Q4 2024 Coherent Corp Earnings Call

August 15, 2024

Speaker Change: Simply put, it was a combination of the innovation this company is driving and the revenue growth potential that's ahead of us.

Speaker Change: Innovation is the lifeblood of the technology industry and Coherent is a deeply innovative company. Over the course of my career in the tech industry I've worked at many innovative companies and I can tell you firsthand that the innovation happening every day in this company is absolutely world-class.

Speaker Change: Innovation is in the company's DNA. We innovate at a foundational physical level that underpins critical advancements in many of today's most important and demanding growth applications.

Speaker Change: Innovation is what this company was founded on, and I believe that's why the company has thrived over 50 years.

Speaker Change: And I want to ensure that we continue to cultivate this culture of innovation for the next 50 years.

Speaker Change: Of course, innovation is only meaningful if it ultimately has impact on people's lives and translates into shareholder value creation. The second thing that attracted Meta Coherent is our market and product position and our ability to impact and drive large secular growth opportunities.

Operator: Good day, and thank you for standing by. Welcome to the Coherent Corp. FY24 Q4 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. I would now like to hand the conference over to your speaker today, Paul Silverstein, Senior Vice President, Investor Relations and Corporate Communications.

Speaker Change: The addressable market for our products and innovation is over $60 billion and growing quickly.

Coherent: Coherent is an industry leader across many product lines.

Speaker Change: Thank you very much.

Speaker Change: One of the most exciting growth opportunities is our optical transceiver technology which underpins and drives the high-speed connectivity required by new AI data centers.

Speaker Change: While I believe this is a tremendous opportunity for the company, there are many other examples of secular growth opportunities ahead of us.

Speaker Change: Opportunities such as next-generation telecom systems, advanced displays, semi-cap equipment for next-gen VAMs, industrial automation robotics, EVs, and many others.

Speaker Change: We are well positioned across multiple long-term secular growth markets.

Speaker Change: My responsibility is to translate our innovation engine and growing market opportunity into market-leading revenue growth, expanding profitability, and industry-leading shareholder value creation.

Speaker Change: To achieve these goals and unlock shareholder value, I'm focused on three key areas of improvement.

Speaker Change: Number one, our culture. Number two, our strategy. And number three, our execution.

Paul Silverstein: Good afternoon, everyone. With me today are Jim Anderson, Coherent CEO, and Rich Martucci, Coherent's interim CFO. During today's call, we will provide a financial and business review of Q4 of fiscal 2024 and the business outlook for Q1 of fiscal 2025. Our earnings press release can be found in the investor relations section of our company website at coherent.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements or predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks.

Speaker Change: I'm the culture friend. I love our innovation-focused culture.

Speaker Change: which we will absolutely continue to embrace. But there's also opportunity for improvements in our culture.

Speaker Change: We have to move faster and be more agile. Speed is a competitive advantage.

Speaker Change: To this end, we've initiated changes to simplify our organizational structure, empower our leaders, streamline decision-making, accelerate execution, and ultimately deliver our innovative products to market faster for our customers.

Speaker Change: The culture of change takes time, but I'm excited about some of the early results I've already seen across the company.

Speaker Change: Moving to strategy, we have a very diverse portfolio of product lines and assets and we have a significant opportunity to further optimize and focus this portfolio for growth and profitability.

Speaker Change: To that end, in June, we initiated the Portfolio Review to assess each element of our product portfolio across the set of strategic and financial criteria. We plan to use this assessment as the foundation for making investment and capital allocation decisions moving forward.

Speaker Change: Across our portfolio, we have strong growth engines that need the right level of investment to realize their full growth potential.

Speaker Change: However, we also have product lines and assets that are non-strategic and underperforming.

Speaker Change: We will shift investment to the areas of greatest opportunity, and we will divest or stop investment in underperforming areas.

Speaker Change: Doing so will drive greater focus, concentrate our OPEX and CAPEX dollars on our strongest growth and profit engines, accelerate the deleveraging of our balance sheet, and enhance our EPS and cash flow growth.

Paul Silverstein: These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for Q1 of fiscal 2025. If at any time after this call we communicate any material changes to this guidance, we intend that such updates can be done using a public forum such as a press release or publicly announced conference call. We will refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the investor relations section of our website at coherent.com.

Speaker Change: While I won't be going into the specific areas of investment and disinvestment on today's call, we plan to hold an investor and analyst meeting in the coming quarters that will lay out our strategy for the company.

Speaker Change: This will include our market growth opportunity, our key technology and product line growth investments, and our operational strategy, as well as our long-term target business model.

Speaker Change: Finally, the third area of focus for improvement is operational excellence.

Speaker Change: I believe we have significant opportunity to improve our operational efficiency and effectiveness moving forward.

Speaker Change: Let me touch on a few examples of opportunity ahead of us.

Speaker Change: After meeting with many of our top customers and partners, it's clear to me that we can improve our revenue growth by engaging our customers in a more strategic way that is less transactional and more focused on building deep multi-generational partnerships.

Speaker Change: Our customers definitely view us as an industry innovator, but we need to improve our roadmap execution fidelity, accelerate our time-to-market on key technology transitions, and become a trusted innovation partner to our customers.

Speaker Change: We also need to ensure we're leveraging the broader ecosystem and working more closely with our key partners.

Speaker Change: Beyond top-line growth, we need to improve our gross margin.

Speaker Change: Frankly, our gross margin is too low.

Speaker Change: I believe we should be operating at a consistent, sustainable gross margin level above 40%.

Speaker Change: On pricing, it's clear we have room for improvement. Our team is implementing a new pricing optimization strategy across our businesses.

Speaker Change: to appropriately balance competitive pricing with fair payment for the innovation that we deliver to our customers.

Speaker Change: On the cost side of the gross margin equation, we have multiple areas for improvement.

Speaker Change: For example, we need to improve our product yields, our overall asset utilization, and our make-versus-buy decisions.

Paul Silverstein: Now let me turn the call over to Jim Anderson, our CEO.

Speaker Change: Horse margin improvement will take time, but we are determined to drive a disciplined road map of margin expansion.

Jim Anderson: Thank you, Paul, and thank you everyone for joining us on our call today. It's been a little over 2 months since I joined Coherent, and I'm more excited today about the potential of this company and an opportunity for shareholder value creation than the first day I joined. I wanna start by thanking my predecessor, Chuck Mattera, for his over 20 years of service to the company, including his last 8 years as CEO. Chuck's tireless dedication and leadership of Coherent has had a tremendous lasting impact on the company. On behalf of all of our employees and our board of directors, I wanna once again thank him for his service and wish him all the best. I'd also like to take the opportunity to thank my new Coherent teammates for the incredibly warm welcome to the company.

Speaker Change: On operating expenses, we need to improve return on investment.

Speaker Change: For R&D, while innovation requires investment, those investments must be focused, efficient, and offer high return.

Speaker Change: Today, our R&D investment is spread too thin.

Speaker Change: We will focus our R&D investment on the areas of greatest growth potential and eliminate investment in highly speculative projects that lack a strong business case.

Speaker Change: On SG&A, we need to drive greater efficiency.

Speaker Change: We will execute on our in-flight synergy and efficiency programs while finding new ways to better leverage our significant scale.

Speaker Change: Ultimately our goal is to increase gas generation.

Speaker Change: Consistent growth, gross margin improvement, and better OPEX efficiency will help. However, we also need to improve our return on capital expenditures.

Speaker Change: We will align our CapTex investments with our overall portfolio strategy and focus on our areas of greatest growth and profitability. With better operational discipline, I believe we have opportunity to significantly increase our free cash flow and accelerate our pace of debt reduction and deleveraging.

Speaker Change: Our near-term capital allocation priorities are first, to fund our organic growth engines, and second, to deleverage our balance sheet as quickly as possible.

Speaker Change: I believe the combination of an enhanced culture, along with strategic portfolio optimization and operational execution improvements will help put us on a path of sustained market-leading growth, enhanced profitability and cash generation, and a strong balance sheet.

Jim Anderson: In these first weeks, I've met with employees at many of our locations across the world. I'm deeply impressed with the exceptional depth and breadth of talent as well as the determination and hard work of my teammates. I look forward to working side by side with them to unlock the full potential of the company. Since joining Coherent, I've received a number of questions from employees and shareholders regarding my initial impressions on the business and our long-term strategic direction. I've also been asked about my reasons for joining Coherent and what drew me to this opportunity. Let me start with what I found most attractive about joining Coherent. Simply put, it was a combination of the innovation this company is driving and the revenue growth potential that's ahead of us. Innovation is the lifeblood of the technology industry, and Coherent is a deeply innovative company.

Speaker Change: As I mentioned earlier, I look forward to sharing more details about our plans and specific business metrics and targets at an upcoming Investor and Analyst Meeting.

Speaker Change: One of my near-term priorities is to fill the CFO role.

Speaker Change: We're considering both internal and external candidates and making good progress on the search.

Speaker Change: Once the new CFO is in place, we'll set a specific date for our Investor and Analyst meeting.

Speaker Change: I'll now switch gears and provide some brief comments on our fiscal fourth quarter results.

Speaker Change: Revenue in Q4 increased by approximately 9% both sequentially and year-over-year, driven primarily by strong growth in our Datacom transceivers for AI data center deployments.

Speaker Change: Non-GAAP gross margin expanded by 145 basis points sequentially, due primarily to recovery from the transitory issues that impacted RQ3.

Speaker Change: Non-GAAP EPS grew by 16% sequentially and by almost 50% year-over-year as a result of top-line growth and margin expansion.

Speaker Change: Let me summarize what we're seeing in our business by end market vertical.

Speaker Change: In the communications ad market, Q4 revenue increased by 10% sequentially and by 19% year-over-year. We experienced strong growth in Datacom, where Q4 revenue grew 16% sequentially and 58% year-over-year, due primarily to AI data center demand.

Speaker Change: We saw strong sequential growth in our 800-gig Datacom Transceiver revenue in Q4, and are also seeing increasing orders and backlog for the current and future quarters.

Jim Anderson: Over the course of my career in the tech industry, I've worked at many innovative companies, and I can tell you firsthand that the innovation happening every day in this company is absolutely world-class. Innovation is in the company's DNA. We innovate at a foundational physical level that underpins critical advancements in many of today's most important and demanding growth applications. Innovation is what this company was founded on, and I believe it's why the company has thrived for over 50 years. I wanna ensure that we continue to cultivate this culture of innovation for the next 50 years. Of course, innovation is only meaningful if it ultimately has impact on people's lives and translates into shareholder value creation. The second thing that attracted me to Coherent is our market and product position and our ability to impact and drive large secular growth opportunities.

Speaker Change: We also delivered initial samples of our 1.6T datacomp transceivers, which we expect to begin ramping to calendar 2025.

Speaker Change: Our new Datacom optical switch platform is progressing well and is generating significant customer engagement, and we expect to enter customer trials in calendar 2025.

Speaker Change: Growth in data comms partially offset by a 6% sequential and 38% year-over-year decline in telecom revenue due to end market weakness.

Speaker Change: Although we expect the telecom end market to remain weak in the near term, we also expect to ramp our new 100 gig ZR and 400 gig ZR plus coherent transceivers over the course of our fiscal year.

Speaker Change: Overall, we expect the communications market to be a strong long-term growth factor for the company.

Speaker Change: In the industrial end market, revenue increased 2% sequentially and 5% year-over-year.

Speaker Change: Our Display Capital Equipment Vertical saw growing demand in Q4 for our XMR lasers for kneeling and related services driven by expanding OLED adoption into smartphones and the inception of OLED adoption into laptop and tablet computers.

Speaker Change: with the latter essentially doubling long-term demand for OLED screen area production.

Speaker Change: In our other industrial verticals, we saw relatively stable revenue in aggregate.

Speaker Change: Well, we expect overall industrial and market demand to be soft in the near term.

Speaker Change: We believe we are well positioned for growth over the long term, given our multiple growth opportunities in this segment, driven by new product introductions.

Speaker Change: such as our fiber laser platform for cutting and our new line beam annealing systems for Gen 8 display fans.

Speaker Change: In our two remaining markets, electronics and instrumentation, each of which account for less than 10% of our total revenue, we saw a sequential revenue growth, and both end markets would be long-term growth opportunities for us.

Jim Anderson: The addressable market for our products and innovation is over $60 billion and growing quickly. Coherent is an industry leader across many product lines, and we're driving innovation, secular growth applications that will change how we live and work. One of the most exciting growth opportunities is our optical transceiver technology, which underpins and drives the high-speed connectivity required by new AI data centers. While I believe this is a tremendous opportunity for the company, there are many other examples of secular growth opportunities ahead of us. Opportunities such as next generation telecom systems, advanced displays, semicap equipment for next gen fabs, industrial automation robotics, EVs, and many others. We are well-positioned across multiple long-term secular growth markets. My responsibility is to translate our innovation engine and growing market opportunity into market-leading revenue growth, expanding profitability and industry-leading shareholder value creation.

Speaker Change: In summary, about two months in, I'm even more excited about the opportunity to unlock significant shareholder value based on the depth and breadth of our innovation, the size of the market opportunities we address, and the potential to improve our operational execution.

Speaker Change: We're expecting strong growth in our Datacom business over the coming quarters, and while some near-term softness persists in our telecom and industrial end markets, we expect fiscal 2025 overall to be a solid growth year for the company.

Speaker Change: I'll now turn the call over to our interim CFO, Rich Martucci.

Rich Martucci: Thank you, Jim. Overall, I'm very pleased with the continued sequential financial progress we made in the fourth quarter of fiscal 2024.

Rich Martucci: We delivered a strong order with sequential revenue growth and healthy improvement in our gross and operating margins, which drove sequential earnings per share growth.

Rich Martucci: Fourth quarter revenue was $1,314,000,000 representing an increase of 8.7% sequentially and 9.1% versus the prior year.

Rich Martucci: From a segment perspective, networking revenue increased 10% sequentially and by 16% year-over-year.

Rich Martucci: Material segment revenue increased 17% sequentially, but decreased 3% year-over-year. And our laser segment revenue increased by 1% sequentially and by 7% year-over-year.

Rich Martucci: Our fourth quarter gap gross margin of 32.9% improved by 255 basis points sequentially and by 437 basis points versus the prior year.

Rich Martucci: Our non-GAAP fourth quarter gross margin of 37.2%, improved by 145 basis points sequentially and 132 basis points versus the prior year.

Rich Martucci: Sequential improvements were primarily due to our increased revenue volume and

Rich Martucci: resolution of the transitory margin issues that we cited in the preceding quarter, including the recovery in our Datacom AI transceiver yield and resolution of the power failure issue that depressed both of our silicon carbide revenue and gross margin.

Jim Anderson: To achieve these goals and unlock shareholder value, I'm focused on three key areas of improvement. Number one, our culture, number two, our strategy, and number three, our execution. On the culture front, I love our innovation-focused culture, which we will absolutely continue to embrace, but there's also opportunity for improvements in our culture. We have to move faster and be more agile. Speed is a competitive advantage. To this end, we've initiated changes to simplify our organizational structure, empower our leaders, streamline decision-making, accelerate execution, and ultimately deliver our innovative products to market faster for our customers. Culture of change takes time, but I'm excited about some of the early results I'm already seeing across the company. Moving to strategy. We have a very diverse portfolio of product lines and assets, and we have a significant opportunity to further optimize and focus this portfolio for growth and profitability.

Rich Martucci: Our fourth quarter GAAP operating expenses were $339 million compared to $344 million in the prior quarter and $499 million in the year-ago quarter.

Rich Martucci: Fourth quarter non-GAAP operating expenses were $266 million compared to $250 million in the prior quarter and $248 million in the year-ago quarter.

Rich Martucci: The sequential increase in non-GAAP operating expenses includes year-end bonus and benefit adjustments and Term Loan Fee refinancing fees.

Rich Martucci: Looking ahead, we plan to continue to be disciplined in managing our SG&A expenses while ensuring that we invest in our product portfolio.

Rich Martucci: Our fourth-quarter restructuring expenses included the GAAP operating expenses were $14 million compared to $12 million in the preceding quarter and $119 million in the year-ago quarter.

Rich Martucci: Our Restructuring Synergy and Site Consolidation Plans are progressing in line with previously communicated expectations in terms of both cost and savings.

Rich Martucci: Our fourth quarter, 4.8% gap operating margin increased by 296 basis points compared to 1.8% in the prior quarter.

Rich Martucci: And by 1,769 basis points compared to an operating loss of 12.9% in the year-ago quarter, driven by improvements in both gross margin and operating expense leverage.

