Earnings Call Transcript
COHERENT CORP. (COHR)
Earnings Call Transcript - COHR Q2 2025
Operator, Operator
Greetings and welcome to the Coherent Fiscal Year 2025 Second Quarter Earnings webcast. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead.
Paul Silverstein, Senior Vice President of Investor Relations
Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent CEO, and Sherri Luther, Coherent CFO. During today's call, we will provide a financial and business review of the second quarter of fiscal 2025 and the business outlook for the third quarter of fiscal 2025. Our earnings press release can be found in the investor relations section of our company website at coherent.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements or predictions are based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the third quarter fiscal 2025. If, at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum, such as a press release or publicly announced conference call. We will refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the Investor Relations section of our website at coherent.com. Let me now turn the call over to our CEO, Jim Anderson.
Jim Anderson, CEO
Thank you, Paul, and thank you, everyone, for joining today's call. I'd like to start by thanking my Coherent teammates for their strong execution in our fiscal second quarter and the continued focus and great progress on driving market-leading innovation. For our fiscal second quarter, revenue increased by approximately 6% sequentially and 27% year-over-year to a record $1.43 billion. This was driven by growth in multiple areas, including strong AI-related datacom transceiver growth, a second quarter of sequential growth in our telecom revenue, and sequential growth across multiple key industrial end markets. As I mentioned when I first joined the company, in addition to growing the top line, expansion in our gross margin would be a strategic focus area for the company, driven by parallel initiatives on both pricing optimization, as well as product cost improvements. During our fiscal second quarter, we made solid progress towards our goal of achieving durable company-wide gross margin of over 40%. Q2 non-GAAP gross margin of 38.2% marks strong improvement on both a sequential and year-over-year basis. While we have a lot more work to do on gross margin, I'm pleased with the team's focus and progress in this area. While we continue to invest in strategic R&D to fuel the long-term growth of the company, we remain focused on driving greater operational leverage and efficiency across the company. With revenue growth, gross margin expansion, and disciplined OpEx management, we drove significant expansion and profitability in Q2, with non-GAAP EPS growing over 40% sequentially and more than tripling on a year-over-year basis. Again, we have much more work ahead of us, but we remain focused on driving long-term shareholder value. Let me shift gears and share some thoughts on our products and end markets. Starting with our data center and communications market, Q2 revenue increased 6% sequentially and by 58% year-over-year. The sequential and year-over-year increases were driven by another strong quarter of growth in our datacom revenue and a second quarter of sequential growth in our telecom revenue. We achieved record Q2 datacom revenue, which grew 4% sequentially and by 79% year-over-year due to ongoing strong AI data center demand. We continue to see expansion in the number of customers adopting and ramping our 800 gig transceivers. And in addition, revenue from our 400 gig and below transceivers remains strong. We also continue to make solid progress on our 1.6T transceiver products as we move through key engineering milestones with our customers. After delivering initial samples of our 1.6T datacom transceivers to customers last year, we remain on track to begin ramping sales in calendar 2025, and we are seeing continued expansion of our customer engagements on 1.6T. Even as we focus on the 1.6T ramp, we are investing and innovating for the future. We are both developing our 3.2T transceivers and investing in the key ingredient technologies that underlie our transceiver roadmap and that can support a variety of form factors of optical data transmission. We have the broadest and deepest portfolio in the industry of photonic technologies required for high-speed optical data transmission. Our customers view our technology portfolio as an important competitive advantage of Coherent in optical data transmission applications. For example, one of the key capabilities that we've had in-house for over 20 years is our indium phosphide platform, which is the key technology behind our EML and CW lasers. The U.S. Government recently announced plans to use CHIPS Act funding to help with the expansion of indium phosphide capacity at our Sherman, Texas facility. In our fiscal Q2, our indium phosphide production output tripled on a year-over-year basis. This enabled rapid year-over-year growth in our 800 gig transceiver products, some of which are EML-based and some of which are based on CW lasers combined with our silicon photonics solution. We expect to continue to expand our indium phosphide capacity over the coming quarters to support our long-term growth in both EML and CW laser capacity. We also continue to execute on a roadmap of important ingredient laser technologies, such as our 200 gig differential EMLs; 200 gig VCSELs, and high-power CW lasers for our silicon photonic solutions. In addition to our key laser technologies, we're investing and innovating across a broad spectrum of important enabling technologies for our optical data transmission, including optical lens arrays, garnet, isolators, micro-optics, and thermal management solutions. Beyond transceivers and ingredient technologies, our new data center Optical Circuit Switch, or OCS, platform is progressing well and our customer engagements are expanding. This platform enables significant expansion in our data center addressable market, and I'm very pleased to announce that in Q2 we received our first customer order for this differentiated new platform. Unlike other mechanical MEMS-based solutions, our platform uses field-proven digital liquid crystal technology that provides tremendous advantages to our customers. We expect