Coherent Corp

NYSE:COHR

Earnings Call Analysis

Company Forecasts Strong Datacom and Silicon Carbide Growth

The company reported a 100% quarter-over-quarter growth in 800G shipments, crossing a quarterly run rate of $100 million. They anticipate that AI-related applications will account for over 50% of datacom transceiver revenues in fiscal '24. Growth is projected to continue, with expectations of a 65% CAGR for 800G and above transceivers from 2023 to 2028. Demand in the silicon carbide market is also robust, strengthening the company's position through customer engagements and long-term supply agreements. Revenue is expected to be 70% to 150% higher than the $300 million forecasted, with roughly 20% in the first half and the majority in the second half of the year.

Silicon Carbide Market and Growth Strategy

The company expressed strong confidence in the silicon carbide market, with growth expected to continue over the next five to ten years. Their strategy is reinforced by customer engagement and long-term supply agreements, as exemplified by their recent announcements with Mitsubishi and DENSO. This bullish stance is supported by the interest from both existing and new customers, particularly for the 200-millimeter offering.

Operational Efficiency and R&D Expansion

Operational synergies and cost reductions have successfully curbed the company's operational expenses, while planned R&D increases, particularly in the realm of AI, are set as strategic initiatives for future growth. These R&D investments are aimed at paving the road for fiscal year 2025 and beyond, indicating a long-term outlook for innovation and product development.

Supply Chain Control and Demand

The company has strong control over its supply chain with two facilities capable of producing datacom technologies, currently meeting demand with one. They are well-positioned to keep pace with both internal and external demands, even as they face a challenging ramp in data rate requirements . Additionally, the company has a unique ability to produce high-speed VCSELs, which are pivotal for future growth.

Margin Enhancements and Supply Assurance

Margins are on par with corporate averages but stand to improve through increased volumes and utilization in their fabs. The reliance on the company's synergy and restructuring plans is crucial for bolstering gross margins. In terms of supply, they foresee no challenges with VCSEL production as they ramp up transceiver modules, although external supply chain factors, particularly around ICs, could impact overall ramp abilities.

Telecom and Datacom Market Dynamics

The telecom sector showed a growth spurt in the December quarter compared to the October quarter. For the remainder of the fiscal year, double-digit growth is anticipated in the second half. They are also navigating a highly promising datacom transceiver market, projected to grow at a 65% CAGR over the next five years starting from calendar year 2023. The company targets growing faster than this already impressive market clip, with a current focus on AI-related applications.

Revenue Guidance and Future Outlook

Revenue expectations are bullish, with projections suggesting a 70% to 150% increase over a baseline of $300 million. Revenue distribution is projected to be slightly altered from the previous 20-80 split between the first and second halves of the year to something closer to that ratio. Looking ahead to fiscal '25, the 65% five-year CAGR sets a high bar for growth in the sector.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Coherent Corp. Fiscal Year 2024 Second Quarter Earnings Conference. [Operator Instructions] Please be advised that today's conference being recorded.

I would now like to hand the conference over to the Vice President of Investor Relations for Coherent Corp, Paul Silverstein.

[Paul Silverstein, executive]

Thank you, Carmen, and good morning, everyone. Thank you for joining our second quarter fiscal 2024 earnings call. The call will be available for webcast replay on the Investor Relations section of our website. On the call, we have Coherent's Chair and CEO, Dr. Chuck Mattera, and a number of coherent senior leaders who Chuck will introduce shortly. This morning, we will devote the majority of our time to answer your questions from analysts and the investment community.

Yesterday, after market close, we issued a press release, posted a shareholder letter and updated investor presentation to the Investor Relations section of our website and furnished these documents in a Form 8-K. This morning, we filed our 10-Q. The shareholder letter contains the financial statements historically included in our earnings press releases and detailed information regarding our operating performance, key trends and outlook.

Before we begin, a short statement about forward-looking statements. We may make and/or refer to forward-looking statements, including statements about future performance and market outlook. Actual results may differ from those in the forward-looking statements. The shareholder letter and our SEC reports set forth risk factors that could cause actual results to differ materially. We assume no obligation to update forward-looking statements, which speak only as of their respective dates. During this call, we may discuss both GAAP and non-GAAP financial measures. If we do, a reconciliation of GAAP to non-GAAP measures is included in the shareholder letter. If we present historical non-GAAP financial measures, we will limit our discussion to those that are reconciled in the shareholder letter.

