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Coherent Corp
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Good day, and thank you for standing by. Welcome to the Coherent Corp. Fiscal Year '24 Third Quarter Earnings Call.
[Operator Instructions]
Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your first speaker today, Paul Silverstein, Senior Vice President, Investor Relations. Please go ahead.
Thank you, Victor, and good morning, everyone. Thank you for joining our third quarter fiscal 2024 earnings call. On the call, we have Coherent Chair and CEO; Dr. Chuck Mattera and a number of Coherent senior leaders which Chuck will introduce shortly.
Yesterday, after market closed, we issued a press release, posted a shareholder letter and an 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, outlook, visibility, key trends and developments.
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. We present historical non-GAAP financial measures. We'll limit our discussion on 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.
Thank you, Paul. The segment continues at Coherent where we delivered another solid quarter. Before diving into the details, I will comment briefly on the CEO search process. As previously disclosed, our Board has retained a leading executive search firm to help identify and establish a selection committee to evaluate CEO candidates from a pool of both internal and external candidates.
Our focus is on preparing for and selecting a new CEO with the necessary skills, knowledge and experience to seamlessly and successfully succeed me and to help ensure Coherent's sustainable growth and success. With that said, I will not comment on it further during today's call. Rather, I will focus my brief remarks on our super exciting performance in Q3 and the exciting setup for Q4 and fiscal year '25.
As I have stated previously, leadership development is among our CEO's most important responsibilities. Given the shareholder letter's extensive disclosures, I have asked the following senior leaders to participate in the Q&A portion of today's call: Rich Martucci, Interim Chief Financial Officer; Dr. Giovanni Barbarossa, Chief Strategy Officer and the President of the Materials segment; Dr. Julie Sheridan Eng, Chief Technology Officer; Mr. Sanjai Parthasarathi, Chief Marketing Officer; Magnus Bengtsson, Chief Commercial Officer, who leads our global sales and service organization and who came to us through the Coherent acquisition; Sohail Khan, EVP Silicon Carbide LLC; Dr. Lee Xu, EVP Datacom Transceivers; and Dr. Beck Mason, EVP Telecom. For the last 20 years, I have been blessed with the privilege of working with the most experienced management team in the industry as one small measure.
Those of us on today's call have 300 years of collective experience. We will provide investors a rich source of information about the depth and breadth of our markets, technologies, operations and overall business. For the quarter, we delivered solid sequential improvement in revenue and EPS, both of which came in above the high end of our guidance. Due primarily to unexpected issues that we've already resolved or expect to soon resolve, the non-GAAP gross margin was below guidance but rigorous operating expense discipline and controls allowed us to deliver non-GAAP operating margin in line with our guidance.
The highlights of our third quarter include an almost 7% sequential increase in revenue and a $0.17 or almost 50% sequential increase in non-GAAP EPS. Another strong -- another quarter of strong AI-related Datacom demand for our 800G Datacom transceivers, we now expect this strength to continue in the current fourth quarter and into fiscal '25. A slower-than-expected recovery in our telecom markets, continuous lines of improving outlook for our industrial market, which accounts for approximately 34% of total revenue.
The repayment of $58 million of outstanding debt and the completion of a repricing of our $2.4 billion secured term loan B, reducing interest rate margins by 25 basis points, which results in an annual savings of approximately $9 million and the upgrade of our credit rating to BA2 by Moody's, reflecting our leadership position in the exciting AI market and their expectation that our financial performance will continue to improve.
Our diversification across product, technology and regional markets is serving us well. AI-related Datacom demand remains strong. While still early, we also saw further signs in the quarter of improving demand in our industrial market, along with further signs of stabilization in our Instrumentation and Electronics markets, which we expect will also eventually return to growth. Despite the macroeconomic backdrop, our diversification strategy has helped distinguish us from the rest of the pack.
For the quarter, we posted revenue of $1.209 billion, which was above the high end of our guidance, and non-GAAP EPS of $0.53, which was also above the high end of our guidance. Operating cash flow was $117 million. We invested $93 million in capital equipment, and we returned $58 million of debt.
Turning to our guidance. For the fourth quarter of fiscal '24, we are guiding for revenue of approximately $1.123 billion to $1.32 billion and non-GAAP earnings per share of approximately $0.52 to $0.68. Revenue of approximately $4.62 billion to $4.7 billion for the year, which is a $70 million increase at the low end of our previous guidance. Non-GAAP EPS of approximately $1.56 to $1.73 for the year, up from $1.30 to $1.70, which was our previous guidance.
