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II VI Incorporated (NASDAQ:IIVI)
Q1 2020 Earnings Call
Nov 12, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the II-VI Incorporated FY '20 First Quarter Earnings Conference Call. [Operator Instructions]

Now, I'd like to hand the conference over to your first speaker today, Ms. Mary Jane Raymond, Chief Financial Officer. Ma'am, you may begin.

Mary Jane Raymond -- Chief Financial Officer

Thank you, Paul, and good morning. I'm Mary Jane Raymond, the Chief Financial Officer, here at II-VI Incorporated. Welcome to our first quarter earnings call for fiscal year 2020. With me today on the call is Dr. Chuck Mattera, our Chief Executive Officer; Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Compound Semiconductor Segment. This call is being recorded on Tuesday, November 12, 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 it over to Dr. Chuck Mattera. Chuck?

Vincent D. Mattera -- President and Chief Executive Officer

Thanks, Mary Jane. Good morning, and thanks to everyone who are joining us today. Before we begin, I would like to take a minute to thank all of our veterans. As they remind us of the importance of dedication and determination over the long haul and II-VI is strategic position in the aerospace and defense market. As we have many times in the past 20 years we have started another new chapter in the evolution of II-VI. On September 24, we closed the Finisar transaction, the largest acquisition in our history. Our excitement has only increased since day one as a result of the complementarity of the technology and manufacturing platforms of both companies. Despite some market pauses commensurate with our conservative case and the normal heavy lifting that is needed in the time immediately after an acquisition. We are confident that we will disrupt the status quo. As a result of the acquisition we are the largest component and subsystem supplier in the global optical communications market and we believe the undisputed leader in photonics solutions and compound semiconductors. The combination of the semiconductor laser customized optics and integrated circuit technologies along with the miniaturization and automation platforms of the new company. Position us well to expand into a larger portion of each of our end markets.

For example, we fully expect our industry-leading indium phosphide laser capabilities to enable rapid growth across multiple markets, including optical communications, automotive, hyperscale data center communications, life science diagnostics and consumer electronics applications to name a few. Moreover, we believe that increased scale and quality will ultimately yield lower cost, greater competitiveness and result in more ubiquitous adoption at scale. In fact, we are already seeing tremendous growth in our indium phosphide based coherent products. Our recent innovations in highly integrated indium phosphide laser components and analog integrated circuits have propelled us into a leading position for the latest generation of 100G, 200G and 400G pluggable coherent transceiver. In fact, we've already had multiple design in engagements for the coherent opportunities before us and we are committed significant resources in order to intersect the market and establish a strong number one position.

Our investment focus is being guided by a broad customer base with whom we have over 20 active design engagements. We expect to see meaningful revenue and profit upside in both FY '20 and FY '21. This differentiated platform for coherent products will help offset the fact that the datacom space is in a low part of the cycle as web 2.0 players prepare for a technology change. Combined with our coherent transceiver innovations, our high-speed VCSEL know how will help spur growth in the next transceiver upgrade cycle in data centers from 100G through 400G and 800G, which Giovanni will discuss in more detail.

We are continuing to work at expanding the number of new opportunities that we can address from our 3D Sensing VCSEL business. I've spent a good deal of my personal time in the last six weeks communicating with customers and employees, to understand the capability and readiness of the operations at the Sherman, Texas plant. That facility is the newest and largest of the world's compound semiconductor fabs known to us. During my visits, I found a well equipped world-class wafer fab substantial insufficient in-house MOCVD epitaxial growth infrastructure in capacity. And the market leading development team well-positioned for the next generation design in cycle currently under way.

Although the fab was qualified in the September quarter and it was well-positioned to begin volume shipments in the December quarter, a technical issue required some additional attention and that work is causing a delay. We are working closely with our largest 3D Sensing customer to implement in a qualified the improvements that have been identified. And as of today, our conservative view is that we will begin shipping in the March quarter. We are actively sharing best practices between the fabs and expect the benefits of that synergy to quickly accrue.

We are accelerating the improvements through the final stages of the approval process. In the meanwhile, we have been asked to ramp up the capacity and shipments from our Eastern Pennsylvania and Warren New Jersey fabs, over and above our forecast and that is going extremely well. With respect to cost synergies we got off to a very good start at the crack of the bat. Our preclosing integration planning work allowed us to hit the ground running on the first day of the combined company.

At this point, we have a very robust process under way for the supply chain synergies. The largest portion of our identified $85 million of cost of goods sold synergies over three years. Our new Chief Sales Officer, is also working with his team to identify revenue synergies, which would be accretive to our total $150 million, three year cost synergy projections from both the cost of goods sold and OpEx. Customer engagements have remained very positive. And in discussions with them we sense that momentum is building at our key accounts. That the OpEx level, we have already achieved the good part of the synergies associated with corporate cost, including the elimination of the duplicated C-suite personnel, insurance, order fees and directors fees to name just a few examples.

Regarding the order, to hold separate. The Finisar WSS business, we believe that the market leading potential of the combination of II-VI in Finisar WSS caused China's regulators to rule that they be held and operated separately to preserve competition. Our remedy plan is already been submitted for approval, and we look forward to both of our WSS teams driving as the market grows.

