Coherent | Six Five Media: Beyond the Numbers - Jim Anderson on Coherent’s Next Chapter

It's good to be back Pat and Dan, thanks for giving me some time. Appreciate it.

Yeah, it's good to see you too. And I guess that dates us all the way back to AMD days, so have known you guys for a while. So thanks again for giving me some time.

Yeah, I appreciate it. We really did have a good quarter. This is our fiscal second quarter, our December quarter. And yeah, I really appreciate the outstanding execution that my team had in the quarter. We grew revenue about 6% sequentially, but we grew 27% on a year-over-year basis. And the company grew in a bunch of different areas. But we didn't just grow top-line revenue; we expanded gross margin on both a sequential and year-over-year basis. And then in terms of profit, if we look at the EPS, we grew EPS 40% sequentially, so 40% sequentially, and we more than tripled it on a year-over-year basis. So I would say, yeah, good progress. We have a lot more work to do for sure as a team, but really good progress in our fiscal Q2. And a couple areas of growth that I would flag: number one, and you guys already mentioned it, data center is a big market for us and it's a big part of our revenue. And no surprise, AI-driven data center growth. We do a lot of optical transceivers that enable the optical networking between different computing nodes in the data center, so we saw tremendous growth there. But the other big part of our business, maybe a little less appreciated right now than the data center business, but I love this part of our business, is the industrial part of our business. And we saw really nice sequential growth in our industrial business across a bunch of different areas. So I would say good balanced growth across the company, but yeah, great fiscal Q2 and a great end to the calendar year.

Well, I think you know, you guys have both known me for a long time, and I think probably you know that at the end of the day, I'm a product guy. I love products, I love the technology, I love spending time with customers. So I get really excited about the products and technology, and that's really what drew me into Coherent. When I looked at the technology platform of this company, the depth and breadth of the technology is just astounding. I did my research before joining the company and was pretty astounded by the breadth of technology. But then when I got inside the company, able to visit lots of different sites, our production sites, our R&D sites, it's like getting a look under the hood of a new car and finding out that the engine is way more powerful than what you thought. So the technology engine in this company was even more powerful than what I thought once I got inside. And one of the things that's really unique about Coherent, and it's very different than the other companies I've worked with in my career, is if you think about what Coherent does, it almost all comes back to the photon. The photon is the fundamental particle of light, and the photon has all sorts of unique properties that make it pretty incredible. All of Coherent's core competence is around harnessing the power of a photon, using a photon to do all sorts of amazing things. I've spent the prior part of my career around electrons, making electrons compute faster, move data, etc. What is really cool about Coherent is photons and its focus on the photon. You can kind of boil everything that Coherent does down into three applications of the photon. The first one is we use the photon, that light energy, to transmit data. Obviously that's for data center AI data centers, a big part of our business. But the other way that we use photons is to concentrate them in a laser beam and you can use that to change the nature of a material. And the third way is you bounce a photon off something and you can use that to measure or sense things. So everything we do is basically one of those three things. I think the company is just incredibly differentiated in its expertise of the photon, and I think that's going to become increasingly important over not just the next few years but over the coming decades. So it's pretty exciting from a technology product standpoint, and I think the company has tremendous growth ahead of it.

The short answer is we are seeing a tremendous amount of growth right now in demand for our products. In that most recent quarter I was talking about, Q2, just for our data center business, that grew 80% year-over-year. It's a very fast growth. But if you step back and think about what's going on in the data center, of course we're all aware that there are these big AI workloads that are being run in the data centers and those continue to grow, expanding the capacity of data centers. But what a lot of times the industry is focused on is just the expansion in the computing nodes within the data center. So certainly we're ramping up the amount of compute capacity, whether that's GPUs or CPUs or XPUs. But as both of you guys know, as you ramp up the computing nodes, the network between those nodes has to grow at an equal to or greater rate actually than the computing nodes, because there's a tremendous amount of data and traffic traveling between all these different computing nodes within the server rack itself, between the racks within the data center, and also between data centers. A lot of these big AI workloads run across data centers, so that's putting tremendous demands on the total amount of bandwidth that has to be added to the network. Now, if you think about, okay, I have to add a huge amount of bandwidth, the best way to add bandwidth is to use optical networking. Because back to the photon, the photon can transmit data and provide bandwidth that's orders of magnitude greater than you can achieve with electrical connections. So that's why we believe we're going to see over the coming years this transition to more and more of the interconnect links between the computing nodes to be more and more optical versus electrical moving forward. And that's fantastic for us. Dan, as you pointed out, we build not just transceivers today, pluggable transceivers that are used in the data center, but we build all the ingredients, the key optical ingredients that go into that: the lasers that are used for the light source, the isolators that are used, we grow the garnet material that's used in the isolator that's used in the transceiver. This is one of our transceivers here, and we don't just assemble this thing; we make all the key optical components that go into it. So yeah, I think that positions us really well for this incredible increase in bandwidth in the data center and the drive towards using more optics, replacing electrical connections with optics moving forward.

