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spk19: regarding VXLs, and Agnes will take the telecom question.
spk07: Giovanni? Yes, so let me clarify. Let me try to be clear. No, it's not. Okay, so we don't have a challenge from a supply standpoint, from the VXL standpoint. Of course, when you have a production of transceiver modules, there's a number of other things that need to happen, including test automation of assembly lines, you know, new... new processes, and of course, there is also an external supply chain, particularly around ICs, that will impact our ability to ramp. So everything is coming together. And, you know, based on the demand, the demand is definitely stronger than what we could supply. We are capacity limited, but not necessarily from a device standpoint, but just as an overall ability to ramp to the volumes that we have been caught by supplies. by our customers in terms of the most recent forecast versus previous forecasts. We are very aligned with roadmaps. We know exactly what the customers are looking for for next-generation products, and so we'll adapt our internal supply chain to keep up with the demand. Currently, we don't have experience. Going back to your first question, we don't experience a challenge from a VIX production standpoint. And I want also to recall that we have sufficient capacity for both internal and external suppliers. So we can manage that as we need to support our own transceiver business, obviously, as a priority.
spk11: Thanks, Giovanni. Would you take the telephone, for sure? Good morning, Chris. So in telecom, we saw growth in the December quarter over the October quarter by about 20%. And if we look out for the balance of the fiscal year, we expect double-digit growth second half over first half. And beyond that, in 25, as the market improves, we expect additional growth, both from the market coming back, but also a lot of the engagement we have with customers on design wins for new products. Great. Thanks, Magnus. Thanks for your question, Chris.
spk19: Thanks, guys.
spk26: Thanks. One moment for our next question. It comes from the line of Mark Miller with the Benchmark Company. Please go ahead.
spk04: Thank you for the question and congrats on your progress. Just was wondering in terms of new applications for VIXILs in terms of automotive and other applications, what are you looking at over the next 12 months or so?
spk19: Great. Good morning, Mark. Julie, will you take that one?
spk30: Sure, sure. Yeah, so Vixels, in addition to the Datacom market, can be used in the sensing market. Obviously, we're in the sensing world in mobile phone applications. And then in addition to that, you can use Vixels for all kinds of other sensing, including, you know, in a vehicle, potentially in health applications, So many potential future applications of VIXILs in fencing. Thank you.
spk19: Thanks, Julie.
spk17: Thank you, Mark.
spk26: Thank you. One moment for our next question, please. Comes from the line of Tim Savageau with Northern Capital Markets.
spk20: Hi, good morning. And I'm sorry if I might have missed this earlier. but you talked about 800 gig transceiver shipments at about 100 million in the quarter, kind of doubling sequentially. Do you have an outlook for where you expect that number to go, either in fiscal Q3 or by year end? And I'll follow up from there. Thanks.
spk19: Yeah. Okay, Tim. Thanks for your question. Tim, what we said, that you may have missed is what I said, is I expected our shipments in Q3 to be greater than Q2, and in Q4, greater than Q3. We're on a ramp. It's going up and to the right.
spk20: Okay, well, if I might maybe follow up on that a little bit. I mean, you're talking about fairly modest sequential growth here for Q3 and growth in telecom. So I guess... Are you looking for, and even if you look at your Q2 results, it seems like the lower speed stuff might have come down pretty good. So you're seeing some offsets there. Is sort of that the dynamic for, you know, overall Datacom revenue or, you know, what are the puts and takes? Or is that ramp slowing a bit, I guess, you know, from the rate that obviously...
spk19: It really is an insightful question. Meeta, Marshall had the same question, and Sanjay tried to address it. Let's let him take another pass at it.
spk08: Okay. So thanks for the question, Tim, good morning. So in terms of the market, the fastest growing segment of the market is 800G and above, which is really AI. We just redid our forecast on the market. It's growing at a 65% category in the next five years, Tim. So it's a very sharply growing market. And we expect, we aim to grow faster than it, than that market. Now, the traditional networking market is certainly not growing at that cliff. And we are not really factoring a significant rebound in our non-AI, if you will, market growth or our revenue growth. So a lot of our revenue growth is coming from AI-related applications. Hopefully that's clear to Thank you, Sanjay.
spk20: Yep, I'm a little late. Sorry. Thanks, appreciate it. Thanks. Yeah, thanks, Tim.
spk26: One moment for our next question. And it's from Ananda Barua. Ananda Barua with Loop Capital. Please proceed.
spk32: Yeah, good morning, guys. Thanks for taking the question, and congrats on the strong execution. Yeah, actually, just a follow-up there, Sanjay. Clarification, is that the, I guess, what is 65% growth over the next five years, specifically?
spk08: Hi, Ananda, good morning. It is the growth of 800G and above transceivers, Datacom transceivers, from calendar 23 to calendar 28. I got it. It's at a 65% category.
spk32: Super helpful. And I guess my question is, Any way to think about yet the transceiver opportunity for Gen AI outside of the hyperscale complex? And so specifically, I'm thinking at telcos and on premise, say like Fortune 1000 types. And that's it for me.
spk19: Okay, good morning, Ananda. Julie will take the next one.
