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Coherent Corp
Earnings Call Analysis
Q1-2024 Analysis
Coherent Corp
The company commenced the fiscal year on a strong note, overcoming macroeconomic headwinds to produce first-quarter revenue of $1.053 billion—a figure slightly above the midpoint of its guidance. The non-GAAP earnings per share (EPS) also excelled, reaching $0.16 and surpassing expectations. The financial health of the company was further underscored by an operating cash flow of $199 million, showcasing both sequential and year-over-year improvement. These results were bolstered by strategic diversification, namely the standout performance of the silicon carbide business, which saw $1 billion investments from Mitsubishi Electric and DENSO, and strong demand for AI-related datacom transceivers and components.
While maintaining realistic expectations about the impact of ongoing market challenges, the company is optimistic about its growth potential. It's not only expanding its existing customer base but also engaging with new significant AI players, which promises a larger and more complex opportunity landscape. The company aims to improve its margin structure through various strategies, including restructuring and realizing synergies from Coherent acquisition. This confidence in growth is supported by the guidance for the second fiscal quarter with revenue projected between $1.05 billion to $1.175 billion and non-GAAP EPS from $0.14 to $0.32. Consistently, the fiscal year 2024 revenue guidance remains unchanged at approximately $4.5 billion to $4.7 billion.
Despite increasing restrictions on raw materials from China, particularly graphite which is essential for the silicon carbide business, the company has successfully mitigated risks through multi-sourcing strategies. This proactive approach towards supply chain management has secured the continuity of its silicon carbide business, which continues to experience robust demand, even amid signs of a slowing electric vehicle (EV) market. Customer engagement remains vigorous, with orders growing across the end markets, and a healthy design win funnel suggests the potential for sustained growth across most markets.
The company is poised to enhance margins by capitalizing on ongoing cost reductions—including synergy and restructuring plans—and leveraging product mix towards higher margin goods. Additionally, the new product introductions, such as 800G and the anticipated 1.6T transceivers looking to inflect around fiscal year 2025, will be accretive to overall margins. The company remains committed to a CapEx guidance of $350 million to $400 million for FY 2024, with future investments in silicon carbide for FY 2025 to be offset by external funding from recent partnerships.
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Good day, and thank you for standing by. Welcome to the Coherent Corp. FY '24 First Quarter Earnings Call. [Operator Instructions] Please be advised today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Paul Silverstein. Please go ahead.
Thank you, Kevin, and good morning, everyone. Thank you for joining our first quarter fiscal 2024 earnings call. Today on the call, we have Chair and CEO, Dr. Chuck Mattera, and a number of executives who Chuck will introduce in a moment.
Yesterday, after the market closed, Coherent issued a news release and posted a shareholder letter along with an updated investor presentation in the Investor Relations section of our website. Both of these documents were furnished on a Form 8-K. This morning, we filed our 10-Q. Today's conference call will be available for webcast replay in the Investor Relations section of our website.
Before I turn the call over to Chuck for his opening remarks, please note that following our September overview webinar on our communications market, we plan on hosting our second market overview webinar focused on our industrial market to be held on December 14. I want to call everyone's attention to our shareholders' letter, which contains our traditional financial statements that were previously set forth in our earnings press release along with detailed information around our operating performance, key trends and outlook. The plan is the bulk of this morning's call to answering questions from the analysts from the investment community.
I also want to remind everyone on this call, we will refer to forward-looking statements, including all statements the company will make about its future performance and market outlook, and actual results may differ materially from these forward-looking statements. Factors that could cause actual results to differ materially are set forth in the first quarter 2024 shareholder letter and in our SEC reports. Coherent assumes no obligation to update any forward-looking statements which speak only as of their respective dates.
Also during this call, we'll discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the shareholder letter. With respect to 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, please go ahead.
Thank you, Paul. Leadership development is among the most important jobs of a CEO, given how extensive our disclosures are in the shareholder letter, I have the following senior leaders with me on the call today. They are Interim Chief Financial Officer, Rich Martucci, Chief Strategy Officer and President of the Materials segment, Dr. Giovanni Barbarossa; EVP of Lasers, Dr. Chris Dorman, who came to us through the Coherent acquisition; Sohail Khan, EVP of our Wideband Gap Technologies silicon carbide business; our Chief Commercial Officer, Magnus Bengtsson, who leads our global sales and service org, and who also came to us through the Coherent acquisition; Chief Marketing Officer, Dr. Sanjai Parthasarathi; and the EVP of our telecommunications business, Dr. Beck Mason, a recent market hire and one of the industry's top leaders who chose to come to Coherent as a place to grow.
