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II VI Incorporated (NASDAQ:IIVI)
Q4 2019 Earnings Call
Aug 13, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the II-VI Incorporated Q4 and Year-End FY '19 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we'll 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, Ms. Mary Jane Raymond, Chief Financial Officer. You may begin.

Mary Jane Raymond -- Chief Financial Officer

Thank you, Skyler, and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our fourth quarter and year-end earnings call for fiscal year 2019. With me today on the call is Dr. Chuck Mattera, our Chief Executive Officer; and Dr. Giovanni Barbarossa, our Chief Technology Officer for fiscal year '19 and for fiscal year '20. Our fiscal year -- our new Chief Strategy Officer and the President of our new segment to be called Compound Semiconductors Segment.

This call is being recorded on Tuesday, August 13th, 2019. 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 the call over to Dr. Chuck Mattera. Chuck?

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Thanks, Mary Jane. Good morning, everyone, and thanks for joining a recall to review some of the highlights of our fiscal year '19 and a perspective view of our first quarter of fiscal year '20. Before we get into it, I want to thank the members of the investment community for engaging us so much, since November 9th and getting to understand our value propositions, core competencies, sources of sustainable competitive advantage and more about our Company culture.

I'd like to use a few minutes before I get into it to provide some context. Fran Kramer and I transitioned the President and CEO role three years ago. Since then, we've carried on in the II-VI tradition of building long-term shareholder value, employee value and customer value one day at a time. It's been a remarkable three years, as we embarked on our current transformative growth phase.

Our fiscal year '19 was punctuated by growing markets, underpinned by large and irreversible mega trends that we believe will allow us to enable our growing list of customers to win in their markets. Up against this backdrop, we not only delivered solid results, we completed two acquisitions each in the optical communications and aerospace and defense businesses. We completed a strategic collaboration to manufacture again on silicon carbide devices. We received many distinguished service awards from key customers, and we continued our leadership development and succession planning to be sure that II-VI maintains the top talent pool to oversee the strengthening of our enterprisewide culture. And we continue to be a company to which people want to dedicate their time and talent.

Our pending acquisition of Finisar has added a substantial engagement with the Finisar team around integration planning of another 30-plus year industry leader, who has engaged employees at the core, remarkably the same as those in II-VI. They care deeply about the positive impact that they can still have on the big challenges that the world is confronting. As you listen this morning, it has become apparent that we are going to need more time to conclude the transaction. Good things take time, and I remain optimistic and enthusiastic about the combination and to get the company ready to substantially scale to its opportunities and aspirations and enable us to strike a sense of urgency to hit the ground running on Day 1. We've organized II-VI on July 1st to get us into a more scalable structure. There are two operating segments and core functions that cut across the enterprise. These have the additional advantage as they are also ready to plug and play when Finisar arrives.

Joining me this morning are, Mary Jane Raymond, our Chief Financial Officer; and Dr. Giovanni Barbarossa, the President of Compound Semiconductors segment and first II-IV Chief Strategy Officer; Sunny Sun is the President of the Photonics Solutions segment. In the fullness of time, we will make these structural and executive leadership changes simple and clear for the investment community by way of subsequent communications. Among the changes, however, I want to acknowledge this morning Gary Kapusta, who served as the Chief Operating Officer during the last few years. Like many others, Gary has a new leadership role, in his case, the Chief Procurement Officer. We are lucky at II-IV to retain his talent as we grow.

Now let's turn to our report. Today, we will give you an overview of our quarterly and annual results and our Q1 FY '20 outlook. Regarding the transaction, as I noted and as noted in our press release, we plan to refile our application to SAMR to extend the time for a successful completion. Both II-IV and Finisar have extensive operations in China. Some 12,000 employees in China between our two companies, and we serve a wide variety of customers in the China market. With the Phase 3 nearing conclusion, the SAMR process looks to need a little longer to complete. Both companies have a broad and deep footprint in China, and the SAMR process is very interactive with third parties and the companies. We now believe we will be able to conclude during the fall of 2019.

Turning to the results and the outlook, it was another record year for II-IV. For the fiscal year, our revenues grew to $1.36 billion or 18% annual growth. Our GAAP EPS of $1.63 per share grew 21%, with non-GAAP EPS of $2.54 a share, growing 25%. For the quarter, revenue was a record at $363 million and grew 13% and non-GAAP EPS was $0.67 per share, grew 29% year-over-year. Leading the growth were our optical communications and our military end markets, now called aerospace and defense beginning in FY '20.

Our revenue in these markets grew 35% and 63% respectively. We estimate customers accelerated between $10 million to $20 million of revenue of optical communications products in Q4 from Q1 to satisfy their strategic planning needs. In industrial, including automotive, following 40% growth in Q4 FY '18 year-over-year, we experienced about a 20% decline compared to last year's fourth quarter, and although it was about flat sequentially.

For the full year FY '19, optical communications grew 36%, aerospace and defense grew 29%, semiconductor capital equipment grew 12%, consumer grew 9% and the industrial market remained flat to the peak achieved in F Y '18, when the market grew 20% overall annually. Silicon carbide substrate sales represented 6% of our total revenue and grew 51% compared to FY '18.

