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.

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.

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…

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.

[Operator Instructions] Our first question will come from the line of Samik Chatterjee from JPMorgan. Your line is open.

Hi, thank you for taking my questions and congrats on the strong results here. If I can just start with datacom. And when you started on this ramp, which has been pretty impressive, you did have the benefit of a lot of visibility into the orders from your customers. I think at that point, you had almost like a year's visibility in terms of orders based on how you're communicating about orders. As we now move into fiscal '25 and lead times are coming down, just curious what kind of visibility are customers giving you in relation to demand for fiscal '25, what do you think are the key growth drivers for the 800 gig or datacom business in total in FY '25? And have a follow-up. Thank you.

Thank you, Samik. Lee, would you like to?

Hi, thanks for the question. This is Lee Xu. Our outlook versus a quarter ago did not change. We still see strong growth in overall 800G and AI-related demand, and our customer interaction has been improving. And as you can see in the past few quarters, our 800G ramp-up from FY '23 is $20 million or to $50 million in our Q1, a little bit over $100 million in Q2. And this quarter, we reported close to $200 million and we project in Q4 of more than $250 million. So we still see further growth in FY '25, but in our field, the - how to say the lead-time for people to order 800G transceivers is coming down. And that's why we are - when we forecast our 800G revenue, we are being more prudent. But in terms of trend, our forecast from our key customers, there is no change. And we also said that we are broadening our 800G customer basis and now it's much broader and we see that in FY '25, it's going to be even more broad. Thank you.

Thank you, Lee.

And for my follow-up, if I can just quickly ask on the supply side, we get a lot of questions from investors asking about if there are supply constraints either on VCSELs or any of the other components going into the datacom transceivers. Particularly as you plan ahead for the ramp in fiscal '25 or the growth in fiscal '25, how you're managing around those sort of visibility around supply, any key bottlenecks that you see that you need to resolve? Thank you.

Thank you for that key question. We largely resolved all the material constraints, whether it's internal or external. So we feel confident on our capability.

Thank you, Lee.

Okay, thanks, Samik.

Thank you. One moment for our next question. Thank you. Our next question will come from the line of Simon Leopold from Raymond James. Your line is open.

Great. Thank you very much for taking the question. The first thing I wanted to see if you could unpack a little bit was, in the prepared remarks, Chuck, you mentioned the gross margin being a little bit softer than what you had been anticipating. Could you help us understand what are sort of the key drivers and expectations for how gross margin can improve over time? Is it as simple as getting utilizations up or is it more about the cost-reduction and synergies? Help us understand sort of the key levers and the targets. And then I've got a follow-up.

Okay, good morning, Simon. Thanks for your question. Rich is ready to go.

Thank you, Simon. Obviously, management team was a little disappointed in our performance in Q3 on the margin. We detailed out the one-time really transitory items in Q3. As we move forward, and as we mentioned, we still are targeting a 40% gross margin by the second quarter - first half of FY '26, and with that - over 20% operating margin. And there's many positive drivers that we have to achieve this. First is really the incremental volume and the mix as well. Without a doubt, we're going to need the increase in our industrial as well as instrumentation markets. Those are typically sales that come through - revenue that comes through our networking or our materials and laser segment, that will strengthen the margins as well as our strength in supply chain and buying power, that also is a key factor. We did have mentioned to you our synergy and restructuring plans in the past, which we are on pace for. But even longer-term, we're in the midst of a transformation. We just started a global design for a new ERP implementation, a new system. And we are just at the beginning of implementing AI tools. So all those factors will culminate in us reaching a higher margin.

Thank you. And then as my follow-up, I'd like to sort of get some sense of your vision of where the AI opportunity can go. So it looks as if you're expected to exceed your prior expectations for this fiscal year. I imagine it's maybe a little bit early to give us details on fiscal '25, but if you could give us some guideposts of how you're thinking about the 800 gig and above business evolving beyond the next quarter? Thank you.

