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spk07: Ladies and gentlemen, thank you for standing by and welcome to the Coherent Corp FY23 first quarter earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. I would now like to turn the call over to your host, Mary Jane Raymond, Chief Financial Officer. You may begin.
spk17: Thank you, Kevin, and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at Coherent Corp. Welcome to our earnings call today. for the first quarter of fiscal year 2023. This is our first earnings call as Coherent Corp, and the call is being recorded on Wednesday, November 9th, 2022. With me today on the call is Dr. Chuck Matera, our chair and chief executive officer. After our prepared remarks, both Dr. Mark Sobey, president of the laser segment, and Dr. Giovanni Barbarossa, our chief strategy officer and the president of the materials segment, will join us during the Q&A to better explain the unique benefits of our strategy, the results we are reporting today, as well as the exciting prospects we have to expand our footprint in our broad markets as we go forward. For today's call, the press release and investor presentation are available in the investor relations section of our website, coherent.com. Our fiscal year 22 ESG report for Legacy 2.6 is also on the website. It highlights key points of our board and employee diversity, namely that 46% of our board are women and or persons of color, and that 49% of our workforce are women, as well as our investments to support STEM and educational advancement. The report also details our products that are critical to improvements and global energy efficiency and the increasing sustainability of our locations that produce them. In fiscal year 22, 29% of our legacy 2.6 energy consumption came from renewable resources. 100% of our European legacy sites are on renewable energy sources. And we exited this year purchasing approximately 38% of our electricity from renewable sources in our legacy facilities. I think you'll like this report when you get a moment to read it. Today's results discussion includes certain non-GAAP measures. Non-GAAP financials are not a substitute for, nor superior to, financials prepared in accordance with GAAP. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's documents. I remind you that during this call, we'll be making certain forward-looking statements, including but not limited to statements regarding macroeconomic trends, expectations for our products and technology, trends in our markets, and our expected financial performance, including our guidance. In addition, we will discuss expectations regarding the recent acquisition of Coherent Inc., including market opportunities and expected synergies. All forward-looking statements are based on current expectations, forecasts, and assumptions, and involve risks and uncertainty that could cause actual results to differ materially from the statements made today. Our comments should be viewed in the context of the risk factors Detailed in our most recent Form 10-K, filing for the fiscal year ended June 30, 2022. Coherent assumes no obligation to update the information discussed during this call except as required by law. With that, let me turn it over to Dr. Chuck Matera.
spk04: Chuck? Thank you all for joining us today. Nearly 18 months ago, when we were selected as the winner of an intense three-way competition to acquire the company that was long seen as the industry's gold standard of laser technology, we embarked on a new chapter of our bold strategy to diversify and expand our exposure and participation in growth markets that are inflecting due to irreversible megatrends. These include Industry 4.0, in the technology and scale transitions that are underway in mobile and intelligent networks out to the edge, the Internet of Things to support AR and AI services, and also those consistent with our vision of a world transformed through innovations vital to a better life today and the sustainability of future generations, including our silicon carbide and battery materials that enable the electrification of transportation, an important long-term contributor to the reduction of global CO2 emissions. So with the acquisition of Coherent finally having closed on July 1st, when we enthusiastically got underway, it is from this new base of unique technology endowments, a deep penetration into multiple ecosystems, strong customer intimacy, new business models that include products and service, and the addition of a huge influx of extraordinary and diverse talent to the broad base we had before that we endeavored to deliver sustainable long-term shareholder value. On September 8, 2022, we transitioned to our new name, Coherent Corp., launched our new brand, and began trading with the new ticker symbol, COHR. We adopted the name Coherent because it has the universal meaning of bringing things together. And I believe that a great excitement that stems from some of our really cool stuff will emerge as we bring our extraordinary talent closer together. We hit the ground running together, and we haven't skipped a beat since. The first 90 days together were super exciting as we followed our well-honed integration game plan that we laid out together. for over a year prior to the close. We moved quickly into the first phase of our organizational integrations within the quarter with a focus on the worldwide sales and service organizations so we could deepen our understanding of our position and prospects at our largest strategic accounts. Many of these accounts became even larger and have even greater opportunities than either company understood before the acquisition closed. I'll next share some highlights of our performance by our four major markets. In addition to the numbers Mary Jane will report briefly on, the substantial progress we made on the start of the integration activities, I encourage the analysts who participate in the Q&A to direct your questions about the segments to Jolani for materials and networking and to Mark about lasers. Before we get into the details, though, I'd like to first acknowledge the extraordinary coherent team that overcame many dynamic challenges and delivered a steady stream of industry-leading and award-winning products and services to our valued customers. We worked tirelessly to do what we said we would do. And as always in our company, our commitment is evident in our aspirations, in our actions, and especially in our results. Turning to Q1, we delivered for the first time over a billion dollars in revenue in a single quarter. Regarding the lingering effects of the supply chain, we have seen improvements in lead times for some strategic components and moderation of shortages for others, but we are still affected by pockets of supply chain constraints that have yet to show any signs of moderation. Without these constraints, which total $64 million in the quarter, we would have shipped over $1.4 billion, the top end of our guidance. However, with the strong winds of demand at our backs, we carried on with determination and delivered $1.34 billion in revenue. We grew 69% year-over-year and 52% sequentially, and consistent with our recent strong growth projections, Legacy 26's organic revenue grew 20% compared to Q1 FY22. On a pro forma basis, the company grew 13% over Q1 FY22. Turning now to the segments in Q1 FY23, the revenue contributions by segment was 44% from networking, 29% from lasers, and 27% from materials. As increased market diversification was one of the major elements of our strategy to acquire Coherent, That rationale is perhaps most evident when looking at the size of our communications businesses. In Q1, we derived 44% of our revenue from the communications market down from the previous 66% in FY21 and 22 when we were a company only a little more than half the size we are today. With the increased scale and greater market and product breadth, we believe that we now have a much better balanced and sustainable portfolio to drive us into an exciting future. Regarding our revenues from the other three markets, we derived 34% from industrial, 13% from electronics, and 9% from instrumentation. Our earnings delivery was ahead of plan in large measure due to a relentless focus on solid market share gains, appropriate pricing discipline, driving procurement costs down, and increased