Q1 2023 Coherent Corp Earnings Call

November 9, 2022

Yeah.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Ladies and gentlemen, thank you for standing by and walk through the coherent Corp. FY 'twenty three first quarter earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone I would now like to turn the call over to your host Mary Jane Raymond Chief Financial Officer, you May begin.

Thank you Kevin and good morning.

Mary Jane Raymond the Chief Financial Officer here at Coke, Aaron Karp welcome to our earnings call today for the first quarter of fiscal year 2023.

This is our first earnings call as coherent Corp, and the call is being recorded on Wednesday November nine 2022.

With me today on the call is Dr. Chuck Mattera, our chair and Chief Executive Officer. After our prepared remarks, both Dr. Mark <unk> President of the laser segment and Dr. Giovanni Barbarossa, our Chief strategy Officer, and the President of the materials segment will join us during the Q&A.

To better explain the unique benefits of our strategy. The results we are reporting today as well as the exciting prospects, we have to expand our footprint and our broad markets as we go forward.

For today's call the press release and Investor presentation are available in the Investor Relations section of our website coherent dot com.

Our fiscal year 'twenty two ESG report for legacy two six is also on the website. It highlights key points of our board and employee diversity mainland at 46% of our board are women and our persons of color.

And at 49% of our workforce, our women as well as our investments to support stem and educational advancement.

Toward also details are products that are critical to improvements.

Energy efficiency, and the increasing sustainability of our locations that produce them.

In fiscal year, 'twenty, 229% of our legacy <unk> energy consumption came from renewable resources, 100% of our European legacy sites are on renewable energy sources, and we exited this year purchasing approximately 38% of our electricity from renewable sources and our legacy.

<unk> I think you'll like this report it when you get a moment to read it.

Today's results discussion includes certain non-GAAP measures non-GAAP financials are not a substitute for nor superior to financials prepared in accordance with GAAP. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in todays documents.

Mind, you that during this call, we'll be making certain forward looking statements, including but not limited to statements regarding macroeconomic trends expectations for our products and technology trends in our markets and our expected financial performance, including our guidance.

In addition, we will discuss expectations regarding the recent acquisition of coherent Inc.

<unk> market opportunities and expected synergies.

All forward looking statements are based on current expectations forecasts and assumptions and involve risks and uncertainty that could cause actual results to differ materially from the statements made today.

Our comments should be viewed in the context of the risk factors detailed in our most recent Form 10-K filing for the fiscal year ended June 32022.

Coherent assumes no obligation to update the information discussed during this call except as required by law.

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

Thank you all for joining us today.

Nearly 18 months ago, when we were selected as the winner of an intense freeway competition require the company that was long seen as the industry's gold standard of laser technology.

We embarked on a new chapter of our bold strategy to diversify.

Is expand our exposure and participation in growth markets that are inflicting due to irreversible megatrends.

These include industry for Dato.

And the technology and scale transitions that are underway in mobile and the intelligent networks out to the edge.

The internet of things to support <unk> and AI services.

And also those consistent with our vision of a world transformed through innovations vital to a better life today and the sustainability of future generations, including.

Our silicon carbide and battery materials that enable the electrification of transportation.

An important long term contributor to the reduction of global Cotwo emissions.

So with the acquisition of coherent finally, having closed on July one when we enthusiastically got underway. It is from this new base of unique technology and dominance.

A deep penetration into multiple ecosystems.

Drone customer intimacy.

New business models that include products and service and the addition of a huge influx of extraordinary and diverse talent to the broad base, we had before that we endeavor to deliver sustainable long term shareholder value.

On September <unk> 2022, we transitioned to our new name coherent Corp.

Launched our new brand and began trading with a new ticker symbol <unk>.

We adopted the named coherent because it has the universal meaning of bringing things together and.

And I believe that a great excitement that stems from some of our really cool stuff will emerge as we bring our extraordinary talent closer together.

We hit the ground running together and we haven't skipped a beat since.

The first 90 days together, we're super exciting as we followed our well honed integration game plan that we've laid out together with <unk>.

Over a year prior to the close.

We moved quickly into the first phase of our organizational integrations within the quarter with.

With a focus on the worldwide sales and service organizations. So we could deepen our understanding of our position and prospects at our largest strategic accounts.

Many of these accounts became even larger and have even greater opportunities than either company understood before the acquisition closed.

Our next share some highlights of our performance by our four major markets.

In addition to the numbers Mary Jane will report briefly on the substantial progress we made on the start of the integration activities.

I encourage the analysts who participate in the Q&A to direct your questions about the segments to Giovanni for materials and networking and to Mark about lasers.

Before we get into the details, though I'd like to first acknowledge the extraordinary coherent team that overcame many dynamic challenges and delivered a steady stream of industry, leading and award winning products and services to our valued customers.

We work tirelessly to do what we said we would do.

And as always in our company our commitment is evident in our aspirations.

And our actions.

And especially in our results.

Turning to Q1, we delivered for the first time over $1 billion in revenue in a single quarter.

Regarding the lingering effects of the supply chain, we have seen improvements in lead times for some strategic components.

And moderation of shortages for others.

But we are still affected by pockets of supply chain constraints that have yet to show any signs of moderation.

Without these constraints, which totaled $64 million in the quarter, we would have shipped over $1 $4 billion. The top end of our guidance.

However, with the strong winds of demand at our backs, we carried on with determination and delivered $1 34 billion in revenue.

We grew 69% year over year, and 52% sequentially and consistent with our recent strong growth projections legacy <unk> organic revenue grew 20%.

Compared to Q1 FY 'twenty two.

On a pro forma basis, the company grew 13% over Q1 FY 'twenty two.

Turning now to the segments in Q1, FY 'twenty three the revenue contributions by segment was 44% from networking, 29% from lasers and 27% for materials.

As increased market diversification was one of the major elements of our strategy to acquire a coherent.

That rationale is perhaps most evident when looking at the size of our communications businesses.

Q1, we derived 44% of our revenue from the communications market down from the previous 66%.

In FY 'twenty, one 'twenty two when we were a company only a little more than half the size we are today.

With the increased scale and greater market and product breadth. We believe that we now have a much better balanced and sustainable portfolio to drive us into an exciting future rigs.

Regarding our revenues from the other three markets, we derived 34% from industrial 13% from electronics and 9% from instrumentation.

Our earnings delivery was ahead of plan and large measure due to a relentless focus on solid market share gains appropriate pricing discipline, driving procurement costs down and increased productivity.

These factors combined enabled us to deliver solid performance with non-GAAP diluted EPS of $1 four per share.

This was considerably higher than the midpoint of our guidance and favorable favorable FX contributed only about seven in the quarter.

Turning now to the communications markets, we continued to benefit from those customers continuing to make investments in telecom and cable TV infrastructure and we are gaining share in those markets.

Our revenue growth from telecom and Datacom were both strong double digits year over year.

There are both forecasted to show additional gains from that base again in FY 'twenty three compared to FY 'twenty, two with telecom forecasted to grow even faster in datacom.

We continue to drive design wins with our industry, leading coherent transceivers that are increasingly fully integrated into the equipment makers routers and we have strong growth projections for our coherent bookable products in FY 'twenty three and beyond.

Regarding our data center customers, we continue to forecast hyperscale growth in the second half of this year.

We are optimistic about the future as we believe these telecom and Datacom markets will be long term resilience as the insatiable demand for products that consume and generate information move to the edge of the network as part of their digital transformation.

In anticipation of sustained demand and evolving customer requirements driving our differentiated product roadmap, we continue to accelerate our investments in our semiconductor laser fabs in the U S and Europe .

And our assembly and testing facilities throughout southeast Asia.

As a result of the strong communications drivers, we had record revenues in communications with strong performance in both Datacom and telecom, where the split was 57% Datacom, 43% telecom.

Moreover, we had record revenues from our Datacom business as we continue to gain share with the large hyper scaler, while enabling them to realize the benefits of their shifts to higher data rate products.

In the quarter, 43% of our high speed transceiver shipments were at speeds of 200, Virginia and above.

Our shipments of Transceivers for 400, G ramped up and our 800 gig deployments accelerated strongly.

Even with the current macro economic backdrop, our Ethernet transceiver revenue for cloud applications grew at twice the market growth rate.

Given our backlog our current visibility into our customers' projections and our supply contracts that give us confidence in being able to weed. The high speed upgrade cycle. We expect continued strong growth through FY 'twenty three.

Finally during the quarter, we received a number of customer and industry accolades.

One example, we demonstrated our new 200 G AML at the European Conference on optical communications in September .

200, <unk> will enable next generation high speed Transceivers at one six terabits per second and to the best of our knowledge. We were the first to demonstrate error free live traffic and public.

The excitement for such an enabling product has been tremendous from both our customers and their customers alike.

Turning next to industrial our year over year revenues for the pro forma company were down just slightly so we did experienced strong growth in some sectors, including semiconductor capital equipment, which was particularly robust driven by strong demand for our products that underpin EOG and.

And what we believe our strong prospects going forward.

In the display market display capital equipment had another solid quarter with strong and recurring service revenue derived from our substantial fleet of our excimer laser systems deployed worldwide combined with the highest level of new system shipments in more than a year.

Also we continue to win the vast majority of laser lift off opportunities and see continued very strong demand for ultrafast lasers for backend cutting of OLED displays.

We remain bullish on the opportunity for larger size laser in the OLED panels in the segment led by laptops and tablets.

And believe this aligns with reported new generation eight fab investments.

And we will underpin our display business through the next five years.

A recent industry report on the OLED panel opportunity forecast of five X increase in unit volumes over those next five years, which is also consistent with what we hear from customers.

As another example of our enthusiasm about.

The long term prospects of the display business after nearly five years of investment and revolutionary technology.

Our prospects for laser based tools for micro led manufacturing.

Beginning to emerge.

We now have more than 25 active customer engagements with a constant flow in and out of our applications labs.

Customers are super excited about the results of our trials on our 301 micro led demo tools, both in Germany and China.

And for which we just began installing this week our first tool for revenue.

At a well known customer in Asia.

Revenue from our differentiated products for EV battery manufacturing grew 30% sequentially.

Market excitement for our portfolio continues to build as we further integrate our comprehensive product lines of both legacy companies to offer more complete and efficient welding product and service solutions.

We also broadened our successful cutting head portfolio, including our recently released high performance 30 kilowatt cutting head and expect this capability to drive a renewal of growth opportunities.

Turning to the electronics market, our strong performance in Q1 was driven by a surge in demand and record revenue quarter for our sensing business.

Multiple factors have contributed to this exceptional result.

We were first to market with a new sensor technology platform that enables novel functionalities and consumer electronics products.

Second we grew total share by outperforming our competition and time to market.

As in the past, we expect shipments to this market to moderate in the first half of calendar year 2023, while we continue to develop new products for adjacent markets.

Moving to automotive electronics into our silicon carbide business. The electric vehicle industry has been shifting through 800 volt architectures, driven by demand for lower cost fast charging and compact solutions sit.

Silicon carbide power devices are a must have for these applications.

