Good day, and thank you for standing by. Welcome to the Coherent Corp. FY2023 Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised this conference is being recorded.

I would now like to turn the conference over to your speaker today, Mary Jane Raymond. Please go ahead..

Thank you, Kevin, and good morning. I’m Mary Jane Raymond, Coherent’s Chief Financial Officer. Welcome to our earnings call today for the third quarter of fiscal year 2023. This call is being recorded on Wednesday, May 10, 2023. With me today on the call is Dr. Chuck Mattera, our Chair and Chief Executive Officer.

After our prepared remarks, Chuck and I will be joined by Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Materials Segment; Dr. Mark Sobey, our President of the Laser Segment; and Bob Bashaw, our President. They will participate in the Q&A to discuss our strategy, results, and the exciting prospects across our end markets.

For today’s call, the press release and 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 will make certain forward-looking statements.

These include, but are not limited to, statements regarding geopolitical and macroeconomic trends, as well as expectations for our revenue, relevant market trends, and financial performance, including our guidance.

In addition, we will discuss our progress on integration, including our delivery of the projected synergies and certain restructuring matters. 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 and subsequent SEC filings. Coherent assumes no obligation to update the information discussed during this call, except as required by law. With that, let me turn the call over to Dr. Chuck Mattera.

Chuck?.

35% was into industrial; 44% into communications; 11% into electronics; and 10% into instrumentation. Regarding the distribution of our revenues by region, North America accounted for 53%, Europe was 20%, Japan and Korea were 14%, China was 11% and 3% went into the rest of the world.

In the face of the macro challenges in the quarter, customers are now taking proactive measures to manage inventory and cash. We expect the constrained market conditions to persist into FY2024. With this temporary slowdown in the market, we've wasted no time in aligning our cost structure with market realities.

To this end, we are pulling up the schedule for some of the actions planned as part of our multi-year synergy, integration and transformation efforts. We have begun the next phase of the Coherent acquisition integration plan, including those actions involving consolidations and moves to lower-cost sites.

These moves, alongside our other actions will keep us on track for delivering the previously announced $250 million synergy plan. We also undertook a number of actions to align our cost with current market realities as we begin the fourth quarter. We are accelerating the restructuring actions we began in Q3 and announced today.

It is focused on workforce reductions to reduce costs and expenses and facility rationalization, including the relocation of certain facilities to increase our resiliency and to lower our costs.

We are also planning to implement a multi-year digital transformation that will help enable us to improve our manufacturing productivity and efficiency and to provide lower-cost G&A services. We expect to realize $100 million to $125 million of restructuring savings on an annual basis by FY2025.

Cumulative savings for the period FY2023 to FY2025 will range from $200 million to $300 million. The cost to achieve these savings will be between $150 million and $200 million.

The good news is that it's very clear to me that our continued investment in the markets we serve with best-in-class people and technology has earned us a strategic and highly competitive position at a growing number of customers.

We've been planning and executing this evolution for a long time, including the most recent acquisitions of Finisar and Coherent. The power of our diversified and larger scale model is very clear to me. Our work is not done, rather it's just beginning.

We are confident that our new product portfolio, technology and manufacturing platforms will be ready as the growth resumes. I also – I am confident in our ability to secure new design wins across our key product lines to drive long-term differentiated performance.

We are very well positioned to continue benefiting from strong and durable technology trends that we do not see abating anytime soon.

With respect to our four end markets and communications, we experienced a near-term slowdown in the datacom market with some hyperscale and enterprise computing customers and with our telecom and cable TV customers as well as many abruptly shifted their focus in the quarter from managing their supply chain shortages to managing their inventory surpluses.

These affected our telecom and datacom businesses about equally. Datacom revenues were $294 million compared to $332 million in Q3 of FY2022. And telecom revenues were $245 million compared to $222 million also in Q3 FY2022. We believe this is a temporary interruption in the growth trajectory of these markets that will continue into FY2024.

