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II-VI (NASDAQ:IIVI)
Q2 2021 Earnings Call
Feb 09, 2021, 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 fiscal '21 second-quarter results conference call. At this time, all participants are in a listen-only mode. [Operator instructions] I would now like to hand the conference over to your speaker today Mary Jane Raymond, chief financial officer. Thank you.

Please go ahead.

Mary Jane Raymond -- Chief Financial Officer

Thank you, Racquel, and good morning. This is Mary Jane Raymond. I'm the chief financial officer here at II-VI Incorporated. Welcome to our earnings call today for the second quarter of fiscal year '21.

With me today on the call are Dr. Chuck Mattera, our chief executive officer; and Dr. Giovanni Barbarossa, our chief strategy officer and the president of the compound semiconductor segment. This call is being recorded on Tuesday, February 9, 2021.

Our press release and our updated investor presentation are available on the investor relations tab of the website, ii-vi.com. Just as a reminder, any forward-looking statements we may make today during this teleconference are given in the context of today only. They contain risk factors that are subject to change, possibly materially. We do not undertake any obligation to update these statements to reflect events subsequent to today, except as required by law.

A list of our risk factors can be found in our Form 10-K for the year ended June 30, 2020, filed in August. We will also present some non-GAAP measures for which the reconciliations to GAAP are found at the end of each document that includes those measures, such as the press release or the investor presentation. With that, let me turn the call over to Dr. Chuck Mattera.

Chuck?

Chuck Mattera -- Chief Executive Officer

Thank you, Mary Jane. Good morning, everyone, and thank you for joining us today. I am pleased to report that halfway through our fiscal year 2021, we are on track to deliver a strong year. Our revenue for Q2 was $787 million.

It exceeded the top end of our guidance of $780 million, and grew 18% over Q2 of the fiscal year 2020. Among the many highlights this quarter were a book-to-bill ratio of 1.17 for the quarter, leading to a 1.12 book-to-bill ratio on a rolling 12-month basis. We continued to execute on our ramp of 3D sensing VCSELs and delivered against an exceptionally strong demand bringing shipments for the consumer and market to a record high of 15% of revenues. In addition, we delivered excellent growth in life sciences, experienced continued recovery in industrial, and saw continued strength in communications, aerospace and defense, the semiconductor capital equipment market, and in silicon carbide.

Our Q2 guidance contemplated a very strong 3D sensing quarter and we delivered on that. Our year-over-year growth in the consumer end market of over 200% was largely driven by 3D sensing, and again this quarter, we shipped VCSELs arrays in production volumes for front facing, world facing, and emerging applications as Giovanni will describe later. Communications grew 5% over the prior year including for both datacom and telecom. Life sciences gained significant momentum.

It grew almost 50% sequentially and more than 80% compared to Q2 of last year as our products are vital components to the COVID-19 testing ecosystem. Industrial applications grew 10% sequentially across our product lines as we continued to see a brisk recovery driven by increased demand for automotive production. Turning now to a focus on operational excellence. We are well ahead of our plan to achieve our three-year $150 million total synergy target set for the finish of our acquisition in September of 2019.

Our run rate synergies already exceed $100 million as a result of our integration work over the past 15 months. We are now on track to achieve our $150 million total synergy target in 24 months or 12 months ahead of schedule. And we are now increasing our three-year total synergy target to $200 million. Our faster delivery of our synergy plan as contributing to our strengthening margins and our strong cash flow and reflects our ability to execute and integrate large scale acquisitions.

Our cash generation in Q2 was an all-time record for the company, amounting to $221 million of cash flow from operations and $176 million of free cash flow. From the company's inception 50 years ago, we have strategically focused on identifying and capitalizing on irreversible megatrends from our core strength in materials and auto electronic devices. We have been successful in our organic and inorganic execution and growing by leveraging these trends. The application of our strategy and II-VI values, our senior leadership team, and all of our employees are among the reasons we've been able to make this much progress during an unprecedented macro environment in the first half of the fiscal year 2021.

We look forward to the exciting opportunities ahead of us in the second half of the fiscal year 2021 and from many years to come. With that, I will turn it over to our chief strategy officer and president of the compound semiconductor segment, Dr. Giovanni Barbarossa, to review our individual businesses while highlighting our product and technology leadership. Giovanni?

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

Thank you, Chuck. We appreciate our investors' enthusiasm for our strategy and our successful tactical of assessing long-term market opportunities executing large-scale M&A and developing technology platforms aimed at addressing major market megatrends. Augmented reality, autonomous driving, and artificial intelligence are among those megatrends which are enabled by 3D sensing. For this quarter, I'm pleased to report that 3D sensing grew more than 140% sequentially.

We believe, this is increasingly faster than the market growth rate. Both the Warren and Sherman fabs are operating very efficiently due to very solid execution and contributed equally to our 3D sensing revenue in the quater. As Chuck said, 3D sensing growth came from shipments of production volumes of VSCEL arrays for multiple end customers including our front-facing and world facing applications as well as for other consumer electronics and automotive in-cabin sensing. We are also making good progress expanding our customer base with additional wins including in the Android ecosystem and personal computing platforms.