Rich Martucci: Our fourth quarter, 17% non-GAAP operating margin increased by 191 basis points compared to 15.1% in the prior quarter, and by 162 basis points compared to 15.4% in the year-ago quarter.

Jim Anderson: To that end, in June, we initiated a portfolio review to assess each element of our product portfolio across the set of strategic and financial criteria. We plan to use this assessment as the foundation for making investment and capital allocation decisions moving forward. Across our portfolio, we have strong growth engines that need the right level of investment to realize their full growth potential. However, we also have product lines and assets that are non-strategic and underperforming. We will shift investment to the areas of greatest opportunity, and we will divest or stop investment in underperforming areas. Doing so will drive greater focus, concentrate our OpEx and CapEx dollars on our strongest growth and profit engines, accelerate the deleveraging of our balance sheet, and enhance our EPS and cash flow growth.

Rich Martucci: driven by improvements in both gross margin and operating expense leverage.

Rich Martucci: Our fourth quarter interest expense was $68 million compared to $73 million in the preceding quarter and $79 million in the year-ago quarter.

Rich Martucci: The full year FY24 GAAP tax rate was negative 7.5% compared to 27% in the previous year.

Rich Martucci: The full year FY24 non-GAAP tax rate was 20.7% compared to 18.2% in the previous year.

Rich Martucci: Fourth quarter GAAP earnings per diluted share was a negative $0.52 loss compared to a $0.29 loss in the prior quarter and a $1.54 loss in the year-ago quarter.

Rich Martucci: Fourth quarter non-GAAP earnings per diluted share was $0.61 compared to $0.53 in the preceding quarter and $0.41 in the year-ago quarter.

Rich Martucci: We generated $162 million in cash from operations in the fourth quarter compared to $117 million in the prior quarter and $182 million in the year-ago quarter.

Rich Martucci: Fourth quarter capital expenditures were $100 million.

Rich Martucci: versus $93 million in the preceding quarter and $93 million in the year-ago quarter.

Jim Anderson: While I won't be going into the specific areas of investment and disinvestment on today's call, we plan to hold an investor and analyst meeting in the coming quarters that will lay out our strategy for the company. This will include our market growth opportunity, our key technology and product line growth investments, and our operational strategy, as well as our long-term target business model. Finally, the third area of focus for improvement is operational excellence. I believe we have significant opportunity to improve our operational efficiency and effectiveness moving forward. Let me touch on a few examples of the opportunity ahead of us. After meeting with many of our top customers and partners, it's clear to me that we can improve our revenue growth by engaging our customers in more strategic way that is less transactional and more focused on building deep multi-generational partnerships.

Rich Martucci: Free cash flow net of the $49 million of capital funded by the silicon carbide LLC minority interest investment was $111 million.

Rich Martucci: We paid down $64 million in debt during the quarter, in a total of $229 million for all of fiscal 2024.

Rich Martucci: Total debt at the end of FY24 is $4.17 billion.

Rich Martucci: Unrestricted cash increased to $926 million from $899 million in the prior quarter.

Rich Martucci: Restricted cash set aside for our silicon carbide LLC subsidiary decreased to $858 million from $889 million in the preceding quarter.

Rich Martucci: In summary, moving forward, the company will continue to be laser-focused on investing in organic growth, improving operating leverage, prudent capital investment, and executing on paying down debt.

Rich Martucci: Now I will turn to our guidance for the first quarter of fiscal 2025.

Rich Martucci: Revenue is expected to be between $1.27 billion and $1.35 billion. Non-GAAP gross margin is expected to be between 36 and 38 percent.

Rich Martucci: Total operating expenses are expected to be between $260 million and $280 million on a non-GAAP basis.

Rich Martucci: Tax rate for the porter is expected to be between 20 and 23 percent on a non-GAAP basis. EPS is expected to be between 53 and 69 cents on a non-GAAP basis.

Speaker Change: Operator, that concludes our formal comments. We can now open the call for questions.

Jim Anderson: Our customers definitely view us as an industry innovator, but we need to improve our roadmap execution fidelity, accelerate our time to market on key technology transitions, and become a trusted innovation partner to our customers. We also need to ensure we're leveraging the broader ecosystem and working more closely with our key partners. Beyond top line growth, we need to improve our gross margin. Frankly, our gross margin is too low. I believe we should be operating at a consistent sustainable gross margin level above 40%. On pricing, it's clear we have room for improvement. Our team is implementing a new pricing optimization strategy across our businesses to appropriately balance competitive pricing with fair payment for the innovation that we deliver to our customers. On the cost side of the gross margin equation, we have multiple areas for improvement.

Speaker Change: Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. One moment for questions.

Speaker Change: no

Speaker Change: Our first question comes from Samik Chatterjee with J.P. Morgan. He may proceed.

Samik Chatterjee: Hi, thanks for taking my question, and Jim, I look forward to working with you. I guess the first question that I wanted to sort of throw your way is really in relation to, you said it's early days in terms of the strategic assessment you're doing. Just maybe help us think about what are the sort of early reads you have around the portfolio from there? You talked about core and non-core. Maybe what's the criteria using all the lens that you're looking at? From in deciding core and non-core, and how much of the sort of implication is on operating the company more efficiently relative to maybe delivering the balance sheet in terms of priority of these actions?

Speaker Change: and I have a quick follow-up, if you'll allow me. Thank you.

Jim Anderson: Yeah, thank you, Samik. Thanks for the question. I appreciate it. Yeah, and the portfolio assessment, happy to happy to talk a little bit more about that.

Speaker Change: I'm really pleased with the work that the team's been doing on this over the last couple months.

Speaker Change: And think about the portfolio assessment as really work that we're doing to really build a foundation for our strategy going forward. And the ultimate goal of it is to really make sure that the company is concentrating all of its assets, whether that's op-ecs or cap-ecs.

Speaker Change: on the areas of greatest growth and profitability over the long term. And so that's really the ultimate goal. And the way we're approaching it is we're stepping back and looking at the entire company portfolio. We're breaking down the company into each one of its individual

Jim Anderson: For example, we need to improve our product yields, our overall asset utilization, and our make versus buy decisions. Gross margin improvement will take time, but we are determined to drive a disciplined roadmap of margin expansion. On operating expenses, we need to improve return on investment. For R&D, while innovation requires investment, those investments must be focused, efficient, and offer high return. Today, our R&D investment is spread too thin. We will focus our R&D investment on the areas of greatest growth potential and eliminate investment in highly speculative projects that lack a strong business case. On SG&A, we need to drive greater efficiency. We will execute on our in-flight synergy and efficiency programs while finding new ways to better leverage our significant scale. Ultimately, our goal is to increase cash generation. Consistent growth, gross margin improvement, and better OpEx efficiency will help.

Speaker Change: product line divisions, and then we're grading each one of those on a set of strategic and financial criteria. And then what we're doing is putting each one of the businesses into one of four categories.

Speaker Change: And I'm happy to share a little bit more about that. The four categories are, what do we think are the big growth engines for the company moving forward? What are the process engines?

Speaker Change: What are the kind of longer-term bets that the company is making? And then...

Speaker Change: What are those businesses that we think are non-strategic or underperforming?

Speaker Change: When you say growth engines, obviously those are businesses that we believe are going to drive long-term, above-market growth for us. Profit engines are businesses that may be growing a little slower.

Speaker Change: but are generating really healthy levels of profit. Long-term bets are businesses that, you know, we're investing in today that have a longer...

Speaker Change: are why than typical for us.

Speaker Change: but may have a big payoff at the end.

Speaker Change: And then the non-strategic and underperforming businesses are really businesses that just don't fit with the overall portfolio or significantly underperforming our financial targets.

Speaker Change: And really with that foundation built, and that work is really concluding through the course of this month, we'll be taking a set of actions to concentrate our assets, our resources,

Speaker Change: investment on those areas of greatest growth, as I said, and then either divesting or shutting down investment in those underperforming or non-strategic businesses. So, you know, certainly expect to hear more about that, you know, from from us over the coming quarters.

Jim Anderson: However, we also need to improve our return on capital expenditures. We will align our CapEx investments with our overall portfolio strategy and focus on our areas of greatest growth and profitability. With better operational discipline, I believe we have opportunity to significantly increase our free cash flow and accelerate our pace of debt reduction and deleveraging. Our near-term capital allocation priorities are, first, to fund our organic growth engines, and second, to deleverage our balance sheet as quickly as possible. I believe the combination of an enhanced culture along with strategic portfolio optimization and operational execution improvements will help put us on a path of sustained market-leading growth, enhanced profitability and cash generation, and a strong balance sheet. As I mentioned earlier, I look forward to sharing more details about our plans and specific business metrics and targets at an upcoming investor and analyst meeting.

Speaker Change: I'm certainly happy to share more about that at the Investor and Analyst Day that we're planning in the future.

Speaker Change: I think you also asked about de-levering the balance sheet. That's certainly a big focus of ours as well.

Speaker Change: And I look at that de-levering opportunity as really could be driven by two things. To the extent that we do decide to divest any businesses.

Speaker Change: The proceeds of those divestitures could be used to pay down the debt, but also, just setting aside the portfolio assessment, I talked about some of the operational execution improvements we want to drive, really focused on

Speaker Change: are driving better, for instance, gross margin, better profit margins, and obviously that yields better cash flow, which would help us accelerate that pay down. But that certainly, delivering the balance sheet is a key focus as well.

Speaker Change: And if you allow me for a quick follow-up, I know you talked about gross margins being sustainably above 40 is how you're thinking about the business. If you sort of look at the gross margins today, do you think the effective sort of the biggest

Speaker Change: gap between where your aspiration is and what sort of those companies are living today. Is that pricing or is that sort of these underperforming businesses? Once that's sort of done and dusted, you sort of get back to that sustainable range. Maybe just help me in sort of what's the biggest gap you're identifying between where the company should be and where the cross margins are today.

Speaker Change: Yeah, it's a great question, Samik. And I would say it's really a combination of some of it is underperforming businesses that are significantly, that have gross margins that are significantly below our corporate average. But also, if you set that aside, pricing, I think there's both opportunities on pricing, as well as cost structure. And I mentioned this a little bit in my prepared remarks on pricing. I do believe that there's things that we can do to improve our pricing discipline moving forward. And some of those ideas that I'm bringing with me is some of what I did in prior companies, where we applied some advanced pricing.

Jim Anderson: One of my near-term priorities is to fill the CFO role. We're considering both internal and external candidates and making good progress on the search. Once the new CFO is in place, we'll set a specific date for our investor and analyst meeting. I'll now switch gears and provide some brief comments on our fiscal Q4 results. Revenue in Q4 increased by approximately 9%, both sequentially and year-over-year, driven primarily by strong growth in our Datacom transceivers for AI data center deployments. Non-GAAP gross margin expanded by 145 basis points sequentially, due primarily to recovery from the transitory issues that impacted our Q3. Non-GAAP EPS grew by 16% sequentially and by almost 50% year-over-year as a result of top line growth and margin expansion. Let me summarize what we're seeing in our business by end market vertical.

Speaker Change: Think about it as pricing analytics, pricing strategies that really are targeted at making sure that we're competitive on price but also that we're getting fair value for the innovation that we're bringing to markets. I think

Speaker Change: There's a pricing initiative that we've kicked off around better pricing discipline. I expect that to yield gross margin improvement. But then also cost. Look, I think there's a number of different areas.

Speaker Change: across the company where we need to be focused on driving better cost structure. And I mentioned a few of those in the prepared remarks. I think product yields.

Speaker Change: We have improvement to drive their asset utilization. And then I think the third area that I mentioned was better make versus buy decisions, making sure that we're leveraging the bigger ecosystem where it makes sense and making sure that we're applying our assets.

Speaker Change: to where we're driving greatest differentiation or that's providing our customers some sort of significant advantage. But that's sort of the three different areas I'm thinking about in terms of gross margin improvement.

Speaker Change: Great. Thank you. Thanks for taking my questions.

Speaker Change: Thanks, Samik.

Speaker Change: Thank you. Our next question comes from Jeff Kochi with Raymond James. You may proceed.

Jim Anderson: In the communications end market, Q4 revenue increased by 10% sequentially and by 19% year-over-year. We experienced strong growth in Datacom, where Q4 revenue grew 16% sequentially and 58% year-over-year, due primarily to AI data center demand. We saw strong sequential growth in our 800G Datacom transceiver revenue in Q4 and are also seeing increasing orders and backlog for the current and future quarters. We also delivered initial samples of our 1.6T Datacom transceivers, which we expect to begin ramping in calendar 2025. Our new Datacom optical switch platform is progressing well and is generating significant customer engagement, and we expect to enter customer trials in calendar 2025. Growth in Datacom was partially offset by a 6% sequential and 38% year-over-year decline in telecom revenue due to end market weakness.

Jeff Coccia: Yeah, thanks. This is Jeff Coccia for Simon Leopold. I just want to hit on the gross margin a little bit deeper. Maybe we can talk about the glide path and, you know, like what kind of time frame do you see getting to that 40% plus range and, you know, really hitting on maybe that five versus

Speaker Change: versus make decision you know you had a competitor or your competitors last night talking about the Indian phosphide lasers you know being booked out through the end of

Speaker Change: 2025 is in the 200 gig per lane. Maybe just update your thoughts around that for in-house production there. Thank you.

Speaker Change: Yeah, thanks, Jeff. On the first part of your question, the glide path, that's definitely a topic that we want to cover at that investor day that I mentioned. So we'll be scheduling that.

Speaker Change: in the coming quarters. And what we'll do as part of that investor day is...

Speaker Change: So, it's not just lay out the company strategy, but give an overall business model target for the company in a sense of what our timing is, of the time frame to achieve that business model target, including the gross margins.

Speaker Change: But this will definitely be a key focus area for us moving forward. And look, gross margin improvement takes time. Whether it's pricing or cost reductions, those take work. But we're determined to drive a steady road map of improvement moving forward. So you'll hear more about...

Speaker Change: from us.

Speaker Change: around the timing of those gross margin improvements in the quarters ahead. And then on the second part of your question, make versus buy, I think the way to think about this is one of the benefits that Coherent has versus our competitors, and it's a benefit that our customers

Speaker Change: So what we see every day is there's a number of places where we're vertically integrated, and where we build, for instance, not just the Datacon transceiver, but we build a number of the components that go into that transceiver. And to the extent that that provides us

Jim Anderson: Although we expect the telecom end market to remain weak in the near term, we also expect to ramp our new 100G ZR and 400G ZR/ZR+ coherent transceivers over the course of our fiscal year. Overall, we expect the communications market to be a strong long-term growth factor for the company. In the industrial end market, revenue increased 2% sequentially and 5% year-over-year. Our display and capital equipment vertical saw growing demand in Q4 for our excimer lasers for annealing and related services driven by expanding OLED adoption in the smartphones and the inception of OLED adoption into laptop and tablet computers, with the latter essentially doubling long-term demand for OLED screen area production. In our other industrial verticals, we saw relatively stable revenue in aggregate.

Speaker Change: differentiation or faster time to market or generates

Speaker Change: real value for our customers, that's fantastic and we will continue to do that. But what I want to make sure that we're careful about.

Speaker Change: is not just building it internally for the sake of building it internally, but to the extent that there's external providers or an ecosystem that we can leverage.

Speaker Change: That's competitive in terms of technology and cost with the internal option. I'd rather use those resources to focus those on areas that we can truly differentiate and add value for our customers. So I just want to make sure that we're being objective moving forward on make versus buy and being smart about how we leverage.

Speaker Change: Thank you. Thank you. Thank you.

Speaker Change: Got it. Appreciate it.

Speaker Change: Thank you.

Speaker Change: Thanks, thank you. Thanks, Jed.

Speaker Change: Our next question comes from Tom O'Malley with Barclays. You may proceed.

Tom O'malley: Hey Jim, thanks for taking my question and great to meet you. I look forward to working with you as well, but I kind of wanted to ask on the optical opportunity and the transceiver business in general.

Speaker Change: I realize, you know, you just joined the business, and there were a lot of metrics kind of floating around, and I'm sure you don't want to marry yourself to any of those right away, but in your initial days at the business, clearly, you know, the big growth engine at Coherent has been this 800G ramp, and then

Jim Anderson: While we expect overall industrial end market demand to be soft in the near term, we believe we are well-positioned for growth over the long term, given our multiple growth opportunities in this segment, driven by new product introductions such as our fiber laser platform for cutting and our new LineBeam annealing systems for Gen 8 display fabs. In our two remaining markets, electronics and instrumentation, each of which accounts for less than 10% of our total revenue, we saw sequential revenue growth in both end markets remain long-term growth opportunities for us. In summary, about two months in, I'm even more excited about the opportunity to unlock significant shareholder value based on the depth and breadth of our innovation, the size of the market opportunities we address, and the potential to improve our operational execution.

