Coherent Corp.

Good day and thank you for standing by. Welcome to the Coherent Corp FY25 first quarter earnings conference 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Silverstein, Senior Vice President, Investor Relations and Corporate Communication. Please go ahead.

Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent CEO, and Sherry Luther, Coherent CFO. During today's call, we will provide a financial and business review of the first quarter of fiscal 2025 and the business outlook for the second quarter of fiscal 2025. Our earnings press release can be found in the investor relations section of our company website at coherent.com. I would like to remind everyone that during our conference call today, We may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements or predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially, from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the second quarter of fiscal 2025. If at any time after this call we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. We will refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the investor relations section of our website at coherent.com. Let me now turn the call over to Jim Anderson, our CEO.

Thank you, Paul, and thank you, everyone, for joining today's call. I'd like to begin by welcoming Sherry Luther back to Coherent as our new CFO. Sherry and I previously worked together at Lattice Semiconductor for almost six years, where Sherry did an outstanding job as the CFO. Prior to Lattice, Sherry worked for 16 years in various finance roles at Legacy Coherent before its acquisition. Sherry's proven track record as a CFO, combined with her long history with the company, has allowed her to hit the ground running, and we're very pleased to have her join our team. I also want to thank Rich Martucci for serving as our interim CFO prior to Sherry's arrival. Rich's leadership and dedication have been a tremendous help to me and the company, and I'm deeply grateful for his commitment and continued dedication to Coherent. Now that Sherry's on board, I'm pleased to announce that we'll host an Investor and Analyst Day in New York on May 28th of next year. At that event, we'll outline our overall strategy, including our end market growth opportunities product and technology roadmap, and long-term financial model. We look forward to the event and sharing more details about our plans to create value for our shareholders. Before I discuss our first quarter results, I'd like to provide an update on the three key areas of improvement that I outlined at our last earnings call, culture, strategy, and execution. I believe improvements in these three areas will transform our extensive innovative technology portfolio and our growing market opportunity into an engine of market-leading revenue growth, expanding profitability, and industry-leading shareholder value creation. First, regarding culture, I've now had the opportunity to visit more than 20 of our sites and meet with many of my teammates across the world. We have incredible depth and breadth of talent, and our employees' dedication is inspiring. My favorite part of our culture is our focus on innovation and we will continue to nurture this fundamental part of our culture. Yet, as I noted last quarter, there is also opportunity to evolve our culture. We're building a faster and more agile company. We've already made numerous changes to simplify and strengthen our organizational structure, empower our leaders, streamline decision-making, and accelerate execution. Cultural change always takes time, but I'm encouraged by our early progress in this area. Second, regarding strategy, we completed the strategic portfolio review that we initiated in June. This portfolio assessment will be the foundation for making organic and inorganic investment decisions moving forward. We applied a set of strategic and financial criteria to sort each of our product lines into one of four categories, growth engines, profit engines, long-term bets, and non-strategic. We've now moved to the next phase, which is to drive actions based on the strategic assessment. For example, we've already shifted organic investment towards our growth and profit engines, where we have conviction that we can drive strong, long-term profit expansion for the company. For instance, we increased investment in new Datacom platforms, such as next-generation transceivers and our new optical circuit switch. We've also started the process of divesting or shutting down product lines and assets that are non-strategic. For example, we recently announced the planned sale of our Newton-Acliffe facility, which was an underutilized and non-strategic asset. The proceeds from the sale of the facility were used to pay down our outstanding debt and reduce overhead costs. Another example is our recent announcement that we're exploring strategic options for our battery technology platforms. Although our non-strategic businesses represent a relatively small portion of our revenue, they're diluted to the company's margin structure and absorb investment capital and focus that would be better deployed in our core businesses. As we optimize our portfolio over the coming quarters, we'll provide further updates, including at our upcoming investor day. Finally, the third area of focus for improvement is execution. Last quarter, I underscored the opportunity to significantly improve operational efficiency and effectiveness. We're tackling the greatest opportunities up front. For example, we've begun engaging our key customers and partners in a much more strategic manner. This approach