II-VI Incorporated (IIVI) CEO Chuck Mattera on Q3 2021 Results - Earnings Call Transcript

II-VI Incorporated (NYSE:IIVI) Q3 2021 Earnings Conference Call May 6, 2021 9:00 AM ET

Company Participants

Chuck Mattera - Chief Executive Officer

Mary Raymond - Chief Financial Officer

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

Conference Call Participants

Jed Dorsheimer - Canaccord Genuity

Paul Silverstein - Cowen and Company

Ananda Baruah - Loop Capital Markets

Harsh Kumar - Piper Sandler

John Marchetti - Stifel Financial Corp

Simon Leopold - Raymond James

Mark Miller - The Benchmark Company

Dave King - B. Riley

Jim Ricchiuti - Needham & Company

Christopher Rolland - Susquehanna International Group

Meta Marshall - Morgan Stanley

Michael Genovese - WestPark Capital

Operator

Good day and welcome to the II-VI Fiscal Q3 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mary Jane Raymond, Chief Financial Officer. Please go ahead.

Mary Raymond

Thank you, Shelby and good morning. I am Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our earnings call today for the third quarter of fiscal year '21.

With me today on the call are Dr. Chuck Mattera, our Chief Executive Officer; and Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Compound Semiconductor Segment. This call is being recorded on Thursday, May 6, 2021.

Our press release and our updated investor presentation are available on the investor relations tab of the website, ii-vi.com. Just as a reminder, any forward-looking statements we may make today during this teleconference are given in the context of today only. They are subject to various risk factors and 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 known risk factors can be found in our Form 10-K for the year ended June 30, 2020, filed in August of 2020 as well as the Form S-4 filed on May 4, 2021. Our remarks today do not constitute an offer to sell or the solicitation of an offer to buy any securities. No offering of securities shall be made except by means of a prospectus, meeting the requirements of Section 10 of the United States Securities Act of 1933 as amended. Finally, with respect to today's call, we will also present some non-GAAP measures for which the reconciliations to GAAP are found at the end of each document that includes those measures, such as the press release or the investor presentation.

With that, let me turn it over to Dr. Chuck Mattera.

Chuck Mattera

Thanks, Mary Jane. I would like to thank you all for joining us today. And for your interest in II-VI It's a time of great challenge for our world and a time of great need too. We are well aware of the opportunity we have to enable so much change, and that there's nothing more difficult to take on than to lead the introduction of a new order of things. That is precisely what we have charted our course to do, consistent with our vision of a world transformed through innovative materials vital to a better life today, and the sustainability of future generations.

In short, we are committed to changing our world and delivering long-term stakeholder value along the way. I would like to recognize our global pandemic response team and all the II-VI employees who once again mitigated the impact to our people and facilities during the quarter as the vaccines in the viruses squared off. The safety of our employees remains our top priority within incalculable toll and suffering from COVID-19. I am grateful to the entire scientific community who develop the vaccines and who are battling hard this global pandemic now surging in India. We will keep all of the people of the world in our prayers. I also want to recognize our II-VI employees who have been enabling PCR testing throughout the pandemic by supplying vital optical filters and thermal management components to makers of life science, diagnostic instruments used around the world for COVID-19 testing and for vaccine development.

Turning to the business, Q3 was a very exciting quarter in which we continue to focus on the growth drivers of our business. As on March 25, we were selected as the successful bidder for Coherent. We have known and regarded Coherent for years as pioneers of industrial laser processing. And as you can see S-4 we have been discussing a possible strategic combination with them for some time. Coherent will add complementary strength to II-VI with their expertise in industrial laser solutions for precision manufacturing, and the focus on the markets and applications for Life Sciences, semi cap equipment, and aerospace and defense, three of II-VI's important emerging markets. We are excited about expanding our technical resources with deep domain knowledge in laser technologies to continue to bring breakthrough solutions to the market.

The combination will also expand our access to new markets and provide us an unmatched opportunity to expand our sales, service and supply chain teams to best serve customers around the world by delivering on the synergy plan. Coherent will be our largest acquisition to date. And partnering with Bain Capital will be a great endeavor. Our Q3 revenue was $783 million. We exceeded the top end of our guidance of $780 million. Our revenue grew 25% year-over-year. We recorded a book-to-bill ratio of 1.08 for the quarter, and we ended the quarter with a record $1.13 billion backlog.

