Good day and thank you for standing by. Welcome to the Coherent Corp. FY ‘24 First 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 today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, Paul Silverstein. Please go ahead..

Thank you, Kevin, and good morning, everyone. Thank you for joining our first quarter fiscal 2024 earnings call. Today on the call, we have Chairman and CEO, Dr. Chuck Mattera; and a number of executives who Chuck will introduce in a moment.

Yesterday after the market closed, Coherent issued a news release and posted a shareholder letter along with an updated investor presentation in the investor relations section of our website. Both of these documents were furnished on a Form 8-K. This morning we filed their 10-Q.

Today's conference call will be available for webcast replay in the investor relations section of our website.

Before I turn the call over to Chuck for his opening remarks, please note that following our September overview webinar on our communications market, we plan on hosting our second market overview webinar focused on our industrial market to be held on December 14th.

I want to call everyone's attention to our shareholder's letter, which contains our traditional financial statements that were previously set forth in our earnings press release, along with detailed information around our operating performance, key trends, and outlook.

We plan to do both of this morning's call to answering questions from analysts in the investment community.

I also want to remind everyone on this call we will refer to forward-looking statements, including all statements the company will make about its future performance and market outlook and actual results may differ materially from these forward-looking statements.

Factors that could cause actual results to differ materially are set forth in the first quarter 2024 shareholder letter and in our SEC reports. Coherent assumes no obligation to update any forward-looking statements, which speak only as of their respective dates. Also during this call, we will discuss both GAAP and non-GAAP financial measures.

A reconciliation of GAAP to non-GAAP measures is included in the shareholder letter. With respect to historical non-GAAP financial measures, we will limit our discussion to those that are reconciled in the shareholder letter. With that, it is my pleasure to turn the call over to Coherent Chair and CEO, Dr. Chuck Mattera. Chuck, please go ahead..

Thank you, Paul. Leadership development is among the most important jobs of the CEO. Given how extensive our disclosures are in the shareholder letter, I have the following senior leaders with me on the call today. They are Interim Chief Financial Officer, Rich Martucci; Chief Strategy Officer and President of the Materials Segment, Dr.

Giovanni Barbarossa; EVP of Lasers, Dr.

Chris Dorman, who came to us through the Coherent acquisition; Sohail Khan, EVP of our Wide-Bandgap Technologies Silicon Carbide business; our Chief Commercial Officer, Magnus Bengtsson, who leads our global sales and service org and who also came to us through the Coherent acquisition; Chief Marketing Officer, Dr.

Sanjai Parthasarathi, and EVP of our Telecommunications Business Dr. Beck Mason, a recent market hire and one of the industry's top leaders, who chose to come to Coherent as a place to grow.

They will participate in the Q&A fireside today to provide investors a rich source of information about the depth and breadth of our markets, technologies, operations, and overall business, and especially our leadership talent. And I'm sure you'll enjoy interacting with them today.

In the first quarter, the Coherent team did a good job executing in the midst of a challenging macroeconomic environment. We posted revenue of $1.053 billion, which was slightly above the midpoint of our guidance, and non-GAAP EPS of $0.16, which was above the midpoint of our guidance.

Operating cash flow was $199 million, which marked sequential and year-over-year improvement. We invested $62 million in capital equipment and we retired $19 million of debt. Macroeconomic headwinds and uncertainty continue to affect many of our end markets and will continue to constrain our near-term growth and visibility.

Our first quarter results, however, demonstrate the success of our diversification strategy. While some of our markets remain challenged, our silicon carbide business, in which we recently announced $1 billion of investments by Mitsubishi Electric and DENSO, enjoyed another quarter of strong demand.

We also enjoyed a second straight quarter of extremely strong demand for our AI-related datacom transceivers and components. Both of these are indicative of the breadth and differentiation we offer the market leaders for disrupting the status quo and underpinning the irreversible market megatrends that we enable.

In addition to continuing to invest in our core assets, we are taking substantive actions to ensure that we improve our operating performance, especially to drive recovering in our margin structure, including through global integration and transformation and the realization of our synergy plan from the coherent acquisition, as well as our previously announced restructuring activities.

Turning now to our guidance for the second quarter of fiscal ‘24, revenue of approximately $1.05 billion to $1.175 billion and non-GAAP earnings per share of approximately $0.14 to $0.32.

Our guidance for fiscal year ‘24 is revenue of approximately $4.5 billion to $4.7 billion, which is unchanged from our previous guidance, and non-GAAP earnings per share of approximately $1 to $1.50, which is also unchanged from our previous guidance.