Analysts projected demand will outstrip supply for many years ahead, leading to sustained bottlenecks that few suppliers will be able to break.

We believe that those who have control of the substrate manufacturing.

Current dose will be among those who will be able to grow faster than the market.

Over the cycle.

Our substrate customers have long recognized our competitive advantage and are now securing their supply through long term agreements.

So we are a leader in this industry and we believe we are building a competitive capability and devices and modules as well and have tremendous growth prospects for this business to <unk>.

Finally, turning to the instrumentation market, our instrumentation business delivered a solid quarter with revenues at sustained peak levels.

Our portfolio of diversified products continue to see very strong demand, including for life science applications as revenue from these products hit a record last quarter.

Customers are clearly excited about our combined portfolio as well as the opportunity to provide additional value and expand even further into the life sciences market at the subsystem level.

Now I won't take time to come back on after the Q&A. So please allow me to make closing comments before I hand, it over to Mary Jane.

For over a half a century.

We remain committed to creating breakthrough solutions to solve our customers' most demanding problems while building an exciting resilient sustainable and valuable growth company.

We have the opportunity of a lifetime in front of us.

And despite the uncertainty about the future and the dynamic challenges. We face every day, we are still aiming to achieve double digit growth again, this year and organic coherent and the new coherent too as you saw from our revenue guidance for the full year, which includes all of our foregoing comments.

All of our employees are squarely focused on building long term value for all stakeholders.

From that and a solid financial position, we will continue to do our very best to continue to earn your confidence and trust.

With that let me turn it over to Mary Jane.

Jamie.

Thank you Chuck.

Q1, FY 'twenty, three quarterly market and geographic breakdown of our 134 billion of revenue can be found on page eight of the investor presentation.

It is worth pointing out the new geographic breakdown of the company Q1, FY 'twenty three revenue are now distributed by 53% and Americas <unk>.

18% in Europe .

14% in Korea, and Japan, combined and 11% in China.

Our Q1, non-GAAP gross margin was 43% and the non-GAAP operating margin was 21, 3%.

Supply chain costs were $7 million and are not excluded to arrive at non-GAAP results.

At the segment level non-GAAP operating margins were 19, 7% for networking 27, 2% from materials and 18, 3% for lasers.

GAAP operating expenses SG&A, plus R&D were $401 million in Q1.

Excluding $35 million of amortization $48 million of stock compensation and $61 million of transaction and integration costs non.

non-GAAP opex was $256 million or 19% of revenue.

Total stock comp is expected to be $35 million per quarter in each of Q2.

Q3 and Q4.

The Q1 amount is.

Is affected by the vesting stock compensation of $18 million or change of control.

Synergies, we're off to a good start in the quarter with $3 million in the quarter and $12 million on an annualized basis due to the retirement of several senior executives and the planned elimination of positions.

Quarterly GAAP EPS was a loss of 56 cents and non-GAAP EPS was $1 four with after tax non-GAAP adjustments of $222 million in total.

Currency accounted positively for <unk>.

And the non-GAAP EPS, primarily from a weaker euro and RMB.

The diluted share count for the GAAP results was 133 million shares.

And for the non-GAAP results the share count was 149 million shares.

The GAAP and non-GAAP EPS calculations are on table six and seven of the press release.

Cash flow from operations in the quarter was $80 million and free cash flow was a loss of $59 million, including capex of $139 million.

One time effects on the cash flow from operations included $60 million in payments for the acquisition.

$35 million in ticking fees, those paid at close and $25 million in legal and consulting fees incurred by the laser segment pre close and paid on the closing date.

Pre tax interest expense was $62 million our outlook.

<unk> $274 million for the year included the one month LIBOR, reaching four 2% and is now forecasted on the yield curve to reach a five 3% should that happen on a schedule of expected our call along with our debt came down with our debt payments will be to limit.

The change in our initial estimate to $5 million to $7 million for a total of $2 $79 million to $284 million.

Our net cash at June 30th just prior to the close was $255 million our September 30.

<unk> of cash and cash equivalents was $904 million. Our total debt position is $4 7 billion, we did successfully settle.

$345 million of convertible debt in stock as we planned.

Using the estimated trailing 12 months on a pro forma basis for the combined company at September earnings.

The gross leverage was three eight times and the net leverage was three one times without the synergy credit using our credit facility definition, which allows synergy credit of $250 million. The net leverage is two six times.

The effective tax rate in the quarter was 24% and we expect the tax rate in fiscal year 'twenty three to be between 22, and 24% assuming no adoption of new or additional.

<unk> tax rulings.

The increase in the tax rate is largely driven by a larger presence in Europe as well as M&A cost that are not deductible.

Turning to our outlook.

<unk> for Q2 fiscal year 'twenty three.

Our outlook for revenue for the second fiscal quarter ended December 31.

2022 is expected to be 134 billion to $1 4 billion and earnings per share on a non-GAAP basis to be 88 to $1 per share.

With respect to our expectations on a full year revenue.

We expect revenue to range from five five.

Five to 5.5 dollars $5 billion.

Our non-GAAP EPS estimate assumes that the effects of purchase accounting, which are all still preliminary.

<unk> added back to GAAP EPS other than depreciation.

That is about $5 million in Q2.

This share count is 151 million shares for the entire guidance range.

The EPS calculation, including the dividend treatment as detailed on table eight of the press release for the guidance and also shows when the series B preferred stock it's dilutive.

All of the four galley.

At today's exchange rate NMS, and an estimated tax rate of 23%.

For the non-GAAP earnings per share, we add back to the GAAP earnings pre tax amount of $183 million to $193 million consisting.

Consisting of $83 million in amortization $34 million in stock comp $20 million to $30 million for transaction integration and restructuring and $46 million for the inventory step up.

The actual dollar amount of non-GAAP items, the tax rate exchange rates, the purchase price accounting and the share counts are all subject to change.

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 mix.

Customer changes supply chain shortages, both upstream and downstream.

Competition.

Changes in regulations.

COVID-19 protocols and global economic conditions.

With that Kevin you May open the line for questions.

Ladies and gentlemen, if you have a question or comment at this time. Please press star one on your Touchtone telephone, we will pause for a moment, while we compile the Q&A roster.

Our first question comes from Ananda Baruah with loop capital Your line is open.

Hey, good morning, guys. Thanks for taking the question.

Yeah Congrats on.

On a nice start here.

What appears to be really solid execution and focus.

Two quick ones, if I could Chuck just to start what are your thoughts on macro in your thinking as we head into 2023 does the backlog looking at several right now does that isolate you or I guess, it a backstop to an extent.

Also what business.

Would you believe.

So it could be the most sensitive to macro shade sheet come when you begin to feel greater pressure than in 2020. Thanks. So I have a quick follow up.

Okay. Thanks.

Thanks.

Thanks for your question and your comments.

Well, we have a strong backlog.

The sales forces is busy working to secure an even greater backlog to the extent we can.

The macro environment. However, it is it's the same for everybody our job is to step it up into two what anybody else can do in this market.

And as far as the as far as the markets go well.

Diversified.

It's part of our strategy.

We will never get it to a spot where oil markets are all firing at the same level and so our job is to.

Work to secure as much as we can while we can and to position ourselves for the future because even in those markets that are maybe only growing a little slower today, we have great prospects for the future as well in our portfolio is aiming for.

Excellent.

And then follow up is great gross margin rate.

Very nicely stronger than at least we had anticipated and opex dollars are actually nicely lower than we had anticipated.

So we'd love context around that contributed to the gross margin gross margin strength and do you think it's sustainable.

And then Mary Jane I guess, the same on the Opex dollars did they come in.

Sort of more efficient than you had anticipated.

Looking back to sustainable as well thanks guys.

Hello.

I would say that first of all the gross margin as we talk about every single quarter.

As a fight every day.

So not necessarily.

Predictable, but I would say that the company continues to work on that very very hard.

Notwithstanding having $134 billion I'd say overall currency, probably helped the margin by about $5 million.

And I would say beyond that we probably had about $8 million help from an expense point of view.

Currency, but having said that we do get rather busy on the synergies early in the first thing we do save the share that we can capture all the synergies to stop hiring. So that is one segment for US is we got to know all of our new colleagues on that in the laser segment and they got to know us.

And I will tell you that we will continue to fight on that Opex for a long long time, because at the end of the day. The Companys call under any circumstances is to be sure that we are able to invest that money well, particularly on the R&D line.

Excellent. Thanks, so much guys.

One moment.

One moment for our next question.

Our next question comes from Paul Silverstein with Cowen Your line is open.

Thanks.

A return driven investment various programs on your leverage relative to macro.

Any thoughts you can share as to how quickly you expect or hope to deleverage.

And how do you get there in terms of Capex plans for the year.

Alongside of the interest expense.

Sure well, obviously the first thing that we did was the.

The success, we had in taking out the convert in stock so that took out $345 million of it.

Historically, what we set about to pay down the debt just lets jealous of paid out for a minute.

Was it actually we didn't expect that much in the first quarter because the goal in the first quarter was to launch all the synergies first which sometimes come with costs, having said that.

Given that the fed has not necessarily led off on what they think they may do this year and what we thought with the ongoing stability of the interest rates. In 2024 actually also may change that has caused us to get new thought to what we would do especially this year and bringing down the.

The leverage through pay down as well this year, we're not moving away from what we originally said which was that within 24 months, we expect it to be at two five times <unk>.

And I think that plus the EBITDA. The continued work on the EBITDA I think will help us from a deleveraging calculation point of view, but the real issue is trying to moderate and stay within our range if not lower our interest expense.

Okay, and a quick follow up if I may and my apologies I heard Chuck I heard your response to the previous question I heard your comments on our call and I can see the numbers. So it sure doesn't look like there is an issue but.

Just have you Avi last week momentum this week.

Both referenced some beginning of macro pressure and the obvious cases.

Field test units.

With this said was the opex by carriers was coming down and Thats always a precursor to Capex declines and then you have momentum roughly some pockets of weakness among web scales again from your numbers and comments it doesn't seem to be a problem, but I want to ask you. A question are you seeing any signs of concern.

From a customer market product market resources at a macro level.

Yes, Thanks, Paul I'm going to ask Youre wanting to take it.

Hey, Paul Thanks for the question no we don't see.

At all.

Any.

Weakness from four bps.

Perspective in fact, we think that we can say at least we have visibility.

Phil.

The first half of the calendar year calendar 2023.

There is strong demand.

I also want to on the.

Underlying that.

It is the result of the combination of the strength of the investments of the customers that we serve as well as us.

Significant.

Share gains, particularly around the high speed side of the of the demands assumed from two onward belonged in these combo.

Things to do this a institution that we have we can.

Really.

Take advantage of.

Of the of the need.

Gotcha.

The type of products and so we continue to gain share.

Versus the competition. So the two are very strong in the.

We have not seen Amy Amy.

The weakness as maybe others.

<unk> reported.

Reported.

I appreciate the responses. Thank you.

One moment for our next question.

Our next question comes from Dave Kang with B Riley Your line is open.

Thank you. Good morning. My first question is regarding your fiscal <unk> outlook. I was wondering if you can give us a little bit more color.