Across our end markets, we had 26 customers that each bought over $10 million and accounted for about 50% of our overall sales. In optical communications, components for ROADM systems led the growth for FY '18 at 60% over -- I beg your pardon, led the growth for FY '19 at 60% over FY '18. Access, submarine and wireless, all grew between 10% to 15%. Only datacom declined for the year overall at about 15%, although we saw some nice growth of over 20% sequentially from Q3 to Q4.

In aerospace and defense, our work on new program qualifications in FY '17 and '18 are showing the results. Of the 29% growth for the year, 21% was organic, 8% was from the acquisitions we completed during the year. We have begun to experience initial demand for our differentiated products in the high energy laser systems applications.

In semiconductor capital equipment, we have significantly expanded our CVD diamond growth capacity to serve the 27% EUV growth we have for FY '19. This method of advanced photolithography is taking hold with customers as a broader number adopt multiple EUV systems due to increased investments in logic components.

The seasonal 3D sensing ramp is well under way, and we expect record 3D sensing revenue for fiscal year '20. We have a number of new designs in development and are excited for the expansion of functionality in calendar year 2020. With respect to our China business, as we noted earlier in the year, we examine the rules and requirements carefully and we serve our China -- Chinese customers to the fullest extent allowed under the current regulations.

As we look toward the first quarter of FY '20, our guidance includes the potential for some ongoing geopolitical tension, though our customers have continued to engage with us on long-term supply planning -- supply chain planning. As is typical, we expect Q1 seasonality of about 10% revenue decline from Q4. We believe that fiscal year 2020 will be another exciting and transformative year for II-VI. And we look forward to updating investors on our progress.

With that, I'd like to turn the call over to Giovanni, to focus on some of the other highlights of the quarter. Giovanni?

Giovanni Barbarossa -- Compound Semiconductors President and Chief Strategy Officer

Thank you, Chuck, and good morning. 2019 continues as the great year of growing demand for several of our engineered material platforms. Silicon carbide substrates, CVD diamond optical windows and semiconductor lasers were in a high demand, enabling a broad range of rapidly growing applications such as datacenter communications, 5G wireless, EUV lithography, 3D sensing, electric vehicles and high energy laser systems.

It's now been 20 years since we've begun walking on silicon carbide, leading to the introduction in 2015 of the world's first 200 millimeter substrates. This year, we began to ship these large substrates, under a program funded by the European Union, tasked with developing an ecosystem for silicon carbide-based power devices, producing 200 millimeter wafers to serve various markets, including electric vehicles. Revenue from silicon carbide substrates now constitute 6% of our total revenue and continues to grow rapidly. Last quarter, we entered a second phase of the development of our six-inch gallium nitride on silicon carbide wafer fabrication capability in Warren, New Jersey, to serve the high performance RF market.

At the same time, this year, we are again expanding the manufacturing capacity of our semi-insulating silicon carbide substrates to meet the new internal and external demand. For all silicon carbide substrate production, we have doubled the capacity three times in the last five years. We have also begun to explore gallium nitride on diamond RF electronics for emerging applications, such as in satellite communications.

As the demand for gallium nitride on diamond materializes, we will be able to leverage our diamond manufacturing capacity, which we perfected and scale to fulfill a five-year agreement that we announced this year with a major customer in the supply chain for EUV lithography equipment. Our CVD diamond technology platform demonstrated our preference, for technology investments, which will enable differentiated progress for a number of market growth opportunities that will emerge over time.

In material processing, II-VI products enable manufacturers to make the lighter and the full more fuel efficient vehicles with advanced laser processing head that produce well with minimal [Indecipherable] materials in vehicle chassis, closures and battery assemblies. We also expect a ultra-high strength in light-weight pumps with increasingly being produced by laser additive manufacturing, a growing market for our products using industrial laser, which in turn is driving the demand for scandium oxide for which we developed a pattern pending recovering process from waste streams. Despite weakness in the memory chip market, the pull for EUV lithographic systems continued, driven by next generation logic chip set, which rely on EUV, therefore, creating demand for this technology, which includes significant content of II-IV products.

In 3D sensing, we've been involved in production for two years on a vertically integrated six-inch VCSEL manufacturing platform. We are in early stages of a market that is growing rapidly and we continue to do so over multiple years. The convergence of computing, communication and sensing will enable consumers to experience high-quality and real time augmented reality on smartphones, smartglasses and car windshields.

In addition to the ramp up for 3D sensing that Chuck mentioned, we recently signed a partnership agreement with a high volume optoelectronics packaging leader. This will leverage a new laser platform for later applications that we will announce in the future. We have continued to invest in the advance driver assistance systems and self-driving vehicle market as they continue to evolve. And they've made progress in developing custom solutions in lasers, optics and integrated modules that rely on our scalable technology platforms.

Our R&D spending in fiscal year '19 increased 19% compared to fiscal '18 from both organic and inorganic investments. About 32% of this growth came from our acquisitions, which added to our capabilities in differentiated components and subsystem, for high-energy laser applications and local count [Phonetic] wavelength selective switches or WSS.

Our acquisition of CoAdna last September, for example, was very timely. It occurred just before a surge in demand for local count of WSS in ROADM networks, particularly in China. We have made significant investments in optical communication products, which provide the connectivity to the global cloud infrastructures, including between continents through undersea links. This year saw the first-ever deployment of multi-cost fiber technology in undersea communications systems, which were enabled by our new 800 milliwatt undersea pump lasers.