spk30: Hey, Chuck. Good morning. Good morning, Ananda. Yeah, so the obviously the biggest deployments are at the biggest web scale. And as time goes on, that spreads out, as you point out, to other smaller entities that could either host services or people may choose to have their services on-premise. So that diversifies the customer base, similar actually to the Ethernet market. And then... So the gen AI, I forgot the second part of the question.
spk19: With regard to will it spill over to telecom?
spk30: Oh, thank you, thank you. Yes, eventually it all spills over to telecom, because all that data that's getting generated inside has to go somewhere. So we do believe that that will impact our telecom revenue in a positive way over time. Should impact eventually also non-AI datacom revenue. And then finally, something that might not be so direct of a comparison, but these Gen AI chips also require the most advanced process nodes. And that's beneficial to our industrial segment for our semi-cap inspection lasers.
spk17: Thanks, Julie.
spk19: I would add that besides Datacom, the Datacom and telecom verticals. We have a semi-cap equipment business, and it's also underpinning the growth in AI by providing new tools, including laser-based tools and engineered material tools to OEMs that have to build the equipment to make the devices. I mean, we have it surrounded.
spk32: Yeah, that's great.
spk19: Thanks, Jeff. Thanks, Anatha. Thanks, Anatha.
spk26: Thank you. One moment for our next question. And it's from the line of Dave Kang with B. Riley. Please proceed.
spk10: Thank you. Thank you. Good morning. Questions on arm lasers. Chuck, I think you talked about in the past that arm lasers is an eight-figure opportunity and could reach nine figures if you successfully penetrate the Chinese market. Just wondering if you can give us an update there.
spk19: Thanks, Dave. Thanks for asking about one of our other super exciting opportunities, Giovanni.
spk07: Yeah, Dave, thanks for the question. Yeah, we're making a lot of progress. Actually, just recently, we learned that a major battery maker in China kind of displaced our competitor laser to replace it with our ones on the production line. So we think it's going to be a huge opportunity for gold, since it's one of the largest battery makers in the world. So we think, in addition to the existing customer, they keep ramping production and see the major advantage of the, you know, spot-free, you know, no porosity kind of weld quality provided by our arm laser beam profile, we believe that, you know, we continue to grow in the market space, you know, and it's not going to be limited just to batteries for EVs. I think we're seeing also application beyond that, you know, not only in the automotive market, but, for example, in the semiconductor equipment market. We've been engaged recently on working on some advanced lithography tools to provide laser welding for some special alloys parts that are needed by those tools.
spk19: Dave, we're aiming to drive a paradigm shift when it comes to laser welding.
spk10: Got it. Thank you.
spk26: Thank you. One moment for our next question, please. It comes from the line of Jim Ricciuti with Needham and Company. Please proceed.
spk15: Thanks. Hi, Chuck. I wonder if you could elaborate on the comment early on in the shareholder letter that you would – considers other strategic opportunities to unlock shareholder value. I'm wondering what that means. Are you suggesting that you might pursue some smaller M&A to maybe expand in some areas that you may not necessarily have the presence you want to have?
spk19: That's a great question. We're, from time to time, asked about it. We are prudent stewards of our capital. And let me ask Bob Bashore, our president, if he'd like to remark.
spk16: Yeah, sure. Yep, I'm happy to, Chuck. Yes, as you know, we have been open to all kinds of transactions in the history of the company, and we are both great partners, and as Chuck said, shareholder value is always our driver. So we are actively, like we have been for 51 years, considering lots of alternatives to grow shareholder value. As we indicate in the shareholder letter, These are probably going to be smaller transactions, not material, but that is our focus across all range of potential transactions.
spk15: Is it a case of expanding in some areas that you're underserved in?
spk14: Is that the focus?
spk16: Well, for sure. If you look at all the technologies and the opportunities we have, There are a lot of corners that we can look in for areas to grow. There's also tremendous opportunities to partner. So we are considering all of those options and have active engagements in those areas.
spk17: Thank you. Thank you, Jim.
spk26: Thank you. Thank you, Bob. One moment for our last question, please. And it comes from the line of Mike Genovese with Rottenblood Securities.
spk02: Hi, good morning. And I guess I'll go to beating the dead horse here. When I parse your comments on 800G as a percentage of Datacom transceivers this year, I end up somewhere in the range of revenue should be 70% to 150% higher than the $300 million you talked about. entering the year. And so with that as the preamble, my two-part question is, are we still looking at 20% of the revenues being in the first half of the year and 80% in the second half of the year, like you guys said last quarter, or is that sort of, has that changed a little bit? And then secondly, just as we look at fiscal 25, should we put Sanjay's Hager, which I think he said was 55%, if I heard that right, I mean, is that roughly the right way to think about where we start for fiscal 25 growth in that business? Thank you.
spk08: Okay. Thank you, Mike. Okay, Sanjay? Yeah. Thanks, Shep. Morning, Mike. So I think our revenue pattern is pretty much in line with what you stated in terms of our growth rate. Obviously, we are aiming to do even better than that in terms of the second half of the fiscal year.
spk19: And mind you, 65% is a five-year CAGR, so you need to keep that in mind. Yeah.
spk02: Sorry, but I guess 2080, though, we're still targeting 2080. That hasn't flattened out a little bit because of the good performance in 2Q. It's still 2080?
spk19: It's close to that. It's close. Maybe a little bit higher than 20 and a little lower than 80, but it's roughly right.