productivity. These factors combined enabled us to deliver solid performance with non-GAAP diluted EPS of $1.04 per share. This was considerably higher than the midpoint of our guidance, and favorable FX contributed only about 7 cents and a quarter. Turning now to the communications markets, we continue to benefit from those customers continuing to make investments in telecom and cable TV infrastructure, and we are gaining share in those markets. Our revenue growth from telecom and datacom were both strong double digits year over year, and are both forecasted to show additional gains from that base, again in FY23 compared to FY22, with telecom forecasted to grow even faster than datacom. We continue to drive design wins with our industry-leading coherent transceivers that are increasingly fully integrated into the equipment maker's routers, and we have strong growth projections for our coherent pluggable products in FY23 and beyond. Regarding our data center customers, we continue to forecast hyperscale growth in the second half of this year. We are optimistic about the future as we believe these telecom and datacom markets will be long-term resilient as the insatiable demand for products that consume and generate information move to the edge of the network as part of the digital transformation. In anticipation of sustained demand and evolving customer requirements driving our differentiated product roadmap, we continue to accelerate our investments in our semiconductor laser fabs in the U.S. and Europe and our assembly and testing facilities throughout Southeast Asia. As a result of these strong communications drivers, we had record revenues in communications with strong performance in both Datacom and Telecom, where the split was 57% Datacom, 43% Telecom. Moreover, we had record revenues from our Datacom business as we continued to gain share with the large hyperscalers while enabling them to realize the benefits of their shifts to higher data rate products. In the quarter, 43% of our high-speed transceiver shipments were at speeds of 200G and above, while our shipments of transceivers for 400G ramped up and our 800G deployments accelerated strongly. Even with the current macroeconomic backdrop, our Ethernet transceiver revenue for cloud applications grew at twice the market growth rate. Given our backlog, our current visibility into our customers' projections, and our supply contracts that give us confidence in being able to lead the high-speed upgrade cycle, we expect continued strong growth through FY23. Finally, during the quarter, we received a number of customer and industry accolades. In but one example, we demonstrated our new 200G EML at the European Conference on Optical Communications in September. The 200G EML will enable next-generation high-speed transceivers at 1.6 terabits per second, and to the best of our knowledge, we were the first to demonstrate error-free live traffic in public. The excitement for such an enabling product has been tremendous from both our customers and their customers alike. Turning next to industrial, our year-over-year revenues for the pro forma company were down just slightly, though we did experience strong growth in some sectors, including semiconductor capital equipment, which was particularly robust, driven by strong demand for our products that underpin EUV and what we believe are strong prospects going forward. In the display market, display capital equipment had another solid quarter with strong and recurring service revenue derived from a substantial fleet of our Exima laser systems deployed worldwide, combined with the highest level of new system shipments in more than a year. Also, we continue to win the vast majority of laser liftoff opportunities and see continued very strong demand for ultra-fast lasers for back-end cutting of OLED displays. We remain bullish on the opportunity for larger size, laser annealed OLED panels in the IT segment led by laptops and tablets and believe this aligns with reported new Generation 8 FAB investments and will underpin our display business through the next five years. A recent industry report on the IT OLED panel opportunity forecast a 5x increase in unit volumes over those next five years, which is also consistent with what we hear from customers. As another example of our enthusiasm about the long-term prospects of the display business, after nearly five years of investment in revolutionary technology, our prospects for laser-based tools for micro-LED manufacturing are beginning to emerge. We now have more than 25 active customer engagements with a constant flow in and out of our applications. Labs customers are super excited about the results of our, of trials on our three in one micro led demo tools, both in Germany and China. And for which we just began installing this week, our first tool for revenue at a well-known customer in Asia. revenue from our differentiated products for ev battery manufacturing through 30 percent sequentially market excitement for our portfolio continues to build as we further integrate our comprehensive product lines of both legacy companies to offer more complete and efficient welding product and service solutions we also broadened our successful cutting head portfolio including our recently released high performance 30 kilowatt cutting head and expect this capability to drive a renewal of growth opportunities. Turning to the electronics market, our strong performance in Q1 was driven by a surge in demand and record revenue quarter for our sensing business. Multiple factors have contributed to this exceptional result. We were first to market with a new sensor technology platform that enables novel functionalities in consumer electronics products. Second, we grew total share by outperforming our competition in time to market. As in the past, we expect shipments to this market to moderate in the first half of calendar year 2023, while we continue to develop new products for adjacent markets. Moving to automotive electronics and our silicon carbide business, the electric vehicle industry has been shifting to 800-volt architectures driven by demand for lower-cost, fast charging, and compact solutions. Silicon carbide power devices are a must-have for these applications. Analysts projected demand will outstrip supply for many years ahead, leading to sustained bottlenecks that few suppliers will be able to break. We believe that those who have control of the substrate manufacturing like Coherent does will be among those who will be able to grow faster than the market over the cycle. Our substrate customers have long recognized our competitive advantage and are now securing their supply through long-term agreements. So we are a leader in this industry and we believe we are building a competitive capability in devices and modules as well and have tremendous growth prospects for this business too. Finally, turning to the instrumentation market, our instrumentation business delivered a solid quarter with revenues at sustained peak levels. Our portfolio of diversified products continue to see very strong demand, including for life science applications, as revenue from these products hit a record last quarter. Customers are clearly excited about our combined portfolio, as well as the opportunity to provide additional value and expand even further into the life sciences market at the subsystem level. Now, I won't take time to come back on after the Q&A, So please allow me to make closing comments before I hand it over to Mary Jane. For over a half a century, we've remained committed to creating breakthrough solutions to solve our customers' most demanding problems while building an exciting, resilient, sustainable, and valuable growth company. We have the opportunity of a lifetime in front of us. And despite the uncertainty about the future, and the dynamic challenges we face every day, we are still aiming to achieve double-digit growth again this year in organic coherent and the new coherent too, as you saw from our revenue guidance for the full year, which includes all of our foregoing comments. All of our employees are squarely focused on building long-term value for all stakeholders. From that and a solid financial position, we will continue to do our very best to continue to earn your confidence and trust. With that, let me turn it over to Mary Jane. Mary Jane?