initial OCS revenue in calendar 2025, and we'll share more details about this innovative product and its revenue potential over the course of the coming quarters. In telecom, our Q2 revenue increased by 16% sequentially and by 11% year-over-year. Q2 is the second quarter in a row of sequential improvement. Revenue growth in Q2 was driven primarily by data center interconnect, with some improvement in the traditional transport market as well. We saw continued growth in the ramp of new products, including our 100 gig, 400 gig, and 800 gig ZR, ZR+ Coherent transceivers, and expect these products to continue to ramp over the coming quarters. In our remaining markets, which are primarily industrial-related applications, aggregate revenue increased 7% sequentially and was flat year-over-year. We saw sequential growth across multiple industrial end markets. In particular, display capital equipment grew on both a sequential and year-over-year basis. Ongoing display strength is being driven by demand for our highly differentiated Excimer lasers for OLED screen manufacturing, resulting from expanding OLED adoption in smartphones and the beginning of OLED adoption in larger format devices like new laptops and tablets. We also saw healthy sequential and year-over-year growth in the semi-cap equipment market, where our lasers and advanced materials are critical enabling technologies for our customers. While we are still taking a cautious near-term outlook on the broad-based industrial end markets, we expect the industrial market to be an important long-term secular growth driver for the company as the broader end markets eventually recover and as our new products continue to ramp. Before wrapping up, I'd also like to provide a brief update on our strategic portfolio optimization. We've made good progress on implementing the strategic portfolio assessment that we completed in the September quarter. As part of the process of divesting or shutting down product lines and assets that are non-strategic, we announced in December that we are evaluating strategic alternatives for our advanced lithium-ion battery recycling technology. This announcement follows the sale of our Newton Aycliffe facility and our announcement that we are evaluating strategic alternatives for our lithium-sulfur battery platform, as well as other portfolio optimization activities that are well underway. As we optimize our portfolio over the coming quarters, we'll provide further updates, including at our upcoming Investor Day this May. In summary, I'm very pleased with the progress we've made in our fiscal second quarter. While some near-term softness persists in our industrial-related end markets, we expect fiscal 2025 overall to be a strong growth year for the company.
Sherri Luther, CFO
Thank you, Jim. In the second quarter, we drove continued sequential improvement in our financial results with strong revenue growth and gross margin expansion, driving strong profitability. In addition, we strengthened the balance sheet by paying down $132 million in debt. Now, I will provide a summary of our results. Second quarter revenue was a record $1.43 billion, an increase of approximately 6% sequentially and 27% year-over-year. From a segment perspective, networking revenue increased 7% sequentially and 56% year-over-year, driven by ongoing strong AI data center demand and the continued recovery in telecom. Laser segment revenue increased 8% sequentially and 6% year-over-year, driven primarily by demand for our Excimer annealing lasers in our display capital equipment business, as well as strong demand in semi-cap equipment. The material segment revenue increased 3% sequentially and decreased 4% year-over-year. The year-over-year decrease was primarily due to weak automotive market demand. Our second quarter non-GAAP gross margin was 38.2%, an increase of 146 basis points compared to the prior quarter, and an increase of 363 basis points, compared to the year-ago quarter. The improvements in gross margin were driven by higher revenue volume, as well as cost reductions and improvements in manufacturing yields offset somewhat by unfavorable product mix. Second quarter non-GAAP operating expenses were $283 million, compared to $278 million in the prior quarter and $239 million in the year-ago quarter. The sequential and year-over-year increases were primarily driven by increased R&D investments in our product portfolio. SG&A decreased sequentially as a result of our disciplined approach to managing our SG&A expenses while ensuring that we invest in our product portfolio. Our second quarter non-GAAP operating margin was 18.5%, compared to 16.1% in the prior quarter and 13.5% in the year-ago quarter. Second quarter non-GAAP tax rate was 17.4%, compared to 20% in the prior quarter, due to the distribution of income earned across the jurisdictions, as well as non-recurring one-time items. Second quarter non-GAAP earnings for diluted share was $0.95, compared to $0.67 in the prior quarter and $0.27 in the year-ago quarter. We paid down $132 million in debt during the quarter using cash from operations. I will turn now to our guidance for the third quarter of fiscal 2025. We expect revenue to be between $1.39 billion and $1.48 billion. We expect non-GAAP gross margin to be between 37% and 39%. We expect total operating expenses of between $285 million and $305 million on a non-GAAP basis. We expect the tax rate for the quarter to be between 17% and 19% on a non-GAAP basis. We expect EPS of between $0.75 and $0.95 on a non-GAAP basis. In summary, I am very pleased with our progress in the quarter. We will continue to focus on improving profitability through gross margin expansion, as well as operational efficiency. It is important that we make investments for the long-term growth of the company while driving operating leverage and efficiency. Cash and capital allocation will continue to be key focus areas to further strengthen and deleverage our balance sheet. As a reminder, we will host an Investor and Analyst Day in New York on May 28 at the New York Stock Exchange. At that event, we will outline our overall strategy, including our end-market growth opportunities, product and technology roadmap, and long-term financial model. That concludes my formal comments. Operator, please open the call for Q&A.