spk18: Okay, great. Thanks so much. Great job. Thank you. You're welcome. Thank you. Thanks for your comments.
spk26: Thank you. And this concludes the Q&A session. I will turn it back to Paul Severson for any final comments.
spk13: Thank you, Karin. I want to thank all the analysts on the call for their thoughtful questions. And I want to thank all of you on the line for having joined us this morning. We look forward to talking to you in the future. Thank you.
spk26: Thank you, ladies and gentlemen, for joining us today. You may now disconnect. you Thank you. Thank you. Thank you. Bye. Thank you. Good day, and thank you for standing by. Welcome to the Coherent Corp Fiscal Year 2024 Second Quarter Earnings Conference. 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 will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw the question, please press star 1-1 again Please be advised that today's conference is being recorded. I would now like to hand the conference over to the Vice President of Investor Relations for Coherent Corp., Paul Silverstein.
spk13: Thank you, Carmen, and good morning, everyone. Thank you for joining our second quarter fiscal 2024 earnings call. The call will be available for webcast replay on the Investor Relations section of our website. On the call, we have Coherent Share and CEO, Dr. Chuck Matera, and a number of coherent senior leaders who Chuck will introduce shortly. This morning, we will devote the majority of our time to answering questions from analysts in the investment community. Yesterday, after market closed, we issued a press release, posted a shareholder letter, an updated investor presentation to the investor relations section of our website, and furnished these documents in a Form 8-K. This morning, we filed our 10-Q. The shareholder letter contains the financial statements historically included in our earnings press releases, and detailed information regarding our operating performance, key trends, and outlook. Before we begin, a short statement about forward-looking statements. We may make and or refer to forward-looking statements, including statements about future performance and market outlook. Actual results may differ from those in the forward-looking statements. The shareholder letter and our SEC report set forth risk factors that could cause actual results to differ materially. We assume no obligation to update forward-looking statements which speak only as of their respective dates. During this call, we may discuss both GAAP and non-GAAP financial measures. If we do, a reconciliation of GAAP to non-GAAP measures is included in the shareholder letter. If we present historical non-GAAP financial measures, we will limit our discussion to those that are reconciled in the shareholder letter. Before I turn the call over to Chuck for his opening remarks, please note that on March 26th, At the Optical Fiber Conference, or OFC, in San Diego, we plan to host a meeting with the investment industry, which will be webcast, during which we will provide an update regarding our communications market. And in April of this year, we plan to host our third market overview webinar, which will be focused on our instrumentation market. The first two market webinars focused on our communications and industrial markets are available on the investor relations section of our website. With that, it is my pleasure to turn the call over to Coherence Chair and CEO, Dr. Chuck Matera.
spk19: Thank you, Paul. It's a great day here in Silicon Valley, close to most of our largest customers. As I've said before, leadership development is among a CEO's most important responsibilities. Given the shareholder letter's extensive disclosures, I have asked the following senior leaders to participate in the Q&A Fireside on today's call. Rich Martucci, Interim Chief Financial Officer. Bob Bashua, President. Dr. Giovanni Barbarossa, Chief Strategy Officer and President, Materials Segment. Sohail Khan, Executive Vice President, Silicon Carbide LLC, our newly created subsidiary for our Silicon Carbide business. Dr. Chris Thorman, Executive Vice President, Lasers, who came to us through the Coherent Acquisition, Magnus Bengtsson, Chief Commercial Officer, who leads our global sales and service organization, and who also came to us through the Coherent Acquisition, Dr. Sanjay Pathasarathy, Chief Marketing Officer, and Dr. Julie Ng, Chief Technology Officer. As being among the industry's best, they will provide investors a rich source of information about the depth and breadth of our markets, technologies, operations, and overall business. We emerged from the second quarter with greater confidence and excitement regarding a return to stronger growth and meaningfully enhanced profitability. For the quarter, we delivered solid sequential improvement in revenue and margins. The highlights of our second quarter include healthy sequential increases in both gross and operating margin, ongoing AI-driven strength in the datacom vertical of our communications market, signs of improving demand in all four verticals within our industrial market, and the telecom vertical of our communications market for the consummation of the previously announced transactions with Mitsubishi Electric and Denso Corporation, in which they invested an aggregate of $1 billion in our silicon carbide business and entered into long-term supply agreements, supporting demand for silicon carbide substrates and epitaxial wafers, and five, an increase in our planned debt repayment in fiscal 2024, resulting from the silicon carbide LLC being able to fund its own operating and capital expenditures. While we expect that the higher revenue in the mix in our forecast will contribute to a rebound in margin structure, we are not waiting for improved end market demand to carry us. We've already implemented actions across virtually all of our businesses in a drive for enhanced operating efficiency. These actions, along with rigorous cost and expense control across the company, help drive our sequential improvement in gross and operating margin in the second quarter. We are on a roll, but we're far from done. As we continue to transform the company to improve operating performance, we will optimize our production footprint and enhance operating resiliency while completing the integration of legacy coherence. We also are exploring other strategic opportunities, not including material acquisitions to unlock shareholder value. Now for some