Coherent (COHR) Q3 2024 Earnings Call Transcript

Coherent (COHR -4.52%)
Q3 2024 Earnings Call
May 07, 2024, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Coherent Corp. fiscal year ’24 third-quarter earnings call. At this time, all participants are in a listen-only mode.

After the speakers’ presentation, there will be a question-and-answer session. [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.

Paul Silverstein — Senior Vice President, Investor Relations

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.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Paul. A 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; Dr.

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 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 retired 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?

Paul Silverstein — Senior Vice President, Investor Relations

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.

Questions & Answers:

Operator

Thank you. [Operator instructions] Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Samik Chatterjee from JPMorgan.

Your line is open.

Samik Chatterjee — JPMorgan Chase and Company — Analyst

Hi. Thank you for taking my questions, and 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.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Samik. Lee, would you like to?

Lee Xu — Executive Vice President, Datacom Transceivers

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 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. Thank you.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Lee.

Samik Chatterjee — JPMorgan Chase and Company — Analyst

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.

Lee Xu — Executive Vice President, Datacom Transceivers

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.

Samik Chatterjee — JPMorgan Chase and Company — Analyst

Thank you.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Lee. Thanks, Samik.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Simon Leopold from Raymond James. Your line is open.

Simon Leopold — Raymond James — Analyst

Great. Thank you very much for taking the question. 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.

Chuck Mattera — Chairman and Chief Executive Officer

OK. Good morning, Simon. Thanks for your question. Rich is ready to go.

Rich Martucci — Interim Chief Financial Officer

Thank you, Simon. The — obviously, the management team was a little disappointed in our performance in Q3 on the margin. We detailed out the one-time 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. First is 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 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.

Simon Leopold — Raymond James — Analyst

Thank you. 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 800G-and-above business evolving beyond the next quarter? Thank you.

Chuck Mattera — Chairman and Chief Executive Officer

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?

Sanjai Parthasarathi — Chief Marketing Officer

OK. Thanks, Chuck. Hi, 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 five 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, looks great.

Chuck Mattera — Chairman and Chief Executive Officer

Good. OK. Thank you, Simon.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Ruben Roy from Stifel. Your line is open.

Ruben Roy — Stifel Financial Corp. — Analyst

Thanks very much, 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.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Ruben. Thanks for the question. Sanjai?

Sanjai Parthasarathi — Chief Marketing Officer

Yep. 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 five years.

And I made the comment earlier about 800G and beyond. That is still growing at the same kind of clip that we had previously anticipated. We keep — the market is young and fluid. We keep getting data points from our customers and end customers.

So, we are constantly revising our view of the market. Hopefully, that answered the question.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Ruben.

Ruben Roy — Stifel Financial Corp. — Analyst

Yes, it did. Thank you, Sanjai. 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?

Chuck Mattera — Chairman and Chief Executive Officer

Ruben, yes, sure. Lee?

Lee Xu — Executive Vice President, Datacom Transceivers

Hi, 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?

Ruben Roy — Stifel Financial Corp. — Analyst

Yes. Thank you.

Lee Xu — Executive Vice President, Datacom Transceivers

Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Thomas O’Malley from Barclays. Your line is open.

Tom O’Malley — Barclays — Analyst

Hey, good morning, guys. Thanks for taking my question. I wanted to ask on the timing of 1.6T. You guys are saying fiscal Q1, your competitor last time was kind of talking about the end of the calendar year, maybe beginning of the next calendar year, there’s really only two 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 one or two? Thank you.

Chuck Mattera — Chairman and Chief Executive Officer

OK. Thanks, Tom. Good morning, Tom. Lee, please.

Lee Xu — Executive Vice President, Datacom Transceivers

OK. Yeah. Thanks for being so clear of what we have published. Yes, we are ready to sample 1.6T or 200G per lane-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.

Tom O’Malley — Barclays — Analyst

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?

Chuck Mattera — Chairman and Chief Executive Officer

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.

Sohail Khan — Executive Vice President, Silicon Carbide LLC

Hi, 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.

Chuck Mattera — Chairman and Chief Executive Officer

I hope that’s helpful, Tom. Hi, Tom?

Tom O’Malley — Barclays — Analyst

Thank you.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Tom.

Operator

Thank you. One moment for our next question. And our next question will come from the line of Meta Marshall from Morgan Stanley. Your line is open.

Meta Marshall — Morgan Stanley — Analyst

Great, thanks. 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 just anything — any commentary on sub 800-gig demand? And then the second question, to harp on the gross margins 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? Thanks.

