also introduced the 12-kilowatt BIMO-FSC laser cutting head.

We entirely redesigned zoom optics capable of independently adjusting the focal diameter and the focal lens over extended ranges in just milliseconds. Such capability enables faster material processing with longer uptime and lower cost of ownership.

At ECOC we launched our 400 milliwatt uncooled micro-pump laser to meet the demand for embedded optical amplification driven by terabit second transmission rates. This micro-pump is also being developed as part of the roadmap to address the emerging autonomous vehicle market.

With respect to 3D-sensing, we’re seeing the benefits of welding established the world-class vertical integrated epitaxial and wafer fab operation on a 6-inch gallium arsenide platform.

We continue to be engaged in the development of several next generation laser devices for consumer, automotive and industrial end markets that seeks to differentiate product and services through innovated augmented reality functionality.

We’ve recently seen an increase in customer interest for laser arrays to enable 3D-sensing applications with time-of-flight technology, and we shipped prototype laser devices to several large customers including OEMs and module integrators.

We expect to run production for some of these customers by the end of the calendar 2019, and so we’re working to qualify additional capacity at our fab in the UK to set the growing precedence in market. With that let me turn it over to Mary Jane..

Good morning, thanks Giovanni. The Company’s overall gross margin for Q1 was 39.4%, and the operating margin was 11.8% or 12.4% adjusted for M&A expenses for CoAdna. The EBITDA margin was 19.7%.

Regarding the segment operating margins, Laser Solutions saw the benefits of 3D-sensing, EUV and growth in optical communications with an 11.6% operating margin compared to 5.3% in Q1 of FY’18. Photonics adjusted operating margin of 13.2% excluding transaction costs compares to last year’s exceptionally high margin as we noted at the time.

The Performance Products operating margin advanced to 12.3% due to a combination of favorable mix and higher operating efficiencies. The Q1 backlog of 480 million consist of a 93 million in Photonics, a 170 million in Performance Products and a 117 million in Laser Solutions. The backlog contains orders that will ship over the next 12 months.

Capital expenditures this quarter were 36 million. The Q1 FY’19 tax rate was 19% and we expect a tax rate of 18% to 20% for the year. The reported EPS in the quarter was $0.40 a share and $0.56 a share on an adjusted basis. The adjustments include 5.3 million in share based compensation 3.7 million in amortization and 1.9 million in transaction costs.

Our cash was 271 million, and our net debt position is 255 million. We did not repurchase any shares this quarter and still have 31 million remaining on our authorization.

Turning to the outlook, the outlook for the second fiscal quarter ending December 31, 2018, is revenue of $330 million to $345 million, and earnings per diluted share of $0.44 to $0.48 including $0.05 a share of one-time and transaction costs for our transactions and collaborations recently announced.

On an adjusted basis, earnings per diluted shares estimated at $0.65 to $0.69 which includes $0.10 for share based comp, $0.06 for amortization and $0.05 for one-time and transaction costs as we noted, but excluding any refinements to the transaction tax as the Company finalizes its implementation of the Tax Cuts and Job Act.

This is all at prevailing exchange rate. The weighted average shares count of 66.2 million shares. This quarter the convert remained slightly anti-dilutive, so we need not add back the 7.2 million shares.

For comparisons to the prior period, the results for the second quarter ended December 31, 2017 were revenue of $281.5 million and GAAP diluted earnings per share of $0.15. This $0.15 includes $0.24 for transaction tax under the 2017 Job Tax Act, $0.08 for stock comp and $0.06 for amortization, foreign adjusted EPS of $0.53.

Now, as we turn to the Q&A for this call, remember that our actual results may vary based on changes in product mix, customer orders, competition, and general economic conditions.

I'll also remind you that our answers to your questions today may contain certain forward-looking statements which are based on our best knowledge today only and for which actual results may differ materially. In addition, during the Q&A, we will abide by our obligations to protect our customer confidentiality.

With that, Sarah, you may open the lines for questions..

[Operator Instructions] Our first question comes from the line of Dave Kang with B. Riley FBR. Your line is now open..

This is actually Lee Krowl on drilling in for Dave Kang this morning.

Just really quick on 3D-sensing, just curious if you could maybe talk about at high level the end rate mix of business because it looks like you guys are starting to get some good traction? And then just kind of curious if the 3D-sensing business will experience you know what we've observed as the seasonality component towards the end of the year or if you expect a more linear ramp as we go into calendar 2019?.

