COHR - NASDAQ

Good day, and thank you for standing by. Welcome to the Coherent Corp. FY '25 First Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Silverstein, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.

Thank you, Operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO; and Sherri Luther, Coherent's CFO. During today's call, we will provide a financial and business review of the first quarter of fiscal 2025, and the business outlook for the second quarter of fiscal 2025. Our earnings press release can be found in the Investor Relations section of our company Web site at coherent.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements or predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the second quarter of fiscal 2025. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. We'll refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the Investor Relations section of our Web site at coherent.com. Let me now turn the call over to Jim Anderson, our CEO.

Thank you, Paul, and thank you everyone for joining today's call. I'd like to begin by welcoming Sherri Luther back to Coherent as our new CFO. Sherri and I previously worked together at Lattice Semiconductor for almost six years, where Sherri did an outstanding job as the CFO. Prior to Lattice, Sherri worked for 16 years in various finance roles at legacy Coherent before its acquisition. Sherri's proven track record as the CFO, combined with her long history with the company, has allowed her to hit the ground running, and we're very pleased to have her join our team. I also want to thank Rich Martucci for serving as our Interim CFO, prior to Sherri's arrival. Rich's leadership and dedication have been a tremendous help to me and the company. And I'm deeply grateful for his commitment and continued dedication to Coherent. Now that Sherri is onboard, I'm pleased to announce that we'll host an Investor and Analyst Day, in New York, on May 28 of next year. At that event, we'll outline our overall strategy, including our end market growth opportunities, product and technology roadmap, and long-term financial model. We look forward to the event and sharing more details about our plans to create value for our shareholders. Before I discuss our first quarter results, I'd like to provide an update on the three key areas of improvement that I outlined at our last earnings call; culture, strategy, and execution. I believe improvements in these three areas will transform our extension, innovative technology portfolio, and our growing market opportunity into an engine of market-leading revenue growth, expanding profitability, and industry-leading shareholder value creation. First, regarding culture, I've now had the opportunity to visit more than 20 of our sites, and meet with many of my teammates across the world. We have incredible depth and breadth of talent, and our employees' dedication is inspiring. My favorite part of our culture is our focus on innovation. And we will continue to nurture this fundamental part of our culture. Yes, as I noted at last quarter, there is also opportunity to evolve our culture. We're building a faster and more agile company. We've already made numerous changes to simplify and strengthen our organizational structure, empower our leaders, streamline decision-making, and accelerate execution. Culture change always takes time, but I'm encouraged by our early progress in this area. Second, regarding strategy, we completed the strategic portfolio review that we initiated in June. This portfolio assessment will be the foundation for making organic and inorganic investment decisions moving forward. We applied a set of strategic and financial criteria to [shore] (ph) each of our product lines into one of four categories; Growth Engines, Profit Engines, Long-Term Bets, and Non-Strategic. We've now moved to the next phase, which is to drive actions based on the strategic assessment. For example, we've already shifted organic investment towards our Growth and Profit Engines, where we have conviction that we can drive strong long-term profit expansion for the company. For instance, we increased investment in new datacom platforms, such as next-generation transceivers, and our new Optical Circuit Switch. We've also started the process of divesting or shutting down product lines and assets that are non-strategic. For example, we recently announced the planned sale of our Newton Aycliffe facility, which was an underutilized and non-strategic asset. The proceeds from the sale of the facility were used to pay down our outstanding debt and reduce overhead costs. Another example is our recent announcement that we're exploring strategic options for our battery technology platform. Although our non-strategic businesses represent a relatively small portion of our revenue, they're diluted to the company's margin structure and absorb investment capital and focus that would be better deployed in our core businesses. As we optimize our portfolio over the coming quarters, we'll provide further updates, including at our upcoming Investor Day. Finally, the third area of focus for improvement is execution. Last quarter, I underscored the opportunity to significantly improve operational efficiency and effectiveness. We're tackling the greatest opportunities up front. For example, we've begun engaging our key customers and partners in a much more strategic manner. This approach has already uncovered new areas of long-term growth opportunity with our key customers and partners. Another example is our focus on gross margin expansion. We launched initiatives for pricing optimization and product cost reduction aimed at achieving our goal of operating at a consistent sustainable gross margin level above 40%. On operating expenses, we are shifting R&D investment to our growth and profit engines and we are shutting down or divesting highly speculative projects that do not suit our long-term business model. Our go-forward R&D strategy will ensure that investments are focused, efficient, and offer high return. And on SG&A, we are focused on driving greater efficiency and leverage. Evolving our culture, optimizing our strategic portfolio, and improving our operational execution will put us on a path of sustained market-leading growth, enhanced profitability and cash generation, and a stronger balance sheet. I look forward to sharing more details at our upcoming investor meeting. I'll now switch gears and provide some brief comments on our fiscal first quarter results. Revenue in Q1 increased by approximately 3% sequentially and by 28% year-over-year, driven primarily by strong AI-related datacom transceiver revenue growth, along with improvements in our telecom revenue. Non-GAAP gross margin expanded by 49 basis points sequentially, and our non-GAAP EPS grew by 22% sequentially, and by well over 4x year-over-year. Let me summarize what we're seeing by our business by end market. In the communications market, Q1 revenue increased by 14% sequentially, and by 68% year-over-year. The sequential and year-over-year increases were driven by strong increases in both our datacom and our telecom revenue. Our Q1 datacom revenue grew by approximately 16% sequentially and by 89% year-over-year, due primarily to AI data center demand. We're very pleased with the continued ramp of our 800-gig transceivers and the adoption of those products across a broader set of customers. We also continue to make great progress on our 1.6T transceivers. Having delivered initial samples in the preceding quarter, we continue to expect to begin ramping sales of 1.6T datacom transceivers in calendar 2025. We're also investing in a broad portfolio of transceiver ingredient technologies that includes VCSELs, EMLs, and silicon photonics. The breadth of our extensive technology portfolio allows us to deploy the best technology solution for each customer and application. We showcased this capability at the European Conference on Optical Communications this past September, where we presented a multi-technology datacom transceiver demonstration at 200 gig per optical lane based on both our differential EML and our silicon photonics platforms. We also continue to make great progress on key enabling components such as 200 gig differential EMLs, 200 gig VCSELs, and CW lasers for our silicon photonics solutions. We also recently announced a family of high efficiency lasers to power 1.6T optical transceivers based on silicon photonics. Beyond transceivers, our new datacom optical switch platform continues to progress well and is generating significant customer engagement. Our differentiated switch is based on our highly reliable solid-state liquid crystal technology and was recognized at ECOC '24 with the Best Product Award for data center innovation. We've shipped sample units to key strategic customers and we expect to begin ramping revenue in calendar 2025. Shifting to telecom, our revenue increased by 9% sequentially and by 17% year-over-year, although we continue to take a cautious view of the telecom and market recovery, the sequential revenue growth in Q1 was a combination of end market improvement along with our ramp of new products, especially our new 100G