spk17: Thank you, Chuck. The Q1 FY23 quarterly market and geographic breakdown of our $1.34 billion of revenue can be found on page 8 of the investor presentation. It is worth pointing out the new geographic breakdown of the company. Q1 FY23 revenue are now distributed by 53% in America, 18% in Europe, 14% in Korea and Japan combined, and 11% in China. Our Q1 non-GAAP gross margin was 40.3%, and the non-GAAP operating margin was 21.3%. Supply chain costs were $7 million. and are not excluded to arrive at non-GAAP results. At the segment level, the non-GAAP operating margins were 19.7% for networking, 27.2% for materials, and 18.3% for lasers. GAAP operating expenses, SG&A plus R&D, were $401 million in Q1, excluding $35 million of amortization, $48 million of stock compensation, and $61 million of transaction and integration costs. Non-GAAP OPEX was $256 million or 19% of revenue. Total stock comp is expected to be $35 million per quarter in each of Q2, Q3, and Q4. The Q1 amount is affected by the vesting stock compensation of $18 million for change of control. Synergies were off to a good start in the quarter with $3 million in the quarter and $12 million on an annualized basis due to the retirement of several senior executives and the planned elimination of positions. Quarterly GAAP EPS was a loss of $0.56 and non-GAAP EPS was $1.04 with after-tax non-GAAP adjustments of $222 million in total. Currency accounted positively for $0.07 in the non-GAAP EPS, primarily from the weaker Euro and RMB. The diluted share count for the GAAP results was 133 million shares, and for the non-GAAP results, the share count was 149 million shares. The GAAP and non-GAAP EPS calculations are on tables six and seven of the press release. Cash flow from operations in the quarter was $80 million, and free cash flow was a loss of $59 million, including capex of $139 million. One-time effects on the cash flow from operations included $60 million in payments for the acquisition, including $35 million in ticking fees, those paid at close, and $25 million in legal and consulting fees incurred by the laser segment pre-close and paid on the closing date. Free tax interest expense was $62 million. Our outlook of $274 million for the year included the one-month LIBOR reaching 4.2%. It is now forecasted on the yield curve to reach 5.3%. Should that happen on the schedule expected, our goal, along with our debt payments, will be to limit the change in our initial estimates to 5 to 7 million for a total of 279 to $281 million. Our net cash at June 30th, just prior to the close, was $255 million. Our September 30 balance of cash and cash equivalents was 904 million. Our total debt position is 4.7 billion. We did successfully settle the $345 million of convertible debt in stock as we planned. Using the estimated trailing 12 months on a pro forma basis for the combined company at September 30th, the gross leverage was 3.8 times and the net leverage was 3.1 times without the synergy credit. Using our credit facility definition, which allows synergy credit of $250 million, the net leverage is 2.6 times. The effective tax rate in the quarter was 24%, and we expect the tax rate in fiscal year 23 to be between 22 and 24%, assuming no adoption of new or additional tax rulings. The increase in the tax rate is largely driven by a larger presence in Europe, as well as M&A costs that are not deductible. Turning to our outlook, for Q2 fiscal year 23. Our outlook for revenue for the second fiscal quarter ended December 31st, 2022. It's expected to be 1.34 billion to 1.4 billion and earnings per share on a non-GAAP basis to be 88 cents to $1 per share. With respect to our expectations on the full year revenue, we expect revenue to range from 5.25 to 5.55 billion dollars our non-gap eps estimate assumes that the effects of purchase accounting which are all still preliminary are added back to gap eps other than depreciation that is about five million dollars in q2 the share count is 151 million shares for the entire guidance range. The EPS calculation, including the dividend treatment, is detailed on Table 8 of the press release for the guidance and also shows when the Series B preferred stock is diluted. All of the foregoing is at today's exchange rate and an estimated tax rate of 23%. For the non-GAAP earnings per share, we add back to the GAAP earnings free tax amounts of $183 to $193 million, consisting of $83 million in amortization, $34 million in stock comp, $20 to $30 million for transaction integration and restructuring, and $46 million for the inventory step-up. The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, The purchase price accounting and the share counts are all subject to change. As a reminder, our answers today may contain forecasts from which our actual results may differ due to a variety of factors, including but not limited to changes in mix, customer changes, supply chain shortages, both upstream and downstream, competition, changes in regulations, COVID-19 protocols, and global economic conditions. With that, Kevin, you may open the line for questions.
spk07: Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your touchtone telephone. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Ananda Baruha with Loop Capital. Your line is open.
spk13: Hey, good morning, guys. Thanks for taking the question. Yeah, congrats on a nice start here and on what appears to be really solid execution and focus. Two quick ones, if I could. You know, Chuck, just to start, what are your thoughts on macro and your thinking as we head into 2023? Does the backlog, which is super substantive right now, does that isolate you or, I guess, sort of backstop you to an extent? And then also, what businesses – you know, would you believe, uh, could, could be the most sensitive to macro, uh, should, should companies begin to feel greater pressure in, in 23? Thanks. And I have a quick follow-up.
spk09: Okay.