Simon, thanks. Simon, I think we'll take a step back and talk about the market because we're expecting to lead the market. So Sanjai, why don't you just give a quick summary?

Okay. Thanks, Chuck. Hi, Simon. Thanks for the question. So we just - in our investor presentation, we have a chart that talks about the market, the growth and inflection that's happened with AI. Over the next few years, we still see a very strong growth in 800G. It's - over the next five years, it's growing at a 60% CAGR and that's 800G and beyond. So 800G and 1.6. So the market is strong. It's - we are projecting very healthy growth for the market and that's where it is today. That's great.

Good. Okay. Thank you, Simon.

Thank you. One moment for our next question. Our next question will come from the line of Ruben Roy from Stifel. Your line is open.

Thanks very much and congrats team on the execution and solid results. I guess, Chuck, I wanted to follow up on Sanjai's commentary. Which is - the question, I guess would be sort of around longer-term expectations and the CAGR and the CAGR has been moving around on kind of your overall datacom transceiver expectations, so I think in the shareholder letter last night, 21%, which is great, but it's down a little bit from the previous assumption. And so I guess the question would be, what are the moving parts in sort of how you guys are thinking about the longer-term CAGR? Is that you part - are there parts of telco in that? Or is it just datacom that you're considering and any kind of additional detail on how you're thinking about longer-term growth would be helpful? Thank you.

Thank you, Ruben. Thanks for the question. Sanjai?

Yes, Thanks, Ruben. Thanks for the question. Yes, we did take it down a little bit from our last report. Two things happened. One, CY '23 was much bigger than what we had originally anticipated. And then over the long-term, we've taken down the sub 800G numbers a little bit. So we are still projecting 21% over five years, and I made the comment earlier about 800G and beyond. That is still growing at the same kind of clip that we had previously anticipated. We keep - the market is young and fluid. We keep getting data points from our customers and end customers. So we are constantly revising our view of the market. Hopefully, that answers the question.

Yes, it did. Thank you, Sanjai. And then for a follow-up, I had a gross margin question as well, given that datacom transceivers are a meaningful part of the kind of the way the gross margins move around. I guess, can you give us a little more detail on some of the corrective actions around the transceiver yields? And as you look out into fiscal '25 or some of those corrective actions do you think applicable to the 1.6T ramp?

Ruben, yes, sure. Lee?

Hi, Ruben. Thanks for the question. This is one of our key target for our operations, the datacom transceivers. First of all, we did just - we are transparent in terms of - we had a slightly unexpected yield issue impacting our 800G ramp-up in Q3. And that problem has been resolved and we'll see on the datacom a significant margin improvement. And we are going forward in FY '25 because more and more products is going to move to 800G and higher data rate, we think that will further improve our datacom transceiver margins. So going forward, because of our vertical integration, because of our kind of being a leader on high end part of the market, we are quite confident of our gross margin and also the net margin. So does that answer your question?

Yes. Thank you.

Yes. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Thomas O'Malley from Barclays. Your line is open.

Hi, good morning, guys. Thanks for taking my question. I want to ask on the timing of 1.6T. You guys are saying fiscal Q1, your competitor last night was kind of talking about the end of the calendar year, maybe beginning of the next calendar year. There's really only two major customers who are doing 200G per lane at 1.6T. Could you talk about is that sampling in the September quarter, which is fiscal Q1, when do you expect volume production? And is that across multiple customers or just concentrated amongst one or two? Thank you.

Okay. Thanks, Tom. Good morning, Tom. Lee, please.

Okay. Yes, thanks for being so clear of what we have published. Yes, we are ready to sample 1.6T or 200G per lane based transceivers starting on our physical Q1. And we do expect our volume shipment to start at the beginning of calendar '25 of our Q3 fiscal year. And so far everything's going as expected and we're excited about this new opportunity.

Helpful. And then the second question was around silicon carbide. You guys described just an issue during the quarter. Historically, you've had a customer in electronics that's made it a little bit easier to kind of solve for the revenue in the silicon carbide business. Could you just maybe give us a little more color just because that customer has gotten so small, where that revenue has gone from a silicon carbide perspective? And then you talked about some strong growth in the out quarter. Any additional details on where that went in the quarter and where you're expecting over the next couple?

