Q4 2023 Coherent Corp Earnings Call
I hope those of you listening in have had the opportunity to read our new shareholder letter. In the fourth quarter, the coherent team did a good job executing in the midst of a challenging macroeconomic environment. Our revenue of 1.205 billion was above the high end of our guidance and non-GAAP EPS of 41 cents was toward the high end of our guidance. Operating cashflow was 182 million, which marked sequential and year-over-year improvement. We invested 93 million in capital equipment.
and we retired 121 million of debt. When I look back on fiscal year 23, Legacy Coherent contributed to our resilient business model.
In addition, our track record following our acquisition of Finisor once again speaks to our ability to successfully affect strategic acquisitions and thereby create shareholder value. Two major highlights in fiscal year 23.
were related to our acquisition of Finisor, we demonstrated our unique scale while generating nearly 20% of our FY23 revenues from just two customers.
one in communications and one in electronics. These are good examples of the strength of our vertically integrated platforms, which enable breakthrough solutions and our differentiated ability to scale to meet sudden increases in market demand.
like those that we are now seeing in AI. And while we experience a surge in orders in Q4 in communications for AI,
The macroeconomic uncertainty that affected some of the industrial and instrumentation businesses
a slower than forecasted recovering in China, and a post-COVID deceleration in the communications markets drove the conservative fourth quarter order patterns for some of our customers' legacy products.
Recently, some of those customers have taken actions, including reducing orders of legacy products in the face of lower demand and reducing their inventory levels while slowing their planned investments in CapEx.
This setup presents the ongoing challenge of managing through a retooling in Fiscal 24, and so we got busy during Q4 to align our costs with market reality.
We remain bullish about the future because many of our largest customers are also resetting their strategies and accelerating their investments in new products that depend on our innovations and our ability to manufacture at scale. The largest opportunity in FY24 that we are addressing is for 800G data conferenceries for plan, artificial intelligence and machine learning build-outs.
That demand should help offset the anticipated declines in demand from our traditional data center and hyperscale customers in data communications in fiscal 24. In addition, we continue our review of strategic alternatives for our silicon carbide business providers.
another one of our major growth opportunities.
though our outlook assumes that we will not see meaningful signs of recovery before the end of fiscal 24. So in short, we are prepared for a reset year and we consider these challenges as a temporary interruption of otherwise powerful secular trends. Our guidance for the first quarter of fiscal 24 is revenue of approximately one to 1.1 billion and non-GAAP EPS of approximately five cents to 20 cents on 153 million shares. Regarding full year fiscal 24 guidance,
Revenue of approximately four point five to four point seven billion and non-GAAP EPS of approximately $1 to $1 and 50 cents on one hundred and 50 three million shares.
With that, I'll turn the call back over to Paul.
Kevin, if you could open it up for questions. Thank you. Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone.
If your question has been answered or you wish to move yourself from the queue, please press star 1 and 1 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Sam at Chatterjee with JP Morgan. Your line is open. Hi, good morning. Thanks for taking my questions.
inclusion in the guidance or deciding not to put it in the guide? Maybe if you can walk us through, are we sort of to interpret that you're not putting any of those AIML orders in the guide for fiscal 24, or is there some amount of it in the guide related to what you have more sub-capacity visibility around?
And you do mention sort of capacity ramp as one of the hurdles, I think, in the shareholder letter in relation to fiscal 24. So maybe if you can walk us through what are you seeing in terms of capacity challenges, what you need to sort of see in terms of milestones to include that in the guide going forward. And I have a quick follow up. Thank you. Okay. Thank you, Sam. I'll take that. Maybe three points or help.
for a delivery of 800G transceivers. Those have already started. In the first half of the year, we will see a ramp from Q1 to Q2, but the substantial amount of revenue we will deliver, it will be in the second half of the year. And what's in front of that is managing our scale and especially managing our supply chain. And so we see the opportunity for over and above what we have in our plan, but that opportunity will require quite a few more synchronizations, including in the supply chain.
Okay, good, good, thank you. And then you did outline in the presentation in the show a little, like three separate opportunities in AI-ML, relative to EMLs, your DFS laser, as well as pixels. Any sort of thoughts in terms of broader terms where you see the most of likelihood of success within those three buckets and where most of these orders are coming in right now that you're seeing, in which bucket is that coming in? Thank you. Okay, well, I'll start out and then I'll ask Jovani to finish it off, Samak. As you know, we're a vertically integrated supplier.
And if we have anything more to say, 90 days from now, we will. With regard to your second question, our belief is that we're in a market leadership position. It's a competitive market. There are strengths that we bring and we're going to continue to compete on the basis of the strengths that we have in this generation. Those strengths I outlined were evident in FY23 with a rather substantial ramp in datacom transceivers. Year over year from 21 to 22 to 23, we have the ability to scale.
