Q1 2025 Coherent Corp Earnings Call

November 6, 2024

Operator: Good day, and thank you for standing by. Welcome to the Coherent Corp FY 25 Q1 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Silverstein, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.

Good day and thank you for standing by, welcome to the coherent Corp FY25 first quarter earnings conference call. At this time, while participants are in a listen-only mode, after the speaker's presentation, they'll be a co-incident answer session, to ask the question during the session you depress star one on your telephone. You will then hear an automated message at Bison your hand as raised.

To withdraw your question, please press star one one again, please be advised so that these conferences being recorded. I would not like to end the conference over to you this week today. Paul Silverstein, Senior Vice President, Investor Relations and Corporate Communication, please go ahead.

Paul Silverstein: Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO, and Sherri Luther, Coherent's CFO. During today's call, we will provide a financial and business review of Q1 of fiscal 2025 and the business outlook for Q2 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.

Paul Silverstein: Thank you, Operators. You did afternoon everyone. We're with you today are Jim Anderson, Coherent CEO , and Sherry Luther Coherent CFO . During today's call, we will provide a financial and business review of the first quarter of fiscal 2025.

Paul Silverstein: and the business outlook in the second quarter of the fiscal 2025. Our earnings press release can be found in the Investual Relations section for company website at coherent.com.

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

Paul Silverstein: We wish you caution you that first statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that become be files with the SEC, including our 10Ks, 10Qs and 8Ks.

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 Q2 of fiscal 2025. If at any time after this call we communicate any material changes to this guidance, we intend that such updates will 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 provide 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.

Paul Silverstein: These documents contain an identifying important risk factors that could cause the actual results of different materialies, for those containing our projections or full-looking statements.

Paul Silverstein: This call includes and constitutes become official guidance for the second quarter of fiscal 2025. If at any time after the call, we communicate any material changes to this guidance, we intend that such updates will be done using a public form such as a press release or public greenhouse conference call.

Paul Silverstein: Rollandford about Gap and Nongap financial measures during this call. By disclosing its certain Nongap information, the answer that it tends to provide in Dutch and some additional information to permit.

Paul Silverstein: Further analysis of the accomplished performance and underlying trends.

Paul Silverstein: 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. Let me now turn the call over to Jim Anderson, our CEO.

Paul Silverstein: Let me now turn the call over to Jim Anderson, our CEO.

Jim Anderson: Thank you, Paul, and thank you everyone for joining today's call. I'd like to begin by welcoming Sherry Luther back to Coherent as our new CFO. Sherry and I previously worked together at Lattice Semiconductor for almost six years, where Sherry did an outstanding job as the CFO. Prior to Lattice, Sherry worked for 16 years in various finance roles at Legacy Coherent before its acquisition. Sherry's proven track record as a CFO, combined with her long history with the company, has allowed her to hit the ground running, and we're very pleased to have her join our team. I also wanna thank Rich Martucci for serving as our interim CFO prior to Sherry's arrival.

Jim Anderson: Thank you, Paul, and thank you everyone for joining today's call.

Jim Anderson: I'd like to begin by welcoming Sherry Luther back to Coherent as our new CFO. Sherry and I previously worked together at Lattice Semiconductor for almost six years, where Sherry did an outstanding job as the CFO. Prior to Lattice, Sherry worked for 16 years in various finance roles at Legacy Coherent before its acquisition.

Jim Anderson: Sherry's proven track record as a CFO, combined with her long history with the company, has allowed her to hit the ground running, and we're very pleased to have her join our team.

Jim Anderson: I also want to thank Rich Martucci for serving as our interim CFO prior to Sherry's arrival. Rich's leadership and dedication have been a tremendous help to me and the company and I'm deeply grateful for his commitment and continued dedication to Coherent.

Jim Anderson: Rich's leadership and dedication have been a tremendous help to me and the company, and I'm deeply grateful for his commitment and continued dedication to Coherent. Now that Sherri's on board, I'm pleased to announce that we'll host an investor and analyst day in New York on 28 May of next year. At that event, we'll outline our overall strategy, including our end market growth opportunities, product and technology roadmap, and long-term financial model. We look forward to the event and sharing more details about our plans to create value for our shareholders. Before I discuss our Q1 results, I'd like to provide an update on the three key areas of improvement that I outlined at our last earnings call: culture, strategy, and execution.

Jim Anderson: Now that Sherry's on board, I'm pleased to announce that we'll host an Investor and Analyst Day in New York on May 28th of next year.

Jim Anderson: At that event, we'll outline our overall strategy, including our end market growth opportunities, product and technology roadmap, and long-term financial model. We look forward to the event and sharing more details about our plans to create value for our shareholders.

Jim Anderson: Thank you for watching!

Jim Anderson: Before I discuss our first quarter results, I'd like to provide an update on the three key areas of improvement that I outlined at our last earnings call.

Jim Anderson: I believe improvements in these three areas will transform our extensive, innovative technology portfolio and our growing market opportunity into an engine of market-leading revenue growth, expanding profitability, and industry-leading shareholder value creation. First, regarding culture. I've now had the opportunity to visit more than 20 of our sites and meet with many of my teammates across the world. We have incredible depth and breadth of talent, and our employees' dedication is inspiring. My favorite part of our culture is our focus on innovation, and we will continue to nurture this fundamental part of our culture. Yet, as I noted last quarter, there is also opportunity to evolve our culture. We're building a faster and more agile company. We've already made numerous changes to simplify and strengthen our organizational structure, empower our leaders, streamline decision-making, and accelerate execution.

Jim Anderson: Culture, Strategy, and Execution.

Jim Anderson: First, regarding culture, I've now had the opportunity to visit more than 20 of our sites and meet with many of my teammates across the world.

Jim Anderson: We have incredible depth and breadth of talent, and our employees' dedication is inspiring.

Jim Anderson: My favorite part of our culture is our focus on innovation.

Jim Anderson: And we will continue to nurture this fundamental part of our culture.

Jim Anderson: Yet, as I noted last quarter, there is also opportunity to evolve our culture.

Jim Anderson: We're building a faster and more agile company.

Jim Anderson: We've already made numerous changes to simplify and strengthen our organizational structure, empower our leaders, streamline decision making, and accelerate execution.

Jim Anderson: Cultural change always takes time, but I'm encouraged by our early progress in this area. Second, regarding strategy. We completed the strategic portfolio review that we initiated in June. This portfolio assessment will be the foundation for making organic and inorganic investment decisions moving forward. We applied a set of strategic and financial criteria to sort each of our product lines into one of four categories, growth engines, profit engines, long-term bets, and non-strategic. We've now moved to the next phase, which is to drive actions based on the strategic assessment. For example, we've already shifted organic investment towards our growth and profit engines, where we have conviction that we can drive strong long-term profit expansion for the company. For instance, we increased investment in new datacom platforms such as next-generation transceivers and our new Optical Circuit Switch.

Jim Anderson: Cultural change always takes time, but I'm encouraged by our early progress in this area.

Jim Anderson: Second, regarding strategy, we completed the strategic portfolio review that we initiated in June. This portfolio assessment will be the foundation for making organic and inorganic investment decisions moving forward.

Jim Anderson: We applied a set of strategic and financial criteria to sort each of our product lines into one of four categories.

Jim Anderson: Growth engines, profit engines, long-term bets, and non-strategic.

Jim Anderson: We've now moved to the next phase, which is to drive actions based on the strategic assessment.

Jim Anderson: For example, we've already shifted organic investment towards our growth and profit engines, where we have conviction that we can drive strong, long-term profit expansion for the company.

Jim Anderson: For instance, we increased investment in new datacom platforms, such as next-generation transceivers and our new optical circuit switch.

Jim Anderson: We've also started the process of divesting or shutting down product lines and assets that are non-strategic. For example, we recently announced the planned sale of our Newton Aycliffe facility, which was an underutilized and non-strategic asset. The proceeds from the sale of the facility were used to pay down our outstanding debt and reduce overhead costs. Another example is our recent announcement that we're exploring strategic options for our battery technology platform. Although our non-strategic businesses represent a relatively small portion of our revenue, they're dilutive to the company's margin structure and absorb investment capital and focus that would be better deployed in our core businesses. As we optimize our portfolio over the coming quarters, we'll provide further updates, including at our upcoming Investor Day. Finally, the third area of focus for improvement is execution. Last quarter, I underscored the opportunity to significantly improve operational efficiency and effectiveness.

Jim Anderson: We've also started the process of divesting or shutting down product lines and assets that are non-strategic.

Jim Anderson: For example, we recently announced the planned sale of our Newton A-Cliff facility, which was an underutilized and non-strategic asset.

Jim Anderson: The proceeds from the sale of the facility were used to pay down our outstanding debt and reduce overhead costs.

Jim Anderson: Another example is our recent announcement that we're exploring strategic options for our battery technology platform.

Jim Anderson: Although our non-strategic businesses represent a relatively small portion of our revenue, they're diluted to the company's margin structure and absorb investment capital and focus that would be better deployed in our core businesses.

Jim Anderson: As we optimize our portfolio over the coming quarters, we'll provide further updates, including at our upcoming Investor Day.

Jim Anderson: Finally, the third area of focus for improvement is execution.

Jim Anderson: Last quarter, I underscored the opportunity to significantly improve operational efficiency and effectiveness.

Jim Anderson: We're tackling the greatest opportunities up front. For example, we've begun engaging our key customers and partners in a much more strategic manner. This approach has already uncovered new areas of long-term growth opportunity with our key customers and partners. Another example is our focus on gross margin expansion. We launched initiatives for pricing optimization and product cost reduction aimed at achieving our goal of operating at a consistent, sustainable gross margin level above 40%. On operating expenses, we are shifting R&D investment to our growth and profit engines, and we are shutting down or divesting highly speculative projects that do not suit our long-term business model. Our go-forward R&D strategy will ensure that investments are focused, efficient, and offer high return. On SG&A, we are focused on driving greater efficiency and leverage.

Jim Anderson: We're tackling the greatest opportunities up front.

Jim Anderson: For example, we've begun engaging our key customers and partners in a much more strategic manner.

Jim Anderson: This approach has already uncovered new areas of long-term growth opportunity with our key customers and partners.

Jim Anderson: Another example is our focus on gross margin expansion.

Jim Anderson: We launched initiatives for pricing optimization and product cost reduction aimed at achieving our goal of operating at a consistent sustainable gross margin level above 40 percent.

Jim Anderson: On operating expenses, we are shifting R&D investment to our growth and profit engines and we are shutting down or divesting highly speculative projects that do not suit our long-term business model.

Jim Anderson: Our Go Forward R&D strategy will ensure that investments are focused, efficient, and offer high return.

Jim Anderson: And on SG&A, we're focused on driving greater efficiency and leverage.

Jim Anderson: Evolving our culture, optimizing our strategic portfolio, and improving our operational execution will put us on a path of sustained market-leading growth, enhanced profitability and cash generation, and a stronger balance sheet. I look forward to sharing more details at our upcoming investor meeting. I'll now switch gears and provide some brief comments on our fiscal Q1 results. Revenue in Q1 increased by approximately 3% sequentially and by 28% year-over-year, driven primarily by strong AI-related datacom transceiver revenue growth, along with improvements in our telecom revenue. non-GAAP gross margin expanded by 49 basis points sequentially, and our non-GAAP EPS grew by 22% sequentially and by well over 4x year-over-year. Let me summarize what we're seeing by our business by end market. In the communications market, Q1 revenue increased by 14% sequentially and by 68% year-over-year.

Jim Anderson: Evolving our culture, optimizing our strategic portfolio, and improving our operational execution.

Jim Anderson: will put us on a path of sustained market-leading growth, enhanced profitability and cash generation, and a stronger balance sheet.

Jim Anderson: I look forward to sharing more details at our upcoming investor meeting.

Jim Anderson: I'll now switch gears and provide some brief comments on our fiscal first quarter results.

Jim Anderson: Revenue in Q1 increased by approximately 3% sequentially and by 28% year-over-year, driven primarily by strong AI-related Datacom Transceiver revenue growth, along with improvements in our telecom revenue.

Jim Anderson: Non-GAAP gross margin expanded by 49 basis points sequentially, and our non-GAAP EPS grew by 22% sequentially, and by well over 4x year-over-year.

Jim Anderson: Let me summarize what we're seeing by our business by end market.

Jim Anderson: In the communications market, Q1 revenue increased by 14% sequentially and by 68% year-over-year. The sequential and year-over-year increases were driven by strong increases in both our Datacom and our Telecom revenue.

Jim Anderson: The sequential and year-over-year increases were driven by strong increases in both our datacom and our telecom revenue. Our Q1 datacom revenue grew by approximately 16% sequentially and by 89% year-over-year, due primarily to AI data center demand. We're very pleased with the continued ramp of our 800G transceivers and the adoption of those products across a broader set of customers. We also continue to make great progress on our 1.6T transceivers. Having delivered initial samples in the preceding quarter, we continue to expect to begin ramping sales of 1.6T datacom transceivers in calendar 2025. We're also investing in a broad portfolio of transceiver ingredient technologies that includes VCSELs, EMLs, and silicon photonics. The breadth of our extensive technology portfolio allows us to deploy the best technology solution for each customer and application.

Jim Anderson: Our Q1 Datacom revenue grew by approximately 16% sequentially, and by 89% year over year, due primarily to AI data center demand.

Jim Anderson: We're very pleased with the continued ramp of our 800 gig transceivers and the adoption of those products across a broader set of customers.

Jim Anderson: We also continue to make great progress on our 1.6T transceivers.

Jim Anderson: We're also investing in a broad portfolio of transceiver ingredient technologies that includes pixels, EMLs, and silicon photonics.

Jim Anderson: The breadth of our extensive technology portfolio allows us to deploy the best technology solution for each customer and application.

Jim Anderson: We showcased this capability at the European Conference on Optical Communication this past September, where we presented a multi-technology datacom transceiver demonstration at 200 gig per optical lane based on both our differential EML and our silicon photonics platforms. We also continue to make great progress on key enabling components such as 200 gig differential EMLs, 200 gig VCSELs, and CW lasers for our silicon photonics solutions. We also recently announced a family of high-efficiency lasers to power 1.6 T optical transceivers based on silicon photonics. Beyond transceivers, our new datacom optical switch platform continues to progress well and is generating significant customer engagement. Our differentiated switch is based on our highly reliable solid-state liquid crystal technology and was recognized at ECOC 2024 with the Best Product Award for Data Center Innovation.

Jim Anderson: We showcased this capability at the European Conference on Optical Communications this past September, where we presented a multi-technology Datacon transceiver demonstration at 200 gig per optical lane, based on both our differential EML and our silicon photonics platforms.

Jim Anderson: We also continue to make great progress on key enabling components, such as 200 gig differential EMLs, 200 gig pixels, and CW lasers for our silicon photonic solutions.

Jim Anderson: We also recently announced a family of high-efficiency lasers to power 1.6T optical transceivers based on silicon photonics.

Jim Anderson: Beyond transceivers, our new Datacom optical switch platform continues to progress well and is generating significant customer engagement.

Jim Anderson: Our differentiated switch is based on our highly reliable solid-state liquid crystal technology and was recognized at ECOC 24 with the best product award for data center innovation.

Jim Anderson: We've shipped sample units to key strategic customers, and we expect to begin ramping revenue in calendar 2025. Shifting to telecom, our revenue increased by 9% sequentially and by 17% year-over-year. Although we continue to take a cautious view of the telecom end market recovery, the sequential revenue growth in Q1 was a combination of end market improvement along with our ramp of new products, especially our new 100G ZR and 400G ZR/ZR+ coherent transceivers. We're in qualification with our high optical output power C-band 800G ZR/ZR+ coherent transceivers, and we recently announced an L-band version to double the capacity of existing fiber infrastructure. In our remaining markets, which are primarily industrial-related applications, aggregate revenue decreased 10% sequentially and decreased 3% year-over-year.

Jim Anderson: We've shipped sample units to key strategic customers, and we expect to begin ramping revenue in calendar 2025.

Jim Anderson: Shifting to telecom, our revenue increased by 9% sequentially and by 17% year-over-year.

Jim Anderson: Although we continue to take a cautious view of the telecom and market recovery, the sequential revenue growth in Q1 was a combination of end market improvement along with our ramp of new products.

Jim Anderson: especially our new 100 ZR and 400 gig ZR ZR plus coherent transceivers.

Jim Anderson: We're in qualification with our high optical output power C-band 800 gig ZR-ZR plus coherent transceivers, and we recently announced an L-band version to double the capacity of existing fiber infrastructure.

Jim Anderson: In our remaining markets, which are primarily industrial-related applications, aggregate revenue decreased 10% sequentially and decreased 3% year-over-year.

Jim Anderson: Within these markets, ongoing strength in display capital equipment was more than offset by weakness in precision manufacturing and other sub-segments. Display strength is being driven by continued strong demand for our excimer lasers for OLED screen manufacturing, which is driven by increased OLED adoption in new laptop and tablet computers. We also booked initial revenue for our new Python annealing lasers that are being deployed in Gen 8 OLED display fabs. Across other industrial-related end market sub-segments, such as precision manufacturing, we experienced demand headwinds in Q1 that were consistent with broader industry trends. Overall, despite some near-term headwinds, we expect the industrial market to be a long-term growth driver for the company as the end markets recover and as our new products continue to ramp.

Jim Anderson: Within these markets, ongoing strength in display capital equipment was more than offset by weakness in precision manufacturing and other sub-segments.

Jim Anderson: Display strength is being driven by continued strong demand for our eczema lasers for OLED screen manufacturing, which is driven by increased OLED adoption in new laptop and tablet computers.

Jim Anderson: We also booked initial revenue for our new Python annealing lasers that are being deployed in Gen 8 OLED display fabs.

Jim Anderson: Across other industrial related and market sub-segments, such as precision manufacturing, we experienced demand headwinds in Q1 that were consistent with broader industry trends.

Jim Anderson: Overall, despite some near-term headwinds, we expect the industrial market to be a long-term growth driver for the company as the end markets recover and as our new products continue to ramp.

Jim Anderson: In summary, after being on board for five months, I'm even more enthusiastic about the opportunity to unlock significant shareholder value based on the depth and breadth of our technology innovation, the size of the market opportunities we address, and the potential to improve our operational execution. We're expecting strong growth in our communications business over the coming quarters, and while some near-term softness persists in our other end markets, we continue to expect fiscal 2025 overall to be a solid growth year for the company. I'll now turn the call over to our new CFO, Sherri Luther.

Speaker Change: In summary, after being on board for five months, I'm even more enthusiastic about the opportunity to unlock significant shareholder value based on the depth and breadth of our technology 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 communications business over the coming quarters, and while some near-term softness persists in our other end markets, we continue to expect Fiscal 2025 overall to be a solid growth year for the company.

Sherri Luther: Thank you, Jim. Let me begin by saying how excited I am to rejoin Coherent, a company with a rich culture of innovation. I want to express my appreciation for the warm welcome I have received from my Coherent teammates. I also especially want to thank Rich Martucci, who has helped me to quickly come up to speed and ensure a smooth transition. As Jim noted, I spent 16 years at Coherent prior to its acquisition. What attracted me to rejoin Coherent was the opportunity to drive significant shareholder value expansion. The company has a solid foundation with its innovative technology and breadth of product portfolios. I see the opportunity to improve profitability in a number of areas. For example, I see opportunity for growth margin expansion, greater operational efficiency in the R&D investments we make, and opportunity for better SG&A efficiency.

Speaker Change: I'll now turn the call over to our new CFO, Sharon Luther.

Sharon Luther: Thank you, Jim. Let me begin by saying how excited I am to rejoin Coherent, a company with a rich culture of innovation.

Speaker Change: I want to express my appreciation for the warm welcome I have received from my coherent teammates. I also especially want to thank Rich Martucci, who has helped me to quickly come up to speed and ensure a smooth transition.

Speaker Change: As Jim noted, I spent 16 years at Coherent prior to its acquisition. What attracted me to rejoin Coherent was the opportunity to drive significant shareholder value expansion.

Speaker Change: The company has a solid foundation with its innovative technology and breadth of product portfolios. I see the opportunity to improve profitability in a number of areas.

