Coherent Corp.

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.

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.

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?