Coherent Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 16, 2023

There are 19 speakers on the call.

Operator

Day and

Speaker 1

thank you for standing by. Welcome to the Coherent Corp. FY 'twenty three Fourth Quarter Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Speaker 1

Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Silverstein. Please go ahead.

Speaker 2

Thank you, Kevin, and good morning, everyone. Thank you for joining our Q4 fiscal 2023 earnings call. Today on the call, we have Chair and CEO, Doctor. Chuck Mattero Chief Financial Officer, Mary Jane Raymond Chief Strategy Officer and President of Materials Segment, Doctor. Giovanni Barbarossa And Laser segment President, Doctor.

Speaker 2

Mark Sobe. As a reminder, yesterday after the market closed, Coherent posted a shareholder letter along with an updated investor presentation. They can both be found in the Investor Relations section of our website. Before I turn the call over to Chuck for his opening remarks, I want to call everyone's attention to our shareholder letter The shareholder letter contains the traditional financial statements that were previously set forth in our earnings press releases, along with additional color around our operating performance, key trends and outlook. Given the additional disclosures in the letter, we plan to devote the bulk of this morning's call to answering questions from the financial community.

Speaker 2

We've undertaken this change with the goal of providing greater insight and clarity for our quarterly earnings release. We welcome your feedback. I also want to remind everyone on this call that we will refer to forward looking statements, including all statements the company will make about its future financial and operating performance, Growth strategy and market outlook and that actual results may differ materially from those contemplated by these forward looking statements. Risk factors that could cause actual results and trends To differ materially or set forth in the shareholder letter and in the annual and quarterly reports filed with the SEC, Coherent assumes no obligation to update any forward looking statements, which speak only as of their respective dates. In addition, during this call, we may discuss both GAAP and non GAAP financial measures.

Speaker 2

A reconciliation of GAAP to non GAAP measures is included in the shareholder letter. Unless otherwise stated, all financial information referenced in this call will be non GAAP. Our discussion will be limited to those non GAAP financial measures that are reconciled in the shareholder letter. Today's conference call will be available for webcast replay in the Investor Relations With that, it is my pleasure to turn the call over to Chuck. Chuck, please go ahead.

Speaker 3

Thank you, Paul. I hope those of you listening in have had the opportunity to read our new shareholder letter. In the 4th quarter, The Coherent team did a good job executing in the midst of a challenging macroeconomic environment. Our revenue of $1,205,000,000 was above the high end of our guidance and non GAAP EPS of $0.41 was toward the high end of our guidance. Operating cash flow was 182,000,000 which marked sequential and year over year improvement.

Speaker 3

We invested $93,000,000 in capital equipment And we retired $121,000,000 of debt. When I look back on fiscal year 2023, Legacy Coherent contributed to our resilient business model. In addition, Our track record following our acquisition of Finisor once again speaks to our ability Two major highlights in fiscal year 2023 were related to our acquisition of Finisar. We demonstrated our unique scale While generating nearly 20% of our FY2023 revenues from just 2 customers, 1 in communications And 1 in electronics. These are good examples of the strength of our vertically integrated platforms, which enable breakthrough solutions and our differentiated ability to scale to meet sudden increases in market demand like those that we are now seeing in AI.

Speaker 3

And while we experienced a surge in orders in Q4 In communications for AI, the macroeconomic uncertainty that affected some of the industrial and instrumentation businesses, A slower than forecasted recovery in China and a post COVID deceleration in the communications markets drove the conservative 4th quarter order patterns for some of our customers' legacy products. Recently, some of those customers have taken actions, including reducing orders of legacy products in the face of lower demand and reducing their inventory levels while slowing their planned investments in CapEx. This setup presents the ongoing challenge of managing through a retooling in fiscal 2024 and so we got busy during Q4 to align our costs With market reality, we view this temporary slowdown in demand as an opportunity to strengthen our foundations. We remain bullish about the future because many of our largest customers are also resetting their strategies and accelerating their investments in new products that depend on our innovations and our ability to manufacture at scale. The largest opportunity in FY 2024 that we are addressing is for 800 gs datacom transceivers for plant, artificial intelligence and machine learning build outs.

Speaker 3

That demand should help offset the anticipated declines in demand from our traditional data center and hyperscale customers and data communications in fiscal 2024. In addition, we continue our review of strategic alternatives for our silicon carbide business, Another one of our major growth opportunities. Thanks to our strategy of diversification, we believe that we are well positioned To benefit from any improvement in the macroeconomic environment, though our outlook assumes that we will not see meaningful signs of recovery before the end of fiscal 2024. So in short, we are prepared for a reset year And we consider these challenges as a temporary interruption of otherwise powerful secular trends. Our guidance for the Q1 of fiscal 2024 is revenue of approximately $1,000,000,000 to 1,100,000,000 And non GAAP EPS of approximately $0.05 to $0.20 on 153,000,000 shares.

