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Good morning, ladies and gentlemen. And welcome to the II-VI Incorporated Fiscal Year 2019 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. And now I would like to turn the conference over to Mary Jane Raymond Chief Financial Officer. Ma'am you may begin.
Thank you, Glenn and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at II-VI Incorporated. Welcome to our third quarter earnings call for fiscal year 2019. With me on the call are today is Dr. Chuck Mattera, our President and Chief Executive Officer; Dr. Giovanni Barbarossa, our Chief Technology Officer and the President of the Laser Solutions segment; and Gary Kapusta our Chief Operating Officer.
This call is being recorded on Wednesday May 1, 2019. Just as a reminder, any forward-looking statements we may make today during this teleconference are given in the context of today only. We do not undertake any obligations to update these statements to reflect events subsequent to today. With that, let me turn the call over to Dr. Chuck Mattera. Chuck?
Thank you, Mary Jane. Good morning, everyone and thanks for joining us today. It was an equally exciting and productive quarter for II-VI. Before I review our results, I would like to give an update on the Finisar acquisition. First, I would like to thank the boards of both companies Finisar's CEO Michael Hurlston, the Finisar leadership team and particularly the II-VI employees around the world who worked tirelessly to deliver another solid quarter's performance.
The transaction was approved by 97% of the shares voting at our special meeting and 99% of the Finisar shares voting at its special meeting both on March 26. It is also being cleared by four of the five required countries all but China where Phase II of the Chinese process under the state administration for market regulation is well underway.
While we cannot predict a closing time line, we're engaged with experienced U.S. and in-country advisers on the filing process in China, and we remain optimistic that we will be successful in a reasonable timeframe which we still believe will be midyear. The feedback from our customers about the combination continues to be extremely positive, as they anticipated the benefit of the increased size, the technical depth and breadth of our people and our complementary portfolios; our ability to scale and our relentless drive to serve them.
Although, we cannot engage with customers about any planned actions of the combined companies, we are listening to their ideas and inputs for new business opportunities around optical communications to growth and evolution of Hyperscale data centers and the increasing adoption of 3D sensing and LiDAR. We believe that our combined market leadership in the rapidly accelerating global 5G infrastructure deployments, which have already begun and will continue for several years make this an opportune time to be combining.
To help plan for a smooth integration and position us to drive the benefits of increased scale, we have created a transformational integration management office staffed by experts from both companies with world-class consulting advice to help run the process. I am pleased with their progress as we detail the plans required to ensure confidence in the delivery of the $150 million of cost synergies over a 3-year period. In fact, we are also using this process to design transformative approaches to leverage the scale and best practices of both companies.
Now turning to the quarter. Our teams collaborated to overcome some near-term unfavorable conditions in the market with our one 3D Sensing VCSEL customer and yet they still delivered another solid quarter within our guidance. Bookings of $359 million grew 8% compared to last year following significant bookings last quarter. Led by growth in our Photonics segment the revenue of $343 million grew 16% and EPS on a non-GAAP basis grew 35%.
Our strong position in the optical communications market showed outstanding growth for the company at 44% compared to Q3 of FY 2018. Most of the growth came from extremely strong laser and optics component and subsystem demand for ROADM and undersea networks. ROADM products grew over 80% year-over-year. In fact, during the quarter all areas of communications grew compared to last year with the exception of datacom which is now only about 8% of our communications revenue. Sequentially, revenues were steady as customers and suppliers took more time than in the past with their Chinese New Year holiday.
Based on market momentum a significant uptake in bookings in March, the timing of our capacity additions and our successful penetration into new accounts, we expect demand in the global optical networking market including in 5G optical networks to continue to drive strong growth in the second half of the calendar year. Our revenue into the semiconductor capital equipment market grew 29% as the EUV market remains strong for II-VI. Demand for our market-leading silicon carbide substrates was also very strong and now it accounts for 6% of our revenue.
Of particular note is the 70% growth over last year for our substrates led by those OEMs making silicon carbide based power electronic devices including for electric vehicle applications. The industrial end market overall for II-VI grew sequentially but was a slightly down year-over-year. However, early indications from customers are that the market is strengthening particularly in China.
