Coherent Corp.

Greetings and welcome to the Coherent's fourth quarter and full fiscal year 2025 earnings webcast. 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 Tim Anderson, Coherent CEO, and Sherry Luther, Coherent CFO. During today's call, we will provide a financial and business review, the fourth quarter fiscal 2025, and full year fiscal 2025, and the business outlook for the first quarter fiscal 2026. 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 first quarter of fiscal 2026. 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. Our fiscal 2025 was an outstanding year for Coherent as full year revenue increased by approximately 23% year over year to a record $5.81 billion, driven by strong growth in our data center and communications business. Our revenue growth combined with gross margin expansion of 358 basis points led to an approximately 3x increase in our non-GAAP EPS over the prior year. In addition, Q4 marked a strong end to the year with revenue increasing 16% year-over-year to a new record and non-GAAP EPS approximately doubling year-over-year to a dollar per share. Having completed my first year with Coherent, I'd like to take the opportunity to thank my Coherent teammates for their outstanding focus and execution over the last year and their help in positioning the company for continued long-term growth. At Coherent, almost everything we do touches a photon in some way. We believe there is no other company with a broader and deeper portfolio of photonic technology, expertise, and innovation. Photonics is becoming increasingly critical to many applications, including AI data centers, communications, and a wide range of industrial applications. And Coherent is well-positioned to take full advantage of this opportunity. We're excited about the future and I couldn't be more proud to be part of such an incredible team. Let me provide some market and product updates from the past quarter. In our data center and communications market, revenue grew by 51% in fiscal 25. In Q4, revenue grew 5% sequentially and 39% year over year. For fiscal Q4 and full year, we saw a strong growth in both AI data centers and communications. In the data center market, full year revenue increased by 61%. For Q4, we again achieved record quarterly revenue with data center revenue growth of 3% sequentially and 38% year over year. We continue to see strong bookings and demand forecasts across our data center customers as they continue to invest in AI data center capacity expansion. In fiscal Q4, we were pleased to see initial revenue shipments of our new 1.6T transceivers and we continue to expect 1.6T volumes to ramp throughout the balance of this calendar year with more meaningful revenue contribution in calendar 26. In the meantime, demand continued to grow in Q4 for our transceivers with data rates below 1.6T. Beyond 1.6T, we continue to make solid progress on the development of our 3.2T transceiver products and technologies, which will support a range of optical data transmission form factors. Our 400 gig per lane differential EML, which we demonstrated earlier this year and is the foundation of 3.2T transceivers, is recognized by our customers as a key advantage of Coherence Technology Roadmap. We also continue to make progress on CPO related products and technologies with strong engagements across a wide range of customers. For example, one of the key technologies behind CPO applications is CW lasers, We have a long history of producing CW lasers, and we drove a significant increase both sequentially and year-over-year in our CW laser production in Q4, and we expect to continue to rapidly ramp CW laser volume over the coming quarters. To meet the rising demand for our optical networking solutions that use EML or CW lasers, we continue to ramp internal production of indium phosphide. which is the key technology behind EML and CW lasers used in both pluggable transceivers and CPO applications. As a reminder, we've had indium phosphide capability in-house for over 20 years, and indium phosphide-based transceivers account for a majority of our Datacom transceiver revenue, with a majority of our EML-based transceivers utilizing our internally manufactured EMLs. We've tripled indium phosphide capacity year over year, and expect to continue to expand capacity over the coming quarters to support the strong demand signals from our customers. For example, I'm pleased to announce that we will begin production this month of our new 6-inch Indium Phosphide line in Coherent's Sherman, Texas facility. This is the world's first 6-inch Indium Phosphide production platform and is expected to provide us significant advantages in terms of both lower cost and higher volume production. and it will further enhance our industry-leading supply chain resiliency. In addition to indium phosphide, our Sherman, Texas facility is also a site for Vixel production on gallium arsenide technology. As mentioned in a recent Apple announcement regarding their American manufacturing program, we've entered into a new multi-year agreement with Apple for a new generation of Vixel products that support Apple's iPhone and iPad products. We expect revenue from this expanded partnership with Apple to begin in the second half of calendar 26. The Vixels for Apple are manufactured in our Sherman, Texas facility and will help support the long-term growth and utilization of the site. I want to thank Apple, which has been a long-standing customer for this important multi-year agreement. This agreement highlights the importance of our supply chain resiliency and flexibility, including our significant U.S. manufacturing footprint. In fiscal Q4, we also began initial revenue shipments of our new optical circuit switch. As a reminder, this new product represents a $2 billion expansion of our addressable market opportunity. The underlying technology in our OCS has tremendous benefits versus mechanical MEMS-based solutions offered by others, as our solution is non-mechanical and is based on field-proven digital liquid crystal technology that's been deployed for many years in demanding telecom applications. Customer engagements on this new product continue to grow, and we expect revenue to ramp through the remainder of this calendar year and to contribute more meaningfully in calendar 26. We also delivered strong growth for both full-year fiscal 25 