Speaker Change: For example, I see opportunity for gross margin expansion, greater operational efficiency in the R&D investments we make, and opportunity for better SG&A efficiency.

Sherri Luther: In addition, capital allocation is key because we need to ensure that we are investing in the product portfolios that drive the highest return for the company while also paying down debt to deleverage our balance sheet as quickly as possible. I look forward to sharing additional thoughts with you at our Investor and Analyst Event in May. Now let me provide a summary of our results. Overall, in Q1, we drove continued sequential improvement in our financial results with solid revenue growth and gross margin expansion, driving strong profitability. With a strong focus on cash and capital allocation, we paid down $118 million of our debt, which reduced our net debt leverage ratio as defined in the credit agreement to 2.4 times.

Speaker Change: In addition, capital allocation is key because we need to ensure that we are investing in the product portfolios that drive the highest return for the company, while also paying down debt to de-leverage our balance sheet as quickly as possible.

Speaker Change: I look forward to sharing additional thoughts with you at our Investor and Analyst event in May.

Speaker Change: Now let me provide a summary of our results.

Speaker Change: Overall, in the first quarter, we drove continued sequential improvement in our financial results with solid revenue growth and gross margin expansion, driving strong profitability.

Speaker Change: With a strong focus on cash and capital allocation, we paid down $118 million of our debt, which reduced our net debt leverage ratio, as defined in the credit agreement, to 2.4 times.

Sherri Luther: Q1 revenue was $1.35 billion, an increase of approximately 3% sequentially and 28% year over year. From a segment perspective, networking revenue increased 12% sequentially and 61% year over year due to AI data center demand. Laser segment revenue decreased 2% sequentially and increased 4% year over year, reflecting relatively stable end market demand. Material segment revenue decreased 15% sequentially and 3% year over year, primarily due to weak automotive end market demand. Our Q1 non-GAAP gross margin was 37.7%, an increase of 49 basis points compared to the prior quarter and an increase of 293 basis points compared to the year-ago quarter. The improvements in gross margin were driven by higher revenue volume, favorable mix, and yield improvements.

Speaker Change: First quarter revenue was $1.35 billion, an increase of approximately 3% sequentially and 28% year-over-year.

Speaker Change: From a segment perspective, networking revenue increased 12% sequentially and 61% year-over-year due to AI data center demand.

Speaker Change: Laser segment revenue decreased 2% sequentially and increased 4% year-over-year, reflecting relatively stable end market demand.

Speaker Change: Material segment revenue decreased 15% sequentially and 3% year-over-year primarily due to weak automotive and market demand.

Speaker Change: Our first quarter non-GAAP gross margin was 37.7%, an increase of 49 basis points compared to the prior quarter, and an increase of 293 basis points compared to the year-ago quarter.

Speaker Change: The improvements in growth margin were driven by higher revenue volume, favorable mix, and yield improvements.

Sherri Luther: Q1 non-GAAP operating expenses were $276 million compared to $266 million in the prior quarter and $234 million in the year ago quarter. The sequential and year-over-year increases were primarily driven by increased R&D investments in our product portfolio as well as variable compensation. 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 Q1 non-GAAP operating margin was 17.3% compared to 17% in the prior quarter and 12.6% in the year ago quarter. Q1 non-GAAP tax rate was 20.3% compared to 25.9% in the prior quarter as a result of non-recurring one-time items.

Speaker Change: First quarter non-GAAP operating expenses were $276 million compared to $266 million in the prior quarter and $234 million in the year-ago quarter.

Speaker Change: The sequential and year-over-year increases were primarily driven by increased R&D investments in our product portfolio, as well as variable compensation.

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

Speaker Change: Our first quarter non-GAAP operating margin was 17.3% compared to 17% in the prior quarter and 12.6% in the year-ago quarter.

Speaker Change: First quarter non-GAAP tax rate was 20.3% compared to 25.9% in the prior quarter as a result of non-recurring one-time items.

Sherri Luther: Q1 non-GAAP earnings per diluted share was $0.74 compared to $0.61 in the prior quarter and $0.16 in the year-ago quarter. We paid down $118 million in debt during the quarter using cash from operations and the proceeds of the sale of our Newton Aycliffe fabrication facility for incremental debt reduction. I will now turn to our guidance for Q2 of fiscal 2025. Revenue is expected to be between $1.33 billion and $1.41 billion. Non-GAAP gross margin is expected to be between 36% and 38%. Total operating expenses are expected to be between $275 million and $295 million on a non-GAAP basis. Tax rate for the quarter is expected to be between 19% and 22% on a non-GAAP basis.

Speaker Change: First quarter non-GAAP earnings for diluted share was $0.74 compared to $0.61 in the prior quarter and $0.16 in the year-ago quarter.

Speaker Change: We paid down $118 million in debt during the quarter using cash from operations and the proceeds of the sale of our Newton A-Cliff fabrication facility for incremental debt reduction.

Speaker Change: I will now turn to our guidance for the second quarter of fiscal 2025.

Speaker Change: Revenue is expected to be between $1.33 billion and $1.41 billion.

Speaker Change: Non-Gap Growth Margin is expected to be between 36% and 38%.

Speaker Change: Total operating expenses are expected to be between $275 million and $295 million on a non-GAAP basis.

Speaker Change: Tax rate for the quarter is expected to be between 19% and 22% on a non-GAAP basis.

Sherri Luther: EPS is expected to be between $0.61 and $0.77 on a non-GAAP basis. In summary, I'm very excited to return to Coherent. I see a bright future with significant opportunity to drive shareholder value expansion, transforming the company's strong foundation in technology and innovative products into a stronger operating model. That concludes my formal comments. Operator, please open the call for Q&A.

Speaker Change: EPS is expected to be between 61 cents and 77 cents on a non-GAAP basis.

Speaker Change: In summary, I am very excited to return to Coherent. I see a bright future with significant opportunity to drive shareholder value expansion, transforming the company's strong foundation in technology and innovative products into a stronger operating model.

Speaker Change: That concludes my formal comments. Operator, please open the call for Q&A.

Operator: Thank you. Ladies and gentlemen, if you have a question or comment at this time, please press star one one on your telephone. If your question has been answered, and you wish to remove yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Samik Chatterjee with J.P. Morgan. Your line is open.

Speaker Change: Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 1 1 on your telephone. If your question has been answered and you were speaking to yourself from the queue, please press star 1 1 again. We will pause for a moment while we compile our Q&A roster.

Speaker Change: Our first question comes from Samik Chatterjee with J.P. Morgan. Your line is open.

Samik Chatterjee: Hi, hi. Thanks for taking my questions. Maybe if I can start with one for Jim, and then I have a quick follow-up. Jim, I think you mentioned it's been now five months since you joined the company. What's been the feedback that you've received from key customers or partners that you've talked to in terms of areas to focus on, areas that they really think Coherent's good and/or even areas they think Coherent can improve on? I have a quick follow-up. Thank you.

Samik Chatterjee: Hi, thanks for taking my questions, and maybe if I can start with one for Jim and then I have a quick follow-up. Jim, I think you mentioned it's been now five months since you...

Speaker Change: Thank you for joining the company. What's been the feedback that you've received from key customers or partners that you've talked to in terms of areas to focus on, areas that they really think Coherent's good, or even areas they think Coherent can improve on? And then I have a quick follow-up. Thank you.

Jim Anderson: Yeah. Thanks, Samik, for the question. Yeah, great question. Always happy to talk about customers. Definitely spent a lot of time with customers over the last 5 months, meeting as many as possible. You know, I'd say that, you know, first of all, I think we have a lot of really strong existing relationships with our big strategic customers across both our networking accounts and our big data center customers, but also our industrial customers as well. In a lot of cases, there's a long history with these customers that's very strong and very positive.

Speaker Change: Yeah, thanks, Samik, for the question. Yeah, great question. Always happy to talk about customers. I've definitely spent a lot of time with customers over the last five months, meeting as many as possible. You know, I'd say that, you know, first of all, I think we have a lot of really strong

Speaker Change: relationships with our

Speaker Change: big strategic customers across both our networking accounts and our big data center customers but also our industrial customers as well and so in a lot of cases there's a there's a long history with these customers that's very strong and very positive.

Jim Anderson: I think when I talk to our customers, the opportunity that we have is to build relationships with those customers that are much more strategic, much more multi-generational long-term engagements to move from solving problems that are right here in the here and now to focusing on much more multi-generational innovation and partnering with our customers on future generations that are one, two, three generations out. I think that's our opportunity to drive a deeper strategic engagement with our key customers moving forward. I think the couple things that I would say are really resonating with our customers when we have those longer term strategic discussions is, I would say, number one, definitely the technology portfolio and roadmap that we can bring to those customers to help drive their innovation.

Speaker Change: I think when I talk to our customers, the opportunity that we have...

Speaker Change: is to build relationships with those customers that are much more strategic, much more multi-generational, long-term engagements. To move from solving problems that are right here in the here and now to focusing on much more multi-generational innovation and partnering with our customers.

Speaker Change: future generations that are one, two, three generations out and so I think that's our opportunity to drive a deeper

Speaker Change: strategic engagement with our key customers moving forward. And I think that the couple things that I would say are really, really resonating with our customers when we have those longer-term strategic discussions is, I would say, number one, definitely the technology portfolio and roadmap.

Speaker Change: that we can bring to those customers to help drive their innovation. But the second area I would highlight too is supply chain resiliency and the breadth and depth of our supply chain.

Jim Anderson: The second area I would highlight too is supply chain resiliency and the breadth and depth of our supply chain. If I just take, you know, for instance, our AI, our big AI data center customers as an example, because that's where we're seeing the fastest growth in our revenue right now. On that first area of technology roadmap, I think our customers really recognize the breadth and the depth of the technology portfolio that we can bring to bear, especially in the optical networking space, where we don't just assemble the modules, but we build a lot of the ingredient components that go into the module, the lasers, whether they're VCSELs or EMLs or silicon photonics that we design, or a lot of the other ingredients that go into those modules.

Speaker Change: And if I take, you know, if I just take, for instance, our, our AI, our big AI data center customers, as an example, because that's where we're seeing the fastest growth in our revenue.

Speaker Change: right now on that first area of technology roadmap.

Speaker Change: I think our customers really recognize.

Speaker Change: The breadth and the depth of the technology portfolio that we can bring to bear, especially in the optical networking space where we don't just assemble the modules, but we build a lot of the ingredient components that go into the module, the lasers, whether they're pixels or EMLs or silicon photonics that we design.

Jim Anderson: The breadth of technology that we can bring for that multi-generational partnership, I think is really unparalleled. Then the second thing, which is definitely becoming more and more important to all of our big strategic customers, is supply chain resiliency. There again, I think we can bring a really differentiated supply chain where we have incredible geographic diversity in terms of our manufacturing footprint. Then our verticalized structure can be a real advantage, especially in a very fast ramp situation, which we're in right now with our data center customers when demand is increasing very quickly. It's really important to have that verticalized strategy and structure that we have, because I think that's really allowed us to supply them in a really reliable way.

Speaker Change: or a lot of the other ingredients that go into those modules. So the breadth of technology that we can bring for that multi-generational partnership I think is really unparalleled. And then the second thing, which is definitely becoming more and more important to all of our big strategic customers is supply chain resiliency.

Speaker Change: And there again, I think we can bring a really differentiated supply chain where we have incredible geographic diversity in terms of our manufacturing footprint. And then our verticalized structure can be a real advantage, especially in a very fast ramp.

Speaker Change: situation which we're in right now with our data center customers when demand is increasing very quickly.

Speaker Change: It's really important to have that verticalized strategy and structure that we have because I think that's really allowed us to supply them.

Jim Anderson: Those are a couple of things that are really resonating with our customers. I think that back to, you know, the high level point would be, you know, our opportunity to really build a much deeper, strategic engagements with our partners moving forward. I think our customers are definitely receptive to that, and that's definitely an area we'll be focused on moving forward.

Speaker Change: in a really reliable way.

Speaker Change: And so a couple of those are a couple things that are really resonating with our customers, but I think that back to, you know, the high level point would be

Speaker Change: You know, our opportunity to really build much deeper strategic engagements with our partners moving forward. And I think our customers are definitely receptive to that, and that's definitely an area we'll be focused on moving forward.

Samik Chatterjee: Got it. My follow-up, I'm just trying to think of the gross margin here and what we should be tying it to the improvement in the gross margins and what we should be tying it to as we move through the year. You are sort of guiding to sequentially a bit better revenue at the midpoint. Should we be tying those improvements to revenue improvement through the year, or should we be thinking about some of the pricing that you've talked about start to sort of accrete to that? Just trying to think about sort of the gross margin trajectories for the rest of the year. Not looking essentially for guidance, but more how to think about what drives it from here on. Thank you.

Speaker Change: Got it, got it. And for my follow-up, I'm just trying to think of the...

Speaker Change: Margin here and what we should be tying it to the

Speaker Change: you are sort of guiding to sequentially a bit better revenue at the midpoint

Speaker Change: Should we be trying those improvements?

Sherri Luther: Yeah. Hi, Samik. I'll take that question. So I'll start off with a little bit of context on Q1, and then talk about the guide for Q2 and then how we're thinking about it a little bit more long term. When you look at Q1, the approximately 50 basis point sequential improvement, we're really pleased with that, and 290 basis point year-over-year improvement, that really came from a few different areas. One was, of course, higher revenue volume contributed. We also had favorable product mix. An example of where we saw that was in our laser segment, where we saw continued strong demand for our excimer lasers for OLED screen manufacturing.

Speaker Change: what drives it from here on. Thank you.

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

Speaker Change: Yeah, hi Samika, I'll take that question. So I'll start off with a little bit of context on Q1 and then talk about the guide for Q2 and then how we're thinking about it a little bit more long term.

Speaker Change: When you look at Q1, the approximately 50 basis points sequential improvement, we're really pleased with that, and 290 basis points year-over-year improvement, that really came from a few different areas. One was, of course, higher revenue volume contributed. We also had favorable product mix.

Speaker Change: An example of where we saw that was in our laser segment, where we saw continued strong demand for our eczema lasers for OLED screen manufacturing.

Sherri Luther: We also had improvements in yield, and we saw that in our Datacom business, where we saw improvements in our transceivers part of that business. Really a few different areas that drove the sequential and year-over-year improvement there. When we look at Q2, the guide for Q2, you know, that is just set as a range, right, 36% to 38%, it is a range. There can certainly be fluctuations on a quarterly basis with respect to gross margin. We did talk about last quarter. Jim mentioned that we launched our gross margin expansion strategy, which includes product pricing optimization as well as product cost reduction.

Speaker Change: We also had improvements in yield, and we saw that in our Datacom business, where we saw improvements in the transceivers part of that business. So, really a few different areas that drove the sequential and year-over-year improvement there.

Speaker Change: When we look at Q2, the guide for Q2, you know, that is a range, right, 36 to 38%, it is a range.

Speaker Change: and there can certainly be fluctuations on a quarterly basis.

Speaker Change: with respect to growth margin. But we did talk about, last quarter, Jim mentioned that we launched our growth margin expansion strategy, which includes product pricing optimization as well as product cost reduction. And so that's an area where we're gonna focus on because we wanna achieve a long-term growth margin of greater than 40%. And so that's really how to think about what our goal is for our long-term growth margin. And we're in the very early stages of that, certainly.

Sherri Luther: That's an area where we're going to focus on because we want to achieve a long-term growth margin of greater than 40%. That's really how to think about what our goal is for our long-term growth margin. You know, we're in the very early stages of that, certainly, but you can be rest assured that we're focused on really driving to that greater than 40% target. When we get to our investor day in May of next year, we'll certainly give more color on the modeling and all of the different elements of that.

Speaker Change: But you can be rest assured that we're focused on really driving to that greater than 40% target. And when we get to our investor day in May of next year, we'll certainly give more color on the modeling and all of the different elements of that.

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

Speaker Change: Thank you for taking my questions.

Operator: One moment for our next question. Our next question comes from Simon Leopold with Raymond James. Your line is open.

Speaker Change: One moment for our next question.

Speaker Change: Thank you for watching!

Jim Anderson: Sure.

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

Simon Leopold: Thank you very much for taking the question. I've got maybe two, one's more thematic, the other more reflective. The first one is I'd like to really see if we can get some thoughts, particularly from Sherry, regarding priorities for the capital structure. It really just sort of weighing the options of delevering, investing in OpEx, maybe making acquisitions. How are you thinking about these? I'll my follow-up is in terms of the strength of the Datacom business. I know previously management had talked about the products below 800 gig, basically 400 gig and below being relatively flattish for the year. I guess what I'm trying to understand is where was the real upside surprise this quarter?

Simon Leopold: Thank you very much for taking the question. I've got maybe two ones more thematic.

Speaker Change: The first one is, I'd like to really see if we can get some thoughts, particularly from Sherry, regarding priorities for the capital structure.

Speaker Change: really just sort of weighing the options of delivering, investing in OPEX, maybe making acquisitions.

Speaker Change: How are you thinking about these? And my follow-up is, in terms of the strength of the Datacom business, I know previously management had talked about the products below 800 gig, basically 400 gig and below.

Speaker Change: , , , , , , , , , , , , , ,

Simon Leopold: Was it really 800 gig and above, or was there more strength from the more traditional products below 400 gig and below? Did that provide any upside, or was it all coming from the higher performance? Thank you.

Speaker Change: more traditional products below 400 gig and below, did that provide any upside or was it all coming from the higher performance?

Sherri Luther: Thank you, Simon. I'll take the first part of the question on capital allocation. I'll let Jim take the second part of that. From a capital allocation perspective, certainly lots of opportunity that I see in this area in joining the company. You know, really the number one priority is in the organic growth of the company and making those investments that drive the highest ROI. You know, Jim mentioned the strategic portfolio review that was undertaken and completed, and we're really in the next phase there, where we're shifting our R&D spend toward those programs that drive the highest ROI for the company in order to drive the long-term growth. That's the number one priority.

Speaker Change: Thank you, Simon. I'll take the first part of the question on capital allocation. I'll let Jim take the second part of that. So, from a capital allocation perspective, certainly lots of opportunity that I see in this area in joining the company. And, you know, really the number one priority is in the organic growth of the company and making those investments that drive the highest ROI. You know, Jim mentioned the strategic portfolio review that was undertaken, that was completed, and we're really in the next phase there where we're shifting our R&D spend toward those programs that drive the highest ROI for the company in order to drive the long-term growth. That's the number one priority.

Sherri Luther: The second priority, and it's a very close second priority, and that is in reducing our debt to deleverage the balance sheet and really overall strengthen the balance sheet. This also serves to reduce the debt service costs that hit our P&L as well. In Q1 of this 2025, we paid down $118 million to reduce our debt and brought our debt leverage ratio down to 2.4 times as defined in the credit agreement. We're pleased with the sequential progress there.

Speaker Change: The second priority, and it's a very close second priority, and that is in reducing our debt to deleverage the balance sheet and really overall strengthen the balance sheet. This also serves to reduce the debt service costs that hit our P&L as well.

Speaker Change: In Q1 of this 25, we paid down $118 million to reduce our debt and brought our debt leverage ratio down to 2.4 times as defined in the credit agreement. So we're pleased with the sequential progress there.

Sherri Luther: In order to pay that down, we did use cash from operations, you know, an incremental component of that payment was the pay down coming from the proceeds of the sale of our Newton Aycliffe fabrication facility that we sold off during the quarter. The sale of that facility really gave us the opportunity to pay down additional debt to further deleverage. I certainly had a history of aggressively paying down debt, and that's something that's gonna continue to be a focus area for me and a very close second priority.

Speaker Change: But in order to pay that down, we did use cash from operations, but, you know, took an incremental or component of that payment was, pay down, was coming from the proceeds of the sale of our Newton-Acliffe facility, fabrication facility, that we sold off during the quarter. And so the sale of that facility really gave us the opportunity to pay down additional debt.

Speaker Change: to further deleverage. And so I certainly have a history of aggressively paying down debt and that's something that's gonna continue to be a focus area for me and a very close second priority.

Jim Anderson: Simon, on the second part of your question around the datacom business. First of all, yeah, we're really pleased with the performance of that part of our business. Just to reiterate, you know, the datacom transceiver business was up 16% sequentially. It was up 89% year-over-year. You're right, we did see growth as well from a sequential basis in the 400G and below transceiver speeds. We did see sequential growth there that was very nice to see. You know, when you look across the customer base, customers are at different stages of adopting the different transceiver speeds. We still have customers that are doing significant volume on 400G and below as well.