Yes. So Tom, as I understand it, you're trying to plumb our data in the electronics market for sensing versus silicon carbide and you'd like to have a clear view for silicon carbide. Sohail will give you the color that you need, I think.

Hi, Tom, this is Sohail Khan. The - in Q3, we - our silicon carbide had some operational issues about - we mentioned about the power failure and that power impacted - power failure impacted the factory which limited our ability to deliver to the plan. All those actions have been put in place. We were able to get everything back within 30 days. And I am looking at a very good strong Q4 and we expect that we will grow more than 50% from Q3 to Q4.

I hope that's helpful, Tom. Hi Tom?

All right. Thank you.

Thank you.

Thank you. One moment for our next question. And our next question will come from the line of Meta Marshall from Morgan Stanley. Your line is open.

Great. Thanks. Congrats on the quarter. A couple of questions from me. Maybe just first on, you noted that your expectations for kind of growth in sub-800 gig declined and that was what led to the kind of industry or change in the industry growth rate. But just what are you seeing in terms of just anything - any commentary on sub-800 gig demand? And then the second question, not to harp on the gross margins piece, but kind of understanding the overhang to fiscal Q3 and the yield issues that you've resolved both in silicon carbide and datacom. But with most of that seemingly resolved given the answers you've given today, just what is the reason for kind of a slower Q-on-Q pickup than you had been forecasting kind of last quarter? Thanks.

Just Meta, good morning. Just repeat the last part of the question.

Yes. So last quarter, you would have implied kind of about 100 basis point, 150 basis point increase between fiscal Q3 and fiscal Q4 and that seemingly kind of come down to about 80 basis points. And kind of understand the overhang to fiscal Q3, but what is the difference in kind of a smaller jump up between fiscal Q3 and implied fiscal Q4 gross margins?

I think, Rich just give a big picture, if you would, please.

Yes. So the margin resolution in Q3, as we mentioned, are pretty much done. We're still in the middle of ramping, as Lee mentioned, our 800G product and our yield plans that we have going forward. So the other piece of this is the majority of the increase quarter-over-quarter is coming from 800G as well as Sohail managing silicon carbide. And in the past, we did mention that the silicon - the 800G product is at our gross margin average. So it's really part of a mix issue as well quarter-over-quarter.

Yes. Let me add Meta to be clear. While the problems have been resolved for resolving, there's a tail in terms of a ramp back up to where we need to be. It's just not a flash cut. So we're confident about the corrective the corrective actions and the like, but we still need to establish that target yields and they'll come on different product lines will come within this quarter. So there's a little bit of a tailwind to the quarter. Is that clear?

Yes. No, that's perfectly clear. And then just any commentary on sub-800 gig demand?

That's a great topic. Let's go to market first if we can.

Okay. Thanks, Meta. This is Sanjai. So over the five years, the sub 800G is essentially flat. That's our latest projection. The 800G and above, as I said earlier, is growing at a slated to grow at a 60% CAGR. So the sub 800 is - I mean that's our view of the market. And...

Yes, great. Thank you.

Just one second. I think we can clarify one-step further with Lee, please do, because it is a very important topic.

Sure. From our own kind of internal forecast point of view, we see indeed, just as Sanjai was saying, the sub 800G is roughly flat for the next few quarters, but we do see some pickup three quarters from now. And so that's - I think the overall is healthy.

We'll be opportunistic. We'll be opportunistic about it. We're definitely trying to expand the share of wallet with the largest players. We've told the story about 400G in the past. And when it comes, if we can turn our capacity into it and make a real good business out of it, we'll be there.

Perfect. Thank you.

Thank you.

Thank you. One moment for our next question. Next question comes from the line of Karl Ackerman from BNP Paribas. Your line is open.