Other undersea deployments, including our local count WSS, which was the first for II-IV. This year, we launched a new 400 milliwatt version of our flagship uncooled micro-pump laser, still the smallest on the market to enable coherent transmission of engines for 100 gigabits per seconds to one terabit per second and beyond. We also expanded our wavelength management and monitoring subsystem for the platforms, leveraging our vertically integrated ROADM and monitoring component portfolio, such as optical channel monitors and optical time domain reflectometres.

We are excited by the opportunities that our new intelligence subsystems for current class optical monitoring and line transmission will present to our expanding customer base, including hyperscale datacenter operators, particularly in China. Notwithstanding that datacom [Phonetic] has been soft this year, we remain very confident in the secular growth of data centers, driven by the cloud and 5G. And we believe that 5G deployments would boost our entire communications business. In fact, to meet the demand, we open in November 2018, an additional 300,000 square feet campus in Suzhou, China to expand our manufacturing capacity and also our new regional headquarters in Asia.

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

Mary Jane Raymond -- Chief Financial Officer

Thank you, and good morning. Our press release follows our usual format with the total Company numbers for the fourth quarter and the full year on the second page, and then, the segment information follows on the third page.

We have updated all the operating margins for the segment and the Company to adjust for all non-GAAP elements, not just acquisition-related expenses. These are now all adjusted for stock comp and amortization also. We are reporting our quarter and full year in our fiscal year '19 three segments. The 10-K will be filed this way as well. We will produce a historical results table for the new two segments by mid-September.

Revenue growth of 13% in the quarter, was 8% on an organic basis. Revenue growth of 18% for the fiscal year '19 was 14% on an organic basis. Regionally, for FY '19, North America was about 40% of the total, Europe was 20%, China was 22%, Japan was 9% and the rest of the world was 9%. All major regions growing double digits. During fiscal year '19, China led the growth regionally at 30% over fiscal year '18, Japan grew 28%, Europe grew 14% and North America grew 11%. The Company's overall gross margin for Q4 was 38.2% and 38.3% annually. The operating margin was 11.2% for the quarter on a GAAP basis and 10.9% for the year, whereas the non-GAAP operating margin was 15.7% for the quarter and 15.4% for the year, advancing 80 basis points and 50 basis points respectively compared to their same period last year.

Regarding the segment adjusted operating margin for fiscal year '19, laser solutions was 12.4%, slightly higher than last year; photonics was 16.7%, 40 points lower this fiscal year '18; and performance products was 16.5%, 150 points ahead of last year. The main non-GAAP adjustments in the quarter are stock comp of $6.8 million, amortization of $4.6 million and costs associated with acquisitions and acquisition-related planning of $4.8 million. Both stock comp and integration planning costs were lower in Q4 than we had forecasted. For the year, these costs were $25 million for stock comp, $15.6 million for amortization, and $19.4 million for acquisitions and acquisition-related planning. Costs for the planning of the Finisar acquisition was a large portion of the acquisition costs.

Our year-end backlog was $500 million, consisting of $221 million in photonics, a $193 million in performance products, and $86 million in laser solutions. The backlog contains orders with firm ship dates that will ship over the next 12 months. It's probably worth noting that in our specific arrangements for 3D sensing customers, bookings tend to be recorded in the quarter of shipment. Our $6.8 million of share-based compensation for Q4 and $25 million for fiscal year '19 compared to the fiscal year '18 total of $19.7 million and $16 million for fiscal year '17. The Company had other income for the full year of $2.6 million, primarily from equity earnings from our investments and interest income on our excess cash reserves.

Capital expenditures this quarter were $29 million and $137 million for the year. Full year capex for laser solutions was $44 million, for photonics was $45 million, for performance products was $40 million, and the remainder was for corporate operations and infrastructure. By end-market and growth products, $24 million was for silicon carbide, $24 million for pump and other key communications components, $20 million for 3D sensing, $10 million for the CVD diamond and $9 million for precision ceramics. The remainder is across all other divisions for a combination of capacity, fashion, maintenance capital and infrastructure updates.

With respect to amortization and interest expenses related to the convertible debt, the convert remains slightly anti-dilutive after considering the effects of equity compensation on the diluted share count. So the potential share count associated with the convert does not need to be added back to calculate EPS. The tax rate for the year was 16.5% for fiscal year '19. The reported EPS on the quarter was $0.43 a share and $0.67 a share on a non-GAAP basis compared to $0.42 GAAP in fiscal -- in Q4 fiscal year '18 and $0.52 on a non-GAAP basis.

Our cash is $205 million and our net debt position is $262 million. During the year, our acquisitions and investments of $88 million were completed with cash. We repurchased $1.6 million of stock or 50,000 shares in the quarter. We have $29.3 million remaining on our authorization.

Turning to the outlook, the outlook for the first quarter ending September 30th, 2019, assuming no Finisar transaction, is revenue of $320 million to $345 million and the EPS on a GAAP diluted earnings per share basis is $0.33 to $0.43. On an adjusted basis, the EPS range is estimated at $0.55 to $0.65, to which we have -- we add back $0.06 for one-time transactions, $0.07 for amortization costs and $0.09 for stock compensation. This is all at today's exchange rate.