And we have the laser components for the generations that exist today and the 1.6T, which are coming. And so on that basis, I think it's the first inning.
It's very difficult to be assessing what the score will be in the fifth inning and the sixth inning of the game. Everybody's just getting started.
And we're well positioned to be able to move even further past our own aspirations for our leadership position in this market.
Right, this is the first inning of the game. It's the beginning of, I'm not even sure it's a cycle. It's the beginning of a revolution. And there's a lot more to come, we believe. And by the way, if 90 days from now, I can update you on the possibility of additional revenue that we can add to the guidance, if we're able to operationalize it, there may be more to come. Because this is just getting started and we think that in 24 rolling into 25, it's gonna continue to drive our growth.
This is the first inning of the game. It's the beginning of, I'm not even sure it's a cycle. It's the beginning of a revolution. And there's a lot more to come, we believe. And by the way, if 90 days from now, I can update you on the possibility of additional revenue that we can add to the guidance, if we're able to operationalize it, there may be more to come. Because this is just getting started and we think that in 24 rolling into 25, is gonna continue to drive our growth. Thanks for taking the questions, Chuck.
And then just, you know, as you look at recovery of the business, either, you know, late in the second half of the fiscal year or into fiscal 25, does what segments are most likely to kind of recover first outside of DataComm? Thanks. Okay, Medha, thank you for your question. Well, the telecom business itself, given our position of our portfolio, the strength that we have with the telecom customers, I'm expecting that the second half of the year to be better than the first half of the year.
that we'll expect is I do expect to see some signs of recovery before the end of this calendar year. Signs of recovery will be a follow through on new orders.
And those new orders will be consistent and commensurate with both the launch of some new products, including our pluggable DCO modules, and the ramp of those products from a base that we believe we can grow our shear meaningfully beginning the second half of next year. So telecom would be one.
I do think the industrial market is broad-based. We're diversified.
And I don't want to say that we're at the bottom, but I do believe that any meaningful increase in macroeconomic activity, we will begin to see it both in laser utilization, in our service business, and the further adoption.
growing super nicely, I would say, and I'm expecting that to continue into 2024.
nicely, I would say, and I'm expecting that to continue into 24.
Maybe I'd stop and take a follow-up if you like.
Yeah, no, just as a follow-up, I mean, just to come back to data com transceivers, you know, when you talk about this kind of additional 200 million, is the majority of the gating item your capacity, or are there other gating items to kind of recognition of that?
Every manufacturing line has a first constraint.
and when it's broken there's one right behind it, the second constraint. Our job and our expertise is being able to figure out how to manage multiple constraints at one time. Managing the supply line, we have critical components that we're dependent on and that supply line.
for the last six months or so has been in a wind down mode with the tide going up.
last six months or so has been in a wind down mode with the tide going up. And the rather sudden adoption.
in the beginning of the game, in this first inning, caught many in the industry by surprise. And therefore, we have to manage through certain aspects of the supply line. It's going, but if it were going faster, we'd be able to take on.
more because we have the capacity to do more. And we're aiming to do more. I believe that customers want us to do more.
And so in the next couple of months, the urgent approach to managing our entire manufacturing capacity will continue and we'll give an update in 90 days.
Great. Thank you.
Great, thank you. One moment for our next question.
Our next question comes from Vivek Arya with Bank of America. Your line is open.
Thanks. One more on DataComm. For fiscal 23, what was your total DataComm transceiver sales and how much was that in AI ML? I'm curious, how are you drawing that line? Is it anything above 200 gig? So that's my first question.
Okay, Vivek, good morning. Thanks for your question. Let me give it to you in broad strokes because I think that will do it for you.
Now our data com transceiver sales in 23 were approximately 20% of our consolidated revenues
And as it relates to AI,
Whereas there may be some applications in sockets that are at data rates that are less than 800, for us, when we talk about it, we're really talking about 800, and you'll hear us talk about our roadmap for 1.6.
But in FY23, it was not a material amount. We began shipping in the third quarter. And it's going to step up rather substantially in 2024.
For my follow-up, I was hoping if you were Mary Jane could provide the bridge between the sales guidance and the earnings guidance. What are you assuming for gross margins in fiscal 24 and the exit OPEX rate in fiscal 24? What are you assuming for gross margins in fiscal 24 and the exit OPEX rate in fiscal 24? What are you assuming for gross margins in fiscal 24? What are you assuming for gross margins in fiscal 24?
We're widening our gross margin range to 37 to 42. And at lower revenues, similar to what we have in the guidance, given the importance of volume, the margins may not be at 40 every quarter, so that's the first thing.