Given this phenomenal result, I believe it would be worthwhile to review our multi-year trajectory in 3D sensing for the benefit of investors who may be new to our story. Our 3D sensing work began in 2013 after the acquisition of the gallium arsenide platform, which among many things came with some of the industry's best bits of technology despite having zero footprint in the emerging 3D sensing in markets. We started measuring the 3D sensing story publicly in 2016 to explain our acquisition of the wafer fab operations in Warren, New Jersey, and Champaign, Illinois when we acquired the manufacturing foundation to strategically expand our gallium arsenide optoelectronics platform from three to six inch for the large volumes required for the consumer electronics market. We said in our Investor Day in 2017 that entering the 3D sensing market with a vertically integrated six-inch platform would prove to be the most long-term, competitive, and sustainable strategy.

Our conviction was rooted in our deep experience in the business of compound semiconductors. When we acquired Finisar, some asked us which gallium arsenide fab we plan on closing. Our answer was none because we needed the capacity to gain share and become the market share leader by offering breakthrough solutions at scale. The teams in Zurich, Warren, Champagne, Easton, and Sherman worked together to get Sherman qualified and grant.

During the quarter, we accelerated our share gains goal, we believe faster than the market, and we are well on our way to achieving the leading share of the global market. As for the automotive market, we are shipping VSCEL arrays for in-cabin sensing applications. We are also engaged in many LiDAR market opportunities as we have the broadest portfolio of products in the industry. Unlike our pure-play play laser competitors, we have an entire vertical integrated portfolio of both active and passive components made from our engineered materials that are critical for this next-generation LiDAR designs.

On the active side of our broadly set offerings include VCSELs, edge emitters, laser bars, multi-junction emitters, pulse fiber-based sources, thermoelectrics, and laser drivers. On the passive side, we provide a differentiated portfolio of optical components including polygon scanners, goggle mirrors, lenses, filters, gratings, and [Inaudible] windows to name a few. We believe the LiDAR market is still in its infancy, but with our strong customer traction and design engagements, we are well poised to take a large share of this market as it develops. That said, the variety -- the wide wide variety of LiDAR technologies being considered is quite characteristic of the market that is in a very early stage, more time would be required to shake out the winners.

We believe that the more immediate and eventually much larger opportunity in automotive is for our silicon carbide products for power electronics. Recently, one of our Japanese silicon carbide substrate customers was selected by Tier 1 Japanese automotive company, and we are excited to be a key partner in their supply chain. We see that as a strong positive sign that our business in silicon carbide substrate for power electronics resume growth after the slowdown caused by COVID-19 in 2020. Meanwhile, we are continuing to execute on our multi-year plan to develop a product portfolio, a wide band of products that cost the value chain for the electrification of the transport infrastructure.

In the communications market. While telecom was impacted by the slowdown on new system installations due to COVID-19, our high data rate coherent transceivers are ramping up, adding bandwidth to both new and existing networks. We are pleased to report that we are gaining a meaningful share in this market with our quarterly revenue run rate of these products have been more than doubled compared to a year ago, and we expect our share to continue to grow. As part of a coherent modules start to enable data center interconnects, I'm pleased to announce that our disruptive pluggable optical line system on POLS won the best product award for data center innovation at the European Conference on Optical Communications.

The POLS is the first product of its kind on the market and leverages to seek significant breakthroughs in militarizing optical components for amplification and wavelength management, while at the same time, improving performance at reducing power consumption. We are also making steady progress toward growing our share in datacom by ramping up our 200G and 400G products driven by increasing demand from hyper scales both in the U.S. and China. In fact, our 200G and 400G products more than doubled sequentially.

We are also excited to announce that we have just sampled our first 800G transceivers to a large web-scale customer who has already provided exciting feedback. In industrial, we continue to see signs of a recovery driven by a strong increase in demand for capital equipment with our aftermarket business back to pre-pandemic levels. In fact, we had record aftermarket revenue in December. In the semiconductor capital equipment market, recent announcement of significant investments by TSMC and Samsung lead us to believe that our differentiated optics, ceramics, and composites to benefits from a multi-year tailwind.

Finally, our life sciences business increased to 80% year over year, driven by the demand for our thermoelectric and filter products that enable COVID-19 PCR testing. And we are proud to have been able to contribute in such a way to the fight against the pandemic. With the progress we're making across of our material and device platforms driving top-line growth and strong margin expansion, we are very bullish on our diversified business model. With that let me turn it over to Mary Jane.

Mary Jane?

Mary Jane Raymond -- Chief Financial Officer

Thank you, Giovanni, and good morning. Our non-GAAP gross margin was 42% and the non-GAAP operating margin was 22%. The non-GAAP gross margin is 380 basis points ahead of the last II-VI reported pre-acquisition gross margin of 38.2%. And the non-GAAP operating margin is 630 basis points ahead of the last II-VI reported pre-acquisition operating margin of 15.7%.

These margins were driven especially by our synergies, a strong mix, improvement in transceiver margins, and increased fab utilization. At the segment level, the non-GAAP operating margins were 17.4% for photonics and 29.3% for compound semiconductors. Similar to last quarter, compound semis margins were driven due to strength in 3D sensing shipments and increased fab utilization. Our backlog was a record $1.08 billion and consists of $680 million in photonics and $400 million in compound semiconductors.

The backlog contains orders that will ship over the next 12 months. GAAP operating expenses, which are SG&A plus R&D were $204 million excluding amortization of $21 million, $24 million in stock-comp, and $1.3 billion of M&A and integration costs. Non-GAAP opex was $158 million. Non-GAAP opex is 20% of revenue and just over 500 basis points -- and -- and 500 basis points below the opex percentage of revenue just prior to the close of the acquisition when it was nearly 26% for II-VI and Finisar combined with amortization stock-comp and transaction costs excluded.

