Coherent Corp. (COHR) Earnings Call Transcript & Summary

Good morning, good afternoon, and good evening. I'm Mark Lourie, Vice President of Corporate Communications and Brand Development at II-VI Incorporated. Welcome to II-VI Advanced Markets and Technologies Event. We are glad that you are able to join us. We have a great list of speakers today who will provide you with insight into our innovation, strategy, markets and technology platforms. As a reminder, any forward-looking statements we may make today during this event 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 on our Form 10-K for the year ended June 30, 2020. Today's event will run for a total of 2 hours, including a short break halfway through. The presentation materials that we will be showing you today are available on our Investor Relations tab of the website or ii-vi.com/investor.presentations. We will have 90 minutes of presentations followed by a 30-minute Q&A with equity analysts. We will start with Dr. Chuck Mattera, our Chief Executive Officer, who will provide you keynote remarks and introduce you to the speakers. Now let's begin.

Welcome, everyone. I'm Chuck Mattera, CEO of II-VI Incorporated. This is a special year for II-VI. In just over a month on June 22, 2021, to be atomically precise, II-VI will have reached its 50th anniversary. Despite the pandemic, we have been celebrating our golden anniversary since the beginning of the year. In fact, we started on January 26, which we symbolically refer to as 1-26 day. We have many reasons to celebrate. II-VI was founded in 1971 during a time when the world was inspired by the Apollo program that was still unfolding. The first sentence of the founding II-VI business plan in 1971 reads: "A new venture company, II-VI Incorporated, is being formed as a corporation of Pennsylvania to meet evolving needs in optics and electronics markets." Wow, that timeless vision charted our course over the last 50 years. From those inspired and humble beginnings as an engineered materials company, II-VI has emerged as a leader in optical and data communications, consumer electronic sensing, industrial lasers, aerospace and defense, semi-cap equipment, life sciences and automotive technology products and services. We are now a worldwide company with over 22,000 employees coming to work with passion, great skill and a greater determination to make our world safer, healthier, closer and more efficient. 50 years ago, the laser was only 10 years old. Already the carbon dioxide laser or CO2 laser were showing great promise in its ability to bring great efficiencies, enabling productivity improvements in industrial manufacturing, lowering the cost of cutting, welding, drilling, and marking of materials. Our founders set out to engineer optical materials that would enable laser power to increase over the following decades by orders of magnitude greatly expanding their capabilities and the number of applications. We expect that trend to continue. And in fact, in order to continue to contribute even more to the world, II-VI recently became a member of the World Economic Forum, where we will focus our contributions on the advanced manufacturing and production platform, including technology adoption, workforce development and the development of resilient supply chains. We intend to drive innovation and technologies that are transforming the world of production enabling more efficient processes and creating new value for industry, society and the environment. All of our employees, our management team, our Board, and all of the other stakeholders in our business have an understandable interest in diversity, equity and inclusion as DEI and ESG begin to move into the mainstream of public companies. I believe that the back story of II-VI for the last 50 years is not yet well understood. We have been embracing diversity and inclusion as a core part of our culture and business philosophy, and is part of our overall diversification strategy which has been central to our success. I believe that we have not only embraced diversity, equity and inclusion throughout our history, but we have utilized it in our own understated way to build a market leader. Now we are keenly aware that we need to expand our efforts in new ways along these fronts to ensure that we hand over a strong platform to those who will succeed us. We will work tirelessly to sustain a workplace that's open, supportive and diverse so as to attract and develop a new generation of talent, who will continue the work to fulfill our vision of a world transformed through innovative materials vital to a better life today and the sustainability of future generations. I believe that we hold in common the belief that a quality and affordable education provides opportunities to a better life today and a better world tomorrow. For those of you who may not know, the Co-Founder and first CEO of II-VI, Dr. Carl J. Johnson, and his wife, Margot Johnson, built in 2007, the II-VI Foundation to support a great number of students around the world. Many of these students have proudly joined II-VI in part due to their strong affinity to our company culture and to the Johnsons' shared vision to change the world. It is with great pride that we pledged this year, our support to the II-VI Foundation and its philanthropic work around the world with a contribution of $1 million. Carl said that it was with deep satisfaction that 2 of his most significant and lifelong endeavors are coming together on this golden anniversary with a strong sense of common purpose and to continue the cycle of learning, innovation and growth far into the future and for generations to come. One month ago, II-VI celebrated International Mother Earth Day with a few activities designed to broaden awareness of sustainability among our employees. Through these activities, we were pleased to announce that we have entered into renewable energy contracts for 15 of our facilities in the U.S. and Europe, representing about 20% of our annual energy consumption. This initiative began several years ago and last year, it earned us recognition from Apple's Clean Energy Program as a supplier, committed to powering all our production for Apple with 100% clean energy. Our renewable energy procurement program currently covers multiple operations across the U.S. and Europe, and we expect that in the future, it will include our manufacturing sites in Asia. Over the last 50 years, II-VI has distinguished itself by assessing market dynamics, identifying underlying value propositions required by customers in the future, investing in advance in innovations and then integrating core competencies in the form of technology platforms and product roadmaps. We are squarely aimed at offering breakthrough solutions with competitive follow-through and cost of ownership at scale, along with exciting shareholder returns. From a global footprint, we operate with a competitive intensity that's rivaled only by the intensity of our collaboration, compliance and the importance of our vision as we set out each day to change our world. Today, you will hear from speakers, each with decades of experience in the field of photonics, advanced materials and compound semiconductors, who will brief you on a select number of topics to a level that we haven't done before. These topics are about some of the exciting work going on at II-VI today and its potential to drive our growth. We will defer discussions about the combination with Coherent to another day. Today, our speakers will give you greater insight than we ever have in the past about how we at II-VI think about innovation, our core technology platforms and how we leverage them in our advanced markets with clear and compelling illustrations. We will begin with Giovanni Barbarossa, who, in his capacity as Chief Strategy Officer, will begin with a review of our innovation strategy. Chris Koeppen, our Chief Technology Officer, will then introduce you to our OCHIP technology platform. OCHIP will evolve over time to underpin our datacom, telecom and 3D sensing products and allow us to continue to enable the convergence of communications, computing and sensing. Sanjai Parthasarathi, our Chief Marketing Officer, will continue with insights into our communications business and highlight our strategy in coherent optics. Julie Eng, Senior Vice President of our Optoelectronic and RF devices business unit, will expand on our broad program in 3D sensing. We will then shift our focus to a new growth area for II-VI, driven by a world that is increasingly mobile, intelligent and electric. Sohail Khan, Executive Vice President of the New Ventures and Wide-Bandgap Electronics business unit, will give you insight on our Wide-Bandgap technology platform. Then Chris Koeppen will return to expand on our recent announcement in battery technology. Well, we have reached our 50th anniversary as dedicated as ever to engineered materials and innovations that will continue to make our company bigger, better and eventually, the best in our industry. Enjoy the presentations.