and Q4 in our communications business. This business is comprised of both traditional telecom as well as data center interconnect. Communications revenue increased 23% for fiscal 25. For Q4, we saw accelerated growth in this segment, as communications grew 11% sequentially and 42% year-over-year. Growth was driven by robust demand for our ZRZR Plus DCI-focused new product introductions and ongoing recovery and end demand in the 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 increase their revenue contribution throughout fiscal 26 and beyond. In particular, our 100-gig ZR product family is ramping rapidly. Driven by strong customer traction for this uniquely differentiated solution, we productized multiple variants and have several more in development across multiple applications. We believe both AI data centers as well as communications will be strong long-term growth drivers for the company, given the exceptional breadth and depth of our photonic technology. Turning to our industrial-related end markets, revenue decreased 2% for the year. For our fiscal Q4, revenue decreased 2% sequentially and 8% year-over-year. For the full year, we delivered above-market growth in our industrial laser products and services. which was offset by a decline in our silicon carbide business, which was consistent with software and market demand in the automotive segment. In our industrial laser products, where we lead the industry with the widest and deepest portfolio of industrial lasers, fiscal 2025 growth was driven by growth in both product sales as well as growth in our recurring services revenue stream. Year-over-year growth was driven primarily by display capital equipment and semi-cap equipment markets. In particular, display capital equipment growth was driven by growing demand for our laser systems and services that are used to support the capacity expansion of OLED fabs. As OLED screen adoption continues to grow and total OLED surface area is expected to double over the coming years. Across our industrial laser products, our recurring services revenue stream grew faster than product sales. As we discussed at our investor day, we continue to expand the installed base of our industrial lasers and we expect the recurring service revenue stream to continue to become a larger component of our overall industrial revenue over time, which is a tailwind for our gross margin. For our materials products, fiscal 25 revenue, excluding silicon carbide, was flat year-over-year as demand remained stable. During fiscal 25, we experienced a drop in silicon carbide demand, which was a headwind to our overall industrial revenue. However, over the past months, silicon carbide demand has stabilized, and we do not expect this to be a headwind for us in fiscal 26. We continue to see our industrial products and end markets as a strong long-term revenue growth and gross margin expansion opportunity for the company, given our leadership portfolio of hardware and software products and services. On the topic of our investment strategy and our portfolio optimization initiative, as discussed over the past quarters and at our recent Investor Day, We've been driving a series of actions to streamline our portfolio and concentrate our investments in the areas of greatest long-term growth and profitability. As part of our portfolio optimization, today we announced an agreement to sell our aerospace and defense business for $400 million. We expect to close this transaction this quarter. Upon closing, we plan to use the proceeds of the sale to pay down additional debt, and we expect the sale to be accretive to our EPS. We made the decision to sell our A&D business because it was not aligned with our long-term strategic focus areas and it did not support our long-term financial targets. I'd like to thank all of the A&D employees for their tremendous contributions to Coherent over the past years and wish them all the best moving forward. We will continue to look for ways to streamline and strengthen our portfolio moving forward and ensure that our investments are concentrated in the area of greatest shareholder value creation. Regarding the current tariff policy environment, unchanged from last quarter, we do not expect significant impact from tariffs this quarter. Though we do not have full details yet, we believe President Trump's recent announcement regarding semiconductor tariffs may present a competitive advantage for our business. Many of our products, such as transceivers, are today covered by the semiconductor exemption. And as a company with significant US manufacturing operations today, and new investments planned for our Sherman, Texas, Easton, Pennsylvania, and other U.S. facilities, we believe we would avoid the semiconductor tariff. Our extensive U.S. manufacturing footprint is a key part of our overall supply chain resiliency, and we believe this is an important competitive advantage for us. Over the past months, you've heard me stress the importance of Coherent's dynamic, flexible, global manufacturing footprint as a competitive advantage and a hedge against geopolitical risk. Our U.S. footprint is a key part of that strategy. Coherent has a long and proud history of advanced manufacturing in the United States. Leading U.S. manufacturing innovation since our founding more than 50 years ago, beginning with the company's first manufacturing site in Saxenburg, Pennsylvania, which remains our company headquarters. Today our U.S. manufacturing footprint extends across more than 20 U.S. manufacturing locations in 13 states. Across those U.S. manufacturing locations, we employ thousands of people. These sites lead the industry in technical innovation and manufacturing, and we continue to invest in our U.S. manufacturing footprint. In summary, I'm very pleased with the progress we made during our fiscal 2025. We expect fiscal 26 to be another growth year for the company and believe we are well positioned for continued long-term growth as we drive market-leading photonic innovation across our core markets and continue to progress toward the financial targets we provided at our investor day. Once again, I want to thank the Coherent team for all their hard work and dedication. I couldn't be more proud of my teammates and their laser focus on unlocking the full potential of the company. I'll now turn the call over to our CFO, Sherry Luther.