Before I turn the call over to Chuck for his opening remarks, please note that on March 26 at the Optical Fiber Conference, or OFC, in San Diego, we plan to host a meeting with the investment industry, which will be webcast, during which we will provide an update regarding our communications market. And in April of this year, we plan to host our third market overview webinar. It will be focused on our instrumentation market. The first 2 market webinars focused on our communications and industrial markets are available on the Investor Relations section of our website.

With that, it is my pleasure to turn the call over to Coherent's Chair and CEO, Dr. Chuck Mattera.

[Vincent Mattera, executive]

Thank you, Paul. It's a great day here in Silicon Valley, close to most of our largest customers. As I've said before, leadership development is among the CEO's most important responsibilities. Given the shareholder letters extensive disclosures, I have asked the following senior leaders who participate in the Q&A fireside on today's call: Rich Martucci, Interim Chief Financial Officer; Bob Bashaw, President; Dr. Giovanni Barbarossa, Chief Strategy Officer and President Materials segment; Sohail Khan, Executive Vice President Silicon Carbide LLC, our newly created subsidiary for our silicon carbide business; Dr. Chris Dorman, Executive Vice President Lasers, who came to us through the Coherent acquisition; Magnus Bengtsson, Chief Commercial Officer who leads our global sales and service organization and who also came to us through the Coherent acquisition; Dr. Sanjai Parthasarathi, Chief Marketing Officer; and Dr. Julie Eng, Chief Technology Officer.

As being among the industry's best, they will provide investors a rich source of information about the depth and breadth of our markets, technologies, operations and overall business.

We emerged from the second quarter with greater confidence and excitement regarding a return to stronger growth and meaningfully enhanced profitability. For the quarter, we delivered solid sequential improvement in revenue and margins. The highlights of our second quarter include: healthy sequential increases in both gross and operating margin, ongoing AI-driven strength in the datacom vertical of our communications market, signs of improving demand in all four verticals within our industrial market, and the telecom vertical of our communications market for the confirmation of the previously announced transactions with Mitsubishi Electric and DENSO Corporation, in which they invested in aggregate of $1 billion in our silicon carbide business and entered into long-term supply agreements supporting demand for silicon carbide substrates and epitaxial wafers; and five an increase in our planned debt repayment in fiscal 2024 and resulting from the Silicon Carbide LLC being able to fund its own operating and capital expenditures.

While we expect that the higher revenue and the mix in our forecast will contribute to a rebound in margin structure, we are not waiting for improved end market demand to carry us. We've already implemented actions across virtually all of our businesses in a drive for enhanced operating efficiency. These actions, along with rigorous cost and expense control across the company, helped drive our sequential improvement in gross and operating margin in the second quarter. We are on a roll, but we're far from done. As we continue to transform the company to improve operating performance, we will optimize our production footprint and enhance operating resiliency while completing the integration of legacy Coherent. We also are exploring other strategic opportunities, not including material acquisitions to unlock shareholder value.

Now for some numbers. While the macroeconomic environment continues to present challenges, we are pleased with our operating results for the quarter. We posted revenue of $1.131 billion, which was above the midpoint of our guidance, and non-GAAP EPS of $0.36, which was above the high end of our guidance. Operating cash flow was $67 million. We invested $91 million in capital equipment and we retired $89 million of debt. In addition to continuing to invest in our core assets, we are taking substantive actions to ensure we improve our resiliency and operating performance, especially to drive improvement in our margin structure, including through global integration and transformation and the realization of our synergy plan from the legacy Coherent acquisition as well as our previously announced restructuring and consolidation plan.

Our guidance for the third quarter of fiscal 2024 is as follows: revenue of approximately $1.12 billion to $1.20 billion, non-GAAP earnings per share of approximately $0.32 to $0.52. And our updated guidance for fiscal 2024 is revenue of $4.55 billion to $4.70 billion, which represents a $50 million increase at the low end of our previous guidance. Non-GAAP earnings per share of $1.30 to $1.70, which is up from $1 to $1.50 previously.

