Coherent, Inc. (NASDAQ:COHR) Q1 2024 Earnings Call Transcript

Coherent, Inc. (NASDAQ:COHR) Q1 2024 Earnings Call Transcript November 7, 2023

Operator: Good day and thank you for standing by. Welcome to the Coherent Corp. FY ‘24 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Paul Silverstein. Please go ahead.

Paul Silverstein: Thank you, Kevin, and good morning, everyone. Thank you for joining our first quarter fiscal 2024 earnings call. Today on the call, we have Chairman and CEO, Dr. Chuck Mattera; and a number of executives who Chuck will introduce in a moment. Yesterday after the market closed, Coherent issued a news release and posted a shareholder letter along with an updated investor presentation in the investor relations section of our website. Both of these documents were furnished on a Form 8-K. This morning we filed their 10-Q. Today’s conference call will be available for webcast replay in the investor relations section of our website. Before I turn the call over to Chuck for his opening remarks, please note that following our September overview webinar on our communications market, we plan on hosting our second market overview webinar focused on our industrial market to be held on December 14th.

I want to call everyone’s attention to our shareholder’s letter, which contains our traditional financial statements that were previously set forth in our earnings press release, along with detailed information around our operating performance, key trends, and outlook. We plan to do both of this morning’s call to answering questions from analysts in the investment community. I also want to remind everyone on this call we will refer to forward-looking statements, including all statements the company will make about its future performance and market outlook and actual results may differ materially from these forward-looking statements. Factors that could cause actual results to differ materially are set forth in the first quarter 2024 shareholder letter and in our SEC reports.

Coherent assumes no obligation to update any forward-looking statements, which speak only as of their respective dates. Also during this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the shareholder letter. With respect to historical non-GAAP financial measures, we will limit our discussion to those that are reconciled in the shareholder letter. With that, it is my pleasure to turn the call over to Coherent Chair and CEO, Dr. Chuck Mattera. Chuck, please go ahead.

Chuck Mattera: Thank you, Paul. Leadership development is among the most important jobs of the CEO. Given how extensive our disclosures are in the shareholder letter, I have the following senior leaders with me on the call today. They are Interim Chief Financial Officer, Rich Martucci; Chief Strategy Officer and President of the Materials Segment, Dr. Giovanni Barbarossa; EVP of Lasers, Dr. Chris Dorman, who came to us through the Coherent acquisition; Sohail Khan, EVP of our Wide-Bandgap Technologies Silicon Carbide business; our Chief Commercial Officer, Magnus Bengtsson, who leads our global sales and service org and who also came to us through the Coherent acquisition; Chief Marketing Officer, Dr. Sanjai Parthasarathi, and EVP of our Telecommunications Business Dr. Beck Mason, a recent market hire and one of the industry’s top leaders, who chose to come to Coherent as a place to grow.

They will participate in the Q&A fireside today to provide investors a rich source of information about the depth and breadth of our markets, technologies, operations, and overall business, and especially our leadership talent. And I’m sure you’ll enjoy interacting with them today. In the first quarter, the Coherent team did a good job executing in the midst of a challenging macroeconomic environment. We posted revenue of $1.053 billion, which was slightly above the midpoint of our guidance, and non-GAAP EPS of $0.16, which was above the midpoint of our guidance. Operating cash flow was $199 million, which marked sequential and year-over-year improvement. We invested $62 million in capital equipment and we retired $19 million of debt. Macroeconomic headwinds and uncertainty continue to affect many of our end markets and will continue to constrain our near-term growth and visibility.

Our first quarter results, however, demonstrate the success of our diversification strategy. While some of our markets remain challenged, our silicon carbide business, in which we recently announced $1 billion of investments by Mitsubishi Electric and DENSO, enjoyed another quarter of strong demand. We also enjoyed a second straight quarter of extremely strong demand for our AI-related datacom transceivers and components. Both of these are indicative of the breadth and differentiation we offer the market leaders for disrupting the status quo and underpinning the irreversible market megatrends that we enable. In addition to continuing to invest in our core assets, we are taking substantive actions to ensure that we improve our operating performance, especially to drive recovering in our margin structure, including through global integration and transformation and the realization of our synergy plan from the coherent acquisition, as well as our previously announced restructuring activities.