We also believe that the fundamental growth drivers of our communications market are intact, including increasing Internet traffic, the proliferation of network devices and increased broadband and mobile data rates.

While datacom will be partially affected in the short-term by the temporary pullback in investments in infrastructure, including the metaverse, it is expected to come back strongly, driven by the deployments of hyperscale computing and for artificial intelligence and machine learning.

In fact, we believe that we are at another inflection point in a decade-long megatrend forming with artificial intelligence and machine learning, and we expect these trends to account for more than half of all datacom transceiver shipments by 2028.

Despite the current datacom market reset, our industry-leading position in 200G and above remains very strong.

Our leadership in this area derives from the vertical integration of our high-speed lasers, optics and electronics and our transceiver modules, and our ability to scale to meet aggressive volume ramps of the world's leading data center operators.

In addition to the growth of our 200G and 400G datacom transceivers, we are accelerating our 800G shipments in anticipation of exponential growth beginning in FY2024. In telecom, we are a vertically-integrated market leader with our Coherent transceivers and disaggregated solutions.

Once the growth resumes, we expect all of these products to continue to grow at double-digit percentages annually.

We continue to invest in a broad product portfolio to address evolving requirements of our customers who are focusing their resources on developing new platforms, and we are engaged in intense design and activity in response to multiple new opportunities ahead.

These opportunities in telecom stemmed from disaggregation and are being increasingly led by hyperscalers who through their continued build-out of metro, regional and submarine networks are also driving paradigm shifts in the transport network architecture.

With our existing telecom transceiver portfolio and our differentiated DSP technology roadmap, we plan to launch the first 100G Coherent solution for network edge applications.

We expect that the planned $65 billion investment in broadband access from the infrastructure investment and Jobs Act will be a major catalyst for our optical communications business. Finally, as space is the new frontier, we are seeing a strong increase in demand for our differentiated products for satellite communications.

In Industrial, our revenues in the quarter were $438 million, down 3% sequentially. However, we saw a sustained strength in semiconductor cap equipment front-end sales, which grew 15% year-over-year and 8% sequentially and includes our EUV lithography products whose sales grew 30% sequentially.

Lasers for both semiconductor wafer inspection and spike annealing set quarterly records and have a strong outlook at least through the rest of the calendar year. Our leading display customers lowered their demand outlook by greater than 35% due to a decrease in factory utilization based on lower demand, the lowest in four years.

This led to a decrease in our forecasted service business in Korea. In the quarter, a big highlight was that our sales of display spare parts into China surpassed those of Korea for the first time, giving a clear sign of market growth in China even though we see some sluggish demand for mobile devices.

We expect these short-term consumer demand and inventory-related headwinds will resolve as we move towards the calendar Q3 release of the next-gen smartphones from industry leaders.

Such a trend also aligns with the widely announced new-gen 8.5 fab investments in China that we believe will drive a strong recovery in our OLED business into calendar year 2024. In the month of March, we set an all-time record for sales into the laser aftermarket in North America.

We continue to experience strong welding design wins for our kilowatt arm fiber lasers and our highyag beam delivery solutions as a result of the acceleration of EV and battery factories around the world.

Instrumentation was up 4% sequentially to $125 million as we continue to set records in this market through strength across the board, led by applications in immunology and laser-assisted procedures.

Sales of our ultrafast laser-based advanced imaging systems for neuroscience increased as well, and we had our strongest quarter in scientific since pre-COVID times.

We shipped our 100,000th OBIS mini laser, and we added several new design wins for our light engine solutions where we combine the lasers and optics that form the engine of our customers' products.

It is our strategy to enable customers to source the entire laser light illumination side of their systems from Coherent, accelerating their time to market, time to quality and time to cost. We believe that we can grow our revenue in the years to come well ahead of the market by expanding this addressable market.

At the other end of the optical spectrum, we shipped our 50th meter-class optic for the Thirty Meter Telescope with more than 150 units to go before completion over the next several years.