And while our annual guidance remains unchanged, this simply reflects the confidence we have in that guidance and we continue to believe that we still have very real opportunities to exceed those results by several hundred million dollars as we discussed last quarter.

We will not hesitate to increase our outlook as we gain improved visibility regarding our ability to capitalize on these opportunities within fiscal year ‘24. Now before we turn to your questions, I would like to say how appreciative and proud I am of our employees whose tireless dedication for setting the stage for now, next, and beyond.

Coherent is well positioned with differentiated technology, exceptional talent, and high quality, efficient manufacturing platforms capable of delivering products to the market that are growing at high-single-digits to double-digits.

And I believe that we are better positioned than others to take full advantage of our existing market positions and to grow deeper into these markets, because of our growing scale and customer intimacy and trust.

We are a trusted and valued partner with the industry leaders and that trust and intimacy creates stability in our core business and it also creates a flywheel effect of growth opportunities that many other companies simply don't have.

We have tremendous upside and platform cost optimization from the ongoing integration, special restructuring, and transformation projects over the next few years. And we have a track record to prove our likelihood of success.

We have a good plan and roadmap to take advantage of all of these assets and the opportunity the markets are offering today and to take advantage of the recovery and anticipated growth in our markets.

We have a team of world-class technologists, industry pioneers, and executives with a demonstrated capability for identifying and capitalizing on market megatrends. With that, I'll turn the call back over to Paul.

Paul?.

Thanks, Chuck. We will now open the call to analyst questions. [Operator Instructions] Please direct your questions to Chuck who will decide who is best to respond. Kevin, please go ahead..

Thank you, ladies and gentlemen. [Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan. Your line is open..

Hey, good morning, Samik..

If your phone line is muted, could you please unmute the line?.

Hi. Can you hear me now, Chuck? Yes, I can hear you..

Good morning, Samik..

Yes, good morning, Chuck. Thank you for the comments.

And if I can just start, I mean, last quarter you did talk about, and you referenced this in the shareholder letter as well, the capacity increase or the capacity ramp that you're planning and the incremental orders that you can get from the customers, if your capacity ramp goes full plan or exceeds your current base case.

If you can share your thoughts around the ability to sort of exceed that capacity ramp. What are you seeing as bottlenecks and the ability to go to customers and get incremental orders for the AI -- from the AI use cases and the 800G Transceivers in relation to sort of executing on that capacity ramp, and I have a follow-up after that. Thanks..

Okay, thank you, Samik. Samik, I'm going to ask Giovanni to take that because he's got a view all the way from the laser through the transceiver.

Giovanni?.

So, hey Samik, thanks for the question.

So, I would say, generally speaking, we're doing better than our expectations, but it's very much a moving target in terms of the opportunity here, in the sense that the target's getting higher and higher, as particular as we said in the shareholders' letter, as the engagement with new, significant AI players are increasing, particularly those players that we have not been historically strong at.

So we think that the overall opportunity is getting larger and our ability to meet this larger and larger opportunity obviously gets more complex, more challenging, but I think we have the all hands on deck and the entire team is focused on several of the needs to ramp, which are not only related to the supply chain, because as new products, and this is a, as you know, 800G is a very much new product, there are all these MPI-related challenges to bring up to speed, you know, the manufacturing lines, the test equipment, the, you know, of course, supply chain, as we said, but most important to make sure that we deliver high quality products to our customers the volumes that are replacing us to ramp..

Thank you. And so for my follow-up, if I can just ask about the long-term guidance that you gave in the shareholder letter about 40% gross margin and 20% operating margin that you're looking at.

Can you share some thoughts about, how you're thinking about getting -- make progress to that in relation to cost versus what you need in terms of top line recovery to get to those margin levels? Any thoughts around how much of that we get from cost saves that you're outlining versus any level of volume recovery that you need? Thank you. Okay.

Thank you, Samik.

Rich?.

Thank you. We will benefit from ongoing class reductions, which include our restructuring and synergy plans, higher volume as noted in our guidance, better mix of product on higher margin products, and long-term continued leverage -- to leverage our NPI, as well as vertical integration where we can drive margin improvement..

Okay. Thank you. Thanks for taking the call..

Thank you, Samik..

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

Yes, thank you for letting me ask some questions. I wanted to follow-up on Samik’s question, Chuck, and talk about just sort of the AI transceiver, NPI launches, the delta between sort of your full-year guidance and sort of what you're holding back? Love to hear some details outside of the supply constraints.