The weighted average share count is 55.7 million shares outstanding. For the comparison period, results for the first quarter ended September 30th, 2018 were revenues of $314.4 million and GAAP diluted earnings per share of $0.40.

Now, as we turn to the Q&A for the call, remember that our actual results may differ from these forecasts due to a variety of factors, including but not limited to changes in product mix, customer orders, competition, changes in trade and tariff regulations, 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 and for which actual results may differ materially.

Skyler, you can go ahead and open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Samik Chatterjee with JP Morgan. Your line is now open.

Mary Jane Raymond -- Chief Financial Officer

Hi, Samik.

Samik Chatterjee -- JP Morgan -- Analyst

Hi. Good morning. Thanks for taking my question. Can we just start with a quick temperature check on the two key end markets that you referenced, the industrial and the fiber optics or wireless communication as you refer to it? Will you mention the strength that you're seeing in optical communication as well as aerospace and defense? I'm just wondering, given kind of some of the weaker industrial metrics we're seeing, where are you seeing maybe pockets of weakness in those two?

Mary Jane Raymond -- Chief Financial Officer

So as we said, I think your question is to then illustrate industrial. So as we said, industrial was relatively flat for the year. If you remember last year during fiscal year '18, industrial saw some really serious, unprecedented growth. I mean, it is not typical for the industrial market to grow 20% for the year. And we basically -- the market sort of hung out of that peak. Generally, I would say that as you have heard perhaps from others, there is a little bit less demand for new machines in some geographies around the world. We are still seeing reasonably good laser usage, which in our case is typically the driver of the aftermarket sales. But I would say that probably if you think about the growth we saw in 2018, we have the world pretty much suggesting the use of those systems. Giovanni?

Giovanni Barbarossa -- Compound Semiconductors President and Chief Strategy Officer

Yes.

Samik Chatterjee -- JP Morgan -- Analyst

Can you maybe give me some color on some similarly on the wireless communication side? And we're seeing this strength led by a kind of the infrastructure investments. Are you seeing any slowdown, given kind of the sanctions on Huawei? Are you seeing any slowdown on that side of things?

Mary Jane Raymond -- Chief Financial Officer

So with respect to just optical communications in general, when we talk about communications in general, first of all, it has been a very, very good year. And as we had noted back when the first restrictions on Huawei came out, the restrictions were a ruling, they want it banned [Phonetic] and we were very, very careful in looking at what we were able to do. We would have said that, we are seeing with that sort of growth that we are really in the beginning of the 5G build out. That looks to us to remain well on its way. Whether that in the future, in the next few quarters starts to move downward for other geopolitical tensions is what Chuck mentioned. But generally speaking, it's been a very, very good year in communications in general. Go ahead.

Giovanni Barbarossa -- Compound Semiconductors President and Chief Strategy Officer

Samik, this is Giovanni here. Weather it is 4G or 5G, the drive for our technologies which play into those markets. I want to remind you, we have semi-insulated silicon carbide substrates that are used for [Indecipherable] base stations. We obviously have all of the optical communication infrastructure that feeds into the 5G and 4G wireless infrastructure and so forth. So if you look at the entire demand for our products that fit into the 4G and 5G, those have been very, very strong.

Samik Chatterjee -- JP Morgan -- Analyst

All right. Can I just have a quick follow-up on the gross margin. I see on the slide deck, you have a forecast for improvement in gross margins in fiscal '20, roughly to the 40% level. How much of that should we think about being kind of an improvement, driven by utilization of 3D sensing. And if there -- are there any other drivers that we -- driving that improvement?

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Okay. Samik, this is Chuck. Thanks for joining us, Samik. I would say, you hit it. 3D sensing, the utilization of our fab and our 3D sensing infrastructure will be a major contributor to the margin improvement.

Samik Chatterjee -- JP Morgan -- Analyst

Great. Thank you.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Yeah.

Mary Jane Raymond -- Chief Financial Officer

I would also mention -- to the benefit of those in the call. From a gross margin point of view, one of the things we noted was the very, very nice growth we're seeing in aerospace and defense. Some of that particularly for newer systems, particularly high energy laser systems, some of those arrangements are cost plus. That does have the benefit -- the effect of a little bit of downward pressure on the margin because they're cost plus versus fixed price. But generally speaking, Chuck's answer still stands, which is that the largest driver of the gross margin is 3D sensing.

Go ahead, please.

Operator

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

Mary Jane Raymond -- Chief Financial Officer

Hi, Meta.

Meta Marshall -- Morgan Stanley -- Analyst

Thanks, guys. First question, just any change in kind of the makeup of the order that you're receiving from China customers? I think we had heard from other market participants, perhaps moved to slower speeds or it seem perhaps slowdown in orders from not being able to get the full package. Anything that you are able to know kind of along what the makeup of the orders were? And then second question, just given the departure of the Finisar CEO, like was that expected or kind of any change to your kind of plans with Finisar post-acquisition given management changes? Thanks.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Good morning, Meta. This is Chuck. Let me say it on the first one, we're steady as we go in terms of the mix, the demand and the supply chain managers that we interact with in China. So, we were worried that we might see a little bit of an interruption based on other people's reports of having suspended their sales. But our sales crews were long through the fourth quarter. I think what we're expecting is that we might see a shift to new products beginning in FY '20 for various reasons. So we're stepping up our investments to be able to assure that we have new product platforms to offer the customers as well. And then as far as Michael Hurlston's departure, the -- I would say that we have been able to thanks to the Finisar board and the executive team and Michael himself, they've all been extremely supportive of our engagement for the planning that we need to do. And I would say that things on that front are going exceedingly well. Okay?