spk04: Uh, thanks Ananda. Uh, thanks for your question and your comments. Um, well, we have a strong backlog. The sales forces is busy working to secure an even greater backlog to the extent we can. The macro environment, however it is, it's the same for everybody. Our job is to step it up and to outdo what anybody else can do in this market. And as far as the markets go, well, we're diversified. It's part of our strategy. We'll never get it to a spot where all markets are all firing at the same level. And so our job is to work to secure as much as we can while we can and to position ourselves for the future because even those markets that are maybe only going growing a little slower today we have great prospects for the future as well and our portfolio is aiming for it excellent um and then follow-up is growth growth margin was uh very nicely stronger than than at least we had anticipated
spk13: And OpEx dollars were actually nicely lower than we had anticipated. And just so, we'd love context around contributors to the gross margin strength, and do you think it's sustainable? And then, Mary Jane, I guess the same on the OpEx dollars. Did they come in sort of more efficient than you had anticipated, and do you think that's sustainable as well? Thanks, guys.
spk17: I would say that, first of all, the gross margin, as we talk about every single quarter, is a fight every day. So not necessarily predictable, but I would say that the company continues to work on that very, very hard. Notwithstanding having $1.34 billion, I'd say overall currency probably helped the margin by about $5 million. And I would say beyond that, we probably had about $8 million help from an expense point of view from currency. But having said that, we do get rather busy on the synergies early. And the first thing we do to be sure that we can capture all the synergies is stop firing. So that is one thing that paused as we got to know all of our new colleagues on that in the laser segment and they got to know us. And I will tell you that we will continue to fight on that OpEx for a long, long time because At the end of the day, the company's goal under any circumstances is to be sure that we are able to invest that money well, particularly on the R&D line. Excellent. Thanks so much, guys.
spk07: One moment for our next question. Our next question comes from Paul Silverstein with Cowan. Your line is open.
spk06: Thanks. Mary Jane, given the investment community's focus on your leverage relative to macro and Any thoughts you can share as to how quickly you expect or hope to deleverage and how you get there in terms of CapEx plans for the year alongside of the interest expense?
spk17: Sure. Well, obviously, the first thing that we did was the success we had in taking out the convert in stock. So that took out $345 million of it. Historically, what we've said about the paydown of the debt, just let's deal with the paydown for a minute. was that actually we didn't expect that much in the first quarter because the goal in the first quarter was to launch all the synergies first, which sometimes come with cost. Having said that, given that the Fed has not necessarily let up on what they think they may do this year and what we thought would be ongoing stability in the interest rates in 2024 actually also may change, that has caused us to give new thought to what we would do potentially this year in bringing down the... the leverage through pay down as well this year. We're not moving away from what we originally said, which was that within 24 months, we expected to be at two and a half times gross. And I think that plus the EBITDA, the continued work on the EBITDA, I think will help us from a deleveraging calculation point of view. But the real issue is trying to moderate and stay within our range, if not lower, on our interest expenses.
spk06: Okay, and a quick follow-up, if I may. And my apologies. I heard, Chuck, I heard your response to the previous question. I heard your comments on the call, and I could see the numbers. So it sure doesn't look like there's an issue. But you just had Viabi last week and Lamentum this week both reference the beginning of macro pressure. In Viabi's case, it was field test units. And what they said was that OpEx by carriers was coming down, and that's always a precursor to CapEx declines. and then you had momentum reference some pockets of weakness among web scalers again from your numbers and comments it doesn't seem to be a problem but i want to ask you the direct question are you seeing any signs of concern uh from a customer market product market perspective at a macro level yeah thanks paul paul i'm i'm going to ask you a warning to to take it hey paul thanks thanks for the question no we don't see it at all uh any uh
spk19: weakness from that perspective. In fact, we think that we can say at least we have visibility, let's say, until the first half of the calendar year, calendar 2023, very strong demand. But I also want to underline that it is the result of the combination of the strength of the investments of the customers that we serve, as well as significant share gains, particularly on the high-speed side of the demand, from 200, 400, 800 G, where, you know, thanks to the differentiation that we have, we can really take advantage of the need of such type of products, and so we continue to gain share versus the competition. So the two are very strong, and we have not seen any weakness as maybe others have reported.
spk06: I appreciate the responses. Thank you.
spk07: One moment for our next question. Our next question comes from Dave Kang with B Reilly. Your line is open.
spk09: Thank you. Good morning. My first question is regarding your fiscal 2Q outlook. Just wondering if you can give us a little bit more color of your three different segments, how we should think about it. And my follow-up question is regarding your S and the laser. What's the typical lead times for that product?
spk17: We would expect, on the first question, we would expect good contributions from all three of the segments.
spk04: Thanks, Dave, for your question. Mark, would you like to comment on the eczema question?
spk08: I didn't hear the eczema question. Could you ask one more time, please?
spk09: Yeah, sure. What's the typical lead times?
spk08: Typical lead times for annealing systems are around six months.
spk09: Yeah, eczema, yeah, for annealing, flat panel annealing.
spk08: Yes, for eczema, flat panel annealing, the lead times are typically about six months. Got it. Thank you.
spk09: Did you hear that, Dave? Okay. Yes, I did.
spk02: Thank you.
spk09: Great.
spk02: Thank you.
spk07: One moment for our next question. Our next question comes from Mark Miller with Benchmark. Your line is open.
spk15: Congratulations on the record sales. You're probably aware of the new U.S. restrictions on equipment shipments into China. I'm just wondering, is it any impact to you on coherent, especially for the line beam tools that are going into China?
spk04: Okay. Good morning, Mark. Good morning. Would you like to take that?
spk19: Hey, Mark. Thanks for the question. Absolutely. First of all, as you probably know, there are no UV equipment sales into China. So, you know, since that's the vast majority of the market that we address with our partners, we have zero impact from that perspective. Now, if you go on the deep UVs, and other parts of the semi-cap equipment world, we have seen less than 5% impact on the short-term demand from our customers. And again, it's mostly because we address a segment of their market for which the restriction has been applied, which is on the high end. And so the demand continues strong, and in any case, China wasn't in the loop to begin with. So we haven't really experienced short-term, at least we don't see any weakness.
spk15: You mentioned moderating 3D shipments after a strong quarter in the first half of fiscal 23. How much of that is due to macro and also... you know, if you could talk about any of your opportunities outside of the consumer electronics market for 3D sensing.