Thank you, Jim. Let me begin by saying how excited I am to rejoin Coherent, a company with a rich culture of innovation. I want to express my appreciation for the warm welcome I have received from my Coherent teammates. I also especially want to thank Rich Martucci, who has helped me to quickly come up to speed and ensure a smooth transition. As Jim noted, I spent 16 years at Coherent prior to its acquisition. What attracted me to rejoin Coherent was the opportunity to drive significant shareholder value expansion. The company has a solid foundation with its innovative technology and breadth of product portfolios. I see the opportunity to improve profitability in a number of areas. For example, I see opportunity for gross margin expansion, greater operational efficiency in the R&D investments we make, and opportunity for better SG&A efficiency. In addition, capital allocation is key, because we need to ensure that we are investing in the product portfolios that drive the highest return for the company, while also paying down debt to de-leverage our balance sheet as quickly as possible. I look forward to sharing additional thoughts with you at our investor and analyst event in May. Now, let me provide a summary of our results. Overall, in the first quarter, we drove continued sequential improvement in our financial results with solid revenue growth and gross margin expansion, driving strong profitability. With a strong focus on cash and capital allocation, we paid down $118 million of our debt, which reduced our net debt leverage ratio as defined in the credit agreement to 2.4 times. First quarter revenue was 1.35 billion, an increase of approximately 3% sequentially and 28% year-over-year. From a segment perspective, networking revenue increased 12% sequentially and 61% year-over-year due to AI data center demand. Laser segment revenue decreased 2% sequentially and increased 4% year-over-year, reflecting relatively stable end market demand. Material segment revenue decreased 15% sequentially and 3% year-over-year, primarily due to weak automotive end market demand. Our first quarter non-GAAP gross margin was 37.7%, an increase of 49 basis points compared to the prior quarter, and an increase of 293 basis points compared to the year-ago quarter. The improvements in gross margin were driven by higher revenue volume, favorable mix, and yield improvements. First quarter non-GAAP operating expenses were $276 million compared to $266 million in the prior quarter and $234 million in the year-ago quarter. The sequential and year-over-year increases were primarily driven by increased R&D investments in our product portfolio, as well as variable compensation. Looking ahead, we plan to continue to be disciplined in managing our SG&A expenses, while ensuring that we invest in our product portfolio. Our first quarter non-GAAP operating margin was 17.3% compared to 17% in the prior quarter, and 12.6% in the year-ago quarter. First quarter non-GAAP tax rate was 20.3%, compared to 25.9% in the prior quarter as a result of non-recurring one-time items. First quarter non-GAAP earnings per diluted share was $.074, compared to $0.61 in the prior quarter, and $0.16 in the year-ago quarter. We paid down $118 million in debt during the quarter using cash from operations and the proceeds of the sale of our Newton Aycliffe fabrication facility for incremental debt reduction. I will now turn to our guidance for the second quarter of fiscal 2025. Revenue is expected to be between $1.33 billion and $1.41 billion. Non-GAAP gross margin is expected to between 36% and 38%. Total operating expenses are expected to between $275 million and $295 million on a non-GAAP basis. Tax rate for quarter is expected to be between 19% and 22% on a non-GAAP basis. EPS is expected to be between $0.61 and $0.77 on a non-GAAP basis. In summary, I'm very excited to return to Coherent. I see a bright future with significant opportunities to drive shareholder value expansion, transforming the company's strong foundation in technology and innovative products into a stronger operating model. That concludes my formal comment. Operator, please open the call for Q&A.