Speaker 3

Regarding full year fiscal 'twenty four guidance, revenue of approximately $4,500,000,000 to 4,700,000,000 And non GAAP EPS of approximately $1 to $1.50 on 153,000,000 shares. With that, I'll turn the call back over to Paul.

Speaker 2

Kevin, if you could open it up for questions. Thank you.

Speaker 1

We'll pause for a moment while we compile our Q and A roster. Our first question comes from Samik Chatterjee with JPMorgan. Your line is open.

Speaker 4

Hi, good morning. Thanks for taking my questions and thanks for all the details in the shareholder letter. Very useful to get all those details. Maybe if I can start with just a sort of clarification question on the AIML and particularly sort of the inclusion in the guidance or Deciding not to put it in the guide sort of maybe if you can sort of walk us through are we sort of to interpret that you're not putting any of those AIML Sort of orders in the guide for fiscal 2024 or is there sort of some amount of it in the guide relative to what you have more subcapacity visibility around? And you do mention sort of capacity ramp as one of the hurdles, I think, in the shareholder letter in relation to fiscal 2024.

Speaker 4

So maybe if you can walk us through What are you seeing in terms of capacity challenges? What do you need to sort of see in terms of milestones to include that in the guide going forward? And I have a quick follow-up. Thank you.

Speaker 3

Okay. Thank you, Samik. I'll take that. Maybe three points are helpful. The first one is that the Q4 bookings That we had a surge that we reported.

Speaker 3

That surge was all about AI. That's number 1. Number 2, we have revenue for 800 gs transceivers Contemplated inside our guidance in the 4.5 to 4.7, there's meaningful revenue For a delivery of 800 gs transceivers, those have already started. In the first half of the year, we will see a ramp From Q1 to Q2, but the substantial amount of revenue we will deliver, it will be in the second half of the year. And what's in front of that is managing our scale and especially managing our supply chain.

Speaker 3

And so we see the opportunity for over and above what we have in our plan, but that opportunity will require Quite a few more synchronizations, including in the supply chain. As we work our way through in the next few months through the 1st and second quarter, We'll have our eyes set as we work to compete for the greater opportunity that may come inside this fiscal year.

Speaker 4

Okay. Good. Thank you, Chuck. And then you did outline in the presentation in the shareholder like Three separate opportunities in AIML relative to EMLs, your DSS laser as well as VCSELs. Any sort of thoughts in terms of broader terms where you see the most of likelihood of success Within those three buckets and where most of these orders are coming in right now, that you're seeing in which bucket is that coming in?

Speaker 4

Thank you.

Speaker 3

Okay. Well, I'll start out and then I'll ask Giovanni to finish it off, Samik. As you know, we're a vertically integrated supplier. And in addition to selling both VCSEL based and EML based transceivers for this application, we're also a supplier to the merchant market. And having said that, our ability to scale both at high performance and high volume at high quality to be able to meet this ramp It's partly the basis on which we're going to continue to win both new orders and to be able to ship.

Speaker 3

Johnny, please elaborate.

Operator

So Samik, I would say that roughly right It will be like 1 third short reach, short wavelength, 2 third long reach, long wavelength and which obviously we can Support both with our internal devices. And we see that kind of ratio being different in terms of volumes because price It's different, so the volume will be probably fifty-fifty. And that kind of ratio will probably be the same for the next 5 years. And I'm specifically talking about AI Yes. I saw that 800 gs and we've even the in the future, the 1.6 data, etcetera.

Operator

So that kind of ratio will remain in the next few years

Speaker 4

Got it. Thank you. Thanks for taking my questions.

Speaker 3

Thank you, Samir.

Speaker 1

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

Speaker 5

Great. I appreciate you taking the question and providing all the detail last night. Gave us a little bit of time to try to digest this. So maybe a couple of aspects around the exclusion of the AI related datacom from the guidance, could you help us understand the rationale We're backing the AI related business, which you described as worth several 100,000,000 out of the guidance. And help us understand as well, if we wanted to include this in our own estimates, what do you think the impact would be On the EPS, just as a very, very quick follow-up to this question, what assumption do you have in terms of your market share

Speaker 3

Okay, Simon. Simon, let Let me clarify and let me repeat what I said in response to Samik's question. Our guidance our revenue guidance for the full year And for the Q1, but especially for the full year, contemplates a meaningful amount of revenue For shipping 800 gs transceivers, I want to repeat that. Our plan contemplates a substantial amount of shipments. I believe that there may be additional upside, That additional upside might be as much as $200,000,000 But for us to have the confidence to add it into our plan, We need to manage quite a few aspects of our ramp and we're going to go for it, But I cannot be sure that we'll be successful in having everything come together in time to be able to have the confidence to add that 200,000,000 We're up to $200,000,000 but we're focused on it.

Speaker 3

And if we have anything more to say 90 days from now, we will. With regard to your second question, our belief is that we're in A market leadership position, it's a competitive market. There are strengths that we bring, and we're going to continue to compete On the basis of the strengths that we have in this generation, those strengths I outlined were evident in FY 2023 With a rather substantial ramp in datacom transceivers, year over year from 2021 to 2022 to 2023, We have the ability to scale and we have the laser components for the generations that exist today And the 1.6 t which are coming. And so on that basis, I think it's the 1st inning. It's very difficult to be assessing the what the score will be in the 5th inning and the 6th inning of the game.