They will participate in the Q&A fireside today to provide investors a rich source of information about the depth and breadth of our markets, technologies, operations and overall business, and especially our leadership talent. And I'm sure you will enjoy interacting with them today.
In the first quarter, the Coherent team did a good job executing in the midst of a challenging macroeconomic environment. We posted revenue of $1.053 billion, which was slightly above the midpoint of our guidance, and non-GAAP EPS of $0.16, which was above the midpoint of our guidance. Operating cash flow was $199 million, which marked a sequential and year-over-year improvement. We invested $62 million in capital equipment, and we retired $19 million of debt.
Macroeconomic headwinds and uncertainty continue to affect many of our end markets and will continue to constrain our near-term growth and visibility. Our first quarter results, however, demonstrate the success of our diversification strategy. While some of our markets remain challenged, our silicon carbide business, in which we recently announced of $1 billion investments by Mitsubishi Electric and DENSO, enjoyed another quarter of strong demand.
We also enjoyed a second straight quarter of extremely strong demand for our AI-related Datacom transceivers and components. Both of these are indicative of the breadth and differentiation we offer the market leaders who are disrupting the status quo and underpinning the irreversible market megatrends that we enable.
In addition to continuing to invest in our core assets, we are taking substantive actions to ensure that we improve our operating performance, especially to drive recovery in our margin structure, including through global integration and transformation and the realization of our synergy plan from the Coherent acquisition as well as our previously announced restructuring activities.
Turning now to our guidance for the second quarter of fiscal '24, revenue of approximately $1.05 billion to $1.175 billion, and non-GAAP earnings per share of approximately $0.14 to $0.32. Our guidance for fiscal year '24 is revenue of approximately $4.5 billion to $4.7 billion, which is unchanged from our previous guidance, and non-GAAP earnings per share of approximately $1 to $1.50, which is also unchanged from our previous guidance.
And while our annual guidance remains unchanged, this simply reflects the confidence we have in that guidance, and we continue to believe that we still have very real opportunities to exceed those results by several hundred million dollars as we discussed last quarter. We will not hesitate to increase our outlook as we gain improved visibility regarding our ability to capitalize on these opportunities within fiscal year '24.
Now before I -- before we turn to your questions, I would like to say how appreciative and proud I am of our employees whose tireless dedication for setting the stage for now, next and beyond. Coherent is well positioned with differentiated technology, exceptional talent and high-quality efficient manufacturing platforms capable of delivering products to the market that are growing at high single digits to double digits. And I believe that we are better positioned than others to take full advantage of our existing market positions and to grow deeper into these markets because of our growing scale and customer intimacy and trust.
We are a trusted and valued partner with the industry leaders, and that trust and intimacy creates stability in our core business, and it also creates a flywheel effect of growth opportunities that many other companies simply don't have. We have tremendous upside and platform cost optimization from the ongoing integration, special restructuring and transformation projects over the next few years, and we have a track record to prove our likelihood of success.
We have a good plan and roadmap to take advantage of all of these assets and the opportunity the markets are offering today and to take advantage of the recovery and the anticipated growth in our markets. We have a team of world-class technologists, industry pioneers and executives with a demonstrated capability for identifying and capitalizing on market megatrends.
With that, I'll turn the call back over to Paul. Paul?
Thanks, Chuck. We will now open the call to analyst questions. [Operator Instructions] This call is scheduled for a full hour. [Operator Instructions] Please direct your questions to Chuck, who will decide who's best to respond. Kevin, please go ahead.
[Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan.
Can you hear me now?
Yes.
And if I can just start, I mean, last quarter, you did talk about -- and you referenced this in the shareholder letter as well the capacity increase on the capacity ramp that you're planning and the incremental order that you can get from the customers if your capacity ramp goes per plan or exceed your current base case. If you can share your thoughts around the ability sort of exceed that capacity ramp, what are you seeing as bottlenecks and be able to go to the customers and get incremental orders for the AI -- from the AI use cases and the [ 800 ] will be done through those in relation to sort of executing on that capacity ramp. And I have a follow-up after that.
Okay. Thank you, Samik. Samik, I want to ask Giovanni to take that because he's got a view all the way from the laser through the transceiver. Giovanni?