Now I would like to make some summary comments to tie it all together. I am more confidence than ever in our ability to enable our growth driven by the long-term mega trends in our markets, including 5G wireless, cloud computing, optical communications, 3-D Sensing and electric vehicles. Our strategic plan calls for us to leverage our broad innovation and technology advantages, which along with our unique insights into market shifts will drive significant long-term value creation through a much larger customer outreach increased global scale, expanded and complementary product roadmaps, and existing leadership positions with the largest customers in our fast growing markets.

We now have over 10,000 customers and as many reasons why we are optimistic about the future. In fact, the confidence of our top customers whom we serve, which are expected to account for over $1.5 billion of annualized sales are excellent reminders of the potential power of this platform. We look forward to they are being great partners with us in our future growth plans. Looking back, we work on the planning and integration details of the strategic acquisition for two years, leading up to the close in September. We acquired Finisar to increase the number of our technology platforms and expand our addressable markets while filling our broad objective of enabling the change that the world is experiencing today as it becomes more connected, intelligent, mobile and electric. It is especially important to note, that since, we announced the acquisition over a year ago, changes in market conditions brought on by the side effects of a protracted trade dispute a slowing industrial global economy, a don [Phonetic] market cycles associated with the adoption of new technologies and some operational challenges have created near term headwinds.

These will require us to step up our efforts to get us onto a trajectory to achieve our long-range projections. Therefore we will continue to further assess the business after operating it in its new structure for one to two quarters to define the GAAPs, then the steps that we will take to simultaneously increase our top-line and to align our cost structure with market realities. In the meanwhile, we will remain focused on executing our strategy, leveraging the technology, identifying and closing gaps step-by-step, while working to improve our operating leverage. With all that is going on, we clearly have rolled our press release and they are working to cover the ground quickly. We have some work yet to do to get ourselves to the extraordinary level of performance that we are capable of and I'm looking forward to being able to report steady progress to you each quarter.

With that, I'll turn it over to Giovanni. Giovanni?

Giovanni Barbarossa -- Chief Strategy Officer, II-VI Incorporated and President, Compound Semiconductors

Thank you, Chuck, and good morning. As a result of the combination of II-VI and Finisar, we expect to be ranked number one in the optical communications component market. With a growth of 5G, which expands the world communication infrastructure from the tower to micro core and subsea networks, we are seeing increased demand across our vertically integrated value chain. For example, we are in a sold-out position in pumps and demands for submarine pumps alone now accounts for over $30 million of the backlog.

5G is also driving an increased demand for coherent transmission. We have an exciting road map for coherent communications from components to modules and subsystems. As Chuck mentioned, we are in a leadership position for the next generation of highly integrated modules and we're already seeing a meaningful revenue this fiscal year with a forecast, anticipate it to generate, a 10 times growth year-over-year. We are also very excited about our work with customers on component offerings that were previously captive within Finisar, including indium phosphide lasers, detectors, ICs and integrated optical subassemblies.

The laser devices for communications alone will enable us to sell a total addressable market previously unserved by Finisar of $1.4 billion by 2023. The designing work will take a number of quarters, though we are already shipping samples now. We expect the revenue to begin to materialize in Q1 of FY '21. For Ethernet transceivers those user data usually meter centers, the market has been down about 15% from 2018. But we expect it to recover in calendar 2020 as we have multiple customer [Indecipherable] under way for revenue in the second half of calendar 2020.

While the main same products, I mean 100G, products for 200G, 400G and 800G will fuel new upgrade cycles in data centers. Our increased debt in product development as position us well to go to market with the higher-speed data modules for hyperscale data centers. 5G is also the driver for gallium nitride on silicon carbide electronics in wireless base stations. During Q1, we saw a rise in semi insulating silicon carbide demand for wireless applications even as the demand for conducting silicon carbide for power electronics temporarily diminished due to macroeconomic conditions. The shift in demand required us to retool, a portion of our proprietary pharmacies to address the surging wireless demand. We expect that the introduction of 5G handsets will further accelerate deployments of 5G base stations worldwide with China being the largest market in 2020 and growing rapidly in the next three years.

We recently introduced the world's first Semi-Insulating 200 millimeter silicon carbide substrates for RF Power Amplifiers for use in 5G base stations. Complementing our 200 millimeter is conduct in silicon carbide substrates introduced four years ago. We also secured a $100 million sole source contract for our 150 millimeter substrates. We are in the process for securing a large-scale facility in the Northeast for our projected 3 tonnes to 5 tonnes capacity expansion in the next three years for our market-leading silicon carbide Substrates.

Turning to the industrial market, we saw about a 10% decline year-over-year with most of the decline coming from China and Europe. Given that we are not only seeing reduction in new system sales, but an overall drop in the GDPs of key geographic markets such as China, we are experiencing condition that affect most of our industrial customers. This may persist into calendar 2020, though, we believe that the long-term demand for laser processing on materials we return to growth, especially for innovative solutions that enable processing at higher laser powers in increased level of automation.