Three different segments, how we should think about it and my follow up question is regarding your estimate laser what's the typical lead times for that product.

We would expect.

On the first question, we would expect good contributions from all three of the segments.

Thanks, Dave for your question Mark would you like to comment on the ultimate question.

Didn't hear the extra my question to just one more time please.

Yes sure.

Take our lead times.

Typical lead times for our annealing systems on a range of six months.

Yes for a nearly flat panel engineering.

Yes for our excimer flat panel annealing mill lead times are typically about six months.

Got it. Thank you did you hear that Dave Okay.

Yes, Thank you Greg.

Yes. Thank you.

For our next question.

Our next question comes from Mark Miller with benchmark. Your line is open.

Congratulations on the record sales.

You are probably aware of the new U S restrictions on equipment shipments into China.

Just wondering is there any impact to you on.

Coherent, especially for alignment tools that are going into China.

Okay. Good morning, Mark joining would you like to take that.

Thanks for the question absolutely first of all as you probably know there are no <unk>.

<unk> sales into China, so since Thats, the vast majority of the market that we address with our partners we have.

It'll impact from that perspective, if you go onto <unk>.

Other parts of the semi cap equipment world, we have seen.

Less than 5% impact on the short term demand from our customers and <unk>.

And again small study because we aggressively.

Segment of the market for which the streets from had been applied which is on the high end.

So the demand continues strong and in any case, China wasn't there to begin with so we have experienced.

Experienced short term at least we don't see any weakness.

You mentioned moderating <unk> shipments after a strong quarter and first half fiscal 'twenty three how much of that is due to two macro.

And also.

Hi.

If you could talk about any year opportunities outside of the U K.

Tumor electronics market for three D sensing.

Got it thanks, Mark So first of all I want to make sure it's clear the outwork, our non buzzword about sensing which includes TV.

And.

So.

We'll follow the typical seasonal trends.

We said in the prepared remarks, and we haven't really seen any effect.

Four months ago from a customer demand standpoint from let's see weaknesses in some of the geographical areas, where the products are being assembled and completed so as demand has been unaffected for us. So we're strong in.

So we haven't really seen anything.

Any weakness from the standpoint.

So it's mainly just seasonal effects that you are talking about.

Correct.

Thank you.

Okay.

Thank you everyone. Our next question comes from Simon Leopold with Raymond James Your line is open.

Thanks for taking the question.

One on.

On the the Hyperscale trends that you called out Chuck and in the prepared remarks, you said.

But you expect hyperscale to grow in the second half of fiscal 'twenty three.

And I guess to me I'm wondering whether or not that imply that you saw any softness from hyperscale in your September quarter.

Or what your expectation is implied for your December forecast.

Whether you are seeing some some inventory absorption or are slowing from that group of customers near term and that's what you were trying to point out was you expect that growth to resume in the first half of calendar 'twenty three.

And then I've got a quick follow up for Mary Jane.

Okay, Hey, good morning, Simon Thanks, Simon what I said was regarding our data center customers. We continue to forecast hyperscale growth in the second half of this year.

To answer your question and maybe put a finer point on it we expect our datacom business to grow sequentially and steadily in the year.

Does that help you.

Yes, I guess, what I'm sort of wondering and I'm not trying to split hairs, but whether or not you saw a little bit of softness clearly your numbers were fine this quarter and the guidance is good but whether or not that particular group of customers was softer than you expected in your September quarter.

It was not but joining do you want to add to that.

So while some are some of the scale.

Booties.

Mind over time, there may be some has shown some weakness over at least the size some slowdown.

The.

As the mix of customers that we address is most affected by that at all so we don't really see that.

That weakness and as I said earlier, the fact that we continue to gain share of the high speed size of the market helps our growth in general right. So it's a combination of factors the mix of customers nominal those debt again.

Distributed demand over a longer period of time.

And then the fact that we're getting so the combination of the tool to Mali, that's pretty good.

Ultimately for us.

Great No I appreciate that and then just a quick follow up for Mary Jane was you called out the 7% benefit from foreign exchange rates and I want to make sure I understand that that's basically it.

Internationally located employees being paid in local currency and therefore translates back to fewer dollars. If that's correct.

If we assume currency stays stable in the December quarter, Youll see a similar benefit and Thats whats implied in your December guidance is that correct.

It depends how you what you're comparing it to if you compare it to Q1, it's costs. It's flat to Q1, if you compare to last year or something else, yes, but we are assuming that the currencies stay in a relative relationship that they have at this time and we are prevailing in Q1.

Great.

Taking the questions.

Our next question comes from James Ricchiuti with Needham Your line is open.

Alright. Thank you so thanks for the color by the way.

The export U S export restrictions I wanted to ask a question also about the laser business.

If we think about some of the forecast for <unk> for the <unk> market and the expectations there.

That market could be down anywhere from it.

<unk> 20 per share.

Next year in calendar 'twenty three.

Wondering how you're viewing that part of the laser business.

Do you just see more of an offset and the display related portion of the laser business that is capital equipment.

Thank you Jim Mark.

Jim Thanks for the question.

So two parts to the answer perhaps Jim.

To quote one of our customers the impact on China's non zero, but as Giovanni indicated, it's probably less than 5% of our semi business in the laser segment less than 2% of our of our overall business and the laser segment.

We are buffered by a large installed base, which really helps.

Thousands of ultraviolet lasers sort of needs to be refurbished every two to three years.

Some have been in service for more than 20 years with our customers asking us to commit to support for another term.

And that service revenue underpins, our strong baseline business kind of irrespective of the latest annual WSB spend so certainly.

Outlook for next year is tampered relative to what we've seen this year, but clearly I think we all believe the long term trend is very positive.

And then if I could just a follow up question.

Certainly I can appreciate given the diversity of the portfolio you have some installation here from but I'm just wondering.

What youre seeing in across the industrial business by geography in terms of China, Europe , North America, and just given in light of the macro concerns that people have.

Express.

That's another good question, Jim I think.

I think we have.

City of products and services that we sell into the industrial.

Markets, we certainly.

The benefit of a very strong backlog.

But in some markets for example, medical device manufacturing, we're number one and other and other markets, where maybe number two and three we think we've got lots of share upside in industrial. So we are beginning to see maybe the first softening in some of the European customer base, but again.

We've got the benefit of a very healthy healthy backlog.

Again, our diversity of markets in the industrial sector.

I think really.

I think it gives us confidence that we're looking at a pretty strong outlook for the year.

Got it thanks, congratulations on a nice start by the way.

Thank you. Our next question comes from semi strategy with Jpmorgan. Your line is open.

Yeah, Hi, thanks, Thanks for taking my questions I guess for the first one if I could sort of.

Get some help on.

Spending the revenue guide for the full year.

Your comments have indicated that demand is remaining robust maybe some pockets of weakness here and there, but largely sort of a strong backlog strong demand and I'm trying to think about visa guidance for revenue to remain sort of flat half over half at the midpoint.

Any insights on sort of what you are seeing book to bill et cetera that will give us some sense of what's driving that revenue guide because ideally.

What are you seeing the company ramped through the yield in terms of revenue and I have a follow up thank you.

Thanks Tommy.

<unk>.

The combined pro forma revenue I think that youll see growth, but at the end of the day. The main thing that we're also trying to keep in mind is the effects of currency on that revenue right. So just in the first quarter, we had 16%.

Currency effects on the revenue so thats part of it if you just multiply that by four and not that that may be exactly how it goes, but it's 60 or $70 million.

But generally speaking I would say that when we look at the combined <unk>.

Number for the company.

Impair too where the pro forma wise.

We're expecting to see some some decent growth this new York as long as Chuck already.

Okay.

Okay. So let me move to the second question.

In terms of the operating margins.

Nick will can margins improve significantly sequentially.

Limited change in the revenue profile, whereas it was interesting with your compound semi margins.

Remained similar sequentially, even despite a significant move up in revenue. So I'm just wondering if you can help me understand that.

Multiple volume leverage sort of the components that would be versus Nick Wilkins, which seem to have a much more material improvement in margins. Thank you.

So I would have said well first of all a couple of things in the in the networking business.

<unk> had a very very strong mix in the transceiver business this quarter.

They have also continued to work hard on moderating what their supply chain challenges have been both in terms of physical product and the costs that are involved in that.

And more importantly on their operating efficiency I mean, it continues to vehicle for us to moderate.

The cost of operations I would say probably the other thing that help them in fairness that because the RMB was wakeup probably translated there.

It's not probably did it did translate there.

Cost to a lower level, so theres, probably a currency effect on that to some extent, which is lesser of an extent materials materials generally as around the world almost all of its sales in dollars and a significant part of their cost in dollars. So thats.

One aspect of that but second of all materials also had a very very good quarter in the fourth quarter as well.

And generally speaking I would say that.

Overall my original range on materials is that it would be 23 to 25 in terms of its resting margin.

So we're happy to see it at 26 and 27, but I don't know given their mix at this particular time that had actually grows by.

100, 150 basis points every quarter and they had significantly last one currency.

Okay.

Thank you.

Our next question comes from Vivek Arya with Bank of America. Your line is open.

Thanks for taking my question My first one I'm curious what is the implied range of gross margins maintain for Q2 and for the fiscal year and what about co head ends products makes it tougher to.

Get a tighter gross margin range is it just is it just that makes us the variability between products is it just pricing competition.

So just any any views on gross margins would be very helpful.

The company doesn't guide on gross margins, but I would say that as we've said consistently.

Our goal is to try and keep that margin over 40%.

And we will continue to do that I think that just tell me again what was your question on the.

Lasers margin.

No sorry, yes, just overall gross gross margin for Q2 and for the full year. So let's say if if the mix you think if the mix Youre planning for Q2 comes through in the mixture of planning for the full year comes through what is the range of gross margins.

So for example, if you take the midpoint of your full year range again gross margins.

Over 40%.

Well the company Hasnt changed its range from $30 38 to 42, just for a whole number of reasons not to mention the COVID-19 issues that we're still seeing particularly in fish out.

But I would say if you took the midpoint of that it would be 40, but we did not guide on gross margin. So that's the answer to the first part of the question. What is the laser question you are asking not the laser question I was just saying that what about the company's mix makes it tougher to get a tighter range of gross margins.

Well I think at this point, we're still really learning first of all the laser products, which nonetheless are very good margins. There is no question about that.

And given that the company saw some pretty nice margin improvement just between Q4 on a on a.

Pro forma basis to Q1.

Together I think we will continue to work with the laser segment to be sure we understand that and potentially take that margin up. That's the first thing. The second thing is there was an awful lot of changes in the macro factors with respect to networking that our team worked very very well through this quarter, but at least when we think about it.

We know that that could still recur and then finally on the material side.

The materials team also continued to see some of the effects of our supply chain shortages.

And on the industrial part of their business. The first quarter. During this quarter is normally their lowest seasonal quarter in the year. So over time I think we will work on type tightening are raising that gross margin range, but at the end of the day. The company does not guide on gross margin.

And for my follow up on Silicon carbide.

How should we think about the contribution to sales and the required capex requirements for this.