The second thing is similarly at the same level of revenue that we're talking about for the full year guidance, the OPEX.
tends to be a little bit higher percentage of sales, not because the dollar value of the OPEX is going up, but because the revenue is lower. So it's probably in the neighborhood of about 22 or 23, which is the high end of our range of 20 to 23. So that's the way we're looking at it. I do think that as the year goes on, we will probably see the margins improve out.
two to four quarters starts to recover in the back half of the year.
But, Mayijan, how do we reconcile, I mean you're guiding sales down I think what 11% at the midpoint and earnings down almost 58% at the midpoint.
So what declines a lot more because gross margins from what you're suggesting sort of seem to be about Where they are in fiscal 23 unless I'm getting that wrong So what are those missing pieces that are driving? You know is it share count like what is making a decline so much faster?
Comparing to 23, I mean the revenue alone, comparing just to the, say the 4.7 billion, sorry, the revenue alone is 91 cents. So the revenue declining is a significant impact on the earnings.
And then from there, you know, the taxes make a difference, the dividends change somewhat, even though we have the share count converting on the Series A, the in-kind tax rate is not
dividends also start to go up because they're capitalized. So those are probably the major things, but the revenue being below 23 is the primary driver.
Okay, thanks. I will follow up separately.
One moment before our next question.
next question.
Our next question comes from Tom O'Malley with Barclays. Your line is open.
Hey, thanks for taking my question. I just wanted to see what silicon carbide was as a percentage of total revenue in the June quarter and the prepared remarks you talked about, the continued supply constraints just from not being able to scale, but you also said it grew nicely. Could you just give it for the June quarter?
Yeah, good morning, Tom. Just give us a second. Yeah. The whole of the wide band gap product line was about 6% of revenue.
Okay, thank you. And then I just wanted to ask just a technical question. Maybe this is in Giovanni's camp. So in terms of AI connections that you're seeing today, I thought it was interesting in your slide deck, you showed that the biggest growing opportunity is what have you Chin Tye and will it become the big selling
between 23 and 28 is the silicon photonics portion, where you have it going from like 800 million to 4.6 billion. Where are you guys playing in silicon photonics and why is that growing so fast in that period of time? Thank you.
Well, there are solutions that, you know, from a power consumption and, you know, generally speaking performance, at some point, a better suited for silica photonics. You still need a laser for those solutions. And we seeā¦
I would say there is a split, zero photonics is not, in the slides, is not identified, you know, it's not split between short reach and long reach, short wavelength, let's say, or what we call it, short reach, long reach. So I would say that split is still a one-third short reach, two-thirds long reach.
and both of them are related to the AI exam that we talked about.
So that's what we are seeing. So the growth, and of course there is not all of it, that's growing fast, but there's also the VCSEL part which is also growing very fast, and that's unrelated to the serial photonics part. But just with respect to serial photonics, that's a split between the...
Still all AI, but it's a split of, let's say, one third, two third, short reach, long reach. Thank you. One moment for our next question. Our next question comes from Ed Dorshimer with William Blair, your line is open.
Thanks for taking my question. This is a follow-up to the previous on silicon carbide. Am I looking at this correctly? If I look at the wide band gap and I strip out Indian phosphide, silicon carbide is roughly 70% of that business.
And, you know, or is there anything else that that I need to be aware of in that business? Jed, can you repeat your question? Which set of financials? Yeah, I'm trying to, what I'm trying to get at is the growth in silicon carbide. Obviously you've said that that was 3% of...
sales and now wide band gap is a total of 6%. Within wide band gap, I think the other major component is indium phosphide, but that seems to be relatively small of about 20-30%, so the vast majority is silicon carbide. Is there anything else that...
that would need to be removed to get back to that silicon carbide because what I'm trying to understand is the growth year over year of that business.
Okay, Jed. Jed, in our wide band gap
the majority of the sales are for silicon carbide substrates.
There is no indium phosphide or gallium arsenide, there is nothing of any other compound semiconductors, there is nothing of any other compound semiconductors, there is nothing of any other compound semiconductors,
We do have our iron implantation services business which includes
providing ion implant services for
to customers who are operating fabs.
And so it is silicon carbide based.
And that's the focus of our YBNG EpiElectronics platform. And it is growing. It is outpacing the growth of the company.
And it's been four to five percent for the last several quarters just
Got it. Okay. Well, and then I guess maybe just you mentioned that the in the shareholder letter that 40% of the capex was directed to this business unit. And then last quarter, I think you updated saying that you were looking at a strategic review of this business unit.
it's a lot of capex for you know something that's relatively small albeit growing. So just how should we think of that percentage in the 24 guide? Do you expect a linear growth or are you expecting with this capital intensity?
in terms of expansion that that would be nonlinear? No, I'm expecting that in FY24 and planning that above 40 to 50% of our capital will be invested in silicon carbide to fuel the growth.