spk19: Thanks, Mark. First of all, I wanted to make sure it's clear that our numbers were about sensing, which includes 3D sensing. And so, you know, we'll follow the typical seasonal trends, and as we said in the prepared remarks, And we have really not seen any effect from a customer demand standpoint from, let's say, weaknesses in some of the geographical areas where products are being assembled and completed. So demand has been unaffected for us. So it's very strong. And, you know, so we haven't really seen anything, any weakness from that standpoint.
spk15: It's mainly just seasonal effects that you're talking about.
spk19: Correct.
spk15: Thank you.
spk04: Thank you, Mark.
spk07: Our next question comes from Simon Leopold with Raymond James. Your line is open.
spk11: Thanks for taking the question. One, on the hyperscale trends that you called out, Chuck, in the prepared remarks, you said that you expect hyperscale to grow in the second half of fiscal 23. And I guess to me, I'm wondering whether or not that implies that you saw any softness from hyperscale in your September quarter or what your expectation is implied for your December forecast, whether you're seeing some inventory absorption or slowing from that group of customers near term. And that's what you were trying to point out was you expect that growth to resume in the first half of calendar 23. And then I've got a quick follow-up from Mary Jane.
spk04: Okay. Hey, good morning, Simon. Thanks. Simon, what I said was regarding our data center customers, we continue to forecast hyperscale growth in the second half of this year. To answer your question and maybe put a finer point on it, we expect our Datacom business to grow sequentially and steadily in the year. Does that help you?
spk11: Yeah, I guess what I'm sort of wondering, and I'm not trying to split hairs, but whether or not you saw a little bit of softness. Now, clearly your numbers were fine this quarter, and the guidance was good, but whether or not that particular group of customers was softer than you expected in your September quarter?
spk04: It was not, but, Johnny, do you want to add to that?
spk19: So while some of the scalers may have redistributed the demand over time, and maybe some have shown some weakness or at least decide to slow down. The mix of customers that we address is not affected by that at all. So we don't really see that weakness. And as I said earlier, the fact that we continue to gain share of the high-speed side of the market helps our growth in general. So it's a combination of factors. The mix of customers, none of those that, again, ever redistributed the demand over a longer period of time, And then the fact that we're getting shares. So the combination of the two ultimately drives pretty good outlook for us.
spk11: Great. No, I appreciate that. And then just the quick follow-up for Mary Jane was you called out the 7 cent benefit from foreign exchange rates. And I want to make sure I understand that that's basically internationally located employees being paid in local currency and and therefore translates back to fewer dollars. And if that's correct, if we assume currency stays stable in the December quarter, you'll see a similar benefit, and that's what's implied in your December guidance. Is that correct?
spk17: It depends what you're comparing it to. If you compare it to Q1, it's because it's like the Q1. If you compare it to last year or something else, yes, but we are assuming that the currency is stay in the relative relationship that they have at this time and were prevailing in Q1. Great.
spk11: Thank you for your questions.
spk07: Our next question comes from James with Needham. Your line is open. Hi.
spk10: Thank you. So thanks for the color, by the way, on the export, U.S. export restrictions. I wanted to ask the question also about the laser business. If we think about some of the forecasts for the WFE market and the expectations that the market could be down anywhere from in excess of 20% next year in calendar 23, I'm wondering how you're viewing that part of the laser business, or do you just see more of an offset in the display related portion of the laser business? that's capital equipment.
spk04: Thank you, Jim.
spk08: Mark? Jim, thanks for the question. So two parts to the answer, perhaps, Jim. Certainly, to quote one of our customers, the impact on China is non-zero, but as Giovanni indicated, it's probably less than 5% of our semi-business in the laser segment, less than 2% of our overall business in the laser segment. We're buffered by a large installed base, which really helps. We have thousands of ultraviolet lasers that need to be refurbished every two to three years. Some have been in service for more than 20 years with our customers asking us to commit to support for another 10. And that service revenue underpins our strong baseline business, kind of irrespective of the latest annual WFE spend. So certainly the outlook for next year is tempered relative to what we've seen this year, but clearly I think we all believe the long-term trend's very positive.
spk10: And then if I get just a follow-up question, I certainly, I can appreciate, given the diversity of the portfolio, you have some insulation here, but I'm just wondering what you're seeing across the industrial business by geography in terms of China, Europe, North America, and just given in light of the macro concerns that people have expressed.
spk08: That's another good question, Jim. I think we have a diversity of products and services that we sell into the industrial markets. We certainly have the benefit of a very strong backlog. In some markets, for example, medical device manufacturing were number one. In other markets, we're maybe number two and three. We think we've got lots of share upside in industrial. So we're beginning to see maybe the first softening in some of the European customer base. But again, we've got the benefit of a very healthy backlog. And again, our diversity of markets in the industrial sector, I think really, you know, I think gives us confidence that we're looking at a pretty strong outlook for the year. Got it. Thanks.
spk10: Congratulations on that. Nice start, by the way.
spk07: Thank you. Our next question comes from Sam McChatterjee with J.P. Morgan. Your line is open.
spk01: Yeah. Hi. Thank you. Thanks for taking my questions. I guess for the first one, if I could sort of get some help on understanding the revenue guide for the full year here, of your comments have indicated that demand is remaining robust, maybe some pockets of weakness here and there, but largely sort of a strong backlog, strong demand. And I'm trying to think about the sort of guidance for revenue to remain sort of flat, half over half at the midpoint, and particularly any insights on sort of what you're seeing in book-to-bill, et cetera, to give us some sense of what's driving that revenue guide, because ideally, I mean, we've been more used to seeing the company ramp through the year in terms of revenue. And I have a follow-up. Thank you.
