Hi, good morning, everyone. I'm Samik Chatterjee . I cover hardware companies at JP Morgan. The company presenting next is Coherent, and we have with us Sanjay Parthasarathy, who's the Chief Marketing Officer. Sanjay, thanks for making it to the conference. I'll start with some of the questions we've been asking as common questions to all of our companies. The first one is around the macro, and really just to outline your thoughts about as you look to the remainder of the year, where do you see the biggest macro risk to your business?
Yeah. Thanks, Samik. When we, you know, macro risk, when we talk, you know, this morning, so many people have everybody has their own view of it. I think from our perspective, we see interest rates and the geopolitical tensions as sort of the two macro factors that we are, you know, watching. I think that's one of these two factors we think will leave our business at sort of moderated levels in fiscal 2024. That's kinda our view right now.
Okay. When you think about the macro-led headwinds, can you maybe delineate a bit where do you see sort of the headwinds being more of a function of inventory versus a real demand slowdown in your business?
Yeah. I think, if you look at all of our market verticals, longer time, longer term, four to five years, that they're all growing at double-digit CAGRs. Some markets are growing, as you know, silicon carbide as an example, is growing at 30%-40% CAGR.
Yeah.
Short term, we do, I think, in certainly in the communications business and specifically in the telecom part of our communications business, there has been an effect due to inventory. If you look at our OEM customers, they're all announcing record quarters. Their backlogs are record levels, but yet their inventory is three, four times prior to COVID. As supply chains kind of have been easing and they're now watching their cash flows carefully, they're dialing down on inventory. That's really what we see. We believe, this will play out for the next couple of quarters and then they will, you know, then things return back to normal levels. That's our expectation.
Switching to a bit longer-term topic, but we're asking all of our companies, sort of maybe this is a bit earlier in the discussion than you want it to be, but how are you thinking about AI and the impact of that on your business? How are you thinking about disruptions as well as opportunities for the business?
I mean, the AI, it's on everybody's mind. I think everybody tries to connect with AI. Our datacom business is directly connected to the AI, you know, as the, we believe 50% of our datacom market will be driven by AI in the next five years. Right now it's about 10%. AI is pervasive. I mean, when we look at our phones, the amount of predictive analytics that it's doing and all of that, I mean, ultimately it needs sensors. Every AI application, awareness of the world, you know, indoor navigation, there are just so many things that AI needs in terms of sensors. I think it's not just, I mean, there are many markets that we're exposed to are gonna be driven by AI.
Datacom is bang direct. There are other things that people don't readily associate with AI, and I think sensors is one of those things.
Okay. Interesting. Maybe just starting on the datacom side then, since we are discussing AI and the direct impact on datacom, maybe flesh that out a bit more. Like, how do you think about the datacom portfolio? It's able to leverage the technology, leverage AI, particularly in terms of what I think we often get as an investor question is this more of a volume opportunity, or is this where you have to invest R&D to move to next-generation products pretty quickly, and it's more of a pricing sort of content opportunity as you move forward?
Yeah. We've been selling into the AI market for quite some time now, for maybe over a year. Today, we believe about 10% of our datacom transceiver revenues go directly into AI, supporting AI clusters, so to speak. We think that in the next five years, that market, 50%, as I said, will be driven by AI. If you look at what are those applications, these applications are short reach, 30 meters below. Very high speed. They're pushing the cutting edge of transceivers. The great advantage that we have are we are completely vertically integrated, and ultimately every transceiver, the heart of the transceiver is the laser.
They would depend on these next gen lasers, 200G and beyond, which is what we are at the very leading edge of that platform. At OFC, if you may know that our largest fiber optic conference, we announced our laser. It's really high speed, short distance, leading-edge performance is the AI requirement. I think we're kinda uniquely positioned there for it to service that market.
Just to be clear, the way you're defining, 'cause I think there's a lot of companies who are defining sort of what they're shipping into AI use cases differently. Are you defining what you're getting in terms of AI revenue as a certain speed that when you're shipping those products at those speed, you're assuming it's AI infrastructure? Or how do you know at the customer end what it is?