We saw no signs of weakness in the demand for our optical communications products. And our current industry checks supported by our strong backlog underscore our view that demand will remain strong for our data comm transceivers, coherent optics and ROTEM products. Although, we continue to send increased stress in our supply chain, our global supply chain team continues to do a fantastic job of managing risk and mitigating the impact of reported supply chain shortages. Even in the face of increased demand, our shipments of transceivers, coherent optics and ROTEM products were basically unaffected by shortages, as we missed less than 1% of our original sales plan for the quarter due to the supply chain.

Our relatively wide Q4 guidance range for revenue reflects that the output of our transceiver business may begin to be affected by supply chain shortages. Also, we will continue to operate with an abundance of caution regarding COVID-19 in our locations throughout the world. In some countries, including the US, our safety protocols may constrain our output at least through Q4 in certain facilities. I believe that the scale that we have been able to achieve in the supply chain as a result of the synergies that we continue to deliver from the finish our acquisition are serving us well. We will maintain a relentless focus on costs, quality and lead times as well as on risk management within our diversified footprint. And we will maintain a discipline about building increased redundancy and resiliency into our distributed supply chains for the long term.

We are exposed to strong growth drivers implied by the mega market trends that we are enabling. In addition to the accelerating pace of the emerging digital transformation that we are enabling, we are pleased with the progress and positive news on many fronts, including the redefinition of a new normal in the face of COVID-19, increased GDP forecasts and evidence of an economic recovery well underway.

Looking ahead to the impact of announcements of infrastructure stimulus investments, the start of an apparent multiyear cycle in semi cap equipment, along with the other irreversible mega trends that underpin mobile, intelligent and electric, we continue to be very exciting. As one example of a possible leading indicator, during the quarter we saw a particular strength from the industrial laser aftermarket, whose revenues were at the same all-time record level of the March quarter of 2018. In addition, several of the AI era mega trends, including the computing end markets are very healthy. And the demand drivers continue to emerge with a proliferation of new use cases. And the buildup of new fabs that have been recently announced, are expected to drive the growth of our semi cap businesses.

Finally, I'm proud to know that our 50th anniversary will take place on June 22. And so the end of an extraordinary beginning for II-VI will be here be foregone. With all that excitement soon behind us, I believe that the best is yet to come. As we continue to reinvent the enterprise in the face of irreversible and accelerating change. We are proud to be serving so many large innovators like Apple that are also committed to having a profoundly positive impact on the world. Their announcement yesterday about our relationship should help clarify our sense of the importance of our long-term strategic investments in disruptive technologies and products that can be manufactured at scale. The announcement by Apple yesterday focused on an award from Apple to II-VI of up to $410 million in future business from their advanced manufacturing fund.

As Apple stated in their announcement this will accelerate II-VI's delivery of future components for iPhones. We are enthusiastic about expanding our partnerships with market leaders like Apple to enable many of the positive changes through the adoption of new technologies that we expect to unfold over the years ahead. We are honored to be Apple's trusted partner, and we look forward to continuing our long-standing relationship.

With that, I'll turn it over to Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Compound Semiconductors segment, Giovanni will detail Q3 and some of the key drivers of our Q4. Giovanni?

Giovanni Barbarossa

Thank you, chuck. The Apple announcement was indeed very exciting. We are proud that our mix of technology is enabling many iPhone features, including face ID, Memoji and emoji, important mode selfie. In addition, as the Apple announcement stated, The LIDAR scanner allows cameras to create a 3D map of the environment, which improves low light photography, and enables more realistic augmented reality experiences. We are proud of creating hundreds of high tech jobs in the US through our long-standing collaboration with Apple. As to how our global 3D sensing business this quarter is almost doubled over the same quarter last year with the difficulties on patent? All facilities are qualified and shipping to multiple customers. And we are in a great position to new design wins with current and future components for the global market.

In fact, we're working on expanding the technology platform for sensing with electronics drivers, and the recently introduced multi junction, VCSEL and flood illumination module platforms. We expect the revenue for 3D sensing in Q4 fiscal year '21 to follow the usual seasonal pattern. While we're squarely focused on preparing for the run, that will begin in calendar Q3.