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks, guys.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Yeah.

Operator

Our next question comes from Jim Ricchiuti with Needham & Company. Your line is now open.

Jim Ricchiuti -- Needham & Company -- Analyst

Hi. Good morning. Quick question. Chuck, I think you alluded to some acceleration from Q1 of $10 million to $20 million in the -- I believe, it was the optical communications area. I wonder if you could just expand on that a little bit.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Well, we have a portfolio of products we can monitor, and with our interactions with the supply chain people and our customers. We have a good sense for how much they want from us, including for a few quarters out, because our sense is that we were asked to sprint the marathon for the last three or four weeks in June. And some of that was -- because we could and because we had timely expanded our capacity, we were able to serve them. And we think that there was a little bit more that we were asked to do in the fourth quarter than what we were expecting. And we think that, that probably came from simply a rebalancing on their side of demand from our Q1 to our Q4. And our judgment is just about $10 million to $20 million. That's the best I can say.

Jim Ricchiuti -- Needham & Company -- Analyst

Got it. And then just turning to the industrial business, there's been obviously a lot of focus about demand and pricing in the laser market in China. And I'm wondering, are you seeing any changing -- any changes in the pricing environment for the components that you supply customers in China in the industrial laser business?

Giovanni Barbarossa -- Compound Semiconductors President and Chief Strategy Officer

Hi, Jim. This is Giovanni here. Nothing extraordinary, it's a very common trend in price declines and general pressure from the market on being -- remaining competitive. But I wanted to mention industrial that if -- I would say that China and Europe definitely weaker and North America is actually strong. So we see -- when we see the general industrial market, I would say as a whole, it was -- as we said, it was a peak and we'll see flat. But it's a combination of all geographies together because there is definitely a quite an activity in North America with very strong economy.

Jim Ricchiuti -- Needham & Company -- Analyst

Okay. Thank you.

Operator

[Operator Instructions] Our next question comes from Mark Miller with the Benchmark Company. Your line is now open.

Mary Jane Raymond -- Chief Financial Officer

Hi, Mark.

Mark Miller -- Benchmark Company -- Analyst

Good morning. Just wondering if you can break out the ROADM sales as a percent of total sales, what was the year-over-year growth? And if you give us a little more color on the impact of Huawei in in the fourth quarter and what you expect this quarter?

Mary Jane Raymond -- Chief Financial Officer

So I think, as Chuck indicated, the sales growth in communications was largely dominated by the growth in the ROADM component. So with respect to overall growth, I mean, I think they were -- they grew probably in excess of 60% for the year as Chuck said, and also in terms of their proportion of the absolute total. They're probably in the neighborhood of about 55% to 60% of the general communications, which is about where they've been for a while.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Good morning, Mark. What was your second part of your question, please?

Mark Miller -- Benchmark Company -- Analyst

A little more color on Huawei and what you're expecting this quarter and what happened last quarter?

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Let's see. We -- what we've said is that we are in the Huawei supply chains, but we have not been able to say more than that. They have been an important customer for us inside our supply chain. We -- that was a driver in the fourth quarter. And I do expect it to slow down just a bit here as we enter into Q1. And that may be part of the story of this rebalancing or acceleration that I referred to earlier. That's the best I can do to give you some color.

Mark Miller -- Benchmark Company -- Analyst

Thank you.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Yeah.

Operator

Our next question comes from Sidney Ho with Deutsche Bank. Your line is now open.

Sidney Ho -- Deutsche Bank -- Analyst

Thanks, and good morning. Hi. Good morning. With regards to your silicon carbide wafer business, I assume you also did not see any impact from the Huawei issue. But have you seen an acceleration of orders from your customers that would indicate share gains for them versus their competitors? And if so, how do you plan on satisfying that demand?

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Hi. Good morning, Sidney. This is Chuck. Well, let me try that. We have -- we believe as we look out into the semi-insulating silicon carbide market underpinning not just one and not just two, but probably three or four major adopters again on silicon carbide technology. We -- I mean, we have been extremely busy expanding and shifting some of our capability to serve this semi-insulating silicon carbide market. But our view is that across the board, the acceleration of the adoption of 5G infrastructure, in addition to the normal pace of build off for 4G, but in particular 5G is stimulating in off a [Phonetic] lot of design and work around this technology by quite a few large incumbents. Is that help you?

Sidney Ho -- Deutsche Bank -- Analyst

Yes, that's helpful. Thanks. Maybe follow-up to that, if you look at -- let's say over the next three to five years, what kind of cost improvement for silicon carbide wafers to expect on an annual basis? The reason I ask that is because it does seem like there are more competitors entering the market, just for example, last week, we have a Taiwanese company coming in. So maybe broadly, how do you view the competitive landscape there?