Speaker Change: you know in the future potentially the 1.6 t-ramp as well but

Speaker Change: When you look at kind of, you know, what was advertised to you when you were first looking at this job and then kind of got underneath the covers and looked at that optical opportunity, could you maybe speak qualitatively about your expectations?

Speaker Change: In that business, I understand that you'll have an annual stay and maybe put some more numbers on it, but just broadly, you know, your feelings on that business and what that growth engine could look like for Coherent over the next couple of years, and then I had a follow-up.

Speaker Change: Yeah, thank you, Tom, for the question. Yeah, the short answer is it's better than I thought before I joined the company. So I had a sense of always as, you know, coherent as a leader in optical transceivers, specifically for Datacom. And obviously, you know, there's tremendous build out happening now with AI data centers. And I had my own sense of what that sort of growth trajectory would look like before I joined the company. It's stronger than what I had thought. And we've seen just over the last, I would say,

Speaker Change: Gosh, you know, four to six weeks as I've spent a lot of time with our top customers.

Speaker Change: across all of our different product lines, but especially in our data comp business, I've gotten a much better sense for the opportunity that's in front of us. And I would say it's a very strong opportunity. And we continue to see...

Speaker Change: Demand strengthening forecasts.

Speaker Change: Strengthening, Billings, Backlogs. So yeah, we do this as a really key growth area for the company. The 800 gig ramp is very exciting for us. And then also, I was really pleased with the team's

Speaker Change: execution on the 1.6T. They delivered samples of 1.6T just over the past few weeks, months. I think that was a key milestone for us.

Jim Anderson: We're expecting strong growth in our Datacom business over the coming quarters. While some near-term softness persists in our telecom and industrial end markets, we expect fiscal 2025 overall to be a solid growth year for the company. I'll now turn the call over to our interim CFO, Rich Martucci.

Speaker Change: and we're looking forward to ramping 1.6T next year.

Speaker Change: But yeah, I think it's an exciting growth area for the company. Now, I'll say that, but I also want to make sure that we recognize that there are other growth areas within the company as well. I know I'm excited about Datacom and AI data centers. But there's a number of other.

Speaker Change: Good areas of growth within the company. I mentioned a few of them in my prepared remarks. So one of the things I think is strength of coherent is not that it's just the innovation that I talked about, but we do have a wide portfolio of growth, growth opportunities across our other businesses as well. And I think that makes for a really strong long term portfolio. That's a diversified portfolio of growth moving forward. So, and yeah, definitely, I'll share more thoughts on all of those. growth engines at the investor day.

Richard J. Martucci: Thank you, Jim Anderson. Overall, I'm very pleased with the continued sequential financial progress we made in the Q4 of fiscal 2024. We delivered a strong quarter with sequential revenue growth and healthy improvement in our gross and operating margins, which drove sequential earnings per share growth. Q4 revenue was $1.314 billion, representing an increase of 8.7% sequentially and 9.1% versus the prior year. From a segment perspective, networking revenue increased 10% sequentially and by 16% year-over-year. Materials segment revenue increased 17% sequentially, but decreased 3% year-over-year. Our laser segment revenue increased by 1% sequentially and by 7% year-over-year.

Rich Martucci: Thank you, Jim Anderson. Overall, I'm very pleased with the continued sequential financial progress we made in the Q4 of fiscal 2024. We delivered a strong quarter with sequential revenue growth and healthy improvement in our gross and operating margins, which drove sequential earnings per share growth. Q4 revenue was $1.314 billion, representing an increase of 8.7% sequentially and 9.1% versus the prior year. From a segment perspective, networking revenue increased 10% sequentially and by 16% year-over-year. Materials segment revenue increased 17% sequentially, but decreased 3% year-over-year. Our laser segment revenue increased by 1% sequentially and by 7% year-over-year.

Speaker Change: Perfect. And then the second one is just a little more tactical in regards to kind of what we heard last night from your competitor, who was talking about an improving telecom market into the September quarter. It sounded as though you were a little more cautious. Can you describe what you're seeing from those customers just in the short term? This is less of kind of a long-term strategic question, but just a sense check on, are you seeing that market recovering with legacy products? Are new product introductions kind of picking up? That's what was kind of echoed last night. Newer products kind of growing at customers. Just the puts and takes on what you're seeing in the telecom market, just because visibility has been pretty bad, inventory levels have been high. Where are we at in that correction kind of off the bottom? Thank you.

Speaker Change: Yeah, thanks, Tom. And I'm going to separate it out into just purely end market comments versus I'll come back and talk about some of the new products that we have ramping here. So just purely end market. Yeah, I guess we're taking a more cautious view on the market.

Speaker Change: I don't believe that we're completely out of woods as an industry on the telecom market. You know, significant destocking has happened in that market, and that's good, right? The telecom market has built up significant inventory. I think most of that destocking is largely behind us, but I think there are still pockets.

Richard J. Martucci: Our Q4 GAAP gross margin of 32.9% improved by 255 basis points sequentially and by 437 basis points versus the prior year. Our non-GAAP Q4 gross margin of 37.2% improved by 145 basis points sequentially and 132 basis points versus the prior year. Sequential improvements were primarily due to our increased revenue volume and resolution of the transitory margin issues that we cited in the preceding quarter, including the recovery in our Datacom AI transceiver yield, and resolution of the power failure issue that depressed both of our silicon carbide revenue and gross margin. Our Q4 GAAP operating expenses were $339 million, compared to $344 million in the prior quarter and $499 million in the year-ago quarter.

Rich Martucci: Our Q4 GAAP gross margin of 32.9% improved by 255 basis points sequentially and by 437 basis points versus the prior year. Our non-GAAP Q4 gross margin of 37.2% improved by 145 basis points sequentially and 132 basis points versus the prior year. Sequential improvements were primarily due to our increased revenue volume and resolution of the transitory margin issues that we cited in the preceding quarter, including the recovery in our Datacom AI transceiver yield, and resolution of the power failure issue that depressed both of our silicon carbide revenue and gross margin. Our Q4 GAAP operating expenses were $339 million, compared to $344 million in the prior quarter and $499 million in the year-ago quarter.

Speaker Change: of inventory that are out there. And so our whole look on the telecom market through the next, I would say, at least six months.

Speaker Change: and probably into the following six months is a bit more of a cautious outlook. Now, it could be that we're wrong and it ends up being better or stronger than that, but we're taking a more cautious view on that. Now, that's all in-market comments. Now, set that aside. I'll switch over to...

Cogiron: Cogiron's, specifically. We, against that market backdrop, we do have a number of new products that are ramping up that are pretty exciting. The number, and I mentioned in the prepared remarks, the

Cogiron: The both the 100 gig and then the 400 gig ZR and ZR plus that will ramp throughout the course of this year. And obviously, since we're ramping over the course of this year, they have a bigger impact in the second half of our fiscal year. So I think that, you know, we do have some growth tailwinds behind us.

Cogiron: In terms of our own products, but I think in terms of the market, we're expecting that to continue to be soft.

Cogiron: Thanks, Tom. I'll go to the next question. Thank you.

Speaker Change: Our next question comes from Meta Marshall with Morgan Stanley. You may proceed.

Meta Marshall: Great, thanks. I'll start with a question, non-AI, just to focus on some other areas of the business. You know, the materials business looked to have kind of better-than-expected performance throughout the quarter. Was some of that just improvement on silicon carbide yields that had kind of encumbered last quarter? Were there any other markets worth calling out that improved there? And then maybe just as a second question, on the Datacom side, I know the focus is on 400 gig and up, but just any recovery you guys are seeing in kind of demand for the non-AI speed transceivers? Thanks.

Richard J. Martucci: Q4 non-GAAP operating expenses were $266 million, compared to $250 million in the prior quarter and $248 million in the year ago quarter. The sequential increase in non-GAAP operating expenses includes year-end bonus and benefit adjustments, and term loan fee refinancing fees. Looking ahead, we plan to continue to be disciplined in managing our SG&A expenses while ensuring that we invest in our product portfolio. Our Q4 restructuring expenses included in GAAP operating expenses were $14 million, compared to $12 million in the preceding quarter, and $119 million in the year ago quarter. Our restructuring synergy and site consolidation plans are progressing in line with previously communicated expectations in terms of both costs and savings.

Rich Martucci: Q4 non-GAAP operating expenses were $266 million, compared to $250 million in the prior quarter and $248 million in the year ago quarter. The sequential increase in non-GAAP operating expenses includes year-end bonus and benefit adjustments, and term loan fee refinancing fees. Looking ahead, we plan to continue to be disciplined in managing our SG&A expenses while ensuring that we invest in our product portfolio. Our Q4 restructuring expenses included in GAAP operating expenses were $14 million, compared to $12 million in the preceding quarter, and $119 million in the year ago quarter. Our restructuring synergy and site consolidation plans are progressing in line with previously communicated expectations in terms of both costs and savings.

Speaker Change: Thank you. And on the first part of your questions on the materials business, yeah, we did see some pickup in the materials business from Q3 to

Speaker Change: to Q4. And you're right, actually, a good chunk of that was...

Speaker Change: The production issues that we had had on silicon carbide in Q3.

Speaker Change: We were able to catch up on those issues or catch up on that demand in Q4. And so we had a little bit of depressed demand or depressed shipments in Q3.

Speaker Change: We were able to catch up on that in Q4. So some of that.

Speaker Change: Sequential gain is, yes, certainly due to that silicon carbide catch-up.

Speaker Change: And then on the second part of your question, I caught that it was on Datacom, but I didn't quite hear the end of the question. Would you mind repeating the end of that Datacom question?

Speaker Change: Yeah, just demand for kind of the non AI speeds or the kind of sub 400 gig. I know that had been an area of more depressed demand, but if you're seeing any changes there.

Speaker Change: Got it. Okay, the sub-400 gig. We're expecting that to be relatively stable, so we don't expect to see any huge growth from that or any huge decline. We're modeling that moving forward as relatively stable.

Richard J. Martucci: Our Q4 4.8% GAAP operating margin increased by 296 basis points compared to 1.8% in the prior quarter, and by 1,769 basis points compared to an operating loss of 12.9% in the year ago quarter, driven by improvements in both gross margin and operating expense leverage. Our Q4 17% non-GAAP operating margin increased by 191 basis points compared to 15.1% in the prior quarter, and by 162 basis points compared to 15.4% in the year ago quarter, driven by improvements in both gross margin and operating expense leverage. Our Q4 interest expense was $68 million, compared to $73 million in the preceding quarter and $79 million in the year ago quarter.

Rich Martucci: Our Q4 4.8% GAAP operating margin increased by 296 basis points compared to 1.8% in the prior quarter, and by 1,769 basis points compared to an operating loss of 12.9% in the year ago quarter, driven by improvements in both gross margin and operating expense leverage. Our Q4 17% non-GAAP operating margin increased by 191 basis points compared to 15.1% in the prior quarter, and by 162 basis points compared to 15.4% in the year ago quarter, driven by improvements in both gross margin and operating expense leverage. Our Q4 interest expense was $68 million, compared to $73 million in the preceding quarter and $79 million in the year ago quarter.

Speaker Change: Great, thank you so much.

Speaker Change: Thank you.

Speaker Change: i

Speaker Change: Our next question comes from Carl Ackerman with BNP Paribas. You may proceed.

Carl Ackerman: Thank you. Jim, you spoke about the need to have less transactional revenue and the ability to improve pricing going forward.

Carl Ackerman: Given your innovation and leadership in high-speed optical transceivers,

Carl Ackerman: Could you discuss the breadth of hyperscale engagements within Datacom and whether this customer demand is resulting in extended volume commitments and order visibility provided to you so that you may enable those customers to meet their data center build-outs? Thank you.

Carl Ackerman: Yeah, thanks, Carl. So, definitely we're seeing, you know, we have very good breadth of customers. You know, if you look at 800 gig,

Carl Ackerman: Our breadth of customers continues to grow. It's grown on a quarter over quarter basis in terms of those customers that are branding 800 gig and are in full production. And so the breadth of customers feel really good about it continues to grow. And then on the second part of your question around

Carl Ackerman: extending visibility. Yeah, our visibility or

Carl Ackerman: The other way to look at it is our order book has continued to improve over the last 90 days, especially over, I would say, the last six to eight weeks. It's certainly improved. And that's given us visibility not just through the end of...

Carl Ackerman: This calendar year, but in the first half of next calendar year, and so really through the rest of our fiscal year here. And that order book continues to strengthen for the Datacom business, which we view as very positive. And so we're definitely focused on making sure we meet that increasing demand.

Carl Ackerman: Thank you.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Vivek Arya with Bank of America. You may proceed.

Richard J. Martucci: The full year FY24 GAAP tax rate was -7.5% compared to 27% in the previous year. The full year FY24 non-GAAP tax rate was 20.7% compared to 18.2% in the previous year. Q4 GAAP earnings per diluted share was -$0.52 loss, compared to a $0.29 loss in the prior quarter and a $1.54 loss in the year ago quarter. Q4 non-GAAP earnings per diluted share was $0.61 compared to $0.53 in the preceding quarter and $0.41 in the year ago quarter. We generated $162 million in cash from operations in the Q4 compared to $117 million in the prior quarter and $182 million in the year ago quarter.

Rich Martucci: The full year FY24 GAAP tax rate was -7.5% compared to 27% in the previous year. The full year FY24 non-GAAP tax rate was 20.7% compared to 18.2% in the previous year. Q4 GAAP earnings per diluted share was -$0.52 loss, compared to a $0.29 loss in the prior quarter and a $1.54 loss in the year ago quarter. Q4 non-GAAP earnings per diluted share was $0.61 compared to $0.53 in the preceding quarter and $0.41 in the year ago quarter. We generated $162 million in cash from operations in the Q4 compared to $117 million in the prior quarter and $182 million in the year ago quarter.

Vivek Arya: Thanks for taking my question. Jim, you mentioned the Strong Water book for your optical transceivers extending several

Vivek Arya: Quarters, I'm curious, are you seeing any impact at all, positive or negative, because of changes in NVIDIA's product schedule, or does that have no impact?

Speaker Change: And then, just given the strength and the order book.

Speaker Change: How does the pricing and gross margin shape up when you look at the next several quarters? Do you think it can improve from here, or do you think that margins in this business may still be dilutive to the overall business?

Speaker Change: Yeah, thanks, Vivek. On the first part...

Speaker Change: On the part that was about the order book, yeah, we continue, as I said, we continue to seek order book strength. And I think you asked about a particular customer.

Speaker Change: Again, comment on that particular customer or really any particular customer.

Speaker Change: But I can say that, you know, in aggregate.

Speaker Change: We're continuing to see, again, the order book strength and demand growing, which is good. On the pricing and gross margin, you know, in general...

Speaker Change: What we would usually see in the transceiver market is the newer, the newer speed grades.

Speaker Change: like 800 and then, you know, soon to be 1.60, generally carry higher gross margins than the older speed grades, right, the older speed grades.

Speaker Change: are usually become commoditized over time and so to the extent that we're ramping the newer speed grades that's certainly generally a tailwind for us.

Richard J. Martucci: Q4 capital expenditures were $100 million versus $93 million in the preceding quarter and $93 million in the year ago quarter. Free cash flow net of the $49 million of capital funded by the Silicon Carbide LLC minority interest investment was $111 million. We paid down $64 million in debt during the quarter in a total of $229 million for all of fiscal 2024. Total debt at the end of FY24 is $4.17 billion. Unrestricted cash increased to $926 million from $899 million in the prior quarter. Restricted cash set aside for our Silicon Carbide LLC subsidiary decreased to $858 million from $889 million in the preceding quarter.

Rich Martucci: Q4 capital expenditures were $100 million versus $93 million in the preceding quarter and $93 million in the year ago quarter. Free cash flow net of the $49 million of capital funded by the Silicon Carbide LLC minority interest investment was $111 million. We paid down $64 million in debt during the quarter in a total of $229 million for all of fiscal 2024. Total debt at the end of FY24 is $4.17 billion. Unrestricted cash increased to $926 million from $899 million in the prior quarter. Restricted cash set aside for our Silicon Carbide LLC subsidiary decreased to $858 million from $889 million in the preceding quarter.