Thank you. [Operator Instructions] Our first question comes from Samik Chatterjee with J.P. Morgan. Your line is open.

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

Yes, thanks, Samik, for the question. Yes, great question. Always happy to talk about the customers, and I've definitely spent a lot of time with customers over the last five months, meeting as many as possible. I'd say that, first of all, I think we have a lot really strong existing relationships with our big strategic customers across both our networking accounts and our big datacenter customers, but also our industrial customers as well. So, in a lot of cases, there's a long history with these customers; it's very strong, and very positive. I think when I talk to our customers, the opportunity that we have is to build relationships with those customers at a much more strategic, much more multigenerational long-term engagements, to move from solving problems that are right here in the here and now, to focusing on much more multigenerational innovation and partnering with our customers on future generations that are one, two, three generations out. And so, I think that's our opportunity to drive a deeper strategic engagement with our key customers, moving forward. And I think the couple things that I would say are really resonating with our customers when we have those longer-term strategic discussions, is, I would say, number one, definitely the technology portfolio and roadmap that we can bring to those customers to help drive their innovation. But the second area I would highlight too is supply chain resiliency, and the breadth and depth of our supply chain. If I just take, for instance, our AI -- our big AI datacenter customers as an example because that's we're seeing the fastest growth in our revenue right now. On that first area of technology roadmap, I think our customers really recognize the breadth and the depth of the technology portfolio that we can bring to bear, specially in the optical networking space, where we don't just assemble the modules, but we build a lot of the ingredient components that go into the module; the lasers, whether they're VCSELs, EMLs for silicon photnonics that we design, or a lot of the other ingredients that go into those modules. So, the breadth of technology that we could bring for that multigenerational partnership I think is really unparalleled. And then the second thing, which is definitely becoming more and more important to all of our but strategic customers, is supply chain resilience. And there again, I think we could bring a really differentiated supply chain, where we have incredible geographic diversity in terms of our manufacturing footprint. And then, our verticalized structure could be a real advantage, especially in a very fast ramp situation, which we're in right now with our datacenter customers. When demand is increasing very quickly, it's really important to have that verticalized strategy and structure that we have, because I think that's really allowed us to supply them in a really reliable. And so, a couple a those or a couple things that are really resonating with our customers, but I think that, back to the high-level point would be our opportunity to really build much deeper strategic engagements with our partners, looking forward. And I think our customers are definitely receptive to that. And yes, it's definitely an area we'll be focused on, moving forward.