Mary Jane Raymond -- Chief Financial Officer

I think, first of all, as we look out on the silicon carbide market and we look at the demand we have from our customers, a lot of which is associated with long-term agreements, if not all of it. We look at what our plans are for capacity expansion, which as we've talked about in the past comes in a number of ways, not just the addition of machines. We would expect first of all, to be able to maintain the margins over the period as the market matures. While that probably has some interaction between the cost and the pricing effect, the first thing that's important to understand is that the innovation on how you make silicon carbide, come along with the markets increasing demand and that's important. Otherwise, the world would not have enough capacity. But let me hand it over to Giovanni, to pick up from there.

Giovanni Barbarossa -- Compound Semiconductors President and Chief Strategy Officer

Yeah. We obviously have to remain competitive across the board from a obviously cost perspective and quality and capacity and so forth. But I want to just state a very important fact that the -- ultimately the quality of the substrate dictates the quality and -- for the yield of the final product and the process of qualifying the substrates, it's time consuming. It's very long. And most of the customers, particularly the largest customers we have, don't want -- we believe they don't want to start what could end up being a very expensive cost reductions. So in other words, they could be competitive cost wise as perhaps the level which end up being not so profitable at the finished device level. And therefore, the substrate is probably not where the pressure is on cost, but it's actually more on the processing infrastructure and so forth.

So of course, there's going to be pressure to be cost competitive, but the time it took us, for example, with our most important customer to be designed in with our substrates, it was a co-development. It took several years and it will take even more years to be replaced by someone else, so it's a very sticky process. And as the market is ramping, cost is always important, which probably not the most important criterion to select alternative suppliers. So we think that the process we went through with our customers, basically demonstrated the quality, particularly our semi-insulating substrates. And we think that explains why we believe we have the largest share of the RF market at this point with the silicon carbide substrates.

Sidney Ho -- Deutsche Bank -- Analyst

That's super helpful. Thanks. Maybe just switching gears to EUV step. Can you talk about the lead times of your products, that is if your products shipping today, are they related to products shipped by your customers a quarter or two quarters out, maybe even longer? And have your dollar content change over time as their tools become more mature? Thanks.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Sidney, it's a great question. We believe that our lead times are probably among the shortest in the chain. When you look at the entire supply chain for the many products that we make in multiple subsystems of the tool itself, our understanding from publicly available or disclosed communications by the end customer is that the cycle time for building these tools is really, really quite a long time as long as two years or at least one to two years, including the burn-in times.

And so, we have been ramping and we have said that we believe that roughly 1% to 2% of the price of the tool is our share, both for initial components and then consumable components. We believe that has not changed. We think time will tell, for example, whether or not we have either an increase or decrease in consumable content. But based on what we know, 1% to 2% and I don't think that we have, but as we talk -- we talk to both our intermediate customer and the end user. And I think that we really don't have an idea as to how long it takes for what we make to end up actually in somebody's wafer fab. But my guess is just probably inside that one to two-year time period. Okay?

Sidney Ho -- Deutsche Bank -- Analyst

Great. Thank you.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Yeah.

Operator

Our next question comes from Dave Kang with B. Riley FBR. Your line is now open.

Dave Kang -- B. Riley FBR -- Analyst

Thank you. Good morning. My first question is regarding your fiscal first quarter outlook regarding a sequential decline of approximately $25 million, $30 million. Besides Huawei that you talked about, is there anything else that's driving those sequential decline?

Mary Jane Raymond -- Chief Financial Officer

Well, I think, first of all, what we said about our outlook was more that we were expecting that we may have some kind of effects of ongoing geopolitical tensions. I don't believe we said Huawei specifically about anything at all. But I think generally speaking, for us, industrial as a general matter typically has a decline of that roughly 10% or more for industrial proper, because a lot of the same dynamic that actually drives the force, which is that typically the machines go in before the summer shut down. So that's one thing. It also, from a military point of view, starts with the end of the fiscal year. We have quite a bit of an increase in our aerospace and defense business, and that may shift that seasonality a little bit, but those are really the main factors. And I think even in years where we've been questioned, when the optical cycle -- optical communication cycle has been growing about [Indecipherable], we should really see a seasonality in Q1. We did have seasonality in Q1, the year still grew. So I think that's really all there is to -- it's just the typical seasonality that we're expecting.

Dave Kang -- B. Riley FBR -- Analyst

Okay.

Mary Jane Raymond -- Chief Financial Officer

[Indecipherable]

Dave Kang -- B. Riley FBR -- Analyst

So just to be clear. Because when Chuck was talking about like $10 million to $20 million acceleration in the fiscal fourth quarter, I thought maybe that may not repeat. So that Huawei might be slowing down. I thought that's what he said, but maybe not?

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

No. What I said was that we believe that inside this very strong fourth quarter that supply chain managers accelerated their request for us to ship based on our extraordinary ability to scale in the fourth quarter and to satisfy their needs. They asked us to ship what we believe is roughly $10 million to $20 million that we think would have come ordinarily either from the scheduled first quarter or most of it scheduled first quarter, maybe a tad in the second quarter. That's it.

Dave Kang -- B. Riley FBR -- Analyst

Got it. Yeah. Okay, understood. And my second question is regarding 5G base stations. I believe Huawei was looking into again on silicon carbide and also again on silicon. Have they decide which route they're going to go with?