Turning now to our guidance for the second quarter of fiscal ‘24, revenue of approximately $1.05 billion to $1.175 billion and non-GAAP earnings per share of approximately $0.14 to $0.32. Our guidance for fiscal year ‘24 is revenue of approximately $4.5 billion to $4.7 billion, which is unchanged from our previous guidance, and non-GAAP earnings per share of approximately $1 to $1.50, which is also unchanged from our previous guidance. And while our annual guidance remains unchanged, this simply reflects the confidence we have in that guidance and we continue to believe that we still have very real opportunities to exceed those results by several hundred million dollars as we discussed last quarter. We will not hesitate to increase our outlook as we gain improved visibility regarding our ability to capitalize on these opportunities within fiscal year ‘24.

Now before we turn to your questions, I would like to say how appreciative and proud I am of our employees whose tireless dedication for setting the stage for now, next, and beyond. Coherent is well positioned with differentiated technology, exceptional talent, and high quality, efficient manufacturing platforms capable of delivering products to the market that are growing at high-single-digits to double-digits. And I believe that we are better positioned than others to take full advantage of our existing market positions and to grow deeper into these markets, because of our growing scale and customer intimacy and trust. We are a trusted and valued partner with the industry leaders and that trust and intimacy creates stability in our core business and it also creates a flywheel effect of growth opportunities that many other companies simply don’t have.

We have tremendous upside and platform cost optimization from the ongoing integration, special restructuring, and transformation projects over the next few years. And we have a track record to prove our likelihood of success. We have a good plan and roadmap to take advantage of all of these assets and the opportunity the markets are offering today and to take advantage of the recovery and anticipated growth in our markets. We have 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 the call back over to Paul. Paul?

Paul Silverstein: Thanks, Chuck. We will now open the call to analyst questions. [Operator Instructions] Please direct your questions to Chuck who will decide who is best to respond. Kevin, please go ahead.

See also 20 States With the Highest Gas Prices in the US and Top 20 Diamond Producing Countries in the World.

Q&A Session

Operator: Thank you, ladies and gentlemen. [Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan. Your line is open.

Chuck Mattera: Hey, good morning, Samik.

Operator: If your phone line is muted, could you please unmute the line?

Samik Chatterjee: Hi. Can you hear me now, Chuck? Yes, I can hear you.

Chuck Mattera: Good morning, Samik.

Samik Chatterjee: Yes, good morning, Chuck. Thank you for the comments. And if I can just start, I mean, last quarter you did talk about, and you referenced this in the shareholder letter as well, the capacity increase or the capacity ramp that you’re planning and the incremental orders that you can get from the customers, if your capacity ramp goes full plan or exceeds your current base case. If you can share your thoughts around the ability to sort of exceed that capacity ramp. What are you seeing as bottlenecks and the ability to go to customers and get incremental orders for the AI — from the AI use cases and the 800G Transceivers in relation to sort of executing on that capacity ramp, and I have a follow-up after that. Thanks.

Chuck Mattera: Okay, thank you, Samik. Samik, I’m going to ask Giovanni to take that because he’s got a view all the way from the laser through the transceiver. Giovanni?

Giovanni Barbarossa: So, hey Samik, thanks for the question. So, I would say, generally speaking, we’re doing better than our expectations, but it’s very much a moving target in terms of the opportunity here, in the sense that the target’s getting higher and higher, as particular as we said in the shareholders’ letter, as the engagement with new, significant AI players are increasing, particularly those players that we have not been historically strong at. So we think that the overall opportunity is getting larger and our ability to meet this larger and larger opportunity obviously gets more complex, more challenging, but I think we have the all hands on deck and the entire team is focused on several of the needs to ramp, which are not only related to the supply chain, because as new products, and this is a, as you know, 800G is a very much new product, there are all these MPI-related challenges to bring up to speed, you know, the manufacturing lines, the test equipment, the, you know, of course, supply chain, as we said, but most important to make sure that we deliver high quality products to our customers the volumes that are replacing us to ramp.