Turning to the rest of our business in the quarter, aerospace and defense grew 16% year-over-year and 11% sequentially driven by the increasing adoptions of lasers and advanced optics for a diverse set of imaging applications. Our sales and communication saw a strong customer pull across both telecom and datacom, particularly from our big web-scale customers. For example, Q3 was the second quarter with doubled revenue for our 200 and 400 G transceivers. These are products which are experiencing a strong pull resulting in a book-to-bill ratio of almost five in which will continue to drive our growth as the web scale has continued to move to higher data rates. At the same time, we are positioned to lead the deployment of next generation optical interfaces at 800 G by leveraging our enabling photonic integrated circuit platforms on both indium phosphide and silicon, which are capable of supporting two energy data rates but wavelength.

The transformation of the optical communication market continues with carriers and datacenter operators accelerating the revolution towards disaggregated optical networks in order to keep pace with the forecasted market demands for bandwidth. We are excited by the market expansion opportunities for our PMA being components, modules, and integrated solutions and we believe that we are in a leading position to continue to enable this fast-growing market. The industrial market also experienced exciting growth during the quarter. Our revenue in this market grew across all types of laser systems 24% year-over-year and sequentially and will reach an all-time high revenue for our aftermarket optics in the Americas.

Globally, our aftermarket revenue reaches pre-pandemic levels, driven by growth in fiber laser optics, co2 laser components, and customized beam delivery systems for the assembly of batteries for the largest electric vehicle manufacturers in the world. Our Life Sciences business grew sequentially for the fourth consecutive quarter driven by demand for our optical filters, discrete optics and thermal management solutions for a portfolio of applications, including PCR testing. These business nearly doubled year-over-year increasing from about 2% of total revenue a year ago to 4% this year. Sales [Indiscernible] grew over 50% in Q3, compared to last year, with sales to over 30 customers in buyers end markets. While we continue to make steady progress in building our device and module business, in accelerating our multi capacity expansion.

Our semiconductor capital equipment product lines are sold out on all of our engineering materials products for both the front end and the back end of the line. And our sales into this market grew 15% sequentially. We continue to expand our manufacturing capacity ahead of the accelerating demand deriving from the multiyear investment cycle, which is globally underway. The GDP growth that Chuck referenced earlier is coming from both North American and Asian markets. To support this growth, we open a new technology and R&D Center in Shanghai, which we inaugurated last month. We also open our applications lab to laser material processing in Suzhou campus to better serve a growing number of industrial customers in China.

Finally, we expected our global silicon carbide with positive operations by opening wafer finishing line on our Suzhou campus to better set the global electric vehicle market globally, including in China, which is expected to be the largest market for electric vehicles.

Finally, many of our large strategic customers are asking us to accelerate our investments in compound semiconductor innovations, including for our exciting silicon carbide base wide band of platforms. Accordingly, we will anticipate adding over 300 jobs to our global R&D team over the next 12 to 18 months, with over 150 of those positions in the US.

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

Mary Raymond

Thank you, Giovanni and good morning. First, in case you missed it, II-VI was recently recognized by Forbes as one of the best midsize companies in America. Thank you, Forbes. I'd also like to thank my colleagues around the world for their remarkable efforts to keep our factories and fabs humming in these challenging times. Thank you very much.

Turning to the quarter, our non-GAAP gross margin was 38.9% and the non-GAAP operating margin was 18%. The non-GAAP gross margin and the non-GAAP operating margin remain well ahead of the margins II-VI reported right before the acquisition of Finisar closed. COVID expenses incurred in the quarter to maintain safe workplaces were $5.5 million, of which about $2 million is included in non-GAAP. This total includes lost work time. And collectively these costs put downward pressure on the margins in the quarter. At the segment level, the non-GAAP operating margins were 14.7% for photonics and 24.2% for compound semiconductors, similar to last quarter, compound semies margins were driven by strong mix.

Our record backlog of $1.13 billion consists of $750 million in photonics and $380 million in compound semiconductors. The backlog contains orders that will ship over the next 12 months. GAAP operating expenses, which are SG&A plus R&D, were $214 million, excluding $21 million of amortization, $14 million of stock comp and $17 million of M&A and integration costs. Non-GAAP OpEx was $163 million or 21% of revenue over - but - and over 500 basis points below the OpEx percent of revenue just prior to the close of the acquisition when it was nearly 26% for II-VI incentives are combined excluding amortization, stock comp and transaction costs.