Hello, everyone. My name is Giovanni Barbarossa, I'm II-VI Chief Strategy Officer and President of the Compound Semiconductor segment. Each year, we review and reassess the global market trends before we update our 5-year growth plan. Our upside opportunities and downside risks are thoroughly analyzed and our investments priority is sorted out by relying on our forward-looking innovation strategy. It is a highly disciplined process that continues to produce consistent results every year in the form of profitable growth. Our innovation strategy relies on 6 interlocking and time-tested criteria to select technology investments aimed at creating core competencies to deliver a differentiated and sustainable value proposition to our customers. This criteria, centered around leveraging our technology platforms across multiple end markets and applications, differentiating our products through engineered materials, competitive vertical integration, process-intensive technologies, capital-intensive infrastructures and performance-driven differentiation. The key to our success is that we apply this criteria consistently and systematically across our diverse set of businesses. Let me explain each one in further detail. First, we invest in technology platforms that we can leverage across multiple end markets and applications because they are more resilient to market cycles. Such strategy enables us to achieve steady returns from the investments and therefore, sustain our investment momentum to scale the platforms and leverage them across adjacent markets that by maximizing our returns on investments throughout the cycles. For example, 3D sensing drove our gallium arsenide technology platform from 3- to 6-inch. Once achieved, we leveraged that platform for other gallium arsenide products that serve adjacent markets. And indeed, in the last 12 months, we announced that we moved our Datacom VCSELs as well as our Edge-Emitters product lines for fiber laser pumps to 6-inch. As a result, while we are gaining share in 3D sensing, we are also getting more competitive in VCSELs for datacom and Edge-Emitters for fiber lasers. We target to differentiate our products by engineering materials that impart functional performance and reliability advantages that are valued by our customers because they differentiated their products. In other words, we prefer to develop and manufacture the best products money can buy, products with the best functional performance and quality, not necessarily the lowest price, but with the lowest cost of ownership and with the most compelling value for our customers. For example, our zinc selenide, diamond, sapphire and ceramic materials are selected by our customers because of their unique optical, mechanical or thermal characteristics or because of our unique ability to make components in very large sizes of very precise shapes or with unparalleled surface finishing and precision coatings. We are able to differentiate in all of these critical performance because we design our own manufacturing equipment to produce the engineered materials at scale with high quality. Third, we evolved over time to be vertically integrated when it makes competitive sense and not necessarily to maximize our margins, but rather to remain cost competitive while protecting our intellectual property and to have full and direct control of the capacity and quality of our manufacturing operations. This is the case of our datacom optoelectronics product lines, which rely on our indium phosphide and gallium arsenide technology platforms as well as the electronic chipsets, which our integrated circuit engineering team designs in close collaboration with our optoelectronics device designers. These are integrated with our own micro-optics and assemble on our high-volume assembly lines in China and Malaysia using test and measurement equipment that we also design and manufacture. Still, we offer a broad portfolio of optoelectronics components to our transceiver competitors to mutually benefit from a larger scale. Fourth, fifth and sixth, we invest to research and develop technology platforms that are process-intensive and require complex manufacturing infrastructures that are capital-intensive, rely on performance-driven differentiation to lead the market. In other words, we like products that can't be easily reverse-engineered and they require capital investments in proprietary manufacturing equipment that cannot be purchased on the open market. Our silicon carbide platform is a great example of our process-intensive technology innovation, performed with II-VI proprietary reactors. We began working on this technology platform in the late '90s. Since then, we have scaled the technology and volume manufacturing platform from 75 to 100 millimeters and currently to 150 millimeters. We were the first to demonstrate the technology to produce a 200-millimeter silicon carbide wafer substrate in 2015. This is really what it takes today to be in the supply chain of Tier 1 automotive manufacturers. But we're not done in investing. More recently, we expanded our core capabilities in silicon carbide with the acquisition of differentiated epitaxial growth, empower design and fabrication platforms. We also licensed a broad portfolio of intellectual property from General Electric in the areas of silicon carbide power devices and modules. Over the next few years, these assets will result in highly-differentiated products, enabling our customers to provide state-of-the-art solutions for the power electronics market. In summary, we prefer to invest in engineered materials platforms with a high barrier to entry, that we can design into products with a differentiated performance advantage for a diversified set of customers. The more we grow possibly, the more opportunities to present themselves. Indeed, we have many great opportunities in front of us, driven by irreversible market megatrends, including artificial intelligence and machine learning in the cloud, next-generation broadband access technologies such as 5G and low orbit satellites, electric vehicles and renewable energy, Industry 4.0 and laser additive manufacturing, directed energy and contested space, personalized medicine and point-of-care diagnostics. We couldn't be more excited about these opportunities. They all have one thing in common, they will all require innovations in materials, lasers, optics and electronics, all areas where we have a strong core competency and differentiated capabilities that will continue to make a big difference.

Hello, everyone. I'm Chris Koeppen, Chief Technology Officer at II-VI. Today, I would like to introduce you to what we refer to as our OCHIP platform, which is short for optoelectronics chip hybrid integration platform. In simple terms, we have developed a proprietary, highly scalable platform for combining lasers, optics and integrated circuits on a single chip. One aspect of our innovation strategy is that we prefer to invest in technology platforms that we can leverage across multiple end markets and applications to achieve steadier returns from such investments. OCHIP is a powerful technology platform, comprising a series of building blocks, each representing an important innovation step. When fully implemented, OCHIP will grow in significance, eventually underpinning most of our transceivers and optical communications as well as advanced sensors for commercial and life science applications. The key is to leverage the appropriate subset of this modular platform, which includes our gallium arsenide, indium phosphide and silicon photonics technologies, depending on the specific product features. Now let's begin with transceivers that are based on our gallium arsenide technology platform. Many of you already know that our gallium arsenide platform enables our datacom vertical cavity surface emitting lasers or VCSELs. Today, VCSEL-based transceivers are used in relatively shorter transmission lengths that range from 200 to 300 meters at various data rates, typically within a server rack and between server racks and switches in data centers. VCSELs are used in such transceivers because they can transmit beyond the typical reach of electrical transceivers. At the same time, they are lower in cost than indium phosphide-based transceivers, which are used for longer reach transmission. VCSELs have recently become even more competitive based on our ability to scale our vertically-integrated gallium arsenide technology platform to 6-inch diameter wafers. And that is thanks to 3D sensing and consumer electronics, which required chips with relatively large-sized VCSEL arrays. This is one of the benefits of a technology platform that supports multiple applications. When one application requires us to innovate and push the frontier of technology, all other applications are driven to yield a benefit. In this case, we scaled our gallium arsenide technology for 6-inch for 3D sensing and that resulted in benefiting our semiconductor laser product lines for datacom, industrial and aerospace and defense. Conversely, innovations in datacom can find their way into 3D sensing. Before I describe this in more detail, let's take a step back and look at the trends in short-reach data center communications. As processors, accelerators and memory get faster and faster, and with architectures such as for high-performance computing, artificial intelligence and machine learning driving more and more interconnections between them, the electrical interfaces are becoming limiting in terms of distance and power. The capacity of networking switches in data centers will continue to increase from 12 terabits per second deployed in volumes today to 25, 50 and even 100 terabits per second in the future to support the Internet of Things, smart cities, smart factories, autonomous vehicles and AR/VR applications. As the switch capacities increase, the transceiver bit rates interconnecting these servers must increase as well. As the transmission bit rates increase, the reach of electrical transceivers decreases, becoming too short, enforcing a transition to optical transceivers that are based on VCSELs. Today's largest volume of short-reach transceivers is based on 4 lanes of 25 gigabits per second VCSELs for a total transmission rate of 100 gigabits per second. The industry has already begun the transition to higher bit rate transceivers, leveraging our more recent 50 gigabit per second VCSEL designs. And as we've shown at OFC 2020, our 100 gigabit per second VCSEL is already in development. For such high speeds, power dissipation and signal integrity become a challenge. We can solve this challenge by leveraging one of the technology building blocks within the OCHIP technology platform. We call it Chip On Glass Assembly or COGA for short. It is based on a glass substrate with multiple layers, electrical circuit traces that interconnect VCSELs, photodiodes and driver electronics for improved efficiency and performance. The real power of COGA is its manufacturing scalability. COGA enables multi-chip module assemblies directly on glass substrates that are 8-inch in diameter and greater. This level of automation dramatically increases production speed, which reduces cost. Our COGA pilot lines are already running, and we look forward to continuing a very exciting ramp. Now with COGA, we not only have a scalable platform for communications, we can leverage it for consumer electronics, including 3D sensing. And combined with our wafer level optics and diffraction gratings, we now have a full set of capabilities to move up the value chain in consumer electronics and automotive sensing applications to offer 3D sensing subassemblies. Our OCHIP platform will also help solve the power dissipation challenge in network switches and processors as they scale to higher data rates. OCHIP technology will enable us to build multiple optical transceivers onto a single chiplet, which is directly mounted onto the substrate carrying the switch ASIC or processor. This is known as co-packaged optics. The tight integration of the ASIC and transceivers eliminates interfaces and can reduce the power consumption substantially. For example, let's consider a future 100 terabit per second switch fully equipped with transceivers. By today's pluggable transceiver standards, the transceivers would together consume 2.5 kilowatts of power. But with co-packaged optics, that could potentially be reduced from half to even 1/4 depending on the exact configuration. This has the effect of simplifying and reducing the size, power consumption and cost of the electronics on board. The co-packaged optics module shown in the slide comprises 16 VCSELs operating at 56 gigabits per second for total chip-to-chip bandwidth of 900 gigabits per second. Similarly, indium phosphide and silicon photonic integrated circuits will enable multiple WDM wavelengths to be transmitted on individual single-mode fibers for switch to switch interconnection. Such discussions are taking place in standards bodies and we are actively participating. We also plan to leverage OCHIP with longer reach transceivers too, such as coherent transceivers. These transceivers would benefit from automated wafer-level assemblies for the same reason that is lower cost. There are, however, some differences in the technology that we will need to account for depending on the design, the substrate might be glass, silicon or aluminum nitride ceramic. For coherent transceivers, we will leverage photonic integrated circuits or PICs in either indium phosphide or silicon photonics. Now some of you might be surprised that we mentioned both indium phosphide and silicon photonics. We have no implicit bias towards either one, and we will use the most appropriate and compatible technology for the given application. Now I'll take this opportunity to mention that we are not new players in the silicon photonics area. In fact, our best-selling coherent product leverages silicon photonics for data rates up to 400 gigabits per second. We currently have PICs in both indium phosphide and silicon photonics in development for new coherent transceiver designs and for multiple high-speed bit rates. Those will both be competitive in performance and cost. Note that these same technologies can be leveraged for coherent LiDAR applications and even space communications. Our investments in our transceiver technology platform will help reinvent optical communications for a long time to come. Cost, performance, quality, reliability and power consumption are all critical. Success will depend on 2 factors: number one, healthy margin profiles that will enable and be enabled by substantial R&D investments of the kind that drive disruptive technology innovations like OCHIP. And two, the ability to leverage the same technology platform outside of optical communications to achieve even greater scale like gallium arsenide on 6-inch or COGA. With our sizable R&D investments and industry-leading teams operating at scale, we believe we will continue to increase our technology lead in optical transceiver technology. And our exposure to diverse end markets affords us many opportunities to leverage our new technology platforms, including across new markets and new applications.