And in general the strategy around Silicon carbide, you have just one large player who is spending billions in capex to stay as a leader of the substrate side and then you have a number of customers you plan to in source capacity. So just kind of a near term question on the sales and the Capex.

For Silicon carbide in fiscal 'twenty, three and then the longer term question on the strategy as to how you differentiate between these two extremes write off from a competitive perspective in the market. Thank you.

Right so.

First of all we've said that with respect to the investments that we're making.

We would expect in this sort of $25 26 period that the company would probably have start to say as a percentage of silicon carbide as a percentage of revenue moving into that eight or 10% place from where it is today as we continue to make progress on.

Devices with respect to.

The capital investment that we're making.

During the entire last 10 years, we've probably doubled the capex excuse me, it's doubled the capacity of silicon carbide.

Every 18 months as opposed to some other competitors, who actually had a pause in the middle of that period of time, but nonetheless, we do expect to spend roughly over $1 billion over the next 10 years, the majority of which will be in the first five and the majority of which will be capex, having said that the company continues to look at as it gets larger.

<unk>.

Alex thinks about manufacturing things, including.

Not speaking about just silicon carbide, specifically, but in general whether or not it could be advantageous to the company's growth to have partners in certain areas of the manufacturing and sell it with heartland would be an area, where we do think about that but we think about it for everything at this point as the company gets larger it may not make sense that app.

Absolutely everything fully vertically integrated chocolate, what you'd like to add well, let's ask Vivek do you have any follow up question.

So we're just talking about.

Just the overall strategy as to is there room in the market.

Our coherent just given the one really large substrate care and then the desire of many of your customers do to in source that capacity overtime, So where does that window for coherent to become sustainably profitable in this business.

Well, okay, let's.

Let's come back to the capital too.

I would say about a third of our capital. This year is going to go into into this business.

We're going to compete on the basis of the competencies that we have including the quality the technology and the scale that we have and we're putting in place.

Introducing new platforms on the basis of market opportunities that we clearly have in front of us.

And we believe that we can have a strong profitable growing differentiated business just in materials.

But in addition to that we continue to invest in making very very good progress both on devices and on modules.

The game is is going to inflect and unfold here in this decade and the next few years and I believe that we are already well positioned and we're going to continue to establish the front that we need to in the base that we need to grow from that.

Very very quick very much confidence in our ability to do that and we are well underway.

Let me just make one other comment this market is going to be so big.

I simply.

We can't see where it is not enough capacity in the market today, and it's going to be no. One player that can serve this entire market no one is going to build a whole industry.

One player.

And we intend to be one of the leaders.

Not only have already emerged but are sustainably in the pack okay.

Thank you.

Our next question comes from Sidney Ho with Deutsche Bank. Your line is open.

Thanks for taking my question. My first question is on the semi cap exposure I think organically from the <unk> exposure was only 5%, but I think a core carrier in the hooker legacy coherent is more like 45% now now it's all part of this industrial market that you guys disclosed.

But when you look at that in totality.

We use a thing your organic to fix its mostly type of UV system produce it but how should we think about the drivers of this segment for the entire company. How much is tied to wafer fab equipment spending a certain segment of that and how much is tied to backend packaging and maybe maybe on the display side.

Okay. Thanks, Sydney, Sydney I think what we'll do is let's let Marc Andrew <unk> both give.

Some color.

On the semi cap businesses in their segments.

Hey, Thanks for the question so specific to the laser segment.

Semi cap revenue for us accounts for between 15% to 20% of our overall lasers lasers Reg revenue the areas that we predominantly play and as you know our.

Ultra Violet laser based inspection four verticals and bare wafer and patterned wafer as well as infrared.

<unk> for adjunction of kneeling. So those are our main markets specific to the semi cap industry and as I reaffirm its between 15 and 20% I would say, it's growing probably at the higher end of that range.

But I think on earlier number you quoted was substantially higher I'm not completely clear if that was <unk>.

Address the laser segment or your prior experience with coherent Inc. Before.

But it's definitely less than 20%.

Thanks, Mark joining.

Sidney Thanks for the question.

Again, we have.

The benefit on the materials segment too.

The.

The high end of the market in terms of the.

To note if you like.

And so where the women's <unk> seen.

No slowdown in fact, if anything we continue to invest to support.

Capacity needed to address the demand that we see.

So it's.

It has been.

Lindsay exciting for us too.

Address these high end applications because.

Our margins we are differentiated.

Mentioned many times in the past that we have several.

So stores Pops and some of these tools and so we will see.

The benefit of yields as years of investment.

And these kind of leading position in supplying.

Although.

Emotional people's wafer chucks.

I mean are those all kind of.

Components that go into these four both on the backend tools.

The semi cap customers.

Okay. That's helpful. Thanks, My follow up question and then maybe one for Mary Jane can you help us.

I think how we should we should look at quarterly expenses operating expenses over the next few quarters, including the impact help all the synergies that youre getting from the deal maybe just using the baseline of I think $256 million in Q1, how do you think it will end up by the end of the fiscal year. Thank you.

First of all I would say that generally speaking.

We are likely to see about $65 million shaved on an annualized basis. During the first year on synergies that does not mean that you take say $2 56 and drop it by 65.

On an annualized basis, I would say we would probably.

Be able to maintain.

<unk>.

This year at <unk>.

They go down slightly from a round of 19, but given that our target has been $20 to 23, even being at 19 were down a little bit, though as I said currency helped us a bit but I would expect that the Gulf for example in SG&A is to moderate the absolute dollar amount.

As we go forward from the combined company.

Moderate any growth. So that's one element of synergy on the on the engineering side I do think the company will still strive to look at having its engineering after that the 9% of sales level.

From a.

The pro forma company. If we just look at fiscal year 2002 was about 10 four.

If that stays at about nine or nine and a half you will see that coming down whether or not all of that's achieved during fiscal year 'twenty three I can't really say, but generally the delivery of the synergies across the 250 was expected to be something like.

65, 90, and then the balance in ESR here. The reason there is more on the <unk> because to the extent that we look at say two leases in the same area, where one comes off the lease.

Is moving things to maybe do a common stay say one site. One company has a larger site in the same city.

That just takes longer so those are the types of things that we tend to have as well as the renegotiation of long term contracts.

Okay.

Great. Thank you.

Our next question comes from Richard Shannon with Craig Hallum. Your line is open.

Well thanks, guys for taking my questions I think my first one is on the fiscal 'twenty three sales guidance with the range is there Chuck maybe if you can talk about what would lead you to get to either low end or the high end and specifically if you can address any any specific dynamics by segment or any timing issues or is it just a matter of kind of macro dynamics here to get to the edge.

Guidance.

Oh.

We started out this year.

In this quarter.

We have not.

We haven't stepped out into this.

Maybe in six or seven years, given this kind of long range guidance, even on the revenue.

And we've done it.

Because we have this diversified.

<unk>.

And we have really good visibility we believe.

The biggest single uncertainty in that we're looking them.

<unk> is the supply chain.

And after that Covid is right behind it in China.

And nobody knows how that's going to play out.

Still a long time to go through the fourth quarter I think it is.

Very solid view that we have today about what we're going to go and aspire to do.

So of course, we need to have orders and order coverage all the way to the end we are working on that.

The supply chain and Covid those will be.

A little bit out of our control cohort for sure and supply chain were doing everything we can to mitigate those would be the two okay.

Okay. That's helpful. Chuck and my follow on question just on backlog here and kind of relates to some of the dynamics you just mentioned here, but how are we expecting kind of corporate wide lead times.

Two to trend over the next couple of quarters, obviously lead times pretty much everyone everyone in hardware technology.

Expanding here supply chain is a little bit of an issue, but do you see lead times coming down and what if any impact do you see that having a backlog.

Well, we're not we're not expecting or.

Forecasting a substantial change in the lead times.

Although our plans are based on what we have in front of us.

As far as far as that goes we're constantly working to improve our own lead times.

And our overall ability to manage carefully any changes in the inventory for a good part of that.

That's the best I can say.

Okay, great. Thank you.

Yes.

Sure. Thank you. Our next question comes from Tim <unk> with Northland Capital markets. Your line is open.

Hey, Thanks for squeezing me in there and congratulations on the results.

Results on the telecom side I thought you heard I heard you call out some strength or activity in cable TV network and your infrastructure early in the call Chuck in your prepared comments.

I, just like to get a little more color on that and just as a follow up.

You talked about a record quarter in sensing it seems like you had a pretty big one and a little while ago or a couple of years ago. So it seems like that may have as much as doubled sequentially for you what is the outlook given the seasonality into the December quarter for for three D sensing and that's it for me Okay.

Thank you, Tim Tim I'm going to rest your wanting to take both but as it relates to telecom and <unk> and MSR or cable TV infrastructure, we think about them.

The same kind of in the same bucket.

Different from Datacom Telecom and cable TV infrastructure are related.

With that in mind.

Let me just add.

Extremely.

Well positioned.

The largest of these cable TV infrastructure customers that we have and our business is growing growing growing very well and I expect that we'll continue to do so.

Throughout this year, joining would you like to add to that.

As good maybe.

I'll talk about the.

The sensing outlook.

Said, we said that.

We're going to experience the typical seasonality.

That we are experiencing in the past is just a believer.

Could even commodity customer.

Hi.

Aldo.

Patterns and so we just follow that.

As we've seen we have had.

The strong growth.

Driven by some new applications and new products that we were able to launch.

Compare that with our customers.

And.

We expect.

Because the typical trend that we've seen in the past.

Two.

Slow down.

In the second half of the fiscal year and then eventually.

I'll come back.

Again in the first half over the next fiscal year.

Sure.

In relative terms, we expect that demand to continue.

Resolved.

Long term investments that were made to enable functionalities no media company is going to enable many suppliers can enable so we feel good about the.

The prospects of this.

As I would call the general market does include <unk>.

Thank you our next question comes from.

Who is next.

Question comes from meta Marshall Meta Marshall with Morgan Stanley . Your line is open.

Okay, great. Thanks, a couple of quick questions.

Mary Jane I guess is it always your policy and integrations that kind of stop hiring upfront just as you kind of assess.

Kind of assets in house.

Or is there something different about the environment that made you want to.

Put in kind of a near term hiring freeze and then on the second piece.

Mentioned kind of looking at alternatives.

On the leverage piece, just wondering is there a minimum cash threshold or just anything that we should be mindful of as you kind of assess the leverage position.

So first of all I would just encourage everyone on the phone not to use phrases like hiring freeze, but first of all it is always our policy to get to know our new colleagues first.

As the two companies come together it changes.

Some of our global.

Functions or it changes what some of our leadership positions are we do have people in the normal course than either company deciding that.

They are reaching their retirement age that's one of the things you get to know just in the normal course, they're reaching retirement age and we want to make sure that we have opportunities across the board for people to come into we're also especially if they might be larger haul. So we do that every single time I guess no one should be overreacting on anything about a hiring freeze and.

Frankly, most of my comments are probably more focused on SG&A than they are on R&D as it is a real important matter.