Before turning to questions, I would like to say how appreciative and proud I am of the senior leaders and all of our other employees whose tireless dedication to transforming Coherent are setting the stage for a broad industry leadership now, next and beyond. Opportunity is one of the most difficult things in life to recognize early on. However, we have a 50-plus year old track record to point to, when I say with confidence and faith that I truly believe that the best is yet to come.
With that, I'll turn it back over to Paul. Paul?
Thank you, Chuck. We'll now open the call for analyst questions. This call is scheduled for a full hour as we have approximately 20 analysts that cover the company, we ask that each of you limit yourself to one question and one follow-up. Please direct your questions to Chuck, who will decide who is best to respond.
Victor, please open it up to questions.
[Operator Instructions]
Our first question will come from the line of Samik Chatterjee from JPMorgan.
Congrats on the strong results here. If I can just start with Datacom. And when you started on this ramp, which has been pretty impressive, you did have the benefit of a lot of visibility into the orders from your customers. I think at that point, you had almost like a year's visibility in terms of orders based on how you're communicating about orders.
As we now move into fiscal '25 when lead times are coming down, just curious what kind of visibility our customers giving you in relation to demand for fiscal '25? What do you think are the key growth drivers for the 800 gig or Datacom business in total in FY '25? And I have a follow-up.
Thank you, Samik. Lee, would you like to?
Thanks for the question. This is Lee Xu. Our outlook versus a quarter ago did not change. We still see strong growth in overall 800G and AI-related demand and our customer interaction has been improving. And as you can see, in the past few quarters, our 800G ramp-up from FY '23 is $20 million also to $50 million in our Q1, a little bit over $100 million in Q2. And this quarter, we reported close to $200 million, and we project in Q4 of more than $250 million.
So we still see further growth in FY '25. But in our field, the -- I would say, the lead time for people to order 800G transceivers is coming down. And that's why we are -- when we forecast our 800G revenue, we are being more prudent. But in terms of the trend, our forecast from our key customers, there is no change. And we also said that we are broadening our 800G customer basis. And now it's much broader, and we see that in FY '25, it's going to be even more broad.
And for my follow-up, if I can just quickly ask on the supply side. We get a lot of questions from investors asking about if there are supply constraints either on VCSELs or any of the other components going into the Datacom transceivers, particularly as you plan ahead for the ramp in fiscal '25 or the growth in fiscal '25, how are you managing around those sort of visibility around supply? Any key bottlenecks that you see that you need to resolve?
Thank you for that key question. We largely resolved all the material constraints, whether it's internal or external. So we feel confident on our capabilities.
Our next question comes from the line of Simon Leopold from Raymond James.
The first thing I wanted to see if you could unpack a little bit was in the prepared remarks, Chuck, you mentioned the gross margin being a little bit softer than what you had been anticipating. Could you help us understand what are sort of the key drivers and expectations for how gross margin can improve over time? Is it as simple as getting utilizations up? Or is it more about the cost reduction and synergies? Help us understand sort of the key levers and the targets? And then I've got a follow-up.
Okay. Simon, thanks for your question. Rich is ready to go.
Thank you, Simon. The -- obviously, the management team was a little disappointed in our performance in Q3 on the margin. We detailed out the onetime really transitory items in Q3. As we move forward and as we mentioned, we still are targeting a 40% gross margin by the second quarter -- first half of FY '26. And with that, over a 20% operating margin. And there's many positive drivers that we have to achieve this versus really the incremental volume and the mix as well.
Without a doubt, we're going to need the increase in our Industrial as well as Instrumentation markets. Those are typically sales that come through -- revenue that comes through our networking or our materials and laser segment that will strengthen the margins as well as our strength in supply chain and buying power, that also is a key factor.
We did have mentioned to you our synergy and restructuring plans in the past, which we are on pace for. But even longer term, we're in the midst of a transformation. We just started a global design for a new ERP implementation, a new system, and we are just at the beginning of implementing AI tools. So all those factors will culminate in us reaching a higher margin.