Hello, everyone. I'm Sanjai Parthasarathi, Chief Marketing Officer of II-VI. Today, I'm excited to talk about 2 important product families within our optical communications portfolio here at II-VI, our datacom transceivers and our coherent optics. Let me first begin with the market drivers. The 5G buildout continues around the world, with over 1 million base stations planned for deployment in 2021. Significant rollout plans have been announced recently in the U.S. and in Europe. Other broadband access networks such as fiber-to-the-home and low orbit satellite networks are also being deployed. Collectively, we refer to these networks as access networks as they provide an access to Internet services. Now all of that data generated through these access networks must then travel over the optical network infrastructure. New applications enabled by the digital transformation continue to drive increased bandwidth at the edge of the network, that in turn drives the need for bandwidth upgrades throughout the entire optical network infrastructure. Each time we click an app on our smartphones, we enter a data center, and that one tap on the screen generates several server-to-server, server-to-memory communications within the data center and in between the data centers. It's hard to imagine how we could live without this convenience that in many ways, provides us access to vital services. In fact, COVID-19 has shown us that these services are a lot more than just a convenience. They're increasingly essential in our lives, and as such, we can expect investments in the optical network infrastructure to continue for the foreseeable future. Datacom and telecom to us, represent a combined total available market of over $15 billion today. These large markets are expected to continue to grow at greater than 10% compound annual growth rate over the next 5 years, with some parts of the market such as data center connectivity growing much faster than the rest. Specifically, we continue to see webscalers ambitiously building out their optical network infrastructure, with the amount of spend growing faster than traditional telecom service providers. They're investing not only within the data centers, in data center interconnects, but also in metro, long haul, submarine and even SATCOM networks. Let's drill down into the datacom market. The market for datacom transceivers is led by Ethernet transceivers, which are primarily 100 gigabits per second today. We are in the early stages of 200 gigabits per second and 400 gigabits per second deployment. But we expect these higher bandwidth transceivers to overtake 100 gigabits per second transceivers within the next 5 years. II-VI continues to be #1 in datacom transceivers with over $1 billion in annual sales. We expect to gain significant market share as the market for 200 and 400 gigabits per second transceivers continue to grow. We believe this because each time the transceiver bit rate increases, the technical hurdles increase as well, requiring significant experience and expertise as well as higher investments. The laser is at the heart of any transceiver and is a key enabling component for higher-speed optical communications. In fact, it paces all high-speed transmission. We have a variety of laser platforms, including our vertical cavity surface emitting laser or VCSEL for short-reach applications, our edge-emitting directly modulated laser DML or our electro-absorption modulated laser EML for longer reach and even tunable lasers for even longer reach. We are now getting ready for the next wave of high-speed optics at 800 gigabits per second with our 100 gigabits per second and 200 gigabits per second capable lasers. We also make all the components that go into these next-gen transceivers, namely optics, receivers and integrated circuits. As a completely vertically-integrated supplier with the largest manufacturing scale in the industry, we believe we are in a great position to continue to reinvest in our product portfolio and continue to lead the market. Meanwhile, we are also tracking closely opportunities with emerging applications in high-performance computing that enables artificial intelligence and machine learning. This market may transition to a mix of pluggable transceivers and co-packaged optics technology within a few years. And we have a variety of technology platforms that are in development and uniquely suited to these applications. Now let's move on to another growth area for II-VI in Optical Communications, coherent optics. I would like to tell you now about a product that we announced in early 2020, on the heels of the Finisar acquisition, the IC-TROSA and highlighted significance. The IC-TROSA is an acronym that stands for integrated coherent transmitter-receiver optical subassembly, it's a mouthful. But the IC-TROSA combines all the optical functions that are needed in a coherent transceiver into a single sub assembly. Our IC-TROSA is built on our industry-leading indium phosphide technology platform out of our fab in Sweden, which when combined with 7-nanometer DSP technology, enables 400 gigabits per second coherent transceivers in a tiny QSFP-DD form factor. The II-VI IC-TROSA was the first product to enable optical performance compatible with Open ROADM. a multi-source agreement in a small transceiver form factor like QSFP-DD. I'll come back to that in a minute. As an aside, some of you may recall that we are a vital supplier to the semiconductor capital equipment market, one of the many diverse markets we serve. In that market, we enable extreme ultraviolet lithography or EUV lithography, with our carbon dioxide laser optics, our diamond windows and structural ceramic parts for 7-nanometer nodes today. We are also enabling the emergence of 5-nanometer nodes, the most advanced integrated processes required to produce the most advanced integrated circuits. It's a great example of how engineered materials and optics are pushing the frontier of technology in so many ways, including the DSPs for current transceivers. And by being in the supply chain of EUV lithography, II-VI has a hand in DSP technology as well. Now back to the IC-TROSA. With the IC-TROSA, we leapfrogged an entire generation of coherent optics. These optics, which are still in the market today, are assembled using discrete components. If you follow the coherent optics market, you're likely familiar with those components. They include the integrated tunable laser assembly, ITLA, the integrated coherent receiver, ICR, and the coherent driver modulator, CDM. Now instead of focusing on assemblies of components, we went directly to designing a single integrated optical component containing all the functions of the traditional discrete devices that I mentioned earlier. The IC-TROSA makes it very easy for our customers to integrate it into a pluggable form factor like QSFP-DD or OSFP with the DSP of their choice. We have multiple optical integration technology platforms within II-VI, including indium phosphide and silicon photonics. And at II-VI, we have always been technology agnostic, choosing the best platform for the market and the specific application within that market. While we do have multiple silicon photonics-based product platforms that are both in production as well as in development for various applications, in the case of the IC-TROSA, we chose indium phosphide technology because our indium phosphide platform enables transceivers to achieve much higher optical output powers within the electrical power dissipation budget of the tiny QSFP-DD form factor. That is a critical point of performance differentiation for metro and regional networks compared to silicon photonics. The intrinsic performance of indium phosphide is so much higher than silicon photonics that in metro and regional networks, it enables a simplification of the network architecture with fewer repeaters and regenerators, all within the pluggable QSFP-DD form factor. It's quite an achievement. In addition to transceivers, we have been innovating online systems as well. Line system equipment aggregates signals from multiple coherent transceivers, amplifies them and transmits them from either one data center to another or from one metro node to another. Our unique and innovative, pluggable optical line system or POLS, collapses the functionality provided by a large rack-mount box into a tiny pluggable device. POLS enables plug-and-play optics for data center interconnects, another significant achievement that is being recognized by the industry with multiple awards. Now moving to optical network architecture and disaggregation. Service providers would like to be able to build telecom optical networks using products from a mix of vendors, just the same way that webscalers build data center networks. This is new in telecom optical networks, and this trend is gaining momentum. To achieve this, telecom service providers are driving open standards. An Open ROADM is a multisource agreement that is championed by telecom service providers. The Open ROADM Consortium is redefining reconfigurable metro and long-haul networks to be built using standardized interoperable network elements controlled through open source software interfaces. We believe that the IC-TROSA is a leading technology for these applications with very few merchant competitors. We are confident that we are ahead of the competition and well positioned to ramp up beginning next year. The merchant market for 400G coherent integrated modules for metro and regional networks is expected to grow from around $70 million this year to over $800 million by 2025. We expect to be in a great position to capture significant share of this market. At II-VI, we are excited about advancing the technology in transceivers for telecom, for datacom and high-performance computing. Of course, our product portfolio goes well beyond transceivers, and we so look forward to updating you on those products in the future. Thank you.

