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    COHR
    Earnings call· Dec 2024(Q2 FY25)

    COHERENT CORP. COHR

    Feb 5, 2025 Source

    Executive summary

    Coherent Q2 FY25 — Record Revenue and Strong Profitability Driven by AI Datacom

    Coherent delivered a strong Q2 FY25, achieving record revenue and significant profitability expansion, primarily fueled by robust AI-related datacom transceiver demand and a recovering telecom market. The company made solid progress on gross margin expansion and disciplined OpEx management, while strategically investing in R&D for future growth. Management remains cautiously optimistic about the telecom recovery and is focused on portfolio optimization and long-term shareholder value.

    Highlights

    5

    • Record Q2 revenue of $1.43 billion, up 27% YoY and 6% sequentially.

    • Datacom revenue grew 79% YoY and 4% sequentially, driven by AI data center demand.

    • Non-GAAP gross margin improved to 38.2%, up 146 bps sequentially and 363 bps YoY.

    • Non-GAAP EPS grew over 40% sequentially to $0.95, more than tripling YoY.

    • Telecom revenue increased 16% sequentially and 11% YoY, marking the second consecutive quarter of sequential growth.

    Concerns

    2

    • Materials segment revenue decreased 4% YoY, primarily due to weak automotive end-market demand.

    • Near-term outlook for broad-based industrial end markets remains cautious, with some sub-segments showing no improvement.

    Guidance & targets

    10
    CategoryTargetConfidence
    Revenue
    $1.39 billion to $1.48 billion
    high materiality
    High
    Non-GAAP Gross Margin
    37% to 39%
    high materiality
    High
    Total Non-GAAP Operating Expenses
    $285 million to $305 million
    medium materiality
    High
    Non-GAAP Tax Rate
    17% to 19%
    medium materiality
    High
    Non-GAAP EPS
    $0.75 to $0.95
    high materiality
    High
    Telecom Revenue
    up sequentially
    medium materiality
    Medium
    OCS Revenue
    start to see first revenue
    medium materiality
    Medium
    1.6T Transceiver Sales
    begin ramping sales
    high materiality
    High
    Industrial-related businesses revenue
    down sequentially
    medium materiality
    Medium
    FY25 Overall Growth
    strong growth year
    high materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Networking
    Driven by ongoing strong AI data center demand and continued recovery in telecom. Datacom achieved record Q2 revenue. Telecom saw its second consecutive quarter of sequential improvement.
    Datacom revenue: $588MDatacom growth YoY: 79%Datacom growth QoQ: 4%Telecom revenue: $270MTelecom growth YoY: 11%Telecom growth QoQ: 16%
    		$858M56%7%—
    Laser
    Driven primarily by demand for excimer annealing lasers in display capital equipment and strong demand in semi cap equipment. Overall industrial market outlook remains cautious.
    		$300M6%8%—
    Materials
    Year-over-year decrease primarily due to weak automotive end-market demand. Similar cautious outlook to the Laser segment for industrial-related markets.
    		$272M-4%3%—

    Operational metrics

    8
    Non-GAAP Gross Margin
    38.2%up 146 bps sequentially, up 363 bps YoY
    Q2 FY25

    Solid progress towards goal of over 40% durable company-wide gross margin.

    Non-GAAP Operating Expenses
    $283 millionup from $278 million in Q1 FY25, up from $239 million in Q2 FY24
    Q2 FY25

    Reflects disciplined OpEx management with increased R&D and decreased SG&A.

    Non-GAAP Operating Margin
    18.5%up from 16.1% in Q1 FY25, up from 13.5% in Q2 FY24
    Q2 FY25

    Significant expansion in profitability driven by revenue growth, gross margin expansion, and disciplined OpEx management.

    Non-GAAP Tax Rate
    17.4%down from 20% in Q1 FY25
    Q2 FY25

    Tax rate for the quarter.

    Non-GAAP EPS
    $0.95up over 40% sequentially, more than tripling YoY from $0.27 in Q2 FY24
    Q2 FY25

    Strong profitability expansion.

    Debt Paid Down
    $132 million
    Q2 FY25

    Strengthening the balance sheet.

    Indium Phosphide Production Output
    tripledYoY
    Q2 FY25

    Enabled rapid year-over-year growth in 800-gig transceiver products. Plans to continue expansion.

    SG&A Expenses
    decreased sequentiallysequentially
    Q2 FY25

    Result of disciplined approach to managing expenses while investing in product portfolio.

    Industry KPIs

    7
    MetricValueDetails
    M a contribution—
    Orders book to billStronger orders
    Segment revenue growthNetworking: $858M (56% YoY, 7% QoQ); Laser: $300M (6% YoY, 8% QoQ); Materials: $272M (-4% YoY, 3% QoQ)USD
    Design wins product cycle rampsExpanding customer engagements on 1.6T transceivers; 3.2T transceivers in development; first customer order for OCS platform; continued ramp of 100-gig, 400-gig, 800-gig ZR/ZR+ Coherent transceivers.
    Capacity expansion internal sourcingtripled
    End market revenue mix organic growthIT datacom: 79% YoY; Telecom: 11% YoY; Display capital equipment: growth sequential and YoY; Semi cap equipment: healthy sequential and YoY growth; Automotive: weak demand (Materials segment).%
    Operating margin incremental leverage18.5%%

    Product announcements

    4
    ProductTypeDetails
    1.6T Datacom Transceiversmilestone
    3.2T Transceiversroadmap
    Optical Circuit Switch (OCS) Platformlaunch
    200-gig differential EMLs, 200-gig VCSELs, high-power CW lasersroadmap

    Deals & partnerships

    3
    UndisclosedEvaluating strategic alternatives for advanced lithium-ion battery recycling technology.

    Part of strategic portfolio optimization to divest or shut down nonstrategic product lines and assets.

