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Good day, and thank you for standing by. Welcome to the Coherent Corp. FY2023 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to your speaker today, Mary Jane Raymond, Chief Financial Officer. Please go ahead.

Thank you, Kevin, and good morning. I’m Mary Jane Raymond, the Chief Financial Officer here at Coherent Corp. Welcome to our earnings call today for the second quarter of fiscal year 2023. This call is being recorded on Wednesday, February 8, 2023. With me today on the call is Dr. Chuck Mattera, our Chair and Chief Executive Officer. After our prepared remarks, both Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Materials Segment; and Dr. Mark Sobey, the President of the Laser Segment, will join us during the Q&A to discuss the unique benefits of our strategy, our results, and the exciting prospects across several broad markets. For today’s call, the press release and the investor presentation are available in the Investor Relations section of our website, coherent.com. Today’s results include certain non-GAAP measures. Non-GAAP financials are not a substitute for, nor are they superior to financials prepared in accordance with GAAP. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today’s documents. I remind you that during this call, we’ll make certain forward-looking statements. These include, but are not limited to, statements regarding geopolitical and macroeconomic trends, expectations for our revenue, our market trends, and our expected financial performance, including our guidance. In addition, we’ll discuss our progress on integration, including our delivery of the projected synergies. All forward-looking statements are based on today’s expectations, forecasts, and assumptions. They involve risks and uncertainties that could cause actual results to differ materially from our comments today. Our comments should be viewed in the context of the risk factors detailed in our most recent Form 10-K for the fiscal year ended June 30, 2022. Coherent assumes no obligation to update the information discussed during this call, except as required by law. With that, let me turn it over to Dr. Chuck Mattera. Chuck?

Thanks, Mary Jane. Thank you all for joining us today. Coherent Corp. posted a record revenue quarter of $1.37 billion, consistent with the midpoint of our guidance and grew 70% year-over-year and 2% sequentially. Looking close up at legacy II-VI. Impressively, organic growth was 23% year-over-year and 4% sequentially, while the consolidated pro forma growth was 15% year-over-year. Regarding the composition of our sales by the four major markets: industrial accounted for 33%, communications 44%, 15% from electronics, and 9% from instrumentation. Turning to the distribution of our revenues by region. The second quarter was similar to the first quarter. North America accounted for 55%; Europe, 18%; Korea and Japan combined were 13%; China was 11%; and 3% to the rest of the world. Our non-GAAP EPS was $0.95. We continued our disciplined approach to capital allocation during the quarter. We generated $220 million in cash from operations and invested $106 million in capital equipment for $114 million in free cash flow. We also paid off $133 million of the debt. Our investments in our silicon carbide platform were nearly half of our total capital investment as we execute our multiyear road map for the electrification of transportation and renewable energy infrastructure among our commitments to sustainability. Last week, during Photonics West, we had a strong showing of our broad portfolio of new products and technology innovations that are enabling a wide range of applications across our four end markets. Our thought leaders presented at various events, workshops, and technical sessions, and we had several significant new product announcements. These included the introduction of Python, our next-generation OLED-annealing solid-state laser targeted at new Gen 8 OLED fabs. This is the culmination of four years of innovation and development that retained Coherent’s position as the annealing process of record while improving performance and significantly reducing cost per panel. We believe our innovations in this system will drive adoption into more price-sensitive displays, such as tablets, laptops, and high-end monitors. To further secure our position as an industry leader in ultrafast cutting of OLED panels, we introduced two new ultrafast lasers. We also introduced our next-generation pump laser diodes for fiber lasers with the first semiconductor chip in the industry, to our knowledge, to achieve 50 watts of output power. And we showcased our fully automated contactless laser system for texturing and marketing implantable medical devices. Turning now to our performance by market. Our revenue in electronics grew 131% year-over-year and 11% sequentially, setting another record by hitting the $200 million quarterly mark. Growth was driven primarily from sensing and the seasonal tailwinds of a new product cycle, which we described on our last call. This is the second of the seasonally high two quarters, and in the second half of the fiscal year, we will enter the seasonally low period, during which we expect to have considerably lower revenue when compared to the first half. Our customer intimacy in this market gives us optimism that the future opportunity in consumer electronics is still much broader than just VCSELs for 3D sensing. We believe that sensing will become ubiquitous in metaverse hardware and wearables and LiDAR and other emerging applications. Our strategic engagements are growing across them all. For our silicon carbide power electronics and wireless semiconductor business, we continue to invest in silicon carbide substrate and epitaxial capacity to accelerate the pace of our shipments as demand continues to exceed our ability to supply. In the electric vehicle market, EVs represented 10% of all vehicles sold globally in calendar year 2022. As EVs continue to grow, industry estimates expect the adoption of silicon carbide electronics will also grow but at twice the rate of the overall EV market. We are steadily gaining share in what we believe will be an underserved market for many years to come, perhaps even through the end of this decade. Communications revenue grew 18% year-over-year and 3% sequentially, led by both telecom and datacom, each of which achieved record revenue. Telecom growth was led by broadband initiatives, which in turn drove demand in the metro edge to access networks. We are encouraged by the opportunity that we expect to result from the U.S.’ planned $65 billion investment in broadband access from the Infrastructure Investment and Jobs Act. We expect that it will be a major catalyst for optical communications and specifically our telecom business at all levels of the value chain. As access networks grow, they drive upgrades in the metro, long-haul and submarine networks, all requiring our Coherent transceivers and ROADM integrated product solutions. Our datacom business also hit a quarterly record. Our industry-leading position in 200G and above remains strong at 51% of our datacom transceiver business, compared to 33% a year ago. Our leadership in this area stems in part from our vertical integration of our high-speed lasers, optics, and electronics in our transceiver modules. In addition to our growth of 200G, 400G datacom transceivers, we continue to see accelerated deployments of 800G transceivers, enabling open AI and machine learning applications. We are ramping our full capacity to meet the growing customer demand over the next few quarters. Our optical communications business was honored yesterday ahead of the Optical Fiber Conference in March with awards for three of our products that the 2023 Lightwave Innovation Review singled out. First, our 100G