numbers. While the macroeconomic environment continues to present challenges, we are pleased with our operating results for the quarter. We posted revenue of 1.131 billion, which was above the midpoint of our guidance, and non-GAAP EPS of 36 cents, which was above the high end of our guidance. Operating cash flow was 67 million. We invested 91 million in capital equipment and we retired $89 million of debt. In addition to continuing to invest in our core assets, we are taking substantive actions to ensure we improve our resiliency and operating performance, especially to drive improvement in our margin structure, including through global integration and transformation and the realization of our Synergy Plan from the Legacy Coherent Acquisition as well as our previously announced restructuring and consolidation plan. Our guidance for the third quarter of fiscal 2024 is as follows. Revenue of approximately 1.12 to 1.20 billion. Non-GAAP earnings per share of approximately 32 cents to 52 cents. And our updated guidance for fiscal 2024 is revenue of 4.55 to $4.70 billion, which represents a $50 million increase at the low end of our previous guidance. Non-GAAP earnings per share of $1.30 to $1.70, which is up from $1 to $1.50 previously. Before we take your questions, I would like to say how appreciative and how proud I am of the senior leaders on this call and all of our other employees whose tireless dedication for setting the stage for what's now, next, and beyond. Coherent is well-positioned with differentiated technology, exceptional talent, and high-quality, efficient manufacturing platforms capable of delivering products to markets that are rapidly growing. And I believe we are better positioned than others to take full advantage of our existing market positions and to penetrate deeper into these markets, largely because of the intimacy, trust, and partnerships we have cultivated with market leaders and our increased scale, creating stability in our core business and creating a flywheel effect of other growth opportunities that many of our competitors simply don't have. In the upcoming years, we have tremendous upside potential in platform cost optimization attributable to the ongoing legacy coherent integration, special restructuring, and transformation projects that we've announced. We expect success given our proven track record and have a strong plan and roadmap in place, which will allow us to capitalize on the recovery and growth in our markets and of the broader market opportunities. We are endowed with 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 it over to Paul.
spk13: Paul? Thank you, Chuck. We will now open the call for analyst questions. Please limit yourself to one question. This call is scheduled for an hour. With that, Carmen?
spk26: Thank you. One moment for our first question. And as a reminder, that is star 1-1 to get in the queue. Our first question comes from Samik Chartagy with JP Morgan. Please proceed.
spk09: Hi. Good morning, and thanks for taking my question. Congrats to the entire team there on the strong execution. Maybe just because it's one question, if I keep to Datacom and In the shareholder letter, you refer to number of new significant AI-related customers that you have engagements with. If you can give us a bit more insight about the nature of those customers, the magnitude potentially of those engagements can turn into if you were to win those awards relative to the existing orders that you have. And then just a quick clarification, you did have 100% sequential growth in Datacom 800 gig revenue on capacity ramp, is that roughly where we should expect sort of capacity to linearly expand from here on? Thank you.
spk08: Good morning, Samik. Thanks for your question. Sanjay? Sure. Thanks for your question, Samik. So with any large-scale deployment of new technology, the few hyperscalers drive it, and now we are seeing that to extend more broadly. We are also engaged with new NEMs, as well as up and down the entire ecosystem. So we have a very broad group of customers that's continuing to grow in terms of engagements. Anything on the capacity?
spk09: Did that answer your question? Yeah, anything on the capacity ramp, Sanjay?
spk08: So in the capacity ramp, we did say in the shareholder letter that we grew 100%. That's basically our 800G shipments, 100% quarter over quarter. In our ramp-up plans, we hit the quarterly – We crossed the quarterly run rate of $100 million. And we also said that in fiscal 24, Samik, that over 50% of our data contract receiver revenues will be from AI-related applications. So we are really excited with the ramp and the growth of the market.
spk19: I'm expecting the third quarter will be greater than the second quarter and the fourth greater than the third, Samik, if that gives you any indication. Yeah, sure. Thank you. Thanks for taking the question. Thank you.
spk26: Thank you. One moment for our next question, please. Comes from the line of Ruben Roy with Stifel. Please proceed.
spk25: Thanks very much, and I'll echo my congrats to the team. A follow-up for my one question on networking as well. Chuck, just trying to understand the commentary around the supply constraints. Sounds like they improved. Lead times are shortening. would you say the majority of the supply constraints are behind now and it's a question of shipping to demand, or are there still some components that are out there that are in short supply? Is that kind of a limiting factor to the rest of the year on your AI transceiver shipments?
spk19: Okay. Thanks a lot, Ruben. Ruben, as you know, anytime you go through such a steep ramp, what's lying in front of you with regard to constraints is what you're trying to get out in front of. So if you look in the rear view mirror, the constraints have surely eased and moderated. But when you see the size of the ramp that we're going up, we have to manage a number of constraints. The first constraint, then the second and third, we have to anticipate them. We have to get our agreements with suppliers in place. And we're looking beyond FY24. This is a super, super excited and super hot market. So we're in the process of looking out well into FY25 to be sure that our supply chain can keep up with us. I hope that answers your question, Ruben.
spk25: It does. Thank you for that detail, Chuck.
spk26: Thank you. One moment for our next question, please. And it comes from the line of Ameta Marshall with Morgan Stanley. Please proceed.