Turning now to our 3D Sensing business. Our year-to-date revenue has increased 52% and accounts for 4% of our consolidated year-to-date revenue. In Q3, however, our forecasted revenues did not materialize as expected as the 3D Sensing market was not only seasonally soft but overall has been developing more slowly than was expected. Therefore, we reduced our inventory build plan during the quarter and accelerated operational cost controls to record a $0.06 negative impact of these conditions in Q3.
This slower market demand is expected to negatively affect Q4 EPS by at least $0.06 and even higher in our conservative scenario before seasonally strong demand resumes in the second half of calendar 2019, which we are in the process of operationally preparing for and looking forward to. 3D Sensing demand has the largest effect on the Laser Solutions operating margins in the quarter.
And having said that our work on new designs is progressing extremely well, and our recent design win for a major android platform should be realized as revenue in calendar year 2020. I look forward to a strong close to FY 2019 completing out another very good year. And with that I'll turn it over to Gary to discuss some of our operational initiatives and achievements. Gary?
Thank you, Chuck and good morning. As a function of the quarter's results, communications accounted for 47% of revenue; industrial including automotive was 25%; military was 10%; semiconductor capital equipment including EUV was 8%; and consumer electronics including 3D Sensing was 2%. Our silicon carbide substrate business across all end markets accounted for 6% of revenue.
Geographically, Q3 revenues were distributed 42% in North America; 21% in China, 21% in Europe, 8% in Japan and 8% in the rest of the world. Our largest capital investments were in EUV materials, silicon carbide substrates and optical components for communications applications especially in support of 5G and submarine deployments. These factories are operating at full utilization.
We are continuing to install additional capacity consistent with our record backlog and customers forecasted demands supported by long-term agreements matching our profitable growth objectives. We now accept our CapEx to be about $150 million for the year. We did take every opportunity in Q3 to flex labor down in certain part of the business.
For example, we did this to allow the majority of our workforce in China to take some well-deserved time off to enjoy their Chinese New Year holiday for the first time in recent years. This was aligned with the work schedules of our customers. We also temporarily reduced work schedules based on our lower 3D Sensing inventory build plan.
We are now several quarters into our cost control campaign and we are beginning to see good results. Though this is only the beginning of what will be sustained journey for II-VI. We continue to tighten our cost and expense controls across the company to offset onetime expenses associated with the anticipated Finisar acquisition. Our goals are continue to provide our customers with the best-in-class quality product at the lowest possible cost of ownership by continuing to leverage our vertically integrated supply chain and focus on controlling expenses operational excellence, fully utilizing on-installed capacity and by accelerating our materials and labor productivity efforts. With that I'll turn it over to Giovanni.
Thank you, and good morning. Since the last earnings call we present the three important trade shows. Photonics, OFC and laser Photonics in China where we displayed our latest technologies and product platforms. They were received by customers across many end markets. In industrial materials processing markets, we announced the modular high-power laser processing head which offers the ultimate flexibility in purpose control of the laser beam with a broader range of optical expansion models.
This head enables a wide range of application-specific laser welding tasks including welding for batteries for electric vehicles for which we can already report our first design wins in which we expect to drive renewed growth. We also announced the third generation of our board leading laser cutting head extending its power rating up to 15 kilowatts to meet the growing demand for faster and faster cutting speeds. The opening of our service center for high-power laser beam delivery systems in Xuzhou China complements our North American and European centers to support our customers for new and existing products.
In their back biomedical and scientific end markets now 4% of our total revenue. We introduced a family of fiber-coupled visible lasers for that enable more precise share count. In communications, we demonstrated our new 56 gigabits per second pump for VCSEL arrays for 200 and 400 gigabit internet applications. We also announced a local count Wavelength Selective Switch or WSS, aimed and meeting the performance and cost requirements of ROADM nodes for 5G networks.
And I'm pleased to report our first WSS design wins for undersea optical networks. This expands our share of the undersea optical network market which includes pump lasers, mux/demux filters and detectors. Our collaboration with Sumitomo Electric Device is progressing as planned for an on-time production ramp-up gallium nitride on silicon carbide power-led devices in the second half of 2020.