Sounds like there's some qualification milestones needed.

Is that product specific, customer specific? If you could give us some details on, how you expect those qualifications to ramp near-term and what's left to be done before you actually start, kind of, seeing some revenues?.

Yes. Thank you, Ruben.

Giovanni?.

Thanks for the question. I mean, the -- as we said earlier, new products generally require an incubation period in the manufacturing line to reach the quality, the yields, the performance that we promised. So those are generally true for any product.

This 800G is significantly more challenging than any other product we had before that came to the, kind of, this same type of market.

So I think the complexity comes from the fact that while we are ramping for the orders that we already have, we're also engaging, as I said, new players in a meaningful way to further extend our opportunity in the near future. And therefore, eventually CEO as Chuck mentioned in his remarks, to see an upside for the overall market that we can address.

So it's a combination of serving needs that we have short-term versus the needs to continue to increase the pipeline, the funnel of new opportunities for 800G with additional customers beyond those that we're already engaged with..

Thanks, Giovanni, for the detail. For my follow-up, on telecom, data points remain pretty negative. And nice to hear you guys talk about bottom here coming out of September quarter.

Can you give us some details on what you're thinking in terms of, it sounds like inventory's driving some of your view for the rest of the year, but starting in the December quarter, if you can give us any detail on how you're thinking about that business, whether it's market share or what's driving your view on a recovery, starting here near-term, however gradual that might be?.

Beck?.

Yes, sure. I think in the telecom softness, it's a combination of end market softness and inventory digestion at our customers. And we've been staying very, very close to our customer base on this. And we see progress modestly coming through FY ‘24 and the rest of the quarters on their inventory digestion.

And then we see gradual improvement in the end market demand really progressing through the FY ‘25..

Okay, 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 just on growth margins, was the weakness versus expectations on a mix of categories or just, you know, are there any higher costs that are needing to be paid to kind of clear some of the 800 gig transceiver bottlenecks to be mindful of? And then maybe just as a second question, just any more clarity on how you guys are thinking about debt repayment in fiscal ‘24? Thanks..

Okay, Meta.

Rich?.

Yes. So the margin of weakness is a result of separate factors. One was the -- is the lower volume that we incurred in the quarter. Unfavorable mix are the main key drivers. However, as well, we did experience prior period underutilization that hit the P&L as well. For debt reduction, right now we're anticipating $200 million of pay down for the year..

Great. Thank you..

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

Great, thanks for taking the question. I wanted to get a bit of a clarification type question here in that, unlike last quarter's shareholder letter, and by the way, we like the way you're doing this, it's helpful. This one did not mention explicitly several hundred million of AI-related datacom sales in the outlook.

And I'm just wondering how you'd like us to interpret that exclusion versus the prior quarter's letter? And then I've got a quick follow-up..

All right. Simon, thanks for your question. I'd like to get us back to basics. We have the guidance. The guidance is the guidance. I made some additional comments this morning to give a sense that we're still aiming to do more. But I don't want to get us into a mode where we're going to have guidance and then guidance on top of the guidance.

So we just want to get us back to the basics. That's what we're doing. And as I indicated today, we might have some upside to it that we can achieve. For sure, we have upside as an opportunity.

Okay?.

That's very helpful. Thank you. And then in terms of this AI pipeline of business, I'm just wondering if you could help us bracket how much of this is hyperscale exposure? And how much of it is non-hyperscale? And what I'm getting at is trying to understand a little bit about the customer mix and concentration of the pipeline. Thank you..

It's a -- Sanjay will take that, Simon. I can tell you, it grows every day.

Sanjay?.

Yes, thanks Chuck. So last quarter, Simon, we did 60% of our business came from hyperscalers, and this is both direct, as well as indirect sales into hyperscalers.

Does that help?.

Thank you. Yes it does. I guess I'm wondering about the pipeline is more so than the most recent quarter..

So our pipeline is still pretty strong. We expect to -- in fiscal ‘25, for example, we believe that 80% of our datacom transceiver revenues will be from hyperscalers. A lot of it, majority of it is -- vast majority of it driven by AI/ML..

Thank you very much. Appreciate that..

Simon, thank you for your feedback too on the letter..

Thanks, Simon..

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

Hi. Thanks for taking my question here, guys. I guess, first question, just want to shift from, you know, most of the others around the 800G and just on some of your comments around the consolidation in compound semis, you mentioned this, one if you could give a little bit more color on maybe metric fab.