Operator, Operator
Thank you. Our first question comes from Samik Chatterjee with JPMorgan. Please proceed.
Samik Chatterjee, Analyst
Yes, hi, and thank you for taking my questions. Congratulations on the strong results. Jim, I wanted to hear your thoughts on the telecom market. You've experienced sequential growth in that market for two quarters now, but last quarter you seemed a bit more cautious about your outlook. Can you provide insight on this second consecutive quarter of growth? Has your outlook for the sustainability of that improvement changed? What are you hearing from your customers regarding this? Or are you still cautious about the pace of improvement? I have a quick follow-up after that. Thank you.
Jim Anderson, CEO
Yes, thanks for the question, Samik. I think our view is we moved from cautious to cautiously optimistic. We were really pleased with the results that we saw in telecom in our fiscal Q2, you know, the 16% sequential growth and 11% year-over-year growth in fiscal Q2. As you noted, that was the second quarter of sequential growth. And we are expecting the telecom revenue to be up again sequentially in our fiscal Q3. So given all of that, we are cautiously optimistic that we've moved beyond the bottom of the valley in terms of the telecom recovery and demand and we're on the upslope within that market. Maybe just a little bit more commentary on what drove the sequential growth that we saw in fiscal Q2 is one of the main drivers was growth in data center interconnect, and we expect that growth to continue into the current quarter. We also saw improvement in kind of traditional telecom transport market, which we viewed as a really positive indicator for the overall underlying market health. And then we were really pleased with the continued ramp of our new products as well. So our 100 gig, our 400 gig, and 800 gig ZR/ZR+ Coherent transceivers ramping nicely. We expect that to continue over the coming quarters as well. So yes, quite pleased with the telecom results and looking forward to another sequential improvement in the current quarter.
Samik Chatterjee, Analyst
Got it. Got it. And for my follow-up, the OCS first orders that you're highlighting, that's an exciting announcement. If you can give us a bit more color in terms of how to think about the addressable opportunity here? And I know you've said probably the revenues are in calendar ‘25, but just how to think about the pace of the ramp with the customer and how material it will be in calendar ’25? And what the longer term opportunity there could be?
Jim Anderson, CEO
Thanks, Samik. Yes, really happy to talk about this product line. I love the differentiated technology of this product line. In fact, this was when I first joined the company, I guess that's about eight months ago. This is one of the product lines that the team showed me early on. And when they explained to me the technology differentiation, I was quite impressed and we've since increased R&D investment in this area to expand and accelerate the roadmap on this technology. I'm really, really pleased with the progress here. Maybe just to explain what OCS does for the customer is rather than when they're transmitting data from one computing node to the other computing node, rather than having to go through an electrical switch and switch the data from the optical domain into the electrical domain, by using an optical circuit switch, they're able to keep the signal in the optical domain through the transit from one computing node to the other computing node. And that has great latency and power efficiency advantages, so that's the advantage of OCS. And then for our platform in particular, it's a non-mechanical technology. It's based on digital liquid crystal technology that is much, much higher reliability than the other solutions that are out there that are essentially mechanical-based and based on MEMS-based solutions. And so we have very differentiated technology. We're seeing really good customer engagement and momentum here. We're really pleased to get the first customer order in our fiscal Q2. On the revenue ramp, we remain, our view remains that the revenue, we should start to see first revenue in this current calendar year. We'll probably get better, you know, quantification of that as we move throughout the year, but I think given that we would start to see revenue this year would be more of a contributor in calendar ‘26 and ‘27 and beyond. And in terms of the addressable market, we'll probably talk about that more at our Investor Day in May. We'll give a better quantification of the revenue and market opportunity when we talk at our Investor Day in May. But yes, really pleased with the progress on this product.
Samik Chatterjee, Analyst
Got it. Great, thank you. Thanks for taking my questions.
Operator, Operator
Our next question comes from the line of Simon Leopold with Raymond James. Please proceed.
Simon Leopold, Analyst
Thanks for taking the question. I wanted to discuss the topic of co-package optics or CPO. Given that the noise level on this has definitely increased recently, how does Coherent envision this technology affecting its business in both the intermediate term, as well as the long-term? Thanks.