In addition, as an industry leader in synthetic diamond, we shipped our first diamond-coated substrate enabling high-performance gallium nitrate RF-powered devices in demanding radar and satellite applications. For 3D sensing, we made great progress on several new and complex designs that we expect to start shipping in the second half of calendar 2019.
Our adoption of 3D sensing technology in Android phones is materializing. And we're very excited to report a design win with the smartphone market leader while we continue to work on several others in parallel. Our customer engagements for lighter applications continues to grow thanks to our broad offering of optical components and laser sources ranging from compound semiconductor lasers to optical fiber-based platforms to ceramic solutions.
In the military market our acquisition of Redstone Aerospace allows us to expand our capabilities with high-performance solutions for high energy laser applications and accelerate the deployment of next generation defense laser systems. With that let me turn it over to Mary Jane.
Hello, good morning. The company's overall gross margin for Q3 was 37.2% reflecting the factors my colleagues have discussed, as well as the mix-shift toward optical communication. The operating margin was 9.1% or 10. 3% adjusted for acquisition-related expenses. The EBITDA margin was 16.3% on a GAAP basis and 17. 5% excluding transaction-related costs.
Regarding the segment operating margins the Photonics adjusted operating margin of 12.4% is above last year's Q3 margin of 11.5%. For Performance Products, the quarter was lower at 11% adjusted operating margin. But year-to-date, the adjusted operating margin is 12.7% compared to 12.5% for the same nine months of FY 2018.
The Laser Solutions Q3 operating margin of 6.2% was affected by the seasonally lower 3D Sensing business. But overall it's ahead year-to-date at 9.9% compared to 8% for the first nine months of 2018. The effective tariffs remain relatively immaterial in the quarter. The cost reduction actions both Chuck and Gary discussed are important for profitability and cash level.
While some very large markets are beginning to inflect upwards namely 5G they are not yet at a point of full demand keeping competitive dynamic in the market still very intense. As a result, it's in the exact right time to innovate on our production methods and supply chain practices to improve our cost structure as our markets grow. The Q3 record backlog of $531 million grew 4% sequentially and continues to show good market strength.
This backlog consists of $228 million in Photonics; $208 million in Performance Products and $95 million in Laser Solutions. The backlog contains orders that we'll ship over the next 12 months. Capital expenditures this quarter were $33.8 million. The Q3, FY 2019 tax rate was 9% and we expect a tax rate of between 15% and 18% for the full year. The Q3 tax rate was favorably impacted by the attainment of high tax status at infrared optics plant in China as well as the tax attributes of Redstone.
The reported EPS in the quarter was $0.38 a share and $0.52 a share on an adjusted basis. The adjustments include $7.9 million in share-based compensation; $4.2 million in amortization and $4.1 million in acquisition-related onetime costs including those for the planned acquisition of Finisar. Our cash is $221 million reflecting our $30 million acquisition of Redstone. And our net debt position is $287 million. We did not repurchase any shares this quarter and still have $31 million remaining on our authorization.
We are ahead of last fiscal year's record cash flow from operations at $114 million for the nine months year-to-date. With respect to the financing aspects of the Finisar acquisition, we completed the work to obtain our corporate debt ratings. We obtained B1 ratings from Moody's, a BB minus from S&P and BB rating from Fitch. The term loan A and revolver are both fully priced at LIBOR plus-200 and we have launched the term loan B marketing.
Turning to the outlook, the outlook for the fourth fiscal quarter ending June 30, 2019 is revenue of $343 million to $353 million and diluted earnings per share of $0.33 to $0.39 including $0.11 to $0.13 of integration costs.
On an adjusted basis the earnings per diluted share is estimated at $0.63 to $0.71 which includes $0.12 for share-based compensation; $0.07 for amortization expense and $0.11 to $0.13 for planned integration activities. This is all at prevailing exchange rates. The weighted average share cap is 65.7 million shares. This quarter the convert remains slightly anti-dilutive so we need not add back the 7.2 million shares. Now as we turn to the Q& A for this call, remember, that our actions may vary - our actual results may vary based on product mix, customer orders competition and general economic conditions.