Speaker 3

Everybody is just getting started. And we're well positioned to be able to move even further past Our own aspirations for our leadership position in this market.

Speaker 5

That's very helpful. And just to sort of paraphrase it to make sure it's crystal clear That the exclusion is because of risk of ramping the production, capacity, shipping. It is not Because you believe this is sort of a one time, flash in the pan kind of project. This is the beginning of a cycle, correct?

Speaker 3

Right. This is the first inning of the game. It's the beginning of I'm not even sure it's a cycle. It's the beginning of a revolution. And there's a lot more to come, we believe.

Speaker 3

And by the way, if 90 days from now, I can update you on The possibility of additional revenue that we can add to the guidance, if we're able to operationalize it, there may be more to come Because this is just getting started and we think that in 2024 rolling into 2025 is going to continue to drive our growth.

Speaker 5

Thanks for taking the questions, Chuck.

Speaker 3

Welcome, Simon.

Speaker 1

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

Speaker 6

Great. Thanks. Maybe just outside of the transceiver business for now. You had noted that visibility increased during the quarter. I just wanted to get a sense of Whether that visibility increased anywhere outside of datacom transceivers.

Speaker 6

And then just as you look at recovery of the business either Late in the second half of the fiscal year or into fiscal twenty twenty five, just what segments are most likely to kind of recover first outside of Datacom? Thanks.

Speaker 3

Okay. Meta, thank you for your question. Well, the telecom business itself, Given our position of our portfolio, the strength that we have with the telecom customers, I'm expecting that the second half of the year, to be better than the first half of the year And that we'll expect to I do expect to see some signs of recovery before the end of this calendar year. Signs of recovery will be Follow through on new orders and those new orders will be consistent and commensurate with Both the launch of some new products, including our pluggable DCO modules and the ramp of those products From a base that we believe we can grow our share meaningfully beginning the second half of next year. So telecom would be 1.

Speaker 3

I do think the industrial market is broad based. We're diversified. And I don't want to say that we're at the bottom, but I do believe that any meaningful increase in macroeconomic Activity, we will begin to see it both in laser utilization, in our service business and The further adoption of laser technology, including for EV battery welding, is just one example. Our silicon carbide substrate business is growing, is growing super nicely, I would say, And I'm expecting that to continue into 2024. Maybe I'd stop, Meta, take a follow-up if you like.

Speaker 6

Yes. No, just as a follow-up, I mean, just to come back to datacom transceivers, when you talk about this kind of additional 200,000,000 Is the majority of the gating item your capacity or are there other gating items to kind of recognition of that?

Speaker 3

Every manufacturing line has a first constraint. And when it's broken, there's one right behind it, the second constraint. Our job and our expertise is being able to figure out how to manage multiple constraints at one time. Managing the supply line, we have critical components that we're dependent on. And that supply line For the last 6 months or so, it's been in a wind down mode with the tide going up and the rather sudden adoption In the beginning of this the game in this first inning, caught many in the industry by surprise.

Speaker 3

And therefore, we have to manage through certain aspects of the supply line. It's going, But if it were going faster, we'd be able to take on more because we have the capacity to do more. And we're aiming to do more. I believe that customers want us to do more. And so in the next couple of months, the urgent Approach to managing our entire manufacturing capacity will continue and we'll give an update in 90 days.

Speaker 6

Great. Thank you.

Speaker 1

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

Speaker 7

Thanks. One more on Datacom. For fiscal 2023, what was your total Datacom transceiver sales and how much was that And I'm curious how are you drawing that line? Is it anything above 200 gig? And so that's my first question.

Speaker 3

Okay. Vivek, good morning. Thanks for your question. Let me give it to you in broad strokes because I think that's that'll do it for you. Our datacom transceiver sales in 2023 were approximately 20% of our consolidated revenues.

Speaker 3

And as it relates to AI, whereas there may be some applications in sockets that are At data rates that are less than 800, for us when we talk about it, we're really talking about 800 and you'll hear us talk about our road map For 1.6, but in FY 2023, it was not a material amount. We began shipping in the 3rd quarter, And it's going to step up rather substantially in 2024.

Speaker 7

Thank you, Chuck. And for my follow-up,

Speaker 6

I was hoping if you

Speaker 7

or Mary Jane could provide The bridge between the sales guidance and then the earnings guidance, what are you assuming for gross margins in fiscal 2024 and the exit OpEx rate in fiscal 2024.

Speaker 3

Okay. Thank you, Vivek. Mary Jane?