Yes, thank you. I wanted to focus on the telecom portion of your business for a moment. Clearly, you and peers in the ecosystem have pushed out the recovery in telecom from what was roughly June of this year to the end of this year and perhaps even the beginning of 2025. But within that, there seems to be some pockets of growth as well as softness. For example, last week, one of your peers had spoken about a recovery in metro long-haul, while cable was a bit soft. I'm curious if you have seen similar commentaries within the telecom. So if you could just double-click on the opportunities you see within telecom, what's working, what's not working as you progress toward that recovery in that market? That would be very helpful.

Okay, Karl. Good morning. Thanks. Beck, please.

Sure. Thank you for the question. So we do see a sort of a mixed areas of strength and weakness in the telecom market. One area of strength we have seen is in the China market. And there we see build-outs by most of the major carriers going on with new C+L networks. And we have some differentiated products in our pump laser and our WSS that they give us strength in that market. We expect that to continue through the year. I think the other thing for us where we see a growth opportunity coming in FY '25 is really on the digital Coherent optical pluggable market space. And that's where we have a number of really differentiated products coming to market, including our 100 gig QSFP28 ZR that has tremendous demand from our customer base. And we think that will help us sort of lift up to our FY '25. So our view of what's going to happen in the market and with our growth may be a little bit decoupled from what some of our competitors are seeing. Did that help you with your question?

Yes it did. I'll see you in the floor. Thank you.

Thank you, Karl. Thank you, Beck.

One moment for next question. Our next question comes from the line of Jed Dorsheimer from William Blair. Your line is open.

Hi, thanks for taking my question. So one and a follow-up. I guess, first, just on the silicon carbide, maybe as an additional clarity, I know you had that the power outage, but wondering if you could give an update on progress on your 200-millimeter development activities and any metrics that you can provide? And then I have a follow-up.

Okay. Thank you, Jed. Sohail, please.

Hi, thanks for the question. 200 millimeters is going quite well. We are supplying pre-production quantities to multiple customers. And the feedback from the customers is very good, both from quality as well as their ability to bring their lines up. As you know, the ramp is going to be dependent on when their fabs are up. So from our standpoint, we are ready and we are adding capacity more to ramp and we will see a much more contribution coming in next fiscal year.

That's great. Thanks. And then as a follow-up, you know, clearly there's a lot of demand in the Datacom side of the business, and it's fantastic that you guys are playing well into that. As we think out a little bit, I'm just curious, something that's a bit out of your control, how you're thinking about the power challenges and specifically lead times around things like transformers seem to be limiting data center growth. And I'm curious you know how a company that's selling components into that market is thinking about some of those structural challenges in developing with respect to AI? Thanks.

Hi. Thank you, Jed. Giovanni, would you like to take that?

Yes, of course, we read about it. We know Elon Musk is worried about it about the transformers for the transformers. I mean that's a very well-known challenge. We are keep - we keep focusing on ultimately what's driving our demand? Recently, you've seen that the optical bandwidth required by GPU is actually growing. It's not only the number of GPUs per cluster is growing. Demand is strong in terms of number of GPUs. But what's very important for us is the increase in optical bandwidth required by GPU, that's driving the need for 1.6 data and beyond and that will continue for quite some time as the GPU require more and more bandwidth for their input-output. So that's what's really the fundamental drivers for our growth, which I don't think they are going to change. And of course, there are - there could be challenges in infrastructure, from an infrastructure standpoint, but those will - it's not really up to us to solve. But we - obviously, we may be dependent on them. But the fundamental drivers for our growth will remain unchanged.

Thank you, Giovanni. Jed, it's particularly focused on the total energy required by the system. Hope that was helpful, Jed?

It is. Thank you, Chuck. I appreciate, and thanks Giovanni.

Thank you. One moment for our next question. And our next question will come from the line of Mark Miller from the Benchmark Company. Your line is open.

Congratulations on your progress. I was just wondering if you can give us some color on ROADMs and also are there any new opportunities coming along for VCSELs and where are you positioned in that market?