I'll also remind you that our answers to your questions may contain certain forward-looking statements. We will answer them on the basis of our best knowledge today and our actual results may differ materially. In addition during the Q&A, we will abide by our obligations to protect our customer confidentiality. Lance, you may open the line for questions.
[Operator Instructions]
Your first question comes from the line of Jim Ricchiuti from Needham & Company. Your line is open.
Thank you, good morning. Chuck, I was wondering if you can maybe expand on your comments you made about seeing some signs of recovery. Presumably you were referencing the industrial part of the business in China.
Sure, Jim. Good morning, thanks for your questions. I would reference it right through today. January and February were typical; February was a little slower than usual. March was almost explosive for us. And it seems that including just in the last few weeks or so we think to have a lot of chatter and request on the industrial market --from the industrial market in China in particular. That's the gist of it.
Okay. That's helpful. Mary Jane, I am wondering if you can talk if it's possible to break out some of the impact on gross margins with respect to the 3D Sensing business. Was that much of a headwind on gross margins? I know mix certainly impacted the gross margin this quarter in terms of the optical shift but was the underutilization in the 3D Sensing business impact as well?
Well, I would say that was most of it.
Okay. Terrific. And one final question from me. Just I was wondering if you might elaborate or give us a little bit color on the small acquisition on the military side Redstone.
Okay. Let me take that, Jim. Thanks a lot for that. As we mentioned, either one or two calls ago, we also acquired another small company. We're intending to build out and revolutionize high energy laser technology enabling a new class of systems for our customers. These two investments underpin irreversible market trends and intrinsic and asymmetric advantages of deployment of high energy lasers for multiple new military applications. Although they are small, they fit real nicely and are a great example of II-VI acquisition strategy. I believe and I'm expecting that just those two small acquisitions alone in combination with the business that we have could contribute greater than $200 million of revenue over the next five years. Just to give you a sense.
Your next question comes from the line of Tim Savageaux from Northland Capital Markets. Your line is open.
Hi, good morning. Couple of questions for me. First, if we can focus on the communication side, well maybe I'll combine these two. You saw very strong bookings I think orders up nearly 50% year-over-year. I wondered if you could kind of dig into the drivers there from a geographic standpoint to what degree you're seeing China as a major contributor here and to the extent we're looking at China mobile backbone upgrades later on the in the year.
To what extent you think that demand is sustainable in the communication side in China? And then just looking at the overall guidance as to what extent that reflected in your go-forward guidance. And you talked about industrial really bouncing back. You had a very strong order book in Photonics. The guidance is up sequentially but you're pretty modestly so. I wondered if you can talk about kind of what's impacting that relative to both very strong Photonics bookings and your anecdote commentary on the industrial side.
Okay. There's a lot there. I think we'll have to team. Let me make some comments and Mary Jane can listen in and absorb and maybe reflect on the guidance. But, Tim, let's take a first question about the market itself as it relates to communications. Here's what we're seeing. In Europe, I would say there've been slightly softer but demand especially around 5G is increasing. In North America, it's stable, strong and coherent offset by a slower demand in cable TV particularly as the large acquisition that we see in front of us, that we are part of a supply chain of it so itself out.
Here's the strong demand, very strong overall is coming throughout the supply chain that we serve both in China and in India. So maybe that's a good starting point. We see the beginning of this 5G happening. We're expanding our capacity we're sold out our pumps, our passives, our amplifiers; our channel monitors our wavelength selector's switches. We're in a state of extreme demand on us. And I'm expecting based on our checks with customers and our discussions with customers, I'm expecting it to continue into the second half of the calendar year.
And maybe I'll stop here. Let Mary Jane take the guidance and we'll come back to industrial because you got quite a few --you're trying to get a discount asking three questions all at the same time.
So, Tim, I'd say with respect to the growth in the quarter, we had a decent amount it from China. But while I would say that we perhaps had - we had good contribution from the growth from China and from Japan. While not so much from the U. S. The U.S. market remains very, very strong. The U.S. market so far had been the strongest contributor to the communications growth actually. So that's the first thing. The second thing is with respect to kind of how we're thinking about the guidance.