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

Yes, hi, Samik. I'll take that question. So, I'll start off with a little bit of context on Q1, and then talk about the guide for Q2, and then how we're thinking about it a little bit more long-term. When you look at Q1, the approximately 50 basis point sequential improvement, we're really pleased with that, and 290 basis points year-over-year improvement. That really came from a few different areas. One was, of course, higher revenue volume contributed. We also had favorable product mix. And example of where we saw that within our Lasers segment, where we saw continued strong demand for our excimer lasers for OLED screen manufacturing. We also had improvements in yield, and we saw that in our datacom business where we saw improvements in our -- the trends -- we started that business, so really a few different areas that drove the sequential and year-over-year improvement there. When we look at Q2, the guide for Q2, that is a range, right, 36% to 38%, it is a range, and there can certainly be fluctuation on a quarterly basis with respect to gross margin. But we did talk about, last quarter; Jim mentioned that we launched our gross margin expansion strategy which includes product pricing optimization, as well as product cost reduction. And so that's an area where we're going to focus on because we want to achieve a long-term gross margin of greater than 40%, and so that's really how to think about what our goal is for our long-term gross margin. And we're in the very early stages of that. And certainly, that you can be rest assured that we're focused on really driving to that greater than 40% target. And when we get to our Investor Day, in May of next year, we'll certainly give more color on the model and all of the different elements of that.

Got it. Great, thank you. Thanks for taking my questions.

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

Thank you very much for taking the question. I've got maybe two, one is more thematic, the other more reflective. The first one is I'd like to really see if we can get some thoughts, particularly from Sherri, regarding priorities for the capital structure, really just sort of weighing the options of delivering, investing in OpEx, maybe making acquisition. How are you thinking about these? And my follow-up is, in terms of the strength of the datacom business, I know, previously, management had talked about the products below 800 gig, basically 400-gig and below being relatively flattish for the year. And I guess what I'm trying to understand is where was the, really, upside surprise this quarter, was it really 800 gig and above or was there more strength from the more traditional products below -- 400-gig and below, did that provide any upside or was it all coming from the higher performance? Thank you.

Thank you, Simon. I'll take the first part of the question on capital allocation. I'll let Jim take the second part of that. So, from a capital allocation perspective, certainly lots of opportunity that I see in this area in joining the company. And really, the number one priority is in the organic growth of the company and making those investments that drive the highest ROI. Jim mentioned the strategic portfolio review that was undertaken and completed and we're really in the next phase there where we're shifting our R&D spend toward those programs that drive the highest ROI for the company in order to drive the long-term growth. So, that's the number one priority. The second priority, and it's a very close second priority, and that is in reducing our debt to deleverage the balance sheet and really overall strengthen the balance sheet. This also serves to reduce the debt service costs that hit our P&L as well. In Q1 of this 25, we paid down $118 million to reduce our debt and brought our debt leverage ratio down to 2.4 times as defined in the credit agreement. So, we're pleased with the sequential progress there. But in order to pay that down, we did use cash from operations, but took an incremental or component of that pay down was coming from the proceeds of the sale of our Newton Aycliffe facility, fabrication facility that we sold after in the quarter. And so, the sale of that facility really gave us the opportunity to pay down additional debt to further deleverage. And so, I certainly have a history of aggressively paying down debt and that's something that's going to continue to be a focus area for me and a very close second priority.