Speaker Change: But, you know, a lot of my comments earlier on Gross Margin are really focused at the aggregate company level.

Speaker Change: Not just in Datacom, but at the aggregate company level, I believe that there's opportunity for us to improve our pricing discipline, to have a better optimized pricing strategy across the company, across all of our product lines. And then also, you know, there's a number of cost structure improvements.

Speaker Change: that I think the company has opportunity to improve, not just in Datacom, but across some of our other product lines as well.

Speaker Change: And for my follow-up...

Speaker Change: So you're guiding, you know, the current quarter roughly kind of flat sequentially, what are the puts and takes from a different, from the different segments? And I know you're not guiding to December, but should we assume that those same end market trends

Speaker Change: follow in December also? Or do you think that there is the, you know, the prospect for, you know, some sequential improvement as we look at December, just just from a broad end market perspective? Thank you.

Speaker Change: Yeah, but back on the September quarter, the one that we currently guided, yeah, we guided roughly...

Speaker Change: flat sequentially. We would expect the Datacon business, as we were just talking about, we would expect the Datacon business to be sequentially up.

Speaker Change: but some of our other businesses tied to the telecom.

Speaker Change: and the industrial markets to be either flat or sequentially down. And so that offsets some of the data-com growth. And if you look at the midpoint of our guide, obviously our guide is a range, right? And that's what we're seeing for the current quarter that we're in. For the December quarter, I'll probably save those comments until the next arena's call. We'll give more insight into what we're seeing in the December quarter and maybe into the beginning of the next calendar year as well.

Richard J. Martucci: In summary, moving forward, the company will continue to be laser focused on investing in organic growth, improving operating leverage, prudent capital investment, and executing on paying down debt. Now I will turn to our guidance for Q1 of FY25. Revenue is expected to be between $1.27 billion and $1.35 billion. Non-GAAP gross margin is expected to be between 36% and 38%. Total operating expenses are expected to be between $260 million and $280 million on a non-GAAP basis. Tax rate for the quarter is expected to be between 20% and 23% on a non-GAAP basis. EPS is expected to be between $0.53 and $0.69 on a non-GAAP basis. Operator, that concludes our formal comments. We can now open the call for questions.

Rich Martucci: In summary, moving forward, the company will continue to be laser focused on investing in organic growth, improving operating leverage, prudent capital investment, and executing on paying down debt. Now I will turn to our guidance for Q1 of FY25. Revenue is expected to be between $1.27 billion and $1.35 billion. Non-GAAP gross margin is expected to be between 36% and 38%. Total operating expenses are expected to be between $260 million and $280 million on a non-GAAP basis. Tax rate for the quarter is expected to be between 20% and 23% on a non-GAAP basis. EPS is expected to be between $0.53 and $0.69 on a non-GAAP basis. Operator, that concludes our formal comments. We can now open the call for questions.

Speaker Change: Thank you. Thank you so much.

Speaker Change: Our next question comes from Atif Malik with Citi. He may proceed.

Speaker Change: Thank you. This is Papa Silla for ATIF. Thank you for taking my question. I guess my first question was around the industrial business.

Papa Silla: I guess just looking at it sequentially, we saw a little bit of a deceleration.

Speaker Change: So we were just wondering if you can touch a little bit on the percentage there.

Speaker Change: or perhaps just touch on areas that last quarter kind of saw some difficulties such as precision manufacturing, UV, semi-cap back end, and how they are doing this quarter.

Speaker Change: Yeah, thanks for the question. Yeah, I'm kind of the broad base of industrials in aggregate. We did see a little bit of sequential improvement in aggregate in the industrials from Q3 to Q4, but moving into the current quarter, as I just mentioned on the prior question, we're assuming that both the telecom as well as the industrial space are either kind of flat sequentially or there's some segments that are sequentially down. And that offsets, we're assuming that offsets some of the data sequential growth that we're expecting in the current quarter.

Speaker Change: Got it. And for my quick follow-up, I wanted to touch a little bit on the...

Speaker Change: AI front, on the laser front of things for 1.6D.

Operator: Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from Samik Chatterjee with J.P. Morgan. You may proceed.

Speaker Change: So, I guess our understanding is that from an industry-wide perspective.

Speaker Change: All three technologies, so Vixel, EML, Sifo, have their own pockets of demand. So we were just wondering, from your end, can you touch on engagement across those three and kind of what those mix look like currently and what they might look like maybe two, three quarters down the line?

Speaker Change: Yeah, I think, you know, one of the great things about Coherent is, look, we have a really wide portfolio of technology.

Samik Chatterjee: Hi. Thanks for taking my question. Jim, look forward to working with you. I guess the first question that I wanted to sort of throw your way is really in relation to you said it's early days in terms of the strategic assessment you're doing. Just maybe help us think about what are the sort of early reads you have around the portfolio from there. You talked about core and non-core. Maybe what's the criteria using or the lens that you're looking at it from in deciding core and non-core? How much of the sort of implication is on operating the company more efficiently relative to maybe delevering the balance sheet in terms of priority of these actions? I have a quick follow-up, if you'll allow me. Thank you.

Speaker Change: And so, you know, we develop our own Vixels, we manufacture our own Vixels, we do the same in EML, Indium Phosphide, we develop and manufacture in-house.

Speaker Change: So we both develop and manufacture a number of those lasers in-house. But then, where it makes...

Speaker Change: Mark Miller, Ananda Baruah, Sidney Ho, Jed Dorsheimer, Ruben Roy, Paul Silverstein,

Speaker Change: the biggest technical advantage versus our competition and the biggest differentiation for our customers, we'll always select that technology. Whether it's developed in-house or whether we source it externally, we'll select the best technology that benefits our customers. So I think I probably won't give any prognostication on 1.6T and how much of it will be Vixel versus other technologies. But we'll probably share more about that as we get closer to 1.6T production RAM.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Ruben Roy with Stiefel. You may proceed.

Speaker Change: Thank you and hi Jim. I wanted to

Speaker Change: I know you had a lot of questions on...

Ruben Roy: the strategy and I appreciate the commentary uh high level uh Jim but I wanted to um

Ruben Roy: Just maybe talk about pricing optimization one more time and

Jim Anderson: You know, you talked about some successful turnarounds that you've had, and I've watched the last one, which was tremendous, and in short order, and I'm just wondering if you could comment a little bit.

Speaker Change: Given that, you know, the breadth of products and markets, you know, customers, et cetera, is a lot different.

Speaker Change: I think it's more coherent than the last turnaround that you were working on. How are you thinking about timing? Is this a multi-year strategy?

Jim Anderson: Yeah. Thank you, Soumik. Thanks for the question. I appreciate it. Yeah, on the portfolio assessment, happy to talk a little bit more about that. I'm really pleased with the work that the team's been doing on this over the last couple of months. Think about the portfolio assessment as really work that we're doing to really build a foundation for our strategy going forward. The ultimate goal of it is to really make sure that the company is concentrating all of its assets, whether that's OpEx or CapEx, on the areas of greatest growth and profitability over the long term. That's really the ultimate goal. The way we're approaching it is we're stepping back and looking at the entire company portfolio.

Speaker Change: from an optimization strategy to get some of those margins that you want to get to, or any, you know, kind of high-level commentary on that would be helpful.

Speaker Change: Yeah, thanks Ruben. Look, all, you know, businesses...

Speaker Change: Coherence is a different business. You know, every business has its own dynamics and Coherence itself has a wide range of different businesses within its portfolio. So, it's a little bit of different business by business, but, you know, as I spend time with both our business leaders, our general managers, our sales team, as well as time with our customers, I do think there's opportunity.

Speaker Change: for us to...

Speaker Change: To be better in terms of our pricing discipline and how we price our products in the market.

Speaker Change: And again, finding and striking that right balance between being competitive in the market but making sure we get paid for the innovation that we drive. And I think that there are some approaches, strategies, tactics, and analytics.

Speaker Change: that I've used in my past across multiple different businesses.

Speaker Change: that I think are universal and can be applied to...

Speaker Change: to some of the businesses within Coherent as well. And so that's, you know, that's certainly what we're working on now. We've kicked off already that sort of bigger pricing optimization strategy work. We're driving that across the company. Now, that does take time. It's not something that turns on like a light switch. Some of those initiatives...

Jim Anderson: We're breaking down the company into each one of its individual product line divisions, and then we're grading each one of those on a set of strategic and financial criteria. What we're doing is putting each one of the businesses into one of four categories. Happy to share a little bit more about that. The four categories are what do we think are the big growth engines for the company moving forward? What are the profit engines? What are the kind of longer term bets that the company is making? What are those businesses that we think are non-strategic or underperforming? When we say growth engines, those are obviously businesses that we believe are going to drive long-term above market growth for us.

Speaker Change: take longer time to achieve. Some of those are near-term, some can provide short-term benefit, but there's a wide range of initiatives that we're

Speaker Change: we're beginning to drive and those who yield benefit over time. And as I mentioned earlier, when we get to the investor day and we give our longer term business model targets, including gross margin, we'll get some sense about what we think the progression towards those business model targets, including gross margin, will be over time.

Speaker Change: Very helpful. Thanks. Thanks, Jim. And I guess just a quick follow-up. It sounds like you're saying that you started some of these actions. Are there any other strategic actions that you've implemented currently or is most of it on the come?

Speaker Change: Definitely, in the category of gross margin expansion, we've initiated a number of, as I mentioned, pricing optimization strategies. But we're also working on product cost. So we also kicked off a number of focused product cost activities. And that's something we're driving with sort of equal focus.

Speaker Change: is.

Speaker Change: How do we drive better product cost structure within the company? And, you know, given that we're a manufacturing company, there's a lot more, there's a lot of knobs for us to turn in terms of driving better cost structure with us, better asset utilization.

Jim Anderson: Profit engines are businesses that may be growing a little slower but are generating really healthy levels of profit. Long-term bets are businesses that, you know, we're investing in today that have a longer ROI than typical for us, but may have big payoffs at the end. Then the non-strategic and underperforming businesses are really businesses that just don't fit with the overall portfolio or are significantly underperforming our financial targets. Really with that foundation built, and that work is really concluding through the course of this month, we'll be taking a set of actions to concentrate our assets or our investment on those areas of greatest growth, as I said, and then either divesting or shutting down investment in those underperforming or non-strategic businesses.

Speaker Change: higher yields for our products, et cetera. There's a number of different places we're focused to drive better product cost structure moving forward.

Ruben Roy: Thanks, Ruben.

Speaker Change: Our next question comes from Jack Egan with Charter Equity Research. You may proceed.

Jack Egan: Hey guys, thanks for taking the questions. I just had one in a follow-up. So last quarter you mentioned a 30% increase in bookings for the laser segment, but it's still you know revenue-wise it's still been kind of hovering in the 350 355 million range for the past three quarters So I was just curious is that due to those various positives and negatives in the industrial and telecom? Sectors or markets kind of offsetting each other. Is there or is there anything else at play there?

Speaker Change: Yeah, thanks Jack. It's actually due more to the time from when a booking is made in lasers to when it's shipped. Those are generally longer lead times and so it has more to do with just the natural lead time of that business and there's latency from when those bookings are placed until when the product is actually shipped. So it's more about just the natural lead times of that business.

Speaker Change: Got it, okay. And then, with the silicon carbide capex kind of out of the equation now, I was wondering where are your capex priorities now, other than expanding 800 gig?

Jim Anderson: You know, certainly expect to hear more about that, you know, from us over the coming quarters. Certainly happy to share more about that at the investor and analyst day that we're planning in the future. I think you also asked about delevering the balance sheet. That's certainly a big focus of ours as well. I look at that delevering opportunity as really could be driven by two things. To the extent that we do decide to divest any businesses, the proceeds of those divestitures could be used to pay down the debt.

Speaker Change: Yeah, I would say the number one priority in terms of CapEx, setting aside silicon carbide, is making sure that we have the capacity in place to support the growing demand that we're seeing in the Datacom business.

Speaker Change: And so, you know, right now 800 gig capacity, but we're also building out 1.6 gig capacity as well and making sure we're ready for that ramp. So, yeah, I would say that's our priority one right now in terms of capital expense.

John: Thank you, John.

John: Thanks, Jack.

Speaker Change #101: Our next question comes from Ananda Baruah with Loop Capital. You may proceed.

Ananda Baruah: Hey, yeah, thanks, guys. Good afternoon. Thanks for taking the question. And yeah, Jim, great to meet you. Look forward to working with you. Just one for me.

Speaker Change #103: Do you have any thoughts, Jim, on, this is a transceiver question, do you have any thoughts, early thoughts, on potential for share gain, you know, kind of share gain percent over the next couple of years,

Jim Anderson: Also just, setting aside the portfolio assessment, I talked about some of the operational execution improvements we wanna drive, really focused on driving better, for instance, gross margin, better profit margins, and obviously that yields better cash flow, which would help us accelerate debt pay down. That certainly, delivering the balance sheet, is a key focus as well.

Speaker Change #104: And have you guys, have you yet begun to see the big data center customers?

Speaker Change #105: begin to sort of index more towards U.S. based transceiver producers.

Speaker Change #105: Thanks.

Jim Anderson: Yeah thanks Ananda, that's a that's a great question.

Speaker Change #106: As I've spent time with some of those large data center CSP customers, I think there's clearly opportunity for us to gain share of those customers due to a number of different dynamics.

Speaker Change #106: And look, when you look at coherent, not only are we a...

Speaker Change #106: technology leader in transceivers and I think you know a technology leader that you can rely on over the course of multiple generations.

Samik Chatterjee: Got it. If you allow me for a quick follow-up, I know you talked about gross margins being sustainably above 40, is how you're thinking about the business. If you sort of look at the gross margins today, do you think the effective sort of the biggest gap between where your aspiration is and what's sort of those companies delivering today, is that pricing or is that sort of these underperforming businesses? Once that's sort of done and dusted, do you sort of get back to that sustainable range? Maybe just help me in sort of what's the biggest gap you're identifying between where the company should be and where the gross margins are today.

Speaker Change #106: historically and moving forward.

Speaker Change #106: Well, we have an incredibly resilient supply chain. And I would say that from supply chain resiliency, we are the most resilient supply chain in the industry. And so I think our big data center, Datacom, CSP customers, if they haven't recognized that already, they're definitely having more appreciation for that. So I think the combination of our technology and supply chain resiliency gives us the opportunity to win significantly more share of wallet with those big customers over the coming quarters and years. So thanks for the question, Ananda.

Ananda Baruah: Yeah, thanks for the context.

Speaker Change #107: Thank you. I would now like to turn the call back over to Jim Anderson for any closing remarks.

Speaker Change #108: Thank you, Operator, and thanks again for everybody joining us on our call today. So, just to wrap it up, I'm super excited about the opportunity ahead of us at Coherent, and I want to once again thank all of my new Coherent teammates for all their hard work, dedication, and all the innovation they drive every day.

Speaker Change #109: While we have many strengths, we also have areas of opportunity for improvement to translate our incredible innovation engine and growing market opportunity into outstanding shareholder value creation going forward.

Jim Anderson: Yeah, it's a great question, Samik. I would say it's really a combination of some of it is underperforming businesses that have gross margins that are significantly below our corporate average. But also, if you set that aside, pricing, I think there's both opportunities on pricing as well as cost structure. I mentioned this a little bit in my prepared remarks. On pricing, I do believe that there's things that we can do to improve our pricing discipline moving forward.

Speaker Change #109: Thanks again for your support and look forward to updating you on our progress moving forward. Operator, that concludes our call.

Speaker Change #110: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Speaker Change #111: Thank you for watching!

Speaker Change #111: [music]

Speaker Change #112: Good day and thank you for standing by. Welcome to The Coherent Corp.

Speaker Change #113: FY24 4th Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode.

Speaker Change #114: Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session.

Speaker Change #114: To ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. I would now like to hand the conference over to your speaker today, Paul Silverstein, Senior Vice President, Investor Relations and Corporate Communications.

Jim Anderson: Good afternoon, everyone. With me today are Jim Anderson, Coherent CEO, and Rich Martucci, Coherent CFO. During today's call, we will provide a financial and business review of the fourth quarter of fiscal 2024 and the business outlook for the first quarter of fiscal 2025.