This is Giovanni here. So, regarding mix, there is still -- we are engaged with a number of customers across those several platforms in consumer and automotive and even in industrial for 3D sensing. So, I wouldn’t necessarily talk about anything particular platform like you mentioned.

Android, we see a lot of interest in the time-of-flight as we said during the script. In terms of the revenue outlook, we expect a little bit higher revenue for Q2 then maybe in Q1 as we experienced last year. So, this is kind of probably a repeat of last year but with the higher numbers.

And then, we will see what happens in the next following quarters..

And then, I know you guys kind of talked about it last quarter just from a modeling perspective, but could you maybe just run through impact of foreign exchange?.

So, this quarter I would say the foreign exchange has significantly neutralized. We probably had immediate about a $1 million I’d say in total of FX in the quarter. That’s certainly less than we had seen in prior quarters given that the R&D has weakened a little bit against the U.S. dollar..

And then just last question, you guys kind of just talked about the silicon carbide opportunity and the qualification process for your fab.

Just maybe, could you talk about the timing of that and maybe beyond the timing when how quickly revenue comes after qualification?.

Yes, this is Chuck, Lee. Let me take it in two parts. First of all, we already began the expansion in our Warren, New Jersey fab, which is required in order to keep pace with what we expect to be the forecasted demand running through the fab including for GaN on silicon carbide.

We’ll run through with our partner a very-very methodical approach through the final process integration and qualification, and we’re expecting that above mid calendar 2020, we should be qualified and begin a ramp..

Thank you. Our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open..

I just wanted to get a sense of on the laser -- on the industrial laser side.

Just if you could kind of talk about the trends and apologies, if you did already kind of the CO2 laser side and kind of what you’re as far as renewals there versus the fiber laser side?.

Meta, this is Giovanni. There is no much difference than in the past we still see a good balance between the fiber and CO2 in our revenue kind of pretty similar. And as you know, we -- on the CO2, you’ll too recall it, our EUV revenue is basically super laser revenue even if it’s not -- we don’t capitalize it as an industrial revenue.

We've definitely seen a pickup particularly in China on the fiber laser market, and we’ve enjoyed I would say 30% little bit more than 30% year-over-year growth by supplying particularly laser pump devices to the China fiber laser market which is going pretty nicely.

Obviously, we’re taking advantage of all these newcomers growing in China, as you know they don’t add semiconductor laser pump technology. So, we’re enjoying their growth by supplying them the laser diode engines, the laser diode pumps for their products..

Meta, this is Chuck. I would just like to add that -- thank you, Giovanni. I would like to add that the centerpiece of that opportunity for us is our differentiated semiconductor laser.

The benefit we get is that we have a suite of related optical components that allow us to be a one-stop supplier for people including isolators -- high power isolators, acousto-optic modulators and other related component that are required by the fiber laser builder..

And then maybe on the silicon carbide side, obviously, you guys kind of made your announcement on the wireless side ahead of the quarter. That had been kind of running at more of a 50-50 between wireless and electric vehicles or at least that was kind of what I had understood.

Where should we think of the growth primarily coming from the next year or could we stay at that mix?.

I would say if just you allow me, just go out with the longer time horizon of 2 to 3 years or 4 to 5 years, the mix is going to be dominated by the power electronics market. And at any given point in time in the near term, we expect as the power electronics market grows and our silicon carbide business grows.

That mix is going to diminish of semi-insulating substrates for RF. It's going to become a smaller and smaller fraction. So, today, it might be two-thirds by a one-third semi-insulating, and it balances around based on inventory builds and strategic reserves.

But long-term, the only thing that matters is that A, our semi-insulating business will grow, it is going to grow and I expect it to grow faster than the rest of the market. And the power electronics market is going to grow even faster..

Our next question comes from the line of Fahad Najam with Cowen. Your line is open..

A qualification first, can you please remind us your silicon carbide revenue in the quarter, did it grow 50% year-over-year to 6% of total revenue?.

Yes, that’s what we said..

Question on in terms of your China industrial business.

Can you help us understand relative to commentary from your peers who have been having recent challenges in China? What sets you apart, is that that you guys have significantly different end markets in China from these competitors, to help us understand, why you haven't seen any of the weakness that some of the peers have highlighted regarding the slowdown in China? Is the peers that you guys are obvious related in that market, so can you help us little bit on that?.