So Samik, thanks for the question. So I would say, generally speaking, we're doing better than our expectations, but it's very much a moving target in terms of the opportunity here in the sense that the target is getting higher and higher. Particularly, as we said in the shareholders letter, as the engagement with new significant AI players are increasing, particularly those players that we have not been historically strong at, so we think that the overall opportunity is getting larger and our ability to meet this larger and larger opportunity, obviously, gets more complex, more challenging.
But I think we have all hands on deck and the entire team is focused on several of the needs to ramp which are not only related to the supply chain because as new products, and this is -- as you know, is 800G is a very much new product, there were all these NPI-related challenges to bring up to speed, the manufacturing lines, the test equipment, the -- of course, supply chain, as we said. But most important to make sure that we deliver high-quality products to our customers, the volumes that are refreshing us to have to.
And so my follow-up, if I can just ask about the long-term guidance that you gave in the shareholder letter about 40% gross margin and 20% operating margin that you're looking at. Can you share some thoughts about sort of how you're thinking about getting -- making progress through that in relation to cost versus what you need in terms of top line recovery to get to those margin levels? Any thoughts around how much of that we get from cost saves that you're outlining versus any level of volume recovery that you need.
Okay. Thank you, Samik. Rich?
Thank you. We're going to -- we will benefit from our ongoing cost reduction, which include our restructuring and synergy plans, higher volume, as noted in our guidance, a better mix of product on higher-margin products and long-term continued to leverage our NPI as well as vertical integration where we can drive margin improvement.
Next question comes from Ruben Roy with Stifel.
I wanted to follow up on Samik's question, Chuck, and talk about just sort of the AI transceiver NPI launches, the delta between sort of your full year guidance and sort of what you're holding back. I'd love to hear some details. Outside of the supply constraints, it sounds like there's some qualification milestones needed. Is that product specific, customer specific? And if you could give us some details on how you expect those qualifications to ramp near-term, and what's left to be done before you actually start kind of seeing some revenues.
Thanks, Ruben. Giovanni?
Thanks for the question. I mean the -- as we said -- as I said earlier, new products generally require an incubation period in the manufacturing line to reach the quality, the yields, the performance that we promised. So those are generally true for any product. This 800G is significantly more challenging than any other product we had before the kind of the same type of market.
So I think the complexity comes from the fact that while we are ramping for the orders that we already have, we're also engaging, as I said, new players in a meaningful way to further extend our opportunity in the near future, and therefore, eventually see, as Chuck mentioned in his remarks, to see an upside for the overall market we can address. So it's a combination of serving needs that we have short-term versus the need to continue to increase the pipeline, the funnel of new opportunities for 800G, with additional customers beyond those that we're already engaged with.
Thanks for the detail. For my follow-up, on telecom, the data points remain pretty negative, and nice to hear you guys talk about bottom here coming out of the September quarter. Can you give us some details on what you're thinking in terms of -- it sounds like inventory is driving some of your view for the rest of the year. But starting in the December quarter, if you can give us any detail on kind of how you're thinking about that business, whether it's market share or kind of what's driving your view on a recovery starting here near-term, however gradual that might be?
Yes, sure. I think in the telecom softness, it's a combination of end market softness and inventory digestion at our customers. And we've been staying very, very close with our customer base on this and we see progress modestly coming through FY '24 and the rest of the quarters on their inventory digestion. And then we see gradual improvement in the end market demand really progressing through into FY '25.
Our next question comes from Meta Marshall of Morgan Stanley.
Great. Maybe just on gross margins. Was the weakness kind of versus expectations on the mix of categories or just -- are there any higher costs that are needing to be paid to kind of clear some of the 800-gig transceiver bottlenecks to be mindful of? And then maybe just as a second question, just any more clarity on how you guys are thinking about debt repayment in fiscal '24?
Okay. Maybe Rich.
Yes. So the margin weakness as a result of several factors. One was it's a lower volume that we incurred in the quarter. Unfavorable mix are the main key drivers. However, as well, we did experience a prior period underutilization that hit the P&L as well. For debt reduction, right now, we're anticipating $200 million of pay down for the year.
Our next question comes from Simon Leopold of Raymond James.
I wanted to get a bit of a clarification-type question here in that unlike last quarter's shareholder letter -- and by the way, we like the way you're doing this, it's helpful. This one did not mention explicitly several hundred million of AI-related Datacom sales in the outlook. And I'm just wondering how you'd like us to interpret that exclusion versus the prior quarter's letter. And then I've got a quick follow-up.