spk17: Thanks, Sonic. Compared to the combined performer revenue, I think we will see growth. But at the end of the day, the main thing that we're also trying to keep in mind is the effects of currency on that revenue. Right. So just in the first quarter, we had 16% currency effects on the revenue. So that's part of it. If you just multiply that by four, not that that may be exactly how it goes, but it's $60 or $70 million. But generally speaking, I'd say that when we look at the combined number for the company compared to where the pro-forma was, we're expecting to see some decent growth as the year goes on, as Chuck already said.
spk01: Okay, so let me move to the second question. In terms of the operating margins, Your networking margins improved significantly sequentially with sort of limited change in the revenue profile, whereas it was interesting with your compound semi margins sort of remained similar sequentially even despite a significant move up in revenue. So I'm just wondering if you can help me understand that. Why not more of a volume leverage sort of in compound semi versus networking which seemed to have a much more material improvement in margins? Thank you.
spk17: So I would have said, well, first of all, a couple of things. In the networking business, they had a very, very strong mix in the transceiver business this quarter. They have also continued to work hard on moderating what their supply chain challenges have been, both in terms of fiscal product and the costs that are involved in that, and more importantly, on their operating efficiency. I mean, it continues to be a goal for us to moderate supply The cost of operations, I would say probably the other thing that helped them in fairness is that because the RMB was weak, it probably translated their... It not probably did. It did translate their cost to a lower level. So there's probably a currency effect on that to some extent, which is a lesser of an extent in materials. Materials generally has around the world, almost all of its sales in dollars and a significant part of their cost in dollars. So that's... one aspect of that but second of all materials also had a very very good quarter in the fourth quarter as well um and generally speaking i would say that um uh overall you know my my original range on materials was that it would be 23 to 25 in terms of its resting margin uh so we're happy to see it at 26 and 27 but i don't know given their mix at this particular time that it actually grows by you know say 100 or 150 basis points every quarter and they had significantly less on currency. Thank you.
spk07: Our next question comes from Vivek Aro with Bank of America. Your line is open.
spk12: Thanks for taking my question. For my first one, I'm curious, what is the implied range of gross margins, Mary Jane, for Q2 and for the fiscal year? And what about coherence products makes it tougher to get a tighter gross margin range? Is it just a mix? Is it the variability between products? Is it just pricing, competition? So just any views on gross margins would be very helpful.
spk17: The company doesn't guide on gross margins, but I would say that, as we've said consistently, our goal is to try and keep that margin over 40%. and we will continue to do that. In fact, just tell me again, what was your question on the lasers margin?
spk12: No, sorry. Just overall gross margins for Q2 and for the full year. So let's say if the mix you're planning for Q2 comes through and the mix you're planning for the full year comes through, what is the range of gross margins? So for example, if we take the midpoint of your full year range, can gross margins be over 40%?
spk17: Well, the company hasn't changed its range from 38 to 42, just for a whole number of reasons not to mention the COVID issues that we're still seeing, particularly in Fougeot. But I would say if you took the midpoint of that, it would be 40. But we do not guide on gross margins. So that's the answer to the first part of the question. What is the laser question you were asking?
spk12: No, not the laser question. I was just saying that what about the company's mix makes it tougher to get a tighter range of gross margins?
spk17: Well, I think at this point we are still really learning, first of all, the laser products, which nonetheless are very good margins. There's no question about that. And given that the company saw some pretty nice margin improvement just between Q4 on a pro forma basis to Q1 together, I think we will continue to work with the laser segment to be sure we understand that and potentially take that margin up. That's the first thing. The second thing is there were an awful lot of changes in the macro factors that with respect to networking, that our team worked very, very well through this quarter. But at least when we think about it, we know that that could still recur. And then finally, on the materials side, the materials team also continued to see some of the effects of supply chain shortages. And on the industrial part of their business, the first quarter during this quarter is normally their lowest seasonal quarter in the year. So over time, I think we will work on tightening or raising that gross margin range. But at the end of the day, the company does not guide on gross margin.
spk12: And for my follow-up on silicon carbide, how should we think about the contribution to sales and the required CapEx requirements for this fiscal year? And in general, the strategy around silicon carbide, you have just one large player who is spending billions in CapEx to stay as the leader on the substrate side, and then you have a number of customers who plan to in-source capacity. So just kind of a near-term question on the sales and the capex for silicon carbide in fiscal 23, and then the longer-term question on the strategy as to how you differentiate between these two extremes, right, from a competitive perspective in the market. Thank you.
spk17: All right. First of all, we've said that with respect to the investments that we're making, we would expect in this sort of 25-26 period that the company would probably start to see its percentage of silicon carbide as a percentage of revenue moving into the 8% or 10% place from where it is today as we continue to make progress on devices. With respect to the capital investment that we're making, during the entire last 10 years, we've probably doubled the capacity of silicon carbide every 18 months, as opposed to some other competitors who actually had a pause in the middle of that period of time. But nonetheless, we do expect to spend roughly over a billion dollars over the next 10 years, the majority of which will be in the first five, and the majority of which will be CapEx. Having said that, the company continues to look at, as it gets larger, how it thinks about manufacturing things, including not speaking about just silicon carbide specifically, but in general, whether or not it could be advantageous to the company's growth to have partners in certain areas of the manufacturing. And silicon carbide would be an area where we do think about that, but we think about it for everything at this point. As the company gets larger, it may not make sense to have absolutely everything fully vertically integrated. Chuck, what would you like to add?
spk04: Well, let's ask Vivek. Do you have any follow-up questions, Vivek?
spk12: No, just that one. Chuck, just the overall strategy as to is there room in the market for Coherent just given the one really large substrate player and then the desire of many of your customers to insource that capacity over time. So where is that window for Coherent to become sustainably profitable in this business?