As a result, we continue to invest in our technology platforms. In fact, we recently dis-leased a line of laser light cables for ultra high-power laser safety certified over 26-kilowatt and received the first order for our 2D remote welding head for automotive battery welding applications enabled by our proprietary machine vision software platform for automated and unassisted seam tracking. We also announced the world's first-to-market Aspheric Sapphire lens for high-power lasers providing less focus shift then conventional lens is that ever growing laser powers. With respect to 3D Sensing after 24 months in this market we are well positioned for FY '20 to be a record revenue year. We believe that we are very well-positioned for growth in the following years based on our share world agreements, Vertically integrated 6 inch fab capacity in both Sherman and Warren, and our market-leading power convention efficiency of our VCSEL array.

We are engaged in a number of new opportunities for VCSEL in mobile devices for next year and we are seeing a lot of interest and activity in time of flight 3D cameras for world facing mobile applications. The leading Android vendors are moving for market testing the technology in select high-end model phones to offering the technology our standard across multiple platforms as consumers see the benefit of 3D technology especially input enhancement. We are pleased to report the first shipment of our fully integrated 3D Sensing module, developed to address the need of some android customers and we look forward to beginning to gain share in that segment of the 3D Sensing market too.

We are also seeing a strong interest in our digital technology for 3D imaging and Sensing in automotive, industrial automation and IoT. We are qualified and shipping to one large automotive customer for an in-car 3D camera across multiple vehicles. And we are in active discussions with multiple automotive customers and supply chain partners. We will be rolling out the 3D technology over the next five years. Safety [Phonetic] standards are driving interest in and adoption of in-cabin driver and passenger monitoring. Digital control and high resolution 3D sensors external to the car for short-range proximity detection.

Last quarter, we also certified our factory in Vietnam for automotive standards, and we believe that the combined with automation capabilities for our optical sub-assemblies. This capability will contribute to our competitiveness for sub-assemblies and modules for their market. In addition to 3D Sensing, our Warren and Sherman fabs can address other markets reporting applications. In Warren, we are building out a 6-inch gallium nitride line as part of our previously announced partnership with Sumitomo Electric devices innovation, a leader in gallium nitride RF devices.

In Sherman, the plan is to continue to produce high speed VCSEL for the Datacom market. And we are proud of our team's accomplishment in demonstrating the first 100G PAM4 VCSEL, which conservative 400G and 800G market. We will leverage the former Finisar Datacom VCSELs and integrated capability to increase our sales in the component market. Our Aerospace and Defense business grew 15% over the prior year period and represents 12% of our revenue in the quarter. We are making great strides into several new programs. And remain strategic to our customers existing programs. We are now engaged in 15 new programs with a portfolio of leading-edge technologies to precisely deliver high energy laser beams as a target. We also secured two key design wins in government [Phonetic] sensor products for two multiyear contracts worth the cumulative $300 million in revenue.

With that let me turn it over to Mary Jane.

Mary Jane Raymond -- Chief Financial Officer

Thank you, Giovanni, and good morning. So I'm going to do a few things this morning. First, I'll give you a few minutes navigation of the press release. Next, I'll review -- the highlights of the quarter and close with a discussion of the updated levels of key expenses. The progress on our synergies, the financing and the outlook. So table one, on the second page of the press release, you will see the GAAP results, including six days of Finisar. Table 2 on the third page walks you through the build up of those numbers starting with the operating results for legacy II-VI. The last time we will report results for legacy II-VI. So the comps across the top, are legacy II-VI, Finisar for six days, severance unrelated costs, acquisition-related cost, and then a sub-total column of other special items of columns, two, three and four.

The far right column, shows the consolidated GAAP results. Table 3, on Page 6; shows the segment results. The six days a Finisar are in a line called Finisar another [Phonetic]. This is not to indicate the Finisar will be its own segment because it will not be the related nature of Finisar's operations to II-VI's operation, results in the right treatment being to merge them into our structure, once we see the dynamics of a full quarter. Finally, table 4 on Page 7 shows the non-GAAP margin results by segment. We can answer any questions you have on this format when we get to the Q&A.

The revenue was $340 million in the quarter, including $22 million from Finisar. Revenue growth was 8% with organic growth at 1% compared to last Q1. EPS was a loss of $0.39 for GAAP and positive $0.57 for non-GAAP. Non-GAAP adjustments were $59 million on a pre-tax basis and $48 million on an after-tax basis. These are the adjustments triggered by the close. In addition, Legacy II-VI non-GAAP adjustments were $15 million, including about $5.5 million of cost. We anticipated in the non-GAAP guidance.

To Table 7 of the press release, gives you the breakdown of all these items. Regionally our Q1 FY '20 revenue was split 46% in North America, 22% in Europe, 17% in China , 9% in Japan and the remainder was in the rest of the world. The regional breakdown for legacy II-VI was not actually materially different from this. The regional growth was strongest actually in the Rest of Asia, namely Korea and Taiwan and very good in Japan and North America but down about 20% in China.