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

We believe that the 5G infrastructure, the largest build outs of 5G infrastructure around the world because our belief we'll contain -- we'll have the largest content of electronics based on again on silicon Carbide.

Dave Kang -- B. Riley FBR -- Analyst

Okay.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Not just one provider or not just one service provider. That's what I believe.

Dave Kang -- B. Riley FBR -- Analyst

Got it. My last question is any tariff impact either to US or to China?

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Yes. Give Mary Jane a sec here, just to drink some water. Okay. Mary Jane, do you want to...

Mary Jane Raymond -- Chief Financial Officer

I mean, we commented that the tariffs on the year or the quarters was not particularly material. That is still the answer. It wasn't particularly material. But I would not like to leave you with the sense that there was zero. I wouldn't say this, though, as well. One, two, three, four things that are immaterial can still be collectively immaterial. If they keep going, however, where there is seven, eight, nine immaterial things that could start to add up. But right now, the impact of tariffs was relatively immaterial if we take them collectively as they apply to II-VI whether imposed by China or the US.

Dave Kang -- B. Riley FBR -- Analyst

Got it. Thank you.

Mary Jane Raymond -- Chief Financial Officer

Sure.

Operator

Our next question comes from Paul Silverstein with Cowen. Your line is now open.

Mary Jane Raymond -- Chief Financial Officer

Hi, Paul.

Paul Silverstein -- Cowen and Company -- Analyst

Great. Appreciate taking the questions. Morning. Some clarifications before broader question. First off, Mary Jane, in response to the previous question, your answer, I think was largely backward looking. But short question would be now the tariffs are going up to 25%. Does that change the equation going forward? I trust the answer is still not meaningfully, individually or collectively could have an impact. And I've got two other clarifications with broader question.

Mary Jane Raymond -- Chief Financial Officer

Yeah, that's right. When we put the first comment out that we thought tariffs would be relatively immaterial. We included what would happen, if the tariffs moved to the 25% [Phonetic].

Paul Silverstein -- Cowen and Company -- Analyst

Okay. Moving on, your photonics book-to-bill and your performance products book-to-bill I trust from your previous commentary that you are not concerned by extension, we should not be concerned with the fact that the book-to-bill is off quite a bit. Is that the pull forward of the revenue that Chuck alluded to mention? Is that normal seasonality? What's going on there?

Mary Jane Raymond -- Chief Financial Officer

Yeah. I would say that basically, there's three things that are affecting the book-to-bill across the segment. One was -- right, on one hand, the revenue itself was high. So that changes the math of the equation of the book-to-bill ratio itself. The fact that there were higher bookings, particularly through performance product in Q2 and Q3. We've always said bookings are a little bit lumpy, but then the bookings were huge and especially for performance side, [Indecipherable], and then as Chuck said, but roughly $10 million to $20 million of revenue that would have normally been in Q1 would have been in Q4 bookings. But in fact, would be what we would call a book and ship. It came in and we shipped it.

Paul Silverstein -- Cowen and Company -- Analyst

Got it. All right. So let me ask my broader question. If we look beyond 90-day periods and we look out through the full calendar, excuse me, fiscal '20 and beyond, what is the greatest upside opportunities? I recognize you all have a lot of irons with fire. You always have and it seems to be growing. But what are the greatest opportunities? What are the greatest downside risks?

Mary Jane Raymond -- Chief Financial Officer

Well, I think, we'll all help you here. I think generally speaking, I mean, one of the things that's really exciting is that the growth markets that we targeted silicon carbide, EUV and 3D sensing are really starting to move. And we continue to see, again, not only growth, for example in silicon carbide and power, but we also are seeing on the semi-insulating side for RF. So, those really [Technical Issues] optical communications, obviously moving into the beginning with 5G. It's super exciting, given the potential for that to be a sustained trend. In industrial as well, I mean, Giovanni gave a lot of really fantastic color on many of the innovations in advanced machining that are dependent on laser power. Notwithstanding, there's a look -- at the fiscal year '19 with a little bit of a flatter year. All of those things drive for -- countries around the world, not just individual companies, right. The ability to advance the knowledge economy, advance industry 4.0, etc. So, net-net, it ends up making us pretty excited about a lot of things.

Having said that, anything that disrupts trade is disruptive, and you can't get to the point where people are uncertain, and therefore just paused and how they are buying things are planning. So, consequently, we do worry about the ongoing political tension and certainly look forward to them being resolved satisfactorily. And I think generally speaking, there is any number of things that can happen. We just talked about new competition, geopolitical, economics etc, but I would say we're fairly excited about all of them. Let me see what Giovanni would like to add.