But generally speaking I think we do spend quite a lot of time in the beginning of our game plans just getting to know those companies and given the public.

Interaction that was done in the closing of the coherent are the bidding on the coherent Inc. Transaction I would say both sides advisers cautioned us to be perhaps less engaged pre.

Pre close than we were on previous large acquisition. So there is a long tail here of getting to know each other.

And.

I think both companies want to make sure they're doing things in concert so that also nationally.

Laos us up a little bit of a pause as we think about expenses overall.

You had a second at Heartland.

Yes, the leverage piece.

And then how we should consider either minimum cash or just kind of considerations on that front.

Well I think.

It's fair to say that the company probably thinks in terms of just maybe call it $500 million of cash the minimums, but generally speaking we do have the revolver there and that is largely undrawn.

So if someone were to add I don't know one quarter. It went to $4 75, I also wouldnt recommend anybody jump out a window over that.

But generally speaking I think we do want to make sure that we can fund the company. We are looking at the capital budget and while the Paydown of the debt is a very very important priority for this company. The creation of profitable earnings is the most important priority is the number one priority because thats advantageous to the cash flow as well. So therefore, the actual first priorities.

Capex.

I don't know to someone else's question earlier that we would.

Necessarily dramatically moderate capex unless the market.

In a certain direction and we felt that was the prudent investment thing to death.

Great. Thank you.

Our next question comes from Tom O'malley with Barclays. Your line is open.

Hey, guys. Thanks for taking my questions Giovanni the first one is for you.

You are mentioning normal seasonality into the December quarter in the sensing business could you just remind us what normal seasonality is.

Well novice is either means that will be.

Higher than the previous Florida and then.

<unk>.

Come down in the third and fourth fiscal quarter.

Okay and then.

Just on the quarter on the acquired assets. It looked like coherent came in a bit higher than expectations legacy coherent came in a bit higher than expectations.

I was just curious did you see any change in order.

Earns from Chinese customers in the quarter I know, it's a very small percentage of <unk>.

Your sales that Youre seeing are impacted by potential bans, but did you see any change in ordering patterns. There just for this quarter. Thank you.

So this is mark Tom Thanks for the question, So China represents a pretty small part of our overall.

Lasers lasers revenue.

And we really didn't see any significant change in order patterns at all.

I mean, I think we explained to investors on the say 630 quarter.

Good times, we got questions.

Supply chain.

Jane was was a challenge.

Shanghai was shutdown or whatever and I think the team's worked well to kind of get to the revenue that thanks. Thanks, Tim.

Thank you.

Yeah.

And I'm not showing any further questions at this time I'd like to turn the call back over to Mary Jane.

Let me maybe for closing comments.

Thank you very much for joining us today.

I look forward to speaking with you as time goes on here through the rest of the quarter and we will talk to you again.

In February so thank you so much for joining us and we off.

Good day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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Ladies and gentlemen, thank you for standing by and walk through the coherent Corp. FY 'twenty three first quarter earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session I need to press star one on your telephone I would now like to turn the call over to your host Mary Jane.

Raymond Chief Financial Officer, you may begin.

Thank you, Kevin and good morning, I'm, Mary Jane Raymond the Chief Financial Officer here at coherent Corp. Welcome to our earnings call today for the first quarter of fiscal year 2023.

This is our first earnings call as coherent Corp, and the call is being recorded on Wednesday November nine 2022.

With me today on the call is Dr. Chuck Mattera, our chair and Chief Executive Officer.

After our prepared remarks, both Dr. Mark <unk> President of the laser segment and Dr. Giovanni Barbarossa, our Chief strategy Officer, and the President of the materials segment will join us during the Q&A.

To better explain the unique benefits of our strategy. The results we are reporting today as well as the exciting prospects, we have to expand our footprint and our broad markets as we go forward.

For today's call the press release and Investor presentation are available in the Investor Relations section of our website coherent dot com.

Our fiscal year 'twenty two ESG report for legacy two six is also on the website. It highlights key points of our board and employees diversity, namely to 46% of our for our women and our persons of color.

And at 49% of our workforce, our women as well as our investments to support stem and educational advancement.

Port also details are products that are critical to improvements in global energy efficiency and the increasing sustainability of our locations that produce them.

<unk> I think you'll like this report it when you get a moment to read it.

And you during this call, we'll be making certain forward looking statements, including but not limited to statements regarding macroeconomic trends expectations for our products and technology trends in our markets and our expected financial performance, including our guidance and.

In addition, we will discuss expectations regarding the recent acquisition of coherent Inc.

<unk> market opportunities and expected synergies.

Our comments should be viewed in the context of the risk factors detailed in our most recent Form 10-K filing for the fiscal year ended June 32022.

<unk> assumes no obligation to update the information discussed during this call except as required by law.

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

Thank you all for joining us today.

Nearly 18 months ago, when we were selected as the winner of an intense <unk> competition acquire the company that was long seen as the industry's gold standard of laser technology.

We embarked on a new chapter of our strategy to diversify us.

Is expand our exposure and participation in growth markets that are inflicting due to irreversible megatrends.

These include industry for Dato.

In the technology and scale transitions that are underway in mobile and intelligent networks out to the edge.

The internet of things to support <unk> and AI services.

And also those consistent with our vision of a world transformed through innovations vital to a better life today and the sustainability of future generations, including.

Our silicon carbide and battery materials that enable the electrification of transportation.

An important long term contributor to the reduction of global Cotwo emissions.

So with the acquisition of coherent finally, having closed on July one when.

When we enthusiastically got underway. It is from this new base of unique technology environments.

Deep penetration into multiple ecosystems strong customer intimacy new business models that include products and service.

And the addition of a huge influx of extraordinary and diverse talent to the broad base, we had before that we endeavor to deliver sustainable long term shareholder value.

On September eight 2022, we transitioned to our new name coherent Corp.

Our new brand and began trading with a new ticker symbol <unk>.

We adopted the name coherent because it has the universal meaning of bringing things together.

And I believe that a great excitement that stems from some of our really cool stuff will emerge as we bring our extraordinary talent closer together.

We hit the ground running together and we haven't skipped a beat since.

The first 90 days together, we're super exciting as we followed our well honed integration game plan that we've laid out together for over a year prior to the close.

We moved quickly into the first phase of our organizational integrations within the quarter.

With a focus on the worldwide sales and service organizations. So we could deepen our understanding of our position and prospects at our largest strategic accounts.

Many of these accounts became even larger and have even greater opportunities than either company understood before the acquisition closed.

Our next share some highlights of our performance by our four major markets.

In addition to the numbers Mary Jane will report briefly on the substantial progress we made on the start of the integration activities.

I encourage the analysts who participate in the Q&A to direct your questions about the segments to Giovanni for materials and networking and to Mark about lasers.

We work tirelessly to do what we said we would do.

And as always in our company our commitment is evident in our aspirations.

And our actions.

And especially in our results.

Turning to Q1, we delivered for the first time over $1 billion in revenue in a single quarter.

Regarding the lingering effects of the supply chain, we have seen improvements in lead times for some strategic components.

And moderation of shortages for others, but.

But we are still affected by pockets of supply chain constraints that have yet to show any signs of moderation.

Without these constraints, which totaled $64 million in the quarter.

Would have shipped over $1 $4 billion, the top end of our guidance.

However, with the strong winds of demand at our backs, we carried on with determination and delivered 134 billion in revenue.

We grew 69% year over year, and 52% sequentially and consistent with our recent strong growth projections legacy <unk> organic revenue grew 20%.

Compared to Q1 FY 'twenty two.

On a pro forma basis, the company grew 13% over Q1 FY 'twenty two.

Turning now to the segments in Q1, FY 'twenty three the revenue contributions by segment was 44% from networking, 29% from lasers and 27% for materials.

As increased market diversification was one of the major elements of our strategy to acquire a coherent.

That rationale is perhaps most evident when looking at the size of our communications businesses.

Q1, we derived 44% of our revenue from the communications market down from the previous 66%.

In FY 'twenty, one and 'twenty two when we were a company only a little more than half the size we are today.

With the increased scale and greater market and product breadth. We believe that we now have a much better balanced and sustainable portfolio to drive us into an exciting future.

Regarding our revenues from the other three markets, we derived 34% from industrial 13% from electronics and 9% from instrumentation.

Our earnings delivery was ahead of plan and large measure due to a relentless focus on solid market share gains appropriate pricing discipline, driving procurement cost down and increase productivity.

These factors combined enabled us to deliver solid performance with non-GAAP diluted EPS of $1 four per share.

This was considerably higher than the midpoint of our guidance and favorable favorable FX contributed only about <unk> <unk> in the quarter.

Turning now to the communications markets, we continue to benefit from those customers continuing to make investments in telecom and cable TV infrastructure and we are gaining share in those markets.

Our revenue growth from telecom and Datacom were both strong double digits year over year.

There are both forecasted to show additional gains from that base again in FY 'twenty three compared to FY 'twenty, two with telecom forecasted to grow even faster in datacom.

Regarding our data center customers, we continue to forecast hyperscale growth in the second half of this year.

We're optimistic about the future as we believe these telecom and Datacom markets will be long term resilient as the insatiable demand for products that consume and generate information move to the edge of the network as part of the digital transformation.

And our assembly and testing facilities throughout southeast Asia.

As a result of the strong communications drivers, we had record revenues in communications with strong performance in both Datacom and telecom, where the split was 57% Datacom, 43% telecom.

In the quarter, 43% of our high speed transceiver shipments were at speeds of 200 and above while our shipments of Transceivers for 400, G ramped up and our 800 gig deployments accelerated strongly.

Even with the current macro economic backdrop, our Ethernet transceiver revenue for cloud applications grew at twice the market growth rate.

Finally during the quarter, we received a number of customer and industry accolades.

One example, we demonstrated our new 200 G AML at the European Conference on optical communications in September .

The 200 <unk> will enable next generation high speed Transceivers at one six terabits per second and to the best of our knowledge. We were the first to demonstrate error free Wi traffic in public.

The excitement for such an enabling product has been tremendous from both our customers and their customers alike.

And what we believe our strong prospects going forward.

Also we continue to win the vast majority of laser lift off opportunities and see continued very strong demand for ultrafast lasers for backend cutting of OLED displays.

We remain bullish on the opportunity for larger size laser and the yield OLED panels in the segment led by <unk> and tablets.

And believe this aligns with reported new generation eight fab investments Andrew.

Andrew will underpin our display business through the next five years.

A recent industry report on the OLED panel opportunity forecast of five X increase in unit volumes over those next five years, which is also consistent with what we hear from customers.

As another example of our enthusiasm about the long term prospects of the display business after nearly five years of investment and revolutionary technology.

Our prospects for laser based tools for micro led manufacturing are beginning to emerge.

We now have more than 25 active customer engagements with a constant flow in and out of our applications labs.

Customers are super excited about the results of our trials on our three in one micro OLED demo tools, both in Germany and China.

And for which we just began installing this week our first tool for revenue.

At a well known customer in Asia.

Revenue from our differentiated products for EV battery manufacturing grew 30% sequentially.