Speaker Change: And Simon, on the second part of your question around the Datacom business, first of all, yeah, we're really pleased with the performance of that part of our business. Just to reiterate, you know, the Datacom Transceiver business was up 16% sequentially.

Speaker Change: And it was up 89% year over year. And you're right, we did see growth as well in from a sequential basis in the 400 gig and below transceiver speeds. We did see sequential growth there. That was very nice to see. You know, when you look across the customer base,

Speaker Change: Customers are at different stages of adopting the different transceiver speeds, so we still have...

Speaker Change: customers that are doing significant volume on 400G and below as well and so it's it's really a

Jim Anderson: It's really a mix of different transceiver speeds. Back on 800 gig, I would say, look, we're really pleased with the ramp, the overall ramp of our 800 gig transceivers. The other color I would add is that one of the things I'm really pleased to see is the breadth of customers that we have. The number of customers that are ramping 800 gig has significantly increased. If I look, like, a year ago, it was only maybe a couple customers. Now we have many customers ramping 800 gigs. There's a much bigger diversity of revenue streams underneath that on 800 gig ramp. We do expect 800 gig to continue to grow over the coming quarters as well.

Speaker Change: a mix of different transceiver speeds. And then back on 800 gig, I would say, look, we're really pleased with the ramp, the overall ramp of our 800 gig transceivers. And then the other color I would add is that one of the things I'm really pleased to see

Speaker Change: is the breadth of customers that we have, the number of customers that are ramping 800 gig has significantly increased. If I look like a year ago,

Speaker Change: It was only maybe a couple of customers, now we have many customers ramping 800 gigs. So there's a much bigger diversity of revenue streams underneath that 800 gig ramp. And we do expect 800 gig to continue to grow over the coming quarters as well.

Simon Leopold: Thank you very much.

Jim Anderson: Thanks, Simon Leopold.

Operator: One moment for our next question. Our next question comes from Thomas O'Malley with Barclays. Your line is open.

Speaker Change: Thank you very much.

Speaker Change: Thanks, Simon. One moment for our next question.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Thomas O'Malley with Barclays. Your line is open.

Thomas O'Malley: Hey, guys. Thanks for having me on the call and welcome, Sherri. It's great to have you. I just wanted to ask broadly into the out year. You guys have talked about some strategic alternatives that you guys have taken. You've reviewed the business. You kind of said the review is concluded. You talked about the sale of a facility. You paid down some debt, and then you pointed out specifically the battery business. But I was curious. Is that all that you identified as non-strategic? Could there be additional sales on the way? And just any color you give, I honestly understand that there's an analyst day coming up, but is your intent to give more there, or is that kind of the extent of the non-strategic thus far?

Thomas O'malley: Hey guys, thanks for having me on the call, and welcome Sherry, it's great to have you. I just wanted to ask broadly,

Sherry Luther: Thank you.

Sherry Luther: Into the out year, you guys have talked about some strategic alternatives that you guys have taken, you've reviewed the business, you've kind of said.

Speaker Change: The review is concluded. You talked about the sale of a facility, you paid down some debt, and then you pointed out specifically...

Speaker Change: the battery business but

Speaker Change: I was curious, is that all that you identified as non-strategic? Could there be additional sales on the way? And just any color you give, I honestly understand that there's an annual stay coming up, but is your intent to give more there, or is that kind of the extent of the non-strategic thus far?

Jim Anderson: Yeah. Thanks, Thomas, for the question. No, there are definitely other things that we're working on in the category of non-strategic. As we said, we completed that portfolio assessment. I think it wrapped up pretty much at the end of August, and then we've since moved into execution mode. There's a number of different things that we're looking at. It's just the two examples that I gave in the prepared remarks were from an asset standpoint, the sale of the Newton Aycliffe facility, and then from a product line standpoint, that battery technology platform. There definitely are other things that we're working on within that non-strategic category. We'll certainly share that with investors as at the right time. It's a little premature to share some of that, but we will definitely share that at the right time.

Speaker Change: Yeah, thanks, Thomas, for the question. No, there are definitely other things that we're working on in the category of non-strategic.

Speaker Change: So, as we said, we completed that portfolio assessment, wrapped up pretty much at the end of August, and then we've since moved into execution mode.

Speaker Change: and there's a number of different things that we're looking at.

Speaker Change: And just the two examples that I gave in the prepared remarks were, from an asset standpoint, the sale of the Newton-Acliffe facility, and then from a product line standpoint,

Speaker Change: that battery technology platform. But there definitely are other things that we're working on within that non-strategic.

Speaker Change: And we'll certainly share that with investors at the right time.

Speaker Change: It's a little premature to share some of that, but we will definitely share that at the right time. And then certainly we'll give a better picture at the Investor Day as well. But even between now and the Investor Day, we'll share any key milestones along the way. And then I just want to reiterate what I said in the prepared remarks that,

Jim Anderson: Then certainly we'll give a better picture at the investor day as well. Even between now and the investor day, we'll share any key milestones along the way. Then I just wanna reiterate what I said in the prepared remarks, that even though the overall non-strategic category is a relatively small part of our revenue, again, it is dilutive to our operating margins, and more importantly, it draws away capital and focus from the management team. We are anxious to execute quickly on that to improve focus, to improve where our assets and where our investments are focused.

Speaker Change: You're over it.

Speaker Change: Even though the overall non-strategic category is a relatively small part of our revenue.

Speaker Change: Again, it is dilutive to our operating margins and more importantly it draws away capital and focus from the management team.

Jim Anderson: You know, just beyond just the non-strategic category, you know, in our other categories of, for instance, key growth drivers and key profit drivers, that's a place where we've been adding investment. We've been shifting investment away from the non-strategic areas into the fast-growing areas. Best example of that is the data center AI transceiver growth. We have increased R&D investment in new technology platforms for datacom transceivers. These are new future technology platforms that we're really excited about. As well as the other example I would give would be the optical circuit switching, which we're excited about as well. We're also shifting organic investment towards those high growth, high profitability categories as well. That's certainly already happened or in process as well.

Speaker Change: You know, in our other categories of, for instance, key growth drivers and key profit drivers, that's a place where we've been adding investment. And so we've been shifting investment away from the non-strategic areas into the fast-growing areas. And the best example of that is

Speaker Change: the data center AI transceiver growth and so we have increased

Speaker Change: R&D investment in new technology platforms for datacom transceivers. So these are new future technology platforms that we're really excited about. As well as the other example I would give would be the optical circuit switching, which we're excited about as well. So we're also shifting organic investment towards those high growth, high profitability categories as well. So that's certainly.

Speaker Change: already happened or in process as well.

Thomas O'Malley: Helpful, Jim. The second I had is on 1.6. I think you mentioned calendar year 2025 as a ramp for those transceivers. This is a multi-parter here, so forgive me. Do you think that you'll have any contribution from 1.6 in Q4 of this year? Or are you gonna see any this year? When do you see the volume ramp of 1.6 coming? We've heard from others in the space that there are constraints on the laser side, on the DSP side. Are you seeing any of those constraints?

Speaker Change: Helpful, Jim. And then the second I had is on 1.60, I think you mentioned.

Speaker Change: , Jim Rohn, , , , , , , , , , , , , ,

Speaker Change: Others in the space that there are constraints on the laser side, on the DSP side, are you seeing any of those constraints? And then if you think that the world is kind of ramping on 1.6T, do you guys see kind of more of a silicon photonics world or an EML world as that 1.6T ramp? Sorry for the multi-parter, but I appreciate it.

Thomas O'Malley: If you think that the world is kind of ramping on 1.6, do you guys see kind of more of a silicon photonics world or an EML world as that 1.6 ramps? Sorry for the multi-parter, but appreciate it.

Jim Anderson: Okay. Thanks, Thomas. I'll try to. That was a multi-parter. I'll do my best to get to all of that. At this point, what we're saying is we'll ramp within calendar 2025. Certainly, we're focused, along with our customer, on getting our solution into production as quickly as possible. To the extent that we can ramp sooner, we'll certainly execute as fast as we can. I think I was really pleased that the team delivered samples last quarter. We're working very tightly with our customers, now our lead customers, to get that into production as quickly as possible. But for now, I think I'll leave the expectation at calendar 2025. As we get close to that revenue ramp will certainly share more details about when exactly we expect that ramp and the contribution.

Speaker Change: Okay, thanks Thomas. I'll try to, that was a multi-parter. I'll do my best to get to all of that. So at this point what we're saying is we'll ramp within calendar 25. Certainly we're focused

Speaker Change: along with our customer on getting our solution into production as quickly as possible. So to the extent that we can ramp sooner, we'll certainly execute as fast as we can. I think I was really pleased that the team delivered samples last quarter. We're working very tightly with our customers.

Speaker Change: Now our lead customers to get that into production as quickly as possible and but for now I think I'll leave the expectation at calendar 25 and as we get close to that that revenue ramp will certainly share more details about when exactly we expect that ramp and the contribution and then with respect to the the specific technology that we're using

Jim Anderson: With respect to the specific technology that we're using, what I would say is I think one of our real strengths and something that really differentiates us as an optical networking technology provider is the breadth of technology that we can bring to bear, right? We look at it as, you know, we'll deploy whatever the best technology is for the benefit of the customer and the application that we're trying to drive. Whether that's an EML, VCSEL, or silicon photonics, we're developing all of those different options, and we'll deploy whatever technology is strongest to create the biggest differentiation for our products and the biggest benefit for our customers. That's kinda the approach that we take to the technology.

Speaker Change: What I would say is, I think one of our real strengths, and something that really differentiates us

Speaker Change: As a technology, as an optical networking technology provider is the breadth of technology that we can bring to bear right. We, we look at it as

Speaker Change: You know, we'll deploy whatever the best technology is.

Speaker Change: for the benefit of the customer in the application that we're trying to drive. So whether that's...

Speaker Change: and EML, Bixel, or Silicon Photonics.

Speaker Change: We're developing all of those different options, and we'll deploy whatever technology is strongest to create the biggest differentiation for our products and the biggest benefit for our customers. So that's kind of the approach that we take to the technology. And I think we've got the broadest set of technology options of certainly any of our peers and competitors. So I think that's a real competitive strength for us.

Jim Anderson: I think we've got the broadest set of technology options of certainly any of our peers and competitors. I think that's a real competitive strength for us.

Operator: Thank you. One moment for our next question. Our next question comes from Meta Marshall with Morgan Stanley. Your line is open.

Speaker Change: Thank you. One moment for our next question.

Speaker Change: Thank you.

Speaker Change: Thank you. Bye. Bye.

Speaker Change: Our next question comes from Meta Marshall with Morgan Stanley. Your line is open.

Meta Marshall: Great. Thanks. Maybe a couple questions for me. You know, you mentioned some strength out of telecom in the quarter. Just wondered, you know, is that more Asia-based or US-based? As a second question, you know, you had mentioned kind of some increase in yields as a reason for the upside on gross margins in the quarter. I wanted to get a sense of, is that some of the kind of tailwinds from some of the yield disruptions we saw in fiscal Q3 earlier this year, or is that just kind of additional improvements you guys have made to the business? Thanks.

Meta Marshall: Great, thanks. Maybe a couple questions for me. You know, you mentioned some strengths out of telecom.

Speaker Change: in the quarter. Just wondered, you know, is that more Asia-based or U.S.-based?

Speaker Change: And then as a second question, you know, you had mentioned kind of some increasing yields for reason for upside or gross margins in the quarter. I wanted to get a sense of, is that some of the kind of tailwinds from some of the yield disruptions we saw in fiscal Q3 earlier this year, or is that just kind of additional improvements you guys have made to the business? Thanks.

Jim Anderson: Yeah. Thanks, Meta. First on the first part of the question around telecom strength. Yeah, telecom was a bit stronger than we had originally forecasted. Really pleased to see that. It was first of all, just to reiterate, it was a combination of two things. We saw end market improvement, but it was also due to some of the new products that we have ramping in telecom. Specifically on those new products, I talked about this at last quarter's earnings, the 100G ZR and the 400G ZR/ZR+ that we have begun ramping. We continue to see good ramp contribution from those products, and so that certainly benefited us.

Speaker Change: Thanks.

Speaker Change: Yeah, thanks Meta. First, on the first part of the question around telecom strength. So, yeah, telecom was a bit stronger than we had originally forecasted. Really pleased to see that. And it was, first of all, just to reiterate, it was a combination of two things.

Speaker Change: We saw an end market improvement, but it was also due to some of the new products that we have ramping in telecom, and specifically on those new products, and I talked about this at last quarter's earnings.

Speaker Change: The 100ZR and the 400GB ZR, ZR Plus that we had begun ramping, we continue to see good ramp contribution from those products and so that certainly benefited us. But we did see some improvement in the end market specifically around DCI, Data Center Interconnect.

Jim Anderson: We did see some improvement in the end market, specifically around DCI data center interconnect, but also even in the traditional transport area, the traditional telecom transport area. We did see some strengthening there. We are still taking kind of a cautious view and cautious outlook on telecom recovery overall, but it was nice to see some good end market demand signals, and strength in Q1. And then with respect to Asia versus. I think you asked a question about Asia versus US. I'm actually not sure which market in particular. I believe we saw some improvement across both of those markets.

Speaker Change: but also even in the traditional transport area, the traditional telecom transport area, we did see some strengthening there. We are still taking kind of a cautious view and cautious outlook on telecom recovery overall, but it was nice to see some good end market demand signals.

Speaker Change: and Strength in in Q1. And then with respect to Asia versus, I think you asked a question about Asia versus U.S.

Speaker Change: and I'm

Speaker Change: Actually not sure which market in particular, I believe we saw some improvement across both of those markets.

Jim Anderson: On the second part of your question on yield increase, Sherri mentioned in the Q1 sequential improvement from Q4 to Q1, there were three different factors she highlighted, yield being one of those. I wouldn't really characterize it as a tailwind. I would characterize it as new yield improvements. This is actually something that I highlighted last earnings call when I talked about the gross margin improvement initiative that we were putting in place. I said there was two components of it. There was a pricing component of it, but there's also a big focus on product cost, and I mentioned yields as one of the key areas we've been focusing on. The team has definitely been focused on that over the past few months.

Speaker Change: Schultz, Ed Sheer,

Speaker Change: And then, on the second part of your question on yield increase, yeah, so Sherry mentioned in the Q1 sequential improvement from Q4 to Q1, there were three different factors. She highlighted yield being one of those. Yeah, I wouldn't really characterize it as a tailwind. I would characterize it as new yield improvements.

Speaker Change: And this is actually something that I highlighted last earnings call when I talked about the gross margin improvement initiative that we were putting in place.

Speaker Change: I said there was two components of it. There was a pricing component of it, but there's also a big focus on product costs. And I mentioned yields as one of the key areas we've been focusing on.

Speaker Change: And the team has definitely been focused on that over the past few months. In fact,

Jim Anderson: In fact, some real-time information, Sherri and I were actually sitting in a review with the datacom transceiver team this morning, and we were reviewing yields. Really pleased with the progress that team has made on yield improvements over the past few months and really pleased with the plan that they're showing moving forward. Now, we're still in the early stages of the gross margin improvement strategy and, you know, we have a lot more work in front of us, but I wanna say thanks to the team for the initial work, good work that they've done and for the plan that they have moving forward. Yes, yields will continue to be a key area of focus for us.

Speaker Change: Some real-time information, Sherry and I were actually sitting in a review with the team this morning, the Datacom Transceiver team this morning, and we were reviewing yields, and really pleased with the progress that that team has made.

Speaker Change: on yield improvements over the past few months and really pleased with the plan that they're showing moving forward. Now, we're still in the early stages of the gross margin improvement.

Speaker Change: strategy and you know we have a lot more work in front of us but I want to say thanks to the team for the initial work good work that they've done and and for the plan that they have moving forward so yes yields will continue to be a key area of focus for us

Meta Marshall: Great. Thanks so much.

Operator: One moment for our next question. Our next question comes from Karl Ackerman with BNP Paribas. Your line is open.

Speaker Change: Great, thanks so much. One moment for our next question.

Speaker Change: Thank you.

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

Speaker Change: Our next question comes from Carl Ackerman with BNP Paribus. Your line is open.

Karl Ackerman: Yes. Thank you. Jim, I was hoping you could discuss whether you are seeing data center customers reallocating procurement of optical transceivers to US domiciled suppliers like Coherent. Then second, are you able to quantify your expanding TAM opportunity as AI clusters now have the option of being disaggregated into white box components, that seem to benefit yourself? Thank you.

Carl Ackerman: Yes, thank you.

Carl Ackerman: Jim, I was hoping you could discuss whether you are seeing data center customers reallocating procurement of optical transceivers to U.S. domiciled suppliers like

Carl Ackerman: Coherent.

Speaker Change: And then second, are you able to quantify...

Speaker Change: You're expanding TAM opportunity as AI clusters now have the option of being desegregated into white box components that seem to benefit yourself.

Jim Anderson: Thanks, Karl. 2 really good questions. On the first one on data center customers, I touched on this briefly in I think one of the earlier questions. One of the things that's very important to data center customers is supply chain resiliency. You know, the two things that we always talk about is, of course, number one, the technology roadmap that we have and the breadth and the depth of the technology and the innovation we can bring. The other big part of the discussion is around supply chain resiliency.

Speaker Change: Thank you.

Speaker Change: Thanks, Carl. Two really good questions. On the first one, on data center customers, and I touched on this briefly.

Speaker Change: and I think one of the earlier questions, but one of the things that's very important to data center customers is supply chain resiliency. And the two things that we always talk about is of course, number one, the technology roadmap that we have and the breadth and the depth of the technology and the innovation we can bring.

Jim Anderson: This is becoming more and more important to customers, but they're also really appreciating the differentiation and the value that Coherent brings in terms of supply chain resiliency, because there's really two components of our resiliency. Number one is we have tremendous geographic diversity in our production platforms, in where our devices and modules are built and assembled. That geographic diversity, I think, is a big benefit to our customers. The second piece is around the verticalization. We don't just assemble the transceiver, for example, we manufacture a number of the key components that go into that transceiver.

Speaker Change: But the other big part of the discussion is around supply chain resiliency.

Speaker Change: And this is something that I think customers are really, this is becoming more and more important to customers, but they're also really appreciating the differentiation and the value that Coherent brings in terms of supply chain resiliency, because there's really two components of our resiliency.

Speaker Change: where our devices and modules are built and assembled. And so that geographic diversity, I think, is a big benefit to our customers. And then the second piece is

Speaker Change: around the verticalization. So we don't just assemble the transceiver, for example. We manufacture a number of the key components that go into that transceiver.

Jim Anderson: Whether that's a VCSEL laser or an EML, or that's an isolator or even the garnet material that goes into the isolator that goes into the transceiver, a lot of that we do ourselves. Now we do leverage outside suppliers sometimes as well if it's to our benefit. That verticalization is also the second piece that gives us, again, that really strong supply chain resiliency. I think that is definitely recognized by our data center customers and becoming a, you know, a more important factor moving forward. Then on the second part of your question around expanding TAM. Yeah, that's a great question. I would say definitely the TAM is expanding for us for the reasons that you noted.

Speaker Change: Transceiver. So whether that's a pixel laser, or an EML, or that's an isolator, or even the garnet material that goes into the isolator, that goes into the transceiver, a lot of that we do ourselves. Now we do leverage outside suppliers sometimes as well, if it's to our benefit.

Speaker Change: but that verticalization is also the second piece that gives us again that really strong supply chain resiliency and I think that that is definitely recognized by our data center customers and becoming a more important factor moving forward.

Speaker Change: And then on the second part of your question around expanding TAM, yeah, that's a great question. I would say definitely the TAM is expanding for us for the reasons that you noted.

Jim Anderson: I don't have a good quantification of that today, but I think we will definitely talk about that in the context of our investor day in May, when we share the full breadth of the market opportunity in front of us, and we'll certainly talk about the data center transceiver opportunity, and we'll talk about that expanding TAM at that time.