Fahad, this is Giovanni here. It's pretty simple. We don’t compete with them. We supply to them. So, if they grow, we grow..

So in terms of say, IPG is having retails in China because they are competing in local Chinese suppliers and you end up supplying to the Chinese suppliers, so you are growing your business that way..

As I mentioned earlier, most of this I'll say the vast majority of this fiber laser companies some of which went also public in China don’t have semiconductor laser technology, and they don’t have --as Chuck mentioned, some of the key optical components that are required to build the fiber laser.

So that’s what they need and we supply and we enjoy their results particularly their growth in the China market..

I would also say that just keep in with our business that a good part of our industrial business is driven by the usage of the laser in place. So unlike perhaps others, we don’t necessarily or even at all dependent on new laser system sales, often times when new laser systems sales are lower, the lasers that are in placed are used more.

So, keep that in mind that’s an important part of the industrial laser business for our company..

If I may ask one more question on the partnership you announced with SEDI.

How should we think about your implications to your merchant silicon laser business? Does that in any way put any exclusivity clause or SEDI has first right on your wafer capacity or how should we think about your merchant laser business on this partnership?.

Full steam ahead..

Thank you. Our next question comes from the line of James Kisner with Loop Capital Market. Your line is now open..

So just first I want to drill down on laser solutions, maybe teams of Matthew, you can correct me if I am wrong, but basically you said about 3D-sensing being up 300% and I think you said it contributed 5% of sales for the Company in this quarter.

I am getting laser solutions is kind of up just mid single -- you said, low single digits sort of ex-3D-sensing and that I think is a pretty decent -- that was a pretty big deceleration obviously still much better than peers.

But I just want kind of confirm that that just more broadly, can you just comment and in terms of you're going to get outperforming your peers, but are you indeed seeing a bit of a deceleration in laser solutions with ex-3D-sensing, I want to clarify that?.

It’s just the opposite..

So I mean we talked about the industrial business growing 10% for the quarter I think which answers the question..

But can you talk more about the tariffs, you said you had -- you’re not seeing impact, you don’t expect any impact.

Can you clarify that too and I know your performance is largely based in China is it because your products are not classified as being subject to tariffs mostly? Is it because not that much is leaving in China and going to the U.S.? And are you still also just like comment kind of hold even if the tariffs with the 25% that you're not worried about any incremental impact as a result of tariffs going up?.

So, our company I would say that, first of all everything that happens in our company that is either made in China let’s just say that it’s not necessarily imported -- the incoming goods are not necessarily import from the U.S. that’s the first thing. The second thing is, not everything ships directly out of China to the customer.

Finally, I would say that in cases where the customer is the importer, we’ve been working very-very hard with our customers since the beginning of the tariffs, to look at what the options are, as we’ve settled along, for the management of the tariffs whether that’s an operational option or allowable regulatory option whether that’s changes in the HTS codes that have been promulgated recently or the filing for certain exclusion.

So, we’ve won that gamut on pretty much everything we’ve. We still have many exclusions filed that have not yet been rolled on, but so far we’ve been relatively successful and dealing with and using the opportunity that are disposal to minimize tariffs..

And just one more, if I could. Just can you comment on just general demand in hyper-scale and in China separately? I am not sure you really talked to be one of those, but both of areas in concerning for investors of late and I’ll pass it. Thank you..

Sorry, James. Just repeat that question..

Yes, so there’re kind of two queue in the market that investors being kind of skittish about off late, one is hyper-scale just you know Web 2.0 company just additional -- number of companies have talked about slowing there and just also just.

I don’t think you’ve talked about demand trends in China in general either just I’d love to hear just your short update on those two end markets, if you could? Thank you..

Sure. Let's talk about the demand trends in China as a general matter. I would say that we have continued to see pretty decent Chinese demands across the board. So keep in mind, China is a big market for us. It's both industrial and it's optical as well.

So, we saw obviously the typical seasonally adjusted at industrial demand, but I would day China was as a general matter a relatively strong market for us remaining in this quarter.

And then with respect to hyper-scale, Chuck?.

Yes, I'll just add -- good morning, James. I would say with regards to our business ending intra-data center, it was flat quarter-over-quarter. But what we experienced both for DCI and for ROADMs, we are really strong..

[Operator Instructions] Our next question comes from the line of Sidney Ho with Deutsche Bank. Your line is open..