Giovanni Barbarossa -- Compound Semiconductors President and Chief Strategy Officer

Yes. I was little concerned about relations those well notwithstanding, we're still very excited about, generally speaking the optical communications, the upside potential there across the board, the 5G, silicon carbide, electric vehicles, high-energy lasers where we have been gaining shares there, but there also the 3D sensing. I just want to remind everybody just a couple of years ago, we had zero trade. So, obviously someone has been losing share out there and we've been growing it. And we continue to grow our share in the 3D sensing market. And as we said during [Indecipherable], we anticipate that for the fiscal '20, our 3D sensing revenue will be higher than the fiscal '19. So, we will keep growing and we will adapt to, which I just said, the other technology platforms, which we believe will be boosted by, what we call, irreversible mega trends, which we don't believe was rolled down in the next two years.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Yeah. Hey, Paul. Good morning, this is Chuck. I'd like to -- in particular, I'd like to come to the optical communications space, make three points. Number 1, we continue to see in '20, as we did in '19 and then '18, a really strong upcycle line under the communication network deployments. And we believe that we're extremely well positioned with our portfolio. We believe that we will see growth in '20 over even over '19, which was a strong year to begin with. We're sold out as it relates to the 5G. Our number of our lines including with internal filter lines, which are going to be needed in very large volumes, we are sold out. And we're looking now to be able to expand our capacity quickly to satisfy them.

And then finally, you're looking beyond '20, we're going to use this time period where other people may seem more uncertainty. And we're going to position our portfolio and Giovanni alluded to it earlier, you'll see us spending more time developing more software and better products to be able to satisfy the evolving needs of our customers, including OTDR subsystems, for ROADM subsystems and for all optical cross-connect systems. So, this is a great, great and exciting moment for us, Paul.

Paul Silverstein -- Cowen and Company -- Analyst

I appreciate the responses. Thank you.

Operator

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

Mary Jane Raymond -- Chief Financial Officer

Hi, Richard.

Richard Shannon -- Craig-Hallum -- Analyst

Good morning, Mary, Gio, and Chuck. Thanks for taking my questions as well. Maybe I'll add to the topic of silicon carbide here. I think if I cut your numbers right from the prepared remark, silicon carbide grew roughly 50% last year. Would you can give us a sense of what your expectations are for growth there or maybe couch it in terms of what your capacity will enable? And also, if you can talk about the current position or mix of silicon carbide that's six-inch and where they could go next year?

Mary Jane Raymond -- Chief Financial Officer

So, with respect to [Indecipherable]. I think, first of all, we would expect to continue to see silicon carbide continuing to grow, whether it's exactly at 50% [Phonetic]. I'm not sure I can say, but we certainly expected to be among the elevated growth rates we say, north of 30-ish, keep going. I'm not saying it 30%, I'm just saying that, if we expect it to be among the accelerated growers. And if you think about Giovanni's remarks that, we have doubled the capacity, three times in five years.

We don't tend as a company to put out press releases when we do capacity expansions. We just sort of get along with doing it, but also capacity expansions happens in a lot of different ways, not just the addition of new machines. So consequently, I would expect us for a good long time here to be having a significant part of the capex dedicated to silicon carbide. As we've said before, we now see demand in RF and power particularly for electronic vehicles. But our view as a company, I think as you know is that we do not expect the demand for power use of silicon carbide to be just limited to electric vehicles over the course of time. Go ahead, Chuck.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Good morning, Richard. Richard, I would just add that, we think that yielded throughput, large increases in yield and throughput -- yielded throughput need to accelerate. As we look out, this is such a big marketplace that we're underpinning. As we look out over the next three to five or even five to 10 years, the marketplace is woefully inadequate with supply capability of high-quality silicon carbide substrates as the electric vehicle market penetrates deeper and deeper into the traditional internal combustion engine market. The world is going to need a lot more capacity than what it has, and we're intending to add more capacity to keep pace with our objectives, which is that this business will do one of the growth engines for II-VI for a long time to come.

Richard Shannon -- Craig-Hallum -- Analyst

Okay, great. Second question on capex. Can you give us a sense of what you think for fiscal '20, either number or kind of relative to what you just spend for '19?

Mary Jane Raymond -- Chief Financial Officer

Well, I think first of all, generally speaking, it probably in the neighborhood or less than what we had this year. We obviously had some two or three years of very elevated capex. And I will just remind everyone that back in 2012 when our revenue was about $550 million, our capex was $50 million. So, capex for our Company tends to run about 10% of the revenue even now I know people look at our number now for us more than $100 million and think that's still kind of elevated. I think you want to think about that as being about 10% of the revenue. So, I suspect that it may be at this level and some barge around plus or minus $10 million probably.

Richard Shannon -- Craig-Hallum -- Analyst

Perfect. That's all the questions from me. Thank you.

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Thanks, Richard.

Mary Jane Raymond -- Chief Financial Officer

I think at this point, I know we have a lot of other calls of other companies scheduled today. We are at 10 o'clock. I think we probably should move to close. We really want to thank all of you who are with us today and thank you for all of your questions. We look forward to updating you on the results of our first quarter call -- first quarter of fiscal year '20 in the early part of November. Thank you so much for joining and we will talk to you soon. Bye-bye.

Operator

[Operator Instructions]

Duration: 62 minutes

Call participants:

Mary Jane Raymond -- Chief Financial Officer

Vincent D. Mattera, Jr. -- President and Chief Executive Officer

Giovanni Barbarossa -- Compound Semiconductors President and Chief Strategy Officer

Samik Chatterjee -- JP Morgan -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Jim Ricchiuti -- Needham & Company -- Analyst

Mark Miller -- Benchmark Company -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Dave Kang -- B. Riley FBR -- Analyst

Paul Silverstein -- Cowen and Company -- Analyst

Richard Shannon -- Craig-Hallum -- Analyst

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