Sure. What I was getting at though, Chuck, is, is so in a business that you're, that you, that you're looking at a strategic review, um, which could take different forms. That's a lot of capex that you're putting into that business. Um, are you expecting nonlinear growth in that segment? So another.
That's what I'm to justify the CapEx in that business unit.
Mary Jane, would you like to? Well certainly I think as we have seen and talked about probably in prior quarters, you know as the mainline vehicles from kind of mainline car suppliers start to move to electric, we absolutely expect that this market will have an inflection point upwards.
And I think we're only seeing just the beginning of that. The growth was very strong in the fourth quarter, it was strong in the third quarter. And I think we do expect that to continue. Obviously, customers, it's fortunately this business is somewhat more rational than other parts of our business.
But it's important for the capacity to be there for people also to commit to being able to change over, you know, half of their entire car lines, if not more than that. As in Jelani's segment, Jelani, would you like to add? Yes, so just I'll give you a number, FY23, FY24, we expect growth of at least 40...
We're looking forward to the next question. Our next question comes from Christopher Roland with Susquehanna. Where do you see adaptive differentiate between
Christopher, your line is open. You can ask your question. Hi. Sorry. On mute. Yes. I was wondering if you guys might be able to talk about any kind of non-traditional engagement. Have you guys had any... Again, Paul, please repeat it to say, correct. Marker.
engagements for optical or lasers into things like AI systems or servers or cards. And perhaps if you could talk a little bit more broadly about the economics for AI just in your transceiver business, how margins compare to corporate.
what the OPEX needs are to support that business, etc. Thanks. Chris, can you repeat the first part of your question, the non-financial part?
Yes, so your competitor, for example, is starting to talk about custom AI designs that are going into systems, not just transceivers.
And I was wondering if any hyperscalers have engaged you, any AI specific companies have engaged you in custom designs? Adjani, would you take that? Well, uh...
Thank you Chuck if I can ask you to put a little bit of a finer point on the AI ml transceiver momentum youre seeing.
How would you characterize the relative strength today at least in sort of opex going into Infiniband.
Training clusters versus Ethernet.
And really what I'm trying to get to is if.
If you can give us a sense of timing.
And qualification cycles for Ethernet deployments at 800 gig and then eventually what 16 would be helpful.
Okay.
I'll ask you wanting to addressable and so there is absolutely agnostic to the ultimately the switch architecture of the customers. So if you're talking about.
Maybe the market where the demand is.
Maybe maybe the Liza higher demand for <unk>.
And then.
<unk> Ethernet and deny slides so but.
From just from a hardware standpoint that makes absolutely no difference to us.
Okay.
So are you qualified them for.
I think some of the cloud service providers are talking about moving to.
Ethernet switches 51, two tariff bid et cetera are you qualified.
Those.
Switching to move move out at some point.
<unk> thousand 24.
Yes, absolutely.
Okay.
Okay, and then I guess one last question then.
The FERC Chucker Giovanni.
Mentioned, 20% of consolidated.
Validated revenue.
In fiscal 'twenty three related team, but what you would consider AI ml that leaves a pretty big portion of sort of how I would consider legacy Transceivers 200 gig and maybe in lower.
How do you think that plays out.
You think.
Thats going to ramp faster than legacy falls offer legacy sort of hangs in there.
Are you considering that.
Okay.
Let me let me clarify.
Hi.
My earlier comment was about 20% of our consolidated FY2023 sales were in Datacom transceivers.
Okay, Let me.
Let me ask if you have any question about that.
No.
Thank you Chuck.
I'm glad we're talking.
As.
As we indicated in the shareholder letter, we had a 10% customer in the communications market that was in the data communications market.
And.
That the demand for those legacy products in my prepared remarks, I alluded to a declining demand.
For certain for certain legacy products from our customers.
That demand in FY 'twenty four is going to roll off.
That is our plan.
As it rolls off as it rolls off.
Even faster than it rolls off I am expecting that inside of the fiscal year 2000 and for that we are able to replace it with 800 G AI transceivers.
At a minimum.
We're aiming aiming to do more than that exactly.
Yeah, absolutely yeah. So that's contemplated I appreciate the detail Chuck Thank you.
Welcome Reuben.
One moment for our next question.
Our next question comes from Dave Kang with B Riley Your line is open.
Hi. Thank you. Good morning. My first question is regarding your transceiver revenues what was the split between.
Difference be like 100 gig 400 gig last year and now in 800 gig ramping what do you think that mix will be this fiscal year and whats the margin differential between.
100 gig versus 408 hundred gig thank you.
Joining me on it I would say that the two.
200, 200 gig and above was about <unk>.
I would say, 30% of the total and the rest was to one gig and below however, let me tell you the split between.
The.
Yes.
Sorry, the other way to answer sorry.
And.
No.
So.
Giovanni.