Quarterly, GAAP EPS was $0.73 and non-GAAP EPS was $1.08 with non -- with after-tax non-GAAP adjustments of $43 million in total. The share count for the GAAP results was 115 million shares. For non-GAAP, the share count was 124 million. The GAAP and non-GAAP EPS calculations are in the last two tables of the earnings release.

Stock-comp was $28 million for the quarter, $4 million and cogs, and $24 million in opex. This is $11 million over the estimate of $17 million due to the increase in the II-VI stock price. The stock price is relevant to the valuation of our equity-based cash paid instruments. We use these instruments to incent our non-U.S.

global leaders who are also essential to our team of leaders thinking and acting like owners of II-VI. Using our December 31, 2020 first two stock price, we expect stock-comp for fiscal year '21 to be approximately $88 million, or $16 million for Q1, $28 million for Q2, $22 million for each of Q3 and Q4. Cash flow from operations was $221 million and free cash flow was $176 million. We paid down $49 million of our debt in addition to the required payment of $16 million and the interest expense in the quarter was $15.6 million.

This payment allowed us to reduce our net debt leverage ratio to 0.9 times at December 31, compared to 1.3 times at September 30. Capital expenditures this quarter were $46 million. For the year, we expect capex to be between $180 million and $220 million to support an increase in capacity for compound semiconductor materials and devices. Depreciation was $47 million in the quarter and we expect our forward depreciation expense to be about $46 million to $50 million a quarter.

The FX loss in the quarter was $7.5 million, primarily driven by the Swiss franc and the RMB. The effective tax rate in the quarter was 17%. We expect the tax rate to be between 19% and 22% for the year. The tax rate to be used for the non-GAAP items is 19%.

The tax rate moderated from our prior range of 22% to 26% due to renewals of high-tax status and super R&D deductions in addition to increased stock option exercises and changes in the mix of income around the world. Both the Ascatron and INNOViON acquisitions are now consolidated in our results. The Ascatron acquisition closed on August 20 and the INNOViON acquisition closed on October 1, both in 2020. For the two combined, we had $8 million in revenue, $2 million additional opex, and break-even non-GAAP EPS in the December 31 quarter.

Our non-GAAP results exclude a $7 million gain on the INNOViON acquisition resulting from the fair value measurement of the previous equity investment. Turning to the outlook. Revenue for the third quarter ending March 31, 2021, is expected to be between $760 million to $780 million and earnings per share on a non-GAAP basis at $0.81 to $0.91. This is at today's exchange rate which includes a weaker dollar compared to September 30 and estimated tax rate of 19%, and 126 million shares.

For the non-GAAP earnings per share, we add back to the GAAP earnings' pre-tax amounts of $21 million in amortization, $22 million in stock comp, and $2 million in transaction and integration costs. The estimated Q3 share count is 117 million shares for GAAP and 126 million shares for non-GAAP. The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, and the share count all are subject to change. Before we go to the Q&A, just as a reminder, our answers today may contain forecasts from which our actual results may differ due to a variety of factors including but not limited to changes in product mix, customer orders, competition, changes in regulations, and general economic conditions.

We would also ask that each firm limit its questions to one question with no follow-ups as we would like to try and get everyone in during this call. I'd also like to turn it back to Chuck Mattera for three minutes at the end and we do expect to end the call at 10:00 a.m. Racquel, you may open the line for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Mark Miller with The Benchmark Company.

Mark Miller -- The Benchmark Company -- Analyst

Congratulations on -- on the year, another record quarter, and -- and the significant gains in -- in the 3D sensing area. I just have one question. Other expense, you know, could you give us kind of a feeling for what it'll be next quarter since it has jumped around the last two quarters.

Mary Jane Raymond -- Chief Financial Officer

In the other income and expense line.

Mark Miller -- The Benchmark Company -- Analyst

Right.

Mary Jane Raymond -- Chief Financial Officer

Generally speaking, I think it should really probably only be the FX with a little bit of the equity earnings from our equity investments. But the major driver the caused it to change a lot this quarter was the INNOViON gain.

Mark Miller -- The Benchmark Company -- Analyst

OK. And so, $78 million?

Mary Jane Raymond -- Chief Financial Officer

I'd say it's probably similar to Q1.

Mark Miller -- The Benchmark Company -- Analyst

OK. Thank you.

Mary Jane Raymond -- Chief Financial Officer

Sure.

Operator

Your next question comes from the line of Jed Dorsheimer with Canaccord Genuity.

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Hi. Thanks, and congratulations on the -- on the quarter. My one question, I guess, is, you know, if I look at that -- if I look at the strategy around compound semis, it seems that we're -- what we're seeing and what you're benefiting from is really a renaissance in the semiconductor industry that kind of takes us back or takes me back to the late 70s early 80s on the silicon side. But today, on the compounds.

So, I'm just wondering as you kind of think through the end markets from silicon carbide, sapphire, indium phosphide all of which are -- are kind of manufactured on various platforms. You know, how do you -- how can you help investors think through the cost curves in terms of those -- those cycles? Thanks.

Chuck Mattera -- Chief Executive Officer

Hi, Jed. Good morning, this is Chuck. Thanks for your question. It really is an exciting time for compound semiconductors.