Hello, everyone. I'm Julie Eng, Senior Vice President of the Optoelectronics and RF Devices business unit. As you may have heard us say, we continue to leverage opportunities driven by the convergence of communications, computing and sensing. Today, I'll focus on sensing with vertical cavity surface emitting lasers or as we call them, VCSELs. First, I'd like to take this opportunity to acknowledge Dr. Kenichi Iga, who is now Professor Emeritus at the Tokyo Institute of Technology, who just this month accepted the prestigious IEEE Edison medal for pioneering contributions to the concept, physics and development of the vertical cavity surface-emitting laser. It's quite remarkable that we continue to find new applications for VCSELs more than 40 years after they were invented. But that is the hallmark of a disruptive technology. At II-VI, we continue to develop VCSELs and related technologies that will enable our growth in sensing. In this presentation, I'll provide a sense for the richness of the core capabilities that we are leveraging and reinvesting in, and why it makes such a difference. First, let's recall that II-VI has been in the VCSEL sensing market for decades in applications such as oxygen sensing, the computer mouse and datacom transceivers. II-VI VCSELs found applications in menu selection and screen navigation in early smartphones and on the steering wheels of certain luxury vehicles, where in both cases, VCSELs track the movement of the thumb over the sensor. VCSELs continue to find uses in new applications. VCSELs are used today as proximity sensors, for example, in wireless earbuds to save battery power. VCSELs can be used for scanning the environment to gain certain knowledge about the surroundings, for example, for navigation. VCSELs are used in autonomous vacuum cleaners, in robots navigating through the aisles of order fulfillment warehouses, and in robotic vehicles for food delivery in hospitals, schools and elder care facilities. These are essentially light detection and ranging or LiDAR applications. In 2013, we began working on 2-dimensional VCSEL arrays for 3D sensing in smartphones. As soon as we completed the design, we turned our attention to scaling our production capabilities from 3-inch to 6-inch wafers to meet the time-to-market, time-to-volume and time-to-cost and quality requirements. We achieved this in 2017, just in time for the first smartphone with facial biometrics to come on the market. Today, we produce VCSEL arrays for multiple end customers and applications. We envision the number of disruptive applications growing over time. As many of you already know, VCSELs are in the front side of smartphones for facial biometrics to unlock the screen or, for example, to authenticate a user performing a secure financial transaction. Other use cases in security extend beyond smartphones. VCSELs can be integrated into doorbells to provide secure entry into homes and campus settings. Similarly, they can provide secure entry into cars, elevators and restricted areas. VCSELs can be used for safety features in automotive cabins. They can provide information about the alertness of the driver and the position of passengers, which can prevent accidents or reduce injury with more accurate and timely deployment of airbags. VCSELs are now on the world-facing side of smartphones to improve the quality of photos taken with embedded cameras. VCSELs could be used to scan and digitally recreate with a smartphone app, a 3-dimensional representation of user surroundings. That allows additional information relevant to the user to be superimposed on the real scene, which is what's called augmented reality or AR. For example, users can make measurements in their home before making purchases online or check the way a piece of furniture looks inside their home before making a purchase online. We can already see commercials on television illustrating these features. But someone argued that it is not so convenient to be holding the phone up all the time, such as when walking through the supermarket to see which products are in special while pushing a shopping cart or when traveling through the airport to find the departure gate while carrying luggage. That's why we hear a lot about smart glasses, but those are not yet on the market. For now, we're seeing a precursor of smart glasses in the form of AR headsets in smart factories and other emerging Industry 4.0 stages. Technicians wear them to visualize the step-by-step assembly of complex systems or to be guided efficiently through elaborate troubleshooting procedures and to control quality. These may use VCSELs. The number of applications for VCSEL should grow as they get even better in performance. The next frontier in VCSEL technology is to increase the power density or the optical power per unit area on a chip. This can be leveraged for a number of differentiating benefits, including higher output power to sense farther and wider, extended battery use between charge and a smaller size to achieve lower cost and enable more inconspicuous designs. Yet few suppliers are keeping up with this new inflection point on the learning curve. Remember that we already went from single element VCSEL chips to 2-dimensional VCSEL arrays with hundreds of elements per chip, and then from 3-inch to 6-inch diameter wafers. Now we are pushing the technology in another direction from what is known as single junction to multi-junction VCSELs in order to achieve this higher power density. Multi-junction VCSELs are essentially multiple VCSELs stacked one on top of the other into a monolithic structure. They are more challenging to design and produce, but that is where we excel, given our vertically-integrated model. Multi-junction VCSELs enable higher optical power and efficiency within a given die size. And so we expect them to be adopted for multiple different applications in the future. Just this year in February, we announced our double junction VCSEL arrays, the first of a multi-junction VCSEL array platform for next-generation world-facing 3D sensing applications. We plan to continue our efforts on that trajectory. So far, I've described our advances in VCSEL technology, from single elements to arrays, from 3-inch to 6-inch, and from single to multi-junction. This, in itself, requires large investments and reinvestments that can only be sustained by a business that has successfully scaled. But what's special about II-VI is that we are also #1 in transceivers, which are basically integrated optoelectronic subsystems with lasers, optics and electronics, all integrated into one module. That know-how and scale translate nicely into sensing. Specifically, I'm referring to 2 core capabilities: micro-optics assemblies at scale and driver electronics. We are only in the early stages of leveraging these in sensing. However, we've already made a lot of progress with assemblies in automotive. In February, we announced a VCSEL-based flood illuminator module for driver and occupancy monitoring systems in vehicles. Our new VCSEL flood illumination modules integrate VCSEL chips, photodiodes and diffuser optics, achieving a greater level of vertical integration and value proposition for our customers. The modules are expected to be certified for automotive applications by mid-2021. This will come just as U.S. and European transportation safety regulators are increasingly recommending or requiring driver and occupancy monitoring systems in vehicles. Next, inside the module, we will be leveraging another one of our core competencies, integrated circuits or ICs. Sensing modules require custom ICs designed and packaged for specific VCSEL array geometries and applications to optimize the performance of the entire module. Today, II-VI has a world-class CMOS, analog and digital IC design team, with almost 2 decades of experience in designing drivers for optoelectronics. We operate at the largest scale in the datacom industry, with more than 350 million ICs shipped within transceiver products over the past 10 years alone. II-VI is currently working on IC designs for VCSEL arrays that will leverage co-packaging as part of our OCHIP platform. We have a lot going on in VCSEL-based sensing, VCSEL arrays, 6-inch wafers, multi-junction designs, driver electronics, micro-optics assemblies and the potential for wafer-scale co-packaging. Each represents a strong core competency already acquired or in development. Combined, they are a powerful set that will enable us to be a strong competitor in VCSEL-based sensing for a long time to come. They are examples of the level of innovation that can be achieved with our deep expertise, significant reinvestment capabilities and the ability to leverage core platforms across multiple end markets. Thank you. [Break]