Speaker Change: I don't have a good quantification of that today, but I think we will definitely talk about that in the context of our Investor Day in May, when we share the full breadth of the market opportunity in front of us, and we'll certainly talk about it.

Speaker Change: the data center transceiver opportunity, and we'll talk about that expanding TAM at that time.

Jack Egan: Great. Thank you.

Jim Anderson: Thanks, Carl.

Operator: One moment for our next question. Our next question comes from Ruben Roy with Stifel. Your line is open.

Speaker Change: Great, thank you. Thanks Carl. One moment for our next question.

Speaker Change: Thank you for watching!

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

Speaker Change: Our next question comes from Ruben Roy with Thiefly. Your line is open.

Ruben Roy: Thank you. Jim, I actually had a similar question to the last one, and you started talking a little bit about some of the components that go into transceivers. I was wondering if you know, last quarter you talked about build versus buy and, earlier this year, the company talked about expansion of the six-inch wafer fab, InP fab. Wondering if that's an area that you could, you know, maybe accelerate. You know, if so, how are you thinking about, you know, sort of build versus buy and, you know, kind of insourcing some of these components, you know, certainly on the EML side, as we're hearing about, you know, constraints, et cetera, as you think about 2025 and 2026.

Speaker Change: Thank you. Bye.

Ruben Roy: Thank you. Jim, I actually had a similar question to the last one and you started talking a little bit about some of the components that go into transceivers. I was wondering if, you know, last quarter you talked about build versus buy and

Ruben Roy: Earlier this year, the company talked about expansion of the 6-inch wafer fab and 5-fab. I'm wondering if that's an area that you could, you know, maybe accelerate. And, you know, if so, how are you thinking about, you know, sort of build versus buy and, you know, kind of insourcing some of these components, you know, certainly on the EML side?

Ruben Roy: as we're hearing about constraints, et cetera, as you think about 25 and 26.

Jim Anderson: Yeah. Thanks, Ruben. You know, first of all, our philosophy in general, let me start with what is our general philosophy on build versus buy or develop ourselves versus leverage the outside ecosystem. What we wanna always be doing is applying our R&D dollars to the areas that we can truly differentiate, right? If we believe that we can create true differentiation for our customers that benefits our customers, and do something that's not available in the rest of the market, then that's a good use of our R&D dollars. That can benefit our customers both in terms of the technology advantage or maybe the cost structure advantage. To the extent that we drive true differentiation, we'll do that. If we can't, then we should be leveraging the outside solutions, right?

Speaker Change: Yeah, thanks, Ruben. So, you know, first of all, our philosophy in general, let me start with what is our general philosophy?

Speaker Change: and Sudhajan Rajan.

Speaker Change: on Build Vs. Buy, or Develop Ourselves Vs. Leverage the Outside Ecosystem. What we want to always be doing is applying our R&D dollars to the areas that we can truly differentiate, right? So if we believe that we can create true differentiation for our customers, that benefits our customers,

Speaker Change: and do something that's not available in the rest of the market, then that's a good use of our R&D dollars. And that can benefit our customers both in terms of the technology advantage or maybe the cost structure.

Speaker Change: So to the extent that we drive true differentiation, we'll do that. And if we can't, then we should be leveraging the outside solutions, right? So if we can't generate some real advantage for our customers, then we should be leveraging the ecosystem. And I think that same...

Jim Anderson: If we can't generate some real advantage for our customers, then we should be leveraging the ecosystem. I think that same philosophy applies to our supply chain as well, if we can generate an advantage for our customers that may be technical or cost structure advantage or supply chain resiliency advantage, then we should do that, right? If we can't generate a genuine advantage, then we should be leveraging the outside ecosystem. There are times when we choose to verticalize and build those components ourselves, and there are other times where we choose to leverage outside suppliers. I think moving forward, we're gonna be much more strategic and deliberate about that than maybe we have been in the past. But that's our general philosophy.

Speaker Change: philosophy applies to our our supply chain as well is if we can generate an advantage for our customers that may be technical or cost structure advantage or supply chain resiliency advantage then we should do that right but if there we can't generate a

Speaker Change: a genuine advantage, then we should be leveraging the outside ecosystem and so there are times

Speaker Change: When we choose to verticalize and build those components ourselves, and there are other times where we choose to leverage outside suppliers, and I think we're moving forward, we're going to be much more strategic and deliberate about that than maybe we have been in the past.

Speaker Change: and but that's that's our general philosophy.

Ruben Roy: Very helpful. Thanks, Jim. Just a quick follow-up. I might have missed this, but on the telecom commentary, you know, last quarter, you had a little bit more of a muted outlook on telco. You know, nice surprise here to the upside. Was that mostly driven by DCI or were some of the traditional telecom products also a little bit better than you had thought? Thank you.

Speaker Change: Very helpful. Thanks, Jim. And just a quick follow-up. I might have missed this.

Speaker Change: But on the telecom commentary, you know, last quarter, you had a little bit more of a muted outlook on telco, you know, nice surprise here. To the upside, was that mostly driven by DCI or were some of the traditional telecom products also a little bit better than you had thought? Thank you.

Jim Anderson: Yeah. Thanks, Ruben. It was a combination of both. Yeah, the end market was a bit stronger, and that was a combination of DCI, but also traditional telecom transport as well. We saw an uptick in end market demand there too. As I mentioned earlier, we're still taking a cautious approach to the telecom market. I'd like to see a couple more quarters of improvement before, you know, we're positive that the market is fully recovering, right? Some good positive signs so far.

Speaker Change: Yeah, thanks, Ruben. It was a combination of both. Yeah, the end market was a bit stronger, and that was a combination of DCI, but also traditional telecom transport as well. We saw an uptick in end market demand there, too. And as I mentioned earlier, we're still taking a cautious approach to the telecom market. I'd like to see a couple more quarters of improvement before.

Speaker Change: You know, we're positive that the market is fully recovering, right, but some good positive signs so far.

Ruben Roy: Appreciate it. Thank you.

Operator: One moment for our next question. Our next question comes from Christopher Rolland with Susquehanna. Your line is open.

Speaker Change: Appreciate it. Thank you. One moment for our next question.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Christopher Rolland with Susquehanna. Your line is open.

Christopher Rolland: Hey, guys. Thanks for the question. I guess, firstly, welcome. Also welcome back, Sherri.

Christopher Rolland: Hey guys thanks for the question and I guess firstly welcome and also welcome back Sherry.

Jack Egan: Thanks, Chris

Sherri Luther: Thanks, Chris

Christopher Rolland: My question, I guess first is a follow-up to Ruben's on EMLs. Are you guys gonna be commercially shipping your own EMLs into either 800 and 1.6 next year? Additionally, are you concerned at all about data center capacity constraints for you guys into what could be a pretty robust 2025? This is either for transceiver assembly or light source.

Christopher Rolland: My question, I guess first, is a follow-up to Ruben's on EMLs.

Speaker Change: Are you guys going to be commercially shipping your own EMLs into either 800 and 1.6 next year?

Speaker Change: And additionally, are you concerned at all about data center capacity constraints for you guys into what could be a pretty robust 2025? And this is either for transceiver assembly or light source.

Jim Anderson: Yeah. Thanks, Chris. On the first part of the question on EML usage in 800 gig and 1.6 T. On EMLs, I'll just start by saying we use a combination of our own internally developed and produced EMLs, as well as we do leverage EMLs from very good partners as well. Again, back to that prior question on kind of philosophy, where we think there's benefit for our customers, we will do that internally, but where we can leverage the outside ecosystem, we'll also do that. You know, I would anticipate, you know, us continuing to do that in whether it's 800 gig or 1.6 T, us continuing to leverage both internal as well as external sources.

Speaker Change: Yeah, thanks Chris. So on the first part of the the question,

Speaker Change: on EML usage in 800 gig and 1.6 GbE. On EMLs, I'll just start by saying we use a combination of our own internally developed and produced EMLs, as well as we do leverage EMLs from

Speaker Change: for very good partners as well. And so again, back to that.

Speaker Change: prior question on kind of philosophy, where we think there's benefit for our customers, we will do that internally, but where we can leverage the outside ecosystem, we'll also do that.

Speaker Change: You know, I would anticipate, you know, us continuing to do...

Speaker Change: that in, whether it's 800 gig or 1.6 T.

Speaker Change: us continuing to leverage both internal as well as external sources.

Jim Anderson: I also wanna reiterate the fact that, or that we take a multi-technology approach, right? Not just EML, but to the extent we can leverage a VCSEL or a silicon photonic solution, we'll do that as well, right? Again, we'll take whatever we believe is the best technology path for our customers that gives the greatest benefit. I think that's one of the benefits we bring to our customers is our expertise is really at a deeper level of being able to manipulate photons for the benefit of data transmission. We look at whether it's EML, VCSEL, or silicon photonics, as that's just a method by which we bring our innovation around using photons to transmit data.

Speaker Change: And then I also want to reiterate the fact that we take a...

Speaker Change: multi-technology approach, right? So, not just EML, but to the extent we can leverage Vixel or a silicon photonic solution, we'll do that as well, right? So again, we'll take whatever is...

Speaker Change: whatever we believe is the best technology path for our customers that gives the greatest benefit and I think that's one of the benefits we bring to our customers is

Speaker Change: Our expertise is really at a deeper level of being able to...

Speaker Change: to manipulate photons for the benefit of data transmission. And we look at whether TML, VCSOL, or silicon photonics. That's just a method by which we bring our innovation around.

Jim Anderson: On the second part of your question on, I think it was, Chris, around capacity constraints as we continue to ramp in data center AI. I would say that, you know, first of all, I wanna take the opportunity to thank my production and engineering, manufacturing teams for doing a great job of supporting the ramp of our data center AI business. They've really done an outstanding job making sure that we deliver for our customers. That's not to say that we don't have a constraint here or there, but I think overall, they've done a really outstanding job meeting the demand needs of our customers, and that's certainly our focus moving forward.

Speaker Change: using photons to transmit data.

Speaker Change: And then on the second part of your question on, I think it was, Chris, around capacity constraints as we see as we continue to ramp in data center AI, I would say that

Speaker Change: You know, first of all, I would say that I want to take the opportunity to thank my production and engineering manufacturing teams for doing a great job of supporting

Speaker Change: The ramp of our data center AI business, they've really done an outstanding job making sure that we deliver for our customers.

Speaker Change: And that's not to say that we don't have a constraint here or there, but I think overall they've done a really outstanding job meeting the demand needs of our customers, and that's certainly our focus moving forward. We're certainly increasing and ramping up our capacity internally, whether that's for

Jim Anderson: You know, we're certainly increasing and ramping up our capacity internally, whether that's for transceiver assembly or whether that's for the individual ingredients that go into that transceiver, isolators, VCSEL, EMLs, whatever, right? We're ramping up our capacity and certainly our goal to make sure that we've got the right capacity for the demand that we're seeing from our customers.

Speaker Change: transceiver assembly or whether that's for the individual ingredients that go into that transceiver, isolators, pixels, emails, whatever, right? So we're ramping up our capacity and certainly our goal to make sure that we've got the right capacity for the demand that we're seeing from our customers.

Christopher Rolland: Excellent. Then perhaps a follow-up, Jim. Now that you've had some time to kinda look under the hood, so some of the pushback that I get is around margin expansion opportunities in data center, particularly on the transceiver, you know, your old Finisar business, as you look to your path for greater than 40% total company GMs. What I'm getting at here is, there seems to be a balance here between upside from surging units, obviously driven by AI, versus what I think are fairly aggressive capacity expansion plans for guys, particularly out of Asia. You know, Innolight, but you know, you have CloudLight, you have some other transceiver guys here as well.

Speaker Change: Thank you very much.

Speaker Change: Excellent. And then perhaps a follow-up, Jim.

Speaker Change: Now that you've had some time to kind of look under the hood, some of the pushback that I get is around margin expansion opportunities in data center, particularly on the transceiver, you know, your old Tenosar business.

Speaker Change: as you look to your path for greater than 40% total company GMs. And what I'm getting at here is there seems to be a balance here between upside from surging units, obviously driven by AI,

Speaker Change: versus what I think are fairly aggressive capacity expansion plans for guys particularly out of Asia.

Speaker Change: you know, in the science, but you know, you have Cloudlight, you have some other transceiver guys here as well. So when you balance those together, do you think there is

Christopher Rolland: When you balance those together, do you think there is sizable room here to expand margins on the transceiver side, which is a big chunk of your datacom business?

Speaker Change: There's a sizable room here to expand margins on the transceiver side, which is a big chunk of your Datacom business.

Jim Anderson: Yeah. Thanks, Chris. Let me start at the company level, and then I'm gonna come back to data center transceivers and how that fits in. The short answer on data center transceivers is yes, and it's product cost, but I wanna paint the company picture first, right? At a company level, we're gonna march towards that 40% gross margin goal. I think, you know, like we talked about, there's two big initiatives, one around pricing and one around product cost. I think the pricing optimization that we can do probably applies more to our industrial businesses. We have many different product lines and many different industrial sub-markets underneath the umbrella of the industrial business.

Speaker Change: Yeah, thanks, Chris. Let me start at the company level, and then I'm going to come back to data center transceivers and how that fits in. The short answer on data center transceivers is yes, and it's product cost, but I want to paint the company picture first, right?

Speaker Change: So, at a company level, we're going to march towards that 40% gross margin goal. And I think, you know, there's two, like we talked about, there's two big initiatives, one around pricing and one around product cost.

Speaker Change: I think the pricing optimization that we can do.

Speaker Change: probably applies more to our industrial businesses. So we have many.

Speaker Change: Many different product lines and many different industrial sub-markets underneath the umbrella of the industrial business.

Jim Anderson: I do see opportunity to do a much better job of optimizing the pricing of those products, and capturing what I would say, what I would call is the fair value for the technology and the innovation that we're bringing to those industrial markets. Now, on pricing in the datacom transceiver space, there I think there's. I would say there's not as much opportunity on the pricing side. What I would say is, there's definitely opportunity on the product cost side, and that's one of the examples I gave earlier on the call, is on product costs within transceivers. I highlighted, I believe this on the last earnings call, yields as definitely an opportunity.

Speaker Change: And I do see opportunity to do a much better job of optimizing the pricing of those products and capturing what I would say, what I would call is the fair value for the technology and the innovation that we're bringing to those industrial markets.

Speaker Change: Now in pricing in the Datacom transceiver space, there I think there's, I would say there's not as much opportunity on the pricing side.

Speaker Change: But what I would say is, but there's definitely opportunity on the product cost side, and that's one of the examples I gave earlier on the call.

Speaker Change: is on product costs within transceivers.

Speaker Change: And I highlighted, I believe this on the last earnings call, yields as definitely an opportunity. And Sherry and I, as I said earlier, were in an operational review this morning, spending time talking to the team about yields, the improvements that they've driven over the past few months.

Jim Anderson: Sherry and I, as I said earlier, were in an operational review this morning, spending time talking to the team about yields, the improvements that they've driven over the past few months, and what we need to see in terms of yield improvements moving forward as well. That is definitely an area of focus for us. Back to your data, datacom transceiver question in particular, I would say maybe not so much on pricing, but definitely there's opportunity for us in cost, and we're certainly very focused on that.

Speaker Change: and what we need to see in terms of yield improvements moving forward as well. And that is definitely an area of focus for us.

Speaker Change: Back to your Datacon transceiver question in particular, I would say maybe not so much on pricing, but definitely there's opportunity for us in cost, and we're certainly very focused on that.

Richard Shannon: Great answer. Thanks, Jim.

Operator: One moment for our next question. The next question comes from Jack Egan with Charter Equity Research. Your line is open.

Speaker Change: Great answer. Thanks, Jim.

Speaker Change: for our next question.

Speaker Change: The next question comes from Jack Egan with Charter Equity Research. Your line is open.

Jack Egan: Great. Thanks for taking the questions. I didn't hear or see anything about segment operating margins, but through June, the networking segment had been kind of range-bound in the mid-teens despite being at record revenue. I was just wondering, are you seeing the margin benefits from a higher mix of 800G transceivers today? If not, just when exactly does that impact kind of kick in?

Speaker Change: Bye.

Jack Egan: Great, thanks for taking the questions. So, I didn't hear or see anything about segment operating margins, but through June, the networking segment had been kind of range bound in the mid-teens, despite being at record revenue. So, I was just wondering, are you seeing the margin benefit from a higher mix of 800 gig transceivers today? And if not, just when exactly did that impact kind of kick in?

Jim Anderson: Yeah, Jack, maybe I'll start with that question. If you know, if Sherri wants to add anything, she's welcome to add. What I would say is, yeah, if you look at historically. It sounded like your question was focused on the data center or communication segment, which is mostly data or networking, which is mostly data center, AI data center. If you look historically at when we move to new technology nodes, yes, you're right. The newer speed grades for the transceiver are generally higher margin. To the extent that we're ramping quickly a higher speed more advanced transceiver, that's usually at a higher gross margin. Yeah, the general rule would be as we ramp those higher speeds, we would expect to see margin improvement on that.

Speaker Change: Yeah, Jack, I maybe I'll start with that question. If Sherry wants to add anything, she's she's welcome to add. What I would say is, yeah, if you look at historically with it, it sounded like your question was focused on the data center, or communication segment, which is mostly

Speaker Change: or networking, which is mostly data center, AI data center.

Speaker Change: If you look historically at when we move to new technology nodes, yes, you're right, the newer speed grades for the transceiver are generally higher margin. And so to the extent that...

Speaker Change: We're ramping, quickly ramping a higher speed, more advanced transceiver that's usually at a higher gross margin. So yeah, the general rule would be as we ramp those higher speeds, we would expect to see margin improvement on that.

Sherri Luther: Yeah, I'll just add that if you look into our 10-Q, you'll see, Jack, that we do show a segment profit. On the networking side of the business, we did see higher segment profits eventually. You will see that in there when you dig in.

Speaker Change: Yeah, I'll just add that if you look into our queue, you'll see, Jack, that we do show a segment profit, and on the networking side of the business, we did see higher segment profit sequentially, so you will see that in there when you dig in.

Jack Egan: Okay, great. I appreciate that. My follow-up's a bit of a kind of a higher level question. It was good to see a rebound in telecom, but you know, we've seen this prolonged slowdown in that market after the carrier spent quite a bit on you know, 5G spectrum licenses at first, and then obviously on the 5G equipment build-out itself. When you look at some of the commentary kind of across the telecom supply chain, it's been pretty difficult to monetize 5G. The carriers might not have much incentive to you know, keep spending and adding new capabilities.

Speaker Change: Okay, great. I appreciate that. And then my follow-up is a bit of a kind of a higher-level question. So, it was good to see a rebound in telecom, but, you know, we've seen this prolonged slowdown in that market after

Speaker Change: The carrier spent quite a bit on, you know, 5G spectrum licenses at first, but and then obviously on the 5G equipment build out itself. But when you look at some of the commentary kind of across the telecom supply chain, it's been pretty difficult to monetize 5G.

Speaker Change: So the carriers might not have much incentive to, you know, keep spending and adding new capabilities. So that being said, I'm just kind of curious on your long-term growth outlook for telecom and, you know, whether it may be challenged in the long term just because those newer, more advanced generations, like 5G advanced or 6G, are just difficult to monetize.

Jack Egan: That being said, I'm just kinda curious on your long-term growth outlook for telecom and, you know, whether it may be challenged in the long term just because those newer, more advanced generations like 5G Advanced or 6G are just difficult to monetize.

Jim Anderson: Yeah. Thanks, Jack, and that's a great point, and that's exactly why we're taking, you know, here in the more near-term quarters, a more cautious view on telecom, right? That's why last quarter I said we're taking a cautious view, and the same applies to this quarter as well as until we see a dramatic pickup in telecom operator CapEx. I think, you know, that market may be challenged in terms of recovery. Now, that said, we did see in Q1 some strong positive signs, as I said earlier. I think the clear area of growth is around data center and client interconnect. We are definitely seeing strong demand signals in DCI, right? Obviously that's only a portion of the telecom market, but we are seeing very strong demand signals there.

Speaker Change: Yeah, thanks, Jack, and that's a great point, and that's exactly why we're taking a, you know, here in the more near-term quarters, we're taking a more cautious view on telecom, right? That's why last quarter I said we're taking a cautious view.