Before we take your questions, I would like to say how appreciative and how proud I am of the senior leaders on this call and all of our other employees who started with dedication for setting the stage for what's now, next and beyond. Coherent is well positioned with differentiated technology, exceptional talent and high-quality efficient manufacturing platforms capable of delivering products to markets that are rapidly growing.

And I believe we are better positioned than others to take full advantage of our existing market positions and to penetrate deeper into these markets, largely because of the intimacy, trust and partnerships we have cultivated with market leaders and our increased scale, creating stability in our core business and creating a flywheel effect of other growth opportunities that many of our competitors simply don't have.

In the upcoming years, we have tremendous upside potential and platform cost optimization attributable to the ongoing legacy Coherent integration, special restructuring and transformation projects that we've announced. We expect success given our proven track record and have a strong plan and road map in place, which will allow us to capitalize on the recovery and growth in our markets and of the broader market opportunities. We are endowed with 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 it over to Paul. Paul?

[Paul Silverstein, executive]

Thank you, Chuck. We will now open the call for analyst questions. [Operator Instructions] This call is scheduled for an hour. With that, Carmen?

[Operator]

[Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan.

[Samik Chatterjee, analyst]

Congrats to the entire team there on the strong execution. Maybe just because it's one question, if I keep to datacom. In the shareholder letter, you referred to a number of new significant AI-related customers that you have engagements with. If you can give us a bit more insight about the nature of those customers, the magnitude potentially of those engagements can turn into if you were to win those awards relative to the existing orders that you have.

And then just a quick clarification. You did have 100% sequential growth in datacom, 800-gig revenue on capacity ramp, is that roughly where we should expect sort of capacity to linearly expand from here on?

[Vincent Mattera, executive]

Samik, thanks for your question. Sanjai?

[Sanjai Parthasarathi, executive]

Sure. Thanks for your question, Samik. So with any large-scale deployment of new technology, the few hyperscalers drive it, and now we are seeing that to extend more broadly. We're also engaged with new MEMs as well as up and down the entire ecosystem. So we have a very broad group of customers that's continuing to grow in terms of engagements. Did that answer your question?

[Samik Chatterjee, analyst]

Yes. Anything on the capacity ramp, Sanjai?

[Sanjai Parthasarathi, executive]

So in the capacity ramp, we did say in the shareholder letter that we grew 100%. That's basically our 800G shipments, 100% quarter-over-quarter. In our ramp-up plans, we hit the quarterly -- we crossed the quarterly run rate of $100 million. And we also said that in fiscal '24, Samik, that over 50% of our datacom transceivers revenues will be from AI-related applications. So we are really excited with the ramp and the growth of the market.

[Vincent Mattera, executive]

And I'm expecting the third quarter will be greater than the second quarter and the fourth greater than the third, Samik. If that gives you any indication.

[Operator]

Comes from the line of Ruben Roy with Stifel.

[Ruben Roy, analyst]

Congrats to the team. A follow-up for my one question on networking as well. Chuck, just trying to understand the commentary around the supply constraints. It sounds like they improved, lead times are shortening. Would you say your -- the majority of the supply chain constraints are behind now, and it's a question of shipping to demand? Or are there still some components that are out there that are in short supply? Is that kind of a limiting factor to the rest of the year on your AI transceiver shipments?

[Vincent Mattera, executive]

Okay. Thanks a lot, Ruben. Ruben, as you know, anytime you go through such a steep ramp, what's lying in front of you with regard to constraints is what you're trying to get out in front of. So if you look in the rearview mirror, the constraints have surely eased and moderated.

But when you see the size of the ramp that we're going up, we have to manage a number of constraints. The first constraint, then the second and third, we have to anticipate them. We have to get our agreements with suppliers in place. And we're looking beyond FY '24. This is a super, super exciting and super-hot market. So we're in the process of looking out well into FY '25 to be sure that our supply chain can keep up with us. I hope that answers your question, Ruben.

[Operator]

And it comes from the line of Meta Marshall with Morgan Stanley.