Hello, everyone. My name is Sohail Khan. I'm Executive Vice President of New Ventures and Wide-Bandgap Electronics business unit. The words New Ventures underscore our expectations that a significant part of II-VI future growth will be enabled by our Wide-Bandgap technology platform, which is driven by the market trends that you are familiar with. These trends include the electrification of transportation and the transition to renewable energy, the high-bandwidth wireless infrastructure built around 5G, upcoming 6G along with next-generation radar and low orbit satellite communications. I would like to highlight some of these trends of our silicon carbide platform, including what we have already built, namely a solid foundation of silicon carbide substrates and what we are investing in to move up the value chain with epitaxial wafers, devices and modules. So let me begin with the foundation of our platform, silicon carbide substrates. What is critically important is achieving a perfect crystal structure. In other words, it is important that each item of silicon and carbon finds its intended location in the crystal structure as we grow it into our furnaces at extremely high temperatures. As the crystal grows, atoms that don't fall into the right places will generate defects in the crystal structure that will eventually cause electronic devices to fail under stress from high voltage and high operating temperatures. Maintaining a perfect crystal structure becomes more challenging with larger substrate diameters and longer length crystals, both of which are needed to achieve the market requirements. Each step increases in substrate diameter is an inflection point on the learning curve. II-VI started this journey with a modest $25,000 investment in silicon carbide in late '90s. Since then, II-VI has made significant investments, learning to grow larger diameter wafers, starting from 2-inch or 50-millimeters, and quickly moving to 75- and 100-millimeter and progressively achieving larger diameters over 20 years while maintaining high-quality of materials. Today, our volume shipments include silicon carbide substrates that are 100- and 150-millimeter in diameter. Such large wafer diameters have played a significant role in bringing silicon carbide into the mainstream electronics market. The state-of-the-art is the production at scale of 150-millimeter substrates with superior crystal and surface quality. That alone is what currently separates the top-tier silicon carbide substrate suppliers. II-VI is the market leader that has distinguished itself by being the first to introduce 200-millimeter wafer substrates in 2015. We have set our sights to full scalable manufacturing on 200 millimeters in the coming years. Silicon carbide devices are superior to those based upon silicon for the following reasons: silicon carbides, Wide-Bandgap enables low energy loss, which can increase the driving range of electric vehicles by 10% and or more on a single charge or reduce the cost of the battery by approximately the similar percentage. These devices can operate at much higher temperatures, eliminating the need for cooling components. These devices can sustain voltages that are 10x higher and carry currents up to 5x higher, which enables much higher power density per chip leading to smaller devices. It also enables electronic devices to switch 10x faster, reducing the size and the complexity of the circuits. All of these advantages contribute towards reducing the size, weight and power budget of the vehicle as well as providing significant cost savings. Our silicon carbide crystal growth expertise is backed by a strong portfolio of over 30 patents, along with many trade secrets that include how we design, build and control the IP around our crystal growth furnaces, shape our silicon carbide balls into ingots and cut them into wafers. Silicon carbide, like diamond, is a super hard material. So slicing the ingots into wafers is a carefully engineered process that we continue to evolve to reduce the production cycle, maximize our yield and achieve best-in-class level of quality. Our experience forms a strong foundation on which to expand our capabilities to the next level of the value chain and the time for that is now. In August 2020, we added an industry-leading silicon carbide epitaxy technology to our platform by acquiring Ascatron in Sweden, now called II-VI Kista, a pioneer in silicon carbide epitaxial wafer technology. II-VI Kista has been developing a proprietary technology since the early '90s, now under the trademark of 3DSiC. In 2016, 3DSiC was commercialized at scale on 100- and 150-millimeter diameters wafer. I don't intend to go into the technical details of 3DSiC, which you can find on our website. I would only like to summarize by saying that 3DSiC's differentiated performance stems from the ability to grow very thick epitaxial layer, not only in one step, but in multiple regrowth steps to engineer what we call a buried-grid structure. The value of 3DSiC is that it enables us to address a sweet spot in the market, which is power devices for applications above 1 kilovolt. The market below 1 kilovolt is crowded with suppliers offering power electronics in silicon, gallium nitride, and some in silicon carbide. Above 1 kilovolt, the market becomes almost exclusively the domain of silicon carbide. We will serve all the markets with silicon carbide substrates and epitaxial wafers. Our focus is on bringing to market power devices designed to operate in the range of 1 to 3 kilovolts, followed by power devices for operation at 3 kilovolts and above. We believe that the ability of our products will be well timed with the market demand for each of these 2 categories of products. There are several market drivers which require this capability. The first market driver is the adoption of higher battery voltage. Battery voltage is moving from 400 to 800 volts, which will require power devices above 1.2 kilovolts and therefore, all of those will be based on silicon carbide. Batteries operating at 800-volt are already in the market, used in sports electric cars and their benefits are compelling. They enable these powerful cars with faster acceleration, but also a lower cost and faster battery charging. The cost savings come in part from the ability to use smaller cable diameters and better thermal management due to lower thermal loss. Faster battery charging is the critical important factor for the broader adoption of electric vehicles. The second market driver is the integration of powertrain, where multiple converters are combined and the integration of the motor drive with the inverter in both cases, to reduce size, weight and cost. This requires power electronic subsystems that are more compact so they can fit into much smaller space. Silicon carbide is a great solution for these integrated systems. Silicon carbide's ability to operate at high voltage and high currents enable it to achieve better power density, which yields in smaller devices. The differentiator of high-temperature performance compared with silicon enables silicon carbide devices to operate at high temperatures while reducing the power loss, eliminating the need of bulky heat sink material. The high switching speed reduces quite significantly the electronics footprint taken by filter and passive electronics to make it more compact. The third market driver is the mainstream adoption of renewable energy source, like solar energy, wind power, smart power grids and microgrids. The electrification of trains and planes and the transition to silicon carbide in data center, industrial robots and heavy machinery to satisfy the stringent power requirements. These are all the applications that are driving the demand for power electronics operating at multi-kilovolts. These examples illustrate the power of silicon carbide technology to transform the world, transform markets and the world. Looking ahead and further up the silicon carbide value chain, our plan is to market chips, package devices and modules. That is where our exciting partnership with General Electric comes in. We announced in June 2020 that we licensed technology from GE to manufacture silicon carbide devices and modules for power electronics. GE brings a rich 20-year of experience with silicon carbide and began moving to 100-millimeter platforms since 2015. In 2017, GE introduced 1.2 kilovolt surface mount power electronics, qualified to the automotive spec of AEC-Q101, a standard, which is capable of operating up to 200 degrees Celsius. In 2020, the same year we signed the licensing agreement with GE, they introduce the aviation industry's first silicon carbide converter. Aviation, of course, sets very high standard for reliability. Therefore, we are greatly benefiting from GE's knowledge, experience and extremely demanding requirements of power electronics applications. The collaboration with their great team has been extremely beneficial. GE's technology portfolio substantially accelerates our time to market and gives us great confidence in our ability to meet the market window. This market, which is still at an early stage, could quickly take off within next few years and reach a $30 billion market by 2030. If the world's transport infrastructure is to become electric and powered by renewable energy, the electric grid will need to become more intelligent. With smart grids that manage the directional flow of electric power, to and from power stations, microgrids, and energy storage at scale. Smart grids will react to real-time information that will be analyzed in the cloud, possibly leveraging artificial intelligence. It is reasonable to expect that our transportation, information and infrastructures will become increasingly codependent enabling a future that is increasingly mobile, intelligent and electric.

Hello, everyone. It's me again. Chris Koeppen, Chief Technology Officer at II-VI Incorporated. I would now like to talk about a new technology that we've been working on for lithium-ion batteries, namely advanced sulfur and selenium cathodes. We're extremely excited about it. We envision being part of the lithium battery supply chain with new battery cathode materials that will greatly enhance lithium battery performance. These materials leverage elements in Group 6 of the periodic table, which is to say that this is very much an extension of our core competency. We've all been hearing a lot about lithium batteries in the news lately. So it's worthwhile to take a step back and describe where II-VI fits within the broader context. Rechargeable batteries have essentially 3 components: the anode, the cathode and the electrolyte in between. Of those 3 components, the electrolyte is what is dominating the headlines. You have likely heard of solid-state batteries, which is a reference to electrolyte technology going from a liquid to a solid. Solid-state batteries appear to be really promising in terms of performance and safety improvement, and certainly are attracting a lot of investment. Now anode technology has evolved over time, too, and we continue to hear about new developments, although not as headline grabbing as solid-state batteries. However, we seldom hear about cathode technology development And that is precisely where we believe II-VI will contribute disruptive technology, and that's where we're focusing our innovations. While there are various cathode technologies commercially available, most of the lithium batteries on the market today are based on essentially the same chemistry that Sony introduced in 1991 with their famous handheld camcorder, the first consumer product to use a rechargeable lithium battery. The cathode chemistry is lithium cobalt oxide. II-VI is working on a cathode technology that essentially replaces cobalt with sulfur. Cathode technology based on sulfur can store a lot more energy than the current cobalt-based technology. While the energy storage benefits of sulfur for cathodes has been known for decades, the reason that cathodes with sulfur were never commercialized is that sulfur tends to migrate from the cathode into the electrolyte over time, which quickly degrades the battery performance. Researchers from our Carl J. Johnson Advanced Materials Center at our headquarters in Saxonburg, Pennsylvania, have come up with a new way to keep sulfur from migrating to the electrolyte. They are able to immobilize sulfur within a proprietary skeleton structure made of carbon atoms. This enables sulfur cathodes that are ideal when paired with modern lithium anodes. The performance that we are already seeing with sulfur cathodes exceeds our original expectations in terms of energy, capacity, power delivery and charging time. What's more, sulfur is available in great abundance. A 2020 report from the U.S. Geological Survey indicates that sulfur resources in the U.S. represent 20% of the world total, and the U.S. is the largest producer. That's in contrast with cobalt. which is considered a complex material, in which the U.S. produces less than 1% of the world total, an important consideration for the establishment of domestic and resilient supply chains. The battery market for automotive is already growing rapidly and the technology is evolving, which we believe will present attractive market entry points for sulfur cathodes. For example, solid-state batteries are expected to come on the market around the middle of this decade. II-VI's cathode technology is compatible with both liquid and solid-state electrolytes. Therefore, solid-state batteries could potentially be a market entry point for our sulfur cathodes in automotive. Meanwhile, there are other applications beyond automotive that are also growing rapidly and can provide other market entry points. One of these applications is energy storage at scale. In the U.S., states like California and New York are requiring utilities to install more batteries to add reliability to the grid or to enable microgrid architectures to smooth out peak demands and incorporate sources of renewable energy. Other states are joining the trend. From the technology point of view, batteries might be optimized for power delivery or for energy storage. For example, batteries for heavy equipment might be optimized for power delivery, while batteries on the utility grid might be optimized for energy storage. It turns out that our cathode technology can incorporate a mix of sulfur and selenium to dial in the optimal trade-off. Greater sulfur content maximizes energy storage, while greater selenium content maximizes power delivery. Greater selenium content also enables faster battery charging times that are measured in minutes instead of hours. This, of course, is important to accelerate the adoption of electric vehicles. Our cathode technology has shown promising results, and we continue to advance the technology. At the same time, we are developing partnerships in the battery ecosystem, where we would be a supplier of sulfur, selenium materials for cathodes. Battery prices for automotive are expected to decrease to the point where electric cars will be lower in cost than gasoline-powered cars by the middle of this decade. That, by itself, might become the leading catalyst that accelerates the global demand for electric cars. The resulting battery volumes would further decrease costs, enabling additional applications such as energy storage at scale and enhanced performance smartphones, wearables and other consumer electronics. With the breakthroughs that we have already achieved, the right partnerships and future investments at the right time, we expect to play an important role in the future of battery technology.