Jim Anderson: Some of those ideas that I'm bringing with me is somewhat what I did in prior companies where we applied some advanced, think about it as pricing analytics, pricing strategies that really are targeted at making sure that we're competitive on price, but also that we're getting fair value for the innovation that we're bringing to market. I think there's a pricing initiative that we've kicked off around better pricing discipline. I expect that to yield gross margin improvement. Then also cost. Look, I think there's a number of different areas across the company where we need to be focused on driving better cost structure. I mentioned a few of those in the prepared remarks. I think product yields, we have improvement to drive there, asset utilization.

Speaker Change #115: Our earliest press release can be found in the investment relations section of our company website at coherence.com

Speaker Change #116: I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company.

Speaker Change #116: We wish to caution you that such statements or predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files from the SEC, including our 10-Ks, 10-Qs, and 8-Ks.

Speaker Change #116: These documents contain and identify important risk factors that can cause the actual results to differ materially from those contained in their projections or forward-looking statements.

Speaker Change #116: This call includes and constitutes the company's official guidance for the first quarter of fiscal 2025.

Speaker Change #116: If, at any time after this call, we communicate any material changes to this guidance, we intend that such updates can be done using a public forum, such as a press release or publicly announced conference call.

Speaker Change #116: We will refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends.

Jim Anderson: I think the third area that I mentioned was better make versus buy decisions, making sure that we're leveraging the bigger ecosystem where it makes sense, and making sure that we're applying our assets to where we're driving greatest differentiation or that is providing our customers some sort of significant advantage. That's sort of the three differing areas that I'm thinking about in terms of gross margin improvement.

Speaker Change #116: For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the investment relations section of our website at coherent.com. Now, let me turn the call over to Jim Anderson, our CEO.

Jim Anderson: Thank you, Paul, and thank you everyone for joining us on our call today. It's been a little over two months since I joined Coherent, and I'm more excited today about the potential of this company and the opportunity for shareholder value creation than the first day I joined.

Jim Anderson: I want to start by thanking my predecessor, Chuck Mattera, for his over 20 years of service to the company, including his last eight years as CEO.

Samik Chatterjee: Got it. Great. Thank you. Thanks for taking my questions.

Jim Anderson: Thanks, Samik.

Jim Anderson: Chuck's tireless dedication and leadership of Coherent has had a tremendous lasting impact on the company. And on behalf of all of our employees and our Board of Directors, I want to once again thank him for his service and wish him all the best.

Operator: Thank you. Our next question comes from Jeffrey Kvaal with Raymond James. You may proceed.

Jeffrey Kvaal: Yeah, thanks. This is Jeffrey Kvaal for Simon Leopold. I just wanted to hit on the gross margin a little bit deeper. Maybe you can talk about the glide path and, you know, like what kinda timeframe do you see getting to that 40%+ range? You know, really hitting on maybe that buy versus make decision. You know, you had a competitor or your competitor last night talking about EML, their indium phosphide lasers, you know, being booked out through the end of 2025 in that 200G per lane. Maybe just update your thoughts around that for, you know, in-house production there. Thank you.

Speaker Change #117: I'd also like to take the opportunity to thank my new coherent teammates for the incredibly warm welcome to the company.

Speaker Change #118: In these first weeks, I've met with employees at many of our locations across the world.

Speaker Change #119: I'm deeply impressed with the exceptional depth and breadth of talent, as well as the determination and hard work of my teammates. I look forward to working side-by-side with them to unlock the full potential of the company.

Speaker Change #120: Since joining Coherent, I've received a number of questions from employees and shareholders regarding my initial impressions on the business and our long-term strategic direction.

Speaker Change #120: I've also been asked about my reasons for joining Coherent and what drew me to this opportunity.

Speaker Change #120: Let me start with what I found most attractive about joining Coherent.

Speaker Change #120: Simply put, it was a combination of the innovation this company is driving and the revenue growth potential that's ahead of us.

Jim Anderson: Yeah. Thanks, Jeff. On the first part of your question, the glide path, that's definitely a topic that we wanna cover at that investor day that I mentioned. We'll be scheduling that in the coming quarters. What we'll do as part of that investor day is not just lay out the company strategy, but give an overall business model target for the company and a sense of what our timing is of the timeframe to achieve that business model target, including the gross margins. This will definitely be a key focus area for us moving forward. Look, gross margin improvement takes time, whether it's pricing or cost reductions, those take work, but we're you know, determined to drive a steady roadmap of improvement moving forward.

Speaker Change #120: Innovation is the lifeblood of the technology industry and Coherent is a deeply innovative company. Over the course of my career in the tech industry I've worked at many innovative companies and I can tell you firsthand that the innovation happening every day in this company is absolutely world-class.

Speaker Change #121: Innovation is in the company's DNA. We innovate at a foundational physical level that underpins critical advancements in many of today's most important and demanding growth applications.

Speaker Change #121: Innovation is what this company was founded on, and I believe it's why the company has thrived over 50 years.

Speaker Change #121: And I want to ensure that we continue to cultivate this culture of innovation for the next 50 years.

Speaker Change #122: Of course innovation is only meaningful if it ultimately has impact on people's lives and translates into shareholder value creation. The second thing that attracted Meta Coherent is our market and product position and our ability to impact and drive large secular growth opportunities.

Speaker Change #122: The addressable market for our products and innovation is over $60 billion and growing quickly.

Coherent: Coherent is an industry leader across many product lines.

Speaker Change #123: Thank you.

Speaker Change #123: One of the most exciting growth opportunities is our optical transceiver technology, which underpins and drives the high-speed connectivity required by new AI data centers.

Speaker Change #123: While I believe this is a tremendous opportunity for the company, there are many other examples of secular growth opportunities ahead of us.

Jim Anderson: You'll hear more about us or from us around the timing of those gross margin improvements in the quarters ahead. Then on the second part of your question, make versus buy. Look, I think the way to think about this is one of the benefits that Coherent has versus our competitors, and it's a benefit that our customers see every day, is there's a number of places where we're vertically integrated and where we build, for instance, not just the Datacom transceiver, but we build a number of the components that go into that transceiver. To the extent that that provides us differentiation or faster time to market or generates real value for our customers, that's fantastic, and we will continue to do that.

Speaker Change #123: Opportunities such as next-generation telecom systems, advanced displays, semi-cap equipment for next-gen VAMs, industrial automation robotics, EVs, and many others.

Speaker Change #123: We are well-positioned across multiple long-term secular growth markets.

Speaker Change #124: My responsibility is to translate our innovation engine and growing market opportunity into market-leading revenue growth, expanding profitability, and industry-leading shareholder value creation.

Speaker Change #124: To achieve these goals and unlock shareholder value, I'm focused on three key areas of improvement.

Speaker Change #124: Number one, our culture. Number two, our strategy. And number three, our execution.

Speaker Change #124: I'm a culture friend. I love our innovation-focused culture.

Speaker Change #124: which we will absolutely continue to embrace. But there's also opportunity for improvements in our culture.

Speaker Change #124: We have to move faster and be more agile. Speed is a competitive advantage.

Speaker Change #124: To this end, we've initiated changes to simplify our organizational structure, empower our leaders, streamline decision-making, accelerate execution, and ultimately deliver our innovative products to market faster for our customers.

Speaker Change #124: The culture of change takes time, but I'm excited about some of the early results I'm already seeing across the company.

Speaker Change #124: Moving to strategy, we have a very diverse portfolio of product lines and assets, and we have a significant opportunity to further optimize and focus this portfolio for growth and profitability.

Jim Anderson: What I wanna make sure that we're careful about is not just building it internally for the sake of building it internally, but to the extent that there's external providers or an ecosystem that we can leverage, that's competitive in terms of technology and cost with the internal option, I'd rather use those resources to focus those on areas that we can truly differentiate and add value for our customers. I just wanna make sure that we're being objective moving forward on make versus buy and being smart about how we leverage those.

Speaker Change #124: To that end, in June, we initially did a portfolio review to assess each element of our product portfolio across the set of strategic and financial criteria. We plan to use this assessment as the foundation for making investment and capital allocation decisions moving forward.

Speaker Change #124: Across our portfolio, we have strong growth engines that need the right level of investment to realize their full growth potential.

Speaker Change #124: However, we also have product lines and assets that are non-strategic and underperforming. We will shift investment to the areas of greatest opportunity, and we will divest or stop investment in underperforming areas.

Speaker Change #124: Doing so will drive greater focus, concentrate our OPEX and CAPEX dollars on our strongest growth and profit engines, accelerate the deleveraging of our balance sheet, and enhance our EPS and cash flow growth.

Operator: Got it. Appreciate it.

Jeffrey Kvaal: Got it. Appreciate it.

Speaker Change #124: While I won't be going into the specific areas of investment and disinvestment on today's call, we plan to hold an investor and analyst meeting in the coming quarters that will lay out our strategy for the company.

Jim Anderson: Thanks.

Operator: Thank you. Thanks, Jeff. Our next question comes from Thomas O'Malley with Barclays. You may proceed.

Jeffrey Kvaal: Thank you.

Jim Anderson: Thanks, Jeff.

Operator: Our next question comes from Thomas O'Malley with Barclays. You may proceed.

Thomas O'Malley: Hey, Joe. Thanks for taking my question, and great to meet you. I look forward to working with you as well. I kinda wanted to ask on the optical opportunity and the transceiver business in general. I realize, you know, you just joined the business and there were a lot of metrics kind of floating around, and I'm sure you don't wanna marry yourself to any of those right away. In your initial days at the business, clearly, you know, the big growth engine at Coherent has been this 800G ramp and then, you know, in the future, potentially the 1.6T ramp as well.

Speaker Change #124: This will include our market growth opportunity, our key technology and product line growth investments, and our operational strategy, as well as our long-term target business model.

Speaker Change #124: Finally, the third area of focus for improvement is operational excellence.

Speaker Change #124: I believe we have significant opportunity to improve our operational efficiency and effectiveness moving forward.

Speaker Change #124: Let me touch on a few examples of opportunity ahead of us.

Speaker Change #124: After meeting with many of our top customers and partners, it's clear to me that we can improve our revenue growth by engaging our customers in a more strategic way that is less transactional and more focused on building deep multi-generational partnerships.

Speaker Change #124: Our customers definitely view us as an industry innovator, but we need to improve our roadmap execution fidelity, accelerate our time to market on key technology transitions, and become a trusted innovation partner to our customers.

Speaker Change #124: We also need to ensure we're leveraging the broader ecosystem and working more closely with our key partners.

Thomas O'Malley: When you look at kind of, you know, what was advertised to you, when you were first looking at this job and then kinda got underneath the covers and looked at that optical opportunity, could you maybe speak qualitatively about your expectations in that business? I understand that you'll have an analyst day and maybe put some more numbers on it, but just broadly, you know, your feelings on that business and what that growth engine could look like for Coherent over the next couple of years. I had a follow-up.

Speaker Change #124: Beyond top-line growth, we need to improve our gross margins.

Speaker Change #124: Frankly, our gross margin is too low.

Speaker Change #124: I believe we should be operating at a consistent, sustainable gross margin level above 40%.

Speaker Change #124: On pricing, it's clear we have room for improvement. Our team is implementing a new pricing optimization strategy across our businesses.

Speaker Change #124: to appropriately balance competitive pricing with fair payment for the innovation that we deliver to our customers.

Speaker Change #124: On the cost side of the Gross Margin Equation, we have multiple areas for improvement.

Speaker Change #124: For example, we need to improve our product yields, our overall asset utilization, and our make-versus-buy decisions.

Speaker Change #124: Horse Margin Improvement will take time, but we are determined to drive a disciplined road map of margin expansion.

Jim Anderson: Yeah. Thank you, Tom, for the question. Yeah, the short answer is it's better than I thought before I joined the company. I had a sense of, as you know, Coherent as a leader in optical transceivers, specifically for, you know, Datacom. Obviously, you know, there's tremendous build-out happening now with AI data centers. I had my own sense of what that sort of growth trajectory would look like before I joined the company. It's stronger than what I had thought. We've seen just over the last, I would say, gosh, you know, 4 to 6 weeks, as I've spent a lot of time with our top customers, across, you know, all of our different product lines, but especially in our Datacom business.

Speaker Change #124: On operating expenses, we need to improve return on investment.

Speaker Change #124: For R&D, while innovation requires investment, those investments must be focused, efficient, and offer high return.

Speaker Change #124: Today, our R&D investment has spread too thin.

Speaker Change #124: We will focus our R&D investment on the areas of greatest growth potential and eliminate investment in highly speculative projects that lack a strong business case.

Speaker Change #124: On SG&E, we need to drive greater efficiency.

Speaker Change #124: We will execute on our in-flight synergy and efficiency programs while finding new ways to better leverage our significant scale.

Speaker Change #124: Ultimately, our goal is to increase cast generation.

Speaker Change #124: Consistent growth, gross margin improvement, and better OPEX efficiency will help. However, we also need to improve our return on capital expenditures.

Speaker Change #124: We will align our CapEx investments with our overall portfolio strategy and focus on our areas of greatest growth and profitability. With better operational discipline, I believe we have opportunity to significantly increase our free cash flow and accelerate our pace of debt reduction and deleveraging.

Speaker Change #124: Our near-term capital allocation priorities are first, to fund our organic growth engines, and second, to deleverage our balance sheet as quickly as possible.

Speaker Change #124: I believe the combination of an enhanced culture along with strategic portfolio optimization and operational execution improvements will help put us on a path of sustained market-leading growth, enhanced profitability in cash generation, and a strong balance sheet.

Jim Anderson: I've gotten a much better sense for the opportunity that's in front of us, and I would say it's a very strong opportunity. We continue to see demand strengthening, forecasts strengthening, billings, backlogs. Yeah, we view this as a really key growth area for the company. The 800G ramp is very exciting for us. Then also, I was really pleased with the team's execution on the 1.6T. They delivered samples of 1.6T just over the past few weeks, month. I think that was a key milestone for us, and we're looking forward to ramping 1.6T next year. Yeah, I think it's an exciting growth area for the company.

Speaker Change #125: As I mentioned earlier, I look forward to sharing more details about our plans and specific business metrics and targets at an upcoming investor and analyst meeting.

Speaker Change #125: One of my near-term priorities is to fill the CFO role.

Speaker Change #125: We're considering both internal and external candidates and making good progress on the search.

Speaker Change #125: Once the new CFO is in place, we'll set a specific date for our investor and analyst meeting.

Speaker Change #125: I'll now switch gears and provide some brief comments on our fiscal fourth quarter results.

Speaker Change #125: Revenue in Q4 increased by approximately 9% both sequentially and year-over-year, driven primarily by strong growth in our Datacom transceivers for AI data center deployments.

Speaker Change #125: Non-GAAP gross margin expanded by 145 basis points sequentially, due primarily to recovery from the transitory issues that impacted RQ3.

Speaker Change #125: Non-GAAP EPS grew by 16% sequentially and by almost 50% year-over-year as a result of top-line growth and margin expansion.

Speaker Change #125: Let me summarize what we're seeing in our business by end market vertical.

Speaker Change #126: In the communications ad market, Q4 revenue increased by 10% sequentially and by 19% year-over-year. We experienced strong growth in Datacom, where Q4 revenue grew 16% sequentially and 58% year-over-year, due primarily to AI data center demand.

Jim Anderson: Now I'll say that, but I also wanna make sure that we recognize that there are other growth areas within the company as well. I know I'm excited about Datacom and AI data centers, but there's a number of other good areas of growth within the company. I mentioned a few of them in my prepared remarks. One of the things I think is a strength of Coherent is not that it's just the innovation that I talked about, but we do have a wide portfolio of growth opportunities across our other businesses as well. I think that makes for a really strong long-term portfolio. That's a diversified portfolio of growth moving forward. Yeah, definitely I'll share more thoughts on all of those growth engines at that investor day.

Speaker Change #126: We saw strong sequential growth in our 800-game data contra and SIVA revenue in Q4 and are also seeing increasing orders and backlog for the current and future quarters.

Speaker Change #126: We also delivered initial samples of our 1.6T Datacom transceivers, which we expect to begin ramping to calendar 2025.

Speaker Change #126: Our new Datacom optical switch platform is progressing well and is generating significant customer engagement, and we expect to enter customer trials in calendar 2025.

Speaker Change #126: Growth in data comms is partially offset by a 6% sequential and 38% year-over-year decline in telecom revenue due to end market weakness.

Speaker Change #126: Although we expect the telecom end market to remain weak in the near term, we also expect to ramp our new 100GZR and 400GZR plus coherent transceivers over the course of our fiscal year.

Speaker Change #126: Overall, we expect the communications market to be a strong long-term growth factor for the company.

Speaker Change #126: In the industrial end market, revenue increased 2% sequentially and 5% year-over-year.