And then two, on the new product introduction, you talked about reducing or improving cycle times. Could you talk about where they're at now and where you hope to get those to. Thanks..

Okay, thanks. This is Giovanni here, so thanks for the question.

So we -- when we acquired Finisar, we acquired a number of wafer fabs, which at that time were pretty much fully utilized and as we were able to transfer products and manufacturing lines between sites and so forth, we were able to identify ultimately what the best footprint for the compound semiconductor manufacturing for the company was going to be.

So that's what we are basically doing now because we couldn't do it that fast. So now what we're doing, we are -- we have announced several shutdowns of smaller fabs, and we intend to move and integrate those manufacturing lines into our largest fab, which is in Sherman, Texas. So there was a footprint.

We still have some other fabs between Europe and North America there will still stay with the standalone, because the cost of moving those product lines will be too high. And also, we'll require a lot of e-qualifications that we cannot, we don't see it advantage in moving those product lines.

But at least for the gallium arsenide particularly the gallium arsenide, VCSEL-based type of powders, in some of the indium phosphide-based products, we ultimately decided that Sherman, Texas would be our center of excellence. Our consolidated [Technical Difficulty]..

I'll take the second part, Jed. Thanks for your question with regard to MPI cycle times. I would say one thing I think you know that we're built for speed. This place is organized for a great sense of urgency about everything we do. One of the benefits we have with our global footprint is we can do things 24 hours a day, seven days a week.

That's not so easy for everybody else to say.

I would tell you that I can't give you a baseline generically, because we have so many platforms and so many products in the company, but I will point out that using AI in this last year, our teams have demonstrated a factor of two reduction in the cycle time for launching new products from our fiber laser business.

And that is going to be a contagious example that goes around the company. I think that AI is going to be a great driver, but it's not the only thing that we need to do. And so a factor of two everywhere is a starting point for the mindset of the management team.

Okay?.

Got it. Thank you. Just as a follow-up, on the silicon carbide business, we are seeing greater restrictions on raw materials from China. And I'm just wondering, graphite is an important component to both the furnaces, as well as the input material.

Could you just update on supply chain exposure and if any in terms of how you see specific to graphite? Thanks..

Thanks, Jed.

Hey, Sohail, are you out there?.

Yes, yes. Jed, thanks for your question. First answer is no, we don't have the exposure. We have multi-sourced for both this material and the other components. And we have put in place long-term agreements. And none of our graphite suppliers have the basics coming from China..

That's helpful. Thank you, Sohail..

Thank you, Jed..

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

Great. Thanks, guys, for taking my questions. I'll also echo my happiness with the shareholder. Keep it up, please. I'm going to follow-up on the topic of telecom.

I guess one of the questions I had, looking at some reports here in earning season so far, including last night, we were seeing some inventory burns still taking place at the equipment level here. I'm wondering why you're seeing some start of a pickup here.

And to the degree to which you can describe it, how much of this recovery is coming from transceiver type products like ZR that you point out to shareholder with the letter versus things like WSSs and ROADMs?.

So thanks for the question. So right now I think what we're seeing is a little bit more strength on the WSS and the ROADM, the amplifier and that portion of the business.

And it's really as our customers are burning down inventory right now, we're starting to see different product lines there have a small pickup this quarter and we think that's going to continue to double-digits for the second-half of FY ‘24. Our transceiver-based products, we see a lot of design and activity happening right now.

There's a lot of RFQs and RFPs, especially for new technology products like our 100 gig Coherent ZR and there's an increase in RFP activity around 800 gig, which is coming next year.

And so we think that's very positive for that segment, but we think that's going to be more delayed towards the latter half of FY ‘24 and early FY ‘25 from a ramp perspective.

Does that help provide a little more color?.

Yes, that does. Thanks for that. My follow-on question will be in the display market. I think you talked about service utilization that have increased here sequentially, I think even a nice 20% number if I remember correctly, but still below your year ago levels here.

Wonder if you have any visibility into those utilizations continuing to improve and perhaps even get back to year ago levels and then does this imply or just give you better visibility on further CapEx orders within the display unit?.

Good morning Richard, thank you very much.

Chris Dorman?.

Yes, in display the utilization of the OLED tools drives the service revenue. And it's worth remembering that there are two factors in terms of the utilization. It's the number of phone screens that are produced.