Speaker 8

So I think with respect to the whole year, we're widening our gross margin range To 37 to 42. And at lower revenues, similar to what we have in the guidance, Given the importance of volume, the margins may not be at 40 every quarter. So that's the first thing. The second thing is similarly at the same level Of revenue that we're talking about for the full year guidance, the OpEx, tends to be a little bit higher percentage of sales, Not because the dollar value of the OpEx is going up, but because the revenue was lower. So it's probably in the neighborhood of about $22,000,000 or $23,000,000 which is the high end of our range of 20 to 23.

Speaker 8

So that's the way we're looking at it. I do think that as the year goes on, we will Probably see the margins improve as the volume picks up, especially if some of the outlook that we have that we think covers somewhere between the next 2 to 4 quarters starts to recover in the back half of

Speaker 9

the year.

Speaker 7

But Megan, how do we To reconcile, I mean, you're guiding sales down, I think, what, 11% at the midpoint and earnings down almost 58% at the midpoint. So what declines a lot more, because gross margins from what you're suggesting sort of seem to be about where they are in fiscal 2023, unless I'm getting that wrong. So what are those missing pieces that are driving is it share count? Like what is making earnings decline so much faster?

Speaker 8

Comparing to 23, I mean, the revenue alone, comparing just So the $4,700,000,000 $4,700,000,000 sorry. The revenue alone is $0.91 So the revenue declining is a significant impact on the earnings. And then from there, The taxes make a difference. The dividends change somewhat. Even though we have the share count Converting on the Series A, the in kind dividends also start to go up because Capitalized.

Speaker 8

So those are probably the major things, but the revenue being below 23% is the primary driver.

Speaker 7

Okay. Thanks. I'll follow-up separately.

Speaker 1

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

Speaker 10

Hey, thanks for taking my question. I just wanted to see what silicon carbide was as a percentage of total revenue in the June quarter. In the prepared remarks, you talked about The continued supply constraints, just from not being able to scale, but you also said it grew nicely. Could you just give it for the June quarter?

Speaker 3

Yes. Good morning, Tom. Just give us a second. Yes.

Speaker 8

The whole of the wideband gap Product line was about 6% of revenue.

Speaker 10

Okay. Thank you. And then I just wanted to ask just a technical question. Maybe this In Giovanni's camp, so in terms of AI connections that you're seeing today, I thought it was interesting in your slide deck, You showed that the biggest growing opportunity between 2023 and 2028 is the silicon photonics portion, We have it going from like $800,000,000 to $4,600,000,000 Where are you guys playing in silicon photonics? And why is that growing so fast in that period of time?

Speaker 10

Thank you.

Operator

Well, there are solutions that from a power consumption and generally speaking performance Same point, better suited for serial photonics. You still need a laser for those solutions. And we see I would say there is a split. Cigurobotonics is not in the slides, it's not identified. It's not split between short reach And Long Reach, short wavelength, let's say, or it will be called short reach, long reach.

Operator

So I would say that split is still So 1 third short reach, 2 thirds long reach and both of them are related to the AI ramp That we talked about. So that's what we are seeing. So the growth and of course, there is not that's not all of it. That's growing fast. But there's also the VCSEL part, which is also growing very fast, and that's unrelated to the single photonics part.

Operator

But just With respect to CV Photonics, that's a split between still all AI, but it's a split of, let's say, onethree, twothree,

Speaker 11

Thank you.

Speaker 1

One moment for our next question. Our next question comes from Dorsheimer with William Blair. Your line is open.

Speaker 12

Hi, thanks and thanks for taking my question. Just as a follow-up to the previous on silicon carbide, Am I looking at this correctly that if I look at the wideband gap and I strip out indium phosphide, the silicon carbides roughly 70% of that business? And or is there anything else that I need to be aware of in that business?

Speaker 3

Jed, can you repeat your question? Which set of financing? Yes.

Speaker 5

I'm trying to what I'm trying

Speaker 12

to get at is the growth in silicon carbide. Previously, you've said that, that was 3% of sales and now widebandgap is Total of 6%. Within wide bandgap, I think the other major component is indium phosphide, But that seems to be relatively small of about 20% to 30%, so the vast majority is silicon carbide. Is there anything else that would need to be removed to get back to that silicon carbide? Because what I'm trying to understand is the growth year over year

Speaker 3

Okay, Jed. Jed, in our widebandgap electronics platform, the majority of the sales of our silicon carbide substrates. That's there are no indium phosphide or gallium arsenide is nothing of any other compound semiconductors. But we do have our ion implantation services business, which includes Providing ion implant services for silicon carbide to customers who are operating fabs. And so it is silicon carbide based, and that's the focus of our YBANG up electronics platform.

Speaker 3

And It is growing. It is outpacing the growth of the company.

Speaker 8

And it's been 4% to 5% for the last several quarters, Jess.

Speaker 12

Got it. Okay. Well, and then I guess maybe just, you mentioned that the in the Shareholder letter that 40% of the CapEx was directed to this business unit. And then last quarter, I think you updated saying that you were looking at Strategic review of this business unit, it's a lot of CapEx for something that's relatively small, albeit growing. So just how should we think of that percentage in the 2024 guide?

