Coherent Corp (NYSE:COHR) reported its fourth-quarter earnings on Wednesday after the closing bell.
Below is the transcript from the Q4 earnings call.
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OPERATOR
Welcome to the Coherent fourth quarter and full fiscal year 2025 earnings webcast. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead.
Paul Silverstein (Senior Vice President of Investor Relations)
Thank you Operator and good afternoon everyone. With me today are Jim Anderson, Coherent CEO, and Sherry Luther, Coherent CFO. During today’s call, we will provide a financial and business review of the fourth quarter, fiscal 2025 and full year fiscal 2025 and the business outlook for the first quarter of fiscal 2026. Our earnings press release can be found in the Investor Relations section of our company website at coherent.com I would like to remind everyone that during our conference call today we may make projections or other forward looking statements regarding future events for the future financial performance of the Company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the Company files with the SEC, including our 10-Ks, 10-Qs and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward looking statements. This call includes and constitutes the Company’s official guidance for the first quarter of fiscal 2026. If at any time after this call we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. Additionally, we will refer to both GAAP and non GAAP financial measures during this call by disclosing certain non GAAP information, Management intends to provide investors with additional information to permit further analysis of the Company’s performance and underlying trends for historical periods. We provided reconciliations of these non-GAAP financial measures to GAAP financial measures in our earnings release and investor presentation that can be found on the Investor Relations section of our website at coherent.com let me now turn the call over to our CEO Jim Anderson.
Jim Anderson (Chief Executive Officer)
Thank you Paul and thank you everyone for joining today’s call. Our fiscal 2025 was an outstanding year for Coherent as full year revenue increased by approximately 23% year over year to a record $5.81 billion driven by strong growth in our data center and communications business. Our revenue growth combined with gross margin expansion of 358 basis points led to an approximately 3x increase in our non GAAP EPS over the prior year. In addition, Q4 marked a strong end to the year with revenue increasing 16% year over year to a new record and non GAAP EPS approximately doubling year over year to a dollar per share. Having completed my first year with Coherent, I’d like to take the opportunity to thank my Coherent teammates for their outstanding focus and execution over the last year and their help in positioning the company for continued long term growth. At Coherent, almost everything we do touches a Photon in some way. We believe there is no other company with a broader and deeper portfolio of photonic technology, expertise and innovation. Photonics is becoming increasingly critical to many applications including AI data centers, communications and a wide range of industrial applications, and Coherent is well positioned to take full advantage of this opportunity. We’re excited about the future and I couldn’t be more proud to be part of such an incredible team. Let me provide some market and product updates from the past quarter. In our data center and communications market, revenue grew by 51% in fiscal 25. In Q4, revenue grew 5% sequentially and 39% year over year. For fiscal Q4 and full year, we saw strong growth in both AI data centers and communications. In the data center market, full year revenue increased by 61%. For Q4, we again achieved record quarterly revenue with data center revenue growth of 3% sequentially and 38% year over year. We continue to see strong bookings and demand forecasts across our data center customers as they continue to invest in AI data center capacity expansion. In fiscal Q4, we were pleased to see initial revenue shipments of our new 1.6 Tbps transceivers and we continue to expect 1.6 Tbps volumes to ramp throughout the balance of this calendar year with more meaningful revenue contribution in calendar 26. In the meantime, demand continued to grow in Q4 for our transceivers with data rates below 1.6 Tbps. Beyond 1.6 Tbps, we continue to make solid progress on the development of our 3.2 Tbps transceiver products and technologies which will support a range of optical data transmission form factors. Our 400G per lane differential EML, which we demonstrated earlier this year and is the foundation of 3.2 Tbps transceivers, is recognized by our customers as a key advantage of coherence technology roadmap. We also continue to make progress on CPO related products and technologies with strong engagements across a wide range of customers. For example, one of the key technologies behind CPO applications is CW lasers. We have a long history of producing CW lasers and we drove a significant increase both sequentially and year over year in our CW laser production in Q4 and we expect to continue to rapidly ramp CW laser volume over the coming quarters to meet the rising demand for our optical networking solutions that use EML or CW lasers, we continue to ramp internal production of Indium phosphide which is the key technology behind EML and CW lasers used in both pluggable transceivers and CPO applications. As a reminder, we’ve had Indium phosphide capability in house for over 20 years and Indium phosphide based transceivers account for a majority of our Datacom transceiver