These improvements are driven by our celebrated achievement of synergies and our ongoing cost control. Quarterly GAAP EPS was $0. 66 and non-GAAP EPS was $0.91 with after tax non-GAAP adjustments of $30 million in total. The diluted share count for the GAAP results was 116 million shares. For Non-GAAP the diluted share count was 125 million shares. The GAAP and non-GAAP EPS calculations are in the last two tables of the press release. Stock comp was $17 million for the quarter, $3 million in COGS and $14 million in OpEx. We expect stock comp for Q4 to be $18 million.

Cash flow from operations in the quarter was $91 million and free cash flow was $64 million, we paid down $75 million of our debt in addition to the required payment of $15 million. In Q3, our net debt position moved to a net cash position of $79 million. The interest expense in the quarter was $13 million. Capital expenditures this quarter were $26 million. For the year, we expect CapEx to be between $170 million to $190 million to support our forecasted growth, particularly in compound semiconductors. Depreciation was $47 million in the quarter and we expect our forward depreciation expense to be about $48 million a quarter. FX was a gain in the quarter of $7.9 million primarily driven by the Swiss franc and the Malaysian Ringgit.

This is a reversal of the first half of fiscal year '21 trading in these two currencies. The effective tax rate in the quarter was 13% due to receiving renewed high tech status in several countries; we expect the tax rate to be between 16% and 19% for the year making the Q4 tax rate between 20% and 22%. The tax rate to be used for the non-GAAP items is 19%. The tax rate expectation is reduced from our prior range of 18% to 22% due to renewals of high tech status, which we cannot include until they are enhanced. Super R&D deductions, increased stock option exercises and changes in mixed income around the world.

We had $18.5 million in total costs for M&A integration and other costs largely for Coherent and Finisar. With respect to our Series B preferred stock issuance, we are very, very happy for our new partnership with Bain. We look forward to their advice and counsel as we go forward. II-VI has already received $750 million of the committed Bain Capital investment of $1.8 billion in the form of preferred equity. This investment carries a 5% annual dividend paid in cash and capitalized to the principal for the first four years. This drives a $10.2 million dividend in Q4 for that will be deducted from the net income in the same manner that the $6.9 million dividend is deducted for the Series A preferred stock.

In Q3, the Bain investment had a mark-to-market gain of $11 million for the changes in our stock price during the period between the signing of our agreement and the receipt of the funds. Now that the first tranche of funds has been received, this will not repeat.

Turning to the outlook on Q4. Our record backlog and yesterday's announcement by Apple indicate continued strong demand trends. Our fiscal year '21 outlook is ahead of our original budget, including our having to replace about 5% of our budgeted consolidated revenues for the whole year due to the restrictions on Huawei. We did that within three quarters. For Q, our wider guidance range simply reflects an extra measure of caution related to the supply chain risks, which have increased in the last few months and the potential impact of our continued rigorous COVID-19 protocols, which could affect our ability to convert some of our working process inventory to finished goods by year end. Our outlook for revenue for the fourth quarter ending June 30 2021 is expected to be $752 million to $802 million and earnings per share on a non-GAAP basis at $0.63 to $0.83 at 118 million shares.

For Q4, we expect both the Series A and the Series B preferred stock to be anti-dilutive. This EPS range includes the deduction of the $10.2 million of the Bain dividend from the net income and accounts for about $0.09. This is at today's exchange rate and an estimated tax rate of 21%. For the non-GAAP earnings per share, we add back to the GAAP earnings pretax amounts of $21 million in amortization, $18 million in stock comp, and $12 million in transaction and integration costs. The estimated Q4 share count is 111 million shares for GAAP and 118 million for non-GAAP, the actual dollar amount of non-GAAP items, the tax rate, the exchange rates, and the share count are all subject to change.

Before we go to the Q&A, just as a reminder, our answers today may contain forecasts from which our actual results may differ due to a variety of factors, including but not limited to changes in product mix, customer orders, supply chain shortages, both upstream and downstream, competition, changes in regulations, ongoing requirements to combat COVID-19 virus and general economic conditions. We would also ask that each firm limit its questions to one question with no follow up. As we would like to try and get everyone in during the call today. We expect to end this call at 10 AM. Shelby, you may open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]

We'll take our first question from Jed Dorsheimer of Canaccord Genuity.