But there's a multiplying factor in terms of the percentage of phones, which are using OLED screens and that is led to an uptick in the service revenue, the utilization of the Excimer lasers and that will continue through the year..

Okay, perfect. Thank you..

One moment for our next question. Our next question comes from Sidney Ho with Deutsche Bank. Your line is open..

Great, thank you. Good morning. I want to switch gears over to the industrials market. You seem quite confident that the business will improve in the second-half of fiscal ‘24.

Can you talk about which subsegments do you think will lead to recovery between semi-cap display, precision, manufacturing, and aerospace? Particularly interested in your comments in Precision Manufacturing, you're seeing second conservative order of growth, and some customers are requesting shipments on short notice, but that's quite different than what we are hearing from other broad-based semiconductor companies?.

Okay, Sidney, good morning. This is Chuck. Sidney, we may have two or three people that have an angle on this, but we'll start with Sanjay..

Yes, thanks, Chuck. So in terms of our industrial market group is broken up into verticals, so we have our precision manufacturing vertical, our semi-cap vertical, our display vertical, and aerospace and defense. We are really excited about semi-cap. That market for us has been growing very steadily, quarter-over-quarter, year-over-year.

So there is -- we continue to see a lot of demand both from existing customers and new customers and the envelope of applications seem to continue to improve. On precision manufacturing in particular, that is a market that is a lot more sensitive to macro.

However, we do have certain areas of very strong growth, such as electric vehicles, so our stock market's growing at a 15% CAGR, the medical device market is turning around, that's growing also fairly well. So we've got some really big bright spots within precision manufacturing. And I think Chris covered the display question earlier..

Do you want to add anything to that, Chris?.

Yes, I would say that semiconductor, capital equipment inspection is also showing growth. It remains strong. Our customers continue to pull on a strong backlog there..

Great. Okay, Sidney..

Okay, great. That's helpful. My follow-up question, though, I just want to follow-up on the silicon carbide. You called the near-term demand for the silicon carbide business remains pretty robust, but recent data points from the industry seems to be more mixed in the past few weeks with demand for EVs maybe slowing down a little bit.

Can you give us a sense what you are seeing in terms of demand? Is that you are doing better than others, because you're gaining share? And also interested to see how the pricing side of things are? Are you seeing more competition in terms of prices? Thank you..

Thank you Sidney. Hi Sohail..

Okay. Sidney, that we have to look at the market not by one quarter basis, because this is a market which is on a growth trajectory. And it is going to continue to grow at close to 30% compounded growth rate over next five to 10 years. So one announcement of one vendor pushing in and out does not define the market.

Overall market strength is there and the market adoption is there. And yes, when you have the growth and many players are coming in, that there will be price pressure. It is normal, natural in any growth market. But we see a strong growth and a very good traction with very large customers with the long-term agreements in place..

Okay, thank you..

Thank you, Sidney..

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

Hi, this is Blake Freeman on Vivek. Thanks for taking my question. Wanted to go back to your AI opportunity, I know one of your competitors recently made an acquisition to enter the AI data cloud transceiver space.

First, was hoping you can provide any clarity on the margin generator from higher speed AI-related transceiver products? And if you think this growing competition also creates any pricing risk in the market?.

Thanks for the question. First of all the -- clearly this validates the investment thesis we had for the acquisition of Finisar years ago, so we had that vision, which is now you can see was a pretty good one.

And then it enforces, right, the -- it's an endorsement, it reinforces the strength of the market that we are witnessing today and the upside potential that we all see.

I think the generally speaking, from vertical integration, scale, and technology differentiation, we are still the market leaders and that's explained why we see the funnel, the pipeline for new engagement around 800G increasing daily in the sense that we believe that we have an opportunity, that maybe we have not considered in the recent past to penetrate hyperscalers where we have been historically not as strong as we would have liked to be.

And so generally speaking, the competitiveness of the landscape is there.

I think we welcome competition and I think we are very well positioned with the three attributes, which I mentioned to compete and continue to grow and take advantage of the, again, as I said, of the strategy which we deployed years ago when we identified AI on demand as being a key driver for the growth of our business..

Got it, and then just as a follow-up on the silicon carbide side, I know there's certainly a supply demand imbalance in the market. Just trying to get your thoughts around as there's more device vendors in the market, who are kind of bringing materials production in-house.

How we should think about the growth opportunities for Coherent and I guess, your thoughts on the relative growth in the materials market versus the device market longer term?.

Okay, thanks for your question.