Thank you, Chuck. Our revenue of $1.37 billion was negatively affected by $6 million from currency compared to Q1 FY ‘23 with immaterial effects on the EPS. Our backlog was $2.9 billion at 12/31 and remains solid as customers return to more normal patterns of ordering and inventory management. Our Q2 non-GAAP gross margin was 39.8%, and the non-GAAP operating margin was 20.3%, both negatively affected by $3 million in currency or 20 basis points compared to Q1. Supply chain costs were $10 million and are not excluded to arrive at the non-GAAP results. At the segment level, the non-GAAP operating margins were 19.4% for networking and 26.2% for materials and 15.7% for lasers. GAAP operating expenses, SG&A plus R&D, were $403 million in Q2. Excluding $90 million of amortization, $29 million of stock comp, and $16 million of transaction and integration costs, non-GAAP OpEx was $268 million, or 19.6% of revenue. Our total stock comp is expected to be $30 million to $32 million per quarter for each of Q3 and Q4. Synergies have now reached $30 million on an annualized basis, and we are making good progress in all categories. Quarterly GAAP EPS was a loss of $0.58 and non-GAAP EPS was $0.95, with after tax non-GAAP adjustments of $217 million in total. The diluted share count for the GAAP results was 139 million shares. And for the non-GAAP results, the share count was 150 million shares. The GAAP and non-GAAP EPS calculations are on Tables 6 and 7 of our press release. Interest expense in the quarter was $71 million. And for the six months ended December 31, interest expense was $132 million. Our original outlook for interest cost in August was $274 million on the basis of the one-month LIBOR reaching 4.2%. It is now forecast on the yield curve to achieve 5.1%. Should that happen on the schedule expected, our goal, along with our debt repayments, will be to limit the change in our initial estimate to $5 million to $7 million for a total of $279 million to $281 million. Our December 31st balance of cash items was $913 million, an increase from the prior quarter of $15 million. After paying down $133 million of debt in Q2, our total debt position on December 31 was $4.6 billion. Using the trailing 12 months of adjusted EBITDA on a pro forma basis for the combined company at December 31, the gross leverage was 3.6 times, and the net leverage was 2.9 times without the synergy credit. Including the synergy credit of $235 million that is allowed by our credit facility definition, the gross leverage is 3 times and the net leverage is 2.4 times. Note that 15 million of synergies are already in the results. The effective tax rate in the quarter was 32%. The non-GAAP tax rate is 19%. We expect the tax rate for the remainder of fiscal year ‘23 to be between 18% and 22%, assuming the current mix of earnings and no adoption of new or additional tax rulings. Returning to – turning to the outlook for Q3 fiscal year ‘23. Our outlook for revenue for the third fiscal quarter ended March 31, 2023, is expected to be $1.32 billion to $1.37 billion and earnings per share on a non-GAAP basis to be $0.75 to $0.90 per share. With respect to our expectations on full-year revenue, we expect revenue to range from $5.35 billion to $5.55 billion. Our non-GAAP EPS estimate assumes the effects of purchase accounting, which are all still preliminary, will be added back to GAAP EPS other than the depreciation that is about $5 million in Q3. The share count is 152 million shares for the entire guidance range. The EPS calculation, including the dividend treatment, is detailed on Table 8 of the press release for the guidance range. This table also shows the earnings at which the Series B preferred stock is dilutive. All of the foregoing is at today’s exchange rates at an estimated tax rate of 19%. For the non-GAAP earnings per share, we add back to the GAAP earnings pre-tax amounts of $140 million to $145 million, consisting of $95 million in amortization, $30 million in stock compensation, and $15 million to $20 million for transaction integration and restructuring. The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, the purchase price accounting, and the share counts are all subject to change. As a reminder, our answers today during the Q&A may contain forecasts from which our actual results may differ for a variety of factors. These include changes in the mix, customer requirements, supply chain availability, competition, and economic conditions. With that, Kevin, you may open the line for questions.

[Operator instructions] First question comes from Ananda Baruah with Loop Capital. Your line is open.