[Meta Marshall, analyst]

Great. A couple of questions. Just one, just what are you seeing on inventory of under kind of this 800 gig or AI transceivers, and just when you expect some of the demand for that business to come back? And then just on top of that, a couple of quarters ago, you had noted that you had a couple of hundred million of orders that if you ramp capacity, you expected to be able to fulfill during this fiscal year.

Obviously, you guys are ramping a little bit faster than expected just in terms of that kind of couple of hundred million that you outlined earlier in the year. Just how do you feel like you're going to be able to meet or exceed kind of those excess demand?

[Vincent Mattera, executive]

Thanks, Meta. Thanks for your interest. Sanjai?

[Sanjai Parthasarathi, executive]

Yes. Thanks for your question, Meta. So our -- so we just said in our shareholder letter that we shipped over 100 million in 800G transceivers last quarter. It was much smaller the previous quarter, it grew almost 100% quarter-over-quarter. And then we also said, Meta, that in fiscal '24, 50% of our datacom transceiver revenues will be from AI-related applications. So we are projecting a very strong growth in our 800G shipments. We are on a ramp-up, as Chuck referred to earlier. Hopefully, that answered your question.

[Meta Marshall, analyst]

I guess -- but just in terms of what are you seeing in terms of inventory clearing on the kind of sub-800 gig versus 800 gig -- I mean, I understand the 800-gig commentary, but what are we seeing just in terms of any other demand on the remainder of the business?

[Sanjai Parthasarathi, executive]

Okay. So we haven't factored in any huge rebound in the non-AI business in datacom. And that's one of the -- but most of the growth is in 800G. Pretty much all of the growth is in 800G. And that's why we said over 50% of our fiscal '24, our revenues will be from AI and related 800G products.

[Operator]

And it comes from the line of Simon Leopold with Raymond James.

[Simon Leopold, analyst]

I wanted to as well talk about what's happening in 800-gig data center transceivers. And I'm looking for your thoughts on how you can compete in this market. And I'm struggling candidly because it seems like demand is great, which should be margin-favorable, but some of your competitors probably are willing to take lower margins. And so that might pressure profitability. Could you help us understand how you're thinking about that?

[Vincent Mattera, executive]

Thanks, Simon. Giovanni, would you like to give....

[Giovanni Barbarossa, executive]

Simon, thanks for the question. Well, as a reminder, we are the most vertically integrated player in the space. So we heard, for example, people talking about shortage of pixels. well, guess what, we have the largest pixels supply in the world by far, so including obviously our competitors. So we have a very good kind of control of the supply line for mostly the components other than ICs. And we have our own manufacturing.

We have pretty much the most complete laser offering in the space, both 100 and 200G as we announced in the past. So we think that will be very, very powerful, not only to remain competitive with performance standpoint and a road map standpoint, which are very strategic to our hyperscale customers and the like, but also from a cost structure standpoint. We think that we will have always the best margin profile versus those that have to pretty much buy everything from the merchant market. So we are very active in many of these technologies that will be an advantage from a profitability standpoint.

[Vincent Mattera, executive]

I would add, Simon -- thank you, Giovanni. I would add, Simon, that we have a full portfolio of products that we're making for today and developing for tomorrow. Those are going to be even more exciting than the ones we're making today. And for us, having full control, as Giovanni just described, our focus is on time to market, time to volume and time to profitability. And that's where it needs to stay. We have a track record. It is a competitive market, that's for sure. We're intending to compete.

[Operator]

Comes from the line of Jed Dorsheimer with William Blair.

[Jonathan Dorsheimer, analyst]

Most questions seem to be on datacom so I'll be different in just, I guess, two-part question. Maybe just an update on the -- I saw -- I think it's maybe the first time that I've seen you kind of highlight or call out. But on the MicroLED, could you just talk about the products of Coherent there that you're offering? And then on silicon carbide, there's been some cross currents of data points in the market. I'm just wondering if you might be able to update on -- so what you're seeing from the customer base there?

[Vincent Mattera, executive]

Jed, thanks for your two questions. Chris will go first and then Sohail. Chris?

[Christopher Dorman, executive]

Yes. Thanks, Chuck. Yes. So we spoke about the MicroLED developments that we have in previous quarters and about the multiple orders we received from China, Taiwan and Korea for the tools for a process called Laser-Induced Forward Transfer, which is where you take the currently 10-micron moving towards 5-micron MicroLEDs from the wafer to the display.