Speaker Change: and the same applies to this quarter as well as, until we see a dramatic pickup in.

Speaker Change: telecom operator CapEx I think you know that that market may be challenged in terms of recovery now that said we did see in Q1 some strong positive signs as I said earlier and I think the the clear area of growth is around data center interconnect we are definitely seeing strong demand signals in DCI right and obviously that's only a portion of the telecom market but we are seeing very strong demand signals there and then as I mentioned before we did see a little bit of recovery in telecom traditional telecom transport as well but but we agree in the in the near term we're definitely taking a more cautious view of the telecom recovery now over the long term

Jim Anderson: As I mentioned before, we did see a little bit of recovery in telecom, traditional telecom transport as well. But we agree in the nearer term, we're definitely taking a more cautious view of the telecom recovery. Now, over the long term, we still do believe that, you know, telecom over the long term will continue to grow, and we believe that's a great growth area for the company. We've got a lot of new products that are ramping in that segment, and then we'll paint a more complete picture of what we see as a long-term opportunity as part of our investor day in May.

Speaker Change: We still do believe that, you know, telecom over the long term will continue to grow and we believe that's a great growth area for the company. We've got a lot of new products that are ramping in that segment. And then we'll paint.

Speaker Change: paint a more complete picture of what we see as a long-term opportunity as part of our investor day in May.

Jack Egan: Great. Thank you, guys.

Operator: One moment for our next question. The next question comes from Richard Shannon with Craig-Hallum Capital Group. Your line is open.

Speaker Change: Great, thank you guys.

Speaker Change: Thank you for watching!

Speaker Change: One moment for our next question.

Speaker Change: Thank you. Thank you.

Speaker Change: Our next question comes from Richard Shannon with Craig Hallam Capital Group. Your line is open.

Richard Shannon: Well, great. Thanks everyone for allowing me to ask a couple questions here. Jim, I guess, maybe a quick two-parter, related to Datacom here. When I look at 1.6, how are you thinking about Coherent time to market relative to your competitors? Do you also expect to ramp at a breadth of customer base more like what you have now in 800 gig or kind of what you saw in the earlier stages of 800 gig, whereas you just noted today, the customer base has expanded nicely here, over this period?

Richard Shannon: Okay, thanks everyone for allowing me to ask a couple questions here. Jim, I guess maybe a quick two-parter related to Datacom here.

Richard Shannon: When I look at 1.6...

Richard Shannon: T. How are you thinking about coherent time to market relative to your competitors? And do you also expect to ramp at a breadth of customer base more like what you have now in 800 gig or kind of what you saw in the earlier stage of 800 gig where, as you just know today, the customer base has expanded nicely here over this period?

Jim Anderson: Yeah. Thanks, Richard. On the first one, you know, just reiterate what I said earlier, we delivered samples last quarter. We're working really carefully with our customers to get that into production as quick as possible. At this point, you know, we expect revenue to begin to ramp in calendar 2025. As we get closer to that ramp, we'll certainly share more specifics around that. You know, clearly we're motivated to get that into production as quick as possible on our side. In terms of the second part of the question on breadth of customer base, I think it would be similar to the breadth of customers that we saw at the beginning of the 800G ramp.

Richard Shannon: , , , ,

Speaker Change: Yeah, thanks, Richard. The first one, you know, we delivered, just reiterate what I said earlier, we delivered samples last quarter.

Richard Shannon: We're working really carefully with our customers to get that into production as quick as possible. And at this point, we expect revenue to begin to ramp in calendar 25. As we get closer to that ramp, we'll certainly share more specifics around that. And clearly, we're motivated to get that into production as quick as possible on our side. And then in terms of the second part of the question on breadth of customer base, I think it would be similar to

Richard Shannon: The breadth of customers that we saw at the beginning of the 800 gig ramp might be, could be a little bit different, but it'll be kind of similar magnitude in terms of number of customers.

Jim Anderson: It could be a little bit different, but it'll be kinda similar magnitude in terms of number of customers.

Richard Shannon: Okay. Fair enough for that, Jim. My quick follow-on question here is just following up on the last couple of recent questions related to your telecom business. You just noted in response to the last one here about seeing some really nice growth in DCI versus traditional telecom transport. Any way you can give us a sense of how big each of those buckets are? I know it's not easy to necessarily know where it goes, but is the DCI relatively close to traditional telecom or a small portion? Or just help us out a little bit there, please.

Speaker Change: Okay, fair enough for that Jim. My quick follow-on question here is this...

Richard Shannon: Anyway, give us a sense of how big each of those buckets are, and I know it's not easy to necessarily know where it goes, but is the DCI relatively close to traditional telecom or a small portion? Or just help us out a little bit there, please.

Jim Anderson: Yeah, we don't really break out to that level of granularity. You know, DCI was a smaller portion, but is a rapidly growing portion of that revenue base, right? We do expect DCI to become a bigger component of that overall telecom TAM, as well as our revenue base over the coming quarters. It's certainly faster-growing than kind of the rest of that part of the market.

Jim Anderson: Yeah, we don't really break out to that level of granularity, but, you know, DCI was a smaller portion but is a rapidly growing portion of that revenue base, right? And so we do expect...

Richard Shannon: DCI to become a bigger component of that overall telecom TAM as well as our revenue base over the over the coming quarters. It's certainly faster growing than kind of the rest of that part of the market.

Richard Shannon: Okay. Appreciate the comment, Jim. That's all for me.

Jim Anderson: Thanks, Richard.

Speaker Change: Okay, appreciate the comments, Jim. That's all for me.

Operator: Thank you. Ladies and gentlemen, this concludes today's question and answer session. I'd like to turn the call back over to Jim Anderson for any closing remarks.

Jim Anderson: Thanks, Richard.

Speaker Change: Thank you, ladies and gentlemen. This concludes today's question and answer session. I'd like to turn the call back over to Jim Anderson for any closing remarks.

Jim Anderson: Thank you everyone for joining us on our call today. I wanna once again thank Sherri for joining the team as well. It's good to have her sitting at the table here with me again. Just in closing, I wanna thank all my Coherent teammates for all their hard work and dedication. I'm really proud of them and proud to be on the same team as them. We thank you for all of your support and look forward to updating you on our progress. Operator, that concludes today's call.

Jim Anderson: Thank you everyone for joining us on our call today. I wanna once again thank Sherry for joining the team as well. It's good to have her sitting at the table here with me again.

Jim Anderson: And just in closing, I want to thank all my coherent teammates for all their hard work and dedication and really proud, really proud of them and proud to be on the same team as them. And we thank you for all of your support and look forward to updating you on our progress and operator that concludes today's call.

Operator: Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day. Good day, and thank you for standing by. Welcome to the Coherent Corp. FY25 Q1 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Silverstein, Senior Vice President, Investor Relations and Corporate Communication. Please go ahead.

Operator: Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.

Jim Anderson: Thank you for watching!

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Jim Anderson: Thank you for watching!

Jim Anderson: Thanks for watching.

Jim Anderson: Thank you for watching!

Jim Anderson: Alanis Morissette, Yvonne Horton, Andrea Lombardo, Anastasia Soto, Andrea Lombardo, Anastasia Soto, Anastasia Soto, Anastasia Soto, Anastasia Soto, Anastasia Soto, Anastasia Soto,

Jim Anderson: Thank you for watching.

Jim Anderson: www.mustwatch.eu

Jim Anderson: To be continued

Speaker Change: Good day and thank you for standing by. Welcome to the Coherent Corp FY25 First Quarter Earnings Conference Call.

Speaker Change: At this time, all participants are in a listen-only mode.

Jim Anderson: After the speaker's presentation, there will be a question and answer session.

Speaker Change: To ask a question during the session, you need to press star 1 1 on your telephone. You will then hear an automated message device and your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Silverstein, Senior Vice President, Investor Relations and Corporate Communication. Please go ahead.

Paul Silverstein: Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO, and Sherri Luther, Coherent's CFO. During today's call, we will provide a financial and business review of Q1 of fiscal 2025 and the business outlook for Q2 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 are 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.

Paul Silverstein: Thank you operator, and good afternoon everyone. With me today are Jim Anderson, Coherent CEO, and Sherry Luther, Coherent CFO.

Speaker Change: During today's call, we will provide a financial and business review of the first quarter of Fiscal 2025.

Speaker Change: and the business outlook for the second quarter of fiscal 2025.

Jim Anderson: 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.

Jim Anderson: We wish to caution you that such statements are 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.

Jim Anderson: 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.

Jim Anderson: This call includes and constitutes the company's official guidance for the second quarter of fiscal 2025. If, at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call.

Jim Anderson: 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.

Jim Anderson: 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. Let me now turn the call over to Jim Anderson, our CEO.

Paul Silverstein: Let me now turn the call over to Jim Anderson, our CEO.

Jim Anderson: Thank you, Paul, and thank you everyone for joining today's call. I'd like to begin by welcoming Sherri Luther back to Coherent as our new CFO. Sherri and I previously worked together at Lattice Semiconductor for almost six years, where Sherri did an outstanding job as the CFO. Prior to Lattice, Sherri worked for 16 years in various finance roles at Legacy Coherent before its acquisition. Sherri's proven track record as a CFO, combined with her long history with the company, has allowed her to hit the ground running, and we're very pleased to have her join our team. I also want to thank Rich Martucci for serving as our interim CFO prior to Sherri's arrival. Rich's leadership and dedication have been a tremendous help to me and the company, and I'm deeply grateful for his commitment and continued dedication to Coherent.

Jim Anderson: Thank you, Paul, and thank you, everyone, for joining today's call.

Jim Anderson: Sherry's proven track record as a CFO, combined with her long history with the company, has allowed her to hit the ground running, and we're very pleased to have her join our team.

Jim Anderson: I also want to thank Rich Martucci for serving as our interim CFO prior to Sherry's arrival. Rich's leadership and dedication have been a tremendous help to me and the company, and I'm deeply grateful for his commitment and continued dedication to Coherent.

Jim Anderson: Now that Sherri's on board, I'm pleased to announce that we'll host an investor and analyst day in New York on 28 May of next year. At that event, we'll outline our overall strategy, including our end market growth opportunities, product and technology roadmap, and long-term financial model. We look forward to the event and sharing more details about our plans to create value for our shareholders. Before I discuss our Q1 results, I'd like to provide an update on the 3 key areas of improvement that I outlined at our last earnings call: culture, strategy, and execution. I believe improvements in these three areas will transform our extensive, innovative technology portfolio and our growing market opportunity into an engine of market-leading revenue growth, expanding profitability, and industry-leading shareholder value creation. First, regarding culture.

Jim Anderson: Now that Sherry's on board, I'm pleased to announce that we'll host an Investor and Analyst Day in New York on May 28th of next year.

Jim Anderson: Before I discuss our first quarter results I'd like to provide an update on the three key areas of improvement that I outlined at our last earnings call.

Jim Anderson: Culture, Strategy and Execution.

Jim Anderson: I've now had the opportunity to visit more than 20 of our sites and meet with many of my teammates across the world. We have incredible depth and breadth of talent, and our employees' dedication is inspiring. My favorite part of our culture is our focus on innovation, and we will continue to nurture this fundamental part of our culture. Yet, as I noted last quarter, there is also opportunity to evolve our culture. We're building a faster and more agile company. We've already made numerous changes to simplify and strengthen our organizational structure, empower our leaders, streamline decision-making, and accelerate execution. Cultural change always takes time, but I'm encouraged by our early progress in this area. Second, regarding strategy. We completed the strategic portfolio review that we initiated in June. This portfolio assessment will be the foundation for making organic and inorganic investment decisions moving forward.

Jim Anderson: First, regarding culture, I've now had the opportunity to visit more than 20 of our sites and meet with many of my teammates across the world.

Jim Anderson: We have incredible depth and breadth of talent, and our employees' dedication is inspiring.

Jim Anderson: My favorite part of our culture is our focus on innovation.

Jim Anderson: And we will continue to nurture this fundamental part of our culture.

Jim Anderson: Thank you for watching!

Jim Anderson: Yet, as I noted last quarter, there is also opportunity to evolve our culture.

Jim Anderson: We're building a faster and more agile company.

Jim Anderson: We've already made numerous changes to simplify and strengthen our organizational structure, empower our leaders, streamline decision-making, and accelerate execution.

Jim Anderson: Cultural change always takes time, but I'm encouraged by our early progress in this area.

Jim Anderson: We applied a set of strategic and financial criteria to sort each of our product lines into one of four categories: growth engines, profit engines, long-term bets, and non-strategic. We've now moved to the next phase, which is to drive actions based on the strategic assessment. For example, we've already shifted organic investment towards our growth and profit engines, where we have conviction that we can drive strong long-term profit expansion for the company. For instance, we increased investment in new datacom platforms such as next-generation transceivers and our new Optical Circuit Switch. We've also started the process of divesting or shutting down product lines and assets that are non-strategic. For example, we recently announced the planned sale of our Newton Aycliffe facility, which was an underutilized and non-strategic asset. The proceeds from the sale of the facility were used to pay down our outstanding debt and reduce overhead costs.

Jim Anderson: We applied a set of strategic and financial criteria to sort each of our product lines into one of four categories.

Jim Anderson: Growth engines, profit engines, long-term bets, and non-strategic.

Jim Anderson: We've now moved to the next phase, which is to drive actions based on the strategic assessment.

Jim Anderson: For instance, we increased investment in new datacom platforms, such as next-generation transceivers and our new optical circuit switch.

Jim Anderson: The proceeds from the sale of the facility were used to pay down our outstanding debt and reduce overhead costs.

Jim Anderson: Another example is our recent announcement that we're exploring strategic options for our battery technology platform. Although our non-strategic businesses represent a relatively small portion of our revenue, they're dilutive to the company's margin structure and absorb investment capital and focus that would be better deployed in our core businesses. As we optimize our portfolio over the coming quarters, we'll provide further updates, including at our upcoming Investor Day. Finally, the third area of focus for improvement is execution. Last quarter, I underscored the opportunity to significantly improve operational efficiency and effectiveness. We're tackling the greatest opportunities up front. For example, we've begun engaging our key customers and partners in a much more strategic manner. This approach has already uncovered new areas of long-term growth opportunity with our key customers and partners. Another example is our focus on gross margin expansion.

Jim Anderson: Another example is our recent announcement that we're exploring strategic options for our battery technology platform.

Jim Anderson: As we optimize our portfolio over the coming quarters, we'll provide further updates, including at our upcoming Investor Day.

Jim Anderson: Finally, the third area of focus for improvement is execution.

Jim Anderson: Last quarter, I underscored the opportunity to significantly improve operational efficiency and effectiveness.

Jim Anderson: We're tackling the greatest opportunities up front. [inaudible]

Jim Anderson: For example, we've begun engaging our key customers and partners in a much more strategic manner.

Jim Anderson: This approach has already uncovered new areas of long-term growth opportunity with our key customers and partners.

Jim Anderson: We launched initiatives for pricing optimization and product cost reduction aimed at achieving our goal of operating at a consistent, sustainable gross margin level above 40%. On operating expenses, we are shifting R&D investment to our growth and profit engines, and we are shutting down or divesting highly speculative projects that do not suit our long-term business model. Our go-forward R&D strategy will ensure that investments are focused, efficient, and offer high return. On SG&A, we are focused on driving greater efficiency and leverage. Evolving our culture, optimizing our strategic portfolio, and improving our operational execution will put us on a path of sustained market-leading growth, enhanced profitability, and cash generation, and a stronger balance sheet. I look forward to sharing more details at our upcoming investor meeting. I'll now switch gears and provide some brief comments on our fiscal Q1 results.

Jim Anderson: Another example is our focus on gross margin expansion.

Jim Anderson: We launched initiatives for pricing optimization and product cost reduction aimed at achieving our goal of operating at a consistent, sustainable gross margin level above 40%.

Jim Anderson: Our Go Forward R&D strategy will ensure that investments are focused, efficient, and offer high return.

Jim Anderson: And on SG&A, we're focused on driving greater efficiency and leverage.

Jim Anderson: Evolving our culture, optimizing our strategic portfolio, and improving our operational execution.

Jim Anderson: will put us on a path of sustained market leading growth, enhanced profitability and cash generation, and a stronger balance sheet.

Jim Anderson: I look forward to sharing more details at our upcoming investor meeting.

Jim Anderson: I'll now switch gears and provide some brief comments on our fiscal first quarter results.

Jim Anderson: Revenue in Q1 increased by approximately 3% sequentially and by 28% year-over-year, driven primarily by strong AI-related datacom transceiver revenue growth, along with improvements in our telecom revenue. Non-GAAP gross margin expanded by 49 basis points sequentially, and our non-GAAP EPS grew by 22% sequentially and by well over 4x year-over-year. Let me summarize what we're seeing in our business by end market. In the communications market, Q1 revenue increased by 14% sequentially and by 68% year-over-year. The sequential and year-over-year increases were driven by strong increases in both our datacom and our telecom revenue. Our Q1 datacom revenue grew by approximately 16% sequentially and by 89% year-over-year, due primarily to AI data center demand.

Jim Anderson: Non-GAAP gross margin expanded by 49 basis points sequentially and our non-GAAP EPS grew by 22% sequentially and by well over 4x year-over-year.

Jim Anderson: Let me summarize what we're seeing by our business by end market.

Jim Anderson: In the communications market, Q1 revenue increased by 14% sequentially and by 68% year-over-year.

Jim Anderson: The sequential and year-over-year increases were driven by strong increases in both our Datacom and our Telecom revenue.

Jim Anderson: Our Q1 Datacom revenue grew by approximately 16% sequentially, and by 89% year over year, due primarily to AI data center demand.

Jim Anderson: We're very pleased with the continued ramp of our 800G transceivers and the adoption of those products across a broader set of customers. We also continue to make great progress on our 1.6T transceivers. Having delivered initial samples in the preceding quarter, we continue to expect to begin ramping sales of 1.6T datacom transceivers in calendar 2025. We're also investing in a broad portfolio of transceiver ingredient technologies that includes VCSELs, EMLs, and silicon photonics. The breadth of our extensive technology portfolio allows us to deploy the best technology solution for each customer and application.

Jim Anderson: We're very pleased with the continued ramp of our 800 gig transceivers and the adoption of those products across a broader set of customers.

Jim Anderson: We also continue to make great progress on our 1.6T transceivers.

Jim Anderson: Having delivered initial samples in the preceding quarter, we continue to expect to begin ramping sales of 1.6D Datacom transceivers in calendar 2025.

Jim Anderson: We're also investing in a broad portfolio of transceiver ingredient technologies that includes pixels, EMLs, and silicon photonics.

Jim Anderson: The breadth of our extensive technology portfolio allows us to deploy the best technology solution for each customer and application.

Jim Anderson: We showcased this capability at the European Conference on Optical Communication this past September, where we presented a multi-technology datacom transceiver demonstration at 200 gig per optical lane based on both our differential EML and our silicon photonics platforms. We also continue to make great progress on key enabling components such as 200 gig differential EMLs, 200 gig VCSELs, and CW lasers for our silicon photonic solutions. We also recently announced a family of high-efficiency lasers to power 1.6T optical transceivers based on silicon photonics. Beyond transceivers, our new datacom optical switch platform continues to progress well and is generating significant customer engagement. Our differentiated switch is based on our highly reliable solid-state liquid crystal technology and was recognized at ECOC 2024 with the Best Product Award for Data Center Innovation.

Jim Anderson: We also continue to make great progress on key enabling components, such as 200 gig differential EMLs, 200 gig VCSLs, and CW lasers for our silicon photonic solutions.

Jim Anderson: We also recently announced a family of high-efficiency lasers to power 1.6T optical transceivers based on silicon photonics.

Jim Anderson: Beyond transceivers, our new Datacom optical switch platform continues to progress well and is generating significant customer engagement.

Jim Anderson: Our differentiated switch is based on our highly reliable solid-state liquid crystal technology and was recognized at ECOC 24 with the best product award for data center innovation.