spk28: Great. Thanks. A couple of questions. One, just what are you seeing on inventory of under kind of these 800 gig or AI transceivers and just kind of when you expect some of the demand for that business to come back. And then just kind of on top of that, you know, a couple of quarters ago, you had noted that you had a couple hundred million of orders that if you ramped capacity, you expected to be able to fulfill during this fiscal year, obviously. you guys are kind of ramping a little bit faster than expected just in terms of that kind of couple hundred million that you outlined earlier in the year. Just how do you feel like you're going to be able to meet or exceed kind of those excess demand?
spk08: Thanks, Rita. Thanks for your interest, Sanjay. Yeah, thanks for your question, Mela. So we just said in our shareholder letter that we shipped over 100 million in 800G transceivers last quarter. It was much smaller the previous quarter. It grew almost 100% quarter over quarter. And then we also said, Meera, that in fiscal 24, 50% of our Datacom transceiver revenues will be from AI-related applications. So we are projecting a very strong growth in our 800G shipments. We are on a ramp up, as Chuck referred to earlier. Hopefully that answered your question.
spk28: I guess, but just in terms of what are you seeing in terms of inventory clearing on the kind of sub 800 gig versus 800 gig? I mean, I understand the 800 gig commentary, but what are we seeing just in terms of any other demand on the remainder of the business?
spk08: Okay. So we haven't factored in any huge rebound in the non-AI business in Datacom. And that's one of the, but most of the growth is in 800G. Pretty much all of the growth is in 800G. And that's why we said over 50% of our fiscal 24, our revenues will be from AI and related 800G products.
spk28: Great. Thank you.
spk08: Thank you. Thank you.
spk26: Thank you. One moment for our next question, please. And it comes from the line of Simon Leopold with Raymond James. Please proceed.
spk33: Thanks for taking the question. I wanted to, as well, talk about what's happening in 800 gig data center transceivers. And I'm looking for your thoughts on how you can compete in this market. And I'm struggling, candidly, because it seems like demand is great, which should be margin favorable. But some of your competitors probably are willing to take lower margins. And so that might pressure profitability. Could you help us understand how you're thinking about that? Thank you.
spk07: Thanks, Simon. Johnny, would you like to give a... Simon, thanks for the question. Well, you know, as a reminder, we are the most vertically integrated player in the space. So, you know, we heard, for example, people talking about shortage of pixels. Well, guess what? We have the largest pixel supply in the world by far, so including obviously our competitors. So, you know, we have a very good kind of control of the supply line for the mosquito components other than ICs. And we have our own manufacturing. We have pretty much the most complete laser offering in the space, both the 100 and 200G, as we announced in the past. So we think that will be very, very powerful, not only to remain competitive, but from the standpoint and roadmap standpoint, which are very strategic to our hyperscale customers and the like, but also from a cost structure standpoint, we think that we will have always the best margin profile versus those that have to pretty much buy everything from the merchant market. So we are very captive in many of these technologies that will be an advantage from a profitability standpoint.
spk19: I would add, Simon, thank you, Giovanni. I would add, Simon, that we have a full portfolio products that we're making for today and developing for tomorrow. Those are going to be even more exciting than the ones we're making today. And for us, having full control, as Jelani just described, our focus is on time to market, time to volume, and time to profitability. And that's where it needs to stay. We have a track record. It is a competitive market, that's for sure. We're intending to compete. Thank you.
spk26: Thank you. One moment for our next question, please. Comes from the line of Jed Dorschmer with William Blair. Please proceed.
spk29: Hi, thanks. Most questions seem to be on Datacom, so I'll be different and just, I guess, two-part question. Maybe just an update on the, I saw, I think it's maybe the first time that I've seen you kind of highlight or call out But on the micro-LED, could you just talk about the products of Coherent there that you're offering? And then on silicon carbide, there's been some cross-currents of data points in the market. I'm just wondering if you might be able to update on, Sohail, what you're seeing from the customer base there. Thanks.
spk19: Good morning, Judd. Thanks for your two questions. Chris will go first, and then Sohail. Chris?
spk05: Yeah, thanks, Chuck. Yeah, so we spoke about the micro-ID development that we have in previous quarters and about the multiple orders we received from China, Taiwan, and Korea for the tools for a process called laser-induced forward transfer, which is where you take the currently 10 micron moving towards 5 micron micro LEDs from the wafer to the display. So we're seeing increasing customer engagement and are very excited about the impact of micro LEDs on the television market. And this is a very high level of engagement now and a market that will be growing over the next three to five years. Thank you, Chris. Soil?
spk17: Hello. Can you hear me?
spk06: Yep. Thanks for your question that we are quite bullish about the silicon carbide market and the growth prospects over the next five to 10 years. And based upon that, we are sticking with our plan, which is driven from the customer engagement as well as long term supply agreements which we had in place. The announcement with Mitsubishi and Denso has strengthened our position and we are seeing more engagement and especially a lot of interest from both existing and new customers for 200 millimeters. So we are going to stick to our plan of the investment and expansion, and we will continue to see the growth of our business quarter over quarter and year over year. Thank you.
spk17: Thank you, Shoram.
spk26: One moment for our next question, please. It comes from the line of Richard Shannon with Craig Helm Capital Group.