So we're seeing increasing customer engagement and are very excited about the impact of MicroLEDs on the television market. And this is a very high level of engagement now and a market that will be growing over the next 3 to 5 years.

[Vincent Mattera, executive]

Thank you, Chris. Sohail?

[Sohail Khan, executive]

Hello. Can you hear me?

[Vincent Mattera, executive]

Yes.

[Sohail Khan, executive]

Thanks for your question. We are quite bullish about the silicon carbide market and the growth prospects over the next 5 to 10 years. And based upon that, we are sticking with our plan, which is driven from the customer engagement as well as long-term supply agreement which we had in place. The announcement with Mitsubishi and DENSO have strengthened our position, and we are seeing more engagements and specially lot of interest from both existing and new customers for 200-millimeter. So we are going to stick to our plan of the investment and expansion, and we will continue to see the growth of our business quarter-over-quarter and year-over-year.

[Operator]

It comes from the line of Richard Shannon with Craig-Hallum Capital Group.

[Richard Shannon, analyst]

Maybe I'll ask a financial one here. It seems like after a couple of quarters of OpEx being flat to down, or I guess, a little bit more down on a pro forma basis, it seems like you're implying it growing here at a fairly steady rate here, which seems to be anathetical to the synergy and restructuring plan, I think, you announced 1 or 2 quarters ago. Can you help us understand why that is, why it might seem to be growing at a decent rate after bottoming out here?

[Vincent Mattera, executive]

Thanks a lot Richard. Rich will take it.

[Richard Martucci, executive]

So yes, as you pointed out, our synergy plans and cost reduction has kept our expenses down in the OpEx. The big thing that you see in the ramp-up as we go forward in the guidance really is around R&D, around our AI product as well as other initiatives that we have in place. So that's really the increases coming from the R&D. We've done a really good job in our SG&A expenses.

[Vincent Mattera, executive]

Look, those R&D investments in the second half of the year, Richard, are aimed for FY '25 and beyond on the basis of new information that we've received in the last 1 or 2 quarters from our customers for great clarity.

[Richard Shannon, analyst]

Chuck, any way you'd want to characterize where those investments might sit, like by your segments or end markets or anything like that?

[Vincent Mattera, executive]

In those markets that are growing, are growing extremely quickly, starting with AI, Richard. Everything starts with that.

[Operator]

One moment for our next question. It comes from Karl Ackerman with BNP Paribas.

[Karl Ackerman, analyst]

As you indicated earlier on this call, VCSEL supply is critical right now on the ramp of both 800-gig and 1.6T transceivers. How has your internal capacity supported or helped your design wins for 1.6T, which you indicated will be ramping later on this year? And I guess if you could address that, perhaps you could also discuss the ramp of 1.6T over the next couple of quarters.

[Vincent Mattera, executive]

Karl, thanks for your question. Giovanni will take it. And if there's anything to add, that Julie would like to add, to clarify, she will. Please, Giovanni.

[Giovanni Barbarossa, executive]

Thanks for the question. I mean, as we said earlier, we have our own facility. Actually, we have 2 facilities, 2 [ critical ] fabs that are capable of producing datacom. But at this point in time, we're relying on only 1 fab and it's ramping like leaded by our internal customers and of course, our external customers too, which are our competitors.

So as we said earlier, we have -- the advantage of being basically integrated to have a very a good understanding of the needs of the supply required by our -- both internal and external customers. So we have a full control of that. And we have had similar ramps in the past, this is a challenging ramp in terms of the data rate. But nevertheless, I think we are doing a great job in keeping up with the demand both internal and external supplies. So at least we're shipping based on demand. We are not behind even if we still need to go as requested by the forecast. So we are following up with the demand as we see it right now. So we don't see that being a challenge at least for our VCSEL supply.

[Vincent Mattera, executive]

Julie, would like to add regarding Karl's question on 1.6T.

[Julie Eng, executive]

Right. Just to add to what Giovanni said is we also were one of the few in the industry actually that can make these very high speed. It's a unique capability.