So, first of all, we are beginning to see a pickup but our guys in the --who are responsible for the communications business have worked very, very hard over the last three years to increase and we get longer-term agreements. And therefore, unlike what we may have seen in optical communications five years ago where the bookings in a quarter turn into revenue the next. This is not all revenues related adjusted shift next quarter. So we looking at a very, very nice growth trajectory we think here but not so much and it will be in next quarter as well, but it isn't all in the next quarter is probably the main thing to say. I would say while we're also hearing good indicators from customers on industrial picking up, I'm not sure it's a straight inflection up in Q4.
So we've been a little bit cautious about how much we've counted on that. And then for 3D Sensing it is traditionally one of the lower quarters not withstanding that we are significantly gearing up in the back half of the year. How do we do on that?
Your next question comes from the line of Sidney Ho from Deutsche Bank.
Hi, good morning. Thanks for taking my call. I want to ask about on the silicon carbide side. Can you give use a sense how much of your silicon carbide revenue has come from long-term contracts that you have a pretty good visibility on? Are these long-term contracts, they have minimum volume take-or-pay? Do they schedule step down or volume pricing? And do you expect the portion of the long-term - revenue from long-term contracting increase over time? That's my first question.
Okay. So first of all, yes, the silicon carbide business is probably one of the most product lines we have. So I'd say nearly all of the silicon carbide is on long-term contracts. So that's the first thing. The second thing is with respect to your question about I think overall economics. Our company has been very, very focused on contributing to the long-term growth of this market. And to that end is reason that we've also worked on our production innovations to both increased yield and output but also look at how the cost of production progresses over time. But in any event I think I got most of questions there. Tell me if I didn't.
No, you got all of them. My second multipart question is that in terms of capital spending you guys talked about $150 million today. In the past you talked about in the fiscal 2018 you talked about how much you spent on each division or each segments. I think it was $27 million in silicon carbide. Can you give us some sort of similar breakdown for this year? And on the specifically on silicon carbide, can you give us a framework how you think about the growth in CapEx in silicon carbide relative to your revenue growth. Are you looking at CapEx to forward-looking 12- months sales? So any metrics that you look at to justify that kind of capital spending. That we'll be great. Thanks.
Okay. So, first of all, we give the breakdown of how the capital was spent at the end of the year. We actually don't do it by quarter. But I can tell you of the capital that we've spent so far in this year, a decent portion of have been for silicon carbide. As I just mentioned to you, silicon carbide is probably one of the most booked businesses we have. With respect to the capital investments in silicon carbide, I think it's important to think about investments period including those that are in what effectively is OpEx and engineering. Because the single greatest advancement in the capacity of the any grown product silicon carbide, diamond whichever is actually the ongoing yield improvement which is why Chuck said we have a yield improvement plan at every single factory that we own.
So we will be looking to both innovate on how the material is being grown, tested et cetera, as well as CapEx for additional machines. So as we look at the CapEx for silicon carbide, first of all, I think it's as you know, the vast majority of the industry but certainly we build our own machines that we don't just build them one at a time, we do put a tranche into the time but we also time that to the demand of the customers. So, I would expect in the silicon carbide case that we're probably in the period for some time now of capacity pretty much continuously going in by tranches. Go ahead Chuck.
Yes. I would like to - good morning, Sid, and thanks for your question and thanks Mary Jane. I would like to add, we believe that market analysts have and are underestimating the requirements for silicon carbide substrates. We have a plan to double our capacity over the next 18 to 24 months. We will expand our output on the basis of improved productivity and yields as Mary Jane said. And we are in touch with customers and even our capacity plans are doubling in 18 to 24 months to sustain our really bullish view about this market. We may accelerate that. We may slow it down on the basis of market conditions. But that to actually give you some sense for the rate of capacity additions based on our belief in both the market and our strong position in.
Your next question comes from the line of Meta Marshall from Morgan Stanley. Your line is open.
Meta Marshall from Morgan Stanley.
Great. A couple of question. Just on the ROADM business kind of when you talk about the growth you're seeing in that is that purely CoAdna? Is that kind of pump lasers and other things that you would kind of consider overall ROADM demand? And then maybe second on the Datacom business, you mentioned that it didn't grow. Just any commentary there on what you're seeing maybe intra data center versus enter inter data center? Thanks.