spk24: Hi, guys. Thanks for taking my question. Maybe I'll ask a financial one here. It seems like after a couple of quarters of OPEX being flat to down, or I guess a little bit more down on a pro-form basis, it seems like you're implying it growing here at a fairly steady rate here, which seems to be antithetical to the synergy and restructuring plan I think you pronounced one or two quarters ago. Can you help us understand why that is, why it seems to be growing at a decent rate after bottoming out here?
spk19: Thanks a lot. Good morning, Richard. Rich will take it.
spk31: So, yes, as you pointed out, our synergy plans and cost reduction has kept our expenses down in the OPEX. The big thing that you see in the ramp-up as we go forward in the guidance really is around R&D, around our AI product. as well as other initiatives that we have in place. So that's really the increases coming from the R&D. We've done a really good job in our SG&A expenses.
spk19: Those R&D investments in the second half of the year, Richard, are aimed for FY25 and beyond on the basis of new information that we've received in the last one or two quarters from our customers with great clarity.
spk24: Chuck, any way you'd want to characterize where those investments might sit, like by your segments or end markets or anything like that?
spk19: In those markets that are growing, growing extremely quickly, starting with AI, Richard. Everything starts with that. Okay, great. Thanks for that detail. Thank you, Richard. Yep.
spk26: Thank you. One moment for our next question. Nick Holmes from Carl Ackerman with BNP Paribas. Please proceed.
spk03: Yes, thank you. Good morning. As you indicated earlier on this call, VIXL supply is critical right now on the ramp of both 800 gig and 1.6T transceivers. How has your internal capacity supported or helped your design wins for 1.6T, which you indicated will be ramping later on this year? And I guess if you could address that, Perhaps we could also discuss the ramp of 1.6T over the next couple quarters. Thank you.
spk19: Okay, good morning, Carl. Thanks for your question. Joanne will take it, and if there's anything to add that Julie would like to add to clarify, she will.
spk07: Please, Joanne. Thanks for the question. I mean, as we said earlier, you know, we have our own facility. Actually, we have two facilities, two free-for-fabs that are capable of producing Datacom, but at this point in time, We're relying on only one FAB, and it's ramping, like, you know, needed by our internal customers and, of course, our external customers, too, which are our competitors. So, as we said earlier, we have the advantage of being basically integrated to have a very good understanding of the needs of the supply required by our both internal and external customers. So, we have full control of that. And, you know, we have had... similar ramps in the past. This is a challenging ramp in terms of the data rate. But nevertheless, I think we are doing a great job in keeping up with the demand both internal and external supply. So at least we're shipping based on demand. We are not behind, even if we still need to grow as requested by the forecast. So we are We are following up with the demand as we see it right now, so we don't see that being a challenge, at least for our Bixell supply.
spk19: Julie, would you like to add regarding Carl's question on 1.16?
spk30: Right. Just to add to what Giovanni said is we also were one of the few in the industry, actually, that can make these very high-speeders. It's a unique capability.
spk19: Thanks. Thank you for your question, Carl.
spk26: Thank you. One moment for our next question, please. And it's from Vivek Arya with the Bank of America Securities. Please proceed.
spk22: Hi, this is Blake Friedman. I'm from Vivek. Thanks for taking my question. On gross margin, you provided a useful outline on actions to return to 40%. But can you maybe quantify all the puts and takes ranging from unproven utilization, operational efficiencies, and new products? And this goes back to a previous question, but on MIX, just given the momentum in AI transceivers, are these products at or above the corporate average gross margin today?
spk19: Hey, good morning, Blake. Thanks. Rich?
spk31: So, two-part question. The first question is the AI, and I think in the last earnings call, we did mention that it is at the average of the corporate average in terms of margin. In terms of our ability to to drive margin in the future, obviously the first thing is volume. That's one. The second is utilization within our FABs, which really two of our six FABs have really improved in terms of the utilization. And also the reliance of our synergy plan, the reliance of our restructuring plan is really going to be utmost of importance in terms of increasing our gross margin going forward.
spk22: Thank you.
spk17: Thank you.
spk26: Thanks. One moment for our next question, please. It comes from the line of Christopher Roland with Susquehanna. Please proceed.
spk21: Thanks for the question. Yeah, can you hear me?
spk26: Can you hear me now? Yes.
spk21: Hi, great. Thanks for the question, and congrats on the results. I just had one clarification and one question. First, the clarification, the primary gating issue on AI is 800 gig Vixels. I just wanted to make sure whether I got that right or not. And then secondly, I wanted to talk about telco. So we're seeing more and more kind of weak data points coming out for telco. But it kind of feels like maybe you're going to tell us that could be in the rear view mirror for you guys. So is December the clear bottom there? Are you expecting to kind of grow through the year here? And where can we kind of normalize out on a quarterly run rate for telecom looking forward? Thanks.
spk19: Okay, Chris. Joanna will clarify your question regarding VIXLs, and Magnus will take the telecom question.