[Operator]

And it's from Vivek Arya with Bank of America Securities.

[Blake Friedman, analyst]

This is Blake Friedman on for Vivek. On gross margin, you provided a useful outline on actions to return to 40%. But can you maybe quantify all the puts and takes ranging from improving utilization, operational efficiencies and new products? And this goes back to a previous question, but on mix, just given the momentum in AI transceivers, are these products at or above the corporate average gross margin today?

[Vincent Mattera, executive]

Blake, thanks. Rich?

[Richard Martucci, executive]

Yes. So a two-part question. The first question is the AI. And I think in the last earnings call, we did mention that it is at the average of the -- corporate average in terms of margin. In terms of our ability to drive margin in the future, obviously, the first thing is volume, that's one. The second is utilization within our fabs, which really 2 of our 6 fabs have really improved in terms of the utilization and also the reliance of our synergy plan, the reliance of our restructuring plan is really going to be utmost of importance in terms of increasing our gross margin going forward.

[Operator]

It comes from the line of Christopher Rolland with Susquehanna.

[Christopher Rolland, analyst]

Can you hear me?

[Vincent Mattera, executive]

Yes.

[Christopher Rolland, analyst]

Great. Congrats on the results. I just had one clarification and one question. First, the clarification. The primary gating issue on AI is 800-gig VCSELs. I just want to make sure whether I got that right or not.

And then secondly, I wanted to talk about telco. So we're seeing more and more kind of weak data points coming out for telco, but it kind of feels like maybe you're going to tell us that could be in the rearview mirror for you guys. So is December the clear bottom there? Are you expecting to kind of grow through the year here? And what -- where can we kind of normalize out on a quarterly run rate for telecom looking forward?

[Vincent Mattera, executive]

Okay, Chris. So Giovanni will clarify your question regarding VCSELs and Magnus will take the telecom question. Giovanni?

[Giovanni Barbarossa, executive]

Yes. So the -- let me clarify, maybe try to be clear. No, it's not, okay? So we don't have a challenge from a supply standpoint from the VCSEL standpoint. Of course, when you ramp a production of transceiver modules, there's a number of other things that need to happen, including tests, automation of assembly lines, new processes.

And of course, there is also external supply chain, particularly around ICs, that will impact our ability to ramp. So everything is coming together. And based on the demand -- the demand is definitely stronger than what we could supply. We are capacity-limited but not necessarily from a device standpoint, but just as an overall ability to ramp to the volumes that we have been caught by surprise by the -- by our customers in terms of the most recent forecast versus previous forecast.

We are realigned with road maps. We know exactly what the customers are looking for, for next-generation products. And so we will adapt our internal supply chain to keep up with the demand. Currently, we don't have experience -- going back to your first question, we don't experience a challenge from a VCSEL production standpoint. And I want also to recall that we have capacity -- superior capacity for both internal and external suppliers. So we don't -- we can manage that as we need to support our own transceiver business, obviously, as a product.

[Vincent Mattera, executive]

Thanks, Giovanni. Magnus, would you take the telecom question?

[Magnus Bengtsson, executive]

Chris, so in telecom, we saw growth in the December quarter over the October quarter by about 20%. And if we look out for the balance of the fiscal year, we expect double-digit growth second half over first half. And beyond that, in '25, as the market improves we expect additional growth, both from the market coming back but also a lot of the engagement we have with customers on design wins for new products.

[Operator]

It comes from the line of Mark Miller with The Benchmark Company.

[Mark Miller, analyst]

Congrats on your progress. Just was wondering in terms of new applications for VCSELs in terms of automotive and other applications. What are you looking at over the next 12 months or so?

[Vincent Mattera, executive]

Great, Mark. Julie, will you take that one?

[Julie Eng, executive]

Sure. Sure, yes. So VCSELs in addition to the datacom market, it can be used in the sensing market. Obviously, we're in the sensing world and mobile phone application. And then in addition to that, you can use VCSELs for all kind of other sensing, including in a vehicle, potentially in health applications, so many potential future applications of VCSELs in sensing.

[Operator]

Comes from the line of Tim Savageaux with Northland Capital Markets.