And Simon, on the second part of your question around the datacom business, first of all, yes, we're really pleased with the performance of that part of our business. Just to reiterate, the datacom transceiver business was up 16% sequentially and it was up 89% year-over-year. And you're right, we didn't see growth as well in from a sequential basis in the 400-gig and below transceiver speeds. We did see sequential growth there. That was very nice to see. When you look across the customer base, customers are at different stages of adopting the different transceiver speeds. So, we still have customers that are doing significant volume on 400G and below as well. And so, it's really a mix of different transceiver speeds. And then, back on 800-gig, I would say, look, we're really pleased with the ramp, the overall ramp of our 800-gig transceivers. And then, the other color I would add is that one of the things I'm really pleased to see is the breadth of customers that we have. The number of customers that are ramping 800-gig has significantly increased. If I look like a year ago, it was only maybe a couple customers. Now, we have many customers ramping 800-gig. So, there's a much bigger diversity of revenue streams underneath that 800-gig ramp. And we do expect 800-gig to continue to grow over the coming quarters as well.

Thank you very much.

Thanks, Simon.

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

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

Yes. Thanks, Thomas, for the question. No, there are definitely other things that we're working on in the category of non-strategic. So, as we said, we completed that portfolio assessment. I think we wrapped up pretty much at the end of August. And then, we've since moved into execution mode. And there's a number of different things that we're looking at. Just the two examples that I gave in the prepared remarks were from an asset standpoint, the sale of the Newton Aycliffe facility. And then, from a product line standpoint, that battery technology platform, but there definitely are other things that we're working on within that non-strategic category, and we'll certainly share that with investors at the right time. It's a little premature to share some of that, but we will definitely share that at the right time. And then, certainly, we'll give a better picture at the Investor Day as well. But even between now and the Investor Day, we'll share any key milestones along the way. And then, I just want to reiterate what I said in the prepared remarks that even though the overall non-strategic category is a relatively small part of our revenue, again, it is dilutive to our operating margins. And more importantly, it draws away capital and focus from the management team. So, we are anxious to execute quickly on that, to improve focus, to improve where our assets and where our investments are focused. And then, beyond just the non-strategic category, in our other categories of, for instance, key growth drivers and key profit drivers, that's a place where we've been adding investment. And so, we've been shifting investment away from the non-strategic areas into the fast-growing areas. And the best example of that is the data center AI transceiver growth. And so, we have increased R&D investment in new technology platforms for datacom transceivers. So, these are new future technology platforms that we're really excited about, as well as the other example I would give would be the optical circuit switching, which we're excited about as well. So, we're also shifting organic investment towards those high-growth, high-profitability categories as well. So, that's certainly already happened or in process as well.

Helpful, Jim. And then, the second I had is on 1.6T. I think you mentioned calendar year '25 as a ramp for those transceivers, but do you think that you'll have -- this is multi-parter here, so forgive me, do you think that you will have any contribution from 1.6T in the fourth calendar quarter of this year? Are you going to see any this year? And then, when do you see the volume ramp of 1.6T coming? We've heard from others in the space that there are constraints on the laser side, on the DSP side. Are you seeing any of those constraints? And then if you think that the world is kind of ramping on 1.6T, do you guys see kind of more of a silicon photonics world or an EML world as that 1.6T ramp? Sorry for the multi-parter, but I appreciate it.