And then as my follow-up, I'd like to sort of get some sense of your vision of where the AI opportunity can go. So it looks as if you're expected to exceed your prior expectations for this fiscal year. I imagine it's maybe a little bit early to give us details on fiscal '25. But if you could give us some guidepost of how you're thinking about the 800 gig and above business evolving beyond the next quarter?
Simon, thanks. Simon, I think we'll take a step back and talk about the market because we're expecting to lead the market. So Sanjai, why don't you just give a quick summary?
Okay. Thanks, Chuck. Simon, thanks for the question. So we just -- in our investor presentation, we have a chart that talks about the market, the growth and inflection that's happened with AI. Over the next few years, we still see a very strong growth in 800G. It's -- over the next 5 years, it's growing at a 60% CAGR. And that's 800G and beyond. So 800G and 1.6. So the market is strong. It's -- we are projecting very healthy growth for the market. And I mean that's where it is today, that's great.
Our next question will come from the line of Ruben Roy from Stifel.
And congrats, team on the execution and solid results. I guess, Chuck, I wanted to follow up on Sanjai's commentary which is -- the question, I guess, would be sort of around longer-term expectations in the CAGR. And the CAGR has been moving around on kind of your overall Datacom transceiver expectations, I think in the shareholder letter last night, 21%, which is -- it's great, but it's down a little bit from the previous assumption.
And so I guess the question would be, what are the moving parts and sort of how you guys are thinking about the longer-term CAGR? Is that -- are there parts of telco in that? Or is it just Datacom that you're considering? And any kind of additional detail on how you're thinking about longer-term growth would be helpful.
Thank you, Ruben. Thanks for the question, Sanjai?
Yes. Thanks, Ruben. Thanks for the question. Yes, we did take it down a little bit from our last report. Two things happened. One, CY '23 was much bigger than what we had originally anticipated. And then over the long term, we have taken down the sub-800G numbers a little bit. So we're still projecting 21% over for 5 years and I made the comment earlier about 800G and beyond. That is still growing at the same kind of clip, that we previously anticipated. We keep -- the market is young and fluid. We keep getting data points from our customers and then customers. So we are constantly revising our view of the market. Hopefully, that answered the question.
Yes, it did. And then for a follow-up, I had a gross margin question as well. Given that Datacom transceivers are a meaningful part of the kind of the way the gross margins move around, I guess. Can you give us a little more detail on some of the corrective actions around the transceiver yields? And as you look out into fiscal '25 or some of those corrective actions, do you think applicable to the 1.6T ramp?
Ruben, yes, sure. Lee?
Ruben, thanks for the question. This is one of our key target for our operations, the Datacom transceivers. First of all, we did just -- we are transparent in terms of we had a slightly unexpected yield issue impacting our 800G ramp-up in Q3. And that problem has been resolved, and we'll see on Datacom a significant margin improvement, and we -- going forward in FY '25 because more and more product is going to move to 800G and higher data rate, we think that we will further improve our Datacom transceiver margins.
So going forward, because of our verticals integration because of our kind of being a leader on high-end part of the market, we are quite confident of our gross margin and also the NIM margin. So does that answer your question?
Yes. Thank you.
And our next question comes from the line of Thomas O'Malley from Barclays.
I wanted to ask on the timing of 1.6T. You guys are saying fiscal Q1. Your competitor last night was kind of talking about the end of the calendar year, maybe beginning of the next calendar year. There's really only 2 major customers who are doing 200G per lane at 1.6T. Can you talk about -- is that sampling in the September quarter, which is fiscal Q1? When do you expect volume production? And is that across multiple customers or just concentrated among 1 or 2?
Okay. Thanks, Tom. Lee, please.
Yes. Thanks for being so clear what we have published. Yes, we are ready to sample 1.6T or 200G per line-based transceivers starting in our fiscal Q1 and we do expect volume shipments to start at the beginning of calendar '25 or of our Q3 fiscal year. And so far, everything's going as expected, and we're excited about this new opportunity.
Helpful. And then the second question was around silicon carbide. You guys described just an issue during the quarter. Historically, you've had a customer in Electronics that's made it a little bit easier to kind of solve for the revenue in the silicon carbide business. Could you just maybe give us a little more color just because that customer has gotten so small? Where that revenue has gone from a silicon carbide perspective? And then you talked about some strong growth in the out-quarter? Any additional details on where that went in the quarter and where you're expecting over the next couple?