Meanwhile, the James Webb Telescope continues to send back mind-bending images, and we are proud of Coherent's contributions as the prime supplier of the world's most advanced space and terrestrial imaging systems. In electronics, our revenues were $139 million, up 121% year-over-year led by consumer electronics for sensing.

Our customer intimacy in this market gives us confidence that the long-term opportunity in consumer electronics is much broader than just VCSELs for 3D sensing. However, we expect lower revenue from just under 10% to 3% or less of our annual revenues for the next 18 to 24 months as some design changes take effect.

We believe that sensing will ultimately become ubiquitous in metaverse hardware and wearables as well as in LiDAR and other emerging applications. Our strategic engagements are growing across them all. Regarding our outlook that we will discuss today, it reflects a degree of caution around customer buying patterns in the near-term.

While June was traditionally legacy II-VI's strongest quarter, the macro factors we are experiencing, along with seasonality will result in lower revenues sequentially. We will continue to stay focused on cost control, synergy realization and cash generation while we align our cost to market realities.

We will work to restructure and transform the company and position our product portfolios for sustainability to enable timely resumption of our growth as the market turns up.

Our synergy and restructuring plans will further enhance our competitive position by driving greater scale and focus at existing sites, and affording increased flexibility and efficiency, product roadmap alignment and access to lower cost structures.

We have completed a rigorous analysis of these plans, a careful assessment of the effects on our people and believe that these moves will position us to achieve both short and long-term commitments. With respect to our silicon carbide business, it grew more than 40% year-over-year. This business continues to be one of our top priorities.

Therefore, our equipment investments in the silicon carbide platform expansion were again about half of our total capital investment. The market is showing signs of a prolonged period of severe capacity constraints forming.

We are extremely well positioned as we have steadily gained share and then what we believe will be an underserved market for many years to come. We are increasingly asked by our customers to support a continuously increasing demand, and we have also often been asked by investors what our end game is for this business.

Even with the $1 billion investment over 10 years that we announced in August of 2021, the gap between projected supply and demand is accelerating, and so we now believe that the market leader who emerges will be the incumbent who is able to timely close the gap and serve the market needs.

This will require a relentless focus on operational excellence and the results orientation that is a natural part of our company culture, and it will also require an even greater commitment to investment. We see a unique opportunity to further accelerate our growth through either accelerated investment and/or deeper strategic partnerships.

To that end, we have commenced the review of the strategic alternatives for our silicon carbide business. This review is focused on effectively serving the market at the same time while maximizing long-term shareholder value for our Coherent shareholders by considering a range of potential alternatives.

These include a sale, joint venture, minority investment or simply staying the course with the continued execution of our business plan.

We remain firmly committed to our customers, employees and our shareholders, and we will continue to invest in capital, capacity and technology innovations, including expanding our portfolio so as to become a full-line supplier of silicon carbide power devices and modules. We can give no assurances as to the outcome of this process.

And following our Q&A session today, we do not intend to make any further public comment regarding this matter until we have a material development to disclose. With that, I'll turn it over to Mary Jane.

Mary Jane?.

Thank you, Chuck. Our backlog of $2.6 billion landed as we expected it would. Our Q3 non-GAAP gross margin was 37.3%, and the non-GAAP operating margin was 17.5%. Supply chain costs were minimal in Q3. At segment level, the non-GAAP operating margins were 13.6% for Networking, 27.5% for Materials and 14.6% for Lasers.

During the quarter, with a sudden downturn in revenue, we carried approximately $15 million of underabsorbed capacity, and the gross margin was also affected by $8 million in FX and $7 million due to mix. Our operating expenses, SG&A plus R&D were 19.8% of sales on a non-GAAP basis.

The non-GAAP items were $62 million in amortization, $29 million in stock comp and $16 million of transaction and integration costs. Total stock comp is expected to be $26 million to $30 million in Q4. Synergies have now reached $66 million on an annualized basis, and we are making good progress in all categories.

With respect to further details on our cost savings actions, our $100 million to $125 million of targeted cost reductions are in addition to our $250 million of cost synergies. These cost reductions are expected to be at least 130 by fiscal year 2017.