Yeah. Certainly we know certain applications are really driven by AI, 800G and beyond today. Now, that changes. You know, in a year from now, maybe it'll be 1.6T which is going to AI and 800G becomes more traditional networking. It's very hard to do a one is to one, in general, we do know some of these applications that AI applications, we know this class of transceivers are going into this type of application. We've got some idea of that.
Okay. Maybe the sort of following on to that, when you now think about we are at 800G and we move to the next-generation products, do you What's your thought process around the timeline around moving to these next-generation products? Like, what was that traditional timeline in going from 100G to 400G? Now do you see that timeline shrinking as you move to next-generation products because of the AI investment?
Yes. We are, you know, 800G is the highest, you know, high volume commercial deployment that's happening today into the hyperscalers. 1.6T is coming on board. Typically, these cycles are three to four years. We now see maybe these be like two to three years because we expect to ship 1.6T in some level of volume in fiscal 2024. You know, a year from now.
Mm-hmm.
The cycles are very long. I mean, I would say maybe half of the market today is still 100G. These cycles are very long. They go through four or five years before they completely kind of die away in a, in a way.
At OFC, the presentation that you had, one of the things you made pretty clear was you're still expecting pluggables to be sort of the bread and butter of the optics industry till 2030, and co-packaged optics don't really sort of show up in the roadmap in terms of commercialization by then. Does AI change that?
Not really. There are. Maybe the way I answer that, the two. If you look at datacom transceivers as a very broad portfolio, and that datacom, the pluggable transceiver is not going away for the next 10 years. That's our expectation. There will be pockets of co-packaged applications, including in certain clusters, et cetera. And we are well, you know, we are well-positioned to serve into those, so it's not, you know. We often say the best application for co-packaging is in a pluggable transceiver 'cause you can still, you know, you can have these what we call chiplets close to the chip, to the switch chip and so there are all these architectures that are emerging. Co-packaging is not, it's not an either/or.
We believe from a overall market, including AI, including all the applications that we have visibility to, that pluggable transceivers will stay dominant as a, from the market perspective.
Thank you. Okay. One of the questions that's come up quite a bit is when you think about the datacom portfolio, does it have the opportunity to support AI clusters that are depending on NVIDIA's technology stack and InfiniBand? Is it going to be more sort of contained to supporting investments around Ethernet?
We sell into all those applications today, InfiniBand, you know, traditional Ethernet, and there'll be a combination, and there may be new protocols and new things that may come up two years from now that we don't know of. From an optical transceiver perspective, protocols are don't really matter. At the end of the day, it's the speed and you're taking data. Whether you're taking Ethernet payload or you're taking InfiniBand payload, it doesn't really affect the device that we make.
Sure. Okay. Now coming back to the more traditional sort of non-AI discussion. 200G+, I think you've said recently, is 50% of Coherent's datacom revenue. At the same time, you continue to talk about further share gains as an opportunity. I mean, you're already one of the large players in datacom overall on a global basis. Where do you see some of those opportunities for share gains? How are you thinking about market share near to longer term?
Right. Right. Yeah, it's a good question. I would say Giovanni often says we have one and a half hyperscalers today. I mean, that's the amount of exposure we have to hyperscalers. We have been increasing. As we said on the call, 50% of our revenues last quarter came from hyperscalers. Almost by definition, it's the high end, the most advanced-
Mm-hmm.
The high-speed products. At the heels of the Finisar acquisition, our exposure to hyperscalers was probably 15%. Over the last three years, we've been building it up. We believe that as the drive goes towards higher and higher speeds, the vertical integration is going to be really important. It's a big deal to our customers today, having a diversified manufacturing base, non-China manufacturing. Look, there is a whole bunch of things that we have that our customers seem to value. That's our confidence in growing it.
The big one is really vertical integration and the in-house laser platforms 'cause when things get really complicated in terms of implementation at the higher speeds, it's great to have all the platforms under one umbrella, as opposed to some of our pure play competitors who are essentially assembling things, buying bits and pieces and assembling it. We think it's gonna be more challenging for them as things go higher speed. Cause our customers are trying to push every little, you know, inch of performance, if you will, right? They're pushing the limit.