spk07: Yes, so let me clarify. Let me try to be clear. No, it's not. Okay, so we don't have a challenge from a supply standpoint, from the VIXO standpoint. Of course, when you have a production of transceiver modules, there's a number of other things that need to happen, including test automation of assembly lines, you know, new processes. And, of course, there is also an external supply chain, particularly around ICs. that will impact our ability to ramp. So everything is coming together. And, you know, based on the demand, the demand is definitely stronger than what we could supply. We are capacity limited, but not necessarily from a device standpoint, but just as an overall ability to ramp to the volumes that we have been caught by surprise by our customers in terms of the most recent forecast versus previous forecasts. We are very aligned with roadmaps. We know exactly what the customers are looking for, for next-generation products. And so we'll adapt our internal supply chain to keep up with the demand. Currently, we don't have experience. Going back to your first question, we don't experience a challenge from a VIX production standpoint. And I want us to recall that we have sufficient capacity for both internal and external suppliers. So we can manage that as we need to support our own transceiver business, obviously, as a priority.
spk11: Thanks, Giovanni. And would you take the telecom question? Sure. Good morning, Chris. So in telecom, we saw growth in the December quarter over the October quarter by about 20%. And if we look out for the balance of the fiscal year, we expect double-digit growth second half over first half. And beyond that, in 2025, as the market improves, we expect additional growth, both from the market coming back, but also a lot of the engagement we have with customers on design wins for new products. Great. Thanks, Magnus.
spk19: Thanks for your question, Chris. Thanks, guys.
spk26: Thanks. One moment for our next question. It comes from the line of Mark Miller with the Benjamin Company. Please go ahead.
spk04: Thank you for the question and congrats on your progress. Just was wondering in terms of new applications for Vixels in terms of automotive and other applications, what are you looking at over the next 12 months or so?
spk19: Great. Good morning, Mark. Julie, will you take that one?
spk30: Sure, sure. Yeah, so Vixels, in addition to the DataCom market, can be used in the sensing market. Obviously, we're in the sensing world in mobile phone applications. And then in addition to that, you can use Vixels for all kinds of other sensing, including, you know, in a vehicle, potentially in health applications, So many potential future applications of VIXILs in fencing. Thank you.
spk19: Thanks, Julie.
spk30: Thank you, Mark.
spk26: Thank you. One moment for our next question, please. Comes from the line of Tim Savageau with Northern Capital Markets.
spk20: Hi, good morning. And I'm sorry if I might have missed this earlier. but you talked about 800 gig transceiver shipments at about 100 million in the quarter, kind of doubling sequentially. Do you have an outlook for where you expect that number to go, either in fiscal Q3 or by year end? And I'll follow up from there, thanks.
spk19: Yeah, okay, Tim, thanks for your question. Tim, what we said, that you may have missed is what I said, is I expected our shipments in Q3 to be greater than Q2 and in Q4 greater than Q3. We're on a ramp. It's going up and to the right.
spk20: Okay, well, if I might maybe follow up on that a little bit. I mean, you're talking about fairly modest sequential growth here for Q3 and growth in telecom. So I guess... Are you looking for, and even if you look at your Q2 results, it seems like the lower speed stuff might have come down pretty good. So you're seeing some offsets there. Is sort of that the dynamic for, you know, overall Datacom revenue or, you know, what are the puts and takes? Or is that ramp slowing a bit, I guess, you know, from the rate that obviously...
spk19: It really is an insightful question. Meeta, Marshall had the same question, and Sanjay tried to address it. Let's let him take another pass at it.
spk08: Okay. So thanks for the question, Tim. Good morning. So in terms of the market, the market, the fastest growing segment of the market is 800G and above, which is really AI. You know, we just redid our forecast on the market. It's growing at a 65% category in the next five years, Tim. So it's a very sharply growing market, and we expect, we aim to grow faster than that market. Now, the traditional networking market is certainly not growing at that cliff, and we are not really factoring a significant rebound in our non-AI, if you will, market growth or our revenue growth. So a lot of our revenue growth is coming from AI-related applications. Hopefully that's clear. Thank you, Sanjay.
spk20: Yep, I'm a little late. Sorry. Thanks, appreciate it. Thanks. Yeah, thanks, Tim.
spk26: One moment for our next question. And it's from Ananda Barua. Ananda Barua with Loop Capital. Please proceed.
spk32: Yeah, good morning, guys. Thanks for taking the question, and congrats on the strong execution. Yeah, actually, just to follow up there, Sanjay, clarification, is that the – I guess what is 65% growth over the next five years specifically?
spk08: Hi, Anand. Good morning. It is the growth of 800G and above transceivers, Datacom transceivers, from calendar 23 to calendar 28.
spk32: I got it.
spk08: It's at a 65% category.
spk32: Super helpful. And I guess my question is, any way to think about yet the transceiver opportunity for Gen AI outside of the hyperscale complex? And so specifically, I'm thinking at telcos and on-premise, say, like Fortune 1000 types. And that's it for me.
spk19: Okay. Good morning, Ananda. Julie will take the next one.
spk30: Good morning. Good morning, Ananda. Yeah, so the Obviously, the biggest deployments are at the biggest web scale, and as time goes on, that spreads out, as you point out, to other smaller entities that could either host services or people may choose to have their services on-premise, so that diversifies the customer base, similar actually to the Ethernet market. So the gen AI, I forgot the second part of the question.
spk19: With regard to will it spill over to telecom?
spk30: Oh, thank you, thank you. Yes, eventually it all spills over to telecom, because all that data that's getting generated inside has to go somewhere. So we do believe that that will impact our telecom revenue in a positive way over time. Should impact eventually also non-AI datacom revenue. And then finally, something that might not be so direct of a comparison, but these Gen AI chips also require the most advanced process nodes, and that's beneficial to our industrial segment for our SEMICAP inspection lasers.