[Timothy Savageaux, analyst]

Sorry if I might have missed this earlier. But you talked about 800-gig transceiver shipments at about 100 million in the quarter kind of doubling sequentially. Do you have an outlook for where you expect that number to go either in fiscal Q3 or by year-end? And I'll follow up from there.

[Vincent Mattera, executive]

Yes. Okay, Tim. Thanks for your question. Tim, what we said that you may have missed is what I said is I expect our shipments in Q3 to be greater than Q2 and in Q4 greater than Q3. We're on a ramp. It's going up and to the right.

[Timothy Savageaux, analyst]

Okay. Well, if I might maybe follow up on that a little bit. I mean, you're talking about fairly modest sequential growth here for Q3 and growth in telecom. So I guess, are you looking for -- and even if you look at your Q2 results, it seems like the lower speed stuff might have come down pretty good. So you're seeing some offsets there. Is sort of that the dynamic for overall datacom revenue? Or what are the puts and takes as -- or is that ramp slowing a bit, I guess, from the...

[Vincent Mattera, executive]

It really is an insightful question. Meta Marshall had the same question and Sanjai tried to address it. Let's let him take another pass at it.

[Sanjai Parthasarathi, executive]

Okay. So thanks for the question, Tim. So in terms of the market, the market -- the fastest-growing segment of the market is 800G and above, which is really AI. We just redid our forecast on the market, it's growing at a 65% CAGR in the next 5 years, Tim. So it's a very sharply growing market and we expect -- we aim to grow faster than that market. Now the traditional networking market is certainly not growing at that clip, and we are not really factoring a significant rebound in our non-AI, if you will, market growth or our revenue growth. So a lot of our revenue growth is coming from AI-related applications. Hopefully, that's clear.

[Vincent Mattera, executive]

Thank you, Sanjai.

[Operator]

And it's from Ananda Baruah with Loop Capital.

[Ananda Baruah, analyst]

Congrats on the strong execution. Yes, actually, just a follow-up there, Sanjai, clarification. Is that the -- I guess, what is 65% growth over the next 5 years specifically?

[Sanjai Parthasarathi, executive]

Ananda, it is the growth of 800G and above transceivers, datacom transceivers from calendar '23 to calendar '28. It's at a 65% CAGR.

[Ananda Baruah, analyst]

Super helpful. And I guess my question is, any way to think about yet the transceiver opportunity for genAI outside of the hyperscale complex? And so specifically, I'm thinking at telcos and on-premise, say, like Fortune 1000 sites. And that's it for me.

[Vincent Mattera, executive]

Okay, Ananda. Julie will take the next one.

[Julie Eng, executive]

Ananda, yes. So the -- obviously, the biggest deployments are the biggest web scale. And as time goes on that spreads out, as you point out, to other smaller entities that could either host services or people may choose to have their services on-premise so that diversified the customer base, similar actually to the Ethernet market. And then -- so the genAI -- I forgot the second part of the question.

[Paul Silverstein, executive]

With regard to -- will it spill over to telecom.

[Julie Eng, executive]

Thank you. Yes, eventually, it all spills over to telecom because all the data that's getting generated inside has to go somewhere. So we do believe that, that will impact our telecom revenue in a positive way over time, should impact eventually also non-AI datacom revenue. And then finally, something that might not be so direct of a comparison, but these genAI chips also require the most advanced process nodes, and that's beneficial to our industrial segment for our semi-cap inspection lasers.

[Vincent Mattera, executive]

Ananda, I would add that besides datacom and telecom verticals, we have a semi-cap equipment business, and it's also underpinning the growth in AI by providing new tools, including laser-based tools and engineered material tools to OEMs that have to build the equipment to make the devices. I mean, we have it surrounded.

[Operator]

And it's from the line of Dave Kang with B. Riley.

[Dave Kang, analyst]

A question is on ARM lasers. Chuck, I think you talked about it in the past that as ARM lasers has an 8-figure opportunity and could reach 9 figures if you successfully penetrate the Chinese market. Just wondering if you can give us an update there.

[Vincent Mattera, executive]

Thanks, Dave. Thanks for asking about one of our other super exciting opportunities. Giovanni?