So, Sohail?.

Yes.

We see a demand on both ends that even you say there are lots of suppliers in the Dubai site, people are still looking for a good MOSFET, a MOSFET which will be rugged, MOSFET which will have high reliability and MOSFET, which can address the future needs, which are getting more and more integration and the amount of current and power you can handle.

So we see a very strong demand on the device side from our customer engagements. And then on the material side that we see a very strong demand for 200 millimeter and in 200 millimeter there are very few limited choices and as you know we were the first one to introduce the 200 product to the marketplace. So, we feel pretty good about it.

Yes, there is competition, but competition reaffirms that there is a strong demand for it..

Great, thank you..

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

Hey guys, congrats on the results and guidance and thanks for the question. I guess my question is around backlogs. So that's now increased two quarters in a row.

Is this a sign, you guys think of the bottoms, does this mean we can grow revenue each quarter as we move through next year? Or are there some decent timing and fulfillment issues here in this backlog that would disturb that kind of linear pattern?.

Okay, thanks a lot Chris. Good morning. Chris, I'm going to ask Magnus just to make a general comment about the overall pulse from the marketplace as he sees it from the point of view of the demand. And we'll see if there's a follow-up..

Good morning, Chris. Appreciate the question. So let me just talk a little bit about the customer engagement perhaps. I would say that customer engagement is really robust and we see orders continuing to grow across the end market.

Customers today, there's certainly the inventory digestion issues we mentioned with some of our end markets, but customers are really focused on innovation. And so the design wind funnel, the outlook that we have looks very robust across most of our markets. So we would expect that trend to continue..

Great. Thank you. Perhaps as a follow-up to someone else's question, did you guys get to take a look at the Cloud Light deal, or did you guys get to look at the Intel Cifo sale to [Indiscernible], and were any of these deals interesting or perhaps in your opinion threatening in any way either? Thank you..

Okay, Chris.

Giovanni do you want to take that?.

Yes, sure. Thanks for the question. No, we were not engaged. You know, we don't need pretty much a contract manufacturer to be added to our existing manufacturing lines. So we believe that, as I said earlier, we welcome the competition. We think it's the combination will definitely be a stronger competitor.

So we endorse that, but as I said earlier, it's also an endorsement to our strategy, which we deployed years ago to be in this market at this time, be leader with a larger scale and the largest -- broadest portfolio of differentiated components and sub-assemblies for -- to serve this market..

Thanks, Giovanni..

Looks like a nice [Technical Difficulty]. Thanks, Giovanni..

Thanks, Chris. Thank you, Chris..

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

Hey, guys. Thanks for taking my question. I just had one on the segments.

So in your $4.6 billion guide for the year, could you give us a little more color on what you expect a comm business to do and then more specifically within the comm business, what you're expecting the telecom business to do and what the data comm business will do? I ask because there's obviously some big movements inside of the telecom and data comm business, and I'm just trying to get a little better feel for what you guys expect for growth last year.

Thank you..

Okay, Tom, good morning. We're not going to give business unit guidance, and I think Rich can just make a general overall comment. I think at the midpoint, we're up 11% in the second-half, compared to the first-half. There's some puts and takes across the segments.

You want to say anything else, Rich about it?.

No, that's right on..

Okay. If you have any specific question about the telecom market, Beck can take it, but he's not going to give you guidance in the second-half of the year..

Sure, I guess just the trend looks as though the high-speed data comm business looks as though it's the big driver of growth. Could you talk about, historically, you guys have said that within your comm business, the transceiver business is below corporate gross margins.

In these new products, particularly in 800G, are you seeing a creative gross margins with those new higher speed products or are those still below corporate gross margins? Thank you..

Okay, this is a good question. Well, Rich will take it, but I would say at the launch point with all the things that we have going on, what we were at today, we're driving to improve is just a general comment for the company.

We have lots of flywheels turning inside the company all the way from the front end fabs where we're still adding capacity to be able to keep pace not with FY ‘24 demand although that's a challenge because it keeps going up, but especially because we believe FY ‘25 is going to be that much more exciting.

Rich, make a general comment about the margins, if you would..

Sure. So on the margins, the average is about where we are at as a company, but we fully expect as we go through the learning curve that the margins will increase going forward..

Yes..

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

Thank you for the question..

Good morning, Mark..

I'm doing fine. Good morning. I just wanted to pursue a little more from your guidance, it looks like you're projecting improvements in margins going forward. You listed several things in your letter to shareholders.