Simon, thanks for your question. I'd like to get us back to basics. We have the guidance. The guidance is the guidance. I made some additional comments this morning to give a sense that we are still aiming to do more. But I don't want to get us into a mode where we're going to have guidance and the guidance on top of the guidance. So I would just want to get us back to the basics. That's what we're doing. And as I indicated today, we might have some upside to it that we can achieve. For sure, we have upside as an opportunity. Okay?
That's very helpful. And then in terms of this AI pipeline of business, I'm just wondering if you could help us bracket how much of this is hyperscale exposure? And how much of it is non-hyperscale? And what I'm getting at is trying to understand a little bit about the customer mix and concentration of the pipeline.
It's a -- Sanjai will take that, Simon. I can tell you, it grows every day. Sanjai.
Yes. Thanks, Chuck. So last quarter, Simon, we did 50% of our business came from hyperscalers. And this is both direct as well as indirect sales into hyperscalers. Does that help?
Yes, it does. I guess I'm wondering about the pipeline as more so than the most recent quarter.
So our pipeline is still pretty strong. We expect to -- in fiscal '25, for example, we believe that 80% of our Datacom transceiver revenues will be from hyperscalers a lot of it, majority of it is -- a vast majority of it driven by AI/ML.
Appreciate that.
Simon, thank you for your feedback too on the letter. Thanks, Simon.
Our next question comes from Jed Dorsheimer with William Blair.
I guess first question, just want to shift from most of the others around the 800G, and just on some of your comments around the consolidation in compound semis. You mentioned that, one, if you could give a little bit more color on maybe metric [ side ]. And then two, on the new product introduction, you talked about reducing or improving cycle times. Could you talk about where they're at now and where you hope to get those 2?
Okay. This is Giovanni here. So thanks for the question. So we -- when we acquired Finisar, we acquired a number of wafer fabs, which at that time, we're pretty much fully utilized. And as we were able to transfer products and manufacturing lines between sites and so forth, we were able to identify ultimately what the best footprint for the compound semiconductor manufacturing for the company was going to be. And so that's what we're actually doing now because we couldn't do it that fast. So now what we've been doing, we are we've announced several shutdowns of smaller fabs. And we intend to move and integrate those manufacturing lines into our largest fab, which is in Sherman, Texas.
So there was a footprint. We still have some other fabs in between Europe and North America, there will still be stand-alone because the cost of moving those product lines will be too high and also we will require a lot of requalifications. So we cannot -- we don't see it an advantage in moving those lines. But at least for the gallium arsenide -- particularly the gallium arsenide, VCSEL-based type of products, we -- and some of the indium phosphide based products, we ultimately decided that Sherman, Texas will be our center of excellence, our consolidated time.
I'll take the second part, Jed. Thanks for your question. With regard to NPI cycle times. I would say 1 thing, I think you know that. We're built for speed. This place is organized for a great sense of urgency about everything we do. One of the benefits we have is with our global footprint is we can do things 24 hours a day, 7 days a week. That's not so easy for everybody else to say. I would tell you that I can't give you a baseline generically because we have so many platforms and so many products in the company. But I will point out that using AI in this last year, our teams have demonstrated a [ factor II ] reduction in the cycle time for launching new products from our fiber laser business. And that is going to be a contagious example that goes around the company.
I think that AI is going to be a great driver, but it's not the only thing that we need to do. And so a factor II everywhere is a starting point for the mindset of the management team. Okay?
Got it. Just as a follow-up on the silicon carbide business, we are seeing greater restrictions on raw materials from China. And I'm just wondering, graphite is an important component to both the furnaces as well as the input material. Could you just update on supply chain exposure and if any, in terms of how you see specific to graphite?
Thanks, Jed. Sohail, you out there?
Yes. Yes. Jed, thanks for your question. First answer is no, we don't have the exposure. We have multi-sourced for both base material and the other components. And we have put in place long-term agreements. None of our graphite supplier have the basics coming from China.
Our next question comes from Richard Shannon with Craig Hallum.
I'll also echo my happy just with the shareholder or to keep it up, please. I want to follow up on the topic of telecom. I guess one of the questions I had looking at some reports here in earnings season so far, including last night, we're seeing some inventory burn still taking place at the equipment level here. Wondering why you're seeing some start of a pickup here. And to the degree to which you can describe it, how much of this recovery is coming from transceiver type products like ZR that you pointed out in shareholders letter versus things like WSS and ROADMs?