Yeah. Good morning, guys. Yeah. Congrats on solid results and ongoing strong execution. Thanks for taking the questions. Two quick ones if I could. Chuck, are you seeing any, I guess, what you would consider to be meaningful softening in any of the businesses – in any of the meaningful businesses? And then could you give us an update on supply constraints? And then I have a quick follow-up. Thanks.

OK. Well, Ananda, thanks for your question. Let’s take the supply chain first. In the second quarter, the supply chain constraints affected us to a level of $67 million. And so, that will give you some sense. It’s considerably lower than it was a couple of quarters ago. It’s definitely getting better, but it did have an impact on us. That’s first. Second, I tried to give you the color – all the color we could about the markets, about the regions, about the products in our prepared comments. And I would say from the last 90 days, if you look at our revenue guidance, the only thing that you can see which is different is that we have a greater confidence on picking up the bottom end of that revenue guidance, and we shaved just a little bit off the top end. And all of that takes into account our best judgments today. And wherever there are small pockets or pockets of slowdown, we have the versatility, the resiliency, the backlog, and the determination to blow past them. Okay?

That’s very helpful. And as a follow-up, would just love to get a sense where you guys believe legacy Coherent is in the display business cycle? And that’s it for me. Thanks.

Okay. I’ll ask Mark to take that one.

Hi. Thanks for the question. I think as we discussed in our prior call in November, the Excimer annealing business, represents between 20% and 25% of our quarterly revenue, and we’re still very much in that phase. So, I think the forward-looking growth opportunity that we see in IT displays, specifically tablets and laptops, is in front of us, probably one to two years out. But we’re in a pretty steady phase.

Very helpful. Thanks a lot, guys.

One moment for our next question. Next question comes from Simon Leopold of Raymond James. Your line is open.

Thank you very much for taking the question. I appreciate the details today. I wanted to see if we could dig into your updates on your exposure to the hyperscalers or webscalers. I’m estimating that they’re probably close to 10% of total revenue, maybe a little bit below that, following the integration with the old Coherent. But given some of the capital spending trends, I’m wondering if you can update us on your thoughts of how much of your business is coming from there and what your expectations are for the balance of calendar ‘23. Thank you.

Thanks, Simon. I’m going to ask Giovanni to address your question. Thanks for your question.

Thanks, Chuck, and thanks, Simon, for the question. So the – of course, it does change the percentage of the exposure to hyperscalers quarter-by-quarter. But roughly right, it’s about 30% of the total. We said this in the past, it’s about, let’s say, 30% hyperscalers, 30% what we call cloud, about maybe a group of 30 customers. And then a long tail does the rest, the rest of the 30%. So, we have not really seen any slowdown whatsoever in the – at least for the second half of the year. We don’t really see any slowdown in demand. That could be explained by a number of factors. I probably – one is the fact that the higher-speed products, let’s say, 200G and above, now almost they represents 50% of our total, okay? So, that’s where most of the investments are growing. Particularly, of course, with the hyperscalers, we tend to innovate and introduce higher data rates and obviously the general cloud or even the long-term of the customers. So, that’s one reason. The other one, as I said earlier in previous quarters, we see still an opportunity to regain share that we think the – we lost over the past, let’s say, three years between the transition from Finisar to II-VI and now Coherent. So, we – there’s still pockets of markets we think we can to continue to grow our share. So, the two combined explains why we don’t see any slowdown. If anything, we’re very – we’re quite bullish about the near-term future.

And just a quick clarification, that 30% value you referenced is 30% of your networking segment?

No. 30% of the datacom.

30% of datacom. And what’s that as a percent of networking?

Okay. So, that’s 30% of 50%. So, it will be like 15%.

Thank you very much. Appreciate it.

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

Just wanted to talk a little bit more about the laser business in that we saw a step down in laser operating margins. I was hoping you can give a little bit more color around what’s contributed to that.

Mary Jane, do you want to take it first?

Sure. Generally speaking, what affects any of our segments on the margin is that – we – I would say that that is probably a little bit more pronounced in the laser segment, but it’s generally true across all the segments.

And the line being that you alluded to that contributed to some of the mixed results in industrial, is that a case where that ELA tool is slipping a quarter, or is that potentially going out a little further? And maybe what contributed to that? Is that just customer site not being ready, or is there some change in potentially seeing some signs of changing demand in the display market near term?

Jim, this is Mark. That’s a good question. It wasn’t actually – it wasn’t a pushout. We knew we were anticipating to ship one large landing system less during the quarter. So, there was no – it was really based on customer demand, and so no change there. We had anticipated being able to offset with some other upside business, but as you heard, we still had some supply chain balances that affected some of our other business.

Got it. Thank you.

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

Thank you. Good morning. Just wanted to clarify about your comment – Giovanni, your comments about telecom versus datacom. So, it’s 50-50 between telecom and datacom, is that what you said about Simon’s question?

Yes. I’d say it’s about – to be accurate, it’s 54-46. So, 54% datacom, 46% telecom.

Okay. Got it. And then my question is on the backlog. So, it was down a little bit from $3.05 billion to $2.9 billion. Just wondering if sort of backlog apparently peaked already. If you can talk about the expected decay rate, when does it normalize? And also, can you provide the composition of the backlog?