Is that being driven by higher revenues? I guess I have a similar concern about transceivers in terms of the, they being accreted to overall margins, especially when you're seeing strong growth there? So I'm just wondering what's driving the expectations for higher margins? Is it just higher sales or mix?.

I'll take that. This is Rich. Thank you. So as I mentioned before, our ongoing cost reduction, including our synergy and restructuring plans and higher volume, as noted in our guidance, better mix of product on higher margin product as we move forward throughout ‘24, and our long-term continued leverage of our NPI.

Anything that we can also get from our vertical integration where it drives margin improvement, we'll be implementing that as well..

Last question is the data centers. A couple of firms like Cigar and Western Digital are finally saying they're seeing light at the end of the tunnel with their data center customers.

I'm just wondering what you're seeing in terms of data center business?.

Sanjay, do you want to just make [Multiple Speakers] talk about it?.

Yes, sure. So within our data comm business, there are two drivers. The biggest one today is AI, which is growing at a 47% CAGR. Our traditional non-AI business, if you will, is growing at a slower clip. But together it still -- the market is still continuing to grow at a 20% CAGR long-term. So we are pretty excited about that market..

Thank you..

Thank you, Mark..

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

Hey, yes, good morning guys. Yes, thanks for taking the questions. Really appreciate it. Chuck, I guess just sticking on transceivers and the higher speed.

Do you have any sense if your position, I guess, how your position from a share perspective going forward? Would you expect to, I guess any view on expectations to maintain share going forward, gain share going forward, any context there would be helpful. And I have a quick follow-up, thanks..

I believe that we're in a great position. I believe that if you look even beyond 800G, given the portfolio that we have, the products coming through the funnel, that we're going to be able to continue to not only maintain that position, but we're counting on growing it..

And are you guys seeing, just given all the activity in AI, are you seeing any greater urgency from your engagements around 1.6T? You know, you've given a lot of great context, actually, this calendar year, with regards to sort of timelines, industry 1.6T adoption. You made reference, I think, in the slide deck today to 3.2T.

Any greater urgency there given what's going on in AI and any context around your, kind of, market positioning with regards to that. And that's it for me, thanks..

Okay. Thanks, Ananda.

Sanjay?.

Yes, sure. Thanks, Ananda, for the question. So one thing is very clear. With AI, we need to go higher and higher speeds, and it needs to happen, you know, earlier. We're making great progress towards our 1.6T. We believe that we'll be one of the first ones out there.

And in terms of timing, we're looking at -- we think the market will be trying to inflect in 1.60T around fiscal ‘25. And I just want to say we've got all the key enabling blocks, especially the DFB-Mach-Zehnder laser, which is a 200G laser that we demonstrated at ECOC. So we're making good progress there. Hopefully, that helps..

That's great. Appreciate it, guys. Yes, no, that's super helpful. Appreciate it..

Thanks, Ananda..

Thank you..

Thank you..

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

Good morning Dave..

Good morning. Yes, good morning. Thank you.

Just regarding your data comics, I was wondering if you can provide by what the mix was between 100 gig, 400 gig, 800 gig?.

Yes. Please, Sanjai..

So the high speed which we define as 200G and above was 70% of their avenues last quarter..

So I assume the remaining 30% is 100 gig [Indiscernible].

How should we think about, I mean, first of all, are they growing? And what do you think their runway is, and how should we think about pending decay eventually?.

Yes, I mean, the slower speeds are typically today non-AI related, so they're not growing as fast as 800G and even some parts of 400G. But long-term, we still believe those speeds are still going to continue to grow. Especially the AI kind of moves towards the edge of the networks..

Got it. And my follow-up is regarding your CapEx.

How should we think about CapEx for this fiscal year? And then fiscal ‘25 after you get that $1 billion investment from two Japanese companies? How will that drop off in ‘25 after silicon carbide investments?.

Okay, two great questions, Dave.

Rich, will you take those?.

Yes. So as of right now, we're still holding to the full-year guidance that we previously gave of $350 million to $400 million for FY ‘24. On the silicon carbide for FY ‘25, obviously the investment will offset or what we thought we were going to invest in ‘25..

Dave, when we close, we will run through in that next quarter revisions to our guidance. And in the reporting quarter after the close, we'll update and give a strong sense for what we see both for ‘24 and give at least a glimpse of ‘25.

Okay?.

Got it. Thank you..

Yes. Thank you, Dave..

Kevin, can we go on to the next speaker?.