So thanks for the question. So right now, I think what we're seeing is a little bit more strength on the WSS and the ROADM side amplifier and that portion of the business. And it's really as our customers are burning down inventory right now, and we're starting to see different product lines there have a small pickup this quarter, and we think that's going to continue to double digits for the second half of FY '24.
And our transceiver based products, we see a lot of design in activity happening right now. There's a lot of RFQs and RFPs especially for new technology products, like our 100-gig Coherent ZR. And there's an increase in RFP activity around 800 gig, which is coming next year. And so we think that's very positive for that segment, but we think that's going to be more delayed towards the latter half of FY '24 and early FY '25 from a ramp perspective. Does that help provide a little more color?
Yes, that does. My follow-on question will be on the display market. I think you talked about service utilizations that have increased here sequentially, I think even a nice 20% number, if I remember correctly, but still below year ago levels here. I wonder if you have any visibility into those utilizations continuing to improve and perhaps even get back to year ago levels. And then does this imply or just give you better visibility on further CapEx orders within the display unit?
Richard, thank you very much. Chris Dorman?
Yes. In display, the utilization of the OLED tools drives the service revenue. And it's worth remembering that there are 2 factors in terms of the utilization, it's the number of phone screens that are produced, but there's a multiplying factor in terms of the percentage of phones which are using OLED screens. And that has led to an uptick in the service revenue, the utilization of the Excimer lasers, and that will continue through the year.
Our next question comes from Sidney Ho with Deutsche Bank.
Great. I want to switch gears over to the industrials market. You seem quite confident that the business will improve in the second half of fiscal '24. Can you talk about which subsegments do you think will lead the recovery between semi-cap display, precision manufacturing and aerospace? Particularly interested in your comment in precision manufacturing, you're seeing second consecutive order of growth, and some customers are requesting shipments on a short notice, but that's quite different than what we are hearing from other broad-based semiconductor companies.
Okay. Sidney, this is Chuck. Sidney, we may have 2 or 3 people that have an angle on this, but we'll start with Sanjai.
Yes. Thanks, Chuck. So in terms of our industrial market group is broken up into verticals. So we have our precision manufacturing vertical, our semi-cap vertical, our display vertical and aerospace and defense. We are really excited about semi-cap. That market for us has been growing very steadily quarter-over-quarter, year-over-year. So there is -- we continue to see a lot of demand, both from existing customers and new customers. And envelope of applications seem to continue to improve.
On precision manufacturing, in particular, that is a market that is a lot more sensitive to macro. However, we do have certain areas of very strong growth, such as electric vehicles. So our stock markets growing at a 15% CAGR. The medical device market is turning around, that's growing also fairly well. So we've got some really big bright spots within precision manufacturing. And I think Chris covered the display question earlier.
Do you want to add anything to that, Chris? .
Yes. I would say that semiconductor capital equipment inspection is also showing growth. It remains strong. Our customers continue to pull. And a strong backlog there.
Okay. Great. That's helpful. My follow-up question, I just want to follow up on the silicon carbide. You call out the near-term demand for silicon carbide business remains pretty robust. But recent data points from the industry seems to be more mixed in the past few weeks, with demand for EVs may be slowing down a little bit. Can you give us a sense what you are seeing in terms of demand? Is that you are doing better than others because you're gaining share? And also interested to see how the pricing side of things are. Are you seeing more competition in terms of prices?
Thank you, Sidney.
Okay. Sidney, that you have to look at the market, not by 1 quarter basis because this is a market which is on a growth trajectory. And it is going to continue to grow at close to 30% compounded growth rate over the next 5 to 10 years. So one announcement of one vendor pushing in and out does not define the market. Overall, market strength is there, and the market adoption is there. And yes, when you have the growth and many players are coming in, that there will be price pressure. It is normal, natural in any growth market, but we see a strong growth and a very good traction with very large customers with the long-term agreements in place.
Our next question comes from Vivek Arya with Bank of America.
This is Blake Friedman on for Vivek. I wanted to go back to your AI opportunity. I know one of your competitors recently made an acquisition to enter the AI Datacom transceiver space. First, I was hoping you can provide any clarity on the margin generated from higher-speed AI-related transceiver products, and if you think this growing competition also creates any pricing risk in the market.
Thanks for the question. First of all, the -- clearly, this validates the investment thesis we had for the acquisition of Finisar years ago. So we had that vision, which is now -- you can see it was a pretty good one. And then reinforces, right, it's an endorsement. It reinforces the strength of the market that we are witness today and the upside potential that we all see.