Speaker Change #126: Our Display and Capital Equipment vertical saw growing demand in Q4 for our XMR lasers for kneeling and related services driven by expanding OLED adoption into smartphones and the inception of OLED adoption into laptop and tablet computers.

Speaker Change #126: with the latter essentially doubling long-term demand for OLED screen area production.

Speaker Change #126: In our other industrial verticals, we saw relatively stable revenue in aggregate.

Thomas O'Malley: Perfect. Then the second one is just a little more tactical, in regards to what we heard last night from your competitor, who was talking about an improving telecom market into the September quarter. It sounded as though you were a little more cautious. Just can you describe what you're seeing from those customers just in the short term? This is less of kind of a long-term strategic question, but just a sense check on, you know, are you seeing that market recovering with legacy products? Are new product introductions kinda picking up? That's what was kind of echoed last night, newer products kind of growing at customers. Just the puts and takes on what you're seeing in the telecom market, just because visibility has been pretty bad, inventory levels have been high.

Speaker Change #126: While we expect overall industrial and market demand to be soft in the near term, we believe we are well positioned for growth over the long term given our multiple growth opportunities in this segment, driven by new product introductions.

Speaker Change #126: such as our fiber laser platform for cutting and our new line beam annealing systems for Gen 8 display fans.

Speaker Change #126: In our two remaining markets, electronics and instrumentation, each of which account for less than 10% of our total revenue, we saw a sequential revenue growth, and both end markets would be long-term growth opportunities for us.

Speaker Change #127: In summary, about two months in, I'm even more excited about the opportunity to unlock significant shareholder value based on the depth and breadth of our innovation, the size of the market opportunities we address, and the potential to improve our operational execution.

Speaker Change #127: We're expecting strong growth in our Datacom business over the coming quarters, and while some near-term softness persists in our telecom and industrial end markets, we expect fiscal 2025 overall to be a solid growth year for the company.

Thomas O'Malley: Where are we at in that correction kinda off the bottom? Thank you.

Jim Anderson: Yeah. Thanks, Tom. Look, I'm gonna separate it out into just purely end market comments versus I'll come back and talk about some of the new products that we have ramping here. Just purely end market. Yeah, I guess we're taking a more cautious view on the market. I don't believe that we're completely out of the woods as an industry on the telecom market. You know, significant destocking has happened in that market, and that's good, right? The telecom market had built up significant inventory. That's. I think most of that destocking is largely behind us. But I think there are still pockets of inventory that are out there.

Speaker Change #127: I'll now turn the call over to our interim CFO, Rich Martucci.

Rich Martucci: Thank you, Jim. Overall, I'm very pleased with the continued sequential financial progress we made in the fourth quarter of fiscal 2024.

Rich Martucci: We delivered a strong order, the sequential revenue growth, and healthy improvement in our gross and operating margins, which drove sequential earnings per share growth.

Rich Martucci: Fourth quarter revenue was $1,314,000,000 representing an increase of 8.7% sequentially and 9.1% versus the prior year.

Rich Martucci: From a segment perspective, networking revenue increased 10% sequentially and by 16% year-over-year.

Rich Martucci: Material segment revenue increased 17% sequentially but decreased 3% year-over-year. And our laser segment revenue increased by 1% sequentially and by 7% year-over-year.

Rich Martucci: Our fourth quarter gap gross margin of 32.9% improved by 255 basis points sequentially and by 437 basis points versus the prior year.

Rich Martucci: Our non-GAAP fourth quarter gross margin of 37.2%, improved by 145 basis points sequentially and 132 basis points versus the prior year.

Jim Anderson: Our whole look on the telecom market through the next, I would say at least six months and probably into the following six months is a bit more of a cautious outlook. Now, it could be that we're wrong and it ends up being better or stronger than that, but we're taking a more cautious view on that. Now, that's all end market comments. Now set that aside. I'll switch over to Coherent specifically. Against that market backdrop, we do have a number of new products that are ramping that are pretty exciting. You know, a number, and I mentioned them in the prepared remarks, both the 100G and then the 400G ZR and ZR+ that'll ramp throughout the course of this year.

Rich Martucci: Sequential improvements were primarily due to our increased revenue volume and

Rich Martucci: resolution of the transitory margin issues that we cited in the preceding corner, including the recovery in our Datacom AI transceiver yield and resolution of the power failure issue that depressed both of our silicon carbide revenue and gross margin.

Rich Martucci: Our fourth quarter GAAP operating expenses were $339 million compared to $344 million in the prior quarter and $499 million in the year-ago quarter.

Rich Martucci: Fourth quarter non-GAAP operating expenses were $266 million compared to $250 million in the prior quarter and $248 million in the year-ago quarter.

Rich Martucci: The sequential increase in non-GAAP operating expenses includes year-end bonus and benefit adjustments and Term Loan Fee refinancing fees.

Rich Martucci: Looking ahead, we plan to continue to be disciplined in managing our SG&A expenses while ensuring that we invest in our product portfolio.

Rich Martucci: Our fourth quarter restructuring expenses included the GAAP operating expenses, were $14 million compared to $12 million in the preceding quarter, and $119 million in the year-ago quarter.

Rich Martucci: Our Restructuring Synergy and Site Consolidation plans are progressing in line with previously communicated expectations in terms of both cost and savings.

Rich Martucci: Our fourth quarter, 4.8% gap operating margin increased by 296 basis points compared to 1.8% in the prior quarter.

Jim Anderson: Obviously, since they're ramping over the course of this year, they have a bigger impact in the second half of our fiscal year. I think that you know, we do have some growth tailwinds behind us in terms of our own products. I think in terms of the market, we're expecting that to continue to be soft.

Speaker Change #128: And by 1,769 basis points compared to an operating loss of 12.9% in the year-ago quarter, driven by improvements in both gross margin and operating expense leverage.

Speaker Change #128: Our fourth quarter, 17% non-GAAP operating margin increased by 191 basis points.

Speaker Change #128: compared to 15.1% in the prior quarter and by 162 basis points compared to 15.4% in the year-ago quarter.

Paul Silverstein: Thanks. I'll take the next question.

Jim Anderson: Thanks. I'll take the next question.

Operator: Thank you. Our next question comes from Meta Marshall with Morgan Stanley. You may proceed.

Speaker Change #128: driven by improvements in both gross margin and operating expense leverage.

Meta Marshall: Great, thanks. I'll start with a question non-AI, just to focus on some other areas of the business. You know, the materials business looked to have kind of better than expected performance throughout the quarter. Was some of that just improvement on silicon carbide yields that had kind of encumbered last quarter? Were there any other markets worth calling out that improved there? Then maybe just as a second question, on the data comm side, I know the focus is on 400G and up, but just any recovery you guys are seeing in kind of demand for the non-AI speed transceivers? Thanks.

Speaker Change #128: Our fourth quarter interest expense was $68 million compared to $73 million in the preceding quarter and $79 million in the year-ago quarter.

Speaker Change #128: The full year FY24 GAAP tax rate was negative 7.5% compared to 27% in the previous year.

Speaker Change #128: The full year FY24 non-GAAP tax rate was 20.7% compared to 18.2% in the previous year.

Speaker Change #128: Fourth quarter GAAP earnings per diluted share was a negative $0.52 loss compared to a $0.29 loss in the prior quarter and a $1.54 loss in the year-ago quarter.

Speaker Change #128: Fourth quarter non-GAAP earnings per diluted share was $0.61 compared to $0.53 in the preceding quarter and $0.41 in the year-ago quarter.

Speaker Change #128: We generated $162 million in cash from operations in the fourth quarter compared to $117 million in the prior quarter and $182 million in the year-ago quarter.

Jim Anderson: Thank you. On the first part of your questions on the materials business, yeah, we did see some pickup in the materials business from Q3 to Q4. You're right, actually, a good chunk of that was the production issues that we had on silicon carbide in Q3. We were able to catch up on those issues or catch up on that demand in Q4. We had a little bit of depressed demand or depressed shipments in Q3. We were able to catch up on that in Q4. Some of that sequential gain is, yeah, certainly due to that silicon carbide catch up.

Speaker Change #128: Fourth quarter capital expenditures were $100 million versus $93 million in the preceding quarter and $93 million in the year-ago quarter.

Speaker Change #128: Free cash flow net of the $49 million of capital funded by the silicon carbide LLC minority interest investment was $111 million.

Speaker Change #128: We paid down $64 million in debt during the quarter, in a total of $229 million for all of fiscal 2024.

Speaker Change #128: Total debt at the end of FY24 is $4.17 billion.

Speaker Change #128: Unrestricted cash increased to $926 million from $899 million in the prior quarter.

Speaker Change #128: Restricted cash set aside for our silicon carbide LLC subsidiary decreased to $858 million from $889 million in the preceding quarter.

Speaker Change #128: In summary, moving forward, the company will continue to be laser-focused on investing in organic growth, improving operating leverage, prudent capital investment, and executing on paying down debt.

Speaker Change #128: Now I will turn to our guidance for the first quarter of fiscal 2025.

Speaker Change #128: Revenue is expected to be between $1.27 billion and $1.35 billion. Non-GAAP gross margin is expected to be between 36 and 38 percent.

Speaker Change #128: Total operating expenses are expected to be between $260 million and $280 million on a non-GAAP basis.

Jim Anderson: On the second part of your question, I caught that it was on Datacom, but I didn't quite hear the end of the question. Would you mind repeating the end of that Datacom question?

Speaker Change #128: Tax rate for the porter is expected to be between 20 and 23 percent on a non-GAAP basis. EPS is expected to be between 53 and 69 cents on a non-GAAP basis.

Speaker Change #129: Operator, that concludes our formal comments. We can now open the call for questions.

Meta Marshall: Yeah. Just demand for kind of the non-AI speeds, or the kind of sub-400 gig. I know that had been an area of more depressed demand, but if you're seeing any changes there.

Speaker Change #130: Thank you. As a reminder to ask a question please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question please press star 1 1 again. One moment for questions.

Speaker Change #131: Our first question comes from Samik Chatterjee with J.P. Morgan. He may proceed.

Samik Chatterjee: Hi. Thanks for taking my question, and Jim, I look forward to working with you. I guess the first question that I wanted to sort of throw your way is really in relation to you said it's early days in terms of the strategic assessment you're doing. Just maybe help us think about what are the sort of early leads you have around the portfolio from there. You talked about core and non-core, maybe what's the criteria you're using or the lens that you're looking at in deciding core and non-core, and how much of the sort of implication is on operating the company more efficiently relative to maybe de-levering the balance sheet in terms of priority of these actions.

Jim Anderson: Got it. Okay, the sub-400 gig. We're expecting that to be relatively stable, so we don't expect to see any huge growth from that or any huge decline. We're modeling that moving forward as relatively stable.

Samik Chatterjee: and have a quick follow-up if you'll allow me, thank you.

Meta Marshall: Great. Thank you so much.

Operator: Thank you. Our next question comes from Karl Ackerman with BNP Paribas. You may proceed.

Samik Chatterjee: yeah

Jim Anderson: Yeah, thank you, Samik. Thanks for the question. I appreciate it. Yeah, and the portfolio assessment, happy to talk a little bit more about that.

Karl Ackerman: Yes, thank you. Jim, you spoke about the need to have less transactional revenue and the ability to improve pricing going forward. Given your innovation and leadership in high-speed optical transceivers, could you discuss the breadth of hyperscale engagements within Datacom and whether this customer demand is resulting in extended volume commitments and order visibility, provided to you, so that you may enable those customers to meet their data center build outs? Thank you.

Jim Anderson: I'm really pleased with the work that the team's been doing on this for the last couple months.

Jim Anderson: And think about the portfolio assessment as really work that we're doing to really build a foundation for our strategy going forward. And the ultimate goal of it is to really make sure that the company is concentrating all of its assets, whether that's OPEX or CAPEX.

Jim Anderson: on the areas of greatest growth and profitability over the long term. And so that's really the ultimate goal. And the way we're approaching it is we're stepping back and looking at the entire company portfolio. We're breaking down the company into each one of its individual

Jim Anderson: product line divisions, and then we're grading each one of those on a set of strategic and financial criteria. And then what we're doing is putting each one of the businesses into one of four categories.

Jim Anderson: Yeah, thanks, Carl Ackerman. So definitely we're seeing, you know, we have very good breadth of customers. You know, if you look at 800G, our breadth of customers continues to grow. It's grown on a quarter-over-quarter basis in terms of those customers that are ramping 800G and are in full production. And so the breadth of customers feel really good about it continues to grow. And then on the second part of your question around extending visibility. Yeah, our visibility or the other way to look at it is our order book has continued to improve over the last 90 days, especially over, I would say, the last 6 to 8 weeks. It's certainly improved.

Jim Anderson: And I'm happy to share a little bit more about that. The four categories are, what do we think are the big growth engines for the company moving forward? What are the profit engines?

Jim Anderson: What are the kind of longer-term bets that the company is making? And then...

Jim Anderson: What are those businesses that we think are non-strategic or underperforming?

Jim Anderson: When we say growth engines, obviously those are businesses that we believe are going to drive long-term, above-market growth for us. Profit engines are businesses that may be growing a little slower.

Jim Anderson: but are generating really healthy levels of profit. Long-term bets are businesses that, you know, we're investing in today that have a longer...

Jim Anderson: R.O.I. than typical for us.

Jim Anderson: but may have a big payoff at the end.

Jim Anderson: And then the non-strategic and underperforming businesses are really businesses that just don't fit with the overall portfolio or are significantly underperforming our financial target.

Jim Anderson: And really with that foundation built, and that work is really concluding through the course of this month, we'll be taking a set of actions to concentrate our assets, our...

Jim Anderson: investment on those areas of greatest growth, as I said, and then either divesting or shutting down investment in those underperforming or non-strategic businesses. So, you know, certainly expect to hear more about that, you know, from from us over the coming quarters.

Jim Anderson: That's given us visibility not just through the end of this calendar year, but in the first half of next calendar year, so really through the rest of our fiscal year here. That order book continues to strengthen for the Datacom business, which we view as very positive. We're definitely focused on making sure we meet the increasing demand.

Jim Anderson: I'm certainly happy to share more about that at the investor and analyst day that we're planning in the future.

Jim Anderson: I think you also asked about de-levering the balance sheet. That's certainly a big focus of ours as well.

Jim Anderson: And I look at that deliberating...

Jim Anderson: Opportunity really could be driven by two things. To the extent that we do decide to divest any businesses.

Jim Anderson: The proceeds of those divestitures could be used to pay down the debt. But also, just setting aside the portfolio assessment, I talked about some of the operational execution improvements we want to drive, really focused on...

Jim Anderson: Driving better, for instance, gross margin, better profit margins, and obviously that yields better cash flow, which would help us accelerate that pay down. But certainly, delivering the balance sheet is a key focus as well.

Speaker Change #132: And if you allow me for a quick follow-up, I know you talked about gross margins being sustainably above 40 is how you're thinking about the business. If you sort of look at the gross margins today, do you think

Karl Ackerman: Thank you.

Operator: Thank you.

Jim Anderson: Thank you.

Karl Ackerman: Cool.

Jim Anderson: Cool.

Operator: Our next question comes from Vivek Arya with Bank of America. You may proceed.

Speaker Change #132: The effective sort of the biggest.

Speaker Change #133: Thank you.

Speaker Change #134: Yeah, it's a great question, Samik. And I would say it's really a combination of some of it is underperforming businesses that are significantly, that have gross margins that are significantly below our corporate average. But also, if you set that aside, pricing, I think there's both opportunities on pricing as well as cost structure. And I mentioned this a little bit in my prepared remarks on pricing. I do believe that there's things that we can do to improve our pricing discipline moving forward. And some of those ideas that I'm bringing with me is somewhat what I did in prior companies, where we applied some advanced

Vivek Arya: Thanks for taking my question. Jim, you mentioned a strong order book for your optical transceivers extending several quarters. I'm curious, are you seeing any impact at all, positive or negative, because of changes in NVIDIA's product, you know, schedule, or does that have no impact? Just given the strength in the order book, how does the pricing and gross margin shape up when you look at the next several quarters? Do you think it can improve from here, or do you think that margins in this business may still be, you know, diluted to the overall business?

Speaker Change #134: Think about it as pricing analytics, pricing strategies.

Speaker Change #134: that really are targeted at making sure that we're competitive on price, but also that we're getting fair value for the innovation that we're bringing to markets. I think there's a pricing initiative that we've kicked off around better pricing discipline. I expect that to yield gross margin improvement, but then also cost. Like, I think there's a number of different areas.