So, we don’t normally give the composition of the backlog, number one. But two, Dave, you may remember on the last call as well as in various conferences, one of the things that I noted was that investors should not be worried if the backlog starts to go down, we don’t necessarily consider it a decay because the goal was to start to ship what’s in that backlog. So, we are seeing customers returning to more normal patterns of ordering, and that’s exactly the behavior we saw in the second quarter was exactly what we expected.

And I would add, Mary Jane – I would add, Dave, I think that asset to normal ordering patterns will take place over the next few quarters.

Got it. And my follow-up is, Chuck, your commentary about deceleration in some of the – your end markets. Just wondering if you can specify which end markets are decelerating or expected to decelerate.

Thanks, Dave. I would point to the industrial section in my comments about the back end of the line for the semiconductor equipment. Like that gave you some sense for a little bit of a slowdown as it relates to lasers for via-hole drilling and for marking. And I also balance that with the really substantial growth that we’ve seen both in EUV, on the industrial side and battery welding on the industrial side. And then, also, in our materials for front end of the line equipment in semi-cap. So, it’s a mix, and I said so, that’s probably the best example.

So, just to be clear, you’re not throwing in the Sensing segment as part of the segment that is slowing?

I also – in my commentary, Dave, I also pointed to the fact that in the first two quarters of our fiscal year, we have seasonal tailwinds. And I also made a clear remark about the second half of the year that we expect to be considerably lower than the first half. Okay?

But just because of the seasonality, not necessarily the weaker demand, right?

Giovanni, do you want to elaborate on that?

Yes. Sure, Chuck. Dave, of course, the demand is not something that we have seen slowing down. There’s – that’s why we talk about seasonality. Seasonality, it’s all about introduction of new products from our customers and we follow the pattern. So, it’s completely unrelated to demand.

Got it. Thank you.

Our next question comes from Samik Chatterjee with JPMorgan. Your line is open.

Hi. Thanks for taking my questions. I have a couple. Maybe if I can start with a question on backlog. And totally understand your sort of view in terms of the backlog will start to moderate a bit as supply improves and order patterns normalize. How are you thinking about backlog related to sort of exiting the year? Does this remain elevated? And just trying to match that up against sort of the decision to take some of the high end of the revenue guide a touch lower. I mean, how does that sort of match up with the backlog still remaining quite high at this point? And I have a follow-up.

First of all, I’d say…

Mary Jane?

Yes. Sure, Chuck. Thanks. I would say that, on the one hand, while not necessarily, I know we only have a half to go here forecasting the backlog. Last quarter, I had indicated if we saw a resting backlog over time, not necessarily by 6/30, but over time coming down more toward 2.5, 2.6, I wouldn’t be surprised. But I don’t necessarily think it will be at that level by 6/30. So, that’s the first thing. I would say they’re probably, really in some ways, unrelated to each other. We just – the backlog does remain very high. But do keep in mind that, that backlog is over 12 months. And as we’ve indicated in the past, typically, the individual items that are in the backlog are timed. They may not necessarily all be times to being shipped by 6/30. So, we have some customers who routinely will give us relatively long-dated orders going across the entire 12 months. So, it really has nothing so much to do with the backlog coming down a little bit, the change in the top end. It’s just more truing up the forecast as we’ve gone along here.

Got it. And for my follow-up, I think, Chuck and Mary Jane, you both talked about sort of the mix in – mixed sort of end-market outlook that you’re seeing with certain markets remaining very strong, certain sort of pockets of weakness. If we aggregate all that together, like how is the book-to-bill looking, particularly as you sort of go through the last few months of the quarter? Like are we continuing to see sort of a step down in the aggregate book-to-bill? Or is that because of the diversification that you have remaining quite robust?

Well, again, the book-to-bill is not nearly as relevant really right now as the backlog itself. I mean, customers are changing their ordering patterns. But, generally, I would say there are variations certainly in bookings in particular areas where customers have had given much, much longer-dated orders in now, say, 12 months when their historical ordering pattern is more like six, so they’re returning to six. But generally speaking, I would say that we’re very, very positive about the outlook for the company given the strength of that backlog. Chuck, would you like to add anything to that?

No. I think what we said stands. Over the next few quarters, we can expect it to – the book-to-bill ratio as we see it to get to more normal patterns that we would have seen before the last couple of years’ events, including where the supply chain shortages started.

Okay. Thank you. Thanks for taking the questions.

Our next question comes from Mark Miller with The Benchmark Company. Your line is open.

Thank you for the question. I just wanted to talk about – you said that the supply constraints again impacted sales by $67 million. I’m wondering how that broke out between networking and lasers.

It was mostly networking – thanks for your question, by the way. Good Morning, Mark. It was – yes, it was nearly all networking, but there was an impact to the lasers segment.

I just was wondering in terms of other expense, it’s jumped around the last couple of quarters. Do we expect other expense in the March quarter to be similar to what you saw in December?

I would say that it’s probably going to be somewhat lower, probably closer to plus or minus $1 million. It does move around for an awful lot of things, some of which are still related to purchase accounting. But it’s probably for Q3, plus or minus $1 million.