One of the outcomes of that, with what we've seen obviously on the telecom side play out a bit more, has been industry consolidation, right? The R&D roadmap is challenging. Sort of having a vertical integration across the portfolio is a more beneficial place to be. Do you see that changing near-term in terms of more industry consolidation on the datacom side as well? Would you be a consolidator there, or how would you sort of?
Yeah.
How would you play that out? Investment side?
Yeah, it's a good question. The sense that if you look at broadly our datacom and telecom portfolio, I'll start with datacom. We are completely vertically integrated, but we don't, you know, we were not making DSPs for a while. You know, we've been quietly investing over the last three, four years on DSP, and we announced our first DSP product. It's not a datacom product, but it's a telecom product. The skill set and the product portfolio is largely the same. We would expect datacom products to come out as well. On the telecom side, there are always opportunities. I mean, people look at the Coherent acquisition. I'm talking about legacy coherent.
Yeah.
Really, there is no interaction with communication. That's not really true. We did not have specialty fiber for our amplifiers. There are telecom amplifiers, we'd buy fiber. Now we have. I mean, we still buy fiber, but we now have a source for fiber, for specialty fiber.
Mm-hmm.
That came from. There are always things to. We really don't see anything else that, with that, we have kind of completed the portfolio. There's really nothing else that we need, in terms of, you know, acquisition or anything from a datacom perspective.
Okay. Okay. The market for 800 products, how do you think about adoption from customers? Should we think it'll be a smaller base of customers restricted to hyperscalers, or do you see more broad-based use cases outside of hyperscalers as well over time?
Yeah, I mean, the market is, I would say 60%, 65% of the market today is hyperscalers. There's a big fraction of the market, but that is non-hyperscalers. Now if we go five years back then, you know, the hyperscalers were just getting started.
Yep.
That portion of the market, smaller data centers, there are lots of tier two, tier three data centers and, you know, then the enterprise. You know, whatever happens, you know, over time, the whatever happens in the data center happens in the enterprise. It just takes more time. We see that happening.
Okay. Let me open it up here and see if anyone has a question. Any questions in the audience? Okay, let me continue. On the datacom side, another question that keeps coming up is the pricing headwinds. It's been roughly 10% per annum in terms of pricing headwinds that you've seen. How should we think about sort of historical price declines in 200G or sort of 400G products? Are you on those sort of newer products as well, running at those sort of typical 10% pricing headwinds? Does some of the inventory digestion that we're going through from the hyperscalers, is that changing the pricing dynamic?
Yeah. When we look at pricing, we look at it from a dollars per bit perspective. We don't, you know. Ultimately, that's the value that the customer, you know, that our customer sees. That's the cost the customer sees. When we go to higher speeds, the dollars per bit, almost by definition, drops for the customer. However, our best margins are at the higher speed products because that's where we get the maximum value. You have to look at it from a margin perspective on the transceiver, cost perspective from a dollars per bit. We don't see anything, you know, we really. The. I mean, our customers can, at the high speed, they will take every transceiver we make.
Their, you know, the demand is tremendous and it's just our supply that is holding them back. Yeah.
Maybe asked another way. I mean, hundred gig went through a significant price moderation. What maybe if I play out that scenario, as you said, like the higher speeds, that's where the demand is, what prevents hundred gig from going through another sort of step down in terms of pricing? Because that still contributes a lot of revenue for you.
Yeah. you know, you'd be surprised, Samik, if I told you know, we are still shipping a lot of 1G products and sub-1G products. You know, the pricing, with any of these products, yes, it goes through some erosion. There is first a, you know, it starts high and then starts to go through some erosion. After that, the erosion stabilizes. I think, 100G has probably reached a time where it's, that erosion has stabilized, because, I mean, there are some applications, because when the market kind of migrates on to the higher speeds, then this becomes sort of a niche-y kind of a market, and there's really no more price erosion there.