Again above was 70% just wanted to make clear.
Yes, yes, okay. Okay.
So now in terms of the.
The major change in our.
Moving to distributions has been if you recall in the past we said that.
One third was <unk>.
Hyperscale is one.
It's a top 20 cloud and then.
And then the one third of that.
Enterprise and that is so.
As a result of the shift to AI and the result of some inventory.
What we did over.
593 <unk>.
That ratio has actually changed now to two third.
He's around AI at least full FY 'twenty four and it's most of it will be 800 G 200 gene above of course, including energy and then the rest of these.
That's a smaller cloud players and enterprise so the ratio of one third one third one like <unk>.
And then the other one third split between the remaining cloud providers.
And the enterprise. So hyperscale is will be a much larger share of the total than in FY 'twenty.
And how does that how does that.
That transition that the shift.
Impact the margins.
So as I know.
Noted earlier the margins on <unk>.
Higher data rate more technologically complex products tend to be higher than the average in a given group. So in the case of Transceivers.
These greater than 200, Jay and certainly 800 G would be above the average having said that.
For those parts that are say 100 and below at some point, we become very very very good.
Making those so that the lower margin tends to.
The lower margin products, our average margin products tend to hold actually.
Because as time goes on also we're almost the only one that makes them. So generally speaking that's how you should think about the margin structure there.
Got it.
Mary Jane.
My last question is on your backlog $2 7 billion and was wondering if you can.
Provide the split between your it can be divisions and also if you can.
Can provide I know you've provided operating margins for it can be divisions wondering if we can get gross margins full dose.
So with respect to the backlog for the materials segment of the $2 7 billion its about 650.
Of the networking segment, it's about 1.2 and the balance would be in lasers.
With respect to the gross margin of the segments. We don't typically give that as you know.
But I think that you can imagine that it basically goes and somewhat parallel to the operating margin remembering that raw materials and laser diodes have the highest margins in the company along with typically our industrial products.
The laser systems are typically slightly above the corporate average.
And that <unk>.
Telecom.
Communications margins tend to be below the corporate average.
Sure.
Got it thank you.
Thank you Dave one moment for our next question.
And our next question comes from Jim Ricchiuti with Needham <unk> Company. Your line is open.
Good morning, Mary Jane I Wonder, if you did you'd be willing to share any targets for debt reduction.
In fiscal 'twenty four.
Yes, maybe it say at the midpoint of your full year guidance, how should we be thinking about that and then I have a follow up.
Well.
Yes.
So we haven't previously talked about targets for debt reduction obviously, we would have.
Strive to be north of 200 on that.
Paying down the debt remains a very very high priority of their very high priority to the point that while the Capex is the first call on the capital structure.
We have been very very aggressive about managing that capex because to some extent the capex naturally moderate and lower <unk> of our revenue.
And then looking at some of the comments you've made in the shareholder letter on the display side of the business I'm wondering if you are you expecting any kind of seasonal pickup in utilization that's going to drive that part of the business in the first half just in light of what we're hearing from one of the suppliers of OLED.
Cereals into the handset market and then on the systems side, you alluded to pick up.
Orders out of China is that.
Deliveries for fiscal 'twenty, four or the bulk of those in fiscal 'twenty five.
Great. Great question is Jim Thanks for your question Mark when you dress both thanks Chuck.
Hi, Jim Yes, we definitely expect service utilization pick up.
First half of our fiscal year. So over the next six months as you know we get a batch of new smartphone releases from various manufacturers typically in the September October period.
We certainly got visibility into two having expectations of that driver of service revenue.
And the bookings that we that we mentioned on our new <unk>.
OLED capital equipment.
The shipments are in FY 'twenty four.
Those shipments are within the fiscal year.
Okay, Mark how does that compare with past investment cycles, you've seen in this part of the business.
That's a great question.
I think it's pretty similar.
<unk>.
We love this business to be more linear it's not it tends to it tends to be associated with fab build outs as you know and we've got a limited number of customers six to eight major major customers split between today is pretty much split between China and Korea. So.
So I think it's I think it's pretty similar tends to go in phases. Each phase is typically three to four systems. So you can imagine that the orders that we recently collected or in that sort of range.
And we would expect additional phases to be built out as well as.
We've mentioned many times on prior calls and expectation of generation eight five build outs, especially in China. So we see this as reasonably typical.
Okay. Thank you.
Your next question.
Hi, Kevin.
Yes.
Please go ahead.
Next question comes from Tim subjects with Northland Capital markets. Your line is open.
Hi, good morning.
Couple of questions here, and maybe they're related which is specifically I wanted to focus on.
Trends in the telecom business from a demand standpoint.
You probably have some inventory issues, there as well, but as you look through to end demand.