Yes. Tom, as I understand it, you're trying to plumb our data in the Electronics market for sensing versus silicon carbide. And you'd like to have a clear view for silicon carbide. Sohail will give you that color that you need, I think.
Tom, this is Sohail Khan. The -- in Q3, we -- our silicon carbide had some operational issues about -- we mentioned about the power failure and that power impacted -- power failure impacted the factory, which limited our ability to deliver to the plan. All those actions have been put in place. We were able to get everything back within 30 days. And I am looking at a very good, strong Q4, and we expect that we will grow more than 50% from Q3 to Q4.
And our next question will come from the line of Meta Marshall from Morgan Stanley.
Congrats on the quarter. A couple of questions for me. Maybe just first on -- you noted that your expectations for kind of growth in sub 800-gig declined, and that was what led to the kind of industry or change in the industry growth rate. But just what are you seeing in terms of anything -- any commentary on sub 800-gig demand? And then the second question, at the heart on the gross margin piece, but kind of understanding the overhang to fiscal Q3, and the yield issues that you've resolved both in silicon carbide and Datacom. But with most of that seemingly resolved, given the answers you've given today, just what is the reason for kind of a slower Q-on-Q pickup than you had been forecasting kind of last quarter?
Just repeat the last part of the question.
Yes. So last quarter, you would have implied kind of about 100, 150 basis point increase between fiscal Q3 and fiscal Q4 and that seemingly kind of come down to about 80 basis points. And kind of understand the overhang to fiscal Q3, but what is the difference in kind of a smaller jump up between fiscal Q3 and implied fiscal Q4 gross margins?
I think, Rich, just give a big picture, if you would, please.
Yes. So the margin resolution in Q3, as we mentioned, are pretty much done. We're still in the middle of ramping as we mentioned, our 800G product and our yield plans that we have going forward. So the other piece of this is the majority of the increase quarter-over-quarter is coming from 800G as well as silicon carbide and in the past, we just mentioned that the 800G product is at our gross margin average. So it's really part of a mix issue as well quarter-over-quarter.
Yes. Let me add, Meta, to be clear. While the problems have been resolved or resolving, there's a tail in terms of a ramp back up to where we need to be. It's just not a flash cut. So we're confident about the corrective actions and the like, but we still need to establish that target eagles will definitely come on -- different product lines will come within this quarter. So there's a little bit of a tailwind to the quarter. Is that clear?
Yes. No, that's perfectly clear. And then just any commentary on sub-800 gig demand?
That's a great topic. Let's go to market first, if we can.
Okay. Thanks, Meta. This is Sanjai. So over the 5 years, the sub-800G is essentially flat. That's our latest projection. The 800G and above, as I said earlier, is growing at a -- needed to grow at a 60% CAGR. So the sub-800 is -- I mean, that's our view of the market.
Just one second. I think we can clarify one step further with Lee. Can you please do this? It is a very important topic.
From our own kind of internal forecast point of view, we see, indeed, just as Sanjai was saying, the sub-800G is roughly flat for the next few quarters but we do see some pickup 3 quarters from now. So that -- I think the overall is healthy.
We'll be opportunistic about it. We're definitely trying to expand the share of wallet with the largest players. We've told the story about 400G in the past. And when it comes, if we can turn our capacity into it and make a real good business out of it, we'll be there.
The next question comes from the line of Karl Ackerman from PNB Paribas.
I wanted to focus on the telecom portion of your business for a moment. Clearly, you and peers in the ecosystem have pushed out the recovery and telecom from what was roughly June of this year to the end of this year and perhaps even the beginning of 2025. But within that, there seems to be some pockets of growth as well as softness. For example, last week, one of your peers had spoken about a recovery in metro long haul while cable was a bit soft. I'm curious if you have seen similar commentaries within the telecom.
So if you could just double click on the opportunities you see within telecom? What's working, what's not working as you progress toward that recovery in that market? That would be very helpful.
Okay, Karl. Beck, please.
Sure. Thank you for the question. So we do see a sort of a mixed areas of strength and weakness in the telecom market. One area of strength we have seen is in the China market. And there, we see build-outs by most of the major carriers going on with new C+L networks. We have some differentiated products in our pump laser and our WSS that give us strength in that market, and we expect that to continue through the year.