Okay. Okay. Let's switch gears to telecom. One of the questions you probably expected already would be, how long do you expect the inventory digestion from your customers to last? Maybe in that relation, have you done any sort of estimates around how much overshipping was happening related to underlying demand in the last few quarters? Sort of what's the-
undershipping at this point that's going on?
We've been, you know, our, if you look at our OEM customers and those who are reporting publicly, especially those who are all optical or those who are reporting part of optical, they've all had record quarters. Record quarters for them. Their backlogs are very strong, but their inventory levels and those of them who report inventory, you can see that it's three, four times before what you know, COVID was. Based on the end market is still very strong. Yes, we'll go through some gyrations, but the long term is also very strong. I think if based on our analysis, we think this. The telecom OEM side, I think it plays out for about two or three quarters before inventories return to normal, then ordering patterns also become normal.
I mean, the ordering patterns are when they couldn't get enough product, they were ordering a whole lot, right? I mean, that's sort of... I think that's what kinda led to where we are today. The underlying demand is strong. If you look at telecom, you see the Broadband Act, which is $65 billion of commitments. Now, how much of that actually makes it out to the components needs to be figured out, but we believe it is, it's definitely a growth driver for the telecom business, especially in the access, where you're talking about access transceivers and anything you do in the access will ultimately drive the need for.
What's-
gear at the core network.
Yeah. Yeah. Maybe going back to the question, what's your lead time now on most of the products you're shipping to your telecom customers? When we do eventually see an uptick in demand, like how much of a advance notice do you get because of the lead time?
Yeah.
Start to see that into your order pipeline?
Yeah. Our lead times have kind of moderated back to pretty close to what it was prior to all the supply chain issues. So it's hard to say 'cause our We sell products at all levels of the value chain, so there isn't, you know, so some are off the shelf, and some takes 12 weeks to build. So it's all, you know. In general, if you say how are our lead times now compared to, you know, before COVID, I think it's kind of returned back to more of a normal. Our customers are also going back to a more normal ordering pattern, whatever that is specifically.
You mentioned the Broadband Act, before we go into that a bit more, how do you think about 5G as a driver? One of the things that's also raised concerns is the telecom companies themselves, their CapEx coming off the peaks.
Yeah.
the peaks that we saw last few years. When you think about, let's put all this inventory sort of situation aside, when you think about next drivers.
Yeah.
For the next few years, you said Broadband Act. If you go into 5G, does that remain as robust a driver of growth?
Yeah. I think the, there's certain geographies where 5G has taken a little bit of a pause. In China, they've taken a pause a year ago. In the U.S., there's a little bit of a pause, their geographies are going gangbusters. I mean, India is, you know, there's so much of 5G activity in India, in fact, some of our customers have reported, you know, their optical growth, direct result of 5G deployment in India. There are geographies that need 4G, 5G, I think as a long-term driver, it's still a driver of the business. You know, it's not just driving terrestrial business, it's driving submarine business, it's driving SatCom business.
I mean, there is, the access market is still pretty robust.
Any questions from the audience?
I'd like to say, just to add to that, you know, to do full duplex 3D virtual presence, you need 10 terabits per second. To do this such a way.
Yeah.
I can actually, if I go around you and if I'm able to see-
Mm-hmm.
the amount of data you need is 10 terabits per second. I mean, I live in the heart of Silicon Valley, I get 25 meg. We've got a long way to go, and I get one bar on my 5G signal so. We've got a long way to go.
Maybe coming back to your point on the Broadband Act, like now if you think about that as a growth driver, how would you characterize the materiality of it? Like, how would you maybe compare it to the size of the contribution on from 5G standalone, how material will be the broadband access part for your business?
Yeah. It wouldn't be as large as 5G. I would think it'll be maybe a little smaller than 5G because it's access, I think it's going to go into the carriers to develop those platforms so as to allow them to access. We will see transceivers, but it's also access to rural areas that cannot be easily served through fiber networks. We believe SatCom is a big. I mean, we've been, you know, our sales into SatCom, it's tiny, it's probably not material today, but it's growing at a very fast clip. We think those sections will benefit from the Broadband Act.
Okay. Okay. Can you flesh that out a bit more? Like, in terms of products, how different are they from the traditional telecom products?