What can you tell us about what's happening there and kind of related to that if we look at the September quarter guide going down something on the order of 150 million Bucks. If you look across your segments.
What are the main kind of.
Drivers there in terms of.
Puts and takes from a from a sequential standpoint. Thanks.
Okay. Thank you Tim.
Tim.
We had a.
Very strong.
Shipments in communications in the fourth quarter.
I think that will be down.
And into the first quarter.
I think thats the number one driver and the change from Q4 to Q1.
That accounts for.
Maybe more than half or two thirds of the variation and the rest of it's spread across the other markets are across the other segments.
End markets what was the second part of your question.
Well I guess I get that.
I'm with you.
So the point to the extent you are talking about comms being half two thirds of the decline I guess I was trying to get a sense of telecom versus datacom there.
It's a combination.
And the <unk>.
The moderation that we saw in the March quarter, and the telecom market.
That persisted in Q4.
And that will leak into at least the leak into Q1 as well.
It's.
A meaningful part of it.
Great. Thanks very much.
Number four next question.
Our next question comes from Mike Genovese with Rosenblatt Securities. Your line is open.
Thank you.
Just a couple of clarification first.
We will suffer with customers. The one that was almost one performs in datacom customer I just wanted to clarify that that sounds like a web scale.
At flat and then the second clarification, when we talk about.
Who knows.
Also part of that also.
Apple optical cables and electrical cables.
So I just wanted to check that.
Nomenclature to make sure that cables.
On the way you guys talked about us.
Joining us today.
So.
Thanks for the question, yes, absolutely we always includes cables, but just to be clear we have no electrical cables.
In our portfolio. So it is all obstacle, but we do increase <unk>, absolutely and I think your first question probably was.
Couldn't hear you very well, but I believe.
You wanted to.
Yes, the truth when I mentioned, the two things I wanted to thank two Hyperscale is I think that was your questions. So we saw it.
So if I can clarify that question.
You said you had two large customers where orders are expected to go down.
Obviously, the consumer electronics customer I, just wanted to check the second one the datacom customer nobody wants that.
Has the floor.
Okay.
Yeah.
Well one well.
Electronics, where the consumer.
<unk>.
And the communication goes data it was.
Large.
Customer for us.
Okay.
My next question just another quick question.
200, <unk> lasers.
We expect those to be shipping for revenue.
Unfortunately, those or external customers.
Yes.
Well right now we have all of that.
Our internal customer.
Two on the G.
And.
We have design wins with some of our competitors placebo competitors and so will.
There will be meaningful only in the second half of the fiscal year.
Thanks, Paul.
Thank you.
One moment for our next question, Kevin Kevin Kevin, we're going to wrap the call okay.
Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation you may now disconnect and have a wonderful day.
Thank you. Thank you.
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Good day and thank you for standing by welcome to the coherent Corp. FY2023 fourth 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 will need to press star one on your telephone you will then hear an automated messages advising your hand is raised to withdraw your question. Please press star one.
One again, please be advised today's conference is being recorded I would now like to hand, the conference over to your Speaker de Paul Silverstein. Please go ahead.
Thank you Kevin and good morning, everyone. Thank you for joining our fourth quarter fiscal 2023 earnings call today on the call we have chair and CEO , Dr. Chuck Mattera, Chief Financial Officer, Mary Jane Raymond Chief Strategy Officer, and President materials segment, Dr. Giovanni Barbarossa laser segment President Dr. <unk> <unk> as a remind.
Yesterday after the market closed coherent posted a shareholder letter along with an updated investor presentation. They can both be found in the Investor Relations section of our website before I turn the call over to Chuck for his opening remarks, I want to call everyone's attention to our shareholder letter and accompanying change in format of this morning's call. The shareholder letter contains a traditional finance.
Statements that were previously set forth in our earnings press releases, along with additional color around our operating performance key trends and outlook given the additional disclosures in the letter we plan to devote the bulk of this morning's call to answering questions from the financial community.
Undertaken this change with the goal of providing greater insight and clarity for our quarterly earnings release, we welcome your feedback.
I want to remind everyone on this call that we will refer to forward looking statements, including all statements. The company will make about its future financial and operating performance growth strategy and market outlook and that actual results may differ materially from those contemplated by these forward looking statements risk factors that could cause actual results and trends to differ materially are set forth in the shareholder letter.
And in the annual and quarterly reports filed with the SEC coherent assumes no obligation to update any forward looking statements, which speak only as of their respective dates.
During this call we may discuss both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in the shareholder letter unless otherwise stated all financial information referenced in this call will be non-GAAP , our discussion will be limited to those non-GAAP financial measures that are reconciled in the shareholder letter today's conference call will be available for <unk>.
Cast replay in the Investor Relations section of our website for one year with that it's my pleasure to turn the call over to Chuck Chuck. Please go ahead.