All the presentations that you just watched have one thing in common. They give you insights into a subset of our strategic investments. We plan to leverage our scale to make R&D investments in differentiated product portfolios and technology platforms that will continue to enable new use cases, driven by multiple and converging market megatrends. For example, augmented reality, which Julie mentioned, is one such compelling use case. Augmented reality will require the near instantaneous super position of timely information sourced from data centers onto a real scene displayed on a screen, for example, on smart glasses while we are biking or on a heads up display while we are driving. Note that when biking and driving, the scene is continuously changing. This requires data transferring back and forth on a high-speed, low-latency network from the edge of that network, where the sensors collect information, to the core of the network, where data centers process the information. And then back to the edge of the network where useful information can be displayed on our screens. This illustrates what we call the convergence of communications, computing and sensing. A technology that can scale across products that enable communications, computing and sensing can truly be called a platform. By that measure, OCHIP, which Chris introduced is truly a platform, enabling economies of scale through wafer-level assembly for any application that requires high-volume packaging of semiconductor lasers, optics and electronics. OCHIP is the embodiment of a powerful technology platform that is exactly the right fit for our innovation strategy that Giovanni described. Augmented reality is but one of many similar use cases underpinned by low latency connectivity to data centers. Other use cases include autonomous navigation, smart power grids, smart factories, smart cities, remote medical surgery and so on. With the convergence of communications, computing and sensing, we can leverage big data at the core of the network, data that is enhanced by artificial intelligence and machine learning to make our infrastructure smarter and better, and to have access to timely information to make good decisions on the fly. The convergence of communications, computing and sensing equates to a world that is more mobile and intelligent. We're excited about it because it fulfills our vision of a better life today. But we also need to address another part of our vision, the sustainability of future generations. As the market for these applications grow, so will the amount of consumed power. II-VI is committed to enable the move to sustainable power consumption. This is why you heard our speakers today add to the words, mobile and intelligent another word electric. According to the U.S. Environmental Protection Agency, 29% of U.S. greenhouse gas emissions in 2019 were from transportation and 25% from electricity generation. Therefore, leveraging renewable sources of energy to power our zero emissions cars, our factories and our lives has the potential to reduce U.S. greenhouse gas emissions by half. It explains why governments who are eager to contain global warming are generally moving to ban combustion engines by the middle of the century and are planning now to invest in infrastructure, such as electric energy storage at scale and charging stations for electric vehicles. With Sohail's leadership, an international team of experts and a powerful partner like General Electric, we are building out our silicon carbide platform for next-generation power electronics that enable more efficient and compact power systems. If that was not exciting enough, Chris revealed our work on cathode technology for lithium-ion batteries that we've been working on for the last 7 years. We have a way to go to commercialize this battery technology, but the time to engage with the industry is now. As Chuck said, II-VI started 50 years ago with materials from Group 6 of the periodic table to enable CO2 lasers that made factories more efficient. It's quite satisfying that on our 50th anniversary, we begin a new chapter with a new battery technology for the next 50 years and beyond by leveraging the same elements from Group 6 of the periodic table. We are now at the end of our presentations. I hope you've enjoyed them as much as we have, putting them together. Our next and final segment will be audio-only. Chuck Mattera; Giovanni Barbarossa; and Mary Jane Raymond, will host a Q&A session with equity analysts. Stay tuned, and thank you for watching. [Break]

[Operator Instructions] Our first question comes from Jed Dorsheimer with Canaccord Genuity.

By the way, fantastic presentation, nice job to everybody in terms of educating us. I guess, first question is maybe just on the battery side of things, in terms of carbon sulfur structures are not new, they've been talked about for a while. I guess, what's changed? And maybe if you can provide any metrics to sort of energy density or cycle life or discharge rate would be helpful? And then I have a follow-up.

Jed, this is Giovanni here. Let me -- can you hear me?

Yes. No I can.

Just making sure that we are okay. So yes, it's a very exciting platform for us. You're asking some technical details that I won't be able to provide under NDA because we have incredible performance that in terms of charging. In fact, that's one of our major advantages is that by combining sulfur, which, as you know, it's -- as you mentioned, it is a known technology for cathodes, we combine it with selenium. So there is a very fundamental change in the way the cathode is made in terms of the mixture of the two, sulfur and selenium. And the other thing is that not all carbons are equal, as you probably know. So the way we actually make the carbon, it's a proprietary process that enables very high loading percentages of the selenium and the sulfur and therefore gives us the ability to produce 2 kind of batteries, power batteries and energy batteries. So we can switch and tune the 2 for with -- in combination with the carbon to provide 2 different type of battery, it's obviously for very different type of applications. So we believe we can capture a very, very large portion of the market when eventually we'll go to -- into a commercial release of this platform. And the charging performance, I can tell you this, they are -- in some circumstances, are better than super capacitors. And I will leave it to that. Okay. As I mentioned, I think we have some very perform -- high-performance data that we only share under NDA.

Got it. Just my follow-up is another technical question, but just how you think through market segmentation between silicon carbide and gallium nitride? I think generally, the conventional wisdom is above 1 kilovolt in terms of the sweet spot for SiC and that GaN will kind of come in below that. But it also seems like the larger market for GaN might actually be in where gas is within mobile electronics for PAs. I'm just wondering how do you see the markets developing certainly in EV, but really beyond that in terms of other applications for these 2 technologies?

Yes. As Sohail well articulated during the presentation, we are focusing on the high end, on the high performance and hopefully, better rewarded application. So beyond 1 kilovolt, we believe that there is really -- on the market today, there's really no alternative technology to -- that is able to compete with silicon carbide. Yes, as you mentioned, below 1 kilovolt, obviously, kilovolt, they are competing platforms that are equally performing. But beyond that, and as obviously, the speed of charging is important, the field requirements demand higher voltage then obviously, the trend is towards performance. Then we think that like a lot of players in the silicon carbide market, we think that ultimately, silicon carbide will be the preferred and only technology to be able to address those type of requirements beyond 1 kilovolt.

Thanks, Giovanni. Jed, I know we need to roll on. Thanks for your questions with regard to energy. Our presentations today, both on energy and on Power Electronics, I would underscore for investors at the very core we are an engineered materials company, and we are intending to impart competitive advantage both for us and our customers from that platform.

Our next question comes from Ananda Baruah with Loop Capital.

Thanks for doing this. This stuff is always great, it's always super educational for us. I guess just two quick ones, if I could, somewhat unrelated, though it seems like everything you guys saying is related to each other. The first is just OCHIP platform and are there margin implications as you propagate this in the coming years and scale it in the way that you described it today? Does the margin structure level up? And then I'll ask the second one now, too, just which is multi-junction VCSEL designs, like how material is that from a competitive perspective? And listen, like I'm not trying to get back to the stuff we just talked about a couple of weeks ago, but just really thinking, intermediate to longer term, like what are the sort of designs and functional impacts, et cetera, that can come from multifunction specifically? And that's it for me.

With respect to the margin structure, generally speaking, in all of our products, the more value follows margin, right? And value also follows complexity and functionality. So as a result of that, I would imagine that this would be more geared to our products that do tend to draw larger margins.

Got it. And then just sort of -- Mary Jane, a follow-up to that, is there -- as you propagate this, is there just also like sort of margin scale economics that you guys would -- that would just naturally arise from propagating the OCHIP platform?

I'm not sure I can speak to that. First of all, in general, whether it's the OCHIP platform or it's any other one, first of all, the scale always matters and anything that is complex and involves grown materials, scale helps a lot, right? So if you're only making 1 versus 1 million of them, it makes a huge difference, right? So -- but generally speaking, I would imagine that it should be something that does hold its margin as time goes on.

Okay. Okay. And then just quickly on the multi-junction VCSEL designs and the types of, I guess, performance enhancements and characteristics that come with that over time.

I'm sorry, performance characteristics for the VCSELs? What, can you repeat the questions?

Yes. Giovanni, I guess just specifically, there is time spend on highlighting multi-junction VCSEL designs and some of the market opportunities. And I guess really what are some of the sort of specific characteristics about multi-junction VCSEL design?

Well, I mean the fundamental -- yes, sure. The fundamental reason to increase the number of junction is just to increase the power, right? But you also have a benefit from the quantum efficiency of the multi-junction VCSEL, where actually the -- ultimately, the efficiency is a little bit higher than by using, let's say, 2 VCSELs for the same type of power, right? So you have some gaining in efficiency. And just to be clear, there is not definitely or directly a proportionality of power to a number of junctions for all designs. So a 2-junction VCSEl can actually be higher power than the 3-junction VCSEL. It all depends on the design and how it's made and so forth. So it's not a race in terms of number of junctions. The race is really about power per millimeter square of ultimately gallium arsenide wafer technology, right? So that's what really the customers really care ultimately, how much power can you get from a certain surface area of the laser device. And so one way is to increase the number of junctions, but there's obviously other ways in the -- particularly in the design of the AP and the way you extract the light from the VCSEL and so forth. So -- but the -- we have introduced 2. We're working on 3. There's more coming. We see a road map clearly defining the need for high power as the -- some of the applications require to increase the reach, beyond the reach that can obtain today. And there would be really an ability to increase the value of the chips themselves as they get deployed and enabling future applications with better accuracy, better reach. So it's just a start.