The company's overall gross margin for Q1 was 36.2% and 38.3% on a non-GAAP basis. The non-GAAP gross margin excludes the partial inventory ship up, inventory step-up in the quarter of $7.3 million. The GAAP operating margin was negative 5.4% including all the deal costs and 15% on a non-GAAP basis, down 30 basis points from the same period last year. Regarding the segment adjusted operating margins for the quarter compound semiconductor was 17.6%, a good advancement of 210 basis points sequentially and 310 basis points compared to the same period last year.

Photonics was 12.6%, down 330 basis points sequentially, largely due to mix and being out of capacity on key products. Our year-end backlog was $720 million consisting of $386 million in Photonics, and $334 million in compound semiconductor with about $200 million for Finisar. The backlog contains orders that will ship over the next 12 months. It is worth noting that in our long-term share arrangements with customers for 3D Sensing, bookings are typically recorded during the quarter of shipment. The company had other expenses of $5 million consisting of $4 million, a $4 million charge for the extinguishment of the former credit facility and $1 million for negative currency. Capital expenditures this quarter, were $26 million. For the combined company for the year, we are expecting capex in the $220 million range.

With respect to interest expenses of $6.9 million for the quarter. This is related largely to II-VI previously existing debt. The new debt interest and mandatory prepayments, they will run about $40 million to $44 million a quarter, 26% to 27% of which is interest, and 14% to 17% which is mandatory principal repayments. The total expected debt service payments for fiscal year '20, which includes interest and principle are estimated to be $118 million. Our cash is $440 million and our net debt position is $2.05 billion. Our total debt ratio is 4.6 times and the net debt leverage ratio, the basis of the credit facility is 3.8 times.

We are still assessing the tax position of both companies and believe that at this time the tax rate will range from 11% to 14% for the fiscal year 2020. Of the $2.9 billion purchase price for Finisar, $752 million was allocated to amortizing intangible assets, $760 million to goodwill, and the balance to the tangible net assets we acquired or total assets less the liabilities assumed. Based on our work today, the intangibles will be expensed over a weighted average life of approximately seven years, because we have a year to finalize the purchase accounting these numbers and the weighted average time period are subject to modification.

Regarding our progress on synergies, we're tracking well against our target of $150 million in annual cost synergies within three years after the close of the transaction. We have action synergies equivalent to about 20% of our target so far this year. For the largest part of the COGS synergies that being supply chain, we established a global procurement organization that includes procurement, materials, management and supplier quality. The Chief Procurement Officer, directed that this work begin in a clean room prior to the close to define the combined spend for direct materials indirect goods, services and capex. To define our supplier base, including the suppliers we buy from jointly. And to help us identify our sourcing priorities as well as to validate our savings roadmap.

We are aggressively taking action to maximize working capital improvement, including standardizing payment terms for common suppliers and defining opportunities to streamline the number of those suppliers. We don't expect the synergies to generate a significant amount of cash this year because we are planning to action a good portion of the synergies for this year and that will have cost to achieve them. Remember that the synergy work is aimed at reducing the total cost plan of both companies combined over the next three years, thus improving both the gross and operating margins.

Turning to the outlook. During Q2 fiscal year 2020, a number of activities are under way with respect to integration and qualification, some of which could affect these results. At this point, the outlook for the second fiscal quarter ending December 31, 2019 is revenue of $590 million to $630 million, and the EPS on a non-GAAP basis of $0.20 to $0.50. The non-GAAP EPS is adjusted for $18 million in stock comp, $34 million in amortization, $79 million in the rest of the more or less one-time inventory step up and $18 million in cost to facilitate the integration including the move from Alan to Sherman.

The share count to be used is 95.5 million shares -- interest expense, as I noted is about $26 million. This is at today's exchange rates. We are attending several investor conferences in December, and we will provide any updates that we can during those sessions. The pro forma financial statements required to be filed under a Form 10-K/A are expected to be issued on or about December 9, 2019.

Now as we turn to the Q&A for this call remember that our actual results may differ from this forecast due to a variety of factors, including but not limited to, changes in the product mix, customer orders, competition, changes in the 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. And for which results may vary as they are based on our best knowledge today.

Paul, you may open the line for question.

Questions and Answers:

Operator

[Operator Instructions] And our first question will come from Meta Marshall of Morgan Stanley. Your line is open.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks so much. May be just starting with kind of looking forward into Q1 and just it sounds as if -- perhaps some of the weakness to expectations is coming from lower ramps on some of the Finisar products, but just any help kind of between legacy II-VI, legacy Finisar. Just if you're looking into Q1. And then second question just compounds semiconductor, which had a tremendous amount of operating leverage in Q1. Just any help there as to where you were seeing that leverage would be helpful. Thanks.

Mary Jane Raymond -- Chief Financial Officer

Well, answer the first question -- the second question for you and then Chuck and Giovanni can answer the first part of your question. So, as you know, the 3D Sensing business for both companies, is one of the few businesses because of consumer aspect where a lot of the capacity if not, almost all of it needs to go in for qualification. As a result, volume if it lags can cause disleverage. But when it is shipping is very, very good and you -- we see that this well even in Photonics where when the volumes are high, the operating leverage is very good. So that's not a typical in a capital-intensive company. But I would say that particularly in compound semiconductor because of the shipments in 3D Sensing and while down not dramatically down just 10% not what some others are reporting with respect to Industrial that also helps the margin mix a little bit.

