Coherent, Inc. (NASDAQ:COHR) Q3 2024 Earnings Call Transcript

Coherent, Inc. (NASDAQ:COHR) Q3 2024 Earnings Call Transcript May 7, 2024

Coherent, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Coherent Corp Fiscal Year ’24 Third Quarter Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Paul Silverstein, Senior Vice President, Investor Relations. Please go ahead.

Paul Silverstein: Thank you, Victor, and good morning, everyone. Thank you for joining our third quarter fiscal 2024 earnings call. On the call, we have Coherent Chair and CEO, Dr. Chuck Mattera and a number of Coherent Senior Leaders which Chuck will introduce shortly. Yesterday, after-market close, we issued a press release, posted a shareholder letter and an updated investor presentation to the Investor Relations section of our website, and first these documents on 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, outlook, visibility, key trends, and developments.

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 reports 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 that’s 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.

With that, it is my pleasure to turn the call over to Coherent’s Chair and CEO, Dr. Chuck Mattera.

Chuck Mattera: Thank you, Paul. The excitement continues at Coherent where we delivered another solid quarter. Before diving into the details, I will comment briefly on the CEO search process. As previously disclosed, our Board has retained a leading executive search firm to help identify and establish a selection committee to evaluate CEO candidates from approval of both internal and external candidates. Our focus is on preparing for and selecting a new CEO with the necessary skills, knowledge and experience to seamlessly and successfully succeed me and to help ensure Coherent’s sustainable growth and success. With that said, I will not comment on it further during today’s call. Rather, I will focus my brief remarks on our super-exciting performance in Q3 and the exciting setup for Q4 and fiscal year ’25.

As I have stated previously, leadership development is among the 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 portion of today’s call. Rich Martucci, Interim Chief Financial Officer; Dr. Giovanni Barbarossa, Chief Strategy Officer and the President of the Materials segment; Dr. Julie Sheridan Eng, Chief Technology Officer; Dr. Sanjai Parthasarathi, Chief Marketing Officer; Magnus Bengtsson, Chief Commercial Officer, who leads our global sales and service organization and who came to us through the Coherent acquisition; Sohail Khan, EVP, Silicon Carbide LLC; Dr. Lee Xu; EVP, Datacom Transceivers; and Dr Beck Mason, EVP, Telecom.

For the last 20 years, I have been blessed with the privilege of working with the most experienced management team in the industry. As one small measure, those of us on today’s call have 300 years of collective experience. We will provide investors a rich source of information about the depth and breadth of our markets, technologies, operations, and overall business. For the quarter, we delivered solid sequential improvement in revenue and EPS, both of which came in above the high end of our guidance. Due primarily to unexpected issues that we’ve already resolved or expect to soon resolve, the non-GAAP gross margin was below guidance, but rigorous operating expense discipline and controls allowed us to deliver non-GAAP operating margin in line with our guidance.

The highlights of our third quarter include an almost 7% sequential increase in revenue and a $0.17 or almost 50% sequential increase in non-GAAP EPS. Another strong – another quarter of strong AI-related datacom demand for our 800G datacom transceivers. We now expect this strength to continue in the current fourth quarter and into fiscal ’25. A slower than expected recovery in our telecom markets, continued signs of improving outlook for our industrial market, which accounts for approximately 34% of total revenue. The repayment of $58 million of outstanding debt and the completion of a repricing of our $2.4 billion secured term-loan B, reducing interest-rate margins by 25 basis points, which results in an annual savings of approximately $9 million and the upgrade of our credit rating to Ba2 by Moody’s, reflecting our leadership position in the exciting AI market and their expectation that our financial performance will continue to improve.

Our diversification across product, technology and regional markets is serving us well. AI-related datacom demand remains strong. While still early, we also saw further signs in the quarter of improving demand in our industrial market, along with further signs of stabilization in our instrumentation and electronics markets, which we expect will also eventually return to growth. Despite the macroeconomic backdrop, our diversification strategy has helped distinguish us from the rest of the pack. For the quarter, we posted revenue of $1.209 billion, which was above the high end of our guidance and non-GAAP EPS of $0.53, which was also above the high end of our guidance. Operating cash flow was $117 million. We invested $93 million in capital equipment and we retired $58 million of debt.

Turning to our guidance for the fourth quarter of fiscal ’24, we are guiding for revenue of approximately $1.123 billion to $1.32 billion and non-GAAP earnings per share of approximately $0.52 to $0.68. Revenue of approximately $4.62 billion to $4.7 billion for the year, which is a $70 million increase at the low end of our previous guidance. Non-GAAP EPS of approximately $1.56 to $1.73 for the year, up from $1.30 to $1.70, which was our previous guidance. Before turning to questions, I would like to say how appreciative and proud I am of the senior leaders and all of our other employees whose tireless dedication to transforming Coherent are setting the stage for broad industry leadership now, next and beyond. Opportunity is one of the most difficult things in life to recognize early on.

However, we have a 50-plus year old track-record to point to when I say with confidence and faith that I truly believe that the best is yet to come. With that, I’ll turn it back over to Paul. Paul?