Chuck Mattera — Chairman and Chief Executive Officer

Just — Meta, good morning. Just repeat the last part of the question.

Meta Marshall — Morgan Stanley — Analyst

Yeah. 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?

Chuck Mattera — Chairman and Chief Executive Officer

I think, Rich, just give a big picture, if you would, please.

Rich Martucci — Interim Chief Financial Officer

Yeah. 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 did mention that the 800G product is at our gross margin average. So, it’s really part of a mix issue as well quarter over quarter.

Chuck Mattera — Chairman and Chief Executive Officer

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 yields will 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?

Meta Marshall — Morgan Stanley — Analyst

Yep. No, that’s perfectly clear. And then just any commentary on sub-800 gig demand?

Chuck Mattera — Chairman and Chief Executive Officer

Oh, yeah. That’s a great topic. Let’s go to market first, if we can.

Sanjai Parthasarathi — Chief Marketing Officer

OK. Thanks, Meta. This is Sanjai. So, over the five years, the sub-800G is essentially flat.

That’s our latest projection. The 800G and above, as I said earlier, is growing at a — is slated to grow at a 60% CAGR. So, the sub-800 is — I mean, that’s our view of the market.

Meta Marshall — Morgan Stanley — Analyst

Great. Thank you.

Chuck Mattera — Chairman and Chief Executive Officer

Just one second. I think we can clarify one step further with Lee. Can you please do — it is a very important topic.

Lee Xu — Executive Vice President, Datacom Transceivers

Sure. 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 three quarters from now. So, that — I think the overall is healthy.

Chuck Mattera — Chairman and Chief Executive Officer

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.

Meta Marshall — Morgan Stanley — Analyst

Perfect. Thank you.

Operator

Thank you. One moment for our next question. The next question comes from the line of Karl Ackerman from PNB Paribas. Your line is open.

Karl Ackerman — Exane BNP Paribas — Analyst

Yes, thank you. 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 in 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.

Chuck Mattera — Chairman and Chief Executive Officer

OK, Karl. Good morning. Thanks. Beck, please.

Beck Mason — Executive Vice President, Telecommunications

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. Did that help you with your question?

Yes, it did. I’ll cede the floor. Thank you.

Operator

Thank you.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Karl. Thank you, Beck.

Operator

One moment for our next question. Our next question comes from the line of Jed Dorsheimer from William Blair. Your line is open.

Jed Dorsheimer — William Blair and Company — Analyst

Hi. Thanks for taking my question. 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.

Chuck Mattera — Chairman and Chief Executive Officer

OK. Thank you, Jed. Sohail, please.

Sohail Khan — Executive Vice President, Silicon Carbide LLC

Hi. 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 much more contribution coming in next fiscal year.

Jed Dorsheimer — William Blair and Company — Analyst

That’s great. Thanks. 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? Thanks.

Chuck Mattera — Chairman and Chief Executive Officer

OK. Thank you, Jed. Giovanni, would you like to take that?

Giovanni Barbarossa — Chief Strategy Officer and President, Materials Segment

Yeah, of course. We read about it. We know Elon Musk is 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 1.6 tera 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.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Giovanni. Jed is particularly focused on the total energy required by the system. I hope that was helpful, Jed.

Jed Dorsheimer — William Blair and Company — Analyst

It is. Thank you, Chuck. I appreciate it. And thanks, Giovanni.

Operator

Thank you. One moment for our next question. And our next question will come from the line of Mark Miller from The Benchmark Company. Your line is open.

Mark Miller — The Benchmark Company — Analyst

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?

Chuck Mattera — Chairman and Chief Executive Officer

OK. Good morning, Mark. Thanks for your question. We’ll take it in two parts.

First Beck will take the ROADM question. Giovanni will address the VCSEL question. Beck?

Beck Mason — Executive Vice President, Telecommunications

Thanks, Mark. I’m actually really excited you asked that question because one of the most important new trends in ROADMs is really the drive toward C+L 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 two 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 it really emerging is in China, but we know that’s very important to the hyperscalers in North America and some of the higher capacity build-outs.

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.

Chuck Mattera — Chairman and Chief Executive Officer

Great. For the telecom systems and the Datacom laser, VCSELs. Giovanni?

Giovanni Barbarossa — Chief Strategy Officer and President, Materials Segment

So, on the VCSEL at the OFC, 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.

Mark Miller — The Benchmark Company — Analyst

Thank you.