In general, the materials and devices have been around for many decades as you know. And every time they have been invested in, they've been invested to enable new applications or overcome challenges that the incumbent technology have that -- that cause a -- a -- either a constraint or an asymptote in -- in performance. So, they are enabling and the value proposition ultimately has to be taken at the system level. When there's a clear enabling by the com -- by the material in the component of the system itself, then there's a -- generally, a pull by the ecosystem to be able to drive this technology and it happened in the early days of gallium arsenide, for PEMs, and -- and HPTs around a -- around a sar -- a radar infrastructure that -- that was ultimately put in place.

And it led to the world that we see today and that volume spilled over into the handset market. We see the benefit of that coming with GaN on silicon carbide even indium phosphate-based electronics as the advent of the designs for example of even 6G communications networks will rely and be enabled by such innovative devices that will come from the compound semiconductor market. I think that's probably all I can get into. Giovanni, would you like to add anything to that?

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

Oh. It's perfect, Chuck.

Chuck Mattera -- Chief Executive Officer

OK. Jed, I hope that helps.

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Thanks. It -- it does. Thanks, guys.

Operator

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

Paul Silverstein -- Cowen and Company -- Analyst

Thanks, guys. I just hope for some 3D sensing. Chuck and Giovanni, obviously it's ramping nicely. Can you give us any additional insight on the main outlook especially in terms of the breadth of demand beyond just Apple, what you're looking at, and your ability continued -- to continue to drive this type of growth? Obviously, the law of large numbers is going to get harder as you go forward.

And one other related question, I assume we should expect for the margin uplift with the benefit of ongoing volume in 3D sensing.

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

OK. Paul, thanks for the question. Definitely, the number of user cases and the interactions with broad set of customers are -- are increasing. We -- we have, as we said in the script, we have some design wins in Android platforms, volumes are -- are growing.

You -- you know, with all supplies that are not going as fast as they should but we are pretty -- very --very -- very bullish about long-term opportunities for the -- for the application as this especially is a -- it's a -- it's a necessary function to enable those megatrends that we discussed such as, you know, autonomous driving and artificial intelligence, and so forth. So -- so, we -- we are very confident that the demand will continue. So, having a vertically integrated platform is going to be, as we said, a -- a sustainable advantage that we have. And then, yes, definitely volumes help on the margin side.

But I'll -- I'll let -- maybe I'll let Mary Jane comment on -- on that -- on that -- on that part of the question. Mary Jane, would you like to add some?

Mary Jane Raymond -- Chief Financial Officer

I think -- I think 3D sensing continuing to gain volume is positive for the margins. Do keep in mind that the quarters across a year are not steady for 3D sensing. And typically, this past quarter, the December 31 quarter is the strongest quarter. That is what we have seen in the past.

That may change as Giovanni said as we get an increase in other deployments. But for right now, I'd say volume definitely helps but it is not the same volume in every quarter.

Paul Silverstein -- Cowen and Company -- Analyst

OK. Thank you.

Operator

Your next question comes from the line of Jim Ricchiuti with Needham and Company.

Jim Ricchiuti -- Needham & Company -- Analyst

Hi. Good morning. Maybe just to follow up on that comment, Mary Jane, in -- in terms of seasonality. What should we be thinking about in terms of the puts and takes with respect to the March quarter, you know, just in terms of the -- the -- the larger verticals?

Mary Jane Raymond -- Chief Financial Officer

Yes, I -- I would say, first of all, we already looked through the first half of the year. Q1 we still expect to be our smallest quarter. Q2 December 31 was strong for 3D sensing as we just saw. We do expect to see the March 31 quarter probably a little bit down on Q -- on the December 31 quarter.

Some for Chinese New Year, we can't forget that. And also, because I don't think 3D sensing will be at height exactly as it was in December 31. Then the -- the June 30 quarter for us which has historically been our strongest quarter may -- we had such a good quarter this quarter, it may be on par or a little bit higher. But for right now, I'd say, generally speaking, I think just basically do not forget Chinese New Year and the March 31 quarter.

Jim Ricchiuti -- Needham & Company -- Analyst

And that's 3D sensing industrial and the optical communications seasonality in -- in March. I'm wondering how we should be thinking about that.

Mary Jane Raymond -- Chief Financial Officer

Well, not sure we can give it to you exactly. But generally, we don't see it in -- in the -- for industrial, the first quarter, the -- the September 30 quarter tends to be the weakest quarter. Communications can sometimes be a toss-up between December 31 and March 31. But generally speaking, it is Chinese New Year, so I think you should calculate that in.

And now, I think the other markets are probably less subject to specific seasonality in any given exact quarter. 3D sensing --

Jim Ricchiuti -- Needham & Company -- Analyst

OK. Thanks for that.

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

Yeah. And Jim, I -- I want to add, Mary Jane. That yeah, the seasonality sometimes are offset by market reality. You know, I'll -- I'll give an example.

We -- we anticipate to ship more than double the megawatts that we ship in the second -- in sorry -- in the first half of the current-- of the fiscal year in the second year. So, we'll -- we'll double our megawatts in the second half of the year for industrial applications, particularly of course fiber lasers. So, that -- that's a -- that's a -- a -- a really substantial increase in the second half which is not necessarily linked to any seasonality. It's just specific to China coming back very strong with fiber lasers which -- which -- and we are benefiting from -- from that growth.