spk04: um well okay uh viva you know let's come back to the capital too i would say about a third of our capital this year is going to go into into this business um we're going to compete on the basis of the competencies that we have including the quality the technology and the scale that we have and we're putting in place we're introducing new platforms on the basis of market opportunities that we clearly have in front of us and we believe that we can have a strong profitable, growing, differentiated business just in materials. But in addition to that, we continue to invest in making very, very good progress both on devices and on modules. The game is going to inflect and unfold here in this decade, in the next few years. And I believe that we're already well positioned and we're going to continue to establish the front that we need to, and the base that we need to, to grow from that. I have very much confidence in our ability to do that, and we're well underway. Let me just make one other comment. This market is going to be so big. I simply, you know, we can't see that we'll, there's not enough capacity in the market today, and there's going to be no one player that can serve this entire market. No one's going to build a whole industry on one player and we intend to be one of the leaders that not only have already emerged but are sustainably in the pack okay thank you our next question comes from sydney ho with deutsche bank your line is open uh thanks for taking my question uh my first question is on the your semi-cap exposure
spk16: I think organically from the old 2-6, the exclusion was only 5%, but I think the legacy coherent is more like 45%. Now it's all part of this industrial market that you guys disclosed. But if you look at that in totality, we used to think your organic 2-6 is mostly tied to UV system produced, but how should we think about the drivers of this segment for the entire company? How much is tied to waste of time, equipment spending, or certain segments of that And how much is tied to back-end packaging and maybe on the display side?
spk04: Okay. Thanks, Sidney. Sidney, I think what we'll do is let's let Mark and Giovanni both give some color on the semi-cap businesses and their segments.
spk08: Hey, Sidney. Thanks for the question. So specific to the laser segment, Semi-cap revenue for us accounts for between 15% to 20% of our overall lasers revenue. The areas that we predominantly play in, as you know, are ultraviolet laser-based inspection for reticles and bare wafer and patterned wafer, as well as infrared lasers for junction annealing. So those are our main markets specific to the semi-cap industry. And as I reaffirm, it's between 15% and 20%. I would say it's growing probably at the higher end of that range. But I think an earlier number you quoted was substantially higher. I'm not completely clear if that was addressed at the laser segment or your prior experience with clear and ink before. But it's definitely less than 20%.
spk19: Thanks, Mark. Giovanni, would you like to add? Hey, Sidney, thanks for the question. As I said earlier, again, we have the benefit on the material segment to address the high end of the market in terms of the note, if you like. And so we've really seen no slowdown. In fact, if anything, we continue to invest to support the capacity needed to address the demand that we see. So it's been really exciting for us to address these high-end applications because there are high margins. We are differentiated. We mentioned many times in the past that we have several source parts in some of these tools, and so we really see you know, the benefit of years and years of investment having gained this kind of leading position in supplying our, you know, immersion tables, wafer trucks, you know, mirrors, all kind of components that go into these both front-end and back-end tools for the Semicarp customers.
spk16: Okay, that's helpful. Thanks. My follow-up question, and maybe one for Mary Jane, can you help us to think how we should look at quarterly expenses, offering expenses over the next few quarters, including the impact of all the synergies that you're getting from the deal, maybe just using the baseline of, I think, $256 million in Q1. How do you think it will end up by the end of the fiscal year? Thank you.
spk17: First of all, I would say that, generally speaking... We are likely to see about 65 million achieved on an annualized basis during the first year on synergies. That does not mean that you take, say, 256 and drop it by 65. On an annualized basis, I would say we would probably be able to maintain this year. You know, it may go down slightly from a round of 19, but given that our target had been 20 to 23, even being at 19, we're down a little bit, though, as I said, currency helped us a bit. But I would expect that, you know, the goal, for example, in SG&A is to moderate the absolute dollar amount as we go forward from the combined company, moderate any growth. So that's one element of synergy on the engineering side. I do think the company will still strive to look at having its engineering at about the 9% of sales level from a The pro forma company, if we just look at fiscal year 22, was about 10-4. So if that stays at about 9 or 9.5, you would see that coming down. Whether or not all that's achieved during fiscal year 23, I can't really say. But generally, the delivery of the synergies across the 250 was expected to be something like 65-90 and then the balance in the third year. The reason there's more in the third year is because to the extent that that we look at, say, you know, two leases in the same area where one comes off the lease is moving things. Maybe to a common space, say, one site, one company has a larger site in the same city. That just takes longer. So those are the types of things that we tend to have, as well as the renegotiation of long-term contracts.
spk07: Great. Thank you. Our next question comes from Richard Shannon with Craig Hallam. Your line is open.
spk03: Well, thanks guys for taking my questions. I think my first one is on the, uh, the fiscal 23 sales guidance with the, with the ranges there. Chuck, maybe if you can talk about what would lead you to get to either low end or the high end, you know, and specifically if you can address any, any specific dynamics by segment or any timing issues, or is it just a matter of kind of macro dynamics here to get to the edges of that guidance?
spk04: Oh, we, um, we started that this year, um, in this quarter. Um, we, we have not, uh, We haven't stepped out into this maybe in six or seven years, giving this kind of long-range guidance, even on the revenue. And we've done it because we have this diversified business, and we have really good visibility, we believe. The biggest single uncertainty that we're looking down into is the supply chain. And after that, COVID is right behind it in China. And nobody knows how that's going to play out. It's still a long time to go to the fourth quarter. I think it's a very, very solid view that we have today about what we're going to go and aspire to do. Of course, we need to have orders and order coverage all the way to the end. We're working on that. And the supply chain and COVID, those will be a little bit out of our control. COVID for sure. The supply chain, we're doing everything we can to mitigate it. Those would be the two. Okay.
spk03: Okay. That's helpful, Chuck. And my follow-on question is just on backlog here. It kind of relates to some of the dynamics you just mentioned here. But how are we expecting kind of corporate-wide lead times to trend over the next couple of quarters? Obviously, lead times, pretty much everyone in hardware technology have expanded here. Supply chain is a little bit of an issue. But do you see lead times coming down? And what, if any, impact do you see that having on backlog?
spk04: Well, we're not expecting or forecasting a substantial change in the lead times. Our plans are based on what we have in front of us. As far as that goes, we're constantly working to improve our own lead times and our overall ability to manage carefully any changes in the inventory are a good part of that. That's the best I can say.