The FY2023 through 2025 cumulative savings are expected to be between $200 million and $300 million, and the cost to achieve them are approximately $150 million to $200 million, including severance, retention, new net labor costs in the lower cost locations, facility moves, short-term duplicate costs and lease termination costs, along with IT consolidation.

Quarterly non-GAAP EPS was $0.58 against a diluted share count of 141 million shares. GAAP and non-GAAP EPS calculations are on Tables 6 and 7 of our press release. Interest expense in the quarter was $75 million. And for the nine months ended March 31, interest expense was $208 million.

Our total interest cost for fiscal year 2023 is expected to be $281 million to $284 million. The March 31 cash balance was $901 million, just $12 million below the 12/31 balance. After paying down $78 million of debt in Q3, our total debt position on March 31 was $4.5 billion.

Using the trailing 12 months of adjusted EBITDA on a pro forma basis for the combined company at March 31, the gross leverage was 3.5x, and the net leverage was 2.8x with the synergy credit, including the cost savings and the synergy credit of $312 million that is allowed by our credit facility definition, the growth leverage is 2.9x, and the net leverage is 2.3x.

Note that the $38 million of synergies are already in the results. The total of $312 million and $38 million equals $350 million. The additional $100 million of savings is worth two tenths of turn on leverage. Let me just restate the leverage without the synergy credit.

As of March 31, the gross leverage was 3.5x, and the net leverage was 2.8x without the synergy credit. With the synergy credit, it's 2.9x gross and the net leverage is 2.3x net. Our effective tax rate in the quarter was 154%, and the non-GAAP tax rate for the quarter was 19%.

We expect the tax rate for fiscal year 2023 to be between 30% to 32%, assuming the current mix of earnings and no adoption of new or additional tax release. Turning to the outlook for Q4 FY2023.

Our outlook for revenue for the fourth fiscal quarter ending June 30, 2023, is expected to be $1.125 billion to $1.175 billion and earnings per share on a non-GAAP basis to be $0.33 to $0.43 per share. On a full-year basis, our revenue outlook is $5.08 billion to $5.15 billion.

Our non-GAAP EPS estimate assumes that the preliminary effects of purchase accounting are added back to the GAAP EPS other than the depreciation that is $5 million per quarter. The share count is 142 million shares for the entire non-GAAP EPS guidance range and both Series A and B are anti-dilutive.

This means Series A and B dividends should be deducted from net income and the share should not be included in the share count. 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. For the non-GAAP earnings per share, we add back to the GAAP earnings pretax amounts of $190 million to $210 million, including $95 million in amortization, $27 million in stock comp and $70 million to $80 million for integration and restructuring.

The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, the purchase price accounting and the share count are all subject to change. As a reminder, our answers today may contain forecasts from which our actual results may differ materially due to a variety of factors.

These include changes in mix, customer requirements, supply chain availability, competition and economic conditions to name a few. With that, Kevin, you may open the line for questions. Actually, let me amend one last thing.

In our guidance range, the add-back are $95 million in amortization, $27 million in stock comp and $70 million to $85 million for integration and restructuring. All right then. Kevin, you can open the line for questions..

[Operator Instructions] Our first question comes from Ananda Baruah with Loop Capital. Your line is open..

Hi. Good morning, guys. Really appreciate taking the questions here. I guess just to start – this could be for both Chuck and Mary Jane.

How are you thinking – well, I guess how would you describe sort of visibility as you think about it? And then also, sort of with regards to backlog, how are you relating to the backlog now? Do you think of it any differently than you did 90 days ago? And then I have a quick follow-up. Thanks..

The backlog is still strong. The customers are definitely changing their ordering patterns, given the shorter lead times, and they work off on inventory. That's not all of them, but that's a general theme. And I'm still feeling pretty good about it at least for the next couple of quarters..