Vincent D. Mattera -- President and Chief Executive Officer

So, I would add is the, just to repeat, maybe what I said, we are actually in the call, we're hosting the call today from Warren, New Jersey from our 3D Sensing and compound semiconductor fab. I said it's going extremely well here. The team here have done really a fantastic job and it's really exciting to see. So I think that we've said all along, when we get these fabs filled to the target utilization that we would be able to have a real nice business and that's what we're seeing.

For the rest of your question with regard to the business. I think we try to give a very clear transparent and balanced view each one of our markets in Q1 whether we talk about our traditional silicon carbide or our industrial laser markets we experienced softness in the Legacy II-VI markets in the first quarter. And with regard to the Finisar legacy, Finisar business, the Web 2.0 scale purchases of transceivers were less than what we expected, there would be in the first quarter. And so I would say it's a mix of both legacy and Finisar business that were a little bit softer than what we would have hoped for or expected, Meta.

Meta Marshall -- Morgan Stanley -- Analyst

Got it. Thank you so much.

Operator

Your next question will come from Jim Ricchiuti from Needham & Company. Your line is open.

Jim Ricchiuti -- Needham & Company -- Analyst

Thank you. Good morning. Chuck or Mary Jane, I think you mentioned that there were some areas where your experiencing very tight capacity where you may be out of capacity. Can you talk a little bit about where that is that in the power amplifier business?

Mary Jane Raymond -- Chief Financial Officer

So I would say probably in a few places. Yes. So one of the areas is in for optical communications, we have seen what seems to be in the beginning of 5G starting to pick up here. And while we usually see in fact even in great years, we usually see the Q1 quarter, lower than the Q4 quarter. We are out of capacity on several of the key products, especially comps. With respect to silicon carbide, we are -- as we've talked many times continuing to increase that capacity and in particular in this quarter saw a rise as Giovanni mentioned in demand for the semi insulating substrates which is used for RF that caused a conversion of some furnaces and we are and constrain the capacity in the first quarter. So we're now on with that. And there's probably a few other places here or there, but those are probably the two main ones. What you say, Chuck?

Vincent D. Mattera -- President and Chief Executive Officer

Yes, I mean, just recapping for legacy II-VI 980 pumps, semi insulating silicon carbide substrates and on the legacy Finisor side, we are working aggressively to add capacity in our coherent optics and coherant transceiver manufacturing lines to keep pace with the anticipated demands.

Jim Ricchiuti -- Needham & Company -- Analyst

And Chuck just with respect to Sherman, you talked about some of the technical issues. I know if you could elaborate on that or not, but you seem to suggest that you see that being resolved in the March quarter, is that, should we think about that is occurring late in the March quarter? Or any additional color you could provide on that?

Vincent D. Mattera -- President and Chief Executive Officer

Yes, there is a chance it could go earlier than the end of the March quarter. There's a chance it could take a little bit longer with these things. I can elaborate on it this way, simply. This is normal to a semiconductor laser fab. These are issues that as soon as you resolve 5 per 10 issues. The next one or two pop up, but you're seeing this is all normal. We've been through this in our history. We take it with our heads up. I can tell you this, if there is any way for it to be a day earlier. I guarantee anybody that will make it happen if it's possible. And it is the top priority for us. And at the moment, I think we will suffice it to say, as soon as we possibly can and we're doing a collaboratively with a great customer. As soon as we can, we'll get on to it.

Jim Ricchiuti -- Needham & Company -- Analyst

But as far as guidance goes it's you're baking in later in the quarter?

Vincent D. Mattera -- President and Chief Executive Officer

In the March quarter, Jim. That's all I'd like to say.

Jim Ricchiuti -- Needham & Company -- Analyst

Okay. Thank you.

Operator

Your next question will come from Fahad Najam of Cowen. Your line is open.

Fahad Najam -- Cowen -- Analyst

Good morning, guys. Thank you for taking my question. I'll start off with a few questions that, first, can you help us understand with the summer [Phonetic] approval process requiring you to separate the lease. So like, it's business of Finisar for a piece of three years. Are you still reiterating your cost synergy target of $150 million. Can you help --

Mary Jane Raymond -- Chief Financial Officer

Fahad, handg on a minute -- Fahad, hang on a minute. So your question was can we explain the ruling to hold the WSS separate?

Fahad Najam -- Cowen -- Analyst

No. My question is more what is the impact on your synergy cost targets you seem to have reiterated your $150 million cost savings targets. Is that I would assume, keeping the laser [Phonetic] light switch business separate for a period of three years would have impacted that. So can you help us understand how much of a -- put and take it's impacting your synergy target?

Vincent D. Mattera -- President and Chief Executive Officer

Okay. Good morning, Fahad. Fahad it just -- it is very, very difficult to hear what we saying or to understand. There is any way for you to either get -- switch your handset or whatever your system you're on. Please, please make an adjustment. But I'm going to answer the question that I think I could hear. We started this process with a 150 millimeter, $150 million of synergies that we have in our plan. We've built our objective based on delivering more than that, because not everything will hit not everything will hit exactly on schedule and we know that we have to run faster to just to be able to get to where we want to be and we'd like to be able to deliver more, that's just our overall culture, that's our attitude, that's the whole place.