Jim Anderson: We've shipped sample units to key strategic customers, and we expect to begin ramping revenue in calendar 2025. Shifting to telecom, our revenue increased by 9% sequentially and by 17% year over year. Although we continue to take a cautious view of the telecom end market recovery, the sequential revenue growth in Q1 was a combination of end market improvement along with our ramp of new products, especially our new 100G ZR and 400G ZR/ZR+ coherent transceivers. We're in qualification with our high optical output power C-band 800G ZR/ZR+ coherent transceivers, and we recently announced an L-band version to double the capacity of existing fiber infrastructure. In our remaining markets, which are primarily industrial-related applications, aggregate revenue decreased 10% sequentially and decreased 3% year over year.

Jim Anderson: We've shipped sample units to key strategic customers, and we expect to begin ramping revenue in calendar 2025.

Jim Anderson: Shifting to telecom, our revenue increased by 9% sequentially and by 17% year-over-year.

Jim Anderson: especially our new 100 ZR and 400 gig ZR ZR plus coherent transceivers.

Jim Anderson: Thank you for watching!

Speaker Change: In our remaining markets, which are primarily industrial-related applications, aggregate revenue decreased 10% sequentially and decreased 3% year-over-year.

Jim Anderson: Within these markets, ongoing strength in display capital equipment was more than offset by weakness in precision manufacturing and other subsegments. Display strength is being driven by continued strong demand for our excimer lasers for OLED screen manufacturing, which is driven by increased OLED adoption in new laptop and tablet computers. We also booked initial revenue for our new PYTHON annealing lasers that are being deployed in Gen 8 OLED display fabs. Across other industrial-related end market subsegments, such as precision manufacturing, we experienced demand headwinds in Q1 that were consistent with broader industry trends. Overall, despite some near-term headwinds, we expect the industrial market to be a long-term growth driver for the company as the end markets recover and as our new products continue to ramp.

Jim Anderson: Within these markets, ongoing strength in display capital equipment was more than offset by weakness in precision manufacturing and other sub-segments.

Jim Anderson: We also booked initial revenue for our new Python annealing lasers that are being deployed in Gen 8 OLED display fabs.

Jim Anderson: Across other industrial-related and market subsegments, such as precision manufacturing, we experienced demand headwinds in Q1 that were consistent with broader industry trends.

Jim Anderson: We're expecting strong growth in our communications business over the coming quarters. And while some near-term softness persists in our other end markets, we continue to expect Fiscal 2025 overall to be a solid growth year for the company.

Sherri Luther: Thank you, Jim. Let me begin by saying how excited I am to rejoin Coherent, a company with a rich culture of innovation. I want to express my appreciation for the warm welcome I received from my Coherent teammates. I also especially want to thank Rich Martucci, who has helped me to quickly come up to speed and ensure a smooth transition. As Jim noted, I spent 16 years at Coherent prior to its acquisition. What attracted me to rejoin Coherent was the opportunity to drive significant shareholder value expansion. The company has a solid foundation with its innovative technology and breadth of product portfolios. I see the opportunity to improve profitability in a number of areas. For example, I see opportunity for growth margin expansion, greater operational efficiency in the R&D investments we make, and opportunity for better SG&A efficiency.

Speaker Change: I'll now turn the call over to our new CFO, Sharon Luther.

Sharon Luther: Thank you, Jim. Let me begin by saying how excited I am to rejoin Coherent, a company with a rich culture of innovation.

Jim Anderson: As Jim noted, I spent 16 years at Coherent prior to its acquisition.

Jim Anderson: What attracted me to rejoin Coherent was the opportunity to drive significant shareholder value expansion.

Jim Anderson: The company has a solid foundation with its innovative technology and breadth of product portfolios. I see the opportunity to improve profitability in a number of areas.

Jim Anderson: For example, I see opportunity for gross margin expansion, greater operational efficiency in the R&D investments we make, and opportunity for better SG&A efficiency.

Sherri Luther: In addition, capital allocation is key because we need to ensure that we are investing in the product portfolios that drive the highest return for the company while also paying down debt to deleverage our balance sheet as quickly as possible. I look forward to sharing additional thoughts with you at our investor and analyst event in May. Now let me provide a summary of our results. Overall, in Q1, we drove continued sequential improvement in our financial results with solid revenue growth and gross margin expansion driving strong profitability. With a strong focus on cash and capital allocation, we paid down $118 million of our debt, which reduced our net debt leverage ratio as defined in the credit agreement to 2.4 times.

Jim Anderson: In addition, capital allocation is key because we need to ensure that we are investing in the product portfolios that drive the highest return for the company, while also paying down debt to de-leverage our balance sheet as quickly as possible.

Jim Anderson: I look forward to sharing additional thoughts with you at our Investor and Analyst event in May.

Jim Anderson: Now let me provide a summary of our results.

Jim Anderson: Overall, in the first quarter, we drove continued sequential improvement in our financial results with solid revenue growth and gross margin expansion, driving strong profitability.

Jim Anderson: With a strong focus on cash and capital allocation, we paid down $118 million of our debt, which reduced our net debt leverage ratio, as defined in the credit agreement, to 2.4 times.

Sherri Luther: Q1 revenue was $1.35 billion, an increase of approximately 3% sequentially and 28% year-over-year. From a segment perspective, networking revenue increased 12% sequentially and 61% year-over-year due to AI data center demand. Laser segment revenue decreased 2% sequentially and increased 4% year-over-year, reflecting relatively stable end market demand. Material segment revenue decreased 15% sequentially and 3% year-over-year, primarily due to weak automotive end market demand. Our Q1 non-GAAP gross margin was 37.7%, an increase of 49 basis points compared to the prior quarter and an increase of 293 basis points compared to the year-ago quarter. The improvements in gross margin were driven by higher revenue volume, favorable mix, and yield improvements.

Jim Anderson: First quarter revenue was $1.35 billion, an increase of approximately 3% sequentially and 28% year-over-year.

Jim Anderson: From a segment perspective, networking revenue increased 12% sequentially and 61% year-over-year due to AI data center demand.

Jim Anderson: Laser segment revenue decreased 2% sequentially and increased 4% year-over-year, reflecting relatively stable end market demand.

Jim Anderson: Material segment revenue decreased 15% sequentially and 3% year-over-year primarily due to weak automotive and market demand.

Jim Anderson: Our first quarter non-GAAP gross margin was 37.7%, an increase of 49 basis points compared to the prior quarter, and an increase of 293 basis points compared to the year-ago quarter.

Jim Anderson: The improvements in gross margin were driven by higher revenue volume, favorable mix, and yield improvements.

Sherri Luther: Q1 non-GAAP operating expenses were $276 million compared to $266 million in the prior quarter and $234 million in the year-ago quarter. The sequential and year-over-year increases were primarily driven by increased R&D investments in our product portfolio as well as variable compensation. 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 Q1 non-GAAP operating margin was 17.3% compared to 17% in the prior quarter and 12.6% in the year-ago quarter. Q1 non-GAAP tax rate was 20.3% compared to 25.9% in the prior quarter as a result of non-recurring one-time items.

Jim Anderson: First quarter non-GAAP operating expenses were $276 million compared to $266 million in the prior quarter and $234 million in the year-ago quarter.

Jim Anderson: The sequential and year-over-year increases were primarily driven by increased R&D investments in our product portfolio, as well as variable compensation.

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

Jim Anderson: Our first quarter non-GAAP operating margin was 17.3% compared to 17% in the prior quarter and 12.6% in the year-ago quarter.

Jim Anderson: First quarter non-GAAP tax rate was 20.3% compared to 25.9% in the prior quarter as a result of non-recurring one-time items.

Sherri Luther: Q1 non-GAAP earnings per diluted share was $0.74 compared to $0.61 in the previous quarter and $0.16 in the year-ago quarter. We paid down $118 million in debt during the quarter using cash from operations and the proceeds of the sale of our Newton Aycliffe fabrication facility for incremental debt reduction. I will now turn to our guidance for Q2 of fiscal 2025. Revenue is expected to be between $1.33 billion and $1.41 billion. Non-GAAP gross margin is expected to be between 36% and 38%. Total operating expenses are expected to be between $275 million and $295 million on a non-GAAP basis. Tax rate for the quarter is expected to be between 19% and 22% on a non-GAAP basis.

Jim Anderson: First quarter non-GAAP earnings for diluted share was $0.74 compared to $0.61 in the prior quarter and $0.16 in the year-ago quarter.

Jim Anderson: We paid down 118 million dollars in debt during the quarter using cash from operations and the proceeds of the sale of our Newton-Acliffe fabrication facility for incremental debt reduction.

Jim Anderson: I will now turn to our guidance for the second quarter of fiscal 2025.

Jim Anderson: Revenue is expected to be between $1.33 billion and $1.41 billion.

Jim Anderson: Non-gap growth margin is expected to be between 36% and 38%.

Jim Anderson: Total operating expenses are expected to be between $275 million and $295 million on a non-GAAP basis.

Jim Anderson: Tax rate for the quarter is expected to be between 19% and 22% on a non-GAAP basis.

Jim Anderson: EPS is expected to be between 61 cents and 77 cents on a non-GAAP basis.

Jim Anderson: That concludes my formal comments. Operator, please open the call for Q&A.

Operator: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered and you wish to remove yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Samik Chatterjee with J.P. Morgan. Your line is open.

Speaker Change: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone. If your question has been answered, you were speaking to yourself from the queue, please press star 11 again. We'll pause for a moment while we compile our Q&A roster.

Speaker Change: Our first question comes from Samik Chatterjee with J.P. Morgan. Your line is open.

Samik Chatterjee: Hi. Thanks for taking my questions. Maybe if I can start with one for Jim and then I have a quick follow-up. Jim, I think you mentioned it's been now five months since you've joined the company. What's been the feedback that you've received from key customers or partners that you've talked to in terms of areas to focus on, areas that they really think Coherent's good and, or even areas they think Coherent can improve on? Then I have a quick follow-up. Thank you.

Speaker Change: Thank you for the interview.

Jim Anderson: Yeah. Thanks, Samik, for the question. Yeah, great question. Always happy to talk about customers. I've definitely spent a lot of time with customers over the last 5 months, meeting as many as possible. You know, I'd say that, you know, first of all, I think we have a lot of really strong existing relationships with our big strategic customers across both our networking accounts and our big data center customers, but also our industrial customers as well. In a lot of cases, there's a long history with these customers that's very strong and very positive.

Samik Chatterjee: and then I have a quick follow-up.

Speaker Change: Thank you.

Jim Anderson: relationships with our

Jim Anderson: Big strategic customers across both our networking accounts and our big data center customers, but also our industrial customers as well. And so, in a lot of cases, there's a long history with these customers that's very strong and very positive. I think when I talk to our customers, the opportunity that we have...

Jim Anderson: I think when I talk to our customers, the opportunity that we have is to build relationships with those customers that are much more strategic, much more multi-generational long-term engagements to move from solving problems that are right here in the here and now to focusing on much more multi-generational innovation and partnering with our customers on future generations that are one, two, three generations out. I think that's our opportunity to drive a deeper strategic engagement with our key customers moving forward. I think the couple things that I would say really resonate with our customers when we have those longer term strategic discussions is, I would say, number one, definitely the technology portfolio and roadmap that we can bring to those customers to help drive their innovation.

Jim Anderson: is to build relationships with those customers that are much more strategic, much more multi-generational, long-term engagements. To move from solving problems that are right here in the here and now to focusing on much more multi-generational innovation and partnering with our customers.

Jim Anderson: on future generations that are one, two, three generations out. And so I think that's our opportunity to drive a deeper...

Samik Chatterjee: strategic engagement with our key customers moving forward and I think that a couple things that I would say are really really resonating with our customers when we have those longer-term strategic discussions is I would say number one definitely the technology portfolio and roadmap

Jim Anderson: The second area I would highlight too is supply chain resiliency and the breadth and depth of our supply chain. If I take, you know, if I just take for instance our big AI data center customers as an example, because that's where we're seeing the fastest growth in our revenue right now. On that first area of technology roadmap, I think our customers really recognize the breadth and the depth of the technology portfolio that we can bring to bear, especially in the optical networking space, where we don't just assemble the modules, but we build a lot of the ingredient components that go into the module, the lasers, whether they're VCSELs or EMLs or silicon photonics that we design, or a lot of the other ingredients that go into those modules.

Samik Chatterjee: that we can bring to those customers to help drive their innovation. But the second area I would highlight, too, is supply chain resiliency and the breadth and depth of our supply chain.

Samik Chatterjee: And if I take, you know, if I just take, for instance, our...

Jim Anderson: Our big AI data center customers, as an example, because that's where we're seeing the fastest growth in our revenue.

Jim Anderson: right now on that first area of technology roadmap.

Jim Anderson: I think our customers really recognize the breadth and the depth of the technology portfolio that we can bring to bear, especially in the optical networking space where we don't just assemble the modules, but we build a lot of the ingredient components that go into the module, the lasers, whether they're pixels or EMLs or silicon photonics that we design.

Jim Anderson: The breadth of technology that we can bring for that multi-generational partnership, I think is really unparalleled. The second thing, which is definitely becoming more and more important to all of our big strategic customers is supply chain resiliency. There again, I think we can bring a really differentiated supply chain where we have incredible geographic diversity in terms of our manufacturing footprint, and then our verticalized structure can be a real advantage, especially in a very fast ramp situation, which we're in right now with our data center customers when demand is increasing very quickly. It's really important to have that verticalized strategy and structure that we have, because I think that's really allowed us to supply them in a really reliable way.

Jim Anderson: or a lot of the other ingredients that go into those modules. So the breadth of technology that we can bring for that multi-generational partnership, I think is really unparalleled. And then the second thing, which is definitely becoming more and more important to all of our big strategic customers is supply chain resiliency.

Jim Anderson: And there again, I think we can bring a really differentiated supply chain where we have incredible geographic diversity in terms of our manufacturing footprint, and then our verticalized structure can be a real advantage, especially in a very fast ramp.

Jim Anderson: situation which we're in right now with our data center customers when demand is increasing very quickly. It's really important to have that verticalized strategy and structure that we have because I think that's really allowed us to supply them.

Jim Anderson: Those are a couple of things that are really resonating with our customers. But I think that back to, you know, the high-level point would be, you know, our opportunity to really build much deeper strategic engagements with our partners moving forward. I think our customers are definitely receptive to that and that's definitely an area we'll be focused on moving forward.

Jim Anderson: in a really reliable way and so a couple of those are a couple things that are really resonating with our customers but I think that back to

Jim Anderson: You know, the high-level point would be, um...

Jim Anderson: You know, our opportunity to really build much deeper strategic engagements with our partners moving forward. And I think our customers are definitely receptive to that, and that's definitely an area we'll be focused on moving forward.

Speaker Change: And for my follow-up, I'm just trying to think of the growth...

Richard Shannon: What we should be tying it to the improvement in the gross margins, and what we should be tying it to as we move through the year. You are sort of guiding to sequentially a bit better revenue at the midpoint. Should we be tying those improvements to revenue improvement through the year, or should we be thinking more about some of the pricing that you've talked about start to sort of accrete to that? Just trying to think about sort of the gross margin trajectories for the rest of the year. Not looking essentially for a guidance, but more how to think about what drives it from here on. Thank you.

Speaker Change: Margin here and what we should be tying it to the

Speaker Change: Moult through the year, you are sort of guiding to sequentially a bit better revenue.

Jim Anderson: the midpoint, should we be trying those improvements?

Jim Anderson: and so on, and so forth. The Gross Margin Project wreath for the rest of the year, don't look essentially for a guidance but more how to think about it.

Jim Anderson: what drives it from here on. Thank you.

Jim Anderson: When you look at Q1, the approximately 50 basis points sequential improvement, we're really pleased with that, and 290 basis points year-over-year improvement. That really came from a few different areas. One was, of course, higher revenue volume contributed. We also had favorable product mix.

Jim Anderson: An example of where we saw that was in our laser segment, where we saw continued strong demand for our eczema lasers for OLED screen manufacturing.

Sherri Luther: We also had improvements in yield, and we saw that in our Datacom business, where we saw improvements in our transceivers part of that business. Really a few different areas that drove the sequential and year-over-year improvement there. When we look at Q2, the guide for Q2, you know, that is just set as a range, right? 36% to 38%, it is a range. There can certainly be fluctuations on a quarterly basis, with respect to gross margin. We did talk about last quarter, Jim mentioned that we launched our gross margin expansion strategy, which includes product pricing optimization as well as product cost reductions.

Samik Chatterjee: We also had improvements in yield, and we saw that in our Datacom business, where we saw improvements in the transceivers part of that business. So, really a few different areas that drove the sequential and year-over-year improvement there.

Samik Chatterjee: When we look at Q2, the guide for Q2, you know, that is a range, right, 36 to 38%, it is a range.

Samik Chatterjee: and there can certainly be fluctuations on a quarterly basis.

Samik Chatterjee: with respect to growth margin. But we did talk about last quarter, Jim mentioned that we launched our gross margin expansion strategy, which includes pricing optimization as well as product cost reduction. And so that's an area where we're gonna focus on because we wanna achieve a long-term gross margin of greater than 40%. And so that's really how to think about what our goal is for our long-term gross margin. And we're in the very early stages of that, certainly.

Sherri Luther: That's an area where we're gonna focus on because we want to achieve a long-term growth margin of greater than 40%. That's really how to think about where our goal is for our long-term growth margin. You know, we're in the very early stages of that, certainly. You can be rest assured that we're focused on really driving to that greater than 40% target. When we get to our investor day in May of next year, we'll certainly give more color on the modeling and all of the different elements of that.

Jim Anderson: But you can be rest assured that we're focused on really driving to that greater than 40% target. And when we get to our investor day in May of next year, we'll certainly give more color on the modeling and all of the different elements of that.

Richard Shannon: Got it. Great. Thank you. Thanks for taking my question.

Operator: One moment for our next question. Our next question comes from Simon Leopold with Raymond James. Your line is open.

Speaker Change: Thank you for watching!

Samik Chatterjee: Thank you.

Jim Anderson: Thank you.

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

Simon Leopold: Thank you very much for taking the question. I've got maybe two, one's more thematic, the other more reflective. The first one is I'd love to really see if we can get some thoughts, particularly from Sherry, regarding priorities for the capital structure. It really just sort of weighing the options of delevering, investing in OpEx, maybe making acquisitions. How are you thinking about these? I'll, my follow-up is in terms of the strength of the Datacom business. I know previously management had talked about the products below 800G, basically 400G and below being relatively flattish for the year. I guess what I'm trying to understand is where was the real upside surprise this quarter?

Simon Leopold: Thank you very much for taking the question. I've got maybe two ones more thematic.

Jim Anderson: The first one is, I'd like to really see if we can get some thoughts, particularly from Sherry, regarding priorities for the capital structure.

Jim Anderson: really just sort of weighing the options of delivering, investing in OPEX, maybe making acquisitions.

Samik Chatterjee: How are you thinking about these? And my follow-up is, in terms of the strength of the Datacom business, I know previously management had talked about the products below 800 gig, basically 400 gig and below.

Samik Chatterjee: Being relatively flattish for the year and I just what I'm trying to understand is where was the really upside surprise this order? Was it really 800Gg and above or was there more strength from the

Samik Chatterjee: More traditional products below 400 gig and below, did that provide any upside or was it all coming from the higher performance? Thank you.

Speaker Change: You know, Jim mentioned the Strategic Portfolio Review that was undertaken, that was completed, and we're really in the next phase there where we're shifting our R&D spend toward those programs that drive the highest ROI for the company in order to drive the long-term growth. So that's the number one priority.

Sherri Luther: The second priority, and it's a very close second priority, and that is in reducing our debt to deleverage the balance sheet, and really overall strengthening the balance sheet. This also serves to reduce the debt service costs that hit our P&L as well. In Q1 of this 2025, we paid down $118 million to reduce our debt, and brought our debt leverage ratio down to 2.4 times as defined in the credit agreement. We're pleased with the sequential progress there.

Speaker Change: The second priority, and it's a very close second priority, and that is in reducing our debt to deleverage the balance sheet, and really overall strengthen the balance sheet. This also serves to reduce the debt service costs that hit our P&L as well.

Sherri Luther: In order to pay that down, we did use cash from operations, but at the end, you know, it took an incremental component of that payment, the pay down coming from the proceeds of the sale of our Newton Aycliffe fabrication facility that we sold off during the quarter. The sale of that facility really gave us the opportunity to pay down additional debt, to further deleverage. I certainly have a history of aggressively paying down debt, and that's something that's gonna continue to be a focus area for me and a very close second priority.