Speaker 12

Do you expect A linear growth or are you expecting with this capital intensity in terms of expansion that that would

Speaker 3

I'm expecting that in FY 2024 and planning That above 40% to 50% of our capital will be invested in silicon carbide to fuel the growth.

Speaker 5

Sure. What I was getting at though, Chuck, is so in

Speaker 12

a business that you're looking at a strategic Review, which could take different forms, that's a lot of CapEx that you're putting into that business. Are you expecting non linear growth in that segment? So in other words, if you're at 6% right now, In that forecast, is that expected to double? Is it expect that's what I'm to justify the CapEx in that business unit?

Speaker 3

Jane, would you like to?

Speaker 8

Well, certainly, I think as we have seen and talked about probably in prior quarters, As the mainline vehicles from kind of mainline car suppliers start to move to electric, we absolutely expect That this market will have an inflection point upwards. And I think we're only seeing just the beginning of that. The growth was very strong in the 4th quarter. It was strong in the 3rd quarter. And I think we do expect that to continue.

Speaker 8

Obviously, customers Fortunately, this business is somewhat more rational than other parts of our business, but It's important for the capacity to be there for people also to commit to being able to change over half of their entire car lines, if not more than that.

Speaker 3

Okay. As is in Giovanni's segment, Giovanni, would you like to add?

Operator

So Jay, just I'll give you a number. FY 2023, FY 2024, we expect growth of at least 40% for 0. Okay?

Speaker 5

Great.

Speaker 12

Thanks guys. I'll jump back in queue. I appreciate the color.

Speaker 7

Thank you,

Speaker 1

John. One moment for our next question. Our next question comes from Christopher Rolland with Susquehanna. Your line is open. Christopher, your line is open.

Speaker 1

You can ask your question.

Speaker 13

Hi, sorry, on mute. Yes, I was wondering if you guys might be able to talk about Any kind of non traditional engagements? Have you guys had any engagements for optical or lasers Into things like AI systems or servers or cards, and perhaps if you could talk A little bit more broadly about the economics for AI, just in your transceiver business, how margins compare to corporate, What the OpEx needs are to support that business, etcetera? Thanks.

Speaker 3

Yes. Chris, if it was could you repeat the first part of your question, the non financial part?

Speaker 13

Yes. So, your competitor, for example, is starting to talk about custom AI designs that are going into systems, not just transceivers. And I'm Not just transceivers. And I was wondering if any hyperscalers have engaged you, Any AI specific companies have engaged you in custom designs?

Speaker 3

Johnny, would you take us? Well,

Operator

so let me start with the our strength in the device technology. We kindly ship Sell more devices that we actually use internally. So we most of our competitors are actually our customers too, As you probably know, so because of the broad based laser and receivers technology platforms that we have, We're both in short wavelength, short reach and long wavelength, long reach. So we are engaged on some, Let's say non standard designs with some end customers, but Even those customizations at the end of the day in terms of guaranteeing interoperability, they will have to be standardized at some point. So I don't believe there is any difference in terms of the process of standardization that we've seen in the past 20 years of the data from both.

Operator

Of course, as the people trying to improve performance, cost of ownership, etcetera, There are ways to customize a solution internally. I want to remind you that at the end of the day, all of these X 100 GS are all 100 GS optical lanes. So all comes down to 100 GS anyway. And so some of them are parallel, some of them are Different type of approaches, multiplex and so forth. But at the end of the day, it's all 100 gs in the optical lane level, even if there may be 200 gs electrical lanes coming soon and in the future, of course, 200 gs optical lanes coming soon.

Operator

But today, That's where we are. So there is some level of customization, but I don't think it changes Again, our ability to compete is still substantially better than, I would say, most of our Competitors because we as you know, we are the most vertically integrated out there, which doesn't only improves our ability to, As we were saying earlier, Turan has support the demand that we see, but also the ability to differentiate At the transceiver internal design level, so we are engaged from that perspective in some of these super customer, they call it, Customized solution for some of the AI players.

Speaker 3

Jane, would you?

Speaker 6

With respect

Speaker 8

to the margin. So generally speaking, you'll remember that the communications entire end market, the margins tend to be below the corporate average. Having said that, the higher data rate and typically more technologically complex Products that deliver a greater value tend to have margins that are above the average within communications, to a pretty decent extent.

Speaker 13

Great. Thank you very much. Thanks. For my second question here, I know it's hard to figure this out and inventory at your customers. And I know it's going to take a few more quarters here to work through.

Speaker 13

But is there any way to kind of quantify what this inventory burn is, what you think Normalization would have been at your customers. How much more would you have shipped If you're shipping in line with demand, any thoughts on that? And then any thoughts on perhaps the linearity of how this inventory dynamic plays out? Thanks.

Speaker 3

Okay, Chris. I won't be able to speculate on what it could have been. It's Be too complex a function and have great uncertainty, I think. But 90 days ago, I said I thought that the Moderation would persist at least until the end of this calendar year and maybe longer. And it's Still not possible to call it any better than the remarks I made earlier.