Jim Ricchiuti -- Needham & Company -- Analyst

Got it. Thank you for that color.

Mary Jane Raymond -- Chief Financial Officer

Let me just clarify one answer I gave Mark. He was asking us about non-op income and expense. I forgot in the first quarter we had the write-off of the debt cost. Generally speaking, it's probably somewhere between $2 million and $3 million positive.

We can take the next question now.

Operator

Your next question comes from the line of Vivek Arya with Bank of America Securities.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my question. I was hoping you could give us a quick update on your silicon carbide franchise. How much does silicon carbide account for as a percentage of sales? What are the next milestones we should be looking forward to? And recently, one of your competitors spoke about increasing their investments in 200-millimeter capability and I was wondering how that impacts the competitive landscape going forward. Thank you.

Mary Jane Raymond -- Chief Financial Officer

The silicon carbide is between 3% and 4% of the revenue and I'll give the second part to Chuck.

Chuck Mattera -- Chief Executive Officer

OK. Thanks, Vivek, thanks for your question. As -- as we've indicated, there's a long-term growth opportunity for us and we're playing it just like you will play a golf course, one hole at a time. And we have the -- the end in mind, we've described that to investors we think pretty clearly.

We have a scalable silicon carbide substrate platform which was demonstrated to be capable of -- of supporting the 200-millimeter technology about five years ago. So, we're investing in scaling that capability of -- of our silicon carbide substrate. A considerable amount of our capital investment that Mary Jane referred to earlier is focused on adding equipment for silicon carbide crystal growth, epitaxial, wafer growth, ion implantation tools. And to provide a -- a clear technology roadmap for electronic devices and ultimately for modules.

This a multi-year platform investment and I think the best way for investors to think about it is the same way in which Giovanni gave a -- a retrospective view of how we thought about the 6-inch gallium arsenide vertically integrated platform development back more than five years ago. It's going to take us some time to put all the pieces into place that we envision, but we have the talent, we have the team, we have the technology. And now, we have to get the infrastructure in place and get to a scale that we ultimately aim to be at and lets all line of sight inside our -- our near-term and long-range plan. I think that's probably the best way to say it, Vivek.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

OK. Thank you, Chuck.

Chuck Mattera -- Chief Executive Officer

Sure.

Operator

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

Richard Shannon -- CraigHallumCapital Group LLC -- Analyst

Well, thanks actually for taking my questions. A question focused on datacom and probably a two-parter here. I heard some comments about you a 200-gig and 400-gig transceivers doubling sequentially. Can you help us understand what's going on there? And then kind of look forward broadly speaking across the space for both web scale and 5G, how do you see this -- this county you're developing?

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

OK, Richard, this is Giovanni. Thanks for your question. What's going on? Well, we're gaining share. Obviously, pretty fast too.

I think the -- the team has done an incredible job with these new -- new -- new platforms and, you know, it's -- it's very exciting. I'm sorry, what was the second part of the question on 5G?

Richard Shannon -- CraigHallumCapital Group LLC -- Analyst

Dynamics in -- in datacom going forward through the year, especially the web scale and 5G where some of your -- your peers in the market talk about you have a slower start to the year but accelerating as -- as 5G starts to accelerate at the latter half of the year.

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

Yeah. Well, the -- the reality is that because of COVID that made a lot of deployments worldwide is actually -- they've actually been slowed down. I mean, that doesn't mean that the trend is in -- any different than before. Still a -- a -- an important megatrend for us.

I think we've seen a -- we've seen a channel ads being the -- the -- the dominant need for -- for the end customers rather than new deployments. So, that's a -- that's a dynamic there. For example, I think we're seeing more, you know, more client systems being added and line systems being added, and so forth. So, the -- those are -- those are the dynamics in terms of the demand.

I -- I want to emphasize the -- the -- the growth that we've seen in the datacom a little bit stronger than telecom. And then remind the -- this important point I made on the 800 G -- first 800 G shipments that we made, it was really successful. So far though, really exciting to add it to our portfolio. And it's all -- all in all, I think we -- we are going back to a really nice growth with the -- with this team which, you know, for over a year, a lot of customers were probably on the sideline waiting for the integration to happen.

Now, they feel more confident as the numbers demonstrate that we are doing a pretty good job integrating the two companies. So, that -- that's -- that has been very key.

Richard Shannon -- CraigHallumCapital Group LLC -- Analyst

OK. Great. Thank you.

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

Thank you.

Operator

Your next question comes from the line of Ananda Baruah with Loop Capital.

Ananda Baruah -- Loop Capital Markets -- Analyst

Hi. Good morning, guys. Congrats on the -- the solid -- solid performance and thank you for taking the question. I guess, just -- just a bigger picture one, Chuck.

In the press release this morning, you made mention of -- of all markets improving. And so, I was just wondering could you put -- put some context around the key ones there and -- and which market opportunities would you like us to -- to think of as making the most significant impact this year as you move through the year? Thanks.

Mary Jane Raymond -- Chief Financial Officer

Well, I think -- I think, we summarized pretty well in the script the dynamics in every one of the end markets, whether communications, industrial, semi comp, life sciences, 3D sensing, etc. I think all of those markets have a great opportunity to really make an impact on the year. Communications is obviously the largest. 3D sensing is ramping beautifully.