Thank you Paul.
I hope those of you listening in and have had the opportunity to read our new shareholder letter.
In the fourth quarter, the coherent team did a good job executing in the midst of a challenging macro economic environment.
Our revenue of 1.205 billion was above the high end of our guidance.
And non-GAAP EPS of <unk> 41.
Was toward the high end of our guidance.
Operating cash flow was $182 million.
Mark sequential and year over year improvement.
We invested $93 million in capital equipment and.
And we retired $121 million of debt.
When I look back on fiscal year 'twenty three legacy coherent contributed to our resilient business model.
In addition, our track record following our acquisition of finished door. Once again speaks to our ability to successfully effect strategic acquisitions, and thereby create shareholder value.
Two major highlights in fiscal year 'twenty three were related to our acquisition of <unk> we.
We demonstrated our unique scale, while generating nearly 20% of our FY2023 revenues from just two customers.
One in communications and one in electronics.
These are good examples of the strength of our vertically integrated platforms, which enable breakthrough solutions and our differentiated ability to scale to meet sudden increases in market demand like those that we are now seeing in AI.
And while we experienced a surge in orders in Q4 and communications for AI.
The macro economic uncertainty that affected some of the industrial and instrumentation businesses.
Our slower than forecasted recovery in China and.
And a post COVID-19 deceleration and the communications markets drove the conservative fourth quarter order patterns for some of our customers legacy products.
Recently, some of those customers have taken actions, including reducing orders of legacy products in the face of lower demand.
Reducing their inventory levels, while slowing their planned investments in capex.
This setup presents the ongoing challenge of managing through a retooling in fiscal 'twenty four and so we got busy during Q4 to align our costs with market reality.
We view this temporary slowdown in demand as an opportunity to strengthen our foundations.
We remain bullish about the future because many of our largest customers are also resetting their strategies and accelerating their investments in new products that depend on our innovations.
And our ability to manufacture at scale.
The largest opportunity in FY 'twenty for that we are addressing is for 800 G. Datacom Transceivers for plan artificial intelligence and machine learning build outs.
That demand should help offset the anticipated declines in demand from our traditional data center and Hyperscale customers and data communications in fiscal 'twenty four.
In addition, we continue our review of strategic alternatives for our Silicon carbide business. Another one of our major growth opportunities.
Thanks to our strategy of diversification, we believe that we are well positioned to benefit from any improvement in the macroeconomic environment.
Though our outlook assumes that we will not see meaningful signs of recovery before the end of fiscal 'twenty four.
So in short we are prepared for a reset year and we consider these challenges as a temporary interruption of otherwise powerful secular trends.
Our guidance for the first quarter of fiscal 'twenty four is revenue of approximately one to $1 1 billion.
And non-GAAP EPS of approximately <unk> to 'twenty.
On 153 million shares.
Regarding full year fiscal 'twenty four guidance revenue of approximately four 5% to $4 7 billion and non-GAAP EPS of approximately $1 to $1 50.
153 million shares.
With that I'll turn the call back over to Paul.
Kevin if you could open it up for questions. Thank you.
Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your telephone. If your question has been answered you question with yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.
Our first question comes from Sami <unk> with J P. Morgan Your line is open.
Hi, good morning, Thanks for taking my questions and thanks for all the details in the shareholder letter.
Useful to get all those detail, maybe if I can start with just sort of clarification question on the <unk>.
Particularly sort of the inclusion in the guidance are deciding not to put it in the guide sort of maybe if you can sort of walk us through are we set up to interpret that you are not putting any of those sort.
Sort of autos in the guide for fiscal 'twenty, four or is there sort of some amount of it in the guide relative to what you have more capacity visibility around and you do mentioned set up capacity ramp as one of the hotels I think in the shareholder letter in relation to fiscal 'twenty. Four so maybe if you can walk us through.
What are you seeing in them so capacity challenges, what do you need to sort of see in terms of milestones to include that in the guide going forward and I have a quick follow up thank you.
Thank you Sandra Oh, I'll take that maybe three points are helpful. But first one is that the.
Q4 bookings.
We had a surge that we reported that surge was all about AI.
That's number one number two we have revenue for 800 gig transceivers.
Contemplated inside our guidance in the 45 to $4 seven there is meaningful revenue.
For a delivery of 800 gig transceivers.
Those have already started.
In the first half of the year, we will see a ramp from Q1 to Q2.
But the substantial amount of revenue.
We will deliver it will be in the second half of the year.
And what's in front of that is managing our scale and especially managing our supply chain.
And so we see the opportunity for over and above what we have in our plan.
But that that opportunity will require quite a few more synchronization, including in our supply chain.
As we work our way through in the next few months through the first and second quarter, we will have our eyes set as we work to compete.
The greater opportunity that may come inside this fiscal year.