I think the -- generally speaking, from vertical integration, scale and technology differentiation, we are still the market leaders, and that explains why we see the funnel -- the pipeline for new engagements around 800G increasing daily in the sense that we believe that we have an opportunity that maybe we have not considered in the recent past to penetrate hyperscalers, where we have been historically not as strong as we would have liked to be.
And so generally speaking, the competitiveness of the landscape is there. I think we welcome competition. And I think we are very well positioned with the 3 attributes, which I mentioned, to compete and continue to grow and take advantage of the -- again, as I said, of the strategy, which we deployed years ago when we identified AI on demand as being a key driver for the growth of our business.
Got it. And then just as a follow-up on the silicon carbide side. I know there's certainly a supply-demand imbalance in the market. Just trying to get your thoughts around kind of as there's more device vendors in the market who are kind of bringing the kind of materials production in-house. How we should think about the growth opportunities for Coherent and I guess, your thoughts on the relative growth in the materials market versus the device market longer-term.
Okay. Thanks for your question. Sohail.
Yes. The -- we see a demand on both ends that even you said there are lots of suppliers in the device side, people are still looking for a good MOSFET. A MOSFET which will be rugged. A MOSFET which will have high reliability. And a MOSFET which can address the future needs, which are getting more and more integration and the amount of current and power you can handle. So we see a very strong demand on the device side from our customer engagement. And then on the materials side, that we see a very strong demand for 200-millimeter. And in 200-millimeter, there are very few limited choices. And as you know, we were the first 1 to introduce the 200 product to the marketplace. So we feel pretty good about it. Yes, there is competition, but competition reaffirms that there is a strong demand for it.
Our next question comes from Christopher Rolland with Susquehanna.
Congrats on the results and guidance. I guess my question is around backlog, so that's now increased 2 quarters in a row. Is this a sign you guys think of the bottom? Does this means we can grow revenue each quarter as we move through next year? Or are there some decent timing and fulfillment issues here in this backlog that would disturb that kind of linear pattern?
Okay. Thanks a lot, Chris. Chris, I'm going to ask Magnus just to make a general comment about the overall pulse from the marketplace as he sees it from the point of view of the demand, and we'll see if there's a follow-up.
Chris, I appreciate the question. So let me just talk a little bit about the customer engagement perhaps. I would say that customer engagement is really robust, and we see orders continuing to grow across the end market. Customers today, there's certainly the inventory digestion issues we mentioned with some of our end markets, but customers are really focused on innovation. And so the design win funnel, the outlook that we have looks very robust across most of our markets. So we would expect that trend to continue.
Great. Perhaps as a follow-up to someone else's question, did you guys get to take a look at the Cloud Light deal? Or did you guys get to look at the Intel Sipho sale to Jabil? And were any of these deals interested -- interesting or perhaps, in your opinion, threatening in any way either?
Okay, Chris. Giovanni, do you want to take that?
Yes, sure. Thanks for the question. No, we were not engaged -- we don't need very much a contract manufacturer to be added to our existing manufacturing lines. So we believe that -- as I said earlier, we welcome the competition. We think it's -- the combination will definitely be a strong competitor, so we endorse that. But as I said earlier, it's also an endorsement to our strategy, which we deployed years ago to be in this market at this time, be leader with the larger scale and the largest -- broadest portfolio of differentiated components and subassemblies for -- to serve this market.
Our next question comes from Tom O'Malley with Barclays.
I just had one on the segments. So in your $4.6 billion guide for the year, could you give us a little more color on what you expect the comm business to do? And then more specifically within the comm business, what you're expecting the Telecom business to do and what the Datacom business will do? I ask because there's obviously some big movements inside of the Telecom and Datacom business, but I'm just trying to get a little better feel for what you guys expect for growth throughout the year.
Okay. Tom, we're not going to give business unit guidance. And I think Rich can just make a general overall comment. I think at the midpoint, we're up 11% in the second half compared to the first half. There's some puts and takes across the segments. Do you want to say anything else, Rich, about it?
No, that's very right.
Okay. And if you have any specific question about the Telecom market, Beck can take it, but we're not -- he's not going to give you guidance in the second half of the year.
Sure. I guess just the trend looks as though the high-speed Datacom business looks as though it's the big driver of growth. Could you talk about -- historically, you guys have said that within your comm business, the transceiver business is below corporate gross margins. In these new products, particularly in 800G, are you seeing accretive gross margins with those new higher-speed products? Or are those still below corporate gross margin?