Got it. And actually, I'll make this one my follow-up. Chuck, I guess that is to say you guys have described the backlog for a while now is a high-quality backlog, and so it sounds like that's still your opinion. And while orders maybe getting moved around, sounds like, I guess, is it fair to say you're not seeing significant cancellations.

It's more like pushouts and reordering of timing of backlog orders? Thanks..

That's right. We are not seeing any significant cancellations.

And in fact, the main thing that is moving in the backlog is, as we mentioned, is that customers are returning to more typical order patterns, so in some markets that maybe 13-weeks visibility or 26-weeks visibility, whereas during the period of intensive supply chain shortages, some customers had visibility for us out as long as a year in order that we could share that with the suppliers..

I got it. Thanks a lot guys. Super helpful..

Sure..

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

Thanks for taking my question. First one I wanted to ask is more of kind of a philosophical one is given the results today, you didn't choose to preannounce the quarter that was below your guidance. Just wondering sort of how you think about that from a policy perspective.

And then in terms of my follow-up, I'll ask both now because the first one is pretty easy – is when we think about the trends there, do you think of June as sort of setting a bottom end based on everything you see today. I understand it could change and if it is the bottoming, how long do you think it could last? Thank you..

So with respect to the preannounce, we determined that our best message was delivered in connection with the full earnings call and the Q&A as well as the discussions that we have with many of you. So we did think about that very carefully, and that was the conclusion we came to.

Simon, I'm sorry, was the second part of your question, you were asking how long do we expect the bottom to last? Was that it?.

More or less, yes.

I guess it's two parts in that is sort of June setting a bottom? And then how long do we expect this phase last?.

Well, Simon, as I said, I expect it to last into FY2024. I'm not prepared to say in which quarter in FY2024, do I think an inflection point takes place. We're preparing to have at least this level of demand and probably a little bit of upside that we're working to get for at least another one or two quarters at least..

Thank you..

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

Okay. Thanks for taking my question. I guess first one, maybe, Chuck, is a follow-up to that previous. It looks as if everything that’s kind of tied to consumer, whether directly or indirectly is kind of where you're seeing the biggest or the quickest slowdown, i.e., display, OLED.

And I guess as you think about the credit markets that have largely seized and unlikely to kind of open and which is probably the visibility.

I guess what would – as you think about shifting priorities within your business, is that how you're thinking about that comment in terms of bouncing off of what maybe at bottom? Or are you anticipating sort of a return in that display side of the business maybe by MicroLEDs? And then I have a follow-up..

Okay.

Mark, do you want to take that?.

Sure, Chuck.

Can you hear me okay?.

Yes..

Yes. So we definitely saw a softening, as Chuck mentioned, in specifically the – our service business out of Korea. We do clearly see everything we read from other people's quarterly reports is clearly we're seeing some slowing in mobile demand, some display inventory adjustment, both at the end users as well as at our customers.

So we definitely see that today. We would expect seasonally with most of the leading smartphone manufacturers launched new products in our first quarter in the July to September time frame. So we would expect to see that come back and we usually get the pre kind of quality build towards the end of the year.

So I think certainly, on the – speaking specifically to the display side, we definitely would expect that to recover somewhat in the second half of the year. But your observation that it's tied broader to consumer, I think, is pretty accurate..

What I would say, Jed, though, is that for the third quarter, the actual largest drop that was at least not as we expected, was in communications.

We had expected consumer, at least on the consumer electronics side, the smaller electronics, let's call it, we had expected a seasonal decline in that, but it was actually communications that felt very, very quickly in the quarter..

Got it. That's helpful. Thank you for the color.

As my follow-up question, just as it relates to the strategic – your strategic review of the silicon carbide business, I'm curious have you secured strategic – how should I say this? I guess, materials, like graphite, for example, you have a pretty aggressive build-out plan of the $1 billion over the next 10 years.

And I'm just wondering if from a supply chain, you have kind of removed any potential barriers that as you think about that strategic review might be helpful? Thanks..

