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Nov 22, 2023

Coherent: Short

marchmeena29 I’ve written numerous articles on Coherent (NYSE:COHR) both before

marchmeena29

I’ve written numerous articles on Coherent (NYSE:COHR) both before and after the acquisition by II-VI and the subsequent renaming of the company. Following the acquisition, I wrote another Seeking Alpha article on Dec. 12, 2022, entitled "Coherent: Gaining Momentum In Silicon Carbide From Partnership With Infineon."

That article addressed potential tailwinds, noting Coherent's supply partnership with Infineon Technologies (OTCQX:IFNNY) is reinforcing its role as a silicon carbide wafers leader for the automobile industry, primarily because Infineon has inked deals to supply silicon carbide ("SiC") chips to Stellantis (STLA), Hyundai (OTCPK:HYMLF), VW (OTCPK:VWAGY), and Tesla (TSLA) made on Coherent's SiC wafers.

This article address the mystery behind Coherent's comments during its last FQ3 2023 earnings call on May 10, 2023.

CEO Chuck Mattera made a strong case for Silicon Carbide when he stated:

"With respect to our silicon carbide business, it grew more than 40% year-over-year. This business continues to be one of our top priorities.

Even with the $1 billion investment over 10 years that we announced in August of 2021, the gap between projected supply and demand is accelerating. We see a unique opportunity to further accelerate our growth through either accelerated investment and/or deeper strategic partnerships."

But in a puzzling commentary, Mattera also commented on the topic:

"We are increasingly asked by our customers to support a continuously increasing demand, and we have also often been asked by investors what our end game is for this business.

To that end, we have commenced the review of the strategic alternatives for our silicon carbide business. This review is focused on effectively serving the market at the same time while maximizing long-term shareholder value for our Coherent shareholders by considering a range of potential alternatives. These include a sale, joint venture, minority investment or simply staying the course with the continued execution of our business plan."

Reassuring Coherent - Mitsubishi Agreement

Two weeks after the earnings call, on May 26, 2023, Coherent and Mitsubishi Electric (OTCPK:MIELY) announced they will collaborate on a program to scale manufacturing of SiC power electronics on a 200 mm (Coherent's strong point versus older 150mm wafer diameter) technology platform.

Importantly, Mitsubishi Electric announced an investment of ~260 billion yen in the five-year period ending March 2026, out of which ~100 billion yen, will be used to construct a new plant for SiC power devices, based on a 200 mm technology platform, and enhance related production facilities.

As a background to this agreement, Masayoshi Takemi, Executive Officer, Group President, Semiconductor & Device at Mitsubishi Electric, noted:

"Coherent has been for many years a reliable supplier of high-quality 150 mm SiC wafer substrates to Mitsubishi Electric. We are delighted to enter into this close partnership with Coherent to scale our respective SiC manufacturing platforms to 200 mm."

Coherent is a market leader in the development and manufacture of 150 mm and 200 mm SiC substrates. Coherent stated it would have wafer capacity by 2027 to make 1 million 150mm equivalent wafers as part of the $1B investment projected for the next 10 years. In addition, the company is developing advanced SiC substrate growth technologies to support emerging markets in GaN RF and SiC power electronics.

Chart 1 shows Coherent's timeline for its SiC business, according to its recent Q3 Investor Presentation.

Coherent

Chart 1

The largest application of SiC chips, with more than a 65% share, consists of power chain components for automobiles.

The automobile industry is moving to low carbon footprints as ICE (internal combustion engines) are being replaced by EVs and as oil prices rise and chip shortages impacted only ICE. The strong demand for EVs, which grew 55% globally in 2022 as ICE vehicles grew -0.5%, is placing an even stronger demand on SiC automobile chips. Chart 2 illustrates the strong growth in EVs.

EV-Volumes

Chart 2

Based on data for BEV sales through 2026 and based on assumptions of increased penetration, Chart 3 shows SiC chip revenue growing at a compound annual growth rate ("CAGR") of 43%, according to The Information Network's report entitled "Power Semiconductors: Markets, Materials and Technologies."

The Information Network

Chart 3

As shown in Chart 4, SiC chip revenues are a small percentage (blue line) of the overall power semiconductor market, with traditional silicon-based chips the dominant substrate. SiC-based power semiconductor revenues were less than 10% of the Si-based revenues in 2022.

The Information Network

Chart 4

This latest earnings call was disturbing on several levels. First, COHR made no pre-announcement regarding its weak financials, realizing it would miss consensus. The company reported Q3 Non-GAAP EPS of $0.58 that missed by $0.24, and revenue of $1.24B (+49.8% YoY) that missed by $90M.

The outlook for the fourth fiscal quarter ending June 30, 2023, is revenue of $1,125 million to $1,175 million vs. consensus of $1.34B and earnings per diluted share on a non-GAAP basis of $0.33 to $0.43 vs. consensus of $0.86.

However, the Q3 misses and lower Q4 consensus are centered on the performance of the Laser Segment, which is impacted by Consumer Electronics end-products such as PCs and smartphones used in the manufacturer of LED and OLED displays. The networking segment is being impacted by inventory adjustment in cloud servers and data centers. These are the two sectors that have battered the memory companies.

Micron and other memory companies also reported strong growth in the automotive sector, and COHR is no exception although it didn't refer to automotive but to its SiC sector, which grew more than 40% year-over-year.

Another example of Macro factors influencing earnings was Analog Devices (ADI). In its FQ2 2023 earnings call, the company reported that:

"Automotive, which represented 24% of revenue, once again exhibited broad based strength, growing 10% sequentially and 24% year-over-year. Communications, which represented 14% of revenue, decreased both sequentially and year-over-year, due to the ongoing inventory corrections across this end market. And lastly, consumer at 9% of revenue was down more than 20% sequentially and year-over-year."

Indeed, SiC is in my opinion the "crown jewel) of Coherent's business, but the company's dour call and guidance must include the entire company.

Importantly, the Coherent acquisition is having its teething problems, and I have always questioned its rationale. The New Coherent is saddled with long-term debt which may be impacting what is, in my opinion, its future in SiC.

Also in my opinion, management is trying to turn a sow's ear into silk purse. Yes, its Laser Segment from Legacy Coherent has not yet gained traction, but operating loss for the nine months ended March 31, 2023 was $337 million.

If one looks at