Thank you.

Our next question comes from Jed Dorsheimer with William Blair. Your line is open.

Hi. Thanks, and thanks for taking my questions. I just have one and a follow-up. I guess, Mary Jane or Chuck, did I hear correctly from a CapEx split, the 50% was going to silicon carbide? Could you just clarify that for me?

Probably in the neighborhood of 35% to 50% is going into silicon carbide. It’s a significant part of our CapEx for the year.

Got it. And then I didn’t hear you talk much – and maybe I’ve missed this, but it seems like you have a truly differentiated position with high-quality 200-millimeter, whereas rest of the market is struggling with 150 other than one other competitors. So, I’m just curious if you could elaborate on sort of what you have that may be different or the – without getting into process, et cetera., that I’m sure you wouldn’t be entering. But just what would you like to say about sort of the strategy around 200. And I think in your recent presentation, you even talked about getting to 300-millimeter.

Okay. Good morning, Jed. Thanks for your question. Jed, just quickly, and at a very high level that’s all that’s required, we have designed a process technology for growing substrates – silicon carbide substrates around a set of materials and equipment, which we design in-house. Our equipment, crystal growth equipment, allows us to scale such that we can grow 200-millimeter substrates in the same equipment that we grow 150. We announced in 2015 the first high-quality 200-millimeter silicon carbide substrates introduced to the marketplace, that’s eight years ago. So, I would say the one thing that we have is proprietary advantage, second is a scalable platform, third is nearly 10 years of experience. And we are dedicating some part of our capacity today, which is overwhelmingly in demand for 150-millimeter substrates. We are still dedicating capacity to improve and scale and position us for the 200-millimeter market. So, it’s not a question of technology. It’s really a question of capacity. And our investments in even more capital, again, another tranche later this year and then again next year, we’ll have both the market opportunity and the market demand in front of us both for 150 and 200, okay?

That’s great. Thank you.

Next question comes from Richard Shannon with Craig-Hallum. Your line is open.

Hey, guys. Thanks for taking my question. Maybe kind of a two-parter here in your broader sensing category. I guess, the first part of this is, Chuck or Giovanni, how do you see the share position with the kind of 3D sensing when you get into the next generation? Do you see an upward or downward bias to that? And then maybe can you paint us a bigger picture on the broader sensing category outside of 3D sensing? How do you see this ramping applications and kind of the thought process and timeframe when that becomes a lot bigger than it is today?

Hi, Richard. Thanks for your question. So, I think it’s hard to exactly measure the share. We think that we’ve been growing our share, generally speaking. And due to – thanks to the level of [indiscernible] integration, which we think is still unique, let alone the scale that we have, so this has been very, very favorable to our ability to be very competitive, scale-wise, cost-wise, and most importantly, quality-wise. And we think that we have reached a point where we believe we are the share leader in many ways. And so we have a number of opportunities in front of us for new designs, new applications, new markets, new – also new technologies that should be able to let us continue to enjoy this share leadership, not only in 3D but also, as I said, in optical sensing, particularly optical sensing enabled by semiconductor lasers. So, there’s a number of new applications emerging, which we are working on. All of them, they are all obviously applied in many ways. And we can’t really talk about all the details. But we think we are very well-positioned to continue to enjoy a very close partnership and with our key customers, generally speaking.

Okay. Fair enough. Thanks for all the details, Giovanni. A follow-up on a specific topic within datacom. You’ve talked about in the last few conference calls about 800 gig here. I guess it’s probably my assumption, I think most people would assume that’s a very small piece of your datacom business. Maybe you can just verify that’s still the case or kind of give us a sense of where it’s at. But I think the bigger question here is thinking about share in that category. I think you’ve had to battle back from a disappointing start in the 100, 200 to 400-gig generation. But where do you sit in 800-gig? And when does that become a more noticeable part of your business? Is that – will that happen this calendar year, or is it more of a ‘24 story? Thanks.

Yes. Thanks, Richard. Well, 800G is very early, as you know. It’s still small compared to lower data rates. But we are shipping 800G today. We think we are very competitive solution. Thanks to – as you know, the integration of our electronics, photonics, and all the assembly and automation that we have, we have – we think we have the most competitive platform out there. And it’s definitely not going to – something that’s going to be material this fiscal year. But next year, we’ll ramp up very rapidly. And I think we’re well positioned, as we’ve been in the past, to support the demand primarily – as we said earlier, primarily for hyperscalers. So, we have – I think we are very well positioned to get the larger share of the market there.

Great. Thanks, guys. That’s all for me.

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

Hi, good morning. Wanted to talk about kind of overall growth expectations heading forward and specifically, in fiscal ‘24 and moving forward. I think you’ve talked in the past about expectations for a double-digit growth rate for Coherent. I wonder, given some of the macro stuff that you’re seeing, whether that remains the case or if you can give us any color on that. And then along with that, as you look at your major segments across networking materials and lasers, how do you expect those three to contribute to the baseline of growth that you’re expecting? Thanks.

