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Coherent stock price dives on weak outlook

16 Aug 2023

Photonics giant drops in value by 35% as industrial laser sales decline amid general macroeconomic gloom.

Major laser and photonic devices company Coherent has posted annual sales exceeding $5 billion for the first time - but saw more than one-third of the value of its stock wiped out as it warned of challenging times ahead.

The Pittsburgh-headquartered firm, created from the merger of diverse component maker II-VI and laser specialist Coherent just over a year ago, said that although it had received a surge in orders for datacom transceivers to be used in artificial intelligence (AI) applications, demand was slowing elsewhere.

CEO Chuck Mattera told an investor conference call that the company would be “re-tooling” over the coming 12 months, and that it had already “got busy” with cost-cuts in the quarter ending June 30.

“In short, we are prepared for a reset here,” he said - adding his confidence that the current situation represented a temporary interruption to some otherwise resilient market trends, and that there should be some signs of recovery towards the end of the current calendar year.

Site closures
Despite exceeding $5 billion in annual sales, Coherent swung to a net loss of $336 million for the year. That was partly the result of nearly $290 million in interest expenses that relate to various loans taken on to complete last year’s merger - with the company already paying off large chunks of the debt.

In a shareholder letter detailing the latest financial results, the company’s management team wrote:

“While we believe we are well positioned to benefit from any improvement in the macroeconomic environment, we are not assuming we will see signs of a meaningful rebound in fiscal 2024.

“We are prepared for a reset year with these external challenges persisting at least through the first half of our fiscal 2024, and potentially into the second half of our fiscal year as our customers continue to take pro-active measures to manage inventory and cash.”

Those measures include a major restructuring plan, with the firm’s site consolidation efforts accelerated as a result of the recent slowdown.

“In the fourth quarter of fiscal 2023, we implemented a restructuring plan that includes site consolidations and closures, as well as the relocation and requalification of certain manufacturing facilities,” Coherent announced.

Slack laser demand
Coherent’s fiscal year ends June 30, and the latest results represented the first full-year figures since the merger of the former II-VI and Coherent businesses, which was completed July 1, 2022.

They showed sales of $5.16 billion for the just-completed year, after revenues in the latest quarter came in higher than expected, at $1.21 billion.

However, that was still lower than the figure posted in the March quarter, with sales of lasers down 9 per cent sequentially, at $333 million, and demand yet to bounce back significantly.

“Orders in our lasers segment sequentially increased by over 5 per cent, but the increase was more tepid than we expected,” Coherent’s executives stated, pointing to slowing business activity across a number of key industrial applications.

“Weak demand in display, precision manufacturing, and back-end semicap [semiconductor capital equipment] more than offset strength in front-end semicap and scientific applications,” they reported.

Service revenues, a significant chunk of the business unit’s turnover, also declined in the latest quarter - primarily due to softer demand for use in a laser annealing step for smart phone production.

“We expect service revenue to increase as demand for smart phones recovers,” added Coherent.

AI surprise
The firm's biggest single market area remains optical networking, which represented $2.3 billion in full-year sales, and $585 million in the latest quarter - down only slightly on the same period last year.

Mattera said that the timing of a recent surge in demand for 800G datacom transceivers for use in generative AI came as a surprise, and that the sector as a whole was “super-exciting” for Coherent.

“Re-tooling of datacenter architectures and integration of AI clusters by web-scale and other cloud companies represent an immediate and direct growth opportunity for our datacom business – both our transceivers and our enabling active and passive components, especially leading-edge high-speed lasers,” wrote the CEO and his colleagues in the shareholder letter.

However, the telecom side of Coherent’s optical networking business is showing different demand trends, with customers still digesting excess component inventory built up previously, and some delays to major project build-outs.

Taking all of those trends into account, alongside continued weakness in China, the Coherent team forecast that sales in its fiscal year ending June 30, 2024 would drop by something like 10 per cent, to around $4.6 billion.

And although that figure does not include what could amount to hundreds of millions of dollars in additional sales related to AI datacom transceivers, the general outlook appeared to spook investors.

Shortly after discussing the latest figures, Coherent’s stock price slumped in value by as much as 35 per cent, to trade at just over $31 on the Nasdaq. That equates to a market capitalization of around $4.3 billion.

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