Okay. So let me do the datacenter, one second. Let me just come right to the point. Good morning, Meta. We have been and are continuing to experience strong demand for pump lasers, optical channel monitors, passive components, EDFA modules, ROADM line cards, WSS optics and WSS. What I mean is across the board our full line portfolio is in strong demand and that's what's driven more than 80% growth that I referred to earlier. With regard to the inter data center and the data center market, the decline in the datacom market that are reported, we're expecting that market to begin to come back in the second half of 2019, but not at all inconsistent with reports from the marketplace about a slowdown in the datacom business.
Some channel inventory. We've experienced that but our discussions with the customers all point to the strong sense that the second half of the year we could begin to see a return to more normal pickup in demand.
Got it. But it wasn't anything like inter or intra data center delineate it. Just kind of overall expectations on it paused and kind of resumed in the second half.
Mostly, mostly intra-data center.
Your next question comes from the line of Dave Kang from B. Riley FRB. Your line is open.
Yes, good morning. My first question is regarding the Android win. Chuck, I believe you said it will ramp in 2020. I may have missed it. Did you say it's fiscal '20 or calendar '20?
Calendar '20.
Got it. And then on the Redstone, Mary Jane, I think you said - how much did you pay for Redstone? I think I missed that number.
$30 million
$30 million. Got it. And can you provide their revenue run rate, end margins and whether it's an accretive or neutral, any color on those topics?
It's a pretty small acquisition; we're not going to disclose that.
It's a small but strategic, and Dave, I don't know if you're on the call, I repeat it - both combined with the earlier smaller acquisition that we've talked about in the past, I am expecting that they will be accretive to our rapidly developing roadmap in high-energy lasers for our aerospace and defense business, and could contribute at least $200 million of revenue inside in the next five years.
Got it. And then my last question is once again going back to the ROADM products that was up 80% year-over-year, how did they do sequentially and then how should we think about their growth in fiscal fourth-quarter? What's baked into your fiscal fourth quarter guide is my last question? Thank you.
Right. I would say first of all with respect to ROADM components as a general matter, it was a pretty decent sequential growth and I would say with respect to Q4, we have certainly baked in some growth compared to last Q4, but as you know we actually don't detail the guidance by end market. But generally speaking, I would say, we've seen a few quarters here of the optical communications market picking up, and we expect to see that continue.
Yes. I would just add Dave, that as I said, we are sold out and so our ability in Q4 to expand much output is tied to our ability to generate as Gary said the maximum utilization of our facilities. So, really we are taking stock now of our requirements in the second half of our calendar year as we think about our fiscal year 2020 budget as a standalone II-IV before the acquisition. Right now we are in a spot where we are working vigorously to reduce our cycle times, break the constraints, work the supply chain, but when we are in a sold-out position. There is not too much more output that we can get from the facilities we have.
One more question, if I could? I believe you said, Chuck or Mary Jane that as far as our communication strength it was mainly driven by China and India. Obviously, you don't sell directly to India; I assume you sell through like Chinese customers like Huawei, for example?
Well, David, we were asked a question about geography that's why we answered it that way, and our channels into the market, as you know, we sell components to device OEMs and particularly components into network equipment in our manufacturers, and those network equipment manufacturers are the largest in the world and they address the markets in all of these geographies, as you know.
Dave, just so we are together, my comment was that the growth in the quarter was a big contributor from China as well as Japan, a little bit lesser from the US market, but the actual revenue in the - what's very, very good from the US market, it's just the US market has actually been the one been stronger all along.
Our next question comes from the line of Richard Shannon from Craig-Hallum. Your line is open.
Good morning, Chuck and Mary Jane. You were asked a question on gross margins, obviously has been down for a few quarters here, about a year ago you were doing 40% and even early last year a little above 40%, how should we think about the path back towards that maybe if I can ask and kind of some of the information you gave earlier in the call, I think you said 3D sensing was about a $0.06 impact if I assume that's all in gross margins, then it would get us a little bit more than 100 basis points back from that.
I am assuming photonics mix is another impact, but Chuck maybe you can help us understand whether you think getting back to 40% obviously excluding the potential acquisition of Finisar that can be a reality for you?