Okay, good morning, Mark. Thanks for your question. We'll take it in two-parts. First, Beck will take the ROADM question. Giovanni will address the VCSEL question. Beck?

Yes. Thanks, Mark. I'm actually really excited you asked that question because one of the most important new trends in ROADMs is really the drive towards C+L network deployments, which have been kind of on the drawing board for many years and are now finally really coming and being deployed. And one thing that we have that really no one else in the industry has is a true C+L ROADM. So that is - there's two bands in the optical communication space that we use in long-haul DWM communication, one is the C-band and one is the L-band. And by expanding to both C+L, we double the capacity in the fiber. So all of the new networks being deployed today include both C and L. And we're the only company that has a ROADM solution that actually covers both bands simultaneously in a single part, and that's driving a lot of upside opportunity for us as we go forward. The first place we see that really emerging is China, but we know that's very important for the hyperscalers in North-America and some of the higher capacity build-out. So we are excited about what's going to happen in the future in ROADMs. Now the nature of the network is evolving, but that is still evolving to one that is really strongly dependent on use of ROADMs in terminals and boxes and other applications in the network. So we think that's a positive long-term driver for us.

Okay, great. From the telecom systems or to the Datacom laser, VCSEL. Giovanni?

So on the VCSEL, on the OFC, we reported the progress that we have been making on the development of 200G VCSELs, which we think would be a game-changer in the industry as many, many customers, well as generally even competitors kind of ruled out the possibility for VCSELs to go even above beyond 100G. So that's a very exciting - the good news is that we also had our main competitor, probably the only competitor that we have on this space, they're also reporting progress on it, which is very positive for the industry because these industry will need at least two suppliers to support the growth. And then we are also working on 400G VCSELs for the future, you know, it's something that we didn't sight. And so we'll keep the roadmap going. And if you ask in general about VCSELs, I also wanted to mention the progress of multi-junction VCSEL for behind displays applications, which is that required for increase the power coming through the display in some cases, some user cases. So that's also something that we have been working on and will provide further growth for the total line, which is already experiences - experiencing today with the 100G VCSELs ramp, an incredible growth over the past several quarters and in the next few quarters too.

Thanks, Giovanni.

Thank you.

Thank you, Mark.

Thank you. One moment for our next question. Our next question comes from the line of Ananda Baruah from Loop Capital. Your line is open.

Yes, good morning, guys. Thanks for taking the question. Really appreciate it. I guess a little bit bigger picture on transceivers, you know, as you guys progress - and as the market progresses from 800 to 1.6, 2.2. Interested in understanding you know, any net-new technical hurdles and challenges sort of that could occur necessary to be successful there? And I guess any, I'm going to call them business-related dynamics that are going to increasingly manifest that will take to be successful there. And wondering if you guys have a share gain opportunity in that context and what's that whole dynamic could look like? And then I have a quick follow-up. Thanks.

Lee?

Hi, Ananda. Thanks for the question. This is Lee Xu. So this is a very key question. Thanks for asking that. For this development, it is indeed getting higher and higher data rate. The technical challenge is getting more complex and - but to us, there are several advantages also that we got to use a higher portion of our internal lasers and components. And also we found that the competition landscape becomes there are fewer people, right? So for example, for the current 800G shipment, so far is only a small number of companies that would be able to support that in high volume and we expect similar things on the 1.6T and 3.2T. So we do think that we can gain market share in over the next few years.

Your market. Oh, sorry, go ahead.

You also mentioned if there is any key technical hurdles that we won't be able to overcome. So far, no. We - our development has been going on track and we are confident that we'll be able to release the product on time.

This evolution of the market is going to play right into the strengths of Coherent, and we will continue to invest, innovate and to use our imagination across both the laser and the transceiver to deliver disruptive capabilities to a customer. The optical circuit switch is just one example, not a laser-based. The optical circuit switch is just another example of the kind of innovation power in the company and the ability of the company to begin to catalyze new markets that may have billions of dollars' worth of opportunity for us. So thank you for your question, Ananda.

