Coherent Corp. Q1 FY2025 earnings call

Culture: Visited over 20 sites, met teammates, focusing on innovation and building a faster, more agile company with organizational structure changes. ### Strategy: Completed strategic portfolio review, shifting organic investment to Growth and Profit Engines, divesting non-strategic assets like Newton Aycliffe facility and exploring options for battery technology platform. ### Execution: Engaging key customers/partners for growth, initiatives for gross margin expansion (pricing optimization, cost reduction), shifting R&D to growth engines, and focusing on SG&A efficiency. First quarter results: Communications market revenue up 14% sequentially and 68% year-over-year, with datacom up 16% sequentially and 89% year-over-year due to AI demand, and telecom up 9% sequentially and 17% year-over-year. Industrial markets saw aggregate revenue decrease, but display capital equipment was strong. Sherri highlighted paying down $118 million of debt, reducing net debt leverage ratio to 2.4 times, and excitement about driving shareholder value expansion.

First quarter revenue was $1.35 billion, an increase of approximately 3% sequentially and 28% year-over-year. Segment-wise, networking revenue increased 12% sequentially and 61% year-over-year due to AI data center demand. Laser segment revenue decreased 2% sequentially and increased 4% year-over-year, reflecting relatively stable end market demand. Material segment revenue decreased 15% sequentially and 3% year-over-year, primarily due to weak automotive end market demand. The first quarter non-GAAP gross margin was 37.7%, an increase of 49 basis points compared to the prior quarter, and an increase of 293 basis points compared to the year-ago quarter, driven by higher revenue volume, favorable mix, and yield improvements.

For the second quarter of fiscal 2025, revenue is expected to be between $1.33 billion and $1.41 billion. Non-GAAP gross margin is expected to be between 36% and 38%. Total operating expenses are expected to be between $275 million and $295 million on a non-GAAP basis. Tax rate for the quarter is expected to be between 19% and 22% on a non-GAAP basis. EPS is expected to be between $0.61 and $0.77 on a non-GAAP basis.

None explicitly detailed in the transcript beyond general risk factors mentioned about actual results differing from projections as per SEC filings.

Q: Hi, and thanks for taking my questions, and maybe if we can start with one for Jim, and then I have a quick follow-up. Jim, I think you mentioned it's been now five months since you've joined the company. What's been the feedback that you've received from the customers or partners that you've talked to in terms of areas to focus on, areas that they really think Coherent is good and -- or even areas they think Coherent can improve on? And then I have a quick follow-up.

A: Yes, thanks, Samik, for the question. Yes, great question. Always happy to talk about the customers, and I've definitely spent a lot of time with customers over the last five months, meeting as many as possible. I'd say that, first of all, I think we have a lot really strong existing relationships with our big strategic customers across both our networking accounts and our big datacenter customers, but also our industrial customers as well. So, in a lot of cases, there's a long history with these customers; it's very strong, and very positive. I think when I talk to our customers, the opportunity that we have is to build relationships with those customers at a much more strategic, much more multigenerational long-term engagements, to move from solving problems that are right here in the here and now, to focusing on much more multigenerational innovation and partnering with our customers on future generations that are one, two, three generations out. And so, I think that's our opportunity to drive a deeper strategic engagement with our key customers, moving forward. And I think the couple things that I would say are really resonating with our customers when we have those longer-term strategic discussions, is, I would say, number one, definitely the technology portfolio and roadmap that we can bring to those customers to help drive their innovation. But the second area I would highlight too is supply chain resiliency, and the breadth and depth of our supply chain. If I just take, for instance, our AI -- our big AI datacenter customers as an example because that's we're seeing the fastest growth in our revenue right now. On that first area of technology roadmap, I think our customers really recognize the breadth and the depth of the technology portfolio that we can bring to bear, specially in the optical networking space, where we don't just assemble the modules, but we build a lot of the ingredient components that go into the module; the lasers, whether they're VCSELs, EMLs for silicon photnonics that we design, or a lot of the other ingredients that go into those modules. So, the breadth of technology that we could bring for that multigenerational partnership I think is really unparalleled. And then the second thing, which is definitely becoming more and more important to all of our but strategic customers, is supply chain resilience. And there again, I think we could bring a really differentiated supply chain, where we have incredible geographic diversity in terms of our manufacturing footprint. And then, our verticalized structure could be a real advantage, especially in a very fast ramp situation, which we're in right now with our datacenter customers. When demand is increasing very quickly, it's really important to have that verticalized strategy and structure that we have, because I think that's really allowed us to supply them in a really reliable. And so, a couple a those or a couple things that are really resonating with our customers, but I think that, back to the high-level point would be our opportunity to really build much deeper strategic engagements with our partners, looking forward. And I think our customers are definitely receptive to that. And yes, it's definitely an area we'll be focused on, moving forward.

Q: Got it. And for my follow-up, I'm just trying to think of the gross margin here, and what we should be tying it to the improvement in the gross margins and what we should be tying it to as we move through the year. You are sot of guiding to sequentially a bit better revenue in the midpoint. Should we be tying to those improvements to revenue improvement through the year or should we be thinking about some of the pricing that you've talked about, start to sort of agree to that, just trying to think about the gross margin trajectory for the rest of the year, I'm not looking essentially for a guidance, but more how to think about what drives it from here on.

A: Yes, hi, Samik. I'll take that question. So, I'll start off with a little bit of context on Q1, and then talk about the guide for Q2, and then how we're thinking about it a little bit more long-term. When you look at Q1, the approximately 50 basis point sequential improvement, we're really pleased with that, and 290 basis points year-over-year improvement. That really came from a few different areas. One was, of course, higher revenue volume contributed. We also had favorable product mix. And example of where we saw that within our Lasers segment, where we saw continued strong demand for our excimer lasers for OLED screen manufacturing. We also had improvements in yield, and we saw that in our datacom business where we saw improvements in our -- the trends -- we started that business, so really a few different areas that drove the sequential and year-over-year improvement there. When we look at Q2, the guide for Q2, that is a range, right, 36% to 38%, it is a range, and there can certainly be fluctuation on a quarterly basis with respect to gross margin. But we did talk about, last quarter; Jim mentioned that we launched our gross margin expansion strategy which includes product pricing optimization, as well as product cost reduction. And so that's an area where we're going to focus on because we want to achieve a long-term gross margin of greater than 40%, and so that's really how to think about what our goal is for our long-term gross margin. And we're in the very early stages of that. And certainly, that you can be rest assured that we're focused on really driving to that greater than 40% target. And when we get to our Investor Day, in May of next year, we'll certainly give more color on the model and all of the different elements of that.