Chuck Mattera — Chairman and Chief Executive Officer

Thanks, Giovanni. Thank you, Mark.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Ananda Baruah from Loop Capital. Your line is open.

Ananda Baruah — Loop Capital Markets — Analyst

Yeah, good morning. Thanks for taking the question. Really appreciate it. 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. Thanks.

Chuck Mattera — Chairman and Chief Executive Officer

Lee?

Lee Xu — Executive Vice President, Datacom Transceivers

Hi, Ananda. 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. And 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 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.

Ananda Baruah — Loop Capital Markets — Analyst

Yeah, got it. You have your market — oh, sorry.

Lee Xu — Executive Vice President, Datacom Transceivers

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.

Chuck Mattera — Chairman and Chief Executive Officer

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.

Ananda Baruah — Loop Capital Markets — Analyst

Thanks, guys. Appreciate it. I’ll leave it there. Thanks.

Chuck Mattera — Chairman and Chief Executive Officer

Thanks.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Dave Kang from B. Riley.

Your line is open.

Dave Kang — B. Riley Financial — Analyst

Thank you. Good morning. Regarding the OCS, I was just wondering if I could get any update. How do you use it right now? Any new customer wins? And who are your main competitors?

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Dave. Good morning. Julie, do you want to take that?

Julie Sheridan Eng — Chief Technology Officer

Sure. Yeah, 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 yeah, we just feel like we have a really strong position there. So, I’m excited about it.

Chuck Mattera — Chairman and Chief Executive Officer

Thanks, Julie.

Dave Kang — B. Riley Financial — Analyst

Thank you. 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?

Chuck Mattera — Chairman and Chief Executive Officer

Magnus, do you want to take that?

Magnus Bengtsson — Chief Commercial Officer

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.

Dave Kang — B. Riley Financial — Analyst

Thank you.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Dave.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Jim Ricchiuti from Needham & Company. Your line is open.

Jim Ricchiuti — Needham and Company — Analyst

Thank you. Good morning. What drove that 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?

Chuck Mattera — Chairman and Chief Executive Officer

Yes. Thank you. Good morning, Jim. Magnus will take it.

Magnus Bengtsson — Chief Commercial Officer

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.

Jim Ricchiuti — Needham and Company — Analyst

Got it. Thank you.

Chuck Mattera — Chairman and Chief Executive Officer

Precision manufacturing right behind it.

Magnus Bengtsson — Chief Commercial Officer

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.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Magnus. [Inaudible]

Jim Ricchiuti — Needham and Company — Analyst

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?

Magnus Bengtsson — Chief Commercial Officer

I think what we’re excited about in the business is what we’re doing in the welding space to target toward 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.

Jim Ricchiuti — Needham and Company — Analyst

Thank you.

Chuck Mattera — Chairman and Chief Executive Officer

Thanks, Magnus. Thank you, Jim.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Tim Savageaux from Northland Capital Markets. Your line is open.

Tim Savageaux — Northland Capital Markets — Analyst

Hi. Good morning. 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, three quarters in a row now, and I think the book-to-bill was under below one 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?

Chuck Mattera — Chairman and Chief Executive Officer

Rich — just in general, Rich.

Rich Martucci — Interim Chief Financial Officer

OK. So, in general, our book-to-bill quarter over quarter, we did see in Q3 a below one 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 one in Q4.

Chuck Mattera — Chairman and Chief Executive Officer

We’re focused on it, Tim. It’s 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.

Tim Savageaux — Northland Capital Markets — Analyst

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?

Chuck Mattera — Chairman and Chief Executive Officer

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 it at OFC with just a tremendous amount of interest from the industry fanning out to additional layers in the market.

Lee Xu — Executive Vice President, Datacom Transceivers

That’s right. We — as of the beginning of the shipment of 800G, we have two major customers that we reported that. We all know who they are. Now, in the past quarter, we have over four customers that’s ordered significant amount, multimillion dollars from us.

And we are also in the past two 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.

Chuck Mattera — Chairman and Chief Executive Officer

Great. Thank you, Lee. Thanks, Tim.

Tim Savageaux — Northland Capital Markets — Analyst

Thanks very much.

Operator

Thank you. One moment for our next question. And our next question will come from the line of Christopher Rolland from Susquehanna. Your line is open.

Chris Rolland — Susquehanna International Group — Analyst

Hey, guys. Thanks, and 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 two quarters? Is that three 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, etc.

Chuck Mattera — Chairman and Chief Executive Officer

OK. Chris, good morning. Can you clarify? You said something about 500G.