JedDorsheimer

Thanks. I guess given that I only have one question and assuming somebody else will ask on the impact and quantifying on the supply chain. I guess my question would be more strategic around the value proposition on the both the gallium nitride as well as that of the indium phosphide. And specifically, it seems for indium phosphide that most of the driving forces in optical and yet 1550 presents an opportunity from near AI application. So when do you see that starting to materialize and similarly on the gallium nitride, the value proposition moving from PAS and base stations to lower voltage devices?

GiovanniBarbarossa

Jed, hi, thanks for your question, it is Giovanni. Absolutely. The indium phosphide was one of the hidden gems in Finisar, which made the really our position so valuable. And we expect the indium phosphide to take off I would say at least a year from now maybe a year and a half now with a number of applications. And we are working very hard on that we are actually investing heavily as I mentioned in R&D. Also, with respect to that platform, and likewise gallium nitride, we continue with our partnership with Sumitomo to make progress to qualify our six-inch line in Warren, New Jersey. So we think that by the mid of next fiscal year, we'll see some impact on our growth.

MaryRaymond

Actually, for all of you just before we turn to the second question, please let me correct something. I had a small misspeak with respect to the Series B preferred stock, the investment carries a 5% dividend that's paid in stock and capitalized to the principal for the first four years. So sorry for that misspeak. Okay, go ahead, Shelby.

Operator

We'll take our next question from Paul Silverstein with Cowen.

PaulSilverstein

Yes, guys, the numbers you're putting in the proxy that you showed Coherent for fiscal '22 in particular, if I remember it's about 4% top line growth that the revenue represented, any insight you can give that lies behind what would seem to be given all the drivers you're looking at in the room packed. I want to say it appears to be a very soft number, any insight you can provide?

MaryRaymond

Sure, hi, Paul, it's Mary Jane. First of all, we, our S-4 projection includes lots of evaluations of opportunities and risk, whether it be the pandemic, supply chain shortages, trade restrictions, and several other things like that. All of those factors were present this year and present when we did our budget. For fiscal year '21, it would be fair to say that we have probably successfully offset several of those, but all of them have not gone away. And so we have many of these risks, if not other ones presenting themselves in fiscal year '22. As we are working on the '22 budget now, and we, like our colleagues, give quarterly guidance, this is why the projections are not meant to be guidance. And I would say as the company looks at those risks going forward, we will be doing our very best to be seeing what we can do to offset them as we go forward, as we did in 2001.

Operator

We'll take our next question from Ananda Baruah with Loop Capital.

AnandaBaruah

Hi, good morning, guys really appreciate you taking the question. This may end up being more of a clarification of Giovanni's earlier remark. But just the conversation that's begun around 3D sensitive VCSEL digital technology becoming more integrated, the use of integrated VCSEL technology, would love to get your perspective on how the companies use integrated VCSEL technology. And if you view involvement in this favorably and if so what your perspective on roadmap for marketplace involvement may be. Giovanni made a remark that I missed partially about the flood illuminator and it sounded like maybe integration but I want to just sort of clarify that and get your thoughts on that. Really appreciate it.

GiovanniBarbarossa

Thanks Ananda. This is Giovanni here. Thanks for your question. Obviously, this is - the investment we started years ago with our vertically integrated six-inch platform on gallium arsenide for VCSEL, meant to be just the beginning of a journey to enable next generation augmented reality, virtual reality in generally speaking, new applications for consumer electronics products, and we were, as I said during the - the prepared remarks, we doubled the revenue this quarter over last year. And as you know, the market did not now. So, clearly, we have been gaining share, we are gaining share, we will continue, I expect to continue share - to grow share, gain share over the next few quarters and in the next years. And that will deny essentially from many innovations. We have announced multi junction VCSEL family of products. We started with two, we go to three, will eventually go to a larger number of junctions to increase the power of VCSEL. We have announced the illumination modules platforms where we can integrate the VCSEL with some diffractive optics that we make in house. So we have a very attractive roadmap. So it should come clearly as no surprise when you see Apple announcing collaboration and making it public with regard to future components.

Operator

We'll take our next question from Harsh Kumar with Piper Sandler.

