Coherent Corp.

Greetings and welcome to the Coherent Fiscal Year 2025 Third Quarter Earnings Webcast. At this time, all participants are in lesson-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Silverstein. Senior Vice President of Investor Relations for Coherent. 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 third quarter of fiscal 2025 and the business outlook for the fourth 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 are 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 fourth 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. Additionally, 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 in our earnings release and investor presentation that can be found on the investor relations section of our website at coherent.com. Let me now turn the call over to our CEO, Jim Anderson.

Thank you, Paul, and thank you everyone for joining today's call. I'd like to start by thanking my coherent teammates for another quarter of strong execution and the continued focus on accelerating our pace of innovation as we introduced a number of outstanding new products over the past quarter that will help drive long-term growth for the company. Our fiscal third quarter revenue increased by approximately 4% sequentially and 24% year-over-year to a record $1.5 billion, This was primarily driven by ongoing strong AI data center-related revenue growth and a third quarter of growth in our telecom revenue. We also continued to make solid progress towards achieving our gross margin target of operating above 40% on a non-GAAP basis. In fiscal Q3, our non-GAAP gross margin improved on both a sequential and year-over-year basis to 38.5%. Our revenue growth and gross margin expansion drove a 2.4x increase year-over-year, in our non-GAAP EPS. While I'm pleased with the progress to date, we have much more work and opportunity ahead of us. I'd now like to share some updates on our products and markets. Starting with our data center and communications end market, Q3 revenue increased by 9% sequentially and by 46% year-over-year, with growth in both our AI data center and telecom end markets. In the data center market, we achieved record Q3 revenue which grew 11% sequentially and 54% year over year due to ongoing strong AI data center demand. We have the broadest and deepest portfolio of photonic technologies required for high-speed optical data transmission. Our customers value both the breadth and depth of our technology portfolio, as well as our supply chain flexibility and resiliency, especially in the current environment. At the Optical Fiber Communications Conference in March, we introduced many new optical networking products and technologies. For example, six of our products received awards reflecting innovations at the component, module, and system level. At OFC, we showcased three different 1.6-D transceiver designs based on three different types of lasers, a design based on our EML technology, a design based on our new 200-gig-per-lane VIXL technology, and a third design based on our silicon photonics technology. The three different 1.16 demonstrations illustrate the wide breadth of technology options that we bring to our customers as we partner with them over multiple generations of data rate and architectural transitions. We continue to expect 1.16 to begin ramping during this calendar year. We're making good progress with our lead customers, and we continue to execute well through the typical stages of engineering milestones and customer qualifications. We are also pleased to see continued expansion of our 1.6T customer engagement. While we approach the 1.6T ramp, our engineering team is also focused on the development of our portfolio of 3.2T transceiver products and technologies, which will support a range of optical data transmission form factors. For example, at OFC, we reached a key technical milestone for the industry when we demonstrated our 400 gig per lane differential EML. which is the foundation of 3.2T transceivers and paves the path for future industry adoption of 3.2T transceivers. We also expect to see adoption of our 400 gig EMLs and 1.6T transceivers, where they can provide meaningful benefit to our customers. We also showcased a wide range of co-packaged optical solutions over the past quarter. We announced our collaboration with NVIDIA on co-packaged optics and networking switches for AI infrastructure. And at OFC, we showcased a comprehensive portfolio of optical networking components for CPO applications in both the scale-out and scale-up domain. Indium phosphide is the key technology behind our internally produced EML and CW lasers, with the latter being used in our silicon photonics and CPO solutions. We've had in-house indium phosphide capability for over 20 years. Indium phosphide-based EML transceivers already account for the majority of our data center transceiver revenue, and a majority of our EML-based transceivers utilize our internally manufactured lasers. To meet rising demand for optical networking solutions that use either EML or CW lasers, we continue to expand our indium phosphide capacity. In Q3, we once again expanded our capacity both sequentially and year-over-year, with year-over-year capacity growing by over 3x. We remain on track to introduce our six inch indium phosphide platform, which will provide significant advantages