Look, and thank you, Jed. Well, you got it. We pay a lot of attention to the supply chain, and it involves both the equipment that we need for the expansion of the crystal growth operation as well as the critical and strategic raw materials. We have a full court press on that as a matter of course.

We've had that for years, and we'll maintain that all the way up the curve..

Thank you..

Our next question comes from Jim Ricchiuti with Needham & Company. Your line is open..

Hi. Thank you. Just a question on the industrial and particularly on the semi cap side. It looks like you're still seeing fairly strong trends in that business, which is a little bit counter to what some other folks are seeing.

What's your line of sight as you think about that semi cap portion, Chuck, over the next couple of quarters?.

Thank you, Jim. We definitely – we had a real strong quarter in Q3. We opted even the forecast that we have by a little bit. I think the back end of the line will continue to be moved a little backward and maybe a little bit forward. I think that's the place where we're going to see things slide to the right a little longer.

But the front end of the line and our ability to serve it seems to have just a steady demand. I don't see that driving any change to our underlying business for semi cap equipment. So in summary, front end, full speed ahead, the back end of the line for inspect laser – wafer inspection.

That's the place where I think we could see some softness in the next one or two quarters..

Got it. And maybe just a clarification on a previous question, and I just want to make sure I'm understanding this correctly, the improvement that you I think, are suggesting in the display business with utilization in the second half of the calendar year.

Yes, you have a somewhat unique line of sight because you have some line of sight with your consumer electronics customers and you're having conversations, obviously, on the OLED side with your customers in Korea and China.

Is this consistent with what you're hearing from both customers, if you will, in terms of some increase in utilization and some improvement in the second half of the calendar year in that part of the business..

Yes. I ask Mark to add some color to it, about what we're expecting in the fall..

Yes, I think the statement was – I think the way the statement was phrased is accurate, we’re certainly getting indications from our customers that would indicate to us that there would be a pickup, certainly in utilization and service demand in the second half of the calendar year, or the first half of our FY2024..

Yes. Thank you..

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

Hey guys. Thanks for the question.

I know you can't talk too much about strategic plans for [SiC], but I did want to know a little bit more about it, just broad strokes, and why you guys want to partner versus going it alone? Is it the sheer amount of capital that's involved? Or is it kind of sharing the load of potential risk involved – or is it really more looking for like a large captive customer to use the material, just broad strokes? Wondering why the partnership and the change there?.

Okay. I'll ask Bob to address it, but I would say we have large captive customers already and more trying to get more of our mind share and our capacity.

Bob, would you address the rest of the question, please?.

Yes, sure. Thank you, Chris. Well, first of all, we are bullish on the silicon carbide market in general. And what we're seeing is that the market demand is not only growing, but it's accelerating. So the growth is accelerating. We are at an inflection point. And the industry, we believe, is supply constrained today and will remain so.

So given the increased pace of the market, we think that now is the right time really to look at all of our strategic options.

And I'd say a lot of the things that you mentioned are for sure, things that are on our mind, both the amount of capital investment, the opportunity to bring strategic partners to the table to help both with that financial responsibility and with strategic alternatives as we think through where the business is going to go.

So all of those are on our minds. The thing that we are doing now, and we think is the right thing to do is to start a formal process and really take a good hard look at all of our options and then read and react against those options and do the right thing to serve the market and to address our shareholder value..

Yes. I think that's really interesting. I'm looking forward to seeing what comes of it. Your inventory is a little elevated around 160-plus days. I was wondering about kind of utilizations or underutilizations. And then you kind of talked about some footprint consolidation as well.

How should we think about that? And how should we think about that affecting overall company utilizations when you're done?.

So with respect to the inventory being somewhat elevated. We have a plan that is very strict and actually led by Chuck to actually get that inventory down. So we ourselves think the inventory is elevated and it is very, very important to continue to drive to bring that down.

With respect to the footprint consolidation, which, as you're correct, does have – can have an effect on the inventory level. There is no question that the consolidation of certain sites will help the utilization of our manufacturing floor space to a very, very good extent. That's a very important goal here..