Jim Anderson, CEO
Thank you for the question, Simon. To address your inquiry, I will divide my response into two sections. Firstly, I want to discuss our perspective on market evolution and how we anticipate the market to develop in the next few years, particularly with respect to co-packaged optics. Then, I will come back to the second aspect of your question regarding Coherent's opportunities in this landscape. Starting with the market evolution, we believe that the total addressable market for optical networking in data centers will experience substantial growth over the coming years, and this trend is expected to continue long-term. This robust growth is driven by two main factors. The first is the significant increase in bandwidth required to accommodate the rising demand for computing capacity. The expansion plans for data centers will lead to an impressive growth in the number of computing nodes, resulting in a corresponding increase in connections between these nodes and the bandwidth needed. The second factor relates to the transition from electrical to optical connections. We expect to see a growing percentage of interconnects between computing nodes shift towards optical connections. This shift is necessary to meet the high bandwidth demands of connections among various computing components, such as GPUs, CPUs, and other accelerators, where optical connections can provide significantly greater bandwidth compared to electrical connections. We see co-packaged optics as one of the enabling technologies facilitating this conversion, alongside other innovations. In terms of application, we foresee that co-packaged optics will primarily be utilized in scaling up within racks, providing enhanced connections between computing nodes. Therefore, we believe CPO will act as a significant accelerator for the overall market for optical networking in data centers, driven by both the demand for increased bandwidth and the transition to optical technologies. Now, regarding what this means for Coherent, we believe we are well-positioned to drive growth in pluggable transceivers, which remains the leading form factor. We have an impressive roadmap for pluggable transceivers, including our ongoing ramp-up of 1.6T products and the development of 3.2T transceivers, among other future advancements. We are confident in the growth potential of pluggable transceivers, particularly in scaling up. Additionally, we are prepared to capture market share as the total addressable market expands. Furthermore, as we explore other form factors like co-packaged optics, it's crucial to note that Coherent does not solely supply transceivers; we also invest in and innovate the essential technologies used in these devices. This includes areas like indium phosphide platforms, EML and CW lasers, and silicon photonics, all of which are critical for both pluggable transceivers and co-packaged optics. Overall, we feel very well-positioned to thrive in what we see as a rapidly expanding total addressable market. We will share more insights and specifics about market evolution at our Investor Day in May and outline Coherent's growth opportunities.
Simon Leopold, Analyst
That's great. I appreciate the thorough response. And just a very brief follow-up, please is just wondering if there's any customer concentration or vertical concentration you could quantify in the quarter, whether it's the amount from any 10% customers or sort of the AI consumption, whether direct or indirect to web scale. Anything you could help us with in terms of that quantification, I'd appreciate.
Jim Anderson, CEO
Yes, we have a broad range of customers, both hyperscaler customers, as well as enterprise customers. The hyperscaler customers represent the vast majority of the datacom revenue, but we have multiple hyperscaler customers and are well distributed across those key hyperscalers. So yes, I would call our revenue in datacom as well diversified. And then the other point that I would make is on 800 gig transceivers, which I mentioned in the prepared remarks, is one of the really positive things that we've seen over the past year is the number of customers that are ramping 800 gig continues to expand. And so I mentioned this in our last quarter's earnings update, and we saw expansion in the number of customers again over the past quarter. So we view this as very positive as our overall 800 gig revenue is very highly diversified.
Operator, Operator
The next question comes from the line of Vivek Arya with Bank of America. Please proceed.
Michael Mani, Analyst
Hi, this is Michael Mani on for Vivek Arya. Thanks for taking our questions. To start, just wanted to get your thoughts on how the market landscape is evolving across VCSELs, EMLs, and Silicon photonics. You stated that obviously a breadth of needs is required across these customers. But as you get closer to the 1.6T ramp, do you have a better sense of which platform might be seen relatively more pulled from these customers? And how does that inform your buy versus make decision framework around internal production? Thank you.
Jim Anderson, CEO
Yes, thanks Michael. So, first of all, maybe I'll start with kind of our strategy and philosophy around the ingredient technologies is I think it's well recognized by our customers that, you know, when it comes to the ingredients that go into optical networking technology, that Coherent certainly has the broadest and deepest portfolio of ingredient technologies. So we don't just assemble the transceiver. We bring to our customers a very broad and deep and expansive roadmap in terms of all the underlying key technologies. So whether that's a VCSEL laser, an EML laser, a CW laser, EMLs and CWs of course based on indium phosphide platform, which I mentioned in the prepared remarks, silicon photonics, which we've had in production for a number of years. We're able to bring a wide array of technology, and that's one of the key competitive advantages that our customers really appreciate, because when they work with us and when they partner with us in a strategic multi-generational fashion, they know they're working with a company that brings a very complete portfolio of optical networking technology. And so, our approach is to invest in all those key technologies. And what we do is we work with our customers to field the particular technology that best fits their application and their needs. And so what we do is we pick out of our portfolio what we think is the most optimal technology. And so that's our approach. And that's the same approach we've taken on 800 gig. And you mentioned you asked about 1.6T. We've taken the same approach on 1.6T as well. And then in terms of the make versus buy, I think was the last part of your question. Again, our philosophy on make versus buy is we want to make where it provides a genuine competitive advantage to our customers. And where it doesn't provide a genuine advantage, then we should be buying that or sourcing that from the ecosystem. So where we invest our R&D or invest our CapEx dollars, that's where we believe we're either generating a significant technological advantage for our customers or we're creating a significant cost structure advantage. So that's where we focus and concentrate our resources. Otherwise we leverage the ecosystem. And sometimes we mix and match as well. In the case of, for instance, EML lasers, we both source those internally, but we use external partners as well, and we have a number of really good external partners for EML lasers. So we'll sometimes use a mixture for supply chain resiliency as well. So that's kind of our overall philosophy and strategy around that.