My first question is on your strategic collaboration that’s been asked couple of times. Maybe give us a little more color, it sounds like this co-development of product and now I know you talked about the qualification by mid 2020.

But is there any dedicated labor supply agreement? What's the duration of the contract? And more importantly, who owns the IP that’s coming out of it? And do you expect future companies will do similar kind of arrangements?.

First of all, we are not going to be able to get into the detail of the agreement that we have with them. Except to say, it's strategic, it's broad and it's deep.

And it involves the incorporation and integration of our GaN on silicon carbide technology and their GaN on silicon carbide technology for the purpose of producing GaN on silicon carbide devices for the communications market today. And we have a very close relationship with them. We have been planning this for quite some time.

We are really excited about it and we think the time is right. We think the relationship is right. And we love both enabling the market leader and growing with a market leader in this regard..

Maybe my next question is.

Can you talk about overall revenue guidance being up 5% at the midpoint? Can you just give us a little color on that guidance by end market either quarter-over-quarter or year-over-year? I asked that because it seems like there could be a wide range of outcomes this quarter given all the noise out there?.

First of all, we don’t guide by end market and we don’t guide by segment and could there be a wide range of essence there always is a possibility of wide range of outcomes.

I would say as we have already discussed I mean we have some very nice way onto it with respect to optical communications, the same thing with military, industrial is really hanging in there.

The next upcoming quarter, yesterday, as Giovanni mentioned, a reasonably good quarter for Q3, could any of those change, sure, but that we set the way looks right now..

Maybe the last question is on the semi-cap side. You talked about EUV being pretty solid in your long-term agreement with this EUV partner.

Can you talk about some of the trends outside of the EUV? And remind us what kind of lead times do you have for this segment, and if is it the same for EUV products and non-EUV products?.

I am sorry -- did you say -- can you repeat -- you said the lead times?.

Yes, the last part of the question is more about the lead times because there clearly a lot of concerns in the semi-cap side of the OEM side of demand.

Just trying to get a sense from what you guys have seen?.

Well, first of all, we’ve seen an increase change in the forecast, we’ve seen over the past few months versus the forecast that we have seen in the past and we understand that these were primarily the increase in the forecast was primarily driven by the elimination of bottleneck on the supply chain of the EUV end customer, and there was an ask and so now we’re drawing that specific bottleneck being eliminated and then we can take advantage to allow capacity to increase the forecast.

So of course, we’re supplying parts that go into one laser these laser pumps and other laser, and the laser goes into the EUV tool. So, we’re pretty at the bottom of the food chain, if you like. And so, the time that it would take for our product to make into the EUV system, would actually be pretty long.

But we’re definitely in terms of our component lead time, we always are shipping and we’ve capacity available as it comes up and as we see the demand coming from the end customer, so at least from our standpoint we don’t see that being a challenge at all..

Let me add, Sidney, we go into this semiconductor capital market in a number of different -- from a number of different channels. Giovanni’s comments as they relate to EUV are really exciting in addition to that since we go into the EUV market by three separate routes.

In addition to EUV, our normal DUV that is for immersion lithography, we’ve our normal line going business, all we’ve seen is a continued steady increasing demand. And as far as the back end of our line goes, we’ve a number of new developments that we’ve underway for next generation backend of the line including NV factors and those types of product.

And we’re using this time to qualify, to develop and qualify our manufacturing change so that when that back end of the line demand increases over the next 6 to 12 months, we’re ready for that as well. We’re not seeing any impact other than steady or increased demand across the product portfolio for that market segment..

Thank you. Our next question comes from the line of Mark Miller with The Benchmark Company. Your line is now open..

Can you comment on the ROADM market how that’s going for you?.

Yes, we actually pretty involved particularly as you know after the acquisition of Kaiam than where we are today. We’re seeing definitely an increase in the demand and it was a gap we had in our part of portfolio and with the combination of required platform, I think we can see now little bit more interest by customers.

And there is clearly a beginning of the demand for generally speaking with our management in the backhaul of 5G networks particularly with the first deployments in Korea and Japan. So, we are somehow participating to that revenue opportunity with a combination of the products we already had and as I said with the addition of the Kaiam platform..

I would add to that that of course our portfolio including the switches, but also the 980 pump as we integrated fastest the optical channel monitors, we are seeing a very strong demand across the entire component segment of our market and also in the integrated subsystems, including the amplifiers and in some cases line cards.