In SATCOM, I think the difference is the space is the medium, right? There's no fiber. Beyond that, everything that we need for a terrestrial network, we need for SATCOM. Everything that we do, transceivers, amplifiers. However, there's a whole new, since you're going through free space, you need a set of specialized equipment. You need telescopes, you need beacon lasers. You know, you've got to first point the laser, you've got to very high power pulse to locate the other satellite. There's a lot of space comm related products that we actually make through our A&Ds, our aerospace and defense group, and we also through the legacy Coherent acquisition. In addition to everything that we have for terrestrial-
Mm-hmm.
you need these special class of components. Also high fiber, you know, specialty fiber, because these links are very high power links. They're free space links. You need high power amplifiers. Not just the traditional telecom amplifiers. You need, you know, ytterbium-doped kind of amplifiers for more power.
Good. Okay.
It's almost like a fiber laser type.
Yeah. Yeah. non-communication. Moving to the non-communication side of the business. In the semiconductor industry, we're seeing softness after years of sustained growth. Maybe first, what are the primary use cases that you have in your portfolio for the semiconductor industry? In your portfolio, where are the areas of strength, where are the areas of weakness?
Yeah. Everything, you know... Our semi cap business is really exciting. You know, amongst all the news that we had during the earnings call, we had a record quarter for semi cap. We really sell. If you take the entire semi process, starting from wafer slicing and inspection all the way down to back-end processing, we've got lasers and materials in every part of the process. Our majority, or I would say 90% of our revenues last quarter came from the front end. This is the next-gen node, the three nm node. Things like annealing, EUV lithography, you know, wafer inspection. That's really where everything related to the next-gen node is really where our products and services go.
Okay. Okay. Which are the areas of weakness that you're seeing? Any areas of weakness in?
Back-end has been soft. We've seen that. When I say back-end, we make lasers for PCBA drilling, PCB drilling. We make marking lasers to mark the packages. Those things have been soft. As I said, 90% of our business is in the front end. That's an area where we see some softness.
Okay. Okay. In relation to those areas like lithography, wafer inspection, annealing, what are the biggest technology changes that you are working on right now as you think sort of in the next three to five years, what are the biggest areas of growth for you? Because the technology takes a sort of jump to the next generation.
Yeah. Yeah, I think everything when the, when the node size becomes smaller and smaller, our customers are finding things that they could do traditionally without lasers or without some of these advanced materials, they're finding that there's a limit. They need a better material. They need, they cannot... You know, if you take rapid thermal annealing, you know, they cannot do it with a flash bulb anymore. They, they need a laser, so precisely they can control the area of dopant activation, et cetera. It's... You can think of products that enable them, our customers or semi cap toolmakers, to create the next gen node. That's really where most of our products are going, most of our design activity.
That starts from litho, and it's not just litho, it's through the process.
Sure. Okay. Let me switch over to the display business from the legacy coherent side.
Sure.
I think it's fair to say investors were concerned about the outlook for that business right about the time you acquired the legacy coherent piece. How should we think about the outlook right now? How much of it is correlated to sluggish consumer demand? How are you thinking about sort of long-term growth in that business?
Right. The sluggish consumer demand that you just stated, I mean, that caused some impact to our service business. Our customers are not using the tools, as much as they did, you know, a year ago. Last year was a softer year for our display business. We think we have kinda turned that corner because there are two exciting things happening. First is all the Gen 8.6 fabs are coming on, four or five of them in China, which use, you know, for IT displays like iPad and so on. That's exciting because all of those fabs need our OLED annealing tools.
The second exciting part is microLEDs, which we think will kind of inflect in fiscal 25. It's still gonna take time, but our key display customers are already engaging with us. We are shipping them tools, prototype tools. The sales is kind of the process has already begun. Those are probably two big areas that's exciting for that business.
Okay. Okay. Still have two major topics to go through, but let me take this question that's come in, and this is one of the topics still remaining, which is silicon carbide. The question is about risk of commoditization from Chinese competition and progress on 200 mm.