revenue. With the majority of our EML based transceivers utilizing our internally manufactured EMLs, we’ve tripled indium phosphide capacity year over year and expect to continue to expand capacity over the coming quarters to support the strong demand signals from our customers. For example, I’m pleased to announce that we will begin production this month of our new 6 inch indium phosphide line in Coherent’s Sherman, Texas facility. This is the world’s first 6 inch indium phosphide production platform and is expected to provide us significant advantages in terms of both lower cost and higher volume production and it will further enhance our industry leading supply chain resiliency. In addition to indium phosphide, our Sherman, Texas facility is also a site for VCSEL (Vertical-Cavity Surface-Emitting Laser) production on Gallium arsenide technology. As mentioned in a recent Apple announcement regarding their American Manufacturing program, we’ve entered into a new multi year agreement with Apple for a new generation of VCSEL (Vertical-Cavity Surface-Emitting Laser) products that support Apple’s iPhone and iPad products. We expect revenue from this expanded partnership with Apple to begin in the second half of calendar 26th. The VCSEL (Vertical-Cavity Surface-Emitting Laser)s for Apple are manufactured in our Sherman, Texas facility and will help support the long term growth and utilization of the site. I want to thank Apple, which has been a long standing customer for this important multi year agreement. This agreement highlights the importance of our supply chain resiliency and flexibility including our significant US manufacturing footprint. In fiscal Q4 we also began initial revenue shipments of our new optical circuit switch. As a reminder, this new product represents a $2 billion expansion of our addressable market opportunity. The underlying technology in our OCS has tremendous benefits versus mechanical MEMS based solutions offered by others as our solution is non mechanical and is based on field proven digital liquid crystal technology that’s been deployed for many years in demanding telecom applications. Customer engagements on this new product continue to grow and we expect revenue to ramp through the remainder of this calendar year and to contribute more meaningfully in calendar 26. We also delivered strong growth for both full year fiscal 25 and Q4 in our communications business. This business is comprised of both traditional telecom as well as data center interconnect communications. Revenue increased 23% for fiscal 25 for Q4 we saw accelerated growth in this segment AS Communications grew 11% sequentially and 42% year over year. Growth was driven by robust demand for our ZR ZR plus DCI focused new product introductions and ongoing recovery in end demand. In the traditional transport market. We saw continued growth in the ramp of our new products including our 100g, 400G and 800g ZR ZR plus coherent transceivers and expect these products to increase their revenue contribution throughout fiscal 26 and beyond. In particular, our 100G ZR product family is ramping rapidly driven by strong customer traction. For this uniquely differentiated solution, we productized multiple variants and have several more in development across multiple applications. We believe both AI data centers as well as communications will be strong long term growth drivers for the company given the exceptional breadth and depth of our photonic technology. Turning to our industrial related end markets, revenue decreased 2% for the year. For our fiscal Q4, revenue decreased 2% sequentially and 8% year over year. For the full year we delivered above market growth in our industrial laser products and services which was offset by a decline in our silicon carbide business which was consistent with softer end market demand in the automotive segment. In our industrial laser products where we lead the industry with the widest and deepest portfolio of industrial lasers, fiscal 2025 growth was driven by growth in both product sales as well as growth in our recurring services revenue stream. Year over year growth was driven primarily by display capital equipment and semi cap equipment markets. In particular, display capital equipment growth was driven by growing demand for our laser systems and services that are used to support the capacity expansion of OLED fabs. As OLED screen adoption continues to grow and total OLED surface area is expected to double over the coming years. Across our industrial laser products, our recurring services revenue stream grew faster than product sales. As we discussed at our investor day, we continue to expand the installed base of our industrial lasers and we expect the recurring service revenue stream to continue to become a larger component of our overall industrial revenue over time, which is a tailwind for our gross margin for our materials products. Fiscal 25 Revenue excluding Silicon carbide was flat year over year. As demand remained stable. During fiscal 25, we experienced a drop in silicon carbide demand which was a headwind to our overall industrial revenue. However, over the past months silicon carbide demand has stabilized and we do not expect this to be a headwind for us in fiscal 2017. We continue to see our industrial products and end markets as a strong long term revenue growth and gross margin expansion opportunity for the company. Given our leadership portfolio of hardware and software products and services on the topic of our investment strategy and our portfolio optimization initiative as discussed over the past quarters and at our recent Investor day, we’ve been driving a series of actions to streamline our