HarshKumar

Hey, Mary Jane, I wanted to clarify something you said that the Series A and the B also was anti-dilutive. Did I hear that correctly? How does that - we don't see these things very often. How does that work? And then is that $0.09 sort of part broke into $0.63 - guide is - how's that guidance --?

MaryRaymond

So the first of all, the way that the EPS calculation goes for Q3 from an actual point of view is in the press release. And so when we have a security and then the Q4 guidance, we do expect the Series A and Series B to be anti-dilutive. What happens then is that you deduct the dividend from the net income to reach net income available to the common shareholders. And then you - the shares that are used are the ones that are the common shares outstanding plus any other shares, for example, stock comp or the convertible debt that are dilutive. And so in this case, in the third quarter, for example, on the Series A because it was dilutive you add back to 6.9 and you add the shares that are why the shares are 125. When it's anti-dilutive, you do not add back the dividend and you do not add in the shares. That's why the non-GAAP shares for Q4 are at 118. And yes, the $0.09 is in the guidance right.

Operator

Our next question from John Marchetti with Stifel.

JohnMarchetti

Thanks very much, Mary Jane, if you could just spend a moment or two going through some of the puts and takes in the gross margin line this quarter, down a little bit more sequentially than certainly we had expected. You did mention some of the charges that you took around, some of the COVID related issues. Curious if that whole $2 million that you mentioned in non-GAAP in that line, but just any color that you can give us on gross margin would be helpful?

MaryRaymond

Yes. So first of all, the total amount of cost, if I look across the whole company, at everything we're doing, including how if we have a person, unfortunately, testing positive, we asked them to quarantine, which leads to lost time, those total costs were about $5.5 million. And that I would say that the vast majority of that at least 90% of it is in the gross margin. Because in our company, every factory, I believe it would be correct to say that our colleagues that are working every day in the operations are considered essential. So they are actually coming into work and interacting with others, whereas most of the people in G&A and R&D are working from home still. So that I would say did have some - the entire $5.5 million had downward pressure on the gross margin, the $2 million that we non-GAAP was an attempt to try and look at what do we think is the unusual amount in the quarter because there probably is an amount of COVID cost that will go on for some time. So that is one thing that is - was increased in the quarter. That's a fair thing to say.

I think the second thing is that, notwithstanding that compound semiconductors had a very nice mix in the quarter, at the end of the day they certainly had some - somewhat lower mix in the quarter. And so did photonics. So mix had a lot to do with the quarter, if you remember, last quarter, a significant part of the revenue was in 3D sensing, because that's the high quarter for 3D sensing. And in this quarter, we had, I would say more of a - a more moderate mix of everything in the quarter notwithstanding that we're also seeing industrial pickup. So those are really the main puts and takes, I would say for the third quarter.

Operator

We'll take our next question from Simon Leopold with Raymond James.

SimonLeopold

Thank you very much for taking the question. I wanted to see if I could get a little bit more help understanding the Apple announcement yesterday in terms of commitment and appreciate what you've laid out. I wonder if maybe you could compare and contrast the announcement, they made yesterday to what they announced with Finisar back in December 2017. How are these different? And I guess what I'm - the conclusion I'm leaping to is that this should be thought of as a promise or purchase order commitment. And so it does outline some sense of what they'll buy from you in the future over some undetermined time. If you can help us with that. Thank you.

GiovanniBarbarossa

Hi, Simon. Thanks for your question; this is Giovanni Yes, absolutely. As the announcement clearly says it's for future components for iPhone. So clearly there a commitment for future business. And again, it's around specifically future components. So I think if you want is a continuation of what was done with Finisar in a way. But I think this announcement is probably a little bit more clear, maybe than the previous announcement. And so I think we are really thankful to the Apple leadership to announce this in the public domain and give us the ability to talk about it.

Operator

We'll take our next question from Mark Miller with The Benchmark Company.

MarkMiller

Just curious about the increases in SG&A and also other income, was that the gain from Bain investment?

MaryRaymond

Yes. So first of all, let's see the latter. In other income and expense this quarter, we had two positives, both of which come out in non-GAAP, one the FX was positive in the quarter after two quarters of being negative. The second one was the $11 million increase for mark-to-market recording for the Bain security. So that's correct, Mark. Then with respect to the increase in SG&A, if you remember last quarter, from an M&A point of view we did not have too much in our integration costs coming out, but this quarter we had just for Coherent, was $15 million of cost for that pending acquisition.