Our next question comes from Mark Miller with The Benchmark Company.

Let me add my thanks for the presentation. It's -- you're a very complicated company and presentations like this certainly help investors. Just was wondering about the current sharp cut in VCSEL die size for 3D sensors implications for you? And any changes, any technology changes you're doing to address this besides just shrinking the chip size?

Well, the -- there's always -- not for 3D -- not only for 3D sensing, in any market we are in, including datacom and telecom, there is always a really strong push by all customers to ultimately improve the -- or cost of ownership of the technology that we provide, right? And VCSELs both for datacom and 3D sensing ultimately also follow that -- the need. So we are working hard on reducing the cost of the VCSELs in many ways. And I think the user -- the end-user application will be ultimately demand, as we discussed earlier, higher power. So we see over time, cost reduction for the unit being balanced by increase in performance, increase in functionalities, including speed of the modulation and so forth. So there is a -- there's a number of features that will be announced over time and will add value to the device. And therefore, clearly compensate over time for the cost reduction of the initial platform that was deployed for a certain application. And so the two will create, in addition to obviously the demand, which will increase over time, will create a very good growth opportunity for us.

In terms of the Coherent acquisition, do they bring any technologies to the table to be used in some of the products you discussed today?

I think the -- Coherent is obviously very broad -- has a very broad portfolio of laser technologies, is the quintessence of the laser company. And clearly, there are some markets in the -- particularly in the semicap equipment market that will benefit from greatly. The other markets would be industrial, particularly for microprocessing applications, life sciences, it's also very important. But when it comes down to material processing, including the cathode technology that we talked about, we see lasers in general and laser processes being very strategic to produce materials with quality, performance and cost eventually that cannot be reached otherwise with other conventional technology. So that's -- the synergies from that standpoint will really be very great.

[Operator Instructions] Our next question comes from Tom O'Malley with Barclays.

Thanks for hosting such a great event. My first one was around COGA. You mentioned co-packaged optics. I was curious, in terms of timing there, are you thinking that the market kind of consolidates on co-package optics around 800 gig? And then can you talk about your strategy? Because obviously, these optics are going to be co-packaged with switch vendors. Are you going to work directly with those switch vendors? And in instances of how do you sell, are you going to sell discretely to those switch vendors? Or how does that ecosystem work at 800 gig?

Thanks, Tom, for the question. So we actually -- we are in the process to rely on COGA for our 200G platform. So the technology has an advantage in terms of assembling electronics, optics and optoelectronics components, regardless of the speed. So obviously, the advantage is high when the speed is higher because it enables proximity of placement and for particularly reducing power consumptions when they get very close to each other. So -- but we are starting it now. And as the data rate increases, the platform will gain significant share of what we do internally. In terms of the strategy, well, obviously, we don't make switches, so we have to work with other companies that make switches or companies that buy switches at the chip level and then eventually work with them to consolidate the two into the -- into that platform. And this is pretty much what we have been doing when the optoelectronic interfaces were packaged in a box and into something called transceivers or pluggable transceivers. So from that standpoint, there is no real difference in the way we worked in the past and the way we work in the future. There would be a very close collaboration like there was in the past. Of course, OCHIP and COGAs and all co-packaging solution will not be pluggable. It's obviously the collaboration will be stronger, if you want. But in terms of the business model, we don't see a change from that perspective. If anything, the design wins will be stickier than in the past because clearly, the pluggability of by design enables a pretty easy swap of the supply, if you want. But once we are embedded on the board, then it's clearly the replacement is a little bit more difficult. So anyway, we believe that the business model would not change in terms of the relationship with our customers, whether they are OEMs or whether they are webscale integrators and developers, I think, will be -- will continue to be the same.

That's helpful. And then my follow-up was around opcom as well. So you guys are #1 in datacom transceivers today. And you talked about gaining market share at 200G and 400G. Could you talk about where you're going to gain market share? Obviously, there's the laser front as well, but what's driving you to surpass your competition as the speeds are getting higher there?

Okay. So Tom, I mean, we were late. When we came into the game by combining II-VI and Finisar, there was an opportunity they're having from the fact that we were late to market. So as the competition took some share, okay, now we are gaining -- we are trying to get the share back. And that's where the share gain is coming from. It's basically coming from very competitive platforms and is an end effect, is a result of the fact that due to a number of reasons, there was a delay in the launch on these platforms. And so we think that we have all fundamental building blocks from lasers to detectors, from ICs to assembly technologies and automation that will enable us to regain the share. And so therefore, continue to be the #1 in the world as mentioned, but also have a larger share than we may have today.

Our next question comes from Simon Leopold with Raymond James.

Great. I appreciate you guys doing this call. Always good to get this kind of overview and deep dive. So I appreciate that. I guess I'm surprised, I'm the guy to ask this, but not a surprise to you maybe is just trying to get a better understanding about the 3D sensing market over the intermediate term, given that your peer in this market called out roughly a 20% to 25% decline over the next fiscal year. That's certainly worse than I think many of us expected, but I want to get your take.

First of all, I don't think we measure a TAM in terms of quarters. So in terms of the 3D sensing TAM, I think our company is still very, very bullish on the 3D sensing TAM, including in consumer, but also as Julie Eng discussed in automotive and industrial applications. Giovanni just gave a very, very good summary of the typical situation in consumer goods, which was said all along, right? We've said we saw the price pressure -- the price dynamic would be more like optical communications than industrial. And as you strive to have sometimes a smaller device, right? I mean, the tablet or the handheld device itself, capable of greater functionality, naturally, there's a lot of reengineering inside. So that has been happening all along actually. And as Giovanni just explained, and I'm sure he'll do again, that also allows for a greater future set. Over to you, Giovanni.

Yes. So thanks, Mary Jane. Simon. The -- a few days ago, we had one of our customers had a press release, actually, it was a release on the website. And they talked about future products and awarding us some business. If -- I hope that helps understanding the dynamics in the marketplace. There is no doubt that we've been gaining share. As you know, given our growth rate has been much larger than the market growth rate, and we are committed to continue in that direction. And I can't speak for what our competitors see. I mean we can only talk about what we see. And we still believe that this is still very healthy growth opportunity for us, in which we've not invested to get the benefit on a single quarter. I mean, this is a long journey which started a long time ago. And as the end-user applications continue to grow, there is a more larger, broader adoption of the functionalities that augmented reality provides through the laser technologies embedded in some of these appliances that we think the long-term growth opportunities will still be in front of us. And there are seasonal -- clearly, there are seasonal effects on the demand. That shouldn't be a surprise to anybody and obviously, we are affected as anybody else. But the global trend, year-over-year will continue. We don't really see that kind of decline that our competitors have mentioned.

Our next question comes from Meta Marshall with Morgan Stanley.

Great. Maybe a question for me, you noted the GE partnership or kind of licensing agreement. I understand this is kind of very early on into a kind of multiyear journey into the devices side. But just any commentary on how that partnership is working out to date? And maybe a second question kind of on the silicon carbide market, just how you see the market opportunity splitting between kind of the high-end large wafer side where there's less competition from -- and you guys are clearly differentiated versus maybe some of the smaller-sized wafers?

Meta, thanks for your question. The partnership with GE, I would say, is getting even more deeply rooted. It's going great across every front that we had scheduled. The team relationships are really fantastic. And we're getting -- even at this point in the process and in the schedule, we're ahead of where we thought we would be by now. The momentum is increasing. As far as the market goes, I think in Sohail's presentation, it became clear, if it wasn't before, we'll pick our spots. And we're going to pick the spots where we can bring a sustainable differentiation and a competitive advantage. And we're aiming at the higher end of performance where we can bring advantage both at the substrate, the 3DSiC, and at the device level, leveraging all the experience that we have both licensed and are working together with GE to acquire.

Our next question comes from Christopher Rolland with Susquehanna.

Thanks for the day. I guess on OCHIP or COGA, stuff like some of the details there were interesting. I think you talked about glass substrates. And I know that this has been something in the industry for a while, particularly combining them with silicon photonics can have some real economic benefits on the transceiver side. So I think you guys said that maybe you were shipping some COGA products today. I'm not sure about that or not. But can you describe kind of your yield ramp with this technology? Where you are with yields now with this technology kind of fully ramped where they could be? Does this, in fact, give you guys some sort of economic advantage in terms of yields and cost versus your competitors out there? And kind of when does it get if it's not already coupled with silicon photonics?