Michael Mani, Analyst
Great, thank you. And just for my follow-up, what are the puts and takes for gross margins this year? You know, the nice upside, this past quarter, so what initiatives worked well to deliver that? And I guess as we look throughout the rest of this year, what are some of the low-hanging fruit that you'd be able to tackle, whether it's improving product cost on the transceiver side, divesting non-core assets that could help us move upwards from here. Thank you.
Sherri Luther, CFO
Thank you, Michael. Looking at our Q2 results, we achieved a sequential improvement of 150 basis points and a year-over-year increase of 360 basis points, which we are very pleased with. Volume contributed to this growth, but we also saw improvements on the cost side. Specifically, in datacom, we observed yield improvements and lower costs, along with enhancements in our manufacturing process, all of which positively affected our gross margin. You may remember that several quarters ago, we set long-term gross margin targets exceeding 40% and discussed our growth strategies. Reduction in product costs and pricing optimization are essential parts of this strategy. These will continue to be focal points as we work toward our long-term goal of over 40% gross margin. We're pleased with our Q2 results and will maintain our efforts in this area moving forward. Regarding the remainder of the year, I encourage you to look forward to our Investor Day in May, where we will provide more details on the various aspects of our gross margin expansion strategy.
Operator, Operator
And the next question comes from the line of George Nader with Jefferies. Please proceed.
George Nader, Analyst
Hi guys, thanks very much. I wanted to ask about tariffs. Obviously, there's been a lot of news on that front in the last few days and weeks, but you guys obviously have a Chinese manufacturing footprint in some areas of the business, and it does seem like that 10% tariff isn't as bad as imagined previously, but could you talk about what the effect of those tariffs would look like on Coherent? And then what sorts of things could you do to mitigate those effects on the business? And then I guess the other part of this question is, is it possible that some of the strength you're seeing is a pull forward of demand, you know, customers trying to get ahead of the tariffs. But yes, those are the questions. Thanks a lot for your help.
Jim Anderson, CEO
Yes, thanks, George. So on the first part of your question, you know, obviously a dynamic situation around tariffs right now, and we, you know, continue to analyze it and make sure we're adapting as necessary. But if we look at the current quarter of fiscal Q3, we don't expect a significant impact to the current quarter results. And the guidance that Sherri provided in her prepared remarks factored in any impact that we expect from tariffs. And in the second part of your question around mitigation, I think one of the things that the company has done really well over the past years is building a very resilient supply chain. And there's been a very good strategic focus on this over the past years by the team. And they've done a really great job of that. And I think that's built a lot of resilience into our supply chain and a lot of flexibility and adaptability. And by the way, I think our customers definitely recognize that as well. Supply chain resiliency is becoming increasingly important to our customers and they recognize that we have a very resilient supply chain. And I think within the optical networking industry, I would say it's world-class supply chain resiliency. Now, I'd flag a couple specific areas in particular that we have really great resiliency in our supply chain. One is geographic diversity in our manufacturing base, and that gives us great flexibility in terms of being able to shift the location of production to different geographies depending on the needs of our customer. And then the second thing is, which our customers appreciate, is vertical integration, where we've strategically chosen to invest in key technologies, which are very important from an innovation perspective or from a capacity perspective. And so that vertical integration of key enabling technologies is another source of strength in terms of our supply chain resiliency and another area that our customers really value in our overall resiliency. So we're focused on continuing to build supply chain resiliency, but I would say we have a tremendous amount of flexibility and adaptability already built into our supply chain strategy. And then on the last part of your question, which was, you know, did we see any sort of pull forward of demand? We didn't see any indications of that. In our fiscal Q2, I would say the data center demand materialized very much as we had expected at the beginning of the quarter. So we didn't see any signs of any pull forward in demand.
George Nader, Analyst
Super. Thank you very much.
Jim Anderson, CEO
Thanks, George.
Operator, Operator
The next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed.
Meta Marshall, Analyst
Great. Thanks, and congrats on the quarter. Maybe first question, you know, you did see improvement in lasers this quarter, but had noted kind of staying kind of more cautious about that market. I just wanted to get a sense of if you could give kind of how you're viewing that maybe, you know, on Telco where you said you were going from cautious to cautiously optimistic, just how you're viewing kind of the prospects throughout the year for that business. And then I have a follow-up.