I think the other thing for us where we see growth opportunity coming in FY '25, is really on the digital Coherent optical pluggable market space. And that's where we have a number of really differentiated products coming to market, including our 100-gig QSFP28 ZR that has tremendous demand from our customer base, and we think that will help us sort of lift up to our FY '25. So our view of what's going to happen in the market and with our growth maybe a little bit decoupled from what some of our competitors are seeing.
Our next question comes from the line of Jed Dorsheimer from William Blair.
So one and a follow-up. I guess first, just on the silicon carbide, maybe as additional clarity. I know you had the power outage, but wondering if you could give an update on progress on your 200-millimeter development activities and any metrics that you can provide? And then I have a follow-up.
Okay. Thank you, Jed. Sohail, please.
Thanks for the question. 200-millimeter is going quite well. We are supplying preproduction quantities to multiple customers. And the feedback from the customers is very good both from quality as well as their ability to bring their lines up. As you know, the ramp is going to be dependent on when their fabs are up. So from our standpoint, we are ready. And we are adding capacity more to ramp, and we will see a much more contribution coming in next fiscal year.
That's great. And then as a follow-up, clearly, there's a lot of demand in the Datacom side of the business, and it's fantastic that you guys are playing well into that. As we think out a little bit, I'm just curious, something that's a bit out of your control, how you're thinking about the power challenges and specifically, lead times around things like transformers seem to be limiting data center growth? And I'm curious how a company that's selling components into that market is thinking about some of those structural challenges in developing with respect to AI?
Thank you, Jed. Giovanni, would you like to take that?
Yes, of course, we read about it. We know even [indiscernible] worried about it, about the transformers, for the transformers. I mean that's a very well-known challenge. We are -- we keep focusing on ultimately what's driving our demand. Recently, you've seen that the optical bandwidth required by GPU is actually growing. It's not only the number of GPUs, but cost is growing. The demand is strong in terms of number of GPUs. But what's very important for us is the increase in optical bandwidth required by GPU. That's driving the need for 1.6T and beyond, and that will continue for quite some time as the GPU require more and more bandwidth for their input output.
So that's what's really the fundamental drivers for our growth, which I don't think are going to change. And of course, there are -- there could be challenges in the infrastructure from the infrastructure standpoint, but those will -- it's not really up to us to solve. But we -- obviously, we may be dependent on them. But the fundamental drivers for our growth will remain unchanged.
Jed is particularly focused on the total energy required by the system. I hope that was helpful, Jed.
It is.
And our next question will come from the line of Mark Miller from The Benchmark Company.
Congratulations on your progress. I was just wondering if you can give us some color on ROADMs? And also, are there any new opportunities coming along for VCSELs and where are you positioned in that market?
Okay. Mark, thanks for your question. We'll take it in 2 parts. First Beck will take the ROADM question. Giovanni will address the VCSEL question. Beck?
Thanks, Mark. I'm actually really excited you ask that question because one of the most important new trends in ROADMs is really the drive towards CPON cell network deployments, which have been kind of on the drawing board for many years and are now finally really coming and being deployed.
And one thing that we have that really no one else in the industry has is a true C+L ROADM. So that is -- there's 2 bands in the optical communications space that we use in long-haul DFB-M communication, one is the C-band and one is the L-band. And by expanding to both C+L, we doubled the capacity in the fiber. So all of the new networks being deployed today include both C and L. And we're the only company that has a ROADM solution that actually covers both bands simultaneously in a single part, and that's driving a lot of upside opportunity for us as we go forward.
The first place we see are really emerging into China, but we know that's very important to the hyperscalers in North America and some of the higher capacity build-out. We are excited about what's going to happen in the future in ROADMs. Now the nature of the network is evolving, but that is still evolving to one that is really strongly dependent on use of ROADMs in terminals and [ boxes ] and other applications in the network. So we think that's a positive long-term driver for us.
For the telecom systems, the Datacom laser, VCSELs. Giovanni?
So on the VCSEL at the C, we reported the progress that we've been making on the development of 200G VCSELs, which we think would be a game changer in the industry as many customers as well as generally even competitors kind of ruled out the possibility for VCSELs to go even above -- beyond the 100G. So that's the exciting good news is that we also had our main competitor, probably the only competitor we have on the space, they're also reporting progress on it, which is very positive for the industry because the industry will need a lease to suppliers to support the growth. And then we are also working on 400G VCSELs for the future. It's something that we didn't cite. And so we'll keep the road map going.