Chris Rolland — Susquehanna International Group — Analyst

Oh, did I say 500? I meant 800, if I said 500.

Chuck Mattera — Chairman and Chief Executive Officer

OK. 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?

Lee Xu — Executive Vice President, Datacom Transceivers

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.

Chuck Mattera — Chairman and Chief Executive Officer

OK. Thank you, Lee.

Chris Rolland — Susquehanna International Group — Analyst

Great. 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 three technology, laser technologies, VCSELs, EMLs, and SiPho 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 three technologies? And what are your ramp times? Like for example, you’re initially addressing 1.6 with EMLs or SiPho. If not SiPho, like when can you kind of hard move over to SiPho technologies, which I think are a little more cost-effective? Maybe you can talk about where these three technologies kind of intercept 1.6 for you guys?

Chuck Mattera — Chairman and Chief Executive Officer

OK. Julie, do you want to take it?

Julie Sheridan Eng — Chief Technology Officer

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 fabs.

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 capability. We’ve been working on silicon photonics since 2010.

We have silicon photonics shipping in production in product. Our team demonstrated publicly 200G per lane silicon photonics [Inaudible]. 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.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Julie.

Chris Rolland — Susquehanna International Group — Analyst

And just maybe a clarification. Let’s say, within the first ramp, what do you expect the mix of those three technologies to be? And then, let’s say, in the second year, how might that shift?

Chuck Mattera — Chairman and Chief Executive Officer

Chris, I think we only have time for two. We’re running out of time.

Paul Silverstein — Senior Vice President, Investor Relations

Chris, to be respectful to everybody on the call, we still have another person in the queue, and we’ve got two minutes left. So, we’ll take that offline.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you, Chris.

Chris Rolland — Susquehanna International Group — Analyst

Thanks, guys.

Operator

Thank you. One moment for our next question. And our last question for today will come from Richard Shannon from Craig-Hallum. Your line is open.

Richard Shannon — Craig-Hallum Capital Group — Analyst

Hi, guys. Thanks for taking my question. Hi, Chuck.

Chuck Mattera — Chairman and Chief Executive Officer

Good morning.

Richard Shannon — Craig-Hallum Capital Group — Analyst

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 three segments, and specifically, I’m curious whether you expect to be able to get the networking back up in kind of that 19%-plus 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. That’s my only question.

Thanks, guys.

Chuck Mattera — Chairman and Chief Executive Officer

Thank you. Richard.

Rich Martucci — Interim Chief Financial Officer

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.

Chuck Mattera — Chairman and Chief Executive Officer

Richard, do you have a follow-up?

Richard Shannon — Craig-Hallum Capital Group — Analyst

No, that’s all for me, Chuck. Thank you.Thank you, Richard. OK. All right.

Operator

Thank you. And there’s no further questions in the queue. I’ll turn it back over to Paul for any closing remarks.

Paul Silverstein — Senior Vice President, Investor Relations

Thank you, Victor. I want to thank everybody for joining us on the call this morning. Just a heads up, next week on March 14th, we will be hosting our third in our series of investor market webinars that will be on our instrumentation market. As for the other two, 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 quarter.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Paul Silverstein — Senior Vice President, Investor Relations

Chuck Mattera — Chairman and Chief Executive Officer

Samik Chatterjee — JPMorgan Chase and Company — Analyst

Lee Xu — Executive Vice President, Datacom Transceivers

Simon Leopold — Raymond James — Analyst

Rich Martucci — Interim Chief Financial Officer

Sanjai Parthasarathi — Chief Marketing Officer

Ruben Roy — Stifel Financial Corp. — Analyst

Tom O’Malley — Barclays — Analyst

Sohail Khan — Executive Vice President, Silicon Carbide LLC

Meta Marshall — Morgan Stanley — Analyst

Karl Ackerman — Exane BNP Paribas — Analyst

Beck Mason — Executive Vice President, Telecommunications

Jed Dorsheimer — William Blair and Company — Analyst

Giovanni Barbarossa — Chief Strategy Officer and President, Materials Segment

Mark Miller — The Benchmark Company — Analyst

Ananda Baruah — Loop Capital Markets — Analyst

Dave Kang — B. Riley Financial — Analyst

Julie Sheridan Eng — Chief Technology Officer

Magnus Bengtsson — Chief Commercial Officer

Jim Ricchiuti — Needham and Company — Analyst

Tim Savageaux — Northland Capital Markets — Analyst

Chris Rolland — Susquehanna International Group — Analyst

Richard Shannon — Craig-Hallum Capital Group — Analyst

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