So for sure we will have to deal with additional cost, that were not in our plan as a result of holding these businesses separate. And we don't know exactly what they are, but we have an estimate of what they want. And that estimate is going through over three years cause us to running grew faster. So that we can still deliver on the promise of the synergies. We're not, there is no margins here and there is no -- there is an anemic, we have to deliver. So whatever we have to take on, we'll take it on. We're going to try to mitigate it all the time because we're so focused on the cost, but we have to do things right. We have to do the right things and we have home fast. And I'm not at all discouraged about the possibility that there'll be some extra costs. We know that we're going to have to figure out on how to get some extra revenue or reduce the cost someplace else and we're working on it. Okay.

Fahad Najam -- Cowen -- Analyst

Okay. Can you guys hear me now better? Is this better?

Vincent D. Mattera -- President and Chief Executive Officer

Yes. Did you hear what I said Fahad?

Fahad Najam -- Cowen -- Analyst

Yes, I did. Thank you for your response. If you could quantify what the additional head cost from this keeping the laser [Phonetic] light switch business, that will be helpful.

Vincent D. Mattera -- President and Chief Executive Officer

We are not going to do that on this call, Fahad.

Fahad Najam -- Cowen -- Analyst

Okay. Yes, if you can also provide us an update on Finisar. I mean, it's been -- your Finisar has been quite beautiful for three quarters. Can you help us update on employee retention, key talent retention, especially as it relates to 3D Sensing. We often hear about people leaving. Can you just give us an update on the employee retention rates?

Vincent D. Mattera -- President and Chief Executive Officer

Yes, I would say this is one heck of an exciting place to work out and we have a normal attrition rate that we've experienced and running these businesses and I can tell you that, I know of no corner of the company where the attrition rate is higher than normal is probably lower than normal. There's a lot of people that want to come to work here. And I would say that there is a great interest in people wanting to come to work in such an exciting company with this roadmap. Nothing is perfect. But we are determined to be able to match the right talent that we need to have in the jobs that we need to have. And as part of our day one assessment going forward. We've identified a few critical spots of our own assessment and in conjunction with the assessment of some of our customers and we will go and work to fill those. It's at the top objective of us just to

retain the top talent that we have and to attract additional people to be able to fuel the growth at this company. I'm very, very excited about our engagement with our employees worldwide Fahad.

Fahad Najam -- Cowen -- Analyst

Super. Thank you so much. If I could ask a question --

Mary Jane Raymond -- Chief Financial Officer

We probably need to let someone else have a chance, but if we have time for sure we'll be pleased to take any other questions from you.

Fahad Najam -- Cowen -- Analyst

Alright. It's going to be a short question on the Industrial revenue. If you can just help us what was the amount of revenue that was the disappointment was due to organic and demand versus you being shortened components?

Mary Jane Raymond -- Chief Financial Officer

For Industrial, your question was how much is organic, all of it. So --

Fahad Najam -- Cowen -- Analyst

No, what I meant to say, sorry, what I meant to ask was, how much of the weakness in the industrial revenue was as a result of the you being out of components and shortage of supplies?

Mary Jane Raymond -- Chief Financial Officer

On the industrial revenue, I think we answered that question. There is a reduction in new systems built, and as the GDP, and in some major industrial countries declines that has an effect on the aftermarket. So, operator, let's go to the next -- the next analyst on the call.

Operator

The next question will come from Samik Chatterjee of JP Morgan. Your line is open.

Mary Jane Raymond -- Chief Financial Officer

Hi, Samik.

Samik Chatterjee -- JP Morgan -- Analyst

Hi, Mary and hi Chuck. So just wanted to see if you can dig a bit deeper into couple of end markets, particularly in optical communications telecom and datacom. You mentioned the strength you're seeing in telecom related to 5G just wanting to understand if it's across all geographies? Or are you seeing a bit weakness in China. And then on data comps. Is there any visibility at this point in terms of a stabilization in that end market or what your plans would be relative to the Finisar business there in terms of you have seen some competitors switching from articles out to chip. So is there any thoughts there? Thank you.

Vincent D. Mattera -- President and Chief Executive Officer

Yes, Hi, Samik, I would say -- I would tell our telecom business, our Optical Communications business is strong and a I mean a real driver is a turn on in 5G. I mean our factories around the world are working feverishly to keep pace with increases in orders and increases demand associated with 5G. So that's a key highlight that's in China, that I would say that's across all geographies. It's just been strong, every geography we report China, U.S., North America, Japan and then the rest of the world, too. So that's a real driver. I think that's going to continue. On the datacom side, our best view is the market probably, we'll go through another -- another two quarters maybe. And so our model today anticipates that in the second half of the calendar year, we'll begin to see the lift in the datacom business.

In the meanwhile, I said earlier, our coherent optics and coherent transceiver business is expiring a tremendous amount of interest as is the interest in the indium phosphide base, laser component sales and we've had a number of seminars with customers already around the world. And there is a great deal of excitement, people are already beginning to dedicate design and qualification resources to be able to get our lasers fit in both form, fit and function into their products. And that element of our strategy seems to be right at the -- on day one a -- an enthusiasm that people have been waiting for.