And if you ask in general about VCSELs, I also wanted to mention the progress of multifunction VCSEL behind display applications, which is -- that required for increase the power coming through the display in some cases -- some user cases. So that's also something that we have been working on and will provide part of the growth for that product line, which is already experiencing today with the 100G VCSEL ramp, an incredible growth over the past several quarters. So in the next few quarters, too.
Our next question comes from the line of Ananda Baruah from Loop Capital.
Just a little bigger picture on transceivers. As you guys progress and as the market progresses from 800 to 1.6, 3.2, interested in understanding any net new technical hurdles and challenges that sort of -- that could occur necessary to be successful there? And I guess any -- I'm going to call them business-related dynamics that are going to increasingly manifest that it will take to be successful there and wondering if you guys have a share gain opportunity in that context and what that whole dynamic could look like? And then I have a quick follow-up.
Lee?
Thanks for the question. This is Lee Xu. So this is a very key question. Thanks for asking that. For this development, it is indeed getting higher and higher data rates, the technical challenge is getting more complex and -- but to us, there are several advantages also that we got to use a higher portion of our internal lasers and components. Also, we found that the competition landscape becomes -- there are fewer people, right, for the current 800G shipment so far is only a small number of companies that would be able to support that kind of high volume, and we expect similar things on the 1.6T and 3.2T. So we do think that we can gain market share over the next few years.
You also mentioned if there is any key technical hurdles that we won't be able to overcome, so far no. We -- our development has been going on track, and we are confident that we'll be able to release the product on time.
This evolution of the market is going to play right into the strengths of Coherent, and we will continue to invest, innovate and to use our imagination across both the laser and the transceiver to deliver disruptive capabilities to a customer. The optical circuits, which is just one example, not a laser-based but the optical circuit switch is just another example of the kind of innovation power in the company and the ability of the company to begin to catalyze new markets that may have billions of dollars worth of opportunity for us. So thank you for your question, Ananda.
Our next question will come from the line of Dave Kang from B. Riley.
Regarding the OCS, I was just wondering if I could get any update, how do you use it right now in new customer wins? And who are your main competitors?
Thank you, Dave. Julie, do you want to take that?
Sure. Yes, Dave, thanks for the question. So yes, as Chuck was just saying that optical circuits which, I think, is a great example of the power of innovation of our company. I'm sure you saw demo and release at OFC, where we're using our liquid crystal technology. So it's a great example where we have a technology inside the company that we have a long history of. We ship into the undersea market. So it's very, very reliable. And we saw a market opportunity where we could use that same technology for a different market need in the optical circuit switch.
So I was really proud of our team who delivered a great demo for OFC. It is new incremental revenue for us. We think our liquid crystal is a great solution. It operates at a lower voltage than MEMS. And so that leads to higher reliability, but also lower power, which is very, very important in the data center.
We're engaged with many multiple customers and we see shipping samples all within the next few months. And I think we called out in our shareholder letter that we could see revenue on that product by our fiscal year '26. And yes, we just feel like we have a really strong position there. So I'm excited about it.
And my follow-up is on 800 gig. You mentioned that orders were down sequentially from very strong fiscal 2Q. Just wondering what to expect during this quarter?
Magnus, do you want to take that?
Sure. I can take that. Thanks for the question, Dave. So as we noted in the shareholder letters, lead times have come down. And so customer ordering patterns have more normalized to be within lead time, whereas a couple of quarters ago, they ordered many quarters out. So I think we're back to a more normal order pattern.
Our next question comes from the line of Jim Ricchiuti from Needham & Company.
What drove the 30% increase in laser bookings? I'm assuming the ELA display business was as a big driver. Can you say what the bookings, how it performed, excluding display?
Yes. Magnus will take it.
Yes. So yes, I'll have to do the math, but you're right. The orders in the quarter, we saw a good uptick in display orders and I think that drove the lion's share of the uptick. We saw orders from capacity increase in China and we actually expect similar order performance in the display market in the current quarter in Q4. So most of that uptick was display.
Precision manufacturing right behind it.
Yes. Display number one, precision manufacturing also saw an increase, and I think that will see a further increase in Q4. And then in the SEMI vertical, mostly flat.
It actually ties into with the next question on precision manufacturing. What's driving that? Is it the case of easy comparisons? Or are you guys seeing a turn in this part of the business?