Great. Thanks so much. I don't know if you could put any numbers to that or not. But, yes, thank you..

I'm not in a position to put numbers to actual utilization just at this point in time. I mean, obviously, with the lower demand for this quarter we have a lower utilization. So we would be coming off an artificially low base. But that is a good question. I'll think about that and see if we can answer that subsequently..

Thanks, guys..

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

Hi. Thanks for taking questions. Just on the first one, most of the demand challenges you're highlighting today on the networking side, we're well aware of the inventory situation on – in the other segments, there's a bit of consumer demand. So a lot of them sound cyclical or other industry players have called them out as more cyclical.

And I'm just trying to match that up with your restructuring plans, which will obviously be multiyear sort of restructuring efforts and which is more suggestive for structurally low demand that you see for some of the segments? Or should I really be interpreting this as this is a sort of a cost improvement that you needed to enact anyways and what's contemplated and maybe the macro is just sort of driving or triggering to take those actions sooner than you would have ideally taken them? And I have a follow-up.

Thank you..

Yes. Samik, your latter point that we were contemplating these all along. And in some cases, were contemplated by the laser segment even before the acquisition, and we've just chosen to accelerate them. So that is a 100% correct. And I'll do your follow-up..

Yes. And the second was quick.

Essentially, when I think about your synergy plans and then sort of the additional restructuring plans? Is it fair to assume that the additional restructuring base savings would be more in the networking in the materials segments and less impactful on a sort of incremental basis to lasers? Is that the right way of thinking about it?.

I would say that it's actually across all three segments. But given that we already have 250 in the synergies between the laser segment and the rest of the company, then the larger portion of the new restructuring savings, yes, probably does fall on the other two. But the restructuring does affect all three segments..

Thank you. Thanks for taking my questions..

Sure..

Our next question comes from Sidney Ho with Deutsche Bank. Your line is open..

Great. Thank you. In the past, you guys talked about backlog normalizing to this $2.5 billion, $2.6 billion level, and it looks like the normalization process is happening faster than at least we previously expected.

Does that mean in your guidance, you're assuming no more additional work down of this excess backlog? Then how about we just look at the 12-month backlog? Because I know some of the orders are more than 12 months?.

So on the first part of your question, actually, I think what I said is that we expected the backlog to land in the 2.4 to 2.5 range. So it may well be that it is a little bit faster, but I don't think that we've reached the level that we think could be the running backlog at 2.4 to 2.5.

And I'm sorry, Sidney, I did not quite understand your second part..

Yes. The second part is I understand this, you have orders in the backlog that are longer than 12 months.

So if I just look at the 12-month backlog, is that already normalizing?.

Well, for sure, the 12-month backlog is already normalizing, yes. But we do have in several markets, some of our end markets, orders that go beyond 12 months. And in fact, I would say in the laser segment, 15 has been more of their norm. So it is actually normalizing already. That is true.

But I think the resting place, at least in my present estimate is 2.4 to 2.5.

Okay. That's helpful. My follow-up question is on the silicon carbide business. I understand you're going through the strategic review, but one of the large silicon carbide customer has recently announced a supply agreement with the Chinese silicon carbide supplier on 150-millimeter wafers, but also for future 200-millimeter.

Can you talk about your view on any changes in the competitive landscape? And maybe does that have anything to do with the timing of the strategic review? Thank you..

Yes, I'd be happy to take that question, Chuck. Our view of the market is really underpinned across the entire market. It's growing faster, the growth is accelerating, the supply is constrained. And I think in the context of what you're talking about, it's just an example of those things being true.

And so as a result, if you believe that the market is constrained, and it will remain like that for an extended period of time, and it will grow at an accelerating pace, then investing at a greater rate is the right thing to do.

And we believe it's both the right thing to do, and we think we have the right products, technology, quality, all the things that we need to serve the market. So we're bullish on the market, and we remain committed to it..

Okay. Thank you..