We are really, really quite busy. And by any measure including the fact that we have 90% order published at this point in time for the quarter and taking on additional RFQs everyday with people asking us, if we can pull things in, this is an exciting moment for us in this space..

In terms of the silicon carbide, I realized we are just turning the ramp.

What percent of revenues were 5G related this quarter and where do you expect that go say a year from now?.

I'll take it Mark. On silicon carbide, first of all we don’t make a differentiation at least its relates to our semi-insulating substrates because our customer at the moment is making again is the market leader again hence, and their customer are deploying both 4G and steady increases in quantity, as well as preparing the way for 5G.

So we don't make a distinction in our semi insulating silicon carbide substrates as to which are for 4G or which are for 5G. They will enable both..

Could you give me the backlog in terms of Photonics performance laser?.

Yes, of course its $480 million total for the Company at Q1 and Photonics was 193, Performance Products was 170 and Laser Solutions was 170..

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

I do want to touch on fiber lasers again, following up a couple other questions earlier on the call. I think what IPG suggested on their recent call is that there is continuously issues in China competitively, but they were going to be more aggressive there.

I'm wondering if you are seeing any effects of that what your customers are reporting there and whether you're expecting growth in that market sequentially in the December quarter?.

Richard, this is Giovanni here. So as I mentioned earlier, we see a very nice, nice demand from very broad and continuously growing sector of fiber lasers and diode laser customers in China not only.

These players which didn’t exist just maybe some of them just 5 or 6 years ago and their growth in China is pretty outstanding, and as I said earlier we are just participating to their growth we’re enjoying by supplying to them an array of components from the semiconductor lasers to just passive optics that are necessary for making the lasers.

We’re enjoying the growth with them and I think these new dynamic and of course other companies to which we don’t necessarily supply the same kind of products, which may have them internally obviously are being challenged by the combination of our strength in technology components and then local market players in China enjoying their growth there with the industrial market..

A question on silicon carbide, I guess maybe for Chuck or Giovanni.

Is this market constrained in capacity today? Do you expect it to be for any period of time?.

I would definitely say that we’ve been investing in capacity for the past several years and we continue, and so we definitely I would say, we’re sold out, we’re being sold out for a while.

And we feel we’re going to be sold out for a while because in the future because we had to ramp and add the furnaces we make our own furnaces, our proprietary furnaces, so we have to keep investing but we definitely believe that it’s -- the market is constrained..

Can you give us a sense of how much you’re tempting to grow capacity for silicon carbide in the next 12 months or the fiscal year, either way you want to talk about it?.

Well, we’ll talk about in terms of capacity expansion, our main goal is to anywhere in the Company is to break bottlenecks. I mean over the last 18 months, we’ve probably almost doubled the capacity, I’d say going forward.

I would expect that we would increasingly expand at least to keep pace with the market which might be in the neighborhood of 50%, but the goal is that you take all your machines and multiplying by 50, right.

I think the whole goal with us on the vertical integration strategy is to break bottlenecks, but we do expect to continue to see nice growth in silicon carbide and it is a market that allows for the capacity as the demand develops as opposed to it all being at once.

So I would expect us to pretty much keep pace with our demand if not a little bit ahead of it..

Richard, this is Chuck. I would add, for us everybody was -- everyone else is about capacity all the time, it’s an important question, it’s understandable, we’ve a technology roadmap we have a product roadmap.

We’re focused on yield throughput not just solving capacity constraints by adding equipment and we’re focused on roadmap that can ultimately deliver the very best highest quality silicon carbide substrates.

So that our customers can make the most reliable devices and their customers can make the most reliable inverters so that their customers can make the most reliable cars. And all of that starts with a substrate, that’s why it is so critical, as their foundation for this entire transformation happening in the market..

My last question is on the 3D-sensing I actually had a couple of different sub questions here.

Talked about having a strong growth last quarter on year-on-year basis, I'm wondering if you can tell us where do you expect it to year-over-year in the December quarter any sense of customer profile number of customers that you are shipping to and whether you were dealing with or engaging on any world facing types of 3D-sensing opportunities in the mobile space?.

Richard, this is Giovanni here. I would say that we are engaged in most if not all kind of applications out there.

It's so diversified whether it's front facing, rear facing whether it’s a consumer electronics, smartphones whether it's cars whether it's industrial applications whether it's our own laser head where we integrate machine visions with 3D-sensing for steel welding. And so far there is a steel welding tracking.