Okay. Thanks, Thomas. I'll try to -- that was a multi-parter. I'll do my best to get to all of that. So, at this point, what we're saying is we'll ramp within calendar '25. Certainly we're focused, along with our customer, on getting our solution into production as quickly as possible. So, to the extent that we can ramp sooner, we'll certainly execute as fast as we can. I think I was really pleased that the team delivered samples last quarter. We're working very tightly with our customers, now our lead customers, to get that into production as quickly as possible. But for now, I think I'll leave the expectation at calendar '25. And as we get close to that revenue ramp, we'll certainly share more details about when exactly we expect that ramp and the contribution. And then with respect to the specific technology that we're using, what I would say is I think one of our real strengths and something that really differentiates us as a technology -- as an optical networking technology provider is the breadth of technology that we can bring to bear, right? We look at it as we'll deploy whatever the best technology is for the benefit of the customer and the application that we're trying to drive. So, whether that's an EML, a VCSEl, or silicon photonics, we're developing all of those different options and we'll deploy whatever technology is strongest to create the biggest differentiation for our products and the biggest benefit for our customers. So, that's kind of the approach that we take to the technology. And I think we've got the broadest set of technology options of certainly any of our peers and competitors. So, I think that's a real competitive strength for us.

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

Great. Thanks. Maybe a couple of questions for me, you mentioned some strengths out of telecom in the quarter. Just wondered, is that more Asia-based or U.S.-based? And then as a second question, you had mentioned kind of some increasing yields for reason for upside or gross margins in the quarter. I wanted to get a sense of, is that some of the kind of tailwinds from some of the yield disruptions we saw in fiscal Q3 earlier this year? Or is that just kind of additional improvements you guys have made to the business? Thanks.

Yes, thanks, Meta. On the first part of the question around telecom strength, so yes, telecom was a bit stronger than we had originally forecasted. Really pleased to see that. And it was, first of all, just to reiterate, it was a combination of two things. We saw end market improvement, but it was also due to some of the new products that we have ramping in telecom. And specifically on those new products, and I talked about this at last quarter's earnings, the 100

Great. Thanks so much.

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

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

Thanks, Karl. Two really good questions, the first one on data center customers, and I touched on this briefly in, I think, one of the earlier questions, but one of the things that's very important to data center customers is supply chain resiliency. And the two things that we always talk about is, of course, number one, the technology roadmap that we have and the breadth and the depth of the technology and the innovation we can bring. But the other big part of the discussion is around supply chain resiliency. And this is something that I think customers are really -- this is becoming more and more important to customers, but they're also really appreciating the differentiation and the value that Coherent brings in terms of supply chain resiliency, because there's really two components of our resiliency. Number one is, we have tremendous geographic diversity in our production platforms and where our devices and modules are built and assembled. And so, that geographic diversity, I think, is a big benefit to our customers. And then, the second piece is around the verticalization. So, we don't just assemble the transceiver, for example. We manufacture a number of the key components that go into that transceiver. So, whether that's a VCSEL laser or EML or that's an isolator or even the garnet material that goes into the isolator that goes into the transceiver, a lot of that we do ourselves. Now, we do leverage outside suppliers sometimes as well if it's to our benefit, but that verticalization is also the second piece that gives us, again, that really strong supply chain resiliency. And I think that is definitely recognized by our data center customers and becoming a more important factor moving forward. And then, on the second part of your question around expanding TAM, yes, that's a great question. I would say definitely the TAM is expanding for us for the reasons that you noted. I don't have a good quantification of that today, but I think we will definitely talk about that in the context of our Investor Day in May when we share the full breadth of the market opportunity in front of us, and we'll certainly talk about the data center transceiver opportunity, and we'll talk about that expanding TAM at that time.

Great. Thank you.

Thanks, Karl.

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

Thank you. Jim, I actually had a similar question to the last one, and you started talking a little bit about some of the components that go into transceivers. I was wondering if -- last quarter you talked about build versus buy, and earlier this year the company talked about expansion of the six-inch wafer fab and five-fab. I'm wondering if that's an area that you could maybe accelerate, and if so, how are you thinking about sort of build versus buy and kind of insourcing some of these components, certainly on the EML side as we're hearing about constraints, et cetera, as you think about '25 and '26?