    UndisclosedSale of Newton Aycliffe facility.

    Part of strategic portfolio optimization.

    UndisclosedEvaluating strategic alternatives for lithium-sulfur battery platform.

    Part of strategic portfolio optimization to divest or shut down nonstrategic product lines and assets.

    Capital programs

    1
    Indium Phosphide Capacity Expansionunderway
    Funding: CHIPS Act funding

    Benefit: tripled production output YoY in Q2 FY25

    U.S. government announced plans to use CHIPS Act funding to help with the expansion of indium phosphide capacity at the Sherman, Texas facility. Intention to continue expanding capacity over coming quarters to support long-term growth.

    Risks & headwinds

    3
    Near-term softness in industrial-related end marketsnear-term

    Materials segment revenue decreased 4% YoY; Laser segment revenue was flat YoY in aggregate industrial-related applications.

    Mitigation: Focus on long-term secular growth drivers and new product ramps as markets eventually recover.

    Weak automotive end-market demand

    Primary reason for Materials segment YoY decrease.

    Mitigation: Not explicitly stated, but part of broader industrial market strategy.

    TariffsQ3 FY25

    No significant impact expected to Q3 FY25 results.

    Mitigation: Resilient supply chain with geographic diversity and vertical integration provides flexibility and adaptability.

    What to watch in Q3 FY25

    5

    Telecom Market Recovery

    Q3 FY25
    CurrentUp 16% sequentially in Q2 FY25
    TargetUp sequentially

    Why it matters

    Indicates sustainability of the telecom market's recovery from its trough, impacting a key segment's revenue contribution.

    we are expecting the telecom revenue to be up again sequentially in our fiscal Q3.

    Q&A highlights

    5

    Given two sequential quarters of growth in telecom, has the outlook for sustainability of improvement changed from cautious to more optimistic? What are the drivers?

    Management is now 'cautiously optimistic' about the telecom market, expecting another sequential increase in Q3 FY25. Growth is driven by data center interconnect, some improvement in traditional transport, and continued ramp of new products like 100-gig, 400-gig, and 800-gig ZR/ZR+ transceivers.

    “I think our view is we moved from cautious to cautiously optimistic. We were really pleased with the results that we saw in telecom in our fiscal Q2, the 16% sequential growth and 11% year-over-year growth in fiscal Q2. As you noted, that was the second quarter of sequential growth and we are expecting the telecom revenue to be up again sequentially in our fiscal Q3.”

    asked by Samik Chatterjee · answered by James Anderson

    2 min read6 chapters

    Detailed Narrative

    01

    AI-Driven Datacom Growth and Transceiver Roadmap

    Coherent achieved record Q2 datacom revenue, growing 79% YoY and 4% sequentially, fueled by strong AI data center demand. The company is seeing expanding customer adoption of its 800-gig transceivers and remains on track to begin ramping 1.6T transceiver sales in calendar 2025, with expanding customer engagements. Development of 3.2T transceivers is also underway, leveraging a broad portfolio of photonic technologies including indium phosphide, EML, CW lasers, and silicon photonics.

    02

    Telecom Market Recovery and New Product Ramps

    Telecom revenue increased 16% sequentially and 11% YoY, marking the second consecutive quarter of sequential improvement. This growth was primarily driven by data center interconnect and some improvement in the traditional transport market. The company is seeing continued ramp of new products, including 100-gig, 400-gig, and 800-gig ZR/ZR+ Coherent transceivers, and expects further sequential improvement in Q3 FY25, shifting to a 'cautiously optimistic💬' outlook.

    03

    Optical Circuit Switch (OCS) Platform Launch

    Coherent announced its first customer order for the new Optical Circuit Switch (OCS) platform in Q2 FY25, with initial revenue expected in calendar 2025. This platform, based on digital liquid crystal technology, offers significant advantages over mechanical MEMS-based solutions in latency and power efficiency for data center interconnects. The OCS platform expands Coherent's data center addressable market, and further details on its revenue potential will be shared at the upcoming Investor Day.

    04

    Gross Margin Expansion and Operational Efficiency

    Non-GAAP gross margin reached 38.2% in Q2 FY25, a 146 bps sequential and 363 bps YoY improvement, driven by higher revenue volumes, cost reductions, and manufacturing yield improvements, particularly in datacom. The company is focused on achieving a durable company-wide gross margin of over 40% through pricing optimization and product cost improvements across all segments, including transceivers, telecom, and industrial products.

    05

    Strategic Portfolio Optimization and Capital Allocation

    Coherent is actively implementing a strategic portfolio assessment, evaluating alternatives for non-strategic product lines and assets, including advanced lithium-ion battery recycling technology and the lithium-sulfur battery platform. This follows the sale of the Newton Aycliffe facility. The company also paid down $132 million in debt using cash from operations, emphasizing continued focus on strengthening the balance sheet and deleveraging.

    06

    Industrial Market Dynamics and Indium Phosphide Capacity

    While the overall industrial-related end markets remain cautious in the near term, display capital equipment and semi cap equipment showed healthy sequential and YoY growth. Display strength is driven by OLED adoption in larger format devices, utilizing Coherent's excimer lasers. The company tripled its indium phosphide production output YoY in Q2 FY25 and plans further expansion, supported by CHIPS Act funding, to meet long-term growth in EML and CW laser capacity.

    AI-generated summary of the company’s earnings call. Not investment advice.