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

Good morning, Tim..

Tim, your line is on mute..

Good morning, Tim..

Sorry about that. Good morning, a couple of math questions here. I think with some significant implications maybe. First one is on results and guide telecom versus datacom.

And I think the anecdotal commentary is about inventory digestion on the cloud side, but if you look at how that's proceeding, it seems like most of the weakness sequentially was in telecom, going from 40% to 29% on a declining number. So, we talk in order book versus revenues and we're talking about those comments.

Am I looking at that right? As you look at the guide, is most of that sequential growth, about $75 million bucks, is that in comms and is that some AI starting to shift or telecom bouncing back or how will we characterize that? And I have a follow up..

Okay, well I think there's really two questions. Beck will take the one that's market related and Rich will take the finance..

Sure, I mean on the telecom side, we see that growing, you know, modestly this quarter and then we see double-digit growth recovery in the second-half of this fiscal year for our telecom revenues, right? And I can comment on the ratio that was relative to the revenue last quarter..

Exactly. Okay.

Tim, would you repeat the second part of your question for Rich?.

Let me go on to the third part. And of course, there's a Rich history of multi-part questions here with numbers of this call.

But and that is the overall question I'm saying I'm going to ask is what is the absolute size of your AI backlog, but I'm going to try and get there in a couple of parts which is you talked about an order increase last quarter that was entirely networking driven, 30%. That seems like it's $300 million.

There's some commentary here in the call about, despite orders coming down, the AI backlog going up 200%.

So I'm going to give you a chance here just to give us a number for what you got in backlog that you would consider AI, whether that's all 800 gig or not?.

Yes, I don't think we can give you that. What I can tell you is it's a substantial and meaningfully material one-off. But I'm not going to give you the number..

Okay, thanks..

Okay, thank you, Tim..

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

Hi, Thanks. Good morning. So you seem to be suggesting some recovery in the second-half on both the OLED side and the WFE side of the business? The OLED side, I think we understand what's happening with service utilization going up.

What's your line of sight in terms of deployment of new Excimer laser tools in the second-half of fiscal ‘24, as well as your line of sight on the WFE improvement in the second-half?.

Yes, as you mentioned, service utilization, uptick in the Excimer business for display in the near-term. In the long-term, the principal movements in the display market will be around the adoption of OLED technology in laptops, in tablets, in IT panels. And we are engaging with customers on Gen 8 investments.

The timing of those Gen 8 investments should be clear early calendar year ‘25 and we'll be well positioned to work with our customers on the expansion of OLED capacity for tablets and for laptops, which would be incremental to our current business.

We've developed solid state technology in line with the challenges of maintaining a sensible cost level for those larger OLED panels. And in the long-term, we see migration with TVs into the micro LED markets, which we're investing heavily in developing new tools for.

Jim, did you have a second one?.

Yes, the other question was just, and maybe I'll just group this into one last question on the balance of that laser and industrial business. It sounds like you're feeling relatively positive about the WFE portion of the business.

Back-end semi, is that going to continue to be relatively weak? And are you assuming looking at precision manufacturing beyond the current quarter that the recovery there is still fairly uncertain? Is that a good way to characterize the outlook for this part of the business?.

Yes, front end semi remains strong. The reasons for that are that, you know, the customer relationship in the front end semi market is a long-term roadmap. We engage, we partner with our customers in terms of developing that long-term roadmap. We develop lasers specifically for our partners in that area. And it's more than a sale.

The relationship lasts for 20-years in terms of one particular laser technology. The service component of the semi-cap business is very significant. And so we go on this long-term journey which gives us more certainty in the service business of the emergence of the semi-cap inspection market.

So we get a great deal of visibility through our customers on that. In terms of back end, it is softer. The recovery is taking longer, potentially the end of the fiscal year to see any change there. And in precision manufacturing, PMI, as Magnus mentioned before, the recovery is around the end of the year.

But all of that, the precision manufacturing, the back end semi is offset by the strength in display and the strength in semiconductor coupled equipment way for inspection..

Thank you, Chris..

Thank you..

Okay, Jim, thanks for your question..

Thank you, yes..

Okay, thanks..

And I'm not showing any further requests at this time. I’d like to turn the call back over to our host for any closing remarks..

Kevin, thank you. And I want to thank all the analysts on the call for your thoughtful questions. As always, if we could be of any help throughout the quarter, please feel free to reach out. And I want to thank everybody for joining us this morning. Thank you..

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