Speaker Change #135: across the company where we need to be focused on driving better cost structure. And I mentioned a few of those in the prepared remarks. I think product yields.

Jim Anderson: Yeah, thanks, Vivek. On the first part, on the part that was about the order book, yeah, as I said, we continue to see the order book strengthen. I think you asked about a particular customer. I can't comment on that particular customer or really any particular customer, but I can say that, you know, in aggregate, we're continuing to see, again, the order book strengthen and demand growing, which is good. On the pricing and gross margin, you know, in general, what we would usually see in the transceiver market is the newer speed grades, like 800 and then, you know, soon to be 1.6, generally carry higher gross margins than the older speed grades, right?

Speaker Change #135: We have improvement to drive there, asset utilization, and then I think the third area that I mentioned was better make versus buy decisions, making sure that we're leveraging the bigger ecosystem where it makes sense and making sure that we're applying our assets.

Speaker Change #136: to where we're driving greatest differentiation or that's providing our customers some sort of significant advantage. But that's sort of the three different areas I'm thinking about in terms of gross margin improvement.

Speaker Change #137: Great. Thank you. Thanks for taking my questions.

Speaker Change #138: Thanks, Samik.

Speaker Change #139: Thank you. Our next question comes from Jeff Kochi with Raymond James. You may proceed.

Speaker Change #139: Yeah, thanks. This is Jeff Kochi for Simon Leopold. I just want to hit on the gross margin a little bit deeper. Maybe we can talk about the glide path and, you know, like, what kind of time frame do you see getting to that 40% plus range and, you know, really hitting on maybe that five or

Speaker Change #140: versus make decision you know you had a competitor or your competitors last night talking about EML the Indian phosphide lasers you know being booked out through the end of

Speaker Change #141: 2025 is in the 200 gig per lane. Maybe just update your thoughts around that for in-house production there. Thank you.

Speaker Change #142: Yeah, thanks, Jeff. On the first part of your question, the glide path, that's definitely a topic that we want to cover at that investor day that I mentioned. So we'll be scheduling that.

Jim Anderson: The older speed grades, you know, are usually become commoditized over time. To the extent that we're ramping the newer speed grades, that's certainly generally a tailwind for us. You know, a lot of my comments on earlier on gross margin are really focused at the aggregate company level. Not just in Datacom, but at the aggregate company level, I believe that there's opportunity for us to improve our pricing discipline, to have a better optimized pricing strategy across the company, across all of our product lines. You know, there's a number of cost structure improvements that I think the company has opportunity to improve, not just in Datacom, but across some of our other product lines as well.

Speaker Change #142: in the coming quarters. And what we'll do as part of that investor day is...

Speaker Change #143: Ananda Baruah, Simon Leopold, Jim Ricchiuti, Ananda Baruah, Ananda Baruah, Samik Chatterjee,

Speaker Change #143: You know, the time frame to achieve that business model target, including the gross margins.

Speaker Change #143: But this will definitely be a key focus area for us moving forward. And look, gross margin improvement takes time. Whether it's pricing or cost reductions, those take work. But we're determined to drive a steady road map of improvement moving forward. So you'll hear more about...

Speaker Change #143: from us.

Speaker Change #143: around the timing of those gross market improvements in the quarters ahead. And then on the second part of your question, make versus buy, look, I think the way to think about this is one of the benefits that Coherent has versus our competitors, and it's a benefit that our customers

Speaker Change #143: See every day is there's a number of places where we're vertically integrated and where we build, for instance, not just the DataKon transceiver, but we build a number of the components that go into that transceiver. And to the extent that that provides us

Speaker Change #143: differentiation or faster time to market or generates

Speaker Change #143: Real value for our customers. That's fantastic. And we will continue to do that. But when I want to make sure that we're careful about

Speaker Change #143: is not just building it internally for the sake of building it internally, but to the extent that there's external providers or an ecosystem that we can leverage.

Speaker Change #143: That's competitive in terms of technology and cost with the internal option. I'd rather use those resources to focus those on areas that we can truly differentiate and add value for our customers. So I just want to make sure that we're being objective moving forward on make versus buy and being smart about how we leverage.

Vivek Arya: Thanks. For my follow-up, you're guiding, you know, the current quarter roughly kind of flat sequentially. What are the puts and takes from the different segments? I know you're not guiding to December, but should we assume that those same end market trends follow in December also? Do you think that there is, you know, the prospect for, you know, some sequential improvement as we look at December just from a broad end market perspective? Thank you.

Speaker Change #144: Thank you.

Speaker Change #144: Got it. Appreciate it.

Speaker Change #144: Thank you.

Speaker Change #144: Thanks, thank you. Thanks, Jed.

Speaker Change #145: Our next question comes from Tom O'Malley with Barclays. You may proceed.

Speaker Change #146: I realize, you know, you just joined the business, and there were a lot of metrics kind of floating around, and I'm sure you don't want to marry yourself to any of those right away, but in your initial days at the business, clearly, you know, the big growth engine at Coherent has been this 800G ramp, and then

Jim Anderson: Yeah. Vivek, on the September quarter, the one that we currently guided, we guided roughly flat sequentially. We would expect the Datacom business, as we were just talking about, to be sequentially up. Some of our other businesses tied to the telecom and the industrial markets to be sequentially either flat or sequentially down. That offsets some of the Datacom growth. If you look at the midpoint of our guide, obviously our guide is a range, right? That's what we're seeing for the current quarter that we're in. For the December quarter, I'll probably save those comments until the next earnings call.

Speaker Change #147: you know, in the future, potentially the 1.6 T ramp as well. But when you look at kind of, you know, what was advertised to you, when you were first looking at this job, and then kind of got underneath the covers and looked at that optical opportunity, could you maybe speak qualitatively about your expectations?

Speaker Change #148: In that business, I understand that you'll have an annual stay and maybe put some more numbers on it, but just broadly, you know, your feelings on that business and what that growth engine could look like for Coherent over the next couple of years, and then I had a follow-up.

Speaker Change #149: Yeah, thank you, Tom, for the question. Yeah, the short answer is it's better than I thought before I joined the company. So I had a sense of always as coherent as a leader in optical transceivers, specifically for Datacom. And obviously, you know, there's tremendous buildout happening now with AI data centers. And I had my own sense of what that sort of growth trajectory would look like before I joined the company. It's stronger than what I had thought. And we've seen just over the last, I would say, gosh, you know, four to six weeks, as I've spent a lot of time with our top customers,

Jim Anderson: We'll give more insight into what we're seeing in Q4 and maybe into the beginning of the next calendar year as well.

Vivek Arya: Thank you.

Operator: Thank you. Our next question comes from Atif Malik with Citi. You may proceed.

Jim Anderson: Thank you.

Operator: Our next question comes from Atif Malik with Citi. You may proceed.

Speaker Change #149: across all of our different product lines, but especially in our data comp business. I've gotten a much better sense for the opportunity that's in front of us. And I would say it's a very strong opportunity. And we continue to see...

Papa Talla Sylla: Thank you. This is Papa Talla Sylla for Atif Malik. Thank you for taking my question. I guess my first question was around the industrials business. I guess just looking at it sequentially, we saw a little bit of a deceleration versus last quarter. We were just wondering if you can touch a little bit on the puts and takes there or perhaps just touch on, A, that last quarter kind of saw some difficulties such as precision manufacturing, EUV, semicap backend, and how they are doing this quarter.

Speaker Change #149: Demand strengthening forecasts.

Speaker Change #149: Strengthening, Billings, Backlogs. So, yeah, we view this as a really key growth area for the company. The 800 gig grant is very exciting for us. And then also, I was really pleased with the team's

Speaker Change #149: execution on the 1.6T. They delivered samples of 1.6T just over the past few weeks, months. I think that was a key milestone for us.

Speaker Change #149: and we're looking forward to ramping 1.6T next year.

Speaker Change #149: But yeah, I think it's an exciting growth area for the company. Now, I'll say that, but I also want to make sure that we recognize that there are other growth areas within the company as well. I know I'm excited about Datacom and AI data centers. But there's a number of other.

Speaker Change #149: Good areas of growth within the company. I mentioned a few of them in my prepared remarks. So one of the things I think is strength of coherent is not that it's just the innovation that I talked about, but we do have a wide portfolio of growth, growth opportunities across our other businesses as well. And I think that makes for a really strong long term portfolio. That's a diversified portfolio of growth moving forward. So, and yeah, definitely, I'll share more thoughts on all of those. Those growth engines at that investor day.

Jim Anderson: Yeah. Thanks for the question. On kind of the broad base of industrials, in aggregate, we did see a little bit of sequential improvement in aggregate, in the industrials from Q3 to Q4. Moving into the current quarter, as I just mentioned on the prior question, we're assuming that both the telecom as well as the industrial space are either kind of flat sequentially or there's some segments that are sequentially down. We're assuming that offsets some of the Datacom sequential growth that we're expecting in the current quarter.

Speaker Change #150: Perfect. And then the second one is just a little more tactical in regards to kind of what we heard last night from your competitor, who was talking about an improving telecom market into the September quarter. It sounded as though you were a little more cautious. Can you describe what you're seeing from those customers just in the short term? This is less of kind of a long-term strategic question, but just a sense check on, you know, are you seeing that market recovering with legacy products? Are new product introductions kind of picking up? That's what was kind of echoed last night. Newer products kind of growing at customers. Just the puts and takes on what you're seeing in the telecom market, just because visibility has been pretty bad, inventory levels have been high. Where are we at in that correction kind of off the bottom? Thank you.

Speaker Change #151: Yeah, thanks, Tom. And I'm going to separate it out into just purely end market comments versus I'll come back and talk about some of the new products that we have ramping here. So just purely end market. Yeah, I guess we're taking a more cautious view on the market.

Papa Talla Sylla: Got it. For my quick follow-up, I wanted to touch a little bit on the AI front, particularly on the laser front of things for 1.6T. I guess our understanding is that from an industry-wide perspective, all three technologies, VCSEL, EML, SiPhO, have their own pockets of demand. We were just wondering from your end, can you touch on engagement across those three and kind of what those mix look like currently and then what they might look like maybe 2, 3 quarters down the line?

Speaker Change #151: I don't believe that we're completely out of the woods as an industry on the telecom market. Significant destocking has happened in that market, and that's good. The telecom market has built up significant inventory. I think most of that destocking is largely behind us. But I think there are still pockets.

Speaker Change #151: of inventory that are out there. And so our whole look on the telecom market through the next, I would say at least six months.

Speaker Change #152: and probably into the following six months is a bit more of a cautious outlook. Now, it could be that we're wrong and it ends up being better or stronger than that, but we're taking a more cautious view on that. Now, that's all in-market comments. Now, set that aside, I'll switch over to...

Speaker Change #152: We do have a number of new products that are ramping that are pretty exciting. And I mentioned in the prepared remarks, the

Jim Anderson: Yeah. I think, you know, one of the great things about Coherent is, look, we have a really wide portfolio of technology. You know, we develop our own VCSELs, we manufacture our own VCSELs. We do the same in EML, indium phosphide, we develop and manufacture in-house. So we both develop and manufacture a number of those lasers in-house. But then, where it makes sense, we also source some of those lasers externally as well, right? For 1.6, you know, or any technology beyond that as well, we'll always make best use of whatever we think is the best technology to bring the most advanced, most innovative product to market for our customers.

Speaker Change #152: The both the 100 gig and then the 400 gig ZR and ZR plus that will ramp throughout the course of this year. And obviously, since a ramping of the course of this year, they have a bigger impact in the in the second half of our fiscal year. So I think that we do have some growth tailwinds behind us.

Speaker Change #152: in terms of our own products, but I think in terms of the market, we're expecting that to continue to be soft.

Speaker Change #152: Thanks Tom. I'll go to the next question. Thank you.

Speaker Change #153: Our next question comes from Meta Marshall with Morgan Stanley. You may proceed.

Speaker Change #154: Thank you. And on the first part of your questions on the materials business, yeah, we did see some pickup in the materials business from Q3 to Q4.

Speaker Change #154: to Q4. And you're right, actually, a good chunk of that was

Speaker Change #155: The production issues that we had had on silicon carbide in Q3.

Speaker Change #155: We were able to catch up on on those issues or on those issues or catch up on that demand in Q4 And so we had a little bit of depressed demand or depressed shipments in Q3 We were able to catch up on that in Q4. So some of that

Jim Anderson: Whatever gives us the biggest, technical, advantage versus our competition and the biggest, differentiation for our customers, we'll always select that technology. Whether it's developed in-house or whether we source it externally, we'll select the best technology that benefits our customers. I think I probably won't give any prognostication on 1.6 and how much of it will be VCSEL versus other technologies. You know, we'll probably share more about that as we get closer to 1.6, you know, production ramp.

Speaker Change #156: sequential gain is yes certainly due to that silicon carbide catch-up. And then on the second part of your question, I caught that it was on Datacom, but I didn't quite hear the end of the question. Would you mind repeating the end of that Datacom question?

Speaker Change #157: Yeah, just demand for kind of the non AI speeds or the kind of sub 400 gig. I know that had been an area of more depressed demand, but if you're seeing any changes there.

Speaker Change #158: Got it. Okay, the sub-400 gig. We're expecting that to be relatively stable, so we don't expect to see any huge growth from that or any huge decline. We're modeling that moving forward as relatively stable.

Speaker Change #158: Great, thank you so much.

Speaker Change #158: Our next question comes from Carl Ackerman with BNP Paribas. You may proceed.

Carl Ackerman: Thank you. Jim, you spoke about the need to have less transactional revenue and the ability to improve pricing going forward.

Carl Ackerman: Given your innovation and leadership in high-speed optical transceivers,

Papa Talla Sylla: Got it. Thank you.

Operator: Thank you. Our next question comes from Ruben Roy with Stifel. You may proceed.

Jim Anderson: Thank you.

Operator: Our next question comes from Ruben Roy with Stifel. You may proceed.

Carl Ackerman: Yeah, thanks, Carl. So, definitely we're seeing, you know, we have very good breadth of customers. You know, if you look at 800 gig,

Ruben Roy: Thank you. Hi, Jim. I wanted to know you had a lot of questions on the strategy, and I appreciate the commentary, high level, Jim. I wanted to just maybe talk about pricing optimization one more time. You know, you talked about some successful turnarounds that you've had, and I've watched the last one, which was tremendous and in short order. I'm just wondering if you could comment a little bit, given that, you know, the breadth of products and markets, you know, customers, et cetera, is a lot different, I think at Coherent than, you know, at the last turnaround that you were working on.

Carl Ackerman: extending visibility. Yeah, our visibility or

Carl Ackerman: Thank you.

Speaker Change #159: Thank you.

Speaker Change #160: Our next question comes from Vivek Arya with Bank of America. You may proceed.

Vivek Arya: Thanks for taking my question. Jim, you mentioned the Strong Water book for your optical transceivers extending several

Speaker Change #161: I'm curious, are you seeing any impact at all, positive or negative, because of changes in NVIDIA's product schedule, or does that have no impact?

Ruben Roy: Just, you know, how are you thinking about timing and, you know, kind of is this a, you know, multi-year strategy from an optimization strategy to get some of those margins that you wanna get to? Or any, you know, kind of high-level commentary on that would be helpful.

Speaker Change #162: And then, just given the strength and the order book.

Speaker Change #163: How does the pricing and gross margin shape up when you look at the next several quarters? Do you think it can improve from here, or do you think that margins in this business may still be dilutive to the overall business?

Speaker Change #164: Yeah, thanks, Vivek. On the first part...

Speaker Change #165: on the part that was about the order book. Yeah, we continue, as I said, we continue to seek order book strength. And I think you asked about a particular customer.

Jim Anderson: Yeah. Thanks, Ruben. Look, all, you know, businesses. Coherent is a different business. You know, every business has its own dynamics and Coherent itself has a wide range of different businesses within its portfolio. It's a little bit different business by business. You know, as I spend time with both our business leaders, our general managers, our sales team, as well as time with our customers, I do think there's opportunity for us to be better in terms of our pricing discipline and how we price our products in the market. Again, finding and striking that right balance between being competitive in the market, but making sure we get paid for the innovation that we drive.

Speaker Change #165: I can't comment on that particular customer, or really any particular customer, but I can say that, you know, in aggregate,

Speaker Change #165: We're continuing to see, again, the order book strength and demand growing, which is good. On the pricing and gross margin, you know, in general...