Samik Chatterjee -- JP Morgan -- Analyst

Got it. Maybe a quick follow-up if I may. We reiterating a lot of your synergy targets. And I understand the headwinds here from the macro perspective. Are you also reiterating the 10% EPS accretion in the first full year? Or is that something you have to kind of see based on how you deliver on synergies through the year?

Mary Jane Raymond -- Chief Financial Officer

Right. I think your latter part of your question probably answered it for yourself. I mean, I think we've seen some changes as Chuck summarized at the end of his remarks, and at least two of the major end markets, if not really three, that are causing the ramps -- for the ramps for 3D Sensing, for example to be lower than we would have anticipated. Having said that, obviously that would have been affecting the II-VI base business as well changes in the end markets. You can see that from the organic growth in the quarter. So as a result of that, I think what I'd like to really do is take the time to be through, not only the pro forma that was -- is due in about a month's time here, but also to as Chuck put had at least one full month of looking at how the company is doing and what we can do to support the accelerated growth we're seeing in some cases on the top line, but also and how we can work more efficiently together to be able to see than how we think we'll end the year. So I think, that's really the best way to think about it exactly as you already have Samik.

Samik Chatterjee -- JP Morgan -- Analyst

Okay. Great. I understand that clearly. Thank you.

Vincent D. Mattera -- President and Chief Executive Officer

Thank you, Samik.

Operator

The next question will come from Simon Leopold of Raymond James. Your line is open.

Simon Leopold -- Raymond James -- Analyst

Thanks for taking the question. I wanted to see if we could dig a little bit more deeply on the trends you're seeing in the what used to be Finisar transceiver business. I think Giovanni indicated we expected improvement in the second half of '20, just want to make sure that's calendar or fiscal, but -- but understand what's driving that, is this about new products or is this something that you see within the the demand side. I'd like to get a better understanding of the trajectory of that particular business? Thank you.

Giovanni Barbarossa -- Chief Strategy Officer, II-VI Incorporated and President, Compound Semiconductors

Thanks, Simon. This is quite a busy pipeline of new design wins that the team expects and we think that, whether it's 100G, whether it's 400G, whether it is 800G, I'd say all of these bandwidth capacities will require new gears, and so without going all -- through the customer list that we obviously we can't. We see that as an opportunity to the business to bounce back a little bit from where it is today. So we're very confident that the strength of the team is there, the vertical integration helps a lot. Some of the internally sourced coherent solutions that Chuck mentioned are very competitive. So it's an array of activities going on that we have added it, and they are very, very promising from our standpoint. That's why we, we made a comment.

Simon Leopold -- Raymond James -- Analyst

And maybe just to drill down on one particular area, a number of OEMs have talked about vertically integrating silicon photonics and you've got some other players, where silicon photonics. I don't know that we've heard much from Finisar for about a year on this topic. So it's been quiet just. How do you compete against those kinds of products where you have your own? Or are your cost better? How do we think about that? Thank you.

Vincent D. Mattera -- President and Chief Executive Officer

Okay. Thanks, Simon. So yes, we have some activity in silicon photonics is one of the many platforms that the team has been working on over the past few years, obviously, at the same time, I have to say it's hard to believe the silicon photonics will replace indium phosphide for many applications and so in some applications, I think there is an advantage even if as you probably know in some demanding applications silicon photonics has to be complemented by a -- an amplifier which we is creates a great opportunity for our amplifiers team to be designed in. Some application maybe you don't need an amplifier and that was something we are working on as a team in II-VI. So,

again, it's one of the many platforms that we have available to us. We have a number of partners that we're working with to deliver the right chips for the right applications and the complement well with the rest of the indium phosphide as well as the IC [Phonetic] platforms that the team has developed over the years.

So I just, I think there is some activity going on, but it's just one of many. It's, we are not working on silicon photonics to make our products more attractive is just one of many platforms that you need to have at your disposal to deliver the best power money can buy. And that's -- we have -- I was chief technology-agnostic officer, and as I believe that still the case, it doesn't matter what the technology is. I know that's all you have. You would only talk about silicon photonics. If you don't have only that, you also talk about silicon photonics. So I think that has been Finisar and that four to six attitude toward that specific platform.

Simon Leopold -- Raymond James -- Analyst

Great. Thank you for taking the question.

Vincent D. Mattera -- President and Chief Executive Officer

Sure. Welcome.

Operator

[Operator Instructions] The next question is from Tim Savageaux. Your line is open.

Mary Jane Raymond -- Chief Financial Officer

Hi, Tim.

Tim Savageaux -- Northland Capital -- Analyst

Hi. Sorry about that. Good morning. I'll try to keep it somewhat coherent here, no pun intended. If you look at your total revenue guide for fiscal Q2, a couple of questions about that. I guess about $610 million mid-range. A you've mentioned the strength in telecom pretty consistently. If you look at both what came over from Finisar and the growth on the coherent side as well as your overall telecom business, can you give us a sense of that Q2 guide how much of that is telecom. And I assume you would expect that to grow year-over-year? And I will follow up.