Hey, Tim. Good morning. Thanks for your question. Tim, we are determined to continue this leadership position in the market. We have another few months to play out as it relates to collecting up the new orders working on the backlog, positioning the portfolio. So, we’re not going to give an FY ‘24 guidance today, but we are determined to outpace the growth of the market. And even with some of these pockets of softness, we have to determine whether or not we’re looking at a one-quarter or a two-quarter effect. And we’re intensely engaged with customers now. So, I would say we’re enthusiastic. We’re making all the right bets in all the right places. We’re taking full steps and making good progress even with new customers as we try to stitch together the advantages of, for example, the materials in the lasers portfolio and it’s coming along. So, I would just leave it at, yes, it’s true that our aspiration is to grow double-digit into ‘24, but it’s going to take us another few months to sort through that. And we’ll provide an update over the course of the next 90 days, probably as we head into May and then possibly into August, okay?

Great. Sorry, if I can follow-up real quick, and I appreciate that answer. On the telecom side, you seem to put up some pretty good sequential growth there. I imagine a lot of that is driven by supply improvement. But are there any particular product categories within telecom where you saw either strong demand or improved supply to drive that sequential growth? Thanks.

Tim, thanks. I’ll take that one, too. I think you hit on all of them. It really was a nice mix we have had and have a good backlog, that’s true. Parts of the supply chain constraints were broken, that’s true. And we do have demand across the entire telecom portfolio, Coherent transceivers, wavelength selective switches and the ROADMs, all three. So, it’s just a question of timing – order timing and then execution of the – through the operations, taking into account improvements, and in some cases, not so much improvement in the supply chain situation. That did hold us back somewhat on telecom again this quarter.

Thanks very much.

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

Good morning, guys. I apologize to you and others on the call if these were already asked and answered. My line dropped. First off, I assume your previously stated 38% to 42% range but goal maintaining over 40% gross margin hasn’t changed. And, Mary Jane, any color you can provide us as to the various positive and negative levers? And I think last quarter, you cited an $8 million FX impact on gross margin. I may have that wrong, but did you mention any appreciable FX impact this quarter?

So, a couple of things. One, our range on the gross margin has not changed. The effects on the margin last quarter, I think, was $6 million positive. This quarter, it was $3 million negative. So, the currency is – there’s a little havoc being played with the currencies, which is a little bit challenging. And, secondly, our cost to obtain short supply parts also increased a little bit. But having said that, it is still absolutely the company’s goal to continue to push this gross margin. And, absolutely, every operating leader in our company both knows that and is behaving as a very great partner in helping to make that happen.

Mary Jane, I think virtually every company in this earnings cycle has cited ongoing supply chain challenges, but visibility as to improvement with quite a number indicating that the tougher before resolution calendar ‘23. Any thoughts you can share on that? And then I’ve got one quick follow-up.

I think, based on what our guy is saying, too, that it’s actually a fairly decent chance that by the time we get to what would be our fiscal year ‘24, which is the back half of ‘23, that we may start to see most of the issues behind us. So, I think we still have a quarter or so to go here on it. But I do think probably by the end of the year, if not the 9/30 quarter, we should see that starting to get behind us.

Okay. And I appreciate the more challenging macro environment. I know it’s still precisely early with respect to the Coherent acquisition. But are there any early data points as revenue synergies with Coherent? And perhaps, Chuck, Giovanni, Mary Jane, you all could compare it to our progress with Finisar. If I recall, I think it was within three quarters of the close of that deal that you got that Sherman facility qualified and up and shipping on the VCSELs. I think at the time, Finisar had little, if any, presence with hyperscalers. And I think you now have three of the big four, and you just said it’s 30% of your datacom, 15% of comms revenue. Any early signs of that nature that would speak to enhancement of Coherent’s competitive position and wallet share with customers?

Thanks, Paul, for your question. I’ll go first and if Mary Jane or Giovanni like to – or Mark would like to add, they can. I think as it relates to your question regarding revenue synergies, it’s clear that, of course, there are revenue synergies that don’t exist in the networking business. But across industrial, life sciences, semi-cap equipment, and our aerospace and defense business, there are those opportunities. And between the key account managers, between the strategic marketing team and the product managers, especially in the businesses that Giovanni and Mark lead, there are lots of engagements that are happening, including driven by our customers themselves who are desiring to pull us together to understand how the combined portfolio can help them enable yet another disruption. So, those conversations are happening and the markets that I just described to the markets that we’re focused on. And, Giovanni, would you like to add anything or Mark?

No. Chuck, I think you summarized it well. There is no doubt, it’s a very synergistic deal combination to begin with, which we really used to explain the rationale of the combination since the beginning across those four verticals that Chuck mentioned. So, I think it’s – every day is a learning opportunity for us to really figure out substantially more synergies than we ever thought during due diligence just because we were somehow limited by our relative antitrust lawyers to really talk too much about it. And so, now, we are discovering the incredible set of combinations that we can leverage to grow the business even more.