Chris, thanks for the question. I mean I don't think we're going to go and talk about yields, cycle times and process steps. The technology is really powerful, is versatile, in the sense that it can apply to both silicon photonics and indium phosphide. As Chris said in his presentation, we don't necessarily have a preference for either one because we have both. So obviously, if you have only one of them, you see the world dominated by that platform. If you have both, well, you use whatever is the best solution ultimately for the market, for the customers. And in terms of ramping, again, this is just the beginning. As I mentioned, the value of, generally speaking, an integrated platform of both auto electronics and electronics components will be very valuable as the data rate increases over time. And we are in the process now to test it, if you want, to validate at lower speed because that's what you typically do. You start lower speeds and then eventually, you push the platform to higher speeds, higher data rates where the advantage is the performance advantages are more significant. And clearly, as any new technology when it's introduced, it needs to be validated ultimately by our customers. There are no really many alternative ways of putting together ICs and optoelectronics on a single substrate. And so this is the technology we are counting on. Finisar has been investing in the platform for many years. We think we have a really world-class team working on it in collaboration with the component designers, which clearly are all in-house, from the lasers to the ICs and the combination of the 3 things, I mean, really produces something, which I don't believe as well the alternatives in the market in terms of, again, the combination of the 3. So it's really, really powerful optoelectronics and electronics co-packaging, optoelectronics design and electronics design, all under one roof in the same campus, we think, is very powerful, and it will give us a really great differentiating advantage in the marketplace.

Our next question comes from Mark Marchetti with Stifel.

Just wanted to ask a couple of quick questions. First on the 3D sensing side, you mentioned some of the in-cabin modules for driver awareness and safety. Just curious if you think that's an actual material contributor to the 3D sensing business for you next calendar year? And maybe if there's differences competitively in that market versus what you're seeing in the handset market? And then maybe Mary Jane, just for you, given all the investment that's going on here and some of the new technologies that you're working on, should we expect CapEx over the next several years to be materially different from a run rate perspective relative to maybe what we see over the last couple?

I can answer -- go ahead, Giovanni.

Yes. Okay. I'll go first. Thanks, Mary Jane. Thanks, John, for the question. So well, the -- there is no doubt that the price points as well as the margin for automotive application is better than generally speaking, consumer electronics. And there is a need to have our factories receive the automotive certification so we can make these products. And so these are a longer designing cycle, very conservative type of market. And we think we're gaining share in 2 directions. One is on the device level and laser level. And the other one is at the module level with some partners that are working with us to develop the module, not just the laser. And we think that it's again at the beginning, there is some legislation that really pushes for those requirements, particularly in Europe and it's really the beginning. We think there would be some contribution to next year of the next fiscal year, 3D sensing business, but we believe that this will grow over time. It will become a significant part sometime in the next 2 to 3 years, not next year.

With respect to the CapEx, I think you can see that the CapEx in 2021 for our company already increased over 2020. And I think one of the things that we have continuously advised investors is that the way you should think about CapEx in II-VI is that really, it should probably start to trend towards 10% of revenue. And so it's quite a bit more short from that, it's really closer to 6%, but it really should track with the revenue, and it's probably somewhere in the range of, say, 6% to 8% going forward. I think we would also expect to see increases in R&D for this. And as we've advised on that, we have set the OpEx guidance or the OpEx directions at -- for investors at 20% to 23% of revenue. At the present moment, we're at the lower end of that. And I think I've said several times that we do think that it will start to move maybe more toward 21%, 21.5% as we start to invest in these things.

Our next question comes from Dave Kang with B. Riley.

My first question is regarding IC-TROSA. Is 400ZR part of IC-TROSA platform?

Yes. Absolutely. It's a forward compatible, Dave. Thanks for your question. It's forward compatible platform. So yes.

Our next question comes from Tim Savageaux with Northland Capital Markets.

I have a question on the datacom transceiver, kind of laser area. And you at least highlighted 100-gig PAM-4 laser and, I guess, module capability as well. You did have a competitor this last go around, talk about orders coming in for customers that would suggest unit volumes in the hundreds of thousands ramping in the second half. As you look at your 200-, 400-gig module capability. Are you seeing a ramp comparable to that, assuming you're focused on your internal needs on a vertically integrated basis versus merchant on the one hand? And on the other, where are you seeing pricing start, I guess, relative to where we are at 100 gig? I'm probably not going to get a number there, but any color would be appreciated.

Tim, I -- thanks for the question. So the -- yes, demand is in -- this is a very specific numbers that probably I am not going to go into that kind of level of details. But generally speaking, I would say that, yes, demand is growing. We see a nice big pickup in those kind of volumes that you mentioned. We also offer -- just to remind you, maybe this is important, we offer the same kind of products at device level, not just transceivers. So we're trying to make a market of both. And clearly, price points are higher for higher data rates like it should be. And it really depends also in terms of ratio, if you want that ratio, it really depends on the -- ultimately who the customer is, what their power -- purchasing power is, what their volumes are and so forth. So there is really -- it's very -- there is a very broad range depending on the relationship, depending on history, depends on which other products we sell. I mean, many of these customers, we don't only sell laser, we don't only sell transceivers as you can imagine. So there is -- some of these are very strategic, and we have a very different approach with those kind of customers.

Our next question comes from Michael Genovese with WestPark Capital.

So I also want to talk about 400G datacom, because I think on the last conference call, you talked about 5x book-to-bill in that area. And then on this call, you talked a lot about platforms and Coherent and other real platforms. My question is about this cycle. We're obviously in the strong part of the 400G datacom cycle. But is there -- as we know these things, they -- like what happened with 100G is that there's a bad part where the pricing just crashes. But my question is as we go to higher speeds, is there anything platform-wise that's going to cause a shakeout in the industry as we go to higher speeds, it's going to cause fewer competitors. It's going to make these cycles longer or stronger or better margins than before? Or is datacom just always going to be the way that it's been?

Yes. Michael, that's -- you got it. You basically answered your question. That's exactly what we are counting on. And the level, as I mentioned earlier, the level of interaction internally in the company between the various groups, whether it's at laser device level, IC device level, co-packaging level and so forth is intense and is really -- there is not may that have that kind of portfolio of platforms within -- under the same roof. And the -- even some customers that may have decided to invest in module platforms and emerging technology and so forth don't have the kind of those -- that kind of offering. And -- but one thing that's important to mention here in terms of the II-VI strategy, which I actually mentioned at the beginning of my presentation. Even if you have those platforms under the same roof, I think our strategy to diversify the platform by market, it's very successful and in a way, it's very unique. So we make our datacom VCSELs on 6-inch in the same place where we've been making -- we are making VCSEL for 3D sensing. And so it's just an example how you can leverage an infrastructure, which obviously is capital intensive, it's cost intensive, as I mentioned in my presentation, across multiple markets. And that creates an intrinsic leverage that a pure player in one market, those that are only communications may not necessarily be able to take advantage of, right? So we -- and of course, I didn't mention automotive with LiDARs and so forth. So we really make that a really critical decision criteria in our decision process when we invest in these individual platforms. We really think about it twice before making a decision because we really want to make sure that it doesn't address a single application in a single market. We have to create more room for error, more room for growth and more room to make sure that the platform is resilient to market dynamics because all markets go up and down, and we're trying to kind of level out the end result by, again, relying on the platforms to address several markets.

Our next question comes from Tom Diffely with D.A. Davidson.

Maybe one more for Giovanni. When you look at your vertically integrated model and your materials capabilities, And if you think about just the next couple of years, is the biggest advantage to you that you control the supply for these products? Are these materials to make products in some tight markets? Or are you actually seeing technology advantages in these materials that aren't available in the open market for someone else who has to outsource it?

Tom, thanks for the question. Well, I wouldn't like to say control because ultimately, we make the component technology platforms available to our competitors, too. So we -- like datacom VCSEL is a good example, where we have -- we believe we have significant share of the market. And yet, we are obviously a large user of datacom VCSELs for our transceivers. So I think the strength comes really from the collaboration of the teams that we saw from the beginning inside Finisar and somehow in II-VI, too. We saw the value of those teams, indium phosphide, IC, co-packaging, automation in the assembly and so forth, optics, filters and so forth. So that kind of collaboration really sets road maps that are very attractive to our customers. And so when the engagement starts is really forward-looking engagement. And it's a go-to-market kind of journey that we start together with our customers. It takes time to get there, right? So we have -- I think we've done a great job so far, that's really the main reason why we are the leader in terms of market share. It comes from really well-thought strategy that Finisar implemented a long time ago and which matches very well to II-VI strategy in other markets. And so the two companies combined, I think we've been able to take advantage of that across multiple markets. And in the transceivers, we see the exactly same benefits. Really having those teams under the same roof and being able to innovate and work collaboratively with the customer for long-term road mapping to provide ultimately the lowest cost of ownership that sets well what they're looking for. It's not just the price of the transceiver. It's about reliability, it's the ability to work with us in the future -- on future deployments and so forth.

Thank you. This concludes today's Q&A presentation. Thank you for joining. You may now disconnect.