Turning to the electronics market, our strong performance in Q1 was driven by a surge in demand and record revenue quarter for our sensing business.

Multiple factors have contributed to this exceptional result.

We were first to market with a new sensor technology platform that enables novel functionalities and consumer electronics products.

Second we grew total share by outperforming our competition and time to market.

As in the past, we expect shipments to this market to moderate in the first half of calendar year 2023, while we continue to develop new products for adjacent markets.

Silicon carbide power devices are a must have for these applications.

Analysts projected demand will outstrip supply for many years ahead.

Going to sustained bottlenecks that few suppliers will be able to break.

We believe that those who have control of the substrate manufacturing like coherent dose will be among those who will be able to grow faster than the market.

Over the cycle.

Our substrate customers have long recognized our competitive advantage and are now securing their supply through long term agreements.

So we are a leader in this industry and we believe we are building a competitive capability and devices and modules as well and have tremendous growth prospects for this business to <unk>.

Finally, turning to the instrumentation market, our instrumentation business delivered a solid quarter with revenues at sustained peak levels.

Our portfolio of diversified products continue to see very strong demand, including for life science applications as revenue from these products hit a record last quarter.

Customers are clearly excited about our combined portfolio as well as the opportunity to provide additional value and expand even further into the life sciences market at the subsystem level.

No I won't take time to come back on after the Q&A. So please allow me to make closing comments before I hand, it over to Mary Jane.

For over a half a century.

We remain committed to creating breakthrough solutions to solve our customers' most demanding problems while building an exciting resilient sustainable and valuable growth company.

We have the opportunity of a lifetime in front of us.

All of our employees are squarely focused on building long term value for all stakeholders.

Matt and a solid financial position, we will continue to do our very best to continue to earn your confidence and trust.

With that let me turn it over to Mary Jane.

Jane.

Thank you Chuck.

Q1, FY 'twenty, three quarterly market and geographic breakdown of our one through $4 billion of revenue can be found on page eight of the investor presentation.

It is worth pointing out to new geographic breakdown of the company Q1, FY 'twenty three revenue are now distributed by 53% in Americas, 18% in Europe .

14% in Korea, and Japan, combined and 11% in China.

Our Q1, non-GAAP gross margin was 43% and the non-GAAP operating margin was 21, 3%.

Supply chain costs were $7 million and are not excluded to arrive at non-GAAP results.

At the segment level. The non-GAAP operating margins were 19, 7% for networking 27, 2% from materials and 18, 3% for lasers.

GAAP operating expenses SG&A, plus R&D were $401 million in Q1.

Excluding $35 million of amortization $48 million of stock compensation and $61 million of transaction and integration costs.

non-GAAP opex was $256 million or 19% of revenue.

Total stock comp is expected to be $35 million per quarter in each of Q2.

Q3 and Q4.

The Q1 amount is.

Is affected by the vesting stock compensation of $18 million for change of control.

Quarterly GAAP EPS was a loss of 56 cents and non-GAAP EPS was $1 four with after tax non-GAAP adjustments of $222 million in total.

Currency accounted positively for <unk>.

And the non-GAAP EPS, primarily from the weaker euro and RMB.

The diluted share count for the GAAP results was 133 million shares.

And for the non-GAAP results the share count was 149 million shares.

The GAAP and non-GAAP EPS calculations are on table six and seven of the press release.

Cash flow from operations in the quarter was $80 million and free cash flow was a loss of $59 million, including capex of $139 million.

One time effects on the cash flow from operations included $60 million in payments for the acquisition.

$35 million in ticking fees, those paid at close and $25 million in legal and consulting fees incurred by the laser segment pre close and paid on the closing date.

Pre tax interest expense was $62 million our outlook.

<unk> $274 million for the year included the one month LIBOR, reaching four 2% and is now forecasted on the yield curve to reach a five 3% should that happen on the schedule expected our call along with our debt came down with our debt payments will be to limit.

The change in our initial estimate to $5 million to $7 million for a total of $2 $79 million to $284 million.

Our net cash at June 30th just prior to the close was $255 million our September 30.

<unk> of cash and cash equivalents was $904 million. Our total debt position is $4 7 billion, we did successfully settle.

The $345 million of convertible debt in stock as we planned.

Using the estimated trailing 12 months on a pro forma basis for the combined company at September 30.

The effective tax rate in the quarter was 24% and we expect the tax rate in fiscal year 'twenty three to be between 22, and 24% assuming no adoption of new or additional tax rulings.

The increase in the tax rate is largely driven by a larger presence in Europe as well as M&A cost that are not deductible.

Turning to our outlook.

For Q2 fiscal year 'twenty three.

Our outlook for revenue for the second fiscal quarter ended December 31.

2022 is expected to be 134 billion to $1 4 billion and earnings per share on a non-GAAP basis to be 88 to $1 per share.

With respect to our expectations on a full year revenue.

We expect revenue to range from five five.

Five to 5.5 dollars $5 billion.

Our non-GAAP EPS estimate assumes that the effects of purchase accounting, which are all still preliminary.

<unk> added back to GAAP EPS other than depreciation.

That is about $5 million in Q2.

This share count is 151 million shares for the entire guidance range.

The EPS calculation, including the dividend treatment as detailed on table eight of the press release for the guidance and also shows when the series B preferred stock it's dilutive.

All of the four galley.

At today's exchange rate NMS, and an estimated tax rate of 23%.

For the non-GAAP earnings per share, we add back to the GAAP earnings pre tax amount of $183 million to $193 million consisting.

Consisting of $83 million in amortization $34 million in stock comp $20 million to $30 million for transaction integration and restructuring and $46 million for the inventory step up.

The actual dollar amount of non-GAAP items, the tax rate exchange rates, the purchase price accounting and the share counts are all subject to change.

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 mix.

Customer changes supply chain shortages, both upstream and downstream.

Competition.

Changes in regulations.

COVID-19 protocols and global economic conditions.

With that Kevin you May open the line for questions.

Ladies and gentlemen, if you have a question or comment at this time. Please press star one on your Touchtone telephone, we will pause for a moment, while we compile the Q&A roster.

Okay.

Our first question comes from Ananda Baruah with loop capital Your line is open.

Hey, good morning, guys. Thanks for taking the question.

Yeah Congrats on.

On a nice start here.

And on what appears to be really solid execution.

Then also what business.

Would you believe.

It could be the most sensitive to macro should see companies begin to feel greater pressure than in 2000, and I have a quick follow up.

Okay, Alright, thanks, and thanks for your question and your comments.

Well, we have a strong backlog.

The sales forces is busy.

Working to secure an even greater backlog to the extent we can.

The macro environment. However, it is it's the same for everybody our job is to step it up into two what anybody else can do in this market.

And as far as the as far as the markets go well.

Diversified.

It's part of our strategy.

We will never get it to a spot where oil markets are all firing at the same level.

Our job is to.

Work to secure as much as we can while we can and to position ourselves for the future because even those markets that are maybe only growing a little slower today, we have great prospects for the future as well in our portfolio is aiming for.

Excellent.

And then follow up is growth gross margin rate.

Very nicely stronger than at least we had anticipated and opex dollars are actually nicely lower than we had anticipated.

So we'd love context around that contributed to the gross margin gross margin strength and do you think it's sustainable.

And then Mary Jane I guess, the same on the Opex dollars did they come in.

Sort of more efficient than you had anticipated.

Looking back to sustainable as well thanks guys.

Hello.

I would say that first of all the gross margin as we talk about every single quarter.

As a fight every day.

Not necessarily.

Predictable, but I would say that the company continues to work on that very very hard.

Notwithstanding having $134 billion I would say overall currency, probably helped the margin by about $5 million.

And I would say beyond that we probably had about $8 million help from an expense point of view.

Currency, but having said that.

We do get rather busy on the synergies are only in the first thing we do is ensure.

Sure that we can capture all the synergies stop hiring so that is one segment for us as we got to know all of our new colleagues on that in the laser segment and they got to know us.

And I would tell you that we will continue to fight on that Opex for a long long time, because at the end of the day. The Companys call under any circumstances is to be sure that we are able to invest that money well, particularly on the on the R&D line.

Excellent. Thanks, so much guys.

One moment.

One moment for our next question.

Our next question comes from Paul Silverstein with Cowen Your line is open.

Thanks, Mary churn given the investment groups programs on your leverage relative to macro any thoughts you can share as to how quickly you expect or hope to deleverage.

How you get there in terms of Capex plans for the year.

Alongside of the interest expense.

Sure well, obviously the first thing that we did was the the.

The success, we had in taking out the convert in stock so that took out $345 million of it in <unk>.

Sharply what we set about to pay down the debt just lets jealous of paid out for a minute.

It actually we didn't expect that much in the first quarter because the goal in the first quarter was to launch all the synergies <unk>, which sometimes come with costs, having said that.

Given that the <unk>.

That has not necessarily led up on what they think they may do this year and what we thought would be ongoing stability in the interest rates. In 2024 actually also may change that has caused us to get new thought to what we would do.

This year and bringing down the.

The leverage through Paydown as well this year, we're not moving away from what we originally said which was that within 24 months, we expect it to be at two five times <unk>.

Okay, and a quick follow up if I may and my apologies I heard Chuck I heard your response to the previous question I heard your comments on the call I can see the numbers. So it sure doesn't look like there is an issue, but you just have the <unk> momentum this week.

Both referenced some we'd be doing your macro pressure and obvious cains foods fueled.

Field test units.

With this said was the opex by carriers was coming down and Thats always a precursor to capex declines.

The momentum reference some pockets of weakness among web scales again from your numbers and comments it doesn't seem to be a problem, but I want to ask you. What your a question are you seeing any signs of concern.

From a customer market product market resources at a macro level.

Yes, Thanks Paul.

I'm going to ask Joe wanting to take it.

Hey, Paul Thanks for the question no we don't see.

At all.

Any.

Weakness from from Baird.

Perspective in fact, we think that we can say at least we have visibility.

Until.

The first half of this calendar year calendar 2023, very strong demand.

I also want to on the.

On the line.

As the result of the combination of the strength of the investments of the customers that we serve as well as us.

Significant.

Share gains, particularly around the high speed.

Side of the.

The demand ceiling from two onward, Colombia these competency.

Thanks to the differentiation that we have we can.

Well.

Take advantage of the.

Of the of the need.

Gotcha.

The type of products and so we continue to gain share.

Versus the competition. So the two are very strong in.

<unk>.

We have not seen any weakness as maybe others.

<unk> reported.

Reported.

I appreciate the responses. Thank you.

One moment for our next question.

Our next question comes from Dave Kang with B Riley Your line is open.

Thank you. Good morning. My first question is regarding your fiscal <unk> outlook. I was wondering if you can give us a little bit more color.

Your three different segments.

You should think about it and my follow up question is regarding your escalator or what's the typical lead time for that.

Yeah.

So we would expect.

On the first question, we would expect good contributions from all three of the segments.

Thanks, Dave for your question Mark would you like to comment on the ultimate question.

I didn't hear the extra question to just one more time please.

Yes sure.

Typical lead times.

Typical lead times for our annealing systems are around six months.