Speaker 3

And as it relates to telecom as one as a Kind of a primary market where we were affected by it. I am hopeful for sure And looking and engaged in discussions with customers, I believe that we won't see a turn up before This second half and I believe that we will begin to see some signs of it by then.

Speaker 13

Great. Thank you, Chuck.

Speaker 3

Thank you, Chris.

Speaker 1

One moment for our next question. Our next question comes from Ananda Baruah with Loop Capital. Your line is open.

Speaker 9

Hey, good morning guys and thanks for taking the questions. I guess 2 if I could. In the shareholder letter, you guys also talk about So the AI exposure is being more than just AI transceivers. And I think there's mention made of AI active and passive components, High speed lasers and was wondering if you could drill down that. I think you gave some context with OFC on this as well.

Speaker 9

We'd love to get Context on that and any update on what you're thinking about that? And then I have a quick follow-up. Thanks.

Speaker 3

Okay. Ananda, Johnny, maybe just talk about VCSEL's EMLs and OpEx. Yes.

Operator

So Anand, yes, I guess you were wondering if the I mean, obviously, the vast the largest share of the Revenue upside that we see in the year due to the surge in demand, which was, by the way, was a surge because it was Unexpected in terms of size and timing, but not necessarily unexpected for the market trend because we know it was going to come at some point, But it caught us a little bit by surprise. And fortunately, we had we do have the 800 gs platform ready. So it's more a question of logistics and supply chain and ramping up. So that's a one detail. But in terms of the split, let's say, let's call it, between modules and devices, let's say, conceivers And lasers, polodials, in some cases, even ICs, obviously, the transceiver is 90% of So that's kind of the split that we see in the, let's say, in the next 12 months in the fiscal year, in the fiscal 2024.

Operator

So that's kind of Roughly light ratio of revenue wise.

Speaker 9

That's helpful, Giovanni. I appreciate that. And I guess as the follow-up, Thanks a lot for the detail on the AI transceiver TAM in the slide deck And the go forward view, any opinion on what like where you ultimately sit share wise In the various buckets, the way you've laid them out, I mean, just sort of bigger picture. And do you think you're in a position To gain share going forward as well, any context around that would be helpful. Thanks.

Speaker 3

Ananda, we are the largest transceiver maker in the marketplace. And as it relates to this 800 gs opportunity and more broadly AI including the generations to come, Our goal is to be the market leader. It's early as a starting point, But even though it's early, we've gotten busy. I believe that in 2024, what we have baked into our plan It's already a super exciting ramp. And I believe that there will be possible upside of Several 100 of 1,000,000, even in 2024, in the back half of 2024.

Speaker 3

And I believe that our ability to address the market, to serve the market, to scale on the market is going to be critical for us to be able to win. Our goal is to be the market leader.

Speaker 9

And Chuck, is there anything about how you're Sort of going to market with your Vario with the sort of technology portfolio that you have that you think could Increase your advantage in the market, Aignity G1.60, etcetera, relative to where you are today already as a leader?

Speaker 3

Yes, absolutely. Let me repeat. Our laser based technology, Both short wavelength and long wavelength and the demands on that laser technology, including for 800, But especially for 1.6 will separate us even further from the other players in the marketplace Because we are the only vertically integrated company that has a roadmap To support well beyond 800 gs, and I believe that those are among the very strong value propositions that we present to a customer.

Speaker 9

Very helpful. Thanks a lot, Chuck.

Speaker 1

Thank you. One moment for our next question. The next question comes from Reuben Roy with Stifel. Your line is open.

Speaker 14

Thank you. Chuck, if I can ask you to put a little bit of a finer point on the AIML transceiver The momentum you're seeing, how would you characterize the relative strength today at least in sort of optics going into InfiniBand AI training clusters versus Ethernet. And really what I'm trying to get to is, if you can give us a sense of timing And qualification cycles for Ethernet deployments at 800 gig and then eventually 1.6 t would be helpful.

Speaker 3

Okay. Ruben, I'll ask you, Wainwright, to address both.

Operator

Yes. So there is we are absolutely agnostic To the ultimately the switch architecture of the customers, right? So if you're talking about maybe the market where the demand is, Maybe there is a higher demand for InfiniBand than Ethernet and the rest, right? So but I from just from a hardware standpoint, it makes absolutely no difference to us.

Speaker 14

Okay, Giovanni. So are you qualified then for I think some of the cloud service providers are talking about moving to New Ethernet switches, 51.2 Terabit, etcetera. Are you qualified as those You know switches move out at some point in 2024?

Operator

Yes, absolutely.

Speaker 14

Okay. Okay. And then I guess one last question then for Chuck Gervani. You mentioned 20% of Consolidated revenue in fiscal 2023 related to what you would consider AIML, that leaves a pretty big portion of Sure. How I would consider legacy transceivers 200 gig and maybe even lower.

Speaker 14

How do you think that plays out? Do you think the AI ML Seth is going to ramp faster than legacy falls off or legacy sort of hangs in there. How are you considering that?