Speaker Change: But in order to pay that down, we did use cash from operations.

Samik Chatterjee: But, you know, took an incremental or component of that payment was, pay down was coming from the proceeds of the sale of our Newton-Aquith facility, fabrication facility that we sold after in the quarter. And so the sale of that facility really gave us the opportunity to pay down additional debt.

Samik Chatterjee: to further deleverage. And so I certainly have a history of aggressively paying down debt, and that's something that's gonna continue to be a focus area for me and a very close second priority.

Richard Shannon: Simon, on the second part of your question around the Datacom business. First of all, yeah, we're really pleased with the performance of that part of our business. Just to reiterate, you know, the Datacom transceiver business was up 16% sequentially, and it was up 89% year over year. You're right, we did see growth as well from a sequential basis in the 400G and below transceiver speeds. We did see sequential growth there. That was very nice to see. You know, when you look across the customer base, customers are at different stages of adopting the different transceiver speeds. We still have

Samik Chatterjee: And Simon, on the second part of your question around the Datacom business, first of all, yeah, we're really pleased with the performance of that part of our business.

Samik Chatterjee: Just to reiterate, you know, the data count transceiver business was up 16% sequentially.

Samik Chatterjee: And it was up 89% year over year. And you're right, we did see growth as well from a sequential basis in the 400 gig and below transceiver speeds. We did see sequential growth there. That was very nice to see. You know, when you look across the customer base,

Samik Chatterjee: Customers are at different stages of adopting the different transceiver speeds, so we still have...

Jim Anderson: Customers that are doing significant volume on 400 G and below as well. It's really a mix of different transceiver speeds. Back on 800 gig, I would say, look, we're really pleased with the ramp, the overall ramp of our 800 gig transceivers. The other color I would add is that one of the things I'm really pleased to see is the breadth of customers that we have. The number of customers that are ramping 800 gig has significantly increased. If I look, like, a year ago, it was only maybe a couple customers. Now we have many customers ramping 800 gig. There's a much bigger diversity of revenue streams underneath that on 800 gig ramp.

Samik Chatterjee: customers that are doing significant volume on 400G and below as well and so it's it's really a

Samik Chatterjee: a mix of different transceiver speeds. And then back on 800 gig, I would say, look, we're really pleased with the ramp, the overall ramp of our 800 gig transceivers.

Samik Chatterjee: And then the other color I would add is that one of the things I'm really pleased to see

Samik Chatterjee: is the breadth of customers that we have, the number of customers that are ramping 800 gig has significantly increased. If I look like a year ago, it was only maybe a couple of customers. Now we have many customers ramping 800 gigs. So there's a much bigger diversity of revenue streams underneath that 800 gig ramp. And we do expect 800 gig.

Jim Anderson: We do expect 800 gig to continue to grow over the coming quarters as well.

Simon Leopold: Thank you very much.

Samik Chatterjee: to continue to grow over the coming quarters as well.

Jim Anderson: Thanks, Simon Leopold.

Operator: One moment for our next question. Our next question comes from Thomas O'Malley with Barclays. Your line is open.

Speaker Change: Thank you very much.

Speaker Change: Thanks, Simon. One moment for our next question.

Samik Chatterjee: Thank you.

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

Speaker Change: Our next question comes from Thomas O'Malley with Barclays. Your line is open.

Thomas O'Malley: Hey, guys. Thanks for having me on the call, and welcome, Sherry, it's great to have you. I just wanted to ask broadly into the out year, you guys have talked about some strategic alternatives that you guys have taken. You've reviewed the business. You kind of said the review is concluded. You talked about the sale of a facility. You paid down some debt, and then you pointed out specifically the battery business. I was curious, is that all that you identified as non-strategic? Could there be additional sales on the way? Just any color you give. I honestly understand that there's an analyst day coming up, but is your intent to give more there, or is that kind of the extent of the non-strategic thus far?

Thomas O'malley: Hey guys, thanks for having me on the call, and welcome Sherry, it's great to have you. I just wanted to ask broadly,

Speaker Change: Into the out year, you guys have talked about some strategic alternatives that you guys are taking, you've reviewed the business, you've kind of said.

Speaker Change: The review is concluded. You talked about the sales of the facility, you paid down some debt, and then you pointed out specifically...

Speaker Change: the battery business. But I was curious, is that all that you identified as non-strategic? Could there be additional sales on the way? And just any color you give, I honestly understand that there's an annual stay coming up, but is your intent to give more there? Or is that kind of the extent of the non-strategic thus far?

Jim Anderson: Yeah. Thanks, Thomas, for the question. No, there are definitely other things that we're working on in the category of non-strategic. As we said, we completed that portfolio assessment. I think it wrapped up pretty much at the end of August, and then we've since moved into execution mode. There's a number of different things that we're looking at. It's just the two examples that I gave in the prepared remarks were from an asset standpoint, the sale of the Newton Aycliffe facility, and then from a product line standpoint, that battery technology platform. There definitely are other things that we're working on within that non-strategic category. We'll certainly share that with investors at the right time. It's a little premature to share some of that, but we will definitely share that at the right time.

Speaker Change: So, as we said, we completed that portfolio assessment, it wrapped up pretty much at the end of August, and then we've since moved into execution mode.

Speaker Change: and there's a number of different things that we're looking at.

Speaker Change: And just the two examples that I gave in the prepared remarks were, from an asset standpoint,

Speaker Change: the sale of the Newton-Acliffe facility, and then from a product line standpoint.

Speaker Change: that battery technology platform. But there definitely are other things that we're working on within that non-strategic.

Speaker Change: We'll certainly share that with investors as at the right time.

Samik Chatterjee: It's a little premature to share some of that, but we will definitely share that at the right time. And then certainly we'll give a better picture at the Investor Day as well. But even between now and the Investor Day, we'll share any key milestones along the way. And then I just want to reiterate what I said in the prepared remarks that the overall

Jim Anderson: Then certainly we'll give a better picture at the Investor Day as well. Even between now and the Investor Day, we'll share any key milestones along the way. Then I just wanna reiterate what I said in the prepared remarks, that the overall even though the overall non-strategic category is a relatively small part of our revenue, again, it is dilutive to our operating margins, and more importantly, it draws away capital and focus from the management team. We are anxious to execute quickly on that, to improve focus, to improve where our assets and where our investments are focused. Then, you know, just beyond just the non-strategic category, you know, in our other categories of, for instance, key growth drivers and key profit drivers, that's a place where we've been adding investment.

Samik Chatterjee: Even though the overall non-strategic category is a relatively small part of our revenue,

Speaker Change: Again, it is dilutive to our operating margins and more importantly it draws away capital and focus from the management team.

Speaker Change: We are anxious to execute quickly on that, to improve focus, to improve where our

Speaker Change: where our assets and where our investments are focused. And then, you know, just.

Speaker Change: beyond just the non-strategic category.

Jim Anderson: We've been shifting investment away from the non-strategic areas into the fast-growing areas. Best example of that is the data center AI transceiver growth. We have increased R&D investment in new technology platforms for datacom transceivers. These are new future technology platforms that we're really excited about. As well as the other example I would give is the optical circuit switching, which we're excited about as well. We're also shifting organic investment towards those high growth, high profitability categories as well. That's certainly already happened or in process as well.

Speaker Change: the data center AI transceiver growth. And so we have increased.

Thomas O'Malley: Helpful, Jim. The second I had is on 1.6. I think you mentioned calendar year 2025 as a ramp for those transceivers. Do you think that you'll have any contribution from 1.6 in the fourth calendar quarter of this year? Or are you gonna see any this year? When do you see the volume ramp of 1.6 coming? We've heard from others in the space that there are constraints on the laser side and on the DSP side. Are you seeing any of those constraints?

Speaker Change: already happened or in process as well.

Speaker Change: Helpful, Jim. And then the second I had is on 1.6T, I think you mentioned.

Speaker Change: Calender Year 25 is a ramp with those transceivers but um do you think that you'll have- this is a multi-parter here so forgive me do you think that you'll have any contribution from 1.6t uh in the fourth calendar quarter uh of this year or are you gonna see any this year and then when do you see the the volume ramp of 1.6t coming we've heard from

Jim Anderson: Okay. Thanks, Thomas. I'll try to. That was a multi-parter. I'll do my best to get to all of that. At this point, what we're saying is we'll ramp within calendar 2025. Certainly, we're focused, along with our customer, on getting our solution into production as quickly as possible. To the extent that we can ramp sooner, we'll certainly execute as fast as we can. I think I was really pleased that the team delivered samples last quarter. We're working very tightly with our customers, now our lead customers, to get that into production as quickly as possible. For now, I think I'll leave the expectation at calendar 2025.

Speaker Change: Now our lead customers to get that into production as quickly as possible and but for now I think I'll leave the expectation at calendar 25 and as we get close to that That revenue ramp will certainly share more details about when exactly we expect that ramp and the the contribution and then with respect to the the specific technology that we're using

Jim Anderson: As we get close to that revenue ramp, we'll certainly share more details about when exactly we expect that ramp and the contribution. With respect to the specific technology that we're using, what I would say is I think one of our real strengths and something that really differentiates us as a technology, as an optical networking technology provider, is the breadth of technology that we can bring to bear, right? We look at it as, you know, we'll deploy whatever the best technology is for the benefit of the customer and the application that we're trying to drive.

Speaker Change: What I would say is, I think one of our real strengths, and something that really differentiates us

Speaker Change: As a technology, as an optical networking technology provider, is the breadth of technology that we can bring to bear, right? We look at it as...

Speaker Change: You know, we'll deploy whatever the best technology is.

Jim Anderson: Whether that's an EML, VCSEL or silicon photonics, we're developing all of those different options, and we'll deploy whatever technology is strongest to create the biggest differentiation for our products and the biggest benefit for our customers. That's kinda the approach that we take to the technology. I think we've got the broadest set of technology options of certainly any of our peers and competitors. I think that's a real competitive strength for us.

Speaker Change: for the benefit of the customer and the application that we're trying to drive. So whether that's...

Speaker Change: and EML, Bixel, or Silicon Photonics.

Speaker Change: We're developing all of those different options, and we'll deploy whatever technology is strongest to create the biggest...

Operator: Thank you. One moment for our next question. Our next question comes from Meta Marshall with Morgan Stanley. Your line is open.

Speaker Change: Thank you. One moment for our next question.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Meta Marshall with Morgan Stanley. Your line is open.

Meta Marshall: Great. Thanks. Maybe a couple questions for me. You know, you mentioned some strength out of telecom in the quarter. Just wondered, you know, is that more Asia-based or US-based? As a second question, you know, you had mentioned kind of some increase in yields as the reason for the upside on gross margins in the quarter. I wanted to get a sense of, is that some of the kind of tailwinds from some of the yield disruptions we saw in fiscal Q3 earlier this year, or is that just kind of additional improvements you guys have made to the business? Thanks.

Meta Marshall: Great, thanks. Maybe a couple questions for me. You know, you mentioned some strengths out of telecom.

Speaker Change: in the quarter. Just wondered, you know, is that more Asia-based or U.S.-based?

Speaker Change: And then as a second question, you know, you had mentioned kind of some increasing yields.

Speaker Change: for reason for upside or gross margins in the quarter. We wanted to get a sense of, is that some of the kind of tailwinds from some of the yield disruptions we saw in fiscal Q3 earlier this year, or is that just kind of additional improvements you guys have made to the business? Thanks.

Jim Anderson: Yeah. Thanks, Meta. First on the first part of the question around telecom strength. Yeah, telecom was a bit stronger than we had originally forecasted. Really pleased to see that. It was first of all, just to reiterate, a combination of two things. We saw end market improvement, but it was also due to some of the new products that we have ramping in telecom, and specifically on those new products, and I talked about this at last quarter's earnings, the 100G ZR and the 400G ZR/ZR+ that we had begun ramping. We continue to see good ramp contribution from those products, and that certainly benefited us.

Speaker Change: due to some of the new products that we have ramping in telecom. And specifically on those new products, and I talked about this at last quarter's earnings, the 100 ZR and the 400 gig ZR, ZR plus that we had begun ramping, we continue to see good ramp contribution from those products. And so that certainly benefited us. But we did see some improvement in the end market, specifically around DCI data center interconnect, but also even in the traditional transport area, the traditional telecom transport area, we did see some strengthening there.

Jim Anderson: We did see some improvement in the end market, specifically around DCI data center interconnect, but also even in the traditional transport area, the traditional telecom transport area. We did see some strengthening there. We are still taking kind of a cautious view and cautious outlook on telecom recovery overall, but it was nice to see some good end market demand signals, and strength in Q1. With respect to Asia versus. I think you asked a question about Asia versus US. I'm actually not sure which market in particular. I believe we saw some improvement across both of those markets.

Speaker Change: We are still taking kind of a cautious view and cautious outlook on telecom recovery overall, but it was nice to see some good end market demand signals.

Speaker Change: and Strength in in Q1. And then with respect to Asia versus, I think you asked a question about Asia versus U.S.

Speaker Change: Um, I'm...

Speaker Change: I'm actually not sure which market in particular. I believe we saw some improvement across both of those markets.

Jim Anderson: On the second part of your question on yield increase, yeah, so as Sherri mentioned in the Q1 sequential improvement from Q4 to Q1, there were three different factors she highlighted, yield being one of those. Yeah, I wouldn't really characterize it as a tailwind. I would characterize it as new yield improvements. This is actually something that I highlighted last earnings call when I talked about the gross margin improvement initiative that we were putting in place. I said there was two components of it. There was a pricing component of it, but there's also a big focus on product costs. I mentioned yields as one of the key areas we've been focusing on. The team has definitely been focused on that over the past few months.

Speaker Change: Thank you very much. Thank you.

Speaker Change: And then, on the second part of your question on yield increase, yeah, so Sheri mentioned in the Q1 sequential improvement from Q4 to Q1, there were three different factors. She highlighted yield being one of those. Yeah, I wouldn't really characterize it as a tailwind. I would characterize it as new yield improvements.

Sheri: I said there was two components of it. There was a pricing component of it, but there's also a big focus on product costs. And I mentioned yields as one of the key areas we've been focusing on.

Jim Anderson: In fact, some real-time information, Sherri and I were actually sitting in a review with the team this morning, the Datacom transceiver team this morning, and we were reviewing yields. Really pleased with the progress that team has made on yield improvements over the past few months and really pleased with the plan that they're showing moving forward. Now, we're still in the early stages of the gross margin improvement strategy and, you know, we have a lot more work in front of us, but I wanna say thanks to the team for the initial work, good work that they've done and for the plan that they have moving forward. Yes, yields will continue to be a key area of focus for us.

Sheri: And the team has definitely been focused on that over the past few months. In fact,

Meta Marshall: Great. Thanks so much.

Operator: One moment for our next question. Our next question comes from Karl Ackerman with BNP Paribas. Your line is open.

Speaker Change: Great, thanks so much. Thank you. One moment for our next question.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Carl Ackerman with BNP Paribus. Your line is open.

Karl Ackerman: Yes. Thank you. Jim, I was hoping you could discuss whether you are seeing data center customers reallocating procurement of optical transceivers to US domiciled suppliers like Coherent. Second, are you able to quantify your expanding TAM opportunity as AI clusters now have the option of being disaggregated into white box components, that seem to benefit yourself? Thank you.

Carl Ackerman: Yes, thank you.

Carl Ackerman: Jim, I was hoping you could discuss whether you are seeing data center customers reallocating procurement of optical transceivers to U.S. domiciled suppliers like Coherent. And then second, are you able to quantify your expanding TAM opportunity as AI clusters now have the option of being disaggregated into white box components?

Jim Anderson: Thanks, Karl. Two really good questions. On the first one on data center customers, and I touched on this briefly, in, I think one of the earlier questions, but one of the things that's very important to data center customers is supply chain resiliency. You know, the two things that we always talk about is, of course, number one, the technology roadmap that we have and the breadth and the depth of the technology and the innovation we can bring. The other big part of the discussion is around supply chain resiliency.

Carl Ackerman: that seem to benefit yourself. Thank you.

Carl Ackerman: Thank you.

Speaker Change: Thanks, Carl. Two really good questions. On the first one, on data center customers, and I touched on this briefly.

Jim Anderson: This is something that I think this is becoming more and more important to customers, but they're also really appreciating the differentiation and the value that Coherent brings in terms of supply chain resiliency, because there's really two components of our resiliency. Number one is we have tremendous geographic diversity in our production platforms, in where our devices and modules are built and assembled. That geographic diversity, I think, is a big benefit to our customers. The second piece is around the verticalization. We don't just assemble the transceiver, for example. We manufacture a number of the key components that go into that transceiver.

Speaker Change: But the other big part of the discussion is around supply chain resiliency. And this is something that I think customers are really, this is becoming more and more important to customers, but they're also really appreciating

Speaker Change: The differentiation and the value that Coherent brings in terms of supply chain resiliency because there's really two components of our resiliency.

Speaker Change: Number one is we have tremendous geographic diversity in our production platforms and where our

Speaker Change: where our devices and modules are built and assembled. And so that geographic diversity, I think, is a big benefit to our customers. And then the second piece is

Speaker Change: around the verticalization. So we don't just assemble the transceiver, for example. We manufacture a number of the key components that go into that transceiver.

Jim Anderson: Whether that's a VCSEL laser or an EML, or that's isolator or even the garnet material that goes into the isolator that goes into the transceiver, a lot of that we do ourselves. You know, we do leverage outside suppliers sometimes as well if it's to our benefit. That verticalization is also the second piece that gives us, again, that really strong supply chain resiliency. I think that is definitely recognized by our data center customers and becoming a, you know, a more important factor moving forward. Then on the second part of your question around expanding TAM. Yeah, that's a great question. I would say definitely the TAM is expanding for us for the reasons that you noted.

Speaker Change: Transceiver, a lot of that we do ourselves. And we do leverage outside suppliers sometimes as well if it's to our benefit.

Speaker Change: But that verticalization is also the second piece that gives us, again, that really strong supply chain resiliency. And I think that that is definitely recognized by our data center customers and becoming a more important factor moving forward.

Jim Anderson: I don't have a good quantification of that today, but I think we will definitely talk about that in the context of our investor day in May when we share the full breadth of the market opportunity in front of us, and we'll certainly talk about the data center transceiver opportunity, and we'll talk about that expanding TAM at that time.

Speaker Change: the data center transceiver opportunity, and we'll talk about that expanding TAM at that time.

Karl Ackerman: Great. Thank you.

Jim Anderson: Thanks, Carl.

Operator: One moment for our next question. Our next question comes from Ruben Roy with Stifel. Your line is open.

Speaker Change: Great, thank you. Thanks, Carl. One moment for our next question.

Speaker Change: Thank you for watching!

Speaker Change: Our next question comes from Ruben Roy with Stiefel. Your line is open.

Ruben Roy: Thank you. Jim, I actually had a similar question to the last one, and you started talking a little bit about some of the components that go into transceivers. I was wondering you know, last quarter you talked about build versus buy, and earlier this year, the company talked about expansion of the six-inch wafer fab, InP fab. Wondering if that's an area that you could, you know, maybe accelerate. You know, if so, how are you thinking about, you know, sort of build versus buy and, you know, kind of insourcing some of these components, you know, certainly on the EML side as we're hearing about, you know, constraints, et cetera, as you think about 2025 and 2026?

Ruben Roy: Thank you. Thank you. Thank you.

Speaker Change: Earlier this year, the company talked about expansion of the 6-inch wafer fab and 5-fab.

Speaker Change: I'm wondering if that's an area that you could, you know, maybe accelerate and, you know, if so, how are you thinking about, you know, sort of build versus buy and, you know, kind of insourcing some of these components, you know, certainly on the ML side, as we're hearing about, you know, constraints, etc., as you think about 25 and 26.

Jim Anderson: Yeah. Thanks, Ruben. You know, first of all, our philosophy in general. Let me start with what is our general philosophy on build versus buy or develop ourselves versus leverage the outside ecosystem. What we wanna always be doing is applying our R&D dollars to the areas that we can truly differentiate, right? If we believe that we can create true differentiation for our customers that benefits our customers, and do something that's not available in the rest of the market, then that's a good use of our R&D dollars. That can benefit our customers both in terms of the technology advantage or maybe the cost structure advantage. To the extent that we drive true differentiation, we'll do that. If we can't, then we should be leveraging the outside solutions, right?