Okay. It's a good question. Well, Rich will take it. But I would say, at the launch point with all the things that we have going on, where we're at today, we're driving to improve, is just a general comment for the company. We have lots of flywheels turning inside the company all the way from the front-end fabs, where we're still adding capacity to be able to keep pace not with FY '24 demand, although that's a challenge because it keeps going up, but especially because we believe FY '25 is going to be that much more exciting. Rich, make a general comment about margins, if you would.
Sure. So on the margins, the average is about where we are at as a company. And -- but we fully expect, as we go through the learning curve, that the margins will increase going forward.
Our next question comes from Mark Miller with the Benchmark Company.
Just wanted to pursue a little more. From your guidance, it looks like you're projecting improvements in margins going forward. You listed several things in your letter to shareholders. Is that being driven by higher revenues? I guess I have a similar concern about transceivers in terms of the -- they being accretive to overall margins, especially when you're seeing strong growth there. So I'm just wondering what's driving the expectations for higher margins. Is it just higher sales or mix?
Mark, I'll take that. This is Rich. Thank you. So as I mentioned before, our ongoing cost reductions, including our synergy and restructuring plans and higher volume, as noted in our guidance, better mix of products on higher-margin products as we move forward throughout '24, and our long-term continued leverage of our NPI. Anything that we can also get from our vertical integration will drive margin improvement, we'll be implementing that as well.
Last question is the data centers, a couple of firms like again, Western Digital, are finally saying they're seeing light at the end of the tunnel which -- with their data center customers. I'm just wondering what you're seeing in terms of data center business.
Sanjai, do you want to just...
Sure. So within our Datacom business, there are 2 drivers, the biggest one today is AI which is growing at a 47% CAGR. Our traditional non-AI business, if you will, is growing as a slower clip. But together, it's still -- the market is still continuing to grow at a 20% CAGR long-term. So we are pretty excited about that market.
Our next question comes from Ananda Baruah with Loop Capital.
Chuck, I guess just sticking on transceivers, and the higher speeds, do you have any sense if you're positioned -- I guess, how you're positioned from a share perspective going forward? Would you expect to -- I guess, any view on expectations to maintain share going forward, gain share going forward? Any context there would be helpful. And then I have a quick follow-up.
I believe that we're in a great position. I believe that if you look even beyond 800G, given the portfolio that we have of products coming through the funnel, that we're going to be able to continue to not only maintain that position, but we're counting on growing it.
And are you guys seeing -- just given all the activity in AI, are you seeing any greater urgency from your engagement around 1.6T? You've given a lot of great context actually this calendar year with regards to sort of time line, Industry 1.6T adoption. You made reference, I think, in the slide that today to 3.2T. Any urgent -- any greater urgency there given what's going on in AI? And any context around your kind of market positioning with regards to that? And that's it for me.
Okay. Thanks, Ananda. Sanjai?
Yes, Thanks, Ananda, for the question. So one thing is very clear. With AI, we need to go higher and higher speeds, and we need -- it needs to happen earlier. We are making great progress towards our 1.6T. We believe that we'll be one of the first ones out there. And in terms of timing, we're looking at -- we think the market will be trying to inflect in 1.6T around fiscal '25. And I just want to say, we've got all the key enabling blocks, especially the DFB Mach-Zehnder laser which is a 200G laser that we demonstrated at ECOC. So we're making good progress there.
Next question comes from Dave Kang with B. Riley.
Just regarding your Datacom mix, I was wondering if you can provide by what the mix was between 100 gig, 400 gig, 800 gig?
Should I?
Yes, please Sanjai.
So the high speed, which we define as 200G and above was 70% of the revenues last quarter.
So I assume the remaining 30% is 100 gig and below. How should we think about -- I mean, first of all, are they growing? And what do you think their runway is? And how should we think about pending [indiscernible] eventually?
Yes. I mean the slower speeds are typically today non-AI-related, -- so they're not growing as fast as 800G and even some parts of 400G. But long-term, we still believe those speeds are still going to continue to grow, especially as it kind of moves towards the edge of the networks.
Got it. And my follow-up is regarding your CapEx. How should we think about CapEx for this fiscal year? And then fiscal '25 after you get that $1 billion investments from -- to Japanese companies, how will that drop off in '25 after silicon carbide investments?
Okay. Two great questions, Dave. Rich, will you take those?
Yes. So as of right now, we're still holding to the full year guidance that we previously gave of $350 million to $400 million for FY '24. On the silicon carbide for FY '25, obviously, the investment will offset our -- what we thought we were going to invest in '25.