Speaker 3

Okay. Ruben, let me clarify. My earlier comment was about 20% of our consolidated FY 2023 sales were in datacom transceivers. So

Speaker 14

let me

Speaker 3

ask if you have any question about that.

Speaker 14

No, I messed that up then on my end. Thank you, Chuck.

Speaker 3

I'm glad we're talking. As we indicated in the shareholder letter, we had a 10% customer in the communications market that was in the data communications market. And that the demand for those legacy products in my prepared remarks, I alluded to a declining demand For certain legacy products from our customers, that demand in FY 'twenty four is going to roll off. That is our plan. As it rolls off, Even faster than it rolls off, I'm expecting that inside the fiscal year 2024 that we are able to replace it With 800 gs AI transceivers at a minimum, and we're aiming to do more than that.

Speaker 3

Is that clear?

Speaker 14

Absolutely. That's right. Yes, so it's contemplated. I appreciate the detail, Chuck. Thank you.

Speaker 3

You're welcome, Ruben.

Speaker 1

One moment for our next question. Our next question comes from Dave Kang with B. Riley. Your line is open.

Speaker 11

Thank you. Good morning. My first question is regarding your transceiver revenues. What was the split between different speed like 100 gig, 400 gig last year? And now with 800 gig ramping, What do you think that mix will be this fiscal year?

Speaker 11

And what's the margin differential between 100 gig versus 408 100 gig? Thank you.

Speaker 3

Johnny, do you want

Operator

to I would say that the 200 gig and above was about maybe, I would say 30% of the total and the rest was 200 gig and below. However, let me tell you the split between Sorry, the other one answer. Sorry, I invented the number.

Speaker 3

Just to repeat.

Speaker 11

So Giovanni, so 200 gig and above was 70%? Just wanted to make clear.

Operator

Yes, yes. Okay. Okay. So now in terms of the major change in our Revenue distribution has been, if you recall, in the past, we said that onethree was hyperscale as onethree, Let's say top 20 cloud and then onethree rest, let's say, enterprise and the rest. So as a result of the shift to AI and the result of some inventory in the what we did over FY 2023, that ratio has actually changed now to 2 third is around AI at least for FY 2024 And most of it will be 800 gs, 200 gs and above, of course, including 800 gs.

Operator

And then the rest is, Let's say, smaller cloud players and enterprise. So that ratio, onethree, onethree, onethree is like twothree And then the other one that's split between the remaining cloud providers and the enterprise. So hyperscalers We'll be a much larger share of the total than in FY 2020.

Speaker 11

And how does that transition, that Shift impact the margins.

Speaker 8

So as I noted earlier, the margins on the Higher data rate, more technologically complex products tend to be higher than the average In a given group. So in the case of transceivers, these greater than 200 gs and certainly 800 gs would be above the average. Having said that, For those parts that are, say, up 100 gs and below, at some point, we become very, very, very good At making those, so the lower margin tends to the lower margin products or average margin products tend to hold actually, Because as time goes on also, we're almost the only one that makes them. So, generally speaking, that's how you should think about the margin structure there.

Speaker 11

Got it. And Mary Jane, just my last question is on your backlog, dollars 2,700,000,000 I was wondering if you can provide the split between your 3 divisions. And also if you Can provide I know you provided operating margins for 3 divisions, wondering if we can get gross margins for those 3?

Speaker 8

So with respect to the backlog, for the Materials segment, of the $2,700,000,000 it's about 650,000,000 Of the networking segment, it's about 1.2 and the balance would be in lasers. With respect to the gross margin of the segments, we don't typically give that, as you know. But I think that you can imagine that it basically goes in somewhat parallel to the operating margin, remembering that Grown Materials and Laser Diodes have the highest margins in the company along with typically our industrial products. The laser systems are typically slightly above the corporate average, and the telecom the Communications margins tend to be below the corporate average.

Speaker 11

Got it. Thank you.

Speaker 3

Thank you, Dave.

Speaker 1

One moment for our next question. Your next question comes from Jim Ricchiuti with Needham and Company. Your line is open.

Speaker 15

Good morning. Mary Jane, I wonder if you could be willing to share any targets for debt reduction in fiscal 2024. Yes. Maybe, say, at the midpoint of your full year guidance, how should we be thinking about that? And then

Operator

I have a follow-up.

Speaker 8

Well, the so we haven't previously talked about targets for debt reduction. Obviously, we would have Strive to be north of 200 on that. Paying down the debt remains a very, very high priority, a very, very high priority To the point that while the CapEx is the first call on the capital structure, we have been very, very aggressive about managing that CapEx because to some extent, the CapEx naturally moderates in lower in periods of lower revenue.

Speaker 15

And then looking at some of the comments you made in the shareholder letter on the display side of the business, I'm wondering if you Are you expecting any kind of seasonal pickup in utilization that's going to drive that part of the business in the first half? Just in light of what we're hearing from Yes, one of the suppliers of OLED materials into the handset market. And then on the system side, you alluded to pickup in orders out of China, is that deliveries for fiscal 2024 or the bulk of those in fiscal 2025? Thanks.