Paul Silverstein: Thank you, Chuck. We will now open the call for analyst questions. This call is scheduled for a full hour. As we have approximately 20 analysts that cover the company, we ask that each of you limit yourself to one question and one follow-up. Please direct your questions to Chuck, who will decide who is best to respond. Victor, please open it up to questions.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from the line of Samik Chatterjee from JPMorgan. Your line is open.

Samik Chatterjee: Hi, thank you for taking my questions and congrats on the strong results here. If I can just start with datacom. And when you started on this ramp, which has been pretty impressive, you did have the benefit of a lot of visibility into the orders from your customers. I think at that point, you had almost like a year’s visibility in terms of orders based on how you’re communicating about orders. As we now move into fiscal ’25 and lead times are coming down, just curious what kind of visibility are customers giving you in relation to demand for fiscal ’25, what do you think are the key growth drivers for the 800 gig or datacom business in total in FY ’25? And have a follow-up. Thank you.

Chuck Mattera: Thank you, Samik. Lee, would you like to?

Lee Xu: Hi, thanks for the question. This is Lee Xu. Our outlook versus a quarter ago did not change. We still see strong growth in overall 800G and AI-related demand, and our customer interaction has been improving. And as you can see in the past few quarters, our 800G ramp-up from FY ’23 is $20 million or to $50 million in our Q1, a little bit over $100 million in Q2. And this quarter, we reported close to $200 million and we project in Q4 of more than $250 million. So we still see further growth in FY ’25, but in our field, the – how to say the lead-time for people to order 800G transceivers is coming down. And that’s why we are – when we forecast our 800G revenue, we are being more prudent. But in terms of trend, our forecast from our key customers, there is no change. And we also said that we are broadening our 800G customer basis and now it’s much broader and we see that in FY ’25, it’s going to be even more broad. Thank you.

Chuck Mattera: Thank you, Lee.

Samik Chatterjee: And for my follow-up, if I can just quickly ask on the supply side, we get a lot of questions from investors asking about if there are supply constraints either on VCSELs or any of the other components going into the datacom transceivers. Particularly as you plan ahead for the ramp in fiscal ’25 or the growth in fiscal ’25, how you’re managing around those sort of visibility around supply, any key bottlenecks that you see that you need to resolve? Thank you.

Lee Xu: Thank you for that key question. We largely resolved all the material constraints, whether it’s internal or external. So we feel confident on our capability.

Samik Chatterjee: Thank you, Lee.

Chuck Mattera: Okay, thanks, Samik.

Operator: Thank you. One moment for our next question. Thank you. Our next question will come from the line of Simon Leopold from Raymond James. Your line is open.

Simon Leopold: Great. Thank you very much for taking the question. The first thing I wanted to see if you could unpack a little bit was, in the prepared remarks, Chuck, you mentioned the gross margin being a little bit softer than what you had been anticipating. Could you help us understand what are sort of the key drivers and expectations for how gross margin can improve over time? Is it as simple as getting utilizations up or is it more about the cost-reduction and synergies? Help us understand sort of the key levers and the targets. And then I’ve got a follow-up.

Chuck Mattera: Okay, good morning, Simon. Thanks for your question. Rich is ready to go.

Richard Martucci: Thank you, Simon. Obviously, management team was a little disappointed in our performance in Q3 on the margin. We detailed out the one-time really transitory items in Q3. As we move forward, and as we mentioned, we still are targeting a 40% gross margin by the second quarter – first half of FY ’26, and with that – over 20% operating margin. And there’s many positive drivers that we have to achieve this. First is really the incremental volume and the mix as well. Without a doubt, we’re going to need the increase in our industrial as well as instrumentation markets. Those are typically sales that come through – revenue that comes through our networking or our materials and laser segment, that will strengthen the margins as well as our strength in supply chain and buying power, that also is a key factor.

We did have mentioned to you our synergy and restructuring plans in the past, which we are on pace for. But even longer-term, we’re in the midst of a transformation. We just started a global design for a new ERP implementation, a new system. And we are just at the beginning of implementing AI tools. So all those factors will culminate in us reaching a higher margin.

Simon Leopold: Thank you. And then as my follow-up, I’d like to sort of get some sense of your vision of where the AI opportunity can go. So it looks as if you’re expected to exceed your prior expectations for this fiscal year. I imagine it’s maybe a little bit early to give us details on fiscal ’25, but if you could give us some guideposts of how you’re thinking about the 800 gig and above business evolving beyond the next quarter? Thank you.

Chuck Mattera: Simon, thanks. Simon, I think we’ll take a step back and talk about the market because we’re expecting to lead the market. So Sanjai, why don’t you just give a quick summary?

Sanjai Parthasarathi: Okay. Thanks, Chuck. Hi, Simon. Thanks for the question. So we just – in our investor presentation, we have a chart that talks about the market, the growth and inflection that’s happened with AI. Over the next few years, we still see a very strong growth in 800G. It’s – over the next five years, it’s growing at a 60% CAGR and that’s 800G and beyond. So 800G and 1.6. So the market is strong. It’s – we are projecting very healthy growth for the market and that’s where it is today. That’s great.

Chuck Mattera: Good. Okay. Thank you, Simon.

Operator: Thank you. One moment for our next question. Our next question will come from the line of Ruben Roy from Stifel. Your line is open.