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Coherent buoyed by continued AI datacom surge

08 Nov 2023

Demand for faster transceivers helps offset market weakness impacting industrial laser and instrumentation sales.

Photonics technology giant Coherent has posted sales of $1.05 billion for the quarter ending September 30, down 20 per cent on the same period last year as demand for industrial lasers remains subdued.

The NYSE-listed company, created from last-year’s merger of II-VI and the original Coherent laser business, also swung to an operating loss of $21 million, compared with the operating profit of $43 million a year ago.

Discussing the latest figures with investors, CEO Chuck Mattera said that “macroeconomic headwinds and uncertainty” continued to affect many of the firm’s end markets, constraining near-term growth prospects.

Laser orders decline
The weak demand is being felt by Coherent’s lasers division, where orders were down 25 per cent year-on-year, although there was a slight improvement in sales compared with the June quarter.

Divisional sales of $336 million were down 14 per cent compared with the same quarter last year.

“We saw largely unchanged market conditions in our lasers segment, with the macroeconomic environment continuing to impact demand,” reported the firm in a letter to shareholders. “However, we expect to see improvement in the second half of fiscal 2024.”

That outlook is based on “emerging green shoots” in the consumer electronics market, where sales of lasers used in display production and other key steps have been hit by Android smart phone sales dropping to their lowest levels in ten years.

On the plus side, the company continues to see very strong demand for its latest optical transceivers to be used in AI-related data center build-out, following the initial surge reported three months ago.

The high level of demand more than offset ongoing weakness in the telecom side of the networking business, driving overall orders for the unit way above internal forecasts, and up 20 per cent year-on-year.

“We also are excited by the strong interest we are seeing from key customers for 1.6Tb/s transceivers and components,” added the firm, saying that the re-tooling of data center architectures and integration of AI clusters represented “an immediate and direct growth opportunity” for high-speed lasers in particular.

Site consolidation
Despite the potential for an upturn across several markets in 2024, Coherent is also in the midst of a restructuring effort following the merger to improve margins - for example by consolidating much of its active device manufacturing at the giant wafer fabrication facility in Sherman, Texas.

Coherent’s chief strategy officer, Giovanni Barbarossa, explained that although some product lines would still be made at smaller fabs in Europe and North America, the Sherman site - acquired when II-VI merged with Finisar - represented the firm’s center of excellence.

CEO Mattera added: “We have tremendous upside and platform cost optimization from the ongoing integration, restructuring, and transformation projects over the next few years.”

Looking ahead, he said that Coherent was still on track to meet its earlier sales guidance of between $4.5 billion and $4.7 billion for the year ending June 2024 - a figure that would represent a 10 per cent decline on the prior year - although that outlook could be revised upwards if the boom in AI transceivers is sustained.

• The latest update appeared to have little impact on Coherent’s stock price. It continues to trade at around $33 on the NYSE, equivalent to a market capitalization of approximately $5 billion.

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