Coherent, Inc. (NASDAQ:COHR) Q3 2024 Earnings Call Transcript May 7, 2024
Coherent, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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.
Paul Silverstein: 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 close, we issued a press release, posted a shareholder letter and an updated investor presentation to the Investor Relations section of our website, and first these documents on 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 that’s included in the shareholder letter. If we present historical non-GAAP financial measures, we will limit our discussion to those that are reconciled in the shareholder letter.
With that, it is my pleasure to turn the call over to Coherent’s Chair and CEO, Dr. Chuck Mattera.
Chuck Mattera: Thank you, Paul. The excitement 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 approval 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 the 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 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, continued signs 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 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: Thank you, Chuck. We will 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.
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