Operator

We'll take our next question from Dave King with B. Riley.

DaveKing

Good morning. My question is going back to that proxy, a forecast. So what about fiscal '23? Fiscal '22, you're providing a fairly conservative forecast but '23 I believe it's like 20%. So what's driving that 20% type of, I am not saying 20% but much stronger growth in fiscal '23 versus '22.

MaryRaymond

Okay, let's just review this. First of all, with respect to the end markets, we are serving all of our comments that we said today remain in place; we are seeing ourselves right at the cusp of serving some really wonderful future mega revenue trends. So in the preparation for the five-year plan - for the forecasts that were done, one of the things we looked at when we were preparing these, just say take the '21 budget as a part of that we had a lot of things moving in the world, whether that be COVID just starting, trade restrictions that were new and growing and uncertain election, et cetera, et cetera. And as I said, we said that we expected; we did successfully offset those pretty well in fiscal year '21. But our thinking is that those do not really go away, and could present themselves in this near term as in '22. And so we have work underway. And that's what's going on right now to figure out how we will deal with that and continue to deliver for II-VI. That said we still see very, very strong growth drivers going forward. So when you look at the projections, if you think about them in terms of the opportunities that are available to II-VI, we have a lot of very wonderful opportunities ahead of us.

Operator

We'll take our next question from Richard Shannon with Craig-Hallum.

RichardShannon

Well, thanks, guys for taking my question. Maybe a two parter within communications, a couple of comments, very interesting ones from Giovanni, you called out to some strings here in data comm which is not necessarily surprising, but a very strong book-to-bill. I think I heard you say five times, if you can confirm that that will be helpful in helping to understand where that's coming from, including share gains, and telecom seems to be a little bit softer and I guess II-VI is doing well here. Can you help us understand where you're seeing that different than others? Thank you.

GiovanniBarbarossa

Richard, hi, thanks, this is Giovanni. Thanks for your question. Yes, absolutely. We, I did say five specific to the 200 G and 400 G transceivers. So clearly, I think we are getting back on track after almost a year of standby of the Finisar team, waiting for the Chinese approval, a lot of customers remain on the sidelines waiting for the combination to take place. And I think now we are gearing up and going much faster than the market, right? Because clearly the book-to-bill ratio is an indication of that. So it's an indication of yes, I believe gaining share is an indication of the performance, the differentiation of the platforms. And I - but the strength, as I said in the prepared remarks is actually across the board or just more to highlight those two, because those are really the enabling the next generation deployment, particularly for the web-scale customers.

Operator

We'll take our next question from Jim Ricchiuti with Needham & Company.

JimRicchiuti

Hi, good morning. I just wanted to follow up on some of the comments on component constraints. I'm wondering how you're thinking about supply chain issues, potentially looking out beyond the June quarter. Are you more concerned by what you're seeing out there? And do you see any signs of potential double ordering in this kind of environment? Thank you.

ChuckMattera

Okay, good morning, Jim. This is Chuck, and thanks for your question. Good morning. Thanks for your question. And coming back to some of the related questions about future and the demand, we feel like the demand is continuing to be strong. As far as the supply chain goes, when we put our long-range plan together and while we're currently reevaluating, even in the near term, we've taken a very cautious assessment about the near term. And we think we're justified to do that. And we must do that. We've been operating very successfully, inside the bounds of a once in 100 year global pandemic. We've also done one heck of a job managing the supply chain. But it's not only our ability to manage the supply chain that we have to stay focused on. We're looking one in two steps downstream from us. And we have to be mindful that even though the demand environment is feeling very, very strong, that our customers and their customers also have to operate inside this very complex global supply chain. And by the way, when the Intel CEO says that chip shortages will persist for a couple of years, we have to pay attention to that. So our ability to manage through this, I feel very confident we have the very best team in the world to do it.

And I think that we can begin to feel, this - as we started the quarter, we had a little bit more of a challenge. As we started the quarter, this quarter than we had the last couple of quarters. I got great confidence in our team, but there's only so much that they can do. And so we will play this. Every quarter, we will do a very, very aggressive look. We manage this business, day by day, month by month, and we have our heads on a swivel about what we need to do to keep everything on the track that we're on. Okay, I'm really excited about it, Jim. It's going to be a challenge, but I think there's no better team in the industry to work through it.