Silicon carbide is coming up the curve. So I think, really, they -- they really all can make a great contribution to the year, and I think the ones you want to think about are either the largest ones or the ones that are really starting to gain traction in the revenue.

Ananda Baruah -- Loop Capital Markets -- Analyst

And just -- just, Mary Jane, just -- just quick clarification on that. The -- Chuck's comments in the press release about -- about markets improving. So should we anticipate that the key market -- that the growth can be stronger as we go through the year? How about -- how about some -- some context around that? Can -- can somebody --

Mary Jane Raymond -- Chief Financial Officer

I think we already answered that question. I think we already answered that question. We're showing very nice growth in the year across all the markets. It's in the script.

And I think we probably, unfortunately, need to move on.

Operator

Your next question comes from the line of John Marchetti with Stifel.

John Marchetti -- Stifel Financial Corp. -- Analyst

Thanks very much. Mary Jane, you guys identified an additional $50 million of synergies that you're expecting here over the next 12 months or so. Just curious. With the scale now, should we expect most of those are coming through additional cost synergies on the opex line or are there additional opportunities that you still seem to -- to chop away and improve on -- on the gross margin line in relation specifically to this $50 million target?

Mary Jane Raymond -- Chief Financial Officer

I think it's both in the cost of sales and in the opex.

John Marchetti -- Stifel Financial Corp. -- Analyst

And -- and is that again a function of larger scale or are you able to -- to actually identify programs where you can physically take some of those costs out? Thanks.

Chuck Mattera -- Chief Executive Officer

Well, let -- let -- let -- let me add, John, but we -- we need to move on. That -- it -- scale has a lot of benefits and we will have exact targets for both the cost of sales and for our overall expenses. And we will -- we will achieve it.

John Marchetti -- Stifel Financial Corp. -- Analyst

Thanks, Chuck.

Operator

Your next question comes from the line of Harsh Kumar with Piper Sandler. Your line is open. Harsh Kumar, your line's op -- you're not -- your line is open. Are you on mute?

Harsh Kumar -- Piper Sandler -- Analyst

Yes, sorry about that. Hey, guys, congratulations on the strong results. Chuck, I wanted to ask you, is your gross margin of 42% that you put up, is that the new paradigm? Is that how we should be thinking about things going forward? And then when we think about opex for you guys, you've done a great job containing it relative to expectations. But how should we think of the cadence going forward? Do you manage that as a percentage of business or do you manage that as a percentage of revenue growth? Just any color.

Thanks. That's it for me. Thanks.

Mary Jane Raymond -- Chief Financial Officer

Right. The gross margin range for the year is 38 to 42. And the opex margin is in the -- we put in the investor presentation, excluding stock comp as well. It's between 20% and 23% of revenue.

Harsh Kumar -- Piper Sandler -- Analyst

Thank you.

Operator

Your next question comes from the line of Samik Chatterjee with J.P. Morgan.

Samik Chatterjee -- J.P. Morgan -- Analyst

Thank you. Thanks for taking the question. I think primarily for Chuck. Chuck, you've got -- done a great job getting the leverage down since the Finisar acquisition and that gives you a lot of flexibility.

I'm just wondering, do you see a need to further consolidate the market, either be it for new platforms or certain end markets where you have better -- you can get greater -- greater benefits from scale compared to what you have today? Just want to get your thoughts on that. Thank you.

Chuck Mattera -- Chief Executive Officer

OK. Thanks for your comments and for your question, Samik. We have -- have a long-term aspiration to change the world and we are doing it with the -- the benefit of -- of innovation and being able to identify the long-term trends in the marketplace that will take full advantage of that innovation or be enabled by it. We're not done investing.

We have a -- a strategy. It's -- it's well done investing. We have a -- a strategy. It's --it's well -- well-articulated and we have been executing on it for [Audio gap].

I don't see any -- any -- any -- any change to that. And for sure, no change to our discipline and our determination to build our long-term shareholder value and to have a profound impact on -- on the stakeholders all around us as a result. We have -- we have lots of investing to do, lots of imagining to do, and lots of executing to do. And we're going to do a combination of two or three.

Samik Chatterjee -- J.P. Morgan -- Analyst

Thank you.

Operator

Your next question comes from the line of Sidney Ho with Deutsche Bank.

Sidney Ho -- Deutsche Bank -- Analyst

Thanks for taking my que -- question and congrats on a very solid results in 3D sensing business. So my question is actually on the -- on the comp side. I think, Chuck, I know that you mentioned last quarter was impacted by a slowdown of new system installation. I'm curious if you start seeing the recovery of that part of the business yet? And if -- if you look into your orders in backlog, are there particular areas that you see strength or weaknesses over the next few quarters? Thanks.

Chuck Mattera -- Chief Executive Officer

Sidney, can you repeat the first part of your question? Mary Jane -- Mary Jane has comment on the backlog, but what was the first part of your question?

Sidney Ho -- Deutsche Bank -- Analyst

Yeah, you were -- you were talking about last quarter was impacted by slowdown of new system installation. I'm just curious, what have -- have you seen the recovery already in that business? And then did that -- the -- the second part of that is related to backlog of orders that -- did you see anything particular areas that are strength or weaknesses coming up from -- from the orders of backlog? Thank you.

Chuck Mattera -- Chief Executive Officer

I -- I -- I think there's -- I -- I think there's a -- a recovery under way. There are still spots around the world where COVID-19 has -- has had and is having still an impact. They -- the effects -- the profound effects of COVID-19 simply cannot be understated. So that -- that -- that's happening.