Jim Anderson, CEO
Thank you for the question. Regarding lasers, I would like to discuss it in relation to the market. The laser business mainly pertains to industrial applications, which also applies to our materials business with significant industrial involvement. When we examine the industrial and related markets, we see a mixed situation. Some segments are showing signs of improvement while others are not. Therefore, we are maintaining a cautious outlook on these markets in the short term. However, we believe there is potential for long-term growth in this area. I want to highlight a couple of specific segments where we are witnessing positive growth. Firstly, in display capital equipment, our Excimer lasers are instrumental in the manufacturing of OLED screens, which are moving from smaller devices like mobile phones to larger ones such as laptops and PCs. This shift is leading to a significant increase in the total surface area of OLED screens, and our lasers play a crucial role in producing high-quality displays. We have observed growth in this area both sequentially and year-over-year. Secondly, we're noticing an uptick in orders from our semiconductor capital equipment clients, as they anticipate stronger demand in the upcoming quarters. This is another encouraging sign. Overall, though, we remain cautious in our outlook for the near term.
Meta Marshall, Analyst
Got it. And maybe same on materials. You know, I believe you guys mentioned automotive as kind of an ongoing headwind, but just as you look at some of the prospects for that business for the remainder of the year?
Jim Anderson, CEO
Thank you, Meeta. Regarding materials, our comments are very similar to those about lasers. A significant portion of the materials business is tied to the same industrial end markets. For example, materials are also utilized in semiconductor equipment. Therefore, we have a cautious outlook on demand for materials in the industrial-related segments. Specifically, we have noted a weakness in the automotive sector, leading us to adopt a more cautious perspective on materials.
Operator, Operator
The next question comes from the line of Papa Sylla with Citi. Please proceed.
Papa Sylla, Analyst
Thank you for taking my question and congrats for the strong result. I guess my first question is maybe more for Jim, I guess Coherent previously announced kind of seeing strong improvement on 200 gig per lane VCSEL. Just wanted to have kind of additional update on where you are in the process? And is the expectation that 200 gig per lane VCSEL could be available at some point for 1.6V cycle or even more of a 3.2T story?
Jim Anderson, CEO
Yes, thanks Papa. So we continue to progress well on our engineering efforts around not just 200 gig VCSELs, but I also mentioned in the prepared remarks, 200 gig differential EMLs, and also we're building a robust roadmap of CW lasers based on our indium phosphide platform as well. So again, we invest across a range of technologies and then the approach that we take is to deploy the laser technology or any other particular technology that we think is best suited for that application, whether that's a 1.6T transceiver or 3.2T or, you know, we have products on the roadmap beyond that as well. So I probably won't go into the details right now of what specific technology that we're selecting for any particular transceiver product just for competitive reasons, but our strategy and our approach is to build a very robust roadmap of ingredient technologies and to pick the one that's most optimal for a particular customer application.
Papa Sylla, Analyst
Got it. Thank you. That's very helpful. And maybe my follow-up is around the datacom kind of margin. I believe previously you mentioned it being mostly in line with company-level margins, but as you continue to improve yield and benefit from increase.
Jim Anderson, CEO
Operator did we lose Papa's line? To address the question, I believe I understand the main point. I will do my best to respond. It seems to be regarding datacom margins. Let me take a step back and provide a broader company perspective before returning to datacom margins. When I first began my tenure at the company during the initial earnings call, I made it clear that improving gross margins was essential. We have been concentrating on this for several months and quarters. In terms of gross margin, we are tackling it through two main areas, which Sherri mentioned earlier. One is pricing optimization, and the other is product cost. Regarding product cost, there are opportunities for improvement across the company, not only in datacom but also in telecom and all our industrial products, including materials and lasers. There is significant work to be done to enhance product costs. One of the key areas for improvement, especially in datacom margins, is through better yields. I referred to this in the previous earnings call a quarter ago, and it's a crucial product cost area we are focusing on. There are additional areas as well, but improving gross margin remains a top priority for the company. We are dedicating considerable energy to this effort, and I am pleased with the progress the team has made, although there is still much work ahead of us. We are very committed to achieving our gross margin improvement goals.
Operator, Operator
And the next question comes from the line of Karl Ackerman with BNP Paribas. Please proceed.
Karl Ackerman, Analyst
Yes, thank you. I have two questions if I may. To start, Jim, is your AI transceiver opportunity this year gated by your current indium phosphide wafer capacity? I ask because some investors are contemplating how important laser wafer capacity is when you and peers discuss your transceiver roadmap with hyperscalers? And then I'll follow-up please.