spk03: Okay, great. Thank you.
spk07: Sure. Thank you. Our next question comes from Tim Stasoff with Northland Capital Markets. Your line is open.
spk05: Hey, thanks for squeezing me in there, and congratulations on the results. On the telecom side, I thought you heard, I heard you call out some strength or activity in cable TV networking infrastructure early in the call, Chuck, in your prepared comments. I'd just like to get a little more color on that, and just as a follow-up, You talked about a record quarter in sensing. Seems like you had a pretty big one a little while ago or a couple years ago. So it seems like that may have as much as doubled sequentially for you. What is the outlook given the seasonality into the December quarter for 3D sensing? And that's it for me.
spk04: Okay. Thank you, Tim. Tim, I'm going to ask you wanting to take both, but as it relates to telecom and MSO or cable TV infrastructure, We think about them in the same bucket, different from Datacon. So telecom and cable TV infrastructure are related. And with that in mind, let me just add, we are extremely well positioned in the largest of these cable TV infrastructure customers that we have. And our business is growing. We're growing very well. And I expect it will continue to do so throughout this year. Johnny, would you like to add to that?
spk19: No, this is good. Maybe I'll talk about the sensing outlook. Yeah, we said that we're going to experience the typical seasonality that we experienced in the past. It's just driven by customer buying and ordering products. patterns, and so we just follow that. As we've seen, we had, you know, strong growth, even by some new applications and, you know, new products that we were able to launch together with our customers, and we expect the typical trend that we've seen in the past to slow down in the second half of the fiscal year and then eventually come back again in the first half of the next fiscal year. In relative terms, we expect that demand to continue, but these are long-term investments that we have made to enable functionalities that not many companies can enable, many suppliers can enable. So we feel good about the prospects of this, as I call it, you know, the general sensing market, which does include credit sensing.
spk02: Please.
spk07: Our next question comes from Mehta Marshall with Morgan Stanley. Your line is open.
spk14: Great, thanks. A couple of just quick questions. Mary Jane, I guess, is it always your policy and integrations to kind of stop hiring up front just as you kind of assess kind of assets in-house? Or is there kind of something different about the environment that made you want to put in kind of a near-term hiring freeze? And then on the second piece, you mentioned kind of looking at alternatives on the leverage piece, just wondering is there a minimum cash threshold or just anything that we should be mindful of as you kind of assess the leverage position? Thanks.
spk17: First of all, I would just encourage everyone on the phone not to use phrases like hiring freeze. First of all, it is always our policy to get to know our new colleagues first. As the two companies come together, it changes. what some of our global functions are. It changes what some of our ownership positions are. We do have people in the normal course in either company deciding that they're reaching their retirement age. That's one of the things you get to know just in the normal course they're reaching retirement age. And we want to make sure that we have opportunities across the board for people to come into roles, especially if they might be larger roles. So we do that every single time. Again, no one should be overreacting on anything about a hiring freeze. And frankly, most of my comments are probably more focused on SG&A than they are on R&D as a real important matter. But generally speaking, I think we do spend quite a lot of time in the beginning of our game plan just getting to know both companies. And given the public interaction that was done in the closing of the – or the bidding on the coherent ING transaction, I would say both sides' advisors cautioned us to be perhaps less engaged pre-closed than we were on previous large acquisitions. So there is a long tail here of getting to know each other. And I think both companies want to make sure they're doing things in concert. So that also naturally allows us a little bit of a pause as we think about expenses overall.
spk14: You had a second part, Amanda. The leverage piece and just, you know, how we should consider either minimum cash or just kind of considerations on that front.
spk17: Well, I think probably it's fair to say that the company probably thinks in terms of just maybe call it $500 million of cash as a minimum. But generally speaking, you know, we do have the revolver there that is largely undrawn. So if someone were to, I don't know, one quarter, it went to 475. I also wouldn't recommend anybody jump out a window over that. But generally speaking, I think we do want to make sure that we can fund the company. We are looking at the capital budget. And while the pay down of the debt is a very, very important priority for this company, the creation of profitable earnings is the most important priority, is the number one priority, because that's advantageous to the cash flow as well. So therefore, the actual first priority is CapEx. I don't know, to someone else's question earlier, that we would necessarily dramatically moderate CapEx unless the market went in a certain direction and we felt that was the prudent investment thing to do.
spk07: Great. Thank you. Our next question comes from Tom O'Malley with Barclays. Your line is open.
spk18: Hey, guys. Thanks for taking my questions. Giovanni, the first one's for you. You're mentioning normal seasonality into the December quarter in the sensing business. Could you just remind us what normal seasonality is?
spk19: Well, normal seasonality means that it will be higher than the previous quarter, and then it will – come down in the third and fourth fiscal quarter.
spk18: Okay. And then just on the quarter, on the acquired asset, it looked like coherent came in a bit higher than expectations. Legacy coherent came in a bit higher than expectations. I was just curious, did you see any change in order patterns from Chinese customers in the quarter? I know it's a very small percentage of your sales that you're saying are impacted by potential bans. But did you see any change in ordering patterns there just for this quarter? Thank you.
spk08: So this is Mark. Tom, thanks for the question. So China represents a pretty small part of our overall, you know, lasers revenue. And we really didn't see any significant change in order patterns at all.
spk17: I mean, I think we explained to investors on the, say, 630 quarter, at times we got questions that the supply chain was a challenge, that the port of Shanghai was shut down or whatever. And I think the teams worked well to kind of get to the revenue that they expected to.
spk07: Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back over to Mary Jane Redman for closing comments.
spk17: Thank you very much for joining us today. We look forward to speaking with you as time goes on here through the rest of the quarter, and we'll talk to you again in February. So thank you so much for joining us, and we all hope you have a very good day. Bye-bye.
spk07: Ladies and gentlemen, this has concluded today's presentation. You may now disconnect and have a wonderful day.
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