spk17: Thanks, Julie.
spk19: I would add that besides DATACOM, the DATACOM and telecom verticals. We have a semi-cap equipment business, and it's also underpinning the growth in AI by providing new tools, including laser-based tools and engineered material tools to OEMs that have to build the equipment to make the devices. I mean, we have it surrounded. Yeah, that's great. Thank you, Jeff. Thanks, Anatha. Thanks, Anatha.
spk26: Thank you. One moment for our next question. And it's from the line of Dave Kang with B. Riley. Please proceed.
spk10: Good morning, Dave. Thank you. Thank you. Good morning. Questions on ARM lasers. Chuck, I think you talked about in the past that ARM lasers is an eight-figure opportunity and could reach nine figures if you successfully penetrate the Chinese market. Just wondering if you can give us an update there.
spk19: Thanks, Dave. Thanks for asking about one of our other super exciting opportunities. Giovanni?
spk07: Dave, thanks for the question. Yeah, we're making a lot of progress. Actually, just recently, we learned that a major battery maker in China kind of displaced our competitor laser to replace it with our ones on the production line. So we think it's going to be a huge opportunity for gold, since it's one of the largest battery makers in the world. So we think, in addition to the existing customers, they keep ramping production and see the major advantage of the you know, spot-free and, you know, no porosity kind of weld quality provided by our arm laser beam profile, we believe that, you know, we continue to grow in the market space, you know, and it's not going to be limited just to batteries for EVs. I think we're seeing also the application beyond that, you know, not only in the automotive market, but, for example, in the semi-cap equipment market, we've been engaged recently working on some advanced lithography tools to provide laser welding for some special alloys parts that are needed by those tools.
spk19: Dave, we're aiming to drive a paradigm shift when it comes to laser welding.
spk26: Got it. Thank you. Thank you. One moment for our next question, please. me comes from the line of Jim Ricciotti with Needham and company please proceed.
spk15: I wonder, hi, Chuck, I wonder if you could elaborate on the comment early on in the shareholder letter that you would consider other strategic opportunities to unlock shareholder value. I'm wondering what that means. Are you suggesting that you might pursue some smaller M&A to maybe expand in some areas that you may not necessarily have the presence you want to have?
spk19: That's a great, great question. We're from time to time asked about it. We are prudent stewards of our capital. And let me ask Bob Bashore, our president, if you'd like to remark.
spk16: Yeah, sure. Yep, I'm happy to, Chuck. Yes, as you know, we have We've been open to all kinds of transactions in the history of the company, and we are both great partners, and as Chuck said, shareholder value is always our driver. So we are actively, like we have been for 51 years, considering lots of alternatives to grow shareholder value. As we indicate in the shareholder letter, these are probably going to be smaller transactions, not material, but that is our focus across all range of potential transactions.
spk15: But is it a case of expanding in some areas that you're underserved in? Is that the focus?
spk16: Well, for sure. If you look at all the technologies and the opportunities we have, there are a lot of corners that we can look in for areas to grow. There's also tremendous opportunities to partner. So we have we are considering all of those options and have active engagements in those areas.
spk17: Thank you. Thank you, Jim.
spk26: Thank you. Thank you, Bob. One moment for our last question, please. And it comes from the line of Mike Genovese with Rotten Blood Securities.
spk02: Hi, good morning. And I guess I'll go to beating the dead horse here. When I parse your comments on 800G as a percentage of Datacom transceivers this year, you know, I end up somewhere in the range of revenue should be 70 to 150% higher than the 300 million you talked about entering the year. And so, with that as the preamble, my two-part question is, are we still looking at 20% of the revenues being in the first half of the year and 80% in the second half of the year, like you guys said last quarter, or is that sort of, has that changed a little bit? And then secondly, just as we look at fiscal 25, should we put Sanjay's CAGR, which I think you said was 55%, if I heard that right. I mean, is that roughly the right way to think about where we start for fiscal 25 growth in that business? Thank you.
spk08: Okay. Thank you, Mike. Okay, Sanjay? Yeah, thanks, Shep. Morning, Mike. So I think our revenue pattern is pretty much in line with what you stated in terms of our growth rate. Obviously, we are aiming to do even better than that in terms of the second half of the fiscal year.
spk19: And mind you, 65% is a five-year CAGR, so you need to keep that in mind, Mike.
spk02: Yeah. But I'm sorry, but I guess 2080, though, is that we're still targeting 2080. That hasn't flattened out a little bit because of the good performance in 2Q. It's still 2080? It's close to that.
spk19: It's close. Maybe a little bit higher than 20 and a little lower than 80, but it's roughly right.
spk18: Okay, great. Thanks so much. Great job. Thank you. You're welcome. Thank you. Thanks for your comments.
spk26: Thank you. And this concludes the Q&A session. I will turn it back to Paul Severstein for any final comments.
spk13: Thank you, Karin. I want to thank all the analysts on the call for their thoughtful questions. And I want to thank all of you on the line for having joined us this morning. We look forward to talking to you in the future. Thank you.
spk26: Thank you, ladies and gentlemen, for joining us today. You may now disconnect.
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