Chuck, I would just add – it’s a great question, actually. I’d just add, just specifically in our instrumentation space to use that as a really easy example, our two leading customers that we typically engage with both companies separately prior to the acquisition. We might get an audience, maybe 10 or 15 people and maybe some vice presidents. And we recently at Photonics West show had meetings with two of our leading instrumentation customers with over 40 participants from each of the customers. And we essentially got executive suite attendees there that we would previously have not done. And I think several of our customers have commented that they like the fact that they see as much more as a strategic partner rather than just maybe a leading vendor. So, I think we’ve got early indications in multiple markets and in multiple spaces. But that’s just an easy example based Photonics West in the last few weeks.

I appreciate the responses. Thank you.

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

Thanks for taking my question. I wanted to revisit your silicon carbide opportunity. First, with – how much did silicon carbide contribute by way of sales for the December quarter? How much did it grow year-on-year? And how do you think about the growth outlook this year?

Chuck, if you want to take the growth question, I’ll find the other ones.

Okay. The revenues – Vivek, good morning. Revenues grew about 10% or so sequentially. And Mary Jane can at least range the revenues maybe with the best view for the full year. They are growing. We expect them to continue to grow. They’re capped at the kind of band of revenue that we have today on the basis of the capacity that we have – installed capacity that we have in place. That capacity is being added tranche by tranche, large numbers of furnaces at a time. And we’ve given some guidance over the last couple of calls as to how we expect that to evolve. Mary Jane, do you want to give a range for revenues in the…

So, the revenue is about 3% to 4% of the total company. And if you think about that having been 5% of the previous company, which was a smaller size, it showed some very, very nice growth with, as Chuck said, 10% growth year-over-year. The addition of capacity is very, very essential, as Chuck just described. And we’re looking forward to that coming online, so that we can continue to deliver on the demand that we’re right now capacity-wise for.

And is there an opportunity to appeal for whether it’s CHIPS Act funding or other state or federal funding? Because when I look at a number of your competitors, they are building out a lot of capacity as well. So, as much as I know you are spending a lot in your CapEx, half of your CapEx or at least a third of it is going toward this opportunity, but there is a window right now to be investing in this, assuming that this is a market that you want to be a big player in. Then why not try to spend more or try to get more funding from these government agencies, so you can really take advantage of what could be a meaningful growth area for Coherent?

Look, Vivek, this is a meaningful growth opportunity for us, and we couldn’t be more excited about it. So, we’re focused on that. That’s for sure. And to your point, we are in discussions with both elected officials and with government agencies, both at the federal government level in the U.S. and at the state level. And these discussions are ongoing and growing more intense here most recently.

Thank you.

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

Great. Thanks for squeezing me in. Just in terms of the China reopening, just any impact or kind of step back in what you saw in terms of supply chain challenges or just production capability, demand? Just anything to kind of note there and whether you’ve seen kind of getting through that past any maybe COVID waves that I’ve passed through there. And then as a second question just for Mary Jane, any changes to kind of minimum cash that you would want to keep on hand just given macro? Or should we still consider use of cash primarily debt pay down and CapEx in the near term? That’s it for me. Thanks.

Mary Jane, I’d like – Mary Jane, if you would, I’ll go first just on the environment in China and then if you would address the financial question. Meta, I would say as it relates to this last – let’s call it, the last 60 to 90 days or so, for us, for all intents and purposes, it’s pretty much the same as it’s been for the last two or three years. It’s been one story: resilient, flexible, agile, enthusiastic, and able to confront whatever headwinds come and let them just blow right by. The operational team and the team in China have really just done a fantastic job despite the challenges. And they’re already on to – looking forward to the opportunity over the next few quarters or so to position our company there as best as we possibly can.

With respect to the cash question, I’m pretty sure you’ve never met a CFO that didn’t want more cash. But generally speaking, there’s really no change in the minimum cash we have. And as we indicated last quarter, and you just summarized very well, we have changed our thinking a little bit to include debt paydown during fiscal year ‘23, as well as CapEx priorities. That does not slow down the speed with which we’re starting the synergies, and we’re going to continue along that path.

Great. Thanks.

Well, it’s pretty much the same thing we’ve seen for the last couple of years, at least on the legacy II-VI side, which is that the fourth quarter tends to be the strongest quarter in general. It is perhaps less enormously strong than it had been prior to 3D sensing being – or the sensing market being in the numbers. But, generally, I’d say we would expect to see kind of typical seasonality and some strengthening in the other end markets.

Tom, this is Giovanni. Just want to add, new features, new functions, new technology gets in and out of products all the time. What we have seen is that, generally speaking, consumer automotive, general, anywhere, there is a need for interactivity with the machine. Lasers and photodiodes imaging, generally speaking, a very powerful way to sense the world and provide an AI engine inside the machine to respond and make decisions. So, that’s a trend, which will continue and will also increase in terms of the actual ability to, again, sense in broader terms, not only physically, but also from a – for example, from a target perspective, they need different type of sources. Depending on the application, there’s a different level of power, et cetera. So, we have seen and you guys have seen, as the number of lasers, a number of photodiodes, the number of solution that get added to consumer electronics products and then automotive, inside or outside the cat, it just will keep increasing. So, it’s not whether or not – of course, there’s going to be more phones, more cars sold eventually and maybe more phones. But it’s even assuming that more phones have saturated as a number, we think that the adoption of this technology will continue to grow. And so, you can expect future products to be adopted to enhance the functionality of these products.