Excimer annealing.

Nearly flat panel engineering.

Yes for excimer flat panel annealing the lead times are typically about six months.

Got it. Thank you did you hear that they're okay.

Yes, Thank you great.

Yes. Thank you.

For our next question.

Our next question comes from Mark Miller with benchmark. Your line is open.

Congratulations on the record sales.

You are probably aware of the new U S restrictions on equipment shipments into China.

Just wondering is there any impact to you on.

Coherent, especially for the lion's mane tools that are going into China.

Okay. Good morning, Mark joining would you like to take that Mark. Thanks for the question absolutely first of all as you probably know there are no <unk>.

<unk> sales into China, so since Thats vast majority of the market that we address with our deposits we have.

No impact from that perspective.

People on the deep UV <unk>.

Other parts of the semi cap equipment world, we have seen.

Less than 5% impact on the short term demand from our customers and <unk>.

And again, mostly because we are aggressively.

Segment of the market for which the streets from had been applied which is on the high end.

And so the demand continues strong and in any case, China wasn't going to look to begin with so we haven't really.

Experienced.

Short term at least we don't see any weakness.

You mentioned moderating <unk> shipments after a strong quarter and first half of fiscal 'twenty three how much of that is due to two macro.

And also.

If you could talk about any your opportunities outside of the pit.

Consumer electronics market for three D sensing.

Yeah. Thanks, Mark So first of all I want to make sure. It's clear the outwork our numbers went about sensing which includes <unk>.

And.

So.

We'll follow the typical seasonal trends.

We said in the prepared remarks, and we have really not seen any effect.

Four months ago from a customer demand standpoint from let's see weaknesses in some of the geographical areas that were there.

Our products are being assembled and completed so demand is.

Been unaffected for us so we're strong in.

So we haven't really seen anything.

Any weakness from the standpoint.

So it's mainly just seasonal effects that youre talking about.

Correct.

Thank you.

Okay.

Thank you Mark.

Our next question comes from Simon Leopold with Raymond James Your line is open.

Thanks for taking the question.

One on.

On the the Hyperscale trends that you called out Chuck and in the prepared remarks, you said that.

Thank you expect hyperscale to grow in the second half of fiscal 'twenty three.

And I guess to me I'm wondering whether or not that implies that you saw any softness from hyperscale in your September quarter or what your expectation is implied for your December forecast.

Okay, Hey, good morning, Simon Thanks, Simon what I saw.

<unk> was regarding our data center customers, we continue to forecast hyperscale growth in the second half of this year.

Answer your question and maybe put a finer point on it we expect our datacom business to grow sequentially and steadily in the year.

Does that help you.

It was not but joining do you want to add to that.

So while some are some of the scale has been rebooted.

Rebooted the demand over time, and maybe some has shown some weakness over at least the size to slow down.

This is the mix of customers that we address is not affected by that at all so we don't really see that.

Distributed demand over a longer period of time.

And then the fact that we're getting so the combination of the tool to Mali, thus pretty good.

Outlook for us.

Great No I appreciate that and then just a quick follow up for Mary Jane was you called out the 7% benefit from foreign exchange rates and I want to make sure I understand that that's basically it.

Internationally located employees being paid in local currency and therefore translates back to fewer dollars. If that's correct.

If we assume currency stays stable in the December quarter, Youll see a similar benefit and Thats whats implied in your December guidance is that correct.

Great Okay.

Taking the questions.

Our next question comes from James Ricchiuti with Needham Your line is open.

Alright. Thank you so thanks for the color by the way.

The export U S export restrictions I wanted to ask a question also about the laser business.

If we think about some of the forecasts for for the <unk> market and the expectations there.

That market could be down anywhere from.

<unk> 20 per share.

Next year in calendar 'twenty three.

Wondering how you're viewing that part of the laser business.

Do you just see more of an offset and the display related portion of the laser business that's capital equipment.

Thank you Jim Mark.

Jim Thanks for the question.

So two parts to the answer perhaps Jim.

Certainly to quote one of our customers the impact on China's non zero, but as Giovanni indicated.

It's probably less than 5% of our semi business in the laser segment less than 2% of our overall business and the laser segment.

We are buffered by a large installed base, which really helps.

Thousands of ultraviolet lasers.

To be refurbished every two to three years.

Some have been in service for more than 20 years with our customers asking us to commit to support for another 10.

And that service revenue underpins, our strong baseline business kind of irrespective of the latest annual WSB spend so certainly the outlook for next year is tampered relative to what we've seen this year, but clearly I think we all believe the long term trend is very positive.

And then if I could just a follow up question.

Certainly I can appreciate given the diversity of the portfolio you have some installation here, but I'm just wondering.

What youre seeing in across the industrial business by geography in terms of China, Europe , North America, and just given in light of the macro concerns that people have just expressed.

That's another good question, Jim I think.

I think we have a diversity of products and services that we sell into the industrial.

Markets, we certainly.

The benefit of a very strong backlog.

We're in some markets for example, medical device manufacturing, we're number one and other and other markets, where maybe number two and three we think we've got lots of share upsize and industrial so we're beginning to see maybe the first softening in some of the European customer base, but again.

We've got the benefit of a very healthy healthy backlog.

Again, our diversity of markets in the industrial sector.

I think really.

I think it gives us confidence that we're looking at a pretty strong outlook for the year.

Got it thanks, congratulations on a nice start by the way.

Thank you. Our next question comes from semi strategy with Jpmorgan. Your line is open.

Yes, hi, thanks for taking my questions I guess for the first one if I could sort of.

Get some help on.

Spending the revenue guide for the full year.

Your comments have indicated that demand is remaining robust maybe some pockets of weakness here and there, but largely sort of a strong backlog strong demand and I'm trying to think about piece of guidance for revenue to remain sort of flat half over half at the midpoint.

Any insights on sort of what you're seeing book to bill et cetera that will give us some sense of what's driving that revenue guide because ideally.

What are you seeing the company ramped through the yield in terms of revenue and I have a follow up thank you.

Thanks Dominic.

Compared to.

The combined pro forma revenue I think we will see growth, but at the end of the day. The main thing that we're also trying to keep in mind is the effects of currency on that revenue right. So just in the first quarter, we had 16%.

Currency effects on the revenue so thats part of it if you just multiply that by four and not that that may be exactly how it goes but at 60 or $70 million.

But generally speaking I would say that when we look at the combined <unk>.

Number for the company.

Impair too where the pro forma wise.

We're expecting to see some some decent growth with New York as long as Chuck already.

Okay.

Okay. So let me move to the second question.

In terms of the operating margins.

Nick looking margins improved significantly sequentially.

Limited change in the revenue profile, whereas it was addressing with your compound semi margins sort of remained similar sequentially, even despite a significant move up in revenue. So I'm. Just wondering if you can help me understand that.

Why not more of a volume leverage sort of compound semi versus Nick working with seem to have a much more material improvement in margins. Thank you.

So I would have said well first of all a couple of things in the in the networking business.

<unk> had a very very strong mix in the transceiver business this quarter.

They have also continued to work hard on moderating what their supply chain challenges have been both in terms of physical product and the costs that are involved in that.

More importantly on their operating as I should say I mean, it continues to vehicle for us to moderate.

The cost of operations I would say probably the other thing that helped them in fairness is that because the RMB was weighted probably translated there.

It is not probably did it did translate there.

Cost per kilo lower level. So there is probably a currency effect on that to some extent, which is lesser of an extent materials materials generally.

Around the world almost all of it sales in dollars and a significant part of our cost in dollars. So thats.

One aspect of that but second of all materials also had a very very good quarter in the fourth quarter as well.

And generally speaking I would say that.

Overall my original range on materials is that it would be 23% to five in terms of its resting margin.

We're happy to see it at 26 2007, but I don't know given their mix at this particular time that it actually grows by.

100, 150 basis points every quarter and they had significantly less on currency.

Thank you.

Our next question comes from Vivek Arya with Bank of America. Your line is open.

Thanks for taking my question My first one I am curious what is the implied range of gross margins maintain for Q2 and for the fiscal year and what about co head ends products makes it tougher to.

Get a tighter gross margin range is it just is it just to make sense of the variability between products is it just pricing competition.

So just any views on gross margins would be very helpful.

The company doesn't guide on gross margins, but I would say that as we've said consistently.

Our goal is to try and keep that margin over 40%.

And we will continue to do that I think that just tell me again what was your question that's lasers margin.

Yes, just overall gross gross margin for Q2 and for the full year. So let's say if if the mix you think if the mix Youre planning for Q2 comes through in the mixture of planning for the full year comes through what is the range of gross margin.

So for example, if you take the midpoint of your full year range again gross margins.

It'll be over 40%.

Well the company Hasnt changed its range from $30 38 to 42, just for a whole number of reasons not to mention the <unk>.

Covid issues that we're still seeing particularly in fish out.

But I would say if you took the midpoint of that it would be 40, but I, we do not guide on gross margin. So that's the answer to the first part of the question. What is the laser question you are asking.

The laser question I was just saying that what about the company's mix makes it tougher to get a tighter range of gross margins.

Well I think at this point.

We're still really learning first of all the laser products, which nonetheless are very good margins. There is no question about that.

And given that the company saw some pretty nice margin improvement just between Q4 on a on a pro forma basis to Q1 <unk>.

But at least when we think about it.

We know that that could still recur and then finally on the material side.

The materials team also continued to see some of the effects of our supply chain shortages.

And for my follow up on Silicon carbide.

How should we think about the contribution to sales and the required capex requirements for this fiscal year and in general the strategy around Silicon carbide you have just one large player who is spending billions in capex to stay as a leader on the substrate side and then you have a number of customer.

Is your plan to in source capacity, so just kind of a near term question on the sales and the Capex.

Alright.

<unk>.

First of all we have said that with respect to the investments that we're making.

We would expect in this sort of 25 2006 period that the company would probably have start to say its percentage of silicon carbide as a percentage of revenue moving into that eight or 10% place from where it is today as we continue to make progress on.

Devices with respect to.

The capital investment that we're making.

During the entire last 10 years, we've probably doubled the capex excuse me have doubled the capacity of silicon carbide.

Every 18 months as opposed to some other competitors, who actually had a pause in the middle of that period of time, but nonetheless, we do expect to spend roughly over $1 billion over the next 10 years, the majority of which will begin in the first five and the majority of which will be capex, having said that the company continues to look at as it gets larger.

<unk>.

Alex thinks about manufacturing things, including.

Not speaking about just silicon carbide, specifically, but in general whether or not it could be advantageous to the company's growth to have partners in certain areas of the manufacturing in silicon carbide would be an area, where we do think about that but we think about it for everything at this point as the company gets larger it may not make sense that <unk>.

Absolutely everything fully vertically integrated chocolate, what you'd like to add well, let's ask Vivek do you have any follow up question.

So we're just talking about just the overall strategy is there.

<unk> in the market.

For coherent just given the one really large substrate care and then the desire of many of your <unk>.

Customers do to in source that capacity overtime, so where does that window for coherent to become sustainably profitable in this business.

Well, okay, let's.

Let's come back to the capital too.