Operator

We'll take our next question from Christopher Rolland with Susquehanna.

ChristopherRolland

Thanks, guys, and Chuck, this might be a follow up for you. I'm trying to put all the pieces together here; your backlog was fairly flat here. It sounds like you have some additional constraints that we grow backlog, stuff like Finisar transceivers, I think if you want to talk about any other areas of constraint, growing backlog that would be great. But then given your fairly flat backlog, what areas are actually loosening up for you as well, that you're able to fill? Yes, just that high level perspective of backlog, just where you still have constraints and where you're able to fulfill fully?

ChuckMattera

Well, every manufacturing line has constraints, whoever runs the constraints and controls and runs the business. So our whole ability to be able to maximize the yield and throughput through the constraints is our main focus. We have lots of factories, lots of manufacturing lines; we have a common discipline toward constraint management across the company. I don't think I'm going to be able to articulate for you every one of the constraints. If you say where we have any excess capacity, there's not a lot of it. There's not a lot of hanging around. And that's why we have been investing in capital. And we will continue to invest in capital and capacity to enable us both to break the constraints, and to be ready to launch new products and new platforms to drive the growth from 2022 and beyond.

Operator

We'll take our next question from Meta Marshall with Morgan Stanley.

MetaMarshall

Great, thanks, and congrats on the quarter. Mary Jane I just wanted to spend a second on the EPS outlook. On a similar kind of volume to fiscal Q3. And so, I understand the commentary you gave around the preferred shares and some of the COVID costs, but are there any other factors we should be considering that are more fiscal Q4 specific, like bonus true-ups or if some of this just mix of the businesses we step from fiscal Q3 to fiscal Q4? Thanks.

MaryRaymond

Sure. Well, I think if you think about our remarks on the one hand with respect to various things about supply chain, COVID, et cetera. We are probably taking a bit of a conservative approach as we look at Q4 given the various things we could encounter and the EPS is a little bit of a reflection of also the wide range we have in the revenue guidance. It is true, Meta that it's our year end; we do sometimes have true-ups at that for, say compensation. We recognize, for example that happened last year. So we have been working to not have that be too remarkable. But at the end of the day, there could be a little bit of that. Certainly as we finish out the year, I would say the main thing, though, really is that should we see spikes from a COVID point of view that drives some cost, but it's really more of the shortages that could just drive efficiency in the company in Q4 no. Having said that, as you can see, for all of our other quarters, we work very, very hard to offset those, we also try our very best to anticipate by being extremely paranoid before it even starts. But there are as Chuck was indicating growing shortages in some parts of our components that could make it a little bit challenging, as I noted in terms of just the basic moving work in process inventory to finish goods to be able to sell it. And notwithstanding Chris's comment earlier that the backlog was pretty flat, there's certainly people in our company that think that backlog contains revenue, we should be shipping already. So our focus is to really deliver to our customers needs.

Operator

We'll take our last question from Michael Genovese with WestPark Capital.

MichaelGenovese

Great, thanks very much. It doesn't sound like there's been a change. But I just would like any comments on expected regulatory approval for the Coherent deal? Do you have processes going? And then if you could just clarify for me, I'm confused about the preferred dividend if it repeats beyond the fourth quarter, and if it does how often?

MaryRaymond

Right. So first of all, with respect to the filings going as planned, we're already filed in the United States. We're in process for the other jurisdictions. I think S-4 - I have already seen that, and then with respect to the dividend, oh, certainly, it's a quarterly dividend. So it's 5% a year. And is calculated and accumulated quarterly. And as I said, it's a stock paid and capitalized to the principal for the first four years. So yes, the dividend is every quarter, same in the series B same as it is for the Series A.

Operator

That concludes today's question-and-answer session. At this time, I will turn the conference back over to the speakers for any additional or closing remarks.

Mary Raymond

Thank you, Shelby, very, very much. Before we end our call today, we'd like to invite all of you to the II-VI Advanced Markets and Technologies event to be held virtually on May 20 from 10 o'clock in the morning to noon, Eastern US time. We'd love to have all of you there. Thank you so much for joining us today. Have a good day.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.