And I would say the -- the supply chain is -- is been a lot of talk about the integrated circuit supply chain and how that might be an overlay to COVID-19. And so that -- that -- that's another topic, but I'm proud to say that -- that they -- our -- ours global supply chain management team have really done a -- a fantastic job in working with our -- our vendors in mitigating the impact thus far. So we have to watch that. I would say the supply chain is -- is what I'm going to be looking out for in the next three to six months.

OK?

Mary Jane Raymond -- Chief Financial Officer

I -- I don't think the backlog -- we will break the backlog down further than -- than by segment. I don't know that there's a particular area of strength or not.

Chuck Mattera -- Chief Executive Officer

Thank you, Sidney.

Sidney Ho -- Deutsche Bank -- Analyst

OK. Thank you.

Operator

Your next question comes from the line of Tom Diffely with D.A. Davidson.

Tom Diffely -- D.A. Davidson -- Analyst

Hey, good morning. Thanks for the question. Maybe for Giovanni. How do you view the long-term opportunity in LiDAR versus your [Inaudible] to be in 3D sensing for the handsets? And is your capacity for 3D sensing tangible to LiDAR or is it going to require some type of different technology as well?

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

No, we have -- thanks for the question, Tom. So I absolutely -- is -- with the greater opportunities for us. I -- I want to make sure that this is clear. LiDAR market, despite all of the noise in -- in -- in the media and so forth, is still in its infancy for advanced optical solutions, which includes lasers, and all kinds of optics, and -- and circuitry, and -- and so forth.

We -- as I -- as I mentioned in the script, we have a very broad, probably one of the broadest portfolios for both actives and passives. We have different wavelengths, different form factors for the lasers, different type of sub-assemblies, and so forth. So we are well-positioned to take advantage of the interaction with the -- the engagements that we have with a number of customers at different level of the -- of the food chain. And -- and in terms of the -- the technology, I think we really have pretty much all that is needed.

Question is where really to put the bets? Because the -- as I said in the script, it's -- it's sometime -- it's hard to predict which solution will be the -- the largest volume. There is -- there is diff -- different beliefs out there in terms of what's the best approach to -- to give the best performance with the highest reliability and the best eventually price -- price target for the automotive customers. So it is going to take a while to -- to flush that out. And it -- as I said, we are -- right now, we have pretty much all that the market is asking us to deliver.

But the winners in terms of the adoption of this or that architecture, it will take time for that to -- to play out and to -- to happen. So but I think we are well-positioned for that.

Tom Diffely -- D.A. Davidson -- Analyst

OK, that's helpful. Thank you.

Operator

Your next question comes from the line of Tom O'Malley with Barclays.

Tom O'Malley -- Barclays -- Analyst

Hey, guys. Thanks for taking my question and congrats on the really nice results. My question is for Giovanni. You -- you saw the industrial business trough in the September quarter.

You think some M&A going on in the -- in the space. Can you talk about what's going on there? You -- you mentioned you're going to double your megawatts in the second half of the year for fiber lasers. Is that just volume [Audio gap] in China coming back or did the high end of the market a little bit better? Any color on how that market is progressing off the bottom will be really helpful.

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

Well, no, I mean is -- thanks, Tom. I mean it's -- thanks for the question, Tom. It's just China is coming back very fast from -- from that perspective as I mentioned and that's the large majority of our markets. Really, the -- those -- as you know there's many fiber laser makers in China and they are benefiting from our design wins and -- and their growth.

So we're growing with them. And I assume -- I -- I believe they are also taking share for some of -- from some of the -- the incumbents, worldwide incumbents. So they -- they're really making great progress. I -- I think it's -- the largest growth I believe is really for the laser processing for the durable goods.

So I -- I -- I -- I think the microprocessing or such as marking or [Inaudible] maybe that's a smaller portion of the total. Anyway, so that's -- that -- that's some color. And this is very exciting. I mean we have -- the reason why we can -- we can support such a really great demand and coming back particularly from China is because we move also our 980 multi-mode pumps to 6-inch.

So we have that capability. And I'm -- I'm not -- I can't say for sure, but ultimately I think we are the only one in the world that has such a -- such a volume, such a scale capability for to address the market. So we're taking advantage of that.

Tom O'Malley -- Barclays -- Analyst

Thanks, Giovanni.

Operator

Your next question comes -- comes from the line of Christopher Rolland with Susquehanna.

Christopher Rolland -- Susquehanna International Group -- Analyst

Thanks for the question. Congrats on the quarter and I -- I wanted to chime in on the one question policy and pace of the call. I appreciate that. So congrats on-- on the 3D sensing result, but perhaps, for us at least, the photonics and -- and TC and DC was maybe a little bit light here.

It was nice to see backlog up here, but I -- I would assume that's really implied some sort of a supply issue. May -- maybe talk about that. Is --- is it increasing the supply issues? Where do we stand on -- on a new capacity and new supply? Did 3D sensing temporarily take some of that capacity or they he -- held se -- separate? And is the capex like $40 million a quarter enough to solve some of these supply constraints? Thanks.

Chuck Mattera -- Chief Executive Officer

OK. Chris, thank -- thanks for your question. It sounded -- it sounded like there were three or four questions in one. But let -- let -- let me talk about the supply chain in the quarter.