Also, let me just clarify something. I should have helped Chuck here more. On our silicon carbide growth, the answer is that it’s 10% – the growth is 10% year-over-year. And it’s pretty flat sequentially for exactly the same reason Chuck gave, which is the capacity constraint.

Our next question comes from Ruben Roy with Stifel. Your line is open.

Thank you. Chuck, a lot of detail so far. But if we could spend a minute on – there’s a comment in the press release around the pricing and thoughtfully increasing pricing in some areas. Obviously, the – with the business becoming more diversified, wondering if you could just kind of maybe give us a little bit of detail around how you’re seeing the pricing environment evolve, especially in the context of input costs and supply constraints improving. And then I guess you talked about positioning the portfolio of the diversified company and how that’s playing into how you’re thinking about longer-term pricing strategy, that would be helpful. Thanks.

Okay. I’ll start – thanks for your question. I’ll start, and then, I’ll ask Giovanni to add on to it and provide even more color. In these last six months, we put the entire product management team of the whole combined company through a fairly rigorous training cycle. And those product managers in conjunction with the global sales and service organization have had a strategic imperative to improve the operating margins and to position us for competitive pricing that reflect the true value that we bring to the marketplace. Those conversations have been going on even long before we combined with legacy Coherent, but we really stepped it up in the last six months. And whereas you’d like to do it across the Board, it’s not practical. And so, you have to be focused on it. You have to have a strategy for it and an intimacy with the customers with regard to a long-range value proposition and a long-range partnership, which we always focus on developing. And, Giovanni, do you want to point out one or two examples of success in the last six to 12 months?

Sure, Chuck. Yes, we had – we’ve been quite successful in a very cooperative environment with our customers, understanding that some of our costs, particularly in those products that require transformation, so we talk about material processing, material transformation, where there is a significant amount of energy needed, we have been able to increase price in a reasonable way. And I think that the customers have been very pleased. In some cases, we have been offered price increases to – by the customer to secure share in this kind of environment, where they realize that there could have been a risk of supply. So, it’s been a combination of us – asking us to increase prices, which we’ve been quite successful with. And then, customers, in some cases, offering price increases to again continue and secure – they continue to supply for some of these products, which, again, have been affected by a number of inflationary effects that we all know, particularly around energy supply.

I appreciate all that detail. That’s all I had. Thank you very much.

Thank you.

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

Thanks so much. Thanks for squeezing me in. First question, now that we’re in the good part of the 400G data center transceiver cycle, can you talk a bit [Technical Difficulty] 400G versus 100G, if it’s meaningfully different? And then, importantly, is there are any technology moats that you can build in 400G versus 100G because of the greater investment needed in the technology? Thank you.

So, first of all, just for the sake of clarity, as you know, we say 200, 400, 800, 1.6G. As far as we know, it’s all about 100 gigabits per second. And then you’re talking about data rates. So, we have to distinguish between – speed and data rates are not exactly the same. So, even at 400G may actually be four times 100. And 200, maybe two times 100. 200G, we have wireline 200G. We just announced an EML at the European Conference last September. It’s best in the world, we think, and eventually will be a significant shift in bits per second, not necessarily as a data rate, but as a speed. So, all of those complications of combining 100G optical lanes into 200, 400, 800, they have several solutions, several standards. It’s – we have potentially the ability to support all of those form factors, all of those data rates. And we, obviously, own a substantial vertical level – sorry, vertical level of integration in terms of the lasers, in terms of the ICs, in terms of the optics that go into those products. So, I wouldn’t necessarily claim – and nobody could claim that there is a strength in 400G, but there is no strength in 200G or vice versa because the strength is at the bit rate level – sorry, the strength is at the speed level, not necessarily at a bit rate level. So, I think we are well positioned at 100G. We are already well positioned for 200G speed. And so, all of the data rates from 200G and above, I think, we’re very well positioned to, again, as I said earlier, to continue to gain share in the marketplace. We are seeing – just to give you an – just last year, we were at about maybe 15%, and it went to 30%. And now, we’re about 50% of the total datacom sales are actually at 200G and above, which is a sign that we are really focused on the high end of the market, thanks to the – again, the combination of the portfolio, component level that we own and we are better integrated with.

Great. Very helpful. If I could follow up, just another question on the R&D path. Your name is Coherent, but I’m not aware of any DSP products or for 400

Yeah. We should probably take it off-line because we did announce in the past of our own DSPs, and we have – of course, we have several Coherent products. We have an entire division around it. And we’ll walk you through all of the offerings. We are very well positioned. We have started with our own – we have our own DSP design team based in Germany. And we have started with, I would call it, a simple product. And we’ll eventually migrate to more complex products over time and be as basically integrated as we can be with our own DSP. That’s our plan. We have to – we started. We are on a good path. The most significant of the products, of course, the 100G

Thank you.

And I’m not showing any further questions at this time. I’ll turn the call back over to Mary Jane for any closing comments.

We want to thank all of you for joining us today. Thank you for being patient with the time. Thanks to Chuck, Giovanni, and Mark. And we’ll talk to you soon. Have a good day.