in terms of both lower cost and higher volume production. We expect to begin ramping six inch volume production next quarter. We also continue to make good progress with our new data center optical circuit switch or OCS platform, which drives a significant expansion in our data center addressable market opportunity. The underlying technology in our OCS switch is based on field proven digital liquid crystal technology that has been deployed for many years in demanding telecom applications. Our technology has tremendous benefits versus the mechanical MEMS based solutions offered by others. And our customer engagement and enthusiasm around our OCS platform continues to grow. As I noted last quarter, we've already received our first customer order for this key new differentiated platform. and we continue to expect initial OCS revenue in calendar 2025. In telecom, our Q3 revenue increased 2% sequentially and 21% year-over-year. Q3 was the third consecutive quarter of sequential growth. Revenue growth in Q3 was driven primarily by data center interconnect, along with further improvement in traditional transport market. We saw continued growth in the ramp of our new products, including our 100-gig, 400-gig, and 800-gig ZRZR Plus coherent transceivers and expect these products to continue to ramp over the coming quarters. We also continued to expand our product portfolio and announce new products at OFC to address increasing demand for high-speed, efficient, and scalable metro, regional, and DCI applications. We expect this to continue to be a key growth area for us over the long term. In our remaining markets, which are primarily industrial-related applications, aggregate revenue was relatively stable, with a decrease of 2% sequentially and an increase of 1% year-over-year. In Q3, we saw healthy year-over-year growth in the semi-cap equipment and display capital equipment end markets. that was offset by soft demand in broad-based industrial end markets, such as precision manufacturing. Growth in our semi-cap equipment revenue was driven by increased demand for advanced packaging tools, where our lasers, optics, and advanced materials are being increasingly adopted. In our display capital equipment market, year-over-year growth is driven by ongoing demand for our differentiated Eximer laser annealing systems, which support both Gen 6 OLED FAB expansions and new Gen 8 fabs as OLED screen adoption continues to grow. We expect the total surface area of OLED screen production to double over the coming years as OLED screens are adopted across a broader range of devices. In support to the OLED expansion, we continue to ramp shipments of our laser systems for new Gen 8 OLED fabs. Shifting now to our investment strategy, I'd like to provide an update on our strategic portfolio optimization. We continue to drive a series of actions stemming from the portfolio assessment that we completed last year with several parallel initiatives in motion. One area of focus to optimize our portfolio is to exit or divest non-core product lines. For example, during the March quarter, we shut down development of silicon carbide devices and modules and eliminated the related headcount and operational expenses. We have refocused our silicon carbide business on substrate and epi production, where we have differentiated technology and healthy customer demand. We also discontinued several other unprofitable product lines. Another area of focus is to continue to streamline our asset base and divest underutilized assets. For example, we recently announced our intent to sell our underutilized production facility in Champaign, Illinois. We are also pursuing several other asset optimization actions. As we reduce investment in non-core product lines and streamline our asset base, we continue to concentrate and grow investment in our core growth and profit engines to accelerate shareholder value creation for the long term. We'll provide additional details and examples regarding our strategic portfolio realignment at our upcoming investor day. Regarding the current tariff policy environment, the impact of tariffs to our business in the current quarter is not expected to be significant. One of our strengths, which is valued by our customers, is supply chain resiliency and flexibility. We have a global manufacturing footprint that spans roughly 60 different locations across 14 countries, with roughly half of our manufacturing sites located in the U.S. Our geographically diverse supply chain, combined with the internal production of many of our most critical technology infeeds, provides adaptability and optionality that benefits our customers. To the extent there are changes in the landscape, we will adapt as necessary to support our customers. In summary, I'm pleased with the additional progress we made in our fiscal third quarter and especially proud of the large number of new products and technologies that we introduced. With a high level of uncertainty in the current macroeconomic environment, we're taking a more cautious near-term view of our end market demand. However, we continue to expect fiscal 2025 to be a strong growth year for the company, and we believe we are well positioned for continued long-term growth. I look forward to sharing more details about our long-term plans for the company at our upcoming investor day.