Despite the fact that -- that we -- we had a view of what it -- what it could be, our supply chain people managed it to be pretty close to zero, the impact. So we're watching it because we -- we -- we understand the challenges associated with the -- the demand especially in the -- in the snapback of the automotive production and the demand for integrated circuit capacity from other markets. But we do have some constraints and -- and we'll continue to manage those in the supply chain. And we're adding capacity so that our internal or intercompany supply chain can keep pace with the projections and the growth.

And as far as the -- the 3D sensing goes, we're -- we're -- we're increasingly utilizing the capacity we have, so there -- there's no impact at all from the supply chain of that. OK?

Christopher Rolland -- Susquehanna International Group -- Analyst

Thanks, Chuck.

Chuck Mattera -- Chief Executive Officer

Yep. You bet.

Operator

Your next question comes from the line of Meta Marshall with Morgan Stanley.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks. Just on the 3D sensing portfolio. You guys mentioned also having a passive kind of piece to the portfolio with the filters and -- and other products.

I just wanted to get a sense of as you report 3D sensing revenue today, is that primarily VCSEL? And then just as you look forward to the next year, in the next 12 months, would you still expect growth to primarily be driven by share gains or kind of new platforms coming on? Thanks.

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

Hi, Meta. Thanks for the question. This is Giovanni.

Mary Jane Raymond -- Chief Financial Officer

Go ahead, Giovanni.

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

Yeah, I'm sorry. Yeah, the -- Mary Jane, do you want to take it?

Mary Jane Raymond -- Chief Financial Officer

VCSEL is the majority of the volume. I do think, over the next year, we will see as Giovanni already described that there may be other platforms emerging. But as he also said, it's a little bit dependent on the market demand. But we're looking forward to seeing those opportunities materialize.

I think, at this point, I'm sorry, we -- we have a little bit run out of time. I just want to turn it back to Chuck for a few minutes. And as all of you know, we have a scheduled c -- a scheduled call with all of you following this call. Let me turn it back over to Chuck.

Chuck Mattera -- Chief Executive Officer

OK. Thank you, Mary Jane. As 2021, the Year of the Ox begins, my enthusiasm for our future is at an all-time high. And we continue to look forward to leverage the best opportunities that arise from the most exciting and irreversible market megatrends we can address.

Although I acknowledge the sobering reality of COVID-19, a challenge to all humanity. COVID-19 has affected the health, safety, and economic security of a large number of people around the world. However, I am confident that humanity will rise to this and the other important challenges facing our planet. At II-VI, we realize that we must do everything we possibly can to protect our planet and carefully manage its precious and finite resources in order to ensure that future generations will inherit from us a world that's better and more sustainable.

In doing so, we expect that II-VI will play an increasingly significant role in enabling the world to become safer, healthier, closer, and more efficient. This is our mission to which I remain as firmly committed to as ever. While we are executing well, we are doing so out of the strength of our shared belief of our values of integrity, collaboration, accountability, respect, and enthusiasm, or as we say at II-VI, I CARE. Beyond these values, I believe that we hold in common the belief that equality and affordable education provides opportunities to a better life today and a better world tomorrow.

Based on those shared principles, it's with great generosity that II-VI co-founder, Dr. Carl Johnson; and his wife, Margot Johnson, established in 2007 the II-VI Foundation. Through their foundation, Carl and Margot have funded the college and university educations of many students around the world. Many of them have joined II-VI, and some are now in key leadership roles within our ranks.

Today, we are very proud to participate in the II-VI Foundation's mission by contributing $1 million in 2021 to their inspiring project as part of our environmental, social, and governance, or ESG, initiatives. Our renewable commitment to the II-VI Foundation is in part the outcome of a growing conversation at II-VI of a desire to be part of something even bigger than just the growing and innovative company. It's my intent to respond to this call with a greater awareness of our place in the world and to scale our intentions with actions. Today, I'd take this opportunity to acknowledge our heritage and history as we reflect this month on Black History as we do in the United States each February.

I would like to close with a definition of the word innovation, which has its origin in the Latin verb meaning to renew or to change, not simply to invent. And despite all of our successes, in order to be ready to seize yet unseen opportunities that lie ahead but which are sure to come, we will continuously innovate and embrace change. At II-VI, our vision is of a world transformed through innovative materials vital to a better life today and the sustainability of the future generations. That ends our call today and we thank you all for joining us.

Have a good day.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Mary Jane Raymond -- Chief Financial Officer

Chuck Mattera -- Chief Executive Officer

Giovanni Barbarossa -- Chief Strategy Officer and the President of the Compound Semiconductor Segment

Mark Miller -- The Benchmark Company -- Analyst

Jed Dorsheimer -- Canaccord Genuity -- Analyst

Paul Silverstein -- Cowen and Company -- Analyst

Jim Ricchiuti -- Needham & Company -- Analyst

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Richard Shannon -- CraigHallumCapital Group LLC -- Analyst

Ananda Baruah -- Loop Capital Markets -- Analyst

John Marchetti -- Stifel Financial Corp. -- Analyst

Harsh Kumar -- Piper Sandler -- Analyst

Samik Chatterjee -- J.P. Morgan -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Tom Diffely -- D.A. Davidson -- Analyst

Tom O'Malley -- Barclays -- Analyst

Christopher Rolland -- Susquehanna International Group -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

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