Jim Anderson, CEO
Yes, thanks Karl. So what I would first say on supply chain and capacity is, look, I want to take the opportunity to thank my supply chain and manufacturing team for doing an outstanding job of increasing capacity and supporting our customers. If you look at our data center, datacom revenue, it grew 79% year-over-year in the most recent fiscal quarter. And I think the team's done a great job of supporting our customers. And we've been both ramping internal capacity, for instance, in datacom of the assembly of the transceivers, but also in the ingredient technologies. I mentioned you asked about indium phosphide. One of the things I mentioned in the prepared remarks is if you look at our fiscal Q2, on a year-over-year basis we tripled our indium phosphide capacity. And it's our intention to continue growing indium phosphide. And the U.S. Government recently announced plans to help us with the expansion of indium phosphide capacity at our Sherman, Texas plant. So indium phosphide platform, which we've had in-house for over 20 years, we view as a key technology and we expect to continue to ramp volume of indium phosphide technology for EML lasers, CW lasers, et cetera. Now we do also use a multi-source strategy, for instance, on EML lasers where we have, you know, good external partners as well. But we certainly are focused on continuing to ramp capacity given the demand signals that we're seeing from our customers over the long-term.
Karl Ackerman, Analyst
Very clear, thank you. And then if I may, just on OpEx, how should we think about OpEx in March and throughout ‘25? I guess do you anticipate growing OpEx in line with sales growth before and restructuring some of the initiatives that you've already previously laid out, but are still at the forefront? Thank you.
Sherri Luther, CFO
Yes, thank you, Karl. So from an OpEx perspective, when you look at Q2 in terms of our OpEx results there, you saw that we increased our R&D spend sequentially, and that's really as a result of our philosophy that we want to make sure that we are investing our R&D dollars for the long-term growth of the company and really those projects that have the highest ROI. So from an R&D perspective, that's what drove the sequential increase in Q2 and when you look at the midpoint of our guide for total OpEx for Q3, that's also a key driver of the increase going into Q3. From an SG&A perspective, in Q2 you saw that we actually reduced our SG&A spend, in particular the G&A part of that, and that again is part of our philosophy that we want to drive greater leverage and efficiency in the business. And so, you know, the increases in OpEx going into Q3 are really driven by R&D spend. Now, on a quarterly basis, you can always see fluctuations, whether it's in terms of the timing of the benefits that we're able to achieve on the SG&A leverage front or the timing of spend of R&D programs. But that's our philosophy in terms of investing and with respect to OpEx. When you look to the rest of the year and you know that really is an invitation for you to listen to our Investor Day in May as we give more perspective on our long-term model and how we're thinking about that, but that will give you that's just a perspective on Q3 and how to think about that.
Operator, Operator
Thank you. The next question comes from the line of Thomas O'Malley with Barclays. Please proceed.
Thomas O'Malley, Analyst
Hey, guys. I have a short-term one and then a long-term one. Just briefly, for the March quarter, do you think you could walk through? Obviously, revenue is flat and it sounds like communication continues to be cautiously a bit better than you had originally expected. But any color on just the broader segments what gets you to that flat guidance into March is the first question?
Jim Anderson, CEO
Yes, thanks Thomas. It's pretty straightforward. We expect datacom and telecom to be up sequentially. And we expect the rest of our industrial-related businesses to be down sequentially. And that net at the midpoint to be flat.
Thomas O'Malley, Analyst
Gotcha. Super helpful. And then I just wanted to talk strategically longer term. As you look at the dynamic for the transceiver market, particularly in the datacom, are you starting to see, you know, a change in behavior from some of the hyperscalers as it relates to the domestication, domestic, I don't even know how to say the word, but the move to domestic producers of transceivers. And, you know, are you seeing changes in ordering behavior at this point? Or is that all kind of headline news and no real changes yet? I'd just love to get a feel for, you know, if you're already starting to see a move to move supply chains onshore? Thank you.
Jim Anderson, CEO
Thank you, Thomas. I truly believe we have a chance to gain market share in the upcoming quarters and years, and we are focused on achieving that goal. Our conversations with customers usually center on two main topics. First, it begins with the roadmap of technology, which includes not only our transceiver roadmap but also the foundational technologies. Our customers appreciate the extensive and deep capabilities we offer, which is a significant competitive advantage. Secondly, we also discuss supply chain resiliency, highlighting our strong geographic diversity, flexibility, and adaptability, as well as our vertical integration. Customers recognize this supply chain resiliency as a substantial advantage, providing further value beyond our technological roadmap. Both aspects are highly regarded, especially by our major strategic customers.
Operator, Operator
The next question comes from the line of Christopher Rolland with Susquehanna International Group. Please proceed.
Christopher Rolland, Analyst
Hey, thanks for the question. This one's for Jim. And Jim, you're a bigger picture thinker, so this is a bigger picture question, I think. It's really around networking intensity and also timing of either the peak in 800G or the beginning of 1.6. And there's kind of two parts, the first part is DeepSeek. Obviously all the connectivity guys were down big that Monday. Do you think that impacts connectivity at all, the outlook for it? And then perhaps there are pushouts of key AI products. Do you see that affecting either 800 or 1.6 for you guys this year?