portfolio and concentrate our investments in the areas of greatest long term growth and profitability. As part of our portfolio optimization, today we announced an agreement to sell our aerospace and defense business for $400 million. We expect to close this transaction this quarter. Upon closing, we plan to use the proceeds of the sale to pay down additional debt and we expect the sale to be accretive to our eps. We made the decision to sell our A and D business because it was not aligned with our long term strategic focus areas and it did not support our long term financial targets. I’d like to thank all of the A and D employees for their tremendous contributions to Coherent over the past years and wish them all the best moving forward. We will continue to look for ways to streamline and strengthen our portfolio moving forward and ensure that our investments are concentrated in the area of greatest shareholder value creation. Regarding the current tariff policy environment unchanged from last quarter, we do not expect significant impact from tariffs this quarter. Though we do not have full details yet, we believe President Trump’s recent announcement regarding semiconductor tariffs may present a competitive advantage for our business. Many of our products, such as transceivers, are today covered by the semiconductor exemption. And as a company with significant US Manufacturing operations today and new investments planned for our Sherman, Texas Easton, Pennsylvania and other US Facilities, we believe we would avoid the semiconductor tariff. Our extensive US Manufacturing footprint is a key part of our overall supply chain resiliency and we believe this is an important competitive advantage for us. Over the past months, you’ve heard me stress the importance of Coherent’s dynamic, flexible global manufacturing footprint as a competitive advantage and a hedge against geopolitical risk. Our US Footprint is a key part of that strategy. Coherent has a long and proud history of advanced manufacturing in the United States, leading US manufacturing innovation since our founding more than 50 years ago. Beginning with the company’s first manufacturing site in Saxenburg, Pennsylvania, which remains our company headquarters. Today, our US manufacturing footprint extends across more than 20 US manufacturing locations in 13 states. Across those US manufacturing locations, we employ thousands of people. These sites lead the industry in technical innovation and manufacturing and we continue to invest in our US Manufacturing footprint. In summary, I’m very pleased with the progress we made during our fiscal 2025. We expect fiscal 26 to be another growth year for the company and believe we are well positioned for continued long term growth as we drive market leading photonic innovation across our core markets and continue to progress toward the financial targets we provided at our Investor Day. Once again, I want to thank the Coherent team for all their hard work and dedication. I couldn’t be more proud of my teammates and their laser focus on unlocking the full potential of the company. I’ll now turn the call over to our CFO Sherri Luther.
Sherri Luther (Chief Financial Officer)
Thank you Jim we are pleased with our full year 2025 results. We drove strong double digit revenue growth, significant gross margin expansion and improved profitability. We increased our cash from operations enabling us to significantly pay down our outstanding debt and further strengthen our balance sheet. Let me now provide a summary of our results. Fourth quarter revenue was a record $1.53 billion, up 2% sequentially from the third quarter and up 16% year over year driven by growth in AI data center demand coupled with the continuing recovery in telecom. Full year 2025 revenue was a record 5.81 billion, up 23% from 2024. Revenue growth for the full year 2025 was driven by growth in both AI data center demand as well as Telecom. Our Q4 non-GAAP gross margin was 38.1% down 43 basis points compared to the prior quarter and was up 220 basis points compared to the year ago quarter. The sequential decline in gross margin was primarily driven by unfavorable foreign exchange in Q4 which was partially offset by benefits from our gross margin expansion strategy with improvements in both pricing optimization as well as cost reductions. Our non-GAAP gross margin for the full year 2025 was 37.9%, up 358 basis points from 2024. The improvements in non-GAAP gross margin for the full year 2025 were driven by our gross margin expansion strategy where we saw improvements in both pricing optimization as well as cost reductions offset somewhat by unfavorable mix and foreign exchange. Cost reductions included lower manufacturing costs as well as yield improvements. Fourth quarter non-GAAP operating expenses were $307 million compared to $297 million in the prior quarter and $269 million in the year ago quarter. The increases were primarily in R and D driven by increased investments in our product portfolio, in particular in data center and communications. We continue to focus on investing our R and D in those projects with the highest ROI while driving efficiency and greater leverage in SGA. Non GAAP operating expenses for the full year 2025 increased to $1.17 billion from $998 million in 2024, primarily driven by increased investments in our product portfolio as well as variable compensation. Our fourth quarter non-GAAP operating margin was 18% compared to 18.6% in the prior quarter and 15.4% in the year ago quarter. Our non-GAAP operating margin for the full year 2025 was 17.8%, up 472 basis points from 2024. Fourth quarter non-GAAP earnings per diluted share was $1 compared to …