Thanks, guys. Appreciate it. I'll leave it there. Thanks.

Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Dave Kang from B. Riley. Your line is open.

Thank you. Good morning. Regarding that OCS, just wondering if I could get any update, how big is it right now? Any new customer wins and who are your main competitors?

Okay. Thank you, Dave. Good morning. Julie, do you want to take that?

Sure. Yes, Dave, thanks for the question. So yes, as Chuck was just saying that optical circuits switch, I think is a great example of the power of innovation of our company. I'm sure you saw our demo and release at OFC where we're using our liquid crystal technology. So it's a great example where we have a technology inside the company that we have a long history of. We ship into the undersea market. So it's very, very reliable. And we saw a market opportunity where we could use that same technology for a different market need in the optical circuit switch. So I was really proud of our team who delivered a great demo for OFC. It is new incremental revenue for us. We think our liquid crystal is a great solution. It operates at a lower voltage than MEMS and so that leads to higher reliability, but also lower power, which is very, very important in the data center. We're engaged with many multiple customers and we see shipping samples all within the next few months. And I think we called out in our shareholder letter that we could see revenue on that product by our fiscal year '26. And yes, we just feel like we have a really strong position there. So I'm excited about it.

Thanks, Julie.

Thank you. And my follow-up is on 800 gig. You mentioned that orders were down sequentially from very strong fiscal 2Q. Just wondering what to expect during this quarter?

Magnus, do you want to take that?

Sure, I can take that. Thanks for the question, Dave. So as we noted in the shareholder letters, lead times have come down and so customer ordering patterns have more normalized to be within lead-time, whereas a couple of quarters ago, they ordered many quarters out. So I think we're back to a more normal order pattern.

Thank you.

Thank you, Dave.

Thank you. One moment for our next question. Our next question comes from the line of Jim Ricchiuti from Needham & Company. Your line is open.

Hi, thank you. Good morning. What drove that 30% increase in laser bookings? I'm assuming the ELA display business was a big driver. Can you say what the bookings, how it performed excluding display?

Yes. Thank you. Good morning, Jim. Magnus, take it.

Yes. So yes, I'll have to do the math, but you're right, the orders in the quarter, we saw a good uptick in display orders. And I think that drove the lion's share of the uptick. We saw orders from capacity increase in China and we actually expect similar order performance in the display market in the current quarter in Q4. So most of that uptick was display.

Got it. Thank you.

Manufacturing - precision manufacturing right behind it. Display number one.

Yes, display number one. Precision manufacturing also saw an increase and I think that will see a further increase in Q4, and then in the semi vertical, mostly flat.

Thank you, Magnus. Please go ahead, Jim.

Yes, that actually ties into with the next question on precision manufacturing. What's driving that? Is it a case of easy comparisons or are you guys seeing a turn in this part of the business?

I think what we're excited about in the business is what we're doing in the welding space targeted towards EV applications, where we have broad customer engagements and we're seeing increasing depth in terms of customer engagements. I would - we've seen a little bit of an uptick in China in the broader market in China, but we haven't yet seen the broader market turn. For the rest of that space, as you know, it's pretty macro-dependent. And we haven't really seen that change in broad way. So there are some pockets of upside rather than a broad comeback in precision manufacturing.

Thank you.

Thanks Magnus. Thank you, Jim.

Thank you. One moment for our next question. Our next question comes from the line of Tim Savageaux from Northland Capital Markets. Your line is open.

Hi, good morning. I want to come back to the order and backlog discussion. And I guess the commentary was about more normalized, but you've seen orders come down, I think three quarters in a row now and I think the book-to-bill was under --below one in the quarter. And you did see a big surge of orders last year, driven by networking in Q4. It sounds like you don't expect to see that again as lead times normalize. But what should we expect for the direction of overall orders and backlog for the company heading into fiscal Q4 here?

Yes. Rich, just in general, Rich?

