In mid-August, the global laser and photonics firm Coherent Corp. released Q4 and full-year financial results for the fiscal year ended 30 June. Highlighting the announcement—the first full-year numbers since the July 2022 merger between II–VI Inc. and Coherent that created the current company—was a near 56% gain in revenue year to year, to US$5.16 billion, largely attributable to the merger itself. The picture was more sobering on the bottom line, however, as a combination of market weakness, interest costs and restructuring charges led to a net loss of US$259.6 million in fiscal 2023, versus net income of US$234.8 million a year earlier.
Coherent’s earnings announcement offered a window into the shifting fortunes of some segments of the laser and photonics marketplace. For example, the company said it experienced a “surge” in orders by customers for transceivers for data communications during the fourth quarter, driven by the boom in demand surrounding artificial intelligence and machine learning (AI/ML). Yet Coherent has also seen slackening demand for lasers in a number of important industrial client segments including displays, precision manufacturing, and aerospace and defense, as customers in those areas have pulled back in light of softness in their own markets.
Looking ahead, Coherent’s management, in a letter to shareholders, noted that “macroeconomic uncertainty presents a challenge to our visibility into demand trends and attending revenue for fiscal 2024.”
Looking ahead, Coherent’s management, in a letter to shareholders, noted that “macroeconomic uncertainty presents a challenge to our visibility into demand trends and attending revenue for fiscal 2024.” As a result, it’s looking for full-year revenues to decline to between US$4.5 billion and $4.7 billion in fiscal 2024 (though that projection doesn’t include “several hundred million dollars” that management thinks might come from AI/ML-related revenue growth). To address the macroeconomic impact, the company says it embarked on a significant restructuring beginning in the fourth quarter of fiscal 2023.
Restructuring amid macroeconomic weakness
A number of nonrecurring factors contributed to Coherent’s year-to-year swing to a net loss for fiscal 2023. One was an increase in interest expense, from US$121.3 million in fiscal 2022 to US$286.9 million in fiscal 2023, attributable to the sizable chunk of debt the company took on to make the July 2022 merger happen. (Coherent reported that it had paid down around US$121 million of that debt in the fiscal 2023 fourth quarter.)
The firm also booked a US$119.1 million charge in the fourth quarter attributable to its nascent restructuring effort. That restructuring, according to management, will include the closure, consolidation or relocation of a variety of sites and facilities, “intended to realign our cost structure as part of a transformation to a simpler, more streamlined, resilient and sustainable business model.”
On the operating side, Q4 revenues were up 6% from Q3 levels (but down slightly year to year), reaching US$584.6 million, thanks to a strong sales performance for the firm’s higher-data-rate transceivers, particularly for use in generative AI. The materials and lasers sectors, on the other hand, logged quarter-to-quarter decreases of 11% and 9%, to US$288 million and to US$333 million in revenue, respectively. The drops were caused by previously expected declines in the consumer electronics market and weak demand for display and precision manufacturing and semiconductor chip manufacturing equipment.
A “reset year” ahead
On a positive note, the company’s order book showed some strength in the fourth quarter, with an increase in backlog in the networking segment.
On a positive note, the company’s order book showed some strength in the fourth quarter, with an increase in backlog in the networking segment—attributable entirely, according to Coherent, to the significant boost in AI/ML-related datacom transceiver demand. On an investor conference call, CEO Chuck Mattera noted that the company’s goal is to be a “market leader” in AI and called the company’s 2024 plan for the sector “super exciting.”
Nonetheless, orders in other segments have been running slower than expected, and the company wrote in its shareholder letter that, despite the strong data communications–related order numbers, “the near-term macroeconomic environment … continues to adversely impact our near-term revenue, profitability and cash generation.”
Changes in product plans from some larger customers, higher interest rates and the geopolitical environment—including tension between Western countries and China—could exacerbate these macroeconomic challenges, according to Coherent. As a result, the firm said it isn’t counting on a meaningful rebound in fiscal 2024. Instead, it is “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 proactive measures to manage inventory and cash.”
While forthright about the near-term challenges in the market, Coherent management stressed that it continues to believe the longer-term prospects are good for the areas the company serves.
While forthright about the near-term challenges in the market, Coherent management stressed that it continues to believe the longer-term prospects are good for the areas the company serves. And management thinks the firm is well positioned to benefit as things perk up, particularly in light of its reputation and its ongoing restructuring effort.
In the communications segment in particular, the company believes that the growth in AI/ML needs could lead to a retooling of data center architectures that represents “an immediate and direct growth opportunity for our datacom business.” And the company looks for long-term gains in the semiconductor, display and precision manufacturing segments, driven by the emergence and growth of new areas such as micro-LED and EV-battery manufacturing.
Whatever the long-term prospects, Wall Street focused on the company’s sober assessment of prospects for the coming fiscal year: Coherent shares fell by nearly a third in the immediate aftermath of the announcement. In the two weeks since then, the shares have recovered somewhat, gaining more than 9% (compared with an increase of less than 1% for the S&P 500, a broad market index, in the same period).
Correction, 31 August 2023, 09:10 EDT: The story has been updated to correct management’s projection for fiscal 2024 revenues, which had previously been rendered as “between US$4.5 million and $4.7 million”; the dollar amounts should have been billions. OPN regrets the error.