I think what we're excited about in the business is what we're doing in the welding space to target towards EV applications, where we have broad customer engagements, and we're seeing increasing depth in terms of customer engagements. I -- we've seen a little bit of an uptick in China in the broader market in China, but we haven't yet seen the broader market turn for the rest of that space. As you know, it's pretty macro-dependent. And we haven't really seen that change in a broad way. So there are some pockets of upside rather than a broad comeback in precision manufacturing.
Our next question will come from the line of Tim Savageaux from Northland Capital Markets.
I want to come back to the order and backlog discussion. And I guess the commentary was about more normalized, but you've seen orders come down, I think, 3 quarters in a row now, and I think the book-to-bill was under below 1 in the quarter. And you did see a big surge of orders last year driven by networking in Q4. It sounds like you don't expect to see that again as lead times normalize. But what should we expect for the direction of overall orders and backlog for the company heading into fiscal Q4 here?
Richard, just in general words.
Okay. So in general, our book-to-bill quarter-over-quarter, we did see in Q3 below 1 book-to-bill. Really, we expect the year backlog that remained flat pretty much year-over-year, but we still believe that a majority of the strength in the markets in terms of long term will increase the total backlog. We're expecting a book-to-bill -- we really were on 1 in Q4.
We're focused on it, Tim, is a critical success factor going forward. So we're totally focused on it as a team. And we'll have more to say about '25 in 90 days from now, but it's a top priority in the company.
I appreciate it. And just a quick follow-up. I think there was a comment about the customer base broadening out. I believe, specifically in 800 gig, but maybe in Datacom generally. And along those lines, I wonder if you can address kind of concentration in Datacom, whether you had any 10% customers overall in the quarter? And what sort of major customers are driving the Datacom segment at this point?
We report 10% customers once a year, as you know, at the end of the fiscal year, Tim. We don't have any comments on that. But Lee can give you just a general flavor for the broadening of the base which we saw evidence of at OFC with just a tremendous amount of interest from the industry fanning out to additional layers in the market.
That's right. We -- as of the beginning of the shipment of 800G, we have 2 major customers that we reported that we all know who they are. Now in the past quarter, we have over 4 customers that's ordered significant amount, multimillion dollars from us. And we are also in the past 2 quarters have multiple design wins of our 800G -- various 800G product from short range to long range with key customers. So we think going forward into FY '25, the 800G is going to have a much broader customer base.
And our next question will come from the line of Christopher Rolland from Susquehanna.
Congrats on the results. And this may have been answered. But the 500 gig, if you could just talk about the lead times coming down, is that more of like a demand issue or a supply issue? And you guys mentioned a pause for a couple of quarters. Is that 2 quarters? Is that 3 quarters? And is there like this inventory digestion going on here as well, is this kind of exacerbating this pause, like did a ton of people -- was there like an initial rush for 800G AI products, and this market just got ahead of itself and people bought a little bit more? I'm just trying to understand this pause a little bit more here, particularly as when it unpauses, it looks like it will be the beginning of the 1.6 market, kind of. So just trying to put all those pieces together, demand issues, supply issue, inventory digestion, et cetera.
Okay, Chris. Can you clarify? You said something about 500G?
Did I say 500? I meant 800, if I said 500.
Okay. All right. Well, we will try to address that. But for sure, as I said to Tim, that the bookings and building up our backlog is a top priority for the management team. However, as we indicated, we are going to grow again in the fourth quarter and we're building up this capability to continue to expand our output in 800G transceivers. So Lee, why don't you give a little more color?
Thanks for your question, Chris. First of all, 800G, the lead time a few quarters ago, people do place orders for close to a year. That's because at that time, neither the material nor the capacity are fully ready. So people are willing to place longer-term orders and secure the capacity, secure the material. Now as we're -- a couple of the companies ramping up the 800G shipment, so capacity is largely there, although we're still expanding in the next couple of quarters.
And then the material lead time also came down. So that's why as Magnus, our Chief Revenue Officer said, we see customers placing orders within a shorter lead time. And that's -- I think that's very normal in our industry. And that does not change the forecast our customers give us for the future growth of the 800G and related products. That's one question that you asked.