Speaker Change #166: What we would usually see in the transceiver market is the newer, the newer speed grades.

Speaker Change #166: like 800 and then soon to be 1.60, generally carry higher gross margins than the older speed grades, right? The older speed grades.

Speaker Change #166: are usually become commoditized over time and so to the extent that we're ramping the newer speed grades that's certainly generally a tailwind for us.

Speaker Change #166: But, you know, a lot of my comments earlier on Gross Margin are really focused at the aggregate company level.

Speaker Change #166: Not just in Datacom, but at a company level, I believe that there's opportunity for us to improve our pricing discipline, to have a better optimized pricing strategy across the company, across all of our product lines, and then also, you know, there's a number of cost structure improvements

Speaker Change #166: that I think the company has opportunity to improve, not just in Datacom, but across some of our other product lines as well.

Speaker Change #166: And for my follow-up...

Speaker Change #167: So you're guiding, you know, the current quarter roughly kind of flat sequentially, what are the puts and takes from a different, from the different segments? And I know you're not guiding to December, but should we assume that those same end market trends

Speaker Change #168: follow in December also? Or do you think that there is the, you know, the prospect for, you know, some sequential improvement as we look at December, just just from a broad end market perspective? Thank you.

Jim Anderson: I think that there are some approaches, strategies, tactics, and analytics that I've used in my past across multiple different businesses that I think are universal and can be applied to some of the businesses within Coherent as well. That's, you know, certainly what we're working on now. We've kicked off already the sort of bigger pricing optimization strategy work. We're driving that across the company. Now that does take time. It's not something that turns on like a light switch. Some of those initiatives take longer time to achieve. Some of those are near term, some can provide short-term benefit, but there's a wide range of initiatives that we're beginning to drive, and those will yield benefit over time.

Speaker Change #169: Yeah, but back on the September quarter, the one that we currently guided, yeah, we guided roughly... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ...

Speaker Change #170: flat sequentially. We would expect the data con business, as we're just talking about, we would expect the data con business to be sequentially up.

Speaker Change #170: but some of our other businesses tied to the telecom.

Speaker Change #170: and the industrial markets to be either flat or sequentially down. And so that offsets some of the Datacom growth. And if you look at the midpoint of our guide, obviously our guide is a range, right? And that's what we're seeing for the current quarter that we're in. For the December quarter, I'll probably save those comments until the next arena's call. We'll give more insight into what we're seeing in the December quarter and maybe into the beginning of the next calendar year as well.

Speaker Change #170: Thank you. This has been good.

Speaker Change #171: Our next question comes from Atif Malik with Citi. He may proceed.

Speaker Change #171: Thank you. This is Papa Phila for ATIF. Thank you for taking my question. I guess my first question was around the industrial business.

Papa Phila: I guess just looking at it sequentially, we saw a little bit of a deceleration.

Speaker Change #173: So we were just wondering if you can touch a little bit on the percentage there, or perhaps just touch on areas that last quarter kind of saw some difficulties, such as precision manufacturing, UV, semi-cap back end, and how they are doing this quarter.

Speaker Change #174: Yeah, thanks for the question. Yeah, I'm kind of the broad base of industrials in aggregate. We did see a little bit of sequential improvement in aggregate in the industrials from Q3 to Q4, but moving into the current quarter, as I just mentioned on the prior question, we're assuming that both the telecom as well as the industrial space are either kind of flat sequentially or there's some segments that are sequentially down. And that offsets, we're assuming that offsets some of the data sequential growth that we're expecting in the current quarter.

Jim Anderson: As I mentioned earlier, when we get to the Investor Day and we give our longer term business model targets, including gross margin, we'll give some sense about what we think the progression towards those business model targets, including gross margin, will be over time.

Speaker Change #175: Got it. And for my quick follow-up, I wanted to touch a little bit on the...

Speaker Change #176: AI front, on the laser front of things for 1.6D.

Speaker Change #177: So, I guess our understanding is that from an industry-wide perspective.

Ruben Roy: Very helpful. Thanks. Thanks, Jim. I guess just a quick follow-up. It sounds like you're saying that you started some of these actions. Are there any other strategic actions that you've implemented, you know, currently, or is most of it on the come?

Speaker Change #178: All three technologies, so Vixel, EML, Sifo, have their own pockets of demand. So we were just wondering, from your end, can you touch on engagement across those three and kind of what those mix look like currently and what they might look like maybe two, three quarters down the line?

Jim Anderson: Definitely in the category of gross margin expansion, we've initiated a number of, as I mentioned, pricing optimization strategies. We're also working on product cost. We also kicked off a number of focused product cost activities. That's something we're driving with sort of equal focus is how do we drive better product cost structure within the company. You know, given that we're a manufacturing company, there's a lot of knobs for us to turn in terms of driving better cost structure, whether that's better asset utilization, higher yields for our products, et cetera. There's a number of different places we're focused to drive better product cost structure moving forward.

Speaker Change #179: Yeah, I think, you know, one of the great things about Coherent is, look, we have a really wide portfolio of technology.

Speaker Change #180: And so, you know, we develop our own Vixels, we manufacture our own Vixels, we do the same in EML.

Speaker Change #180: Indian phosphide, we develop and manufacture in-house.

Speaker Change #180: So we both develop and manufacture a number of those lasers in-house. But then, where it makes...

Speaker Change #181: We also source some of those lasers externally as well, right? And so for 1.6T, you know, we'll, or any technology beyond that as well, we'll always make best use of whatever we think is the best technology to bring the most advanced, most innovative product to market for our customers. Whatever gives us...

Speaker Change #181: the biggest technical.

Speaker Change #181: advantage versus our competition and the biggest differentiation for our customers, we'll always select that technology. Whether it's developed in-house or whether we source it externally, we'll select the best technology that benefits our customers. So I think I probably won't give any prognostication on 1.6T and how much of it will be Vixel versus other technologies, but we'll probably share more about that as we get closer to 1.6T production RAM.

Speaker Change #181: Thank you.

Speaker Change #181: Our next question comes from Ruben Roy with Stiefel. You may proceed.

Speaker Change #182: Thank you and hi, Jim. I wanted to

Speaker Change #183: Thank you. Thank you. I'm very much looking forward to it. Thank you.

Ruben Roy: All right. Thank you.

Operator: Thanks, Ruben.

Jim Anderson: Thanks, Ruben.

Speaker Change #184: I know you had a lot of questions on...

Ruben Roy: Thank you.

Operator: Our next question comes from Jack Egan with Charter Equity Research. You may proceed.

Speaker Change #185: the strategy and I appreciate the commentary uh high level uh Jim but I wanted to um

Jack Egan: Hey, guys. Thanks for taking the questions. I just wanted a follow-up. Last quarter, you mentioned a 30% increase in bookings for the laser segment, but it's still, you know, revenue-wise, it's still been kinda hovering in the $355 million range for the past three quarters. I was just curious, is that due to those various positives and negatives in the industrial and telecom sectors or markets kind of offsetting each other? Or is there anything else at play there?

Speaker Change #186: Just maybe talk about pricing optimization one more time and

Speaker Change #187: You know, you talked about some successful turnarounds that you've had, and I've watched the last one, which was tremendous, and in short order, and I'm just wondering if you could comment a little bit

Speaker Change #188: Given that, you know, the breadth of products and markets, you know, customers, etc. is a lot different.

Speaker Change #189: I think it's coherent than, you know, at the last, you know, turnaround that you were working on. So just, you know, how are you thinking about timing and, you know, kind of is this a multi-year strategy from an optimization strategy to get some of those margins that you want to get to or any, you know, kind of high-level commentary on that would be helpful.

Jim Anderson: Yeah. Thanks, Jack. It's actually due more to the time from when a booking is made in lasers to when it's shipped. Those are generally longer lead times, and so it has more to do with just the natural lead time of that business. There's latency from when those bookings are placed until when the product is actually shipped. It's more about just the natural lead times of that business.

Speaker Change #190: Yeah, thanks, Ruben. Look, all, you know, businesses... ... ... ... ... ... ...

Speaker Change #191: Coherence is a different business. You know, every business has its own dynamics and Coherence itself has a wide range of different businesses within its portfolio.

Speaker Change #192: So, it's a little bit different business by business, but as I spend time with both our business leaders, our general managers, our sales team, as well as time with our customers, I do think there's opportunity for us to

Speaker Change #193: To be better in terms of our pricing discipline and how we price our products in the market.

Speaker Change #193: And again, finding and striking that right balance between being competitive in the market, but making sure we get paid for the innovation that we drive. And I think that there are some approaches, strategies, tactics, and analytics.

Speaker Change #193: that I've used in my past across multiple different businesses.

Speaker Change #193: that I think are universal and can be applied to...

Speaker Change #193: to some of the businesses within Coherent as well. And so that's, you know, that's certainly what we're working on now. We've kicked off already that sort of bigger pricing optimization strategy work. We're driving that across the company. Now, that does take time. It doesn't, it's not something that turns on like a light switch. Some of those initiatives...

Jack Egan: Got it. Okay. With the silicon carbide CapEx kind of out of the equation now, I was, you know, wondering where are your CapEx priorities now other than expanding 800G?

Speaker Change #193: take longer time to achieve. Some of those are near-term, some can provide short-term benefit, but there's a wide range of initiatives that we're

Speaker Change #193: We're beginning to drive and to mostly yield benefit over time. And as I mentioned earlier, when we get to the investor day and we give our longer term business model targets, including gross margin, we'll get some sense about what we think the progression towards those business model targets, including gross margin, will be over time.

Jim Anderson: Yeah. I would say the number one priority in terms of CapEx, setting aside silicon carbide, is making sure that we have the capacity in place to support the growing demand that we're seeing in the Datacom business. You know, right now, 800G capacity, but we're also building out 1.6T capacity as well and making sure we're ready for that ramp. Yeah, I would say that's our priority one right now in terms of capital expense.

Speaker Change #194: Very helpful. Thanks. Thanks, Jim. And I guess just a quick follow-up. It sounds like you're saying that you started some of these actions. Are there any other strategic actions that you've implanted currently or is most of it on the come?

Speaker Change #195: Definitely, in the category of gross margin expansion, we've initiated a number of, as I mentioned, pricing optimization strategies, but we're also working on product cost. So we also kicked off a number of focused product cost activities, and that's something we're driving with sort of equal focus.

Speaker Change #195: Yes.

Speaker Change #196: How do we drive better product cost structure within the company? And, you know, given that we're a manufacturing company, there's a lot more, there's a lot of knobs for us to turn in terms of driving better cost structure, whether it's better asset utilization.

Speaker Change #196: higher yields for our products, et cetera. There's a number of different places we're focused to drive better product cost structure moving forward.

Operator: Thank you, Jack.

Paul Silverstein: Thank you, Jack.

Speaker Change #197: Thanks, Ruben.

Jim Anderson: Thanks, Jack.

Speaker Change #198: Thanks, Richard.

Operator: Thank you. Our next question comes from Ananda Baruah with Loop Capital. You may proceed.

Speaker Change #198: Our next question comes from Jack Egan with Charter Equity Research. You may proceed.

Speaker Change #199: Hey guys, thanks for taking the questions. I just had one in a follow-up so

Ananda Baruah: Hey. Yeah, thanks guys. Good afternoon. Thanks for taking the question. Yeah, Jim, great to meet you. Look forward to working with you. Just one for me. Do you have any thoughts, Jim, on this transceiver question, early thoughts on potential for share gain, you know, kinda share gain percent, over the next couple of years? Have you guys yet begun to see the big data center customers begin to sorta index more towards US-based transceiver producers? Thanks.

Speaker Change #200: Last quarter, you mentioned a 30% increase in bookings for the laser segment, but it's still, you know, revenue-wise, it's still been kind of hovering in the...

Speaker Change #200: 350

Speaker Change #201: 355 million range for the past three quarters. So I was just curious, is that due to those various positives and negatives in the industrial and telecom sectors or markets kind of offsetting each other? Is there or is there anything else at play there?

Speaker Change #202: Yeah, thanks, Jack. It's actually due more to the time from when a booking is made in lasers to when it's shipped. Those are generally longer lead times, and so it has more to do with just the natural lead time of that business. And there's latency from when those bookings are placed until when the product is actually shipped. So it's more about just the natural lead times of that business.

Speaker Change #203: Got it, okay. And then with the silicon carbide capex kind of out of the equation now, I was wondering where are your capex priorities now, other than expanding 800 gigs?

Jim Anderson: Yeah. Thanks, Ananda. That's a great question. As I've spent time with some of those large data center CSP customers, I think there's clearly opportunity for us to gain share with those customers due to a number of different dynamics. Look, when you look at Coherent, not only are we a technology leader in transceivers, and I think you know, a technology leader that you can rely on over the course of multiple generations, historically and moving forward, but we have an incredibly resilient supply chain. I would say from supply chain resiliency, we are the most resilient supply chain in the industry. I think our big data center, Datacom CSP customers are, if they haven't recognized that already, they're definitely having more appreciation for that.

Speaker Change #204: Yeah, I would say the number one priority in terms of CapEx, setting aside silicon carbide, is making sure that we have the capacity in place to support the growing demand that we're seeing in the Datacom business.

Speaker Change #204: And so, you know, right now 800 gig capacity, but we're also building out 1.6 gig capacity as well and making sure we're ready for that ramp. So, yeah, I would say that's our priority one right now in terms of capital expense.

Speaker Change #205: Thank you, John.

Jack Egan: Thanks, Jack.

Speaker Change #206: Our next question comes from Ananda Baruah with Loop Capital. You may proceed.

Ananda Baruah: Hey, yeah, thanks, guys. Good afternoon. Thanks for taking the question. And yeah, Jim, great to meet you. Look forward to working with you. Just one for me.

Speaker Change #207: Do you have any thoughts, Jim, on, this is a transceiver question, do you have any thoughts, early thoughts on potential for share gain, you know, kind of share gain percent over the next couple of years?

Speaker Change #208: And have you guys, have you yet begun to see the big data center customers?

Speaker Change #209: begin to sort of index more towards U.S.-based transceiver solutions.

Speaker Change #209: Thanks.

Speaker Change #209: Yeah, thanks Ananda, that's a great question.

Jim: As I've spent time with some of those large data center CSP customers, I think there's clearly opportunity for us to gain share of those customers due to a number of different dynamics.

Jim: And look, when you look at Coherent, not only are we a...

Speaker Change #211: technology leader in transceivers and I think you know a technology leader that you can rely on over the course of multiple generations.

Speaker Change #211: Historically, moving forward.

Speaker Change #212: Well, we have an incredibly resilient supply chain, and I would say that from supply chain resiliency, we are the most resilient supply chain in the industry. And so I think our big data center, data cum CSP customers, if they haven't recognized that already, they're definitely having more appreciation for that. So I think the combination of our technology and supply chain resiliency.

Jim Anderson: I think the combination of our technology and supply chain resiliency gives us the opportunity to win significantly more share of wallet with those big customers over the coming quarters and years. Thanks for the question, Ananda.

Speaker Change #213: gives us the opportunity to win significantly more share of wallet with those big customers over the coming quarters and years. So thanks for the question, Ananda.

Speaker Change #213: Yeah, thanks for the context.

Ananda Baruah: Yeah. Thanks for the context.

Speaker Change #213: Thank you. I would now like to turn the call back over to Jim Anderson for any closing remarks.

Operator: Thank you. I would now like to turn the call back over to Jim Anderson for any closing remarks.

Jim Anderson: Thank you, Operator, and thanks again for everybody joining us on our call today. So, just to wrap it up, I'm super excited about the opportunity ahead of us at Coherent, and I want to once again thank all of my new Coherent teammates for all their hard work, dedication, and all the innovation they drive every day.

Jim Anderson: Thank you, operator, and thanks again for everybody joining us on our call today. Just to wrap it up, I'm super excited about the opportunity ahead of us at Coherent. I wanna once again thank all of my new Coherent teammates for all their hard work, dedication, and all the innovation they drive every day. While we have many strengths, we also have areas of opportunity for improvement, to translate our incredible innovation engine and growing market opportunity into outstanding shareholder value creation moving forward. Thanks again for your support and look forward to updating you on our progress moving forward. Operator, that concludes our call.

Speaker Change #214: While we have many streams, we also have areas of opportunity for improvement to translate our incredible innovation engine and growing market opportunity into outstanding shareholder value creation going forward.

Speaker Change #214: Thanks again for your support and look forward to updating you on our progress moving forward. Operator, that concludes our call.

Speaker Change #215: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Q4 2024 Coherent Corp Earnings Call

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