Yes. Thanks, Ruben. First of all, our philosophy in general -- let me start with what is our general philosophy on build versus buy or develop ourselves versus leverage the outside ecosystem. What we want to always be doing is applying our R&D dollars to the areas that we can truly differentiate, right? So, if we believe that we can create true differentiation for our customers that benefits our customers and do something that's not available in the rest of the market, then that's a good use of our R&D dollars. And that can benefit our customers both in terms of the technology advantage or maybe the cost structure advantage. So, to the extent that we drive true differentiation, we'll do that. And if we can't, then we should be leveraging the outside solutions, right? So if we can't generate some real advantage for our customers, then we should be leveraging the ecosystem. And I think that same philosophy applies to our supply chain as well, is if we can generate an advantage for our customers that may be technical or cost structure advantage or supply chain resiliency advantage, then we should do that, right? But if we can't generate a genuine advantage, then we should be leveraging the outside ecosystem. And so, there are times when we choose to verticalize and build those components ourselves. There are other times where we choose to leverage outside suppliers. And I think we're moving forward. We're going to be much more strategic and deliberate about that than maybe we have been in the past, and but that's our general philosophy.

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

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

Appreciate it. Thank you.

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

Hey, guys. Thanks for the question. And I guess, firstly, welcome, and also welcome back, Sherri. My question, I guess, first is a follow-up to Ruben's on EMLs. Are you guys going to be commercially shipping your own EMLs into either 800 and 1.6 next year? And additionally, are you concerned at all about data center capacity constraints for you guys into what could be a pretty robust 2025. And this is either for transceiver assembly or light source.

Yes, thanks, Chris. So, on the first part of the question, on EML usage in 800-gig and 1.6T, on EMLs, I'll just start by saying we use a combination of our own internally developed and produced EMLs, as well as we do leverage EMLs from very good partners as well. And so, again, back to that prior question on kind of philosophy, where we think there's benefit for our customers, we will do that internally, but where we can leverage the outside ecosystem, we'll also do that. And so, I would anticipate us continuing to that in whether it's 800-gig or 1.6T us continuing to leverage both internal as well as external sources. And then, I also want to reiterate the fact that we take a multi-technology approach, right, so, not just EML, but to the extent we can leverage VCSEL or a silicon photonic solution, we'll do that as well, right? So, again, we'll take whatever is -- whatever we believe is the best technology path for our customers that gives the greatest benefit. And I think that's one of the benefits we bring to our customers is our expertise is really at a deeper level of being able to manipulate photons for the benefit of data transmission. And we look at whether it's EML, VCSEL, or silicon photonics, that's just a method by which we bring our innovation around using photons to transmit data. And then, on the second part of your question, I think it was, Chris, around capacity constraints, as we see as we continue to ramp in data center AI. I would say that, first of all, I would say that I want to take the opportunity to thank my production and engineering manufacturing teams for doing a great job of supporting the ramp of our data center AI business. They've really done an outstanding job making sure that we deliver for our customers. And that's not to say that we don't have a constraint here or there, but I think overall, they've done a really outstanding job meeting the demand needs of our customers. And that's certainly our focus moving forward. We're certainly increasing and ramping up our capacity internally, whether that's for transceiver assembly or whether that's for the individual ingredients that go into that transceiver, isolators, VCSELs, EMLs, whatever, right? So, we're ramping up our capacity and certainly our goal to make sure that we've got the right capacity for the band that we're seeing from our customers.

Excellent. And then, perhaps a follow-up, Jim, now that you've had some time to kind of look under the hood, some of the pushback that I get is around margin expansion opportunities in data center, particularly on the transceiver, your old Finisar business, as you look to your path for greater than 40% total company GMs. And what I'm getting at here is, there seems to be a balance here between upside from surging units obviously, driven by AI versus what I think are fairly aggressive capacity expansion plans for guys particularly out of Asia, but in the science, but you have Cloud Light, you have some other transceiver guys here as well. So, when you balance those together, do you think there is sizable room here to expand margins on the transceiver side, which is a big chunk of your data comp business.