The other is that you said that there is a pause for products that seem to be below 800G. What we see is that, indeed, there is some kind of squeezing out effect as people are putting more money on 800G for AI expansion. There's some of the CapEx for normal networking is squeezed out. But we do see that in a few quarters start to go back up. But overall, people might switch to 800G for their normal networking in addition to using on AI. So that's -- overall, that's our view of the current marketplace.
That was a great clarification. As I think out to the 1.6T cycle, every company in this industry has its different kind of strengths and weaknesses. And there's probably going to be 3 technology, laser technologies, VCSELs, EMLs and SiFo that are going to address this 1.6 opportunity, particularly the AI opportunity.
I just wanted to get a clear picture. What are your capabilities? What are your strengths around these 3 technologies? And what are your ramp times? Like for example, you're initially addressing 1.6 with EMLs or SiFo, if not SiFo, like when can you kind of hard move over to SiFo technologies, which I think are a little more cost-effective? Maybe you can talk about where these 3 technologies kind of intercept 1.6 for you guys?
Okay. Julie, do you want to take it?
Sure. Yes. Thanks for the question. Yes, as you accurately said, we can use VCSELs. We can use EMLs. We've actually, in the indium phosphide domain also introduced our DFB-MZ, and we can use silicon photonics. And we have, as you know, for VCSELs and the indium phosphide, we design in-house and we manufacture in-house. For silicon photonics, where as is common in the silicon industry of fabless, so we have an internal design team and we use outsourced fab. And so what we do is we choose the best technology for the product based on the cost and the performance. And because we have access to all the technologies, we can choose the one that makes the most sense.
As far as transitioning to 200G, the fundamental basic laser technology is actually very similar. Once you go from 100G to 200G, it's still hard, but it's very similar. So using this very similar equipment set, we can make the lasers at the higher data rates. The test equipment data rate has to go up. So that's something we need to do but in general, we should be able to handle that ramp challenge the same as we have at 100G.
And then as things -- the silicon photonics isn't always cheaper. But in some cases, for some applications, it may be the best choice. And as we see our products transitioning to silicon photonics, we feel very strong in our capabilities. We've been working on silicon photonics in 2010. We have silicon photonics shipping in production in product. Our team demonstrated publicly 200G per lane silicon photonics [indiscernible] and one very important -- and we have actual products in design right now with silicon photonics for the Datacom.
And one very important thing to never forget is that silicon photonics-based transceiver actually requires an indium phosphide high-power laser. So even in silicon photonics, you should think silicon photonics and indium phosphide. So in silicon photonics-based transceivers, we can differentiate ourselves also with indium phosphide lasers. So we feel that we're at a really good position to address all the technologies at -- for 1.6T at 200G per lane.
And just maybe a clarification. Let's say, within the first ramp, what do you expect the mix of those 3 technologies to be? And then, let's say, in the second year, how might that shift?
Chris, I think we only have time for 2. We're running out of time. Chris?
To be respectful to everybody on the call, we still have another person in the queue, and we've got 2 minutes left. So we'll take that offline.
Thank you, Chris.
And our last question for today will come from Richard Shannon from Craig-Hallum.
I wanted to talk a little bit about margin structure here as you get to your 40% growth and above 20% EBIT margin. I really kind of want to look at the time in the past where you've done that, which is the first half fiscal '22. Looking at the margin structure by your 3 segments. And specifically, I'm curious whether you expect to be able to get the networking back up in kind of that 19-plus percent EBIT range to enable that? Or can you do it with that being not as high? And also maybe if you can suggest what kind of revenue levels required to get to that kind of margin structure, that would be great.
Take it, Richard.
Yes, I think you're 100% right. We have achieved over a 40% margin and the revenue range of that was over $1.3 billion. So as we cross that $1.3 billion mark on the top line, this really comes down to the mix. And even though we believe we can increase the networking margin, we still need, as I mentioned to you earlier, we still need Instrumentation and our industrial markets to improve.
Richard, do you have a follow-up?
No, that's all for me, Chuck. Thank you.
And there's no further questions in the queue. I'll turn it back over to Paul for any closing remarks.
Thank you, Victor. I want to thank everybody for joining us on the call this morning. Just a heads up, next week on March 14, we will be hosting our third in our series of investor market webinars that will be on our Instrumentation market. As for the other 2, the goal is to help give you insight into the various aspects of our business. If you'd like to join, it will be accessible on our website. Once again, thank you all for joining us. We look forward to talking to you throughout the day.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.