I would say about a third of our capital. This year is going to go into into this business.

We're going to compete on the basis of the competencies that we have including the quality of the technology and the scale that we have and we're putting in place.

Introducing new platforms on the basis of market opportunities that we clearly have in front of us.

And we believe that we can have a strong profitable growing differentiated business just in materials.

But in addition to that we continue to invest in making very very good progress both on devices and on modules.

The game is is is going to inflect and unfold here in this decade and the next few years.

And I believe that we are already well positioned and we're going to continue to establish the front that we need to in the base that we need to to grow from that.

I have very very very much confidence in our ability to do that and we are well underway.

Let me just make one other comment this market is going to be so big.

I simply.

We can't see.

It is not enough capacity in the market today.

No one player that can serve this entire market no one is going to build a whole industry.

On one player.

And we intend to be one of the leaders.

Not only have already emerged but are sustainably in the pack okay.

Thank you.

Our next question comes from Sidney Ho with Deutsche Bank. Your line is open.

Thanks for taking my question. My first question is on the semi cap exposure I think organically from the <unk> takes it takes ratio was only 5%, but I think a coherent and legacy coherent it's more like 45% now now it's all part of this industrial market that you guys disclosed.

But when you look at that in totality.

We use the thing your organic to fix its mostly type of UV system produce it but how should we think about the drivers of this segment for the entire company. How much is tied to wafer fab equipment spending a certain segment of that and how much is tied to backend packaging and maybe maybe on the display side.

Okay. Thanks, Sydney, Sydney I think what we'll do is let's let Marc Andrew aligning both give.

Some color on.

On the semi cap businesses in their segments.

Hey, Thanks for the question so specific to the laser segment.

Semi cap revenue for us accounts for between 15% to 20% of our overall lasers lasers Reg revenue the areas that we predominantly play and as you know our.

Ultra Violet laser based inspections for for radicals and bare wafer and patterned wafer as well as infrared.

But I think on the earlier number you quoted was substantially higher I'm not completely clear if that was <unk>.

Address the laser segment or get prior experience with coherent Inc. Before.

But it's definitely less than 20%.

Thanks, Mark joining with us.

Thanks for the question I think as I said earlier again, we have.

The benefit on the materials segment too.

Address the.

<unk>.

The high end of the market in terms of the.

To note if you like.

And.

So what are the women's <unk> seen.

No slowdown in fact, if anything we continue to invest to support the.

Capacity needed to address the demand that we see.

Okay.

It's been the <unk>.

When the exciting for us too.

Address this I end applications because the high margins. We are differentiated we mentioned many times in the past that we have several.

So stores box and some of these tools and so we will see.

The benefit of yields as years of investment gains these kind of leading position in supply.

Although.

Emotional people's wafer chucks.

Maybe those all kind of.

Components with <unk>, both on the backend tools.

The semi cap customers.

Okay.

Thanks, My follow up question and then maybe one for Mary Jane can you help us.

First of all I would say that generally speaking.

<unk>.

We are likely to see about a $65 million shaved on an annualized basis. During the first year on synergies that does not mean that <unk> say $2 56 and drop it by 65.

On an annualized basis, I would say we would probably.

Be able to maintain.

This year it may go down slightly.

Round of 19, but given that our target has been $20 to 23, even being at 19 were down a little bit, though as I said currency helped us a bit but I would expect that the Gulf for example in SG&A is to moderate the absolute dollar amount.

As we go forward from the combined company.

Moderate any growth. So that's one element of synergy on the on the engineering side I do think the company will still strive to look at having its engineering app about 9% of sales level.

From.

The pro forma company. If we just look at fiscal year 2002 was about 10 four.

If that stays at about nine or nine and a half you would see that coming down whether or not all of that is achieved during fiscal year 'twenty three I can't really say that generally the delivery of the synergies across the 250 was expected to be something like.

65, 90, and then the balance in MSR here. The reason there is more on the 30 <unk> because to the extent that.

We look at say two leases in the same area, where one comes off the lease.

Is moving things to maybe do a common space a one site one company has a larger site in the same city.

That just takes longer so those are the types of things that we tend to have as well as the renegotiation of long term contracts.

Okay.

Great. Thank you.

Our next question comes from Richard Shannon with Craig Hallum. Your line is open.

The urge to that guidance.

Oh.

We started that this year.

In this quarter.

We have not.

We haven't stepped out into this.

Maybe in six or seven years, given this kind of long range guidance, even on the revenue.

And we've done it.

Because we have this diversified business.

And we have really good visibility we believe.

The biggest single one uncertainty that we're looking down.

And two is the supply chain.

And after that Covid is right behind it in China.

And nobody knows how that's going to play out is still a long time to go through the fourth quarter I think it's a very very solid view that we have today about what we're going to go and aspire to do.

So of course, we need to have orders and order coverage all the way to the end we are working on that.

The supply chain and covered those will be is a little bit out of our control cohort for sure and supply chain were doing everything we can to mitigate those would be the two okay.

Okay. That's helpful. Chuck and my follow on question is just on backlog here and kind of relates to some of the dynamics you just mentioned here, but how are we expecting kind of corporate wide lead times.

Two to trend over the next couple of quarters, obviously lead times pretty much everyone everyone in hardware technology.

The expanded here supply chain is a little bit of an issue, but do you see the lead times coming down and what if any impact do you see that having a backlog.

Well, we're not we're not expecting or forecasting a substantial change in the lead times.

Our plans are based on what we have in front of us as far as far as that goes we're constantly working to improve our own lead times.

And our overall ability to manage carefully any changes in the inventory for a good part of that.

That's the best I can say.

Okay, great. Thank you.

Yes.

Sure. Thank you. Our next question comes from Tim So I was off with Northland capital markets. Your line is open.

Okay.

Hey, Thanks for squeezing me in there and congratulations on the results.

The results on the telecom side I thought you heard I heard you call out some strength or activity in cable television networking infrastructure early in the call Chuck in your prepared comments.

I'd, just like to get a little more color on that and just as a follow up.

You talked about a record quarter in sensing it seems like you had a pretty big win a little while ago, where a couple of years ago. So it seems like that may have as much as doubled sequentially for you what is the outlook given the seasonality into the December quarter for for three D sensing and that's it for me Okay.

Thank you Tim Tim I'm going to ask you are wanting to take both but as it relates to telecom and NSO or cable TV infrastructure, we think about them.

The same kind of in the same bucket.

From Datacom telecom and cable TV infrastructure related.

With that in mind.

Let me just add.

Extremely.

Well positioned.

And the largest of these cable TV infrastructure customers that we have and our our business is growing growing growing very well and I expect that we will continue to do so.

Throughout this year, joining would you like to add to that.

Good maybe.

I'll talk about the.

So essentially an outlook that deal we said we said that.

We're going to experience the typical seasonality.

That we have experienced in the past.

Good.

Cleveland quantity customer.

By ordering.

Patterns and so we just to follow that.

As we have seen we have had.

The strong growth.

Driven by some new applications and new.

New products that we were able to launch.

Together with our customers.

And.

We expect.

The typical trend that we've seen in the past.

To.

Slowdown in.

The second half of the fiscal year.

And then eventually.

Come back to.

Again in the first half over the next fiscal year.

In relative terms, we expect that demand to continue.

These are.

Long term investments that were made to enable functionalities that not many companies can enable many suppliers can enable so we feel good about.

The prospects of this.

As I call. It general sensing market does include <unk>.

Please go ahead.

Having come from meta Marshall meta Marshall with Morgan Stanley . Your line is open.

Okay, great. Thanks, a couple of quick questions.

Mary Jane I guess is it always your policy and integrations that kind of stop hiring upfront just as you kind of assess.

Kind of assets in house.

Or is there something different about the environment that made you want to.

I put in kind of a nearer term hiring freeze and then on the second piece you mentioned kind of looking at alternatives.

On the leverage piece, just wondering is there a minimum cash threshold or just anything that we should be mindful of as you kind of assess the leverage position.

So first of all I would just encourage everyone on the phone not to use phrases like hiring freeze.

First of all it is always our policy to get to know our new colleagues first.

As the two companies come together it changes.

Some of our global.

Functions or it changes what some of our leadership positions are we do have people in the normal course than either company deciding that they are reaching their retirement age. That's one of the things you got to know just in the normal course, they're reaching retirement age and.

We want to make sure that we have opportunities across the board for people to come into we're also especially as they might be larger haul. So we do that every single time again, no one should be overreacting on anything about a hiring freeze.

And frankly most of my comments are probably more focused on SG&A than they are on R&D as it is a real important matter.

But generally speaking I think we do spend quite a lot of time in the beginning of our game plans just getting to know those companies and given the public.

Interaction that was done in the closing of the coherent are the bidding on the coherent Inc. Transaction I would say both sides advisers cautioned us to be perhaps less engaged.

Pre close than we were on previous large acquisition. So there is a long tail here of getting to know each other.

And.

I think both companies want to make sure Theyre gelling things in concert so that also nationally.

Laos us up a little bit of a pause as we think about expenses overall.

You had a second apartment.

Yes, the leverage piece.

How do we see consider either minimum cash or just kind of considerations on that Brian .

Well I think.

It's fair to say that the company probably thinks in terms of just maybe call it $500 million of cash the minimums, but generally speaking we do have the revolver there and that is largely undrawn.

So if someone were to I don't know one quarter. It went to $4 75, I also wouldnt recommend anybody jump out a window over that.

Opex.

I don't know to someone else's question earlier that we would.

Necessarily dramatically moderate capex unless the market in <unk>.

In a certain direction and we felt that was the prudent investment thing to death.

Great. Thank you.

Our next question comes from Tom O'malley with Barclays. Your line is open.

Hey, guys. Thanks for taking my questions Giovanni the first one is for you.

You are mentioning normal seasonality into the December quarter in the sensing business could you just remind us what normal seasonality is.

Well not most design other means that will be.

Higher than the previous Florida and then.

<unk>.

Come down in the third and fourth fiscal quarter.

Okay and then.

Just on the quarter on the acquired assets. It looked like coherent came in a bit higher than expectations legacy coherent came in a bit higher than expectations.

I was just curious did you see any change in order.

Earns from Chinese customers in the quarter I know, it's a very small percentage of <unk>.

Your sales that you are saying are impacted by potential bans, but did you see any change in ordering patterns. There just for this quarter. Thank you.

So this is mark Tom Thanks for the question, So China represents a pretty small part of our overall.

Lasers lasers revenue.

And we really didn't see any significant change in order patterns at all.

I mean, I think we explained to investors on the say 630 quarter.

Good times, we got questions.

Supply chain was was a challenge us support Shanghai was shutdown or whatever and I think the team's worked well to kind of get to the revenue that they expected to.

Thank you.

Right.

And I'm not showing any further questions at this time I'd like to turn the call back over to Mary Jane.

Let me maybe for closing comments.

Thank you very much for joining us today.

I look forward to speaking with you as time goes on here through the rest of the quarter and we will talk to you again.

In February so thank you so much for joining us and we all have.

During the day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Q1 2023 Coherent Corp Earnings Call

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