Okay. So in general, our book-to-bill, quarter-over-quarter, we did see in Q3 a below one book-to-bill. Really we expect the year backlog to remain flat pretty much year-over-year. But we still believe that a majority of the strength in the markets in terms of long-term will increase the total backlog. We're expecting a book-to-bill really around one in Q4.

We're focused on it, Tim. It's a critical success factor going forward. So we're totally focused on it as a team. And we'll have more to say about '25 in 90 days from now, but it's a top priority in the company.

I appreciate it. And just a quick follow-up. I think there was a comment about the customer base broadening out and I believe specifically in 800 gig, but maybe in Datacom generally. And along those lines, I wonder if you can address kind of concentration in Datacom, whether you had any 10% customers overall in the quarter. And what sort of major customers are driving the Datacom segment at this point?

Yes, we report 10% customers once a year, as you know, at the end of the fiscal year, Tim. We won't have any comments on that. But we can give you just a general flavor for the broadening of the base, which we saw evidence of at OFC with just a tremendous amount of interest from the industry fanning out to additional layers in the market.

That's right. We - as of the beginning of the shipment of 800G, we have two major customers that we reported that, and we all know who they are. And now in the past quarter, we have over four customers that's order significant amount, multi-million dollars from us. And we are also in the past two quarters have multiple design wins of our 800G, various 800G product from short range to long range with the key customers. So we think going forward into FY '25, the 800G is going to have a much broader customer base.

Great. Thank you, Lee.

Okay, thanks everyone.

Thank you. One moment for our last question. And our next question will come from the line of Christopher Rolland from Susquehanna. Your line is open.

Hi guys, thanks and congrats on the results. And this may have been answered, but the 500 gig, if you could just talk about the lead times coming down, is that more of like a demand issue or a supply issue? And you guys mentioned a pause for a couple of quarters, is that two quarters? Is that three quarters? And is there like this inventory digestion going on here as well? Is this kind of exacerbating this pause like did a ton of people, was there like an initial rush for 800G AI products and this market just got ahead of itself and people bought a little bit more? I'm just trying to understand this pause a little bit more here, particularly as when it unpauses, it looks like it will be the beginning of the 1.6 market kind of. So just trying to put all those pieces together, it's demand issues, supply issue, inventory digestion, et cetera.

Yes. Chris, good morning. Can you clarify, you said something about 500G.

Oh, did I say 500, I meant 800, if I said 500?

Okay. Okay. All right. Well, we will try to address that. But for sure, as I said to Tim, that the bookings and building up our backlog is a top priority for the management team. However, as we indicated, we are going to grow again in the fourth quarter and we're building up this capability to continue to expand our output in 800G transceivers. So Lee, why don't you give a little more color?

Okay. Thanks for the question, Tim. First of all, 800G, the lead-time a few quarters ago, people do placed orders for close to a year, and that's because at that time, neither the material nor the capacity are fully ready. So people are willing to place the longer term orders, secure the capacity, secure the material. Now as we are a couple of - the company is ramping-up the 800G shipment, so capacity is largely there, although we're still expanding in the next couple of quarters. And then the material lead-time also came down. So that's why you know, as Magnus, our Chief Revenue Officer said, we see customers placing orders within a shorter lead-time. And that's - I think that's very normal in our industry. And that does not change the forecast our customers give us for the future growth of the 800G and related products. That's one question that you asked. The other is that you said that there is a pause for products that seem to be below 800G. What we see is that indeed there is some kind of a squeezing out effect as people are putting more money on 800G for AI expansion. There's some of the CapEx for normal networking is squeezed out. But we do see that in a few quarters start to go back up. But overall, people might switch to 800G for their normal networking in addition to using on AI. So that's - overall that's our view of the current marketplace.

Okay. Thank you, Lee.