Jim Anderson, CEO
Yes, thanks Chris. So on the first part of the question around DeepSeek and the outlook, you know, first of all, say that we've seen no significant changes in our customers' outlook, both in terms of the orders that they're placing or the long-term forecast that they have been providing to us, we've seen no significant change there. And, you know, I would say in terms of longer term, I think we share the view that many others do in the industry, which is that to the extent that any technology, whether it's DeepSeek or any other technology, makes AI more pervasive that propagates AI in a wider way, makes it easier to adopt or cheaper to adopt, we view that as providing underlying growth for the market over the long-term. So we view that as a long-term positive market trend. But in the shorter term, we've seen no significant change in customer forecasts or ordering patterns. And because of that, I also don't see any impact that it has on 800 gig peak or 1.6T ramp. I don't believe it will have any effect on that. And just more specifically on that part, you know, we believe 800 gig will continue to grow over the coming quarters, even as 1.6T is introduced. Because if you look at the customers, actually the customers, it really depends on the customer on what specific data rate they're currently on. We still have a number of customers that are primarily on 400 gig and still have yet to transition to 800 gig. We have customers that are just at the beginning of their 800 gig ramp. So I think it's you know 800 gig continues to grow while we start to ramp 1.6T.
Christopher Rolland, Analyst
Excellent, thank you Jim. And then secondly you know there are a bunch of Chinese guys with really big capacity ramps coming. I'm just wondering if you're seeing anything in terms of transceiver pricing, pressure on, on your own gross margins in this area? And how much more cost cutting there is to do on the gross margin side or efficiencies on transceiver as well?
Jim Anderson, CEO
Yes, thanks Chris. I would call the transceiver pricing that we've seen as pretty stable. I don't end as predicted as we would expect. I don't think there's been any unusual pricing changes that we've seen. And then on the second part of the question around gross margin efficiency, you know, and I kind of addressed that a little bit earlier in the questions around at a company level, I think we have a lot more work to do on driving product cost efficiency in our gross margin line. So a lot more work ahead of us. Good progress, and I appreciate the progress from the team in fiscal Q2, but both Sherri and I are not yet satisfied with the gross margin and we continue to make sure the company is focused on it.
Operator, Operator
The next question comes from the line of Jack Egan with Charter Equity Research. Please proceed.
Jack Egan, Analyst
Great. Thanks for taking the question. I was hoping you could talk about the yield improvements in datacom a bit. So I was wondering where exactly it came from, like whether it was materials or on the manufacturing or backend side? And then are they coming from kind of the typical development process where you can just continually squeeze out improvements or have these been more like discrete one-time improvements?
Jim Anderson, CEO
I would say it's a range of things, right? There's a number of different places that we're focused on yields. I would say some of them are one-time improvements. Some of them are things that we believe are ongoing improvements that we're sort of at the start of ongoing improvements. I think it's a range of things. We're certainly looking at the entire expanse of any yield improvements we can drive. But also, as I mentioned just a minute or two ago, we're definitely looking at input costs, on overhead costs, anywhere where we can drive cost efficiency, we're focused on that. So I think it's a range of activities.
Sherri Luther, CFO
Yes, I would just add that, just a reminder that from Q1, going into Q1, we saw improvements in yield as well. And we continue to see that in Q2. So as Jim mentioned, it's in different areas, different products, different parts of the process, but we're focused on all those areas and we're really pleased to see continued yield improvements in Q2 in the datacom business.
Jack Egan, Analyst
Great. And so, for my follow-up then, you've given a lot of color on your strategy from the product portfolio and efficiency standpoints. And I know you'll probably share more on this during the Investor Day, but have you made or are you looking to make any major changes when it comes to kind of the sales and marketing or the distribution side, because Coherent has the very broad footprint with vertical integration, as you mentioned. So I was just curious if there were any synergies there?
Jim Anderson, CEO
Yes, thank you. So that is another area that we've been driving improvement in. What I would say is kind of similar to the activities we were driving in R&D is we're trying to make sure that, first of all, that the resources around sales and marketing are applied in the area of greatest opportunity. And so we have made changes where we've reduced resources and sales resources in some areas and we've increased resources in other areas. And so we are shifting resources to where we believe is the greatest long-term growth opportunity and margin growth opportunity for the company. And so yes, we are, there's a number of changes we've already driven and that's someplace where we'll continue to drive improvements moving forward. Yes, thank you operator and thanks everybody for joining us on the call today. So as we wrap up here, I first of all want to thank all of my Coherent teammates for the great hard work and the dedication and the really good solid execution in our fiscal Q2. And thanks for everybody on the call today. Thanks for your support and looking forward to continuing to update you on our progress. Operator, that concludes our call. Thank you.
Operator, Operator
This concludes today's conference. You may now disconnect your lines at this time. Enjoy the rest of your day.