Samik Chatterjee: Thank you. And so for my follow-up, if I can just ask about the long-term guidance that you gave in the shareholder letter about 40% gross margin and 20% operating margin that you’re looking at. Can you share some thoughts about, how you’re thinking about getting — make progress to that in relation to cost versus what you need in terms of top line recovery to get to those margin levels? Any thoughts around how much of that we get from cost saves that you’re outlining versus any level of volume recovery that you need? Thank you. Okay. Thank you, Samik. Rich?

Rich Martucci: Thank you. We will benefit from ongoing class reductions, which include our restructuring and synergy plans, higher volume as noted in our guidance, better mix of product on higher margin products, and long-term continued leverage — to leverage our NPI, as well as vertical integration where we can drive margin improvement.

Samik Chatterjee: Okay. Thank you. Thanks for taking the call.

Chuck Mattera: Thank you, Samik.

Operator: One moment for our next question. Our next question comes from Ruben Roy with Stifel. Your line is open.

Ruben Roy: Yes, thank you for letting me ask some questions. I wanted to follow-up on Samik’s question, Chuck, and talk about just sort of the AI transceiver, NPI launches, the delta between sort of your full-year guidance and sort of what you’re holding back? Love to hear some details outside of the supply constraints. Sounds like there’s some qualification milestones needed. Is that product specific, customer specific? If you could give us some details on, how you expect those qualifications to ramp near-term and what’s left to be done before you actually start, kind of, seeing some revenues?

Chuck Mattera: Yes. Thank you, Ruben. Giovanni?

Giovanni Barbarossa: Thanks for the question. I mean, the — as we said earlier, new products generally require an incubation period in the manufacturing line to reach the quality, the yields, the performance that we promised. So those are generally true for any product. This 800G is significantly more challenging than any other product we had before that came to the, kind of, this same type of market. So I think the complexity comes from the fact that while we are ramping for the orders that we already have, we’re also engaging, as I said, new players in a meaningful way to further extend our opportunity in the near future. And therefore, eventually CEO as Chuck mentioned in his remarks, to see an upside for the overall market that we can address.

So it’s a combination of serving needs that we have short-term versus the needs to continue to increase the pipeline, the funnel of new opportunities for 800G with additional customers beyond those that we’re already engaged with.

Ruben Roy: Thanks, Giovanni, for the detail. For my follow-up, on telecom, data points remain pretty negative. And nice to hear you guys talk about bottom here coming out of September quarter. Can you give us some details on what you’re thinking in terms of, it sounds like inventory’s driving some of your view for the rest of the year, but starting in the December quarter, if you can give us any detail on how you’re thinking about that business, whether it’s market share or what’s driving your view on a recovery, starting here near-term, however gradual that might be?

Chuck Mattera: Beck?

Beck Mason: Yes, sure. I think in the telecom softness, it’s a combination of end market softness and inventory digestion at our customers. And we’ve been staying very, very close to our customer base on this. And we see progress modestly coming through FY ‘24 and the rest of the quarters on their inventory digestion. And then we see gradual improvement in the end market demand really progressing through the FY ‘25.

Ruben Roy: Okay, thank you.

Operator: One moment for our next question. Our next question comes from Meta Marshall with Morgan Stanley. Your line is open.

Meta Marshall: Great. Thanks. Maybe just on growth margins, was the weakness versus expectations on a mix of categories or just, you know, are there any higher costs that are needing to be paid to kind of clear some of the 800 gig transceiver bottlenecks to be mindful of? And then maybe just as a second question, just any more clarity on how you guys are thinking about debt repayment in fiscal ‘24? Thanks.

Chuck Mattera: Okay, Meta. Rich?

Rich Martucci: Yes. So the margin of weakness is a result of separate factors. One was the — is the lower volume that we incurred in the quarter. Unfavorable mix are the main key drivers. However, as well, we did experience prior period underutilization that hit the P&L as well. For debt reduction, right now we’re anticipating $200 million of pay down for the year.