Yes. Well, I think, first of all, you are well on the right track there which is that the gross margin is affected by full utilization of our - about the assets. So 3D sensing was one of the major contributors and I said earlier probably the largest contributor the gross margin went down. At the same time in the development of new product, while the bulk of the money to develop new products and designs are in due course, they do manufacture - to develop products for manufacturability, which means that they also sometimes use time on the lines and that can have a little bit of a dampening effect on the gross margin.
Generally speaking, I would say that that there's a little bit of dampening across the performance products too from a gross margin point of view, the less impact actually more temporary. So I think generally our performance products teams, many of which, if not all of which, the divisions are doing well, getting back onto their stride from Q3, 3D sensing picking up and then industrial resilient]. Keep in mind that as we have often said that the margin for industrial products and grow materials tends to be higher than the corporate average.
So a little bit of kind of flattish performance on a mix with optical communications picking up is kind of affect the margin a little bit, and I think when they are all up and growing which has happened quite a bit over the last three years, I think we'll see the margins resume.
Okay. Fair enough. Question on ROADM, maybe I'll ask you more directly than one of the prior questions here, but I think you're talking about 80% growth here in the ROADM in the March quarter, what would that number have been without CoAdna?
Oh, I would say it's probably still pretty decently up - hang on there. Ask your next question; I'll look at it for you.
Okay. And then I guess a follow-on in within ROADM and I would like to talk about this organically excluding a CoAdna as well or if you want to blend this somehow, but how should we think about kind of unit growth versus content and ASP growth within that ROADM bucket going forward? [Multiple Speakers]
Well, first of all, I think the growth year-over-year still would have been very, very good without CoAdna probably not too far off without CoAdna because obviously within the second quarter sequentially. So it would have been still quite strong. I would also say that with respect your question on ASP, I mean the communications market has the most ongoing pricing pressure of all the end markets we are in probably with the possible exception of consumer, and because I don't think the market is fully utilized at this point, I think we expect to see those dynamics continuing before they potentially mitigate a little bit going forward.
Yes, I'd like to add regarding CoAdna, Mary Jane is absolutely right, you know, it would still have been very strong of its own right, but this is a portfolio that CoAdna have and their ability to excite the people who are designing 5G systems and 5G infrastructure especially in China is really exciting, and is a great complement to a high port switch that that existed Finisar as we look forward. The - our ability to serve other components around the WSS is really also a strong part of our overall strategy and it remains that really, really exciting. I also want to say the team has done a great job. CoAdna is fully and completely integrated into II-VI and they've really done a fantastic job.
Ron, I was asking did you get all of your questions.
Yes. I think you did. I'll have one last question; get a line here just related to the Redstone acquisition. I guess more specifically about the high energy laser market. Chuck, you mentioned kind of a $200 million bogey over the next five years, when do we start to see first contribution? Is that within a one to two-year timeframe or is that a little difficult to predict?
Well, as Mary Jane said it's a - Redstone is a small strategic acquisition, but is on the radar screen of every one of our large aerospace and defense customers. They know - they have known them and know them even better than we do and their products are highly differentiated; they are being designed in. There is a strong demand for more and so we will work with that great team at Redstone to accelerate the deployment and the expansion of their capability. It will be - it'll be slow because the design work and the ramping will take us a little bit of time, but once it all gets into a spot where our customers are happy with our capacity plans, I think it will take off and I am counting on it, and that's why I gave you a sense for that inside our long-range plan which is unusual because I generally don't do that, but I am really excited about it because this is one - this is two actually that are so strategic and they're going to catalyze our position in the supply chain in this market.
We were extremely well differentiated and well positioned in my opinion and I am really excited about it.
Your next question comes from the line of Paul Silverstein from Cowen. Your line is open.
Good morning and I apologize that there is some connectivity problems. So Chuck and Mary Jane, I apologize of this asking repeat yourselves. Especially overall comms business I heard some different things this morning; I want to make sure I understand. It sounds like the overall business was and remains very strong, is that accurate?
Yes.
Yes.
All right. And Chuck, you recently said that your capacity constrained sold out of ROADM, any idea of how much revenue you have left on the table?