Yes, thanks, Chris. Let me start at the company level, and then I'm going to come back to data center transceivers and how that fits in. The short answer on data center transceivers is yes, and it's product cost, but I want to paint the company picture first, right? So, at a company level, we're going to march towards that 40% gross margin goal. And I think there's two, like we talked about, there's two big initiatives, one around pricing and one around product cost. I think the pricing optimization that we can do probably applies more to our industrial businesses. We have many, many different product lines and many different industrial sub-markets underneath the umbrella of the industrial business. And I do see opportunity to do a much better job of optimizing the pricing of those products and capturing what I would say -- what I would call is the fair value for the technology and the innovation that we're bringing to those industrial markets. Now, in pricing in the datacom transceiver space, there I think there's, I would say, there's not as much opportunity on the pricing side. But what I would say is, but there's definitely opportunity on the product cost side. And that's one of the examples I gave earlier on the call is on product costs within transceivers. And I highlighted, I believe this on the last earnings call, yields as definitely an opportunity. And Sherri and I, as I said earlier, we're in an operational review this morning, spending time talking to the team about yields, the improvements that they've driven over the past few months, and what we need to see in terms of yield improvements moving forward as well. And that is definitely an area of focus for us. So, I would -- back to your datacom transceiver question in particular, I would say maybe not so much on pricing, but definitely there's opportunity for us in cost and we're certainly very focused on that.

Great answer. Thanks, Jim.

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

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

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

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

Okay, great. I appreciate that. And then, my follow-up is a bit of a kind of a higher-level question. So, it was good to see a rebound in telecom, but we've seen this prolonged slowdown in that market after the carrier spent quite a bit on 5G spectrum licenses at first, and then obviously on the 5G equipment build-out itself. But when you look at some of the commentary kind of across the telecom supply chain, it's been pretty difficult to monetize 5G. So, the carrier might not have much incentive to keep spending and adding new capabilities. So, that being said, I'm just kind of curious on your long-term growth outlook for telecom and whether it may be challenged in the long-term just because those newer, more advanced generations like 5G, advanced or 6G are just difficult to monetize?

Yes, thanks, Jack. And that's exactly why we're taking a here in the more near-term quarters, we're taking a more cautious view on telecom, right? That's why last quarter I said we're taking a cautious view, and the same applies to this quarter as well. Until we see a dramatic pickup in telecom operator CapEx, I think that market may be challenged in terms of recovery. Now, that said, we did see in Q1 some strong positive signs as I said earlier. And I think the clear area of growth is around data center interconnect. We are definitely seeing strong demand signals in DCI, right? And obviously, that's only a portion of the telecom market, but we are seeing very strong demand signals there. And then, as I mentioned before, we did see a little bit of recovery in telecom, traditional telecom transport as well. But we agree in the near term, we're definitely taking a more cautious view of the telecom recovery. Now, over the long-term, we still do believe that telecom over the long-term will continue to grow and we believe that's a great growth area for the company. We've got a lot of new products that are ramping in that segment. And then, we'll paint a more complete picture of what we see as a long-term opportunity as part of our Investor Day in May.

Great. Thank you, guys.

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

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

Yes, thanks, Richard. The first one we delivered -- just to reiterate what I said earlier, we delivered samples last quarter. We're working really carefully with our customers to get that into production as quick as possible. And at this point we expect revenue to begin to ramp in calendar '25. As we get closer to that ramp, we'll certainly share more specifics around that. And clearly, we're motivated to get that into production as quick as possible on our side. And then, in terms of the second part of the question on breadth of customer base, I think it would be similar to the breadth of customers that we saw at the beginning of the 800-gig ramp. It might be -- could be a little bit different, but it'll be kind of similar magnitude in terms of number of customers.

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

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

Okay. Appreciate the comment, Jim, that's all for now.

Thanks, Richard.

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

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