Speaker Change: Yeah, thanks, Ruben. So, you know, first of all, our philosophy in general, let me start with what is our general philosophy.

Speaker Change: should be on.

Speaker Change: on Build vs. Buy, or Develop Ourselves vs. Leverage the Outside Ecosystem. What we want to always be doing is applying our R&D dollars to the areas that we can truly differentiate, right? So if we believe that we can create true differentiation for our customers, that benefits our customers,

Carl Ackerman: And do something that's not available in the rest of the market, then that's a good use of our R&D dollars. And that can benefit our customers both in terms of the technology advantage or maybe the cost structure.

Carl Ackerman: So to the extent that we drive true differentiation, we'll do that, and if we can, then we should be leveraging the outside solutions, right? So if we can't...

Jim Anderson: If we can't generate some real advantage for our customers, then we should be leveraging the ecosystem. I think that same philosophy applies to our supply chain as well: if we can generate an advantage for our customers that may be technical or cost structure advantage or supply chain resiliency advantage, then we should do that, right? If we can't generate a genuine advantage, then we should be leveraging the outside ecosystem. There are times when we choose to verticalize and build those components ourselves, and there are other times where we choose to leverage outside suppliers. I think we're moving forward, we're gonna be much more strategic and deliberate about that than maybe we have been in the past. That's our general philosophy.

Carl Ackerman: ...generate some real advantage for our customers, then we should be leveraging the ecosystem. And I think that same...

Carl Ackerman: philosophy applies to our our supply chain as well is if we can generate an advantage for our customers that may be technical or cost structure advantage or supply chain resiliency advantage then we should do that right but if there if we can't generate a genuine advantage then we should be leveraging the outside ecosystem and so there are times when we choose to verticalize and build those components ourselves and there are other times where we choose to leverage outside suppliers and I think we're we're moving forward we're going to be much more strategic and deliberate about that than maybe we have been in the past

Carl Ackerman: and but that's that's our general philosophy.

Ruben Roy: Very helpful. Thanks, Jim. Just a quick follow-up. I might have missed this, but on the telecom commentary, you know, last quarter you had a little bit more of a muted outlook on telco. You know, nice surprise here to the upside. Was that mostly driven by DCI or were some of the traditional telecom products also a little bit better than you had thought? Thank you.

Speaker Change: Very helpful. Thanks, Jim. And just a quick follow-up. I might have missed this.

Speaker Change: Yeah, thanks, Ruben. It was a combination of both. Yeah, the end market was a bit stronger and that was a combination of DCI but also traditional telecom transport as well. We saw an uptick in end market demand there, too. And as I mentioned earlier, we're still taking a cautious approach to the telecom market. I'd like to see a couple more quarters of improvement before...

Speaker Change: You know, we're positive that the market is fully recovering, right, but some good positive signs so far.

Ruben Roy: Appreciate it. Thank you.

Operator: One moment for our next question. Our next question comes from Christopher Rolland with Susquehanna. Your line is open.

Speaker Change: Appreciate it. Thank you. One moment for our next question.

Speaker Change: Our next question comes from Christopher Rolland with Susquehanna. Your line is open.

Christopher Rolland: Hey, guys. Thanks for the question. I guess, firstly, welcome and also welcome back, Sherri.

Christopher Rolland: Hey guys thanks for the question and I guess firstly welcome and also welcome back Sherry.

Jim Anderson: Thanks, Chris.

Christopher Rolland: My question, I guess, first is a follow-up to Ruben's on EMLs. Are you guys gonna be commercially shipping your own EMLs into either 800 and 1.6 next year? Additionally, are you concerned at all about data center capacity constraints for you guys into what could be a pretty robust 2025? This is either for transceiver assembly or light source.

Christopher Rolland: My question, I guess first is a follow-up to Ruben's on EMLs.

Christopher Rolland: Are you guys going to be commercially shipping your own EMLs into either 800 and 1.6 next year?

Speaker Change: And additionally, are you concerned at all about data center capacity constraints for you guys?

Speaker Change: into what could be a pretty robust 2025. And this is either for transceiver assembly or light source.

Jim Anderson: Yeah. Thanks, Chris. On the first part of the question, on EML usage in 800G and 1.6T. On EMLs, I'll just start by saying we use a combination of our own internally developed and produced EMLs, as well as we do leverage EMLs from our very good partners as well. Again, back to that prior question on kind of philosophy, where we think there's benefit for our customers, we will do that internally, but where we can leverage the outside ecosystem, we'll also do that. You know, I would anticipate, you know, us continuing to do that in whether it's 800G or 1.6T, us continuing to leverage both internal as well as external sources.

Speaker Change: Yeah, thanks, Chris. So, on the first part of the question,

Speaker Change: on EML usage in 800 gig and 1.6 GHz. On EMLs, I'll just start by saying we use a combination of our own internally developed...

Speaker Change: produced emails as well as we do leverage emails from

Speaker Change: were very good partners as well. And so again, back to that.

Carl Ackerman: You know, I would anticipate, you know, us continuing to do...

Carl Ackerman: that in, whether it's 800 gig or 1.6 T.

Carl Ackerman: us continuing to leverage both internal as well as external sources.

Jim Anderson: I also wanna reiterate the fact that we take a multi-technology approach, right? Not just EML, but to the extent we can leverage a VCSEL or a silicon photonics solution, we'll do that as well, right? Again, we'll take whatever we believe is the best technology path for our customers that gives the greatest benefit. I think that's one of the benefits we bring to our customers is our expertise is really at a deeper level of being able to manipulate photons for the benefit of data transmission. We look at whether EML, VCSEL, or silicon photonics is. That's just a method by which we bring our innovation around using photons to transmit data.

Carl Ackerman: And then I also want to reiterate the fact that we take a...

Carl Ackerman: multi-technology approach, right? So not just EML, but to the extent we can leverage Vixel or a silicon photonic solution, we'll do that as well, right? So again, we'll take whatever is, whatever we believe is the best technology path for our customers that gives the greatest benefit. And I think that's one of the benefits we bring to our customers is

Carl Ackerman: Our expertise is really at a deeper level of being able to...

Carl Ackerman: to manipulate photons for the benefit of data transmission. And we look at whether TML, VCSOL, or silicon photonics. That's just a method by which we bring our innovation around using photons to transmit data.

Jim Anderson: Then on the second part of your question on, I think it was Chris, around capacity constraints as we continue to ramp in data center AI. I would say that you know, first of all, I wanna take the opportunity to thank my production and engineering, manufacturing teams for doing a great job of supporting the ramp of our data center AI business. They've really done an outstanding job making sure that we deliver for our customers. That's not to say that we don't have a constraint here or there, but I think overall, they've done a really outstanding job meeting the demand needs of our customers, and that's certainly our focus moving forward.

Carl Ackerman: And then on the second part of your question on, I think it was, Chris, around capacity constraints as we see as we continue to ramp in data center AI. I would say that

Speaker Change: You know, first of all, I would say that I want to take the opportunity to thank my production and engineering manufacturing teams for doing a great job of supporting the ramp of our data center AI business. They've really done an outstanding job making sure that we deliver for our customers.

Jim Anderson: You know, we're certainly increasing and ramping up our capacity internally, whether that's for transceiver assembly or whether that's for the individual ingredients that go into that transceiver, isolators, VCSEL, EMLs, whatever, right? We're ramping up our capacity, and certainly our goal to make sure that we've got the right capacity for the demand that we're seeing from our customers.

Speaker Change: increasing and ramping up our capacity internally, whether that's for transceiver assembly or whether that's for the individual ingredients that go into that transceiver, isolators, pixels, EMLs, whatever, right? So we're ramping up our capacity and certainly our goal to make sure that we've got the right capacity for the demand that we're seeing from our customers.

Christopher Rolland: Excellent. Then perhaps a follow-up, Jim. Now that you've had some time to kinda look under the hood, so some of the pushback that I get is around margin expansion opportunities in data center, particularly on the transceiver, you know, your old Finisar business, as you look to your path for greater than 40% total company GMs. What I'm getting at here is there seems to be a balance here between upside from surging units, obviously driven by AI, versus what I think are fairly aggressive capacity expansion plans for guys, particularly out of Asia. You know, Innolight, you have CloudLight, you have some other transceiver guys here as well.

Speaker Change: Excellent and then perhaps a follow-up Jim

Speaker Change: versus what I think are fairly aggressive capacity expansion plans for guys particularly out of Asia but

Christopher Rolland: When you balance those together, do you think there is sizable room here to expand margins on the transceiver side, which is a big chunk of your datacom business?

Speaker Change: to expand margins on the transceiver side, which is a big chunk of your data comp business.

Jim Anderson: Yeah. Thanks, Chris. Let me start at the company level, and then I'm gonna come back to data center transceivers and how that fits in. The short answer on data center transceivers is yes, and it's product cost, but I wanna paint the company picture first, right? At a company level, we're gonna march towards that 40% gross margin goal. I think, you know, like we talked about, there's two big initiatives, one around pricing and one around product cost. I think the pricing optimization that we can do probably applies more to our industrial businesses. We have many, many different product lines and many different industrial sub-markets underneath the umbrella of the industrial business.

Speaker Change: I think the pricing optimization that we can do.

Speaker Change: probably applies more to our industrial businesses. So we have many.

Speaker Change: many different product lines and many different industrial sub-markets underneath the umbrella of the industrial business. And I do see the opportunity to do a much better job of optimizing the pricing of those products and capturing what I would say, what I would call is the fair value for the for the technology and the innovation that we're bringing to those industrial markets.

Jim Anderson: I do see opportunity to do a much better job of optimizing the pricing of those products, and capturing what I would call is the fair value for the technology and the innovation that we're bringing to those industrial markets. Now on pricing in the datacom transceiver space, there I think there's not as much opportunity on the pricing side. What I would say is, there's definitely opportunity on the product cost side, and that's one of the examples I gave earlier on the call, is on product costs within transceivers. I highlighted, I believe, this on the last earnings call, yields as definitely an opportunity.

Speaker Change: Now on pricing in the Datacom transceiver space, there I think there's, I would say there's not as much opportunity on the pricing side.

Speaker Change: But what I would say is, but there's definitely opportunity on the product cost side and that's one of the examples I gave earlier on the call.

Speaker Change: is on protocosts within transceivers.

Speaker Change: And I highlighted, I believe this on the last earnings call, yields as definitely an opportunity. And Sherry and I, as I said earlier,

Jim Anderson: Sherri and I, as I said earlier, were in an operational review this morning, spending time talking to the team about yields, the improvements that they've driven over the past few months, and what we need to see in terms of yield improvements moving forward as well. That is definitely an area of focus for us. Back to your data, datacom transceiver question in particular, I would say maybe not so much on pricing, but definitely there's opportunity for us in cost, and we're certainly very focused on that.

Speaker Change: We're in an operational review this morning, spending time talking to the team about yields, the improvements that they've driven over the past few months.

Speaker Change: and what we need to see in terms of yield improvements moving forward as well. And that is definitely an area of focus for us. So, I would, back to your Datacon transceiver question in particular, I would say, maybe not so much on pricing, but definitely there's opportunity for us in cost, and we're certainly very focused on that.

Christopher Rolland: Great answer. Thanks, Jim.

Operator: One moment for our next question. Our next question comes from Jack Egan with Charter Equity Research. Your line is open.

Speaker Change: Great answer. Thanks, Jim.

Speaker Change: One moment for our next questioner.

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

Speaker Change: Thank you for watching!

Speaker Change: The next question comes from Jack Egan with Charter Equity Research. Your line is open.

Jack Egan: Great. Thanks for taking the questions. I didn't hear or see anything about segment operating margins, but through June, the networking segment had been kind of range-bound in the mid-teens despite being at record revenue. I was just wondering, are you seeing the margin benefits from a higher mix of 800G transceivers today? And, if not, just when exactly does that impact kind of kick in?

Jim Anderson: Yeah. Jack, I maybe I'll start with that question. If you know, if Sherri wants to add anything, she's welcome to add. What I would say is, yeah, It sounded like your question was focused on the data center or communication segment, which is mostly data or networking, which is mostly data center, AI data center. If you look historically at when we move to new technology nodes, yes, you're right. The newer speed grades for the transceiver are generally higher margin. And so to the extent that we're ramping quickly a higher speed more advanced transceiver, that's usually at a higher gross margin. Yeah, the general rule would be as we ramp those higher speeds, we would expect to see margin improvement on that.

Speaker Change: or networking, which is mostly data center, AI data center.

Speaker Change: If you look historically at when we move to new technology nodes, yes, you're right, the newer speed grades for the transceiver are generally higher margin and so to the extent that

Speaker Change: We're quickly ramping a higher speed, more advanced transceiver that's usually at a higher gross margin. So, yeah, the general rule would be as we ramp those higher speeds, we would expect to see margin improvement on that.

Sherri Luther: Yeah, I'll just add that, if you look into our Q, you'll see, Jack, that we do show a segment profit. On the networking side of the business, we did see higher segment profits sequentially. You will see that in there when you dig in.

Jack Egan: Okay, great. I appreciate that. My follow-up's a bit of a kind of a higher level question. It was good to see a rebound in telecom, but you know, we've seen this prolonged slowdown in that market after the carrier spent quite a bit on you know, 5G spectrum licenses at first and then obviously on the 5G equipment build-out itself. When you look at some of the commentary kind of across the telecom supply chain, it's been pretty difficult to monetize 5G. The carriers might not have much incentive to you know, keep spending and adding new capabilities.

Speaker Change: Okay, great. I appreciate that. And then my follow-up's a bit of a kind of a higher level question. So,

Speaker Change: It was good to see a rebound in telecom, but we've seen this prolonged slowdown in that market after the carrier spent quite a bit on 5G spectrum licenses at first, and then obviously on the 5G equipment build-out itself. But when you look at some of the commentary across the telecom supply chain, it's been pretty difficult to monetize 5G.

Jim Anderson: Yeah. Thanks, Jack. That's a great point, and that's exactly why we're taking a, you know, here in the more near-term quarters, we're taking a more cautious view on telecom, right? That's why last quarter I said we're taking a cautious view, and the same applies to this quarter as well until we see a dramatic pickup in telecom operator CapEx. I think you know that market may be challenged in terms of recovery. Now, that said, we did see in Q1 some strong positive signs, as I said earlier. I think the clear area of growth is around data center interconnect. We are definitely seeing strong demand signals in DCI, right? Obviously that's only a portion of the telecom market, but we are seeing very strong demand signals there.

Speaker Change: are just difficult to monetize.

Speaker Change: And the same applies to this quarter as well as until we see a dramatic pickup in.

Speaker Change: telecom operator CapEx. I think you know that that market may be challenged in terms of recovery. Now that said we did see in Q1 some strong positive signs as I said earlier and I think the the clear area of growth is around data center interconnect. We are definitely seeing

Speaker Change: Strong Demand Signals in DCI, right? And obviously, that's only a portion of the telecom market.

Jim Anderson: As I mentioned before, we did see a little bit of recovery in telecom, traditional telecom transport as well. We agree in the nearer term, we're definitely taking a more cautious view of the telecom recovery. Now, over the long term, we still do believe that, you know, telecom over the long term will continue to grow and, we believe that's a great growth area for the company. We've got a lot of new products that are ramping in that segment, and then we'll paint a more complete picture of what we see as a long-term opportunity as part of our investor day in May.

Speaker Change: but we are seeing very strong demand signals there. And then, as I mentioned before, we did see a little bit of recovery in telecom, traditional telecom transport as well. But we agree in the near term, we're definitely taking a more cautious view of the telecom recovery.

Speaker Change: Now, over the long term, we still do believe that, you know, telecom over the long term will continue to grow, and we believe that's a great growth area for the company. We've got a lot of new products that are ramping in that segment, and then we'll paint.

Speaker Change: paint a more complete picture of what we see as a long-term opportunity as part of our investor day in May.

Jack Egan: Great. Thank you, guys.

Operator: One moment for our next question. Our next question comes from Richard Shannon with Craig-Hallum Capital Group. Your line is open.

Speaker Change: Great, thank you guys.

Speaker Change: One moment for our next question.

Speaker Change: Thank you.

Speaker Change: Next question comes from Richard Shannon with Craig Hallam Capital Group. Your line is open.

Richard Shannon: Well, great. Thanks, everyone for allowing me to ask a couple of questions here. Jim, I guess, maybe a quick two-parter related to datacom here. When I look at 1.6, how are you thinking about Coherent time to market relative to your competitors? Do you also expect to ramp at a breadth of customer base more like to what you have now in 800 gig or kind of what you saw in the earlier stages of 800 gig, whereas, as you just know today, the customer base has expanded nicely here over this period?

Richard Shannon: Great, thanks everyone for allowing me to ask a couple questions here. Jim, I guess maybe a quick two-parter related to Datacom here.

Richard Shannon: When I look at 1.6...

Richard Shannon: How are you thinking about coherent time-to-market relative to your competitors, and do you also expect to ramp at a breadth of customer base more like what you have now in 800 gig or kind of what you saw in the earlier stage of 800 gig where, as you just know today, the customer base has expanded nicely here over this period?

Jim Anderson: Yeah. Thanks, Richard. On the first one, you know, just reiterate what I said earlier. We delivered samples last quarter. We're working really carefully with our customers to get that into production as quick as possible. At this point, you know, we expect revenue to begin to ramp in calendar 2025. As we get closer to that ramp, we'll certainly share more specifics around that. You know, clearly we're motivated to get that into production as quick as possible on our side. In terms of the second part of the question on breadth of customer base, I think it would be similar to the breadth of customers that we saw at the beginning of the 800G ramp.

Speaker Change: Yeah, thanks, Richard. The first one, you know, we delivered, just reiterate what I said earlier, we delivered samples last quarter. We're working really carefully with our customers to get that into production as quick as possible. And at this point, you know, we expect revenue to begin to ramp in calendar 25. As we get closer to that, that ramp will certainly share more specifics around that. And, you know, clearly, we're motivated to get that into production. As quick as possible on our side. And then in terms of the second part of the question on breadth of customer base, I think it would be similar to the breadth of customers that we saw at the beginning of the 800 gig ramp.

Jim Anderson: It might be, could be a little bit different, but it'll be kinda similar magnitude in terms of number of customers.

Richard Shannon: might be could be a little bit different but it'll be kind of similar magnitude in terms of number of customers

Richard Shannon: Okay, fair enough for that Jim. My quick follow-on question here is this...

Jim Anderson: Yeah, we don't really break out to that level of granularity. You know, DCI was a smaller portion, but is a rapidly growing portion of that revenue base, right? We do expect DCI to become a bigger component of that overall telecom TAM, as well as our revenue base over the coming quarters. It's certainly faster growing than kind of the rest of that part of the market.

Richard Shannon: Okay. Appreciate the comments, Jim. That's all for me.

Jim Anderson: Thanks, Richard.

Speaker Change: Okay, appreciate the conversation, let's all come in. Thanks, Richard.

Operator: Thank you. Ladies and gentlemen, this concludes today's question and answer session. I'd like to turn the call back over to Jim Anderson for any closing remarks.

Speaker Change: Thank you, ladies and gentlemen. This concludes today's question and answer session. I'd like to turn the call back over to Jim Anderson for any closing remarks.

Jim Anderson: Thank you everyone for joining us on our call today. I wanna once again thank Sherry for joining the team as well. It's good to have her sitting at the table here with me again. Just in closing, I wanna thank all my Coherent teammates for all their hard work and dedication. I'm really proud of them and proud to be on the same team as them. We thank you for all of your support and look forward to updating you on our progress. Operator, that concludes today's call.

Jim Anderson: Thank you everyone for joining us on our call today. I want to once again thank Sherry for joining the team as well. It's good to have her sitting at the table here with me again.

Jim Anderson: And just in closing, I want to thank all my coherent teammates for all their hard work and dedication. I'm really proud of them and proud to be on the same team as them. And we thank you for all of your support and look forward to updating you on our progress. And Operator, that concludes today's call. Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect and have a wonderful day.

Operator: Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.

Q1 2025 Coherent Corp Earnings Call

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