Mary Jane Raymond -- Chief Financial Officer

So it's pretty hard for us. We don't normally break this down by end market. I mean, I do think that we would expect to see some of the growth from that area. But I would say the other things there are some, as we just discussed in the call, some downdraft we're dealing with whether they'd be in industrial or as Chuck went into some great detail about the resolving some things from our 3D shipping point of view from Sherman?

Vincent D. Mattera -- President and Chief Executive Officer

Got it. Well, it seems like it could be 40%, 45% or so. And that's kind of where I was headed. If you look at kind of comparable to last year, it looks like that the copper comparable guide down almost 10% high-single digits. And realizing you're going to be wanting to move away from legacy II-VI and Finisar concepts rather quickly, given this is the first quarter out of the box. I wonder if you could characterize that high-single digit or nearly 10% decline. Do you expect to see that across the legacy II-VI and Finisar businesses or would that be concentrated in datacom and Finisar it maybe industrial at II-VI? Any color there would be appreciated.

Mary Jane Raymond -- Chief Financial Officer

Okay. Sure. Well, first of all, I'd say the guide's wide, right? There's still a lot to get underneath. But I would say that if you think about the size of the business is coming in, it would not be unreasonable to think that some of it would be on the Datacom side and if not really most of it. I would say that as we look at the opportunities before us. It will be I think for all of your benefit important to judge kind of revenue synergies, dis-synergies on a little bit more aggregated basis than one quarter. But I think you are on the right track that probably the most of it is really still from datacom side because as Giovanni said, we have seen that market continue to decline as I think you guys have as well and I -- it's more of a calendar 2020 recovery Giovanni talked about more than fiscal.

Tim Savageaux -- Northland Capital -- Analyst

Great. And just very quickly, I missed the Photonics Compound and Semiconductor backlog numbers. If you could repeat that total backlog ex-Finisar. And I have one more

Mary Jane Raymond -- Chief Financial Officer

Let me start with the ones you're asking. So it's 334 for compound Semi it's 386 for Photonics and then Finisar brought about $200 million of the backlog, which you'd have to assume right this based on how their business has been structured over the years that most of that's in Photonics.

Tim Savageaux -- Northland Capital -- Analyst

Got it. And final question, if you look at the Q2 bottom line guide, obviously, impacted by interest expense. I would gather without any -- too much synergy impact although you did talk about hitting the ground running. So it kind of looks like we're adding up the respective expense run rates. I assume there is some synergy impact in there. I think you mentioned a metric of 20%. I'm not sure if that reflected your expectations for the year or the quarter. But at a high level how much synergy is contemplated on the expense side, either in COGS or OpEx in your bottom line guide for Q2?

Mary Jane Raymond -- Chief Financial Officer

Right. Okay. So first of all, I think as you look the expenses forward, right. So this is why Chuck is talking about continuing to look at the synergies, but generally speaking, if you think about kind of how the business model was done the revenue would have been increasing. And so obviously the OpEx would have had some movement as well to accommodate the increase in revenue. The first thing that we're trying to do is severely moderate what an increase curve is. But to your question overall, we had originally estimated that in the first year we have about $35 million of synergies again less than say $150 million divide by three because we don't necessarily have it for the whole year.

So, I think to try and identify synergies on every single line item after one quarter might be pretty hard. I mean this from a executive suite point of view, those people, yes or no. No longer among us, doing very well, elsewhere. But for example on the audit fee. The audit fee comes in across the year. So it doesn't all materialize in the first quarter. So in terms of actually realizing it will be realized through the year. Some of the ones we're counting has having been actions and agreed, that doesn't mean they actually hit the second quarter in the full amount. But generally speaking, I would say that we're looking at somewhere at least in the neighborhood of $30 million to $35 million for the year and, as Chuck said, we will be getting on with that very, very quickly given that we've also seen some changes in the top line profile for the company in this year already. Do you want to add?

Tim Savageaux -- Northland Capital -- Analyst

Thanks.

Mary Jane Raymond -- Chief Financial Officer

Sure.

Operator

And that concludes our Q&A session. I would now like to hand the conference back to Ms. Raymond for closing remarks.

Mary Jane Raymond -- Chief Financial Officer

Thank you very much all of you for joining us. We'd like to -- we'll update you on our results for sure when we report out the second fiscal quarter of fiscal year '20 in early February. And as we indicated if should we have any updates more share and we'll have four investor conference after Thanksgiving and we'll be seeing you then. So thank you very much for joining us and we'll talk to you soon. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Mary Jane Raymond -- Chief Financial Officer

Vincent D. Mattera -- President and Chief Executive Officer

Giovanni Barbarossa -- Chief Strategy Officer, II-VI Incorporated and President, Compound Semiconductors

Meta Marshall -- Morgan Stanley -- Analyst

Jim Ricchiuti -- Needham & Company -- Analyst

Fahad Najam -- Cowen -- Analyst

Samik Chatterjee -- JP Morgan -- Analyst

Simon Leopold -- Raymond James -- Analyst

Tim Savageaux -- Northland Capital -- Analyst

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