[Giovanni Barbarossa, executive]

Yes, Dave, thanks for the question. Yes, we're making a lot of progress. Actually just recently, we learned that the major battery maker in China kind of displaced our competitor laser to replace it with our ones on the production line. So we think it's going to be a huge opportunity for our goal since it's one of the largest battery makers in the world.

So we think in addition to the existing customers they keep ramping production, you see the major advantage of the spatter-free and no-porosity kind of well quality provided by our ARM laser profile, we believe that to grow in the market space. And it's not going to be limited just to batteries for EVs. I think we're seeing application beyond that, not only in the automotive market, but for example, in the semi cap equipment market, we have been engaged recently on working on some advanced lithography tools to provide laser welding for some special alloys parts that are needed by those tools.

[Vincent Mattera, executive]

Dave, we're aiming to drive a paradigm shift when it comes to laser welding.

[Operator]

And it comes from the line of Jim Ricchiuti with Needham & Company.

[James Ricchiuti, analyst]

I wonder if you could elaborate on the comment, early on in the shareholder letter that you would consider other strategic opportunities to unlock shareholder value, I'm wondering what that means. Are you suggesting that you might pursue some smaller M&A to maybe expand in some areas that you may not necessarily have the presence you want to have?

[Vincent Mattera, executive]

That's a great question. We're from time to time, asked about it. We are prudent stewards of our capital. And let me ask Bob Bashaw, our President, if he'd like to remark.

[Walter Bashaw, executive]

Yes, sure. Yes, I'm happy to, Chuck. Yes, as you know, we have been open to all kinds of transactions in the history of the company. And we are both great partners, and as Chuck said, shareholder value is always our driver. So we are actively, like we have been for 51 years, considering lots of alternatives to grow shareholder value. As we indicated in the shareholder letter, these are probably going to be smaller transactions, not material, but that is our focus across all range of potential transactions.

[James Ricchiuti, analyst]

Is it a case of expanding in some areas that you're underserved? Is that the focus?

[Walter Bashaw, executive]

Well, for sure. There's -- if you look at all the technologies and the opportunities we have, there are a lot of corners that we can look in for areas to grow. There's also tremendous opportunities to partner. So we have -- we are considering all of those options and have active engagements in those areas.

[Operator]

And it comes from the line of Mike Genovese with Rosenblatt Securities.

[Michael Genovese, analyst]

And I guess I'll go to beating the dead horse here. When I parse your comments on 800G as a percentage of datacom transceivers this year, I end up somewhere in the range of revenue should be 70% to 150% higher than the $300 million you talked about entering the year. And so with that as the preamble, my two-part question is, are we still looking at 20% of the revenues being in the first half of the year and 80% in the second half of the year like you guys said, last quarter? Or is that sort of -- has that changed a little bit?

And then secondly, just as we look at fiscal '25, should we put Sanjai's CAGR, which I think he said was 65%, if I heard that right? Is that roughly the right way to think about where we start for fiscal '25 growth in that business?

[Vincent Mattera, executive]

Okay. Thank you, Mike. Okay, Sanjai?

[Sanjai Parthasarathi, executive]

Yes. Thanks, Chuck. So Mike, I think our revenue pattern is pretty much in line with what you stated in terms of our growth rate. Obviously, we are going to -- we are aiming to do even better than that in terms of the second half of the fiscal year. .

[Vincent Mattera, executive]

And I remind you, it is 65% is a 5-year CAGR. So maybe just keep that in mind, Mike.

[Michael Genovese, analyst]

Sorry, but I'm just -- I guess, 20-80 though, is that -- we're still targeting 20-80, that hasn't flattened out a little bit because of the good performance in 2Q? It's still 20-80?

[Vincent Mattera, executive]

It's close to that, maybe a little bit higher than 20 and a little lower than 80, but that's roughly right.

[Operator]

Thank you. And this concludes the Q&A session. I will turn it back to Paul Silverstein for any final comments.

[Paul Silverstein, executive]

Thank you, Carmen. I want to thank all the analysts on the call for their thoughtful questions. And I want to thank all of you on the line for having joined us this morning. We look forward to talking with you in the future. Thank you.

[Operator]

Thank you, ladies and gentlemen, for joining us today. You may now disconnect.