We have a very diverse set of applications. So it's kind of we have to wait and see which one will be the top performer in terms of revenues so far.

We are really busy and as I said during the script we are in the process of bringing up to speed to qualifying our fiber in the UK because we are best design out of space and power and capacity in New Jersey. We now have more than five. So that’s why we made the strategic decision sometime ago.

We anticipated this demand to come and it's being time to obviously qualify the new lines, but I think we have put together a world-class vertically integrated ATM fab capabilities that I think is currently paying dividends, and we will continue to be a major growth engine for the Company..

Our next question comes from the line of Troy Jensen with Piper Jaffray. Your line is open..

Lot of my questions have already been kind of asked and answer to hear. I was wondering if maybe on EUV, I know guys have been kind enough to give us another contribution that you guys give on GaN on silicon carbide and 3D sensing.

Could you size how big EUV is for you guys?.

So I think we have said EUV is about 3% of the revenue..

How about maybe for Chuck here, you talked the market is being very, very strong and for you guys for a long time I think for the industry now expanded about two quarters.

I would love to just hear your thoughts on just the sustainability of that? Are we in front of just 4G cycles? Is it 5G deployments just a visibility or conviction at the telco segment will remain strong?.

Troy, this is Giovanni here.

Again, depending on the geography of cost, there is all different dynamics but we think this is going to last for quite some time until at least the especially 5G would be fully deployed you just think about the number of base stations that 5G network will just for would be required in China, talking about maybe up to a 1 million base stations in China.

They all have to be connected. Traffic has to be routed.

And this is talking now, I mean it’s really the beginning, how fast this will happen is kind of a little bit of a challenge, but I -- to figure out, but we believe that the combined demand driven by 5G and then of course all of the connectivity required being between and we did make a sense as we’d also drive additional demand.

So we think this -- we believe is quite sustainable, there would be quarterly adjustments in there, but I think the growth should be there for quite some time..

[Operator Instructions] Our next question comes from the line of Jim Ricchiuti with Needham. Your line is now open..

Looking at your laser solutions book-to-bill of just below one, I mean there’re several pieces to that and I'm wondering if there's a way for you to help us think about the book-to-bill in the traditional industrial portion of that.

And you have talked about the fact that you're still seeing good strength in industrial, but I am just wondering if there's any differences in the various pieces of that laser solutions business?.

I do not think so. I mean looking at it, I wouldn’t say every single piece is the exact thing bookings, but book-to-bill I mean but I’d say generally speaking, it’s very-very steady across all the pieces that go into laser solutions..

Jim, this is Giovanni. I just want to add just keep in mind that a good portion of the laser solutions revenue is pretty much of retail.

We’ve a very large portion which we call book and ship, and so this develops typically throughout the quarters kind of very seasonal some time hard to predict but it’s within 24 hours kind of book and ship kind of dynamic really different than anything else we do in the Company..

And just a follow-up question we don't normally ask you a lot of questions about your military business, but that was a fairly strong growth rate.

And I am wondering how we should think about that, is this -- are you seeing the impact of the increased budget? Is this just more of a lumpy business where quarter-to-quarter we’re going to see a lot of variability? Or are we at the point where you’re seeing some real sustained growth in that part of the business?.

Jim, this is Chuck. It’s a mix of everything you ask. First of all, we do have our bookings can be lumpy, our customers from time-to-time place very large orders with us, and we report those as such and then we may find a bookings roll off for the next couple of few quarters. What I would say is it this business we expect to be a steady grower.

And then an important part of the diversification of this portfolio the transformative power of the technology that our customers are investing in and expecting, we are differentiated in many of those components.

And so we have been working for a quite some time on a roadmap that will enable our customers, and as you know many of these programs were either thought about or being -- many of those programs for next five or 10 years of being conceived now. And we are an important part of those discussions.

We acquired Optonicus as a complement to gain for the complementary technology that we need to unlock other elements of our portfolio. This is an important exciting area, and it's an area of focus that simply going to increase..

There are no further questions at this time. I would now like to turn the call back to Mary Jane Raymond for any further remarks..

Thank you very much there. We would like to thank all of you for joining us today and I would say that this ends our call. We look forward to giving you an update on our second fiscal quarter for fiscal year '19 on our conference call that is scheduled for Thursday January 31, 2019 at 9 o'clock in the morning eastern time.

Thanks again for joining and have a good day..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day..