has already uncovered new areas of long-term growth opportunity with our key customers and partners. Another example is our focus on gross margin expansion. We launched initiatives for pricing optimization and product cost reduction aimed at achieving our goal of operating at a consistent, sustainable gross margin level above 40%. On operating expenses, we are shifting R&D investment to our growth and profit engines, and we are shutting down or divesting highly speculative projects that do not suit our long-term business model. Our go-forward R&D strategy will ensure that investments are focused, efficient, and offer high return. And on SG&A, we are focused on driving greater efficiency and leverage. Evolving our culture, optimizing our strategic portfolio, and improving our operational execution will put us on a path of sustained market leading growth, enhanced profitability and cash generation, and a stronger balance sheet. I look forward to sharing more details at our upcoming investor meeting. I'll now switch gears and provide some brief comments on our fiscal first quarter results. Revenue in Q1 increased by approximately 3% sequentially and by 28% year over year, driven primarily by strong AI-related Datacom transceiver revenue growth, along with improvements in our telecom revenue. Non-GAAP gross margin expanded by 49 basis points sequentially, and our non-GAAP EPS grew by 22% sequentially and by well over 4x year-over-year. Let me summarize what we're seeing by our business by end market. In the communications market, Q1 revenue increased by 14% sequentially and by 68% year-over-year. The sequential and year-over-year increases were driven by strong increases in both our datacom and our telecom revenue. Our Q1 datacom revenue grew by approximately 16% sequentially and by 89% year-over-year due primarily to AI data center demand. We're very pleased with the continued ramp of our 800 gig transceivers and the adoption of those products across a broader set of customers. We also continue to make great progress on our 1.6T transceivers. Having delivered initial samples in the preceding quarter, we continue to expect to begin ramping sales of 1.60 Datacom transceivers in calendar 2025. We're also investing in a broad portfolio of transceiver ingredient technologies that includes Vixels, EMLs, and silicon photonics. The breadth of our extensive technology portfolio allows us to deploy the best technology solution for each customer and application. We showcased this capability at the European Conference on Optical Communications this past September, where we presented a multi-technology Datacon transceiver demonstration at 200 gig per optical lane based on both our differential EML and our silicon photonics platforms. We also continue to make great progress on key enabling components such as 200 gig differential EMLs, 200 gig Vixels, and CW lasers for our silicon photonics solutions. We also recently announced a family of high efficiency lasers to power 1.6T optical transceivers based on silicon photonics. Beyond transceivers, our new DATACOM optical switch platform continues to progress well and is generating significant customer engagement. Our differentiated switch is based on our highly reliable solid state liquid crystal technology and was recognized at ECOC24 with the best product award for data center innovation. We've shipped sample units to key strategic customers, and we expect to begin ramping revenue in calendar 2025. Shifting to telecom, our revenue increased by 9% sequentially and by 17% year over year. Although we continue to take a cautious view of the telecom and market recovery, the sequential revenue growth in Q1 was a combination of end market improvement along with our ramp of new products. especially our new 100 ZR and 400 gig ZR ZR plus coherent transceivers. We're in qualification with our high optical output power C band, 800 gig ZR ZR plus coherent transceivers. And we recently announced an L band version to double the capacity of existing fiber infrastructure. In our remaining markets, which are primarily industrial related applications, aggregate revenue decreased 10% sequentially and decreased 3% year over year. Within these markets, ongoing strength in display capital equipment was more than offset by weakness in precision manufacturing and other subsegments. Display strength is being driven by continued strong demand for our Exmer lasers for OLED screen manufacturing, which is driven by increased OLED adoption in new laptop and tablet computers. We also booked initial revenue for our new Python annealing lasers that are being deployed in Gen 8 OLED display fabs. Across other industrial-related end market subsegments, such as precision manufacturing, we experienced demand headwinds in Q1 that were consistent with broader industry trends. Overall, despite some near-term headwinds, we expect the industrial market to be a long-term growth driver for the company as the end markets recover and as our new products continue to ramp. In summary, after being on board for five months, I'm even more enthusiastic about the opportunity to unlock significant shareholder value based on the depth and breadth of our technology innovation, the size of the market opportunities we address, and the potential to improve our operational execution. We're expecting strong growth in our communications business over the coming quarters, and while some near-term softness persists in our other end markets, We continue to expect fiscal 2025 overall to be a solid growth year for the company. I'll now turn the call over to our new CFO, Sharon Luther.