Yeah, look, I think you're totally right, Pat. Unfortunately, our industrial business doesn't get as much attention. I guess the data center business is growing quickly, but I love our industrial business. The range of applications that we serve is just incredibly diverse, a diverse set of applications and a diverse revenue stream. And the industrial market over the long term will grow a little slower than the data center market for sure, but it's a really stable, steady market with long-term applications. We love it. So what we provide are all sorts of different products: lasers, optics, materials into industrial applications. Some of the common applications would be semiconductor capital equipment. All of the really high-end equipment that's used to manufacture semiconductors, a lot of that equipment is very dependent on lasers for inspection, for changing the nature of a material, etc. So that's a big market for us. Another interesting one is lasers used for OLED screen manufacturing. As you might know, OLED screens mostly have been adopted on smaller formats like mobile phones today, but they're now getting adopted more in PCs and tablets. So the total TAM of surface area of OLED screens is expanding, and the best way to manufacture an OLED screen, a high-quality one, is to use an excimer laser from Coherent. So that's another application. And one of the applications that I really love is the medical applications too. This is something people can always identify with because we all get impacted in some way by medical advancements. Just one example of where our lasers get used in medical: these really high-end medical microscopes where you can watch a neuron within a living brain, you can watch and image an active neuron and how it's connected without damaging the brain tissue at all. That's used in Alzheimer's research, and it's used to research and diagnose, and in some cases our lasers are used to treat as well. So for me, that's a really heartwarming example of our technology. And this is one of our lasers that are industrial lasers, one example, but we make a tremendous range of lasers, different wavelengths, different power levels, etc. They go into lots of different applications. We love that market. It doesn't get the same airtime as data center right now; everybody wants to hear about data center, but the industrial market is a great market for us, and the two combined are a really good combination.

Yeah, look, I agree with you, Dan. Culture to me is a big accelerator. It's an accelerator of execution of all different aspects of the company. And I've seen this firsthand in the companies I've worked with prior to Coherent, the tremendous impact that culture can have, positive impact if it's a great culture. But the reverse is true as well, and you can see all sorts of examples of that in the industry. So when I joined Coherent, definitely a focus on what are the key cultural attributes that are going to be important to our customers, our investors, and our employees over the long term. I'll pick out just a couple as examples. One cultural attribute that I absolutely love at this company, that is stronger than any other company I've ever worked for, is a culture around innovation, and innovation at a really fundamental physical level. This company is just amazingly innovative. We almost take it for granted. When I go out and meet the different R&D teams, the production teams across the world, it's kind of like they just do it day to day and don't think about it. I think we take it for granted, but we have this wonderful culture of focusing on really fundamental scientific innovation that benefits our products and our customers ultimately. So I love that part of our culture. We are definitely doing things to nurture that part of our culture. But on the flip side, where I think we have room for improvement, is we can definitely be a faster, more nimble, faster company. That's where I've really been trying to encourage the organization: hey, we need to improve our speed. It's not good enough just to innovate; you've got to get it to market as well. We've got to speed up our time to market, speed up our execution. So we're making a bunch of changes around enabling our decision makers and our key managers to just be able to make decisions and move quicker as an organization. So I think that's our opportunity: to combine that fantastic innovation culture with better speed and agility moving forward.

Absolutely, thank you. Thank you so much for the time. Happy to chat about Coherent and happy to talk with you guys again anytime. Thanks again, appreciate it.