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

Yes, sorry. One question on just whether you're seeing any changes to pricing in datacom in this environment? I know your expectations were that pricing was going to stay relatively stable, particularly at the high speed, but just as demand has softened, are your expectations still for that? And then maybe just kind of secondarily on that.

I know when you guys bought the Finisar business, the idea was you would kind of keep some of that vertical integration that, that business that had, does this softening in the market kind of change how you think about that business going forward or just alternatives to production on that business? Thanks..

Giovanni, do you want to take..

Yes, Meta, so keep in mind that on the datacom side, we are ramping fast and mostly weighted on the 200G and above data rates.

And so in that case, the price pressure is more on the dollar per bit that obviously we need to deliver than actually the individual ASP of the product, right? So in other words, the focus is on lowering the cost of the traffic – not necessarily by lowering the price of the product, but the – by lowering the price of the dollar per bit behind the lowering the dollar per bit that is delivered with the solution.

So that has been going on for quite some time. And fortunately, we are seeing strong demand for the high data rate transceivers. And so we don't really see anything out of the ordinary right now because we have maybe a couple of quarters of softness. That's not definitely a change in the pricing pattern that we have seen in the past.

So not much difference there..

And then with respect to the question that you are asking on, do we – have we changed our view on the vertical integration for transceivers?.

Let me take that. The short answer is no. We're deriving substantial benefits and advantage by having the model. And then what we're going to stay focused on is working through any underutilization of the capacity and getting our footprint into the lowest cost structure we possibly can.

And introducing new components, new lasers, new optics, new electronics. Those in combination with the model that we have for the assembly and testing will sustain our advantage..

Great. Thank you..

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

Yes.

What are you thinking about in terms of taxes for the current quarter and fiscal 2024, will it be a benefit? And in what percent?.

So my expectation is that the tax rate is probably in the neighborhood of about 25%. And as you know, for this year, the tax rate is a little bit all over the place with respect to purchase accounting. What's deductible and what's not. So that's – but I think overall, for the total year, it should be around 30%..

Okay.

And it will be a tax benefit for the current quarter?.

Against on the losses, yes..

Okay. Thank you..

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

Sorry, everybody. I was on mute. A follow-up for Chuck or Bob on the silicon carbide discussion. As you start the formal review process, Chuck, has anything changed with the way you're thinking about investing? You've been spending 50% of CapEx on silicon carbide.

Do you pause that? Do you accelerate it, given what you're seeing in the market? Just I'd love to understand how you're thinking about kind of the near-term spend for SiC?.

Full speed ahead on the business plan..

Okay. That was easy enough. And then a follow-up on – I think you mentioned that datacom and telecom were equally impacted with the near-term demand environment. Just wondering if you could walk us through – I know there's a lack of visibility as you think about the next couple of quarters, but you did say that datacom should be short term.

You've got some markets that are inflecting like AI. Is that something that you have a little bit of visibility into when you might see datacom come back? Is it next quarter or quarter after? Any other detail would be great? Thank you..

I alluded to intense design-in activity that we have. This AI opportunity, but not only the AI opportunity, the 800G deployments, they are heating up in terms of planning. And that's going to be a focal point in FY2024.

And I do believe that we have – we may have because we're working hard to position ourselves to have maybe a little bit greater opportunity than what we currently have factored into our plans. But it's too early to call that. And I think the next couple of quarters, we're just going to have to watch it carefully.

We're working intensely in terms of capacity, getting new products and positioned to ramp. I think we're uniquely positioned to be able to go from zero to 100 miles an hour when it comes to deployments of new systems and our customers know that. And I believe they're counting on us to be able to do that.

We just need a clear sign is to the rate of acceleration, and that's what we're working on..

Appreciate it. Thanks, Chuck..

And I'm not showing any further questions at this time. I'd like to turn the call back over to Mary Jane..

Thank you very much to everyone for joining us today. We appreciate your participation, and we'll talk to you soon. Bye-bye..

Ladies and gentlemen, this does conclude today's conference. You may now disconnect, and have a wonderful day..