Great. That was a great clarification. As I think out to the 1.6T cycle, every company in this industry has its different kind of strengths and weaknesses. And there's probably going to be three technology, laser technologies, VCSELs, EMLs and [SIFO] that are going to address this 1.6 opportunity, particularly the AI opportunity. I just wanted to get a clear picture, what are your capabilities? What are your strengths around these three technologies? And what are your ramp times? Like, for example, you addressed - initially addressing 1.6 with EMLs or SIFO. If not SIFO, like when can you kind of hard move over to SIFO technologies, which I think are a little more cost-effective. Maybe you can talk about where these three technologies kind of intercept 1.6 for you guys?

Okay. Julie, do you want to take it?

Sure, sure. Yes, thanks for the question. Yes, as you accurately said, we can use, VCSELs we can use EMLs. We've actually in the indium phosphide domain also introduced our DFB-MZ and we can use silicon photonics. And we have, as you know, for VCSELs and indium phosphide, we design in-house and we manufacture in-house. For silicon photonics, we're in a - as is common in the silicon industry, a fabless. So we have an internal design team and we use outsourced fabs. And so what we do is we choose the best technology for the product, based on the cost and the performance and because we have access to all the technologies, we can choose the one that makes the most sense. As far as transitioning to 200G, the fundamental basic laser technology is actually very similar. Once you go from 100G to 200G, it's still hard, but it's very similar. So using this very similar equipment set, we can make the lasers at the higher data rate. The test equipment data rate has to go up. So that's something we need to do. But in general, we should be able to handle that ramp challenge the same as we have at 100G. And then as things - the silicon photonics isn't always cheaper, but in some cases, for some applications, it may be the best choice. And as we see products transitioning to silicon photonics, we feel very strong in our capability. We've been working on silicon photonics since 2010. We have silicon photonics shipping in production in products. Our team demonstrated publicly 200G per lane silicon photonics eyes. And one very important thing - and we have actual products in design right now with silicon photonics for the Datacom. And one very important thing to never forget is that silicon photonics based transceiver actually requires an indium phosphide high-power laser. So even in silicon photonics, you should think silicon photonics and indium phosphide. So in silicon photonics based transceivers, we can differentiate ourselves also with our indium phosphide lasers. So we feel are in a really good position to address all the technologies at for 1.6T to 200G per lane.

Thank you, Julie.

And just maybe a clarification. Let's say within the first ramp, what do you expect the mix of those three technologies to be? And then let's say in the second year, how might that shift?

Chris, I think we only have time for two. We're running out of time.

Chris, to be respectful to everybody on the call, we still have another person in the queue and we've got two minutes left. So we'll take that offline.

Thank you, Chris.

Thanks, guys.

One moment for next question. And our last question for today will come from Richard Shannon from Craig-Hallum. Your line is open.

Hi guys. Thanks for taking my question. Hi, Chuck.

Good morning.

I wanted to talk a little bit about margin structure here as you get to your 40% growth and above 20% EBIT margin. I really kind of want to look at the time in the past where you've done that, which is the first half of fiscal '22. Looking at the margin structure by your three segments. And specifically, I'm curious whether you expect to be able to get the networking back up in kind of that 19 plus percent EBIT range to enable that or can you do it with that being not as high? And also maybe if you can suggest what kind of revenue levels required to get to that kind of margin structure, that'd be great. That's my only question. Thanks guys.

Thank you. Richard.

Yes, I think you were 100% right. We have achieved over a 40% margin and the revenue range of that was over $1.3 billion. So as we cross that $1.3 billion mark on the top line, this really comes down to the mix. And even though we believe we can increase the networking margin, we still need, as I mentioned to you earlier, we still need instrumentation in our industrial markets to improve.

Richard, do you have a follow-up?

No, that's all for me, Chuck. Thank you.

Thank you, Richard. Okay. All right.

Thank you. And there's no further question in the queue. I'll turn it back over to Paul for any closing remarks.

Thank you, Victor. I want to thank everybody for joining us on the call this morning. Just a heads-up, next week on March 14th, we will be hosting our third in our series of investor market webinars that will be on our instrumentation market. As with the other two, the goal is to help give you insight into the various aspects of our business. If you'd like to join, it will be accessible on our website. Once again, thank you all for joining us. We look forward to talking to you throughout the day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.