Actually I think - no, I mean first of all, several of the components that we have, we work to keep just a little bit capacity constrained because this is one optical communications is one of the most volatile markets obviously in the II-VI portfolio. We have seen some really outstanding work by our teams when the demand is presented to them to, to increase their production - various ways whether it's running longer hours, changing the shifts and releasing bottlenecks et cetera. I am sure that they will do a very, very good job on their delivery for Q4, and I think compared to last Q4, we'll probably see some nice growth. I think Chuck was specifically talking about sequential.
Yes. And I - it's a real good question, Paul, it's not an easy one to answer, but, in direct communications with the customers, I believe that our products are designed into sockets differentiated and our task is to not focus on that, but our task is to be able to break the constraints. And I have committed to them that we'll do everything that we can to do that even within the quarter and work with them to reschedule shipments as early into the first quarter of fiscal '20 as we possibly can.
There is just an awful lot of collaboration happening right at the interface with the customers to make sure timing is the best that it can be, and we have to stay focused on that because people are needing what more of what we make, and that's really a great position to be in, but we have a responsibility to do even better than what we're doing and we are working towards it.
And Chuck, do you commented on your 980 pump business?
No. Except to say that our portfolio of ROADM products including our pumps is in extremely high demand and what I didn't say, but I could say, is that just to come back to the widespread deployment of submarine networks, our 980 pump business for the submarine market is also continuing to grow. We have one new sockets at new accounts and those accounts are expanding their demand in the third quarter was good; in the fourth quarter I am expecting it will be even better. And by the way for the submarine market, if I didn't say, I would like to say that the CoAdna team has done an extraordinary job, and we are now have our first - wavelength selective switch qualified for the submarine network; really exciting.
All right. One last question for me; if I could return to that regional discussion, I was a little confused, I thought, Chuck I heard you said that the US was weak and then I thought I heard Mary Jane say that the US was strong, can you just clarify?
I'll just say, let me say, first of all, North America, I would - we have really, really important customers in North America and we are focused on serving them and it's been stable. It's been strong particularly coherent and it was offset I said by slower than usual demand from the cable TV and fiber D people because there's a large acquisition integration that's taking place, but we are very bullish about cable TV and fiber-D architectures. We have been in discussions with the leaders in North America; we think that that's going to be a good long-term opportunity for us.
And what I said was in Europe and this - we have had slightly softer sales, but the demand particularly driven by 5G is increasing coming from our European customers, and it's part of our capacity for try to adding in capacity for 5G. But in general the strongest overall demand has been from China and in India and our customers there.
The final question comes from the line of Tim Savageaux from Northland Capital. Your line is open.
Appreciate the follow-up and 3D related questions here, both with regard to kind of current revenues and expectations. First, and Chuck, I think you mentioned some sequential growth on the industrial side. Can I infer from that, that Laser solutions grew sequentially in Q3 x 3D sensing or no? That's kind of a short term 3D related question. And then and what kind of medium term, I wonder if you might - you mentioned gearing up for the second half ramp kind of in the new product cycle, wonder if you could characterize that ramp at this point relative to what you saw last cycle?
Do you expect growth? I guess over what you saw last cycle? And I think in addition to the Android win for 2020, Giovanni made some comments about second half 2019 design wins that I am not sure I caught on the 3D side, did you mean to imply some additional revenue drivers in the second half of calendar '19 outside of the main product cycle?
Okay. First of all, laser solutions did grow in 3D sensing then respect to 3D -
Yes, we expect to see the same pop-n that we saw last year, but I believe would be a little bit - would be higher than last year. I think we - as we said we are going with the multiple designs and we should be in a better position than last year. But the seasonally the pattern will be very similar.
We are running out fortune for your question there, 10 minutes ago?
I think we hit it.
I am showing no further questions at this time. I would like to turn the conference back to Mary Jane Raymond for closing remarks.
Thank you, Lance, very much. I would like to thank you all for joining us today, and we look forward to speaking to you when we come to our full-year fiscal year 2019 year ending call that is now scheduled for Tuesday, August 13, 2019 at 9:00 a.m. Thank you very much for joining us and have a great day. See you soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.