Okay got it got it. Thank you, Jeff and then you data outlined in the presentation in the shareholder letter three separate opportunities in AI ml <unk>.
This is Lisa as well as <unk>.
Any sort of thoughts in terms of broader films.
Will you see the most of likelihood of success within those three buckets and where most of these orders are coming in right now that youre seeing in which bucket is that coming in thank you.
Okay well.
I'll start out and then I'll ask you are wanting to finish it off Sandra.
As you know, we're a vertically integrated supplier.
In addition to selling both fixed oil based and <unk> based Transceivers for this application were also a supplier to the merchant market.
And having said that our ability to scale.
At high performance and high volume and high quality to be able to meet this ramp is partly the basis on which we're going to continue to win both new orders and to be able to ship Johnny Please.
Elaborate.
So that makes up I would say that roughly right.
It would be like one third shortly short wavelength.
Long Beach long wavelength.
<unk>.
Obviously, we've had we've can support both with our internal devices, and we see that kind of ratio being different potential volumes because.
<unk> is defined so the volume will be probably 50, 50 and that kind of ratio will probably be the same for the next five years numbers, specifically talking about AI.
So the 800 GM evenly in the future of the one six days I'd say the sort of the calculation.
Will remain in the next few years.
Got it. Thank you thanks for taking my questions.
Thank you Sandra one member for next question.
Okay.
Our next question Simon Leopold with Raymond James Your line is open.
Great I appreciate you, taking the question and providing all the detail last night.
Give us a little bit of time to try to digest it.
So maybe a couple of aspects around the exclusion of the AI related data come from the guidance.
Could you help us understand the rationale for we're backing the AI related business, which you described as worth several hundred millions out of the guidance and help us understand as well. If we wanted to include this in our own estimates what do you think the impact would be.
<unk>.
On the EPS and just as a very very quick follow up to this question. What assumption do you have in terms of your market share of 800 gig and above transceivers.
Thank you.
Okay, Simon Simon Let me, let me clarify let me repeat what I said in response to Sami's question.
Our guidance our revenue guidance for the full year.
And for the first quarter, but especially for the full year contemplates a meaningful.
The amount of revenue.
We're shipping 800 gig transceivers.
I want to repeat that.
Our plan.
Complete.
Abstention.
Amount of shipments.
I believe that there may be additional upside.
And that additional upside might be as much as $200 million.
But for us to have the confidence to added into our plan.
Need to we need to manage quite a few aspects of our ramp.
And we're going to go for it but I cannot be sure that we'll be successful in having everything come together in time to be able to have the confidence to add that $200 million or up to two or $200 million, but we're focused on it.
And if we have anything more to say 90 days from now we will.
With regard to Europe .
Second question.
Our belief is that we're in a market leadership position, it's a competitive market.
There are.
And our strengths that we bring and we're going to continue to compete.
On the basis of the strengths that we have in this generation those strengths I outlined.
Were evident in FY 'twenty, three with a rather substantial ramp.
Ramp and Datacom Transceivers.
Year over year from 'twenty, one to 'twenty two to 'twenty three we have the ability to scale.
And we have the laser components for the generations that exist today and the one six T which are coming.
And so on that basis on that basis I think.
It's the first inning.
It's very difficult to be assessing.
What the score will be in the fifth inning in the sixth inning of the game everybody is just getting started.
And we are well positioned to be able to move even further past our own aspirations for our leadership position in this market.
That's very helpful and just to sort of paraphrase it to make sure. It's crystal clear that the exclusion is is because the risk of ramping the production capacity shipping. It is not because you believe this is sort of a onetime.
Flat Pan kind of project at the beginning of a cycle correct.
Alright. This is the first inning of the game.
At the beginning.
I'm not even sure it's a cycle.
It's the beginning of a revolution.
And there is a lot more to come we believe and by the way if 90 days from now I can update you on the.
A possibility of additional revenue that we can add to the guidance, if we're able to operationalize it in.
There may be more to come.
Because this is just getting started and we think.
24, rolling into 'twenty five is going to continue to drive our growth.
Thanks for taking the questions Chuck.
Welcome Simon one number for next question.
Okay.
Our next question comes from meta Marshall with Morgan Stanley . Your line is open.
Okay, great. Thanks, and maybe just outside of the transceiver business for now.
You had noted that visibility increased during the quarter I just wanted to get a sense of it.
Whether that visibility increase anywhere outside of Datacom Transceivers and then.
As you look at recovery of the business either late in the second half of the fiscal year ended fiscal 'twenty five just what segment Theyre, most likely that kind of recover first outside of Datacom.
Okay, Matt. Thank you for your question.
Well.
The telecom business itself.
Given our position.
Of our portfolio the strength that we have with the telecom customers I am expecting that the second half of the year.