Speaker 3

Great questions, Jim. Thanks for your question. Mark, will you address both?

Operator

Thanks, Chuck.

Speaker 16

Hi, Jim. Yes, we definitely Expect service utilization pickup in the first half of our fiscal year, so over the next six months. As you know, we get a batch of new smartphone releases From various manufacturers, typically in the September, October period and we've certainly got visibility into Having expectations that would drive our service revenue and the bookings that we mentioned on our new OLED capital equipment and the shipments are in FY 2024. So those shipments are within the fiscal year.

Speaker 15

Okay. But Mark, how does that compare with past investment cycles you've seen in this part of the business?

Speaker 16

That's a great question. I think it's pretty similar. I mean, We'd love this business to be more linear. It's not. It tends to be associated with fab build outs, as you know, and we've got a limited number of customers, 6 8 major customers split between today, it's pretty much split between China and Korea.

Speaker 16

So I think it's pretty similar, tends to go in phases. Each phase It's typically 3 to 4 systems. So you can imagine that the orders that we recently collected were in that sort of range. And we would expect additional phases To be built out as well as we've mentioned many times in prior calls an expectation of generation 8 fab build outs, especially in China. So yes, we see this as reasonably typical.

Speaker 15

Great. Thank you.

Speaker 1

One moment for our next question.

Speaker 3

Hi, Kevin.

Speaker 1

Yes.

Speaker 3

Okay. Please go ahead.

Speaker 1

Our next question comes from Tim Savageaux with Northland Capital Markets. Your line is open.

Speaker 17

Hi, good morning. And A couple of questions here and maybe they're related, which is specifically I wanted to focus on Trends in the telecom business from a demand standpoint and you probably have some inventory issues there as well. But as you look through to end demand, What can you tell us about what's happening there? And kind of related to that, if we look at the September quarter guide going down Something on the order of $150,000,000 If you look across your segments, what are the main What kind of drivers there in terms of puts and takes from a sequential standpoint? Thanks.

Speaker 3

Okay. Thank you, Tim. We had a very strong Shipments in communications in the 4th quarter, I think that will be down into the Q1. I think that's the number one driver in the change from Q4 to Q1. That accounts for Maybe more than half or 2 thirds of the variation and the rest of it spread across the other markets or across the other segments And markets, what was the second part of your question?

Speaker 11

Well, I guess, I guess, how

Speaker 17

do you No, I'm with you. So to the point to the extent you're talking about comms being half to 2 thirds of the decline, I guess I was trying to get a sense of Telecom versus datacom there?

Speaker 3

It's a combination. And The moderation that we saw in the March quarter in the telecom market, that persisted in Q4 And it will leak into at least leak into Q1 as well. It's a meaningful part of it.

Speaker 17

Great. Thanks very much.

Speaker 1

One moment for our next

Speaker 18

question.

Speaker 1

Our next question comes from Mike Genovese with Rosenblatt Securities. Your line is open.

Speaker 18

Thank you. Just a couple of clarifications. But first, the second customer, the one that was almost 10%, the Datacom customer, I just want to Clarify that that sounds like a web scaler, and I just want to ask that. And then the second clarification is when you talk about Transceivers, you're also subject to also including cables, active optical cables and electrical cables as transceivers. I just want to check That nomenclature to make sure that cables are in fact transceivers in the way you guys talked about it.

Speaker 18

Thank you.

Speaker 3

Johnny, would you

Operator

take it? So, Mike, thanks for the questions. Yes, absolutely. Yes, we always include cables, but just to be clear, we have no electrical cables In our portfolio, so it's all obstacle. We do include Cribos, absolutely.

Operator

And I think your first question probably was, I couldn't hear you very well, but I believe You wanted to yes, the 2 third when I mentioned the 2 third, I was referring to hyperscalers. I think that was your questions. So we saw a

Speaker 18

No, sorry. Just wanted to clarify that question. You said you had 2 large customers where orders were expected to go down and one is Obviously, the consumer electronics customer, I just wanted to check the second one, the datacom customer that, that is in fact a hyperscaler.

Operator

Well, electronics was really consumer electronics And the communication was data. It was a lot larger customs for us.

Speaker 18

Okay. And then my question, just my other quick question is just the 200 gs per lane lasers, When do we expect those to be shipping for revenue within the transceivers or to external customers?

Operator

Well, right now, we are prioritizing our internal customer for anything 200 gs. And but we have design wins with some of our competitors, transceiver competitors. And so Well, that will be meaningful only in the second half of the fiscal year.

Speaker 18

Thank you very much.

Speaker 1

Thank you. One moment for our next question.

Speaker 2

Kevin, we're going to wrap the call.

Speaker 1

Okay. Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may now disconnect and have a wonderful day.

Speaker 14

Thank you.

Speaker 9

Thank you.

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Earnings Conference Call
Coherent Q4 2023
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