Dave, when we -- when we closed, we will run through in that next quarter revisions to our guidance. And in the quarter -- in the reporting quarter after the close, we'll update and give a strong sense for what we see both for '24 and give at least a glimpse of '25, okay?
Our next question comes from Tim Savageaux with Northland Capital Markets.
A couple of math questions here. I think with some significant implications maybe. First one is on kind of results and guide Telecom versus Datacom. And I think the anecdotal commentary is about inventory digestion in the cloud side. But if you look at how that's proceeding, it seems like most of the weakness sequentially was in telecom, going from 40% to 29% on a declining number. So we talk in order book versus revenues when we're talking about those comments, or am I looking at that right? And as you look at the guide, is most of that sequential growth, about $75 million, is that in comps? And is that some AI starting to ship or telecom bouncing back? Or how would we characterize that? And I have a follow-up.
Okay. Well, I think there's really 2 questions. Beck will take the one that's market related and Rich will take the finance. .
Sure. I mean on the telecom side, we see that growing modestly this quarter and we see double-digit growth recovery in the second half of this fiscal year for our telecom revenues, right? And I can comment on the ratio, that was relative to the revenue last quarter.
Exactly. Okay. Tim, would you repeat the second part of your question for Rich?
Let me go on to the third part. And of course, there's a rich history of the multipart questions here with numbers on this call. But -- and that is -- the overall question I'm saying -- I'm going to ask is what is the absolute size of your AI backlog? But I'm going to try and get there in a couple of parts, which is you talked about an order increase last quarter that was entirely networking driven, 30%. That seems like it's $300 million. There's some commentary here on the call about despite orders coming down the AI backlog going up 200%. So I'm going to give you a chance here just to give us a number for what you got in backlog that you would consider AI, whether that's all 800 gig or not?
Yes. I don't think we can give you that. What I can tell you is it's a substantial and meaningfully material on us. But I'm not going to give you the number.
Our next question comes from Jim Ricchiuti with Needham Company.
So you seem to be suggesting some recovery in the second half on both the OLED side and the WFE side of the business. The OLED side, I think we understand what's happening with service utilization going up. What's your line of sight in terms of deployment of new Excimer laser tools in the second half of fiscal '24, as well as your line of sight on the WFE improvement in the second half? .
Yes. As you mentioned, service utilization uptick in the Excimer business for display in the near-term. In the long-term, the principal movements in the display market will be around the adoption of OLED technology in laptops, in tablets, in IT panels. And we're engaging with customers on Gen 8 investments. The timing of those Gen 8 investments should be clear early calendar year '25. And we'll be well positioned to work with our customers on the expansion of OLED capacity for tablets and for laptops, which would be incremental to our current business.
We've developed solid-state technology in line with the challenges of maintaining a sensible cost level for those larger OLED panels. And in the long-term, we see a migration for TVs into the micro LED market, which we're investing heavily in developing new tools for.
Jim, did you have a second one...
Yes. Yes. The other question was just -- and maybe I'll just group this into one last question as on the balance of that laser and industrial business. It sounds like you're feeling relatively positive about the WFE portion of the business. Back-end semi, is that going to continue to be relatively weak? And are you assuming -- looking at precision manufacturing beyond the current quarter that the recovery there is still fairly uncertain. Is that a good way to characterize the outlook for this part of the business?
Yes. Front-end semi remains strong. The reasons for that are that the customer relationship in the front-end semi market is a long-term roadmap. We engage -- we partner with our customers in terms of developing that long-term roadmap. We develop lasers specifically for our partners in that area. And it's more than a sale. The relationship lasts for 20 years in terms of one particular laser technology. The service component of the semi-cap business is very significant. And so we know this a long-term journey, which gives us more certainty in the service business of the emergence of the semi-cap inspection market. So we get a great deal of visibility to our customers on that.
In terms of back end, it is softer. The recovery is taking longer. Potentially the end of the fiscal year to see any change there. And in precision manufacturing, PMI, as Magnus mentioned before, there's -- the recovery is around the end of the year. But all of that, the precision manufacturing in the back-end semi is offset by the strength in display and the strength in semiconductor capital equipment wafer inspection.
And I'm not showing any further questions at this time. I'd like to turn the call back over to our host for any closing remarks.
Kevin, thank you. And I want to thank all the analysts on the call for your thoughtful questions. As always, if we could be a video help throughout the quarter, please feel free to reach out. And I want to thank everybody for joining us this morning. Thank you.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.