Yeah. You know, the substrate technology growing of these high-quality silicon carbide boules and then the substrates to build a compound semiconductor device with good yield is not easy. We've been investing in silicon carbide 30 years as you know, Samik, so have some of our very large competitors. It's not 1 thing where you can take... By putting 30 times the investment, you put it in one year, you cannot get you know, it doesn't work that way. It's a very complicated process. Yes, there's a lot of activity going on all parts of the world to develop these. Ultimately, I think there will be more suppliers.
We don't really see anybody in our rear view mirror that except for one large one that you know of, that we truly would call a competitor.
Okay. Any updates on 200 mm and how you're thinking about sort of the timelines around it?
I mean, we are shipping 200 mm. I mean, bulk of it is, of course, 150 today, but we have been shipping 200 millimeters. We think in the next few years we'd start to see some that market kind of inflect. Just from, I mean the semiconductor world, as you know, it's all about the wafer size.
Yep.
The better.
Maybe just going back to the earnings call, and one of the things that you meant or you had talked about on the earnings call is the supply-demand gap and how it needs to be closed over time, which requires a lot of investment, right? I mean, right now, if you had to take a sort of projection or pre-prediction for the next few years, do you see that supply-demand gap being closed? How much is that again, sort of how much of that is a function of driving you to look for strategic alternatives for your silicon carbide business?
Yeah. We don't really see it closing for at least four to five years. We believe the market's gonna be overserved. Every time we look at the silicon carbide business, the opportunity is bigger, the market's bigger, and it's coming in faster than we thought the year before. To truly, you know, take complete advantage of that opportunity, we are looking at strategic options as Chuck mentioned on the call. It's really to again, in our view, we think taking a much larger view of the opportunity will allow us to, you know, get the best return for our shareholder because it's. Yes, we have committed $1 billion.
It's over 10 years, I think we spent about $200 million last year.
Mm-hmm.
We think in order to completely capture the opportunity that it represents, it needs a larger, much larger investment. That's really what we're looking at from a partnership perspective.
Okay. Got it. maybe switching to the last topic here. VCSELs. VCSEL-based products for 3D sensing. I think few years ago, obviously, there was a lot of optimism of like the market developing beyond the primary customer. Where do things stand today? Where do you see those opportunities for VCSELs beyond the primary spot?
I mean, I would, I would broaden the question, I mean, if I can. Beyond VCSELs, really about sensing. You know, VCSELs is one part of the sensing of sensors, but there's so many sensors on these devices, and that sensor content is only increasing. It's not going down. Long term, we look at the sensing business, including 3D sensing, to be a $4 billion business in the next three or four years. We are going through some gyrations in design because customers go through design cycles. They try to do more with less. In a way, reducing the size of the market short term, but longer term with things like biosensing variables.
I mean, those just sensors are AI, ML, I mentioned that earlier. I mean, that's gonna drive a whole bunch of sensors. The sensors are only gonna go up. There's no. The things that you can do with these compound semiconductor lasers, whether it's for biosensing, glucometry or present, finding presence, et cetera, it's just, the opportunities are enormous.
The $4 billion number that you referred to, have you dissected that down further in terms of like how much is consumer, how much is not?
Yeah. We think it's maybe a third of it is consumer. The remaining would be automotive sensing, you know, in-cabin sensing, lidar, et cetera. I think it's a conservative estimate, but we need to look at how all these... There's a whole bunch of design activity that's going on. Our customers cannot be more excited by the breadth of platforms. You know, I don't know if you know, but another platform, we actually got a brand new compound semi platform from legacy Coherent called gallium antimonide.
Mm-hmm.
That's a compound semi laser which goes at two micron and beyond. You know, VCSELs are the gallium arsenide is at 900 nanometers. It just opens up, you know, the envelope of sensing.
Yeah.
I think we, there are just, the envelope of applications are the amount of design activity, whether you're monitoring sugar to going through the skin or you're monitoring moisture or alcohol, I mean, there's just a whole bunch of design activity that our customers are engaged in.
Okay. I see we're out of time, I'll wrap it up there. Thank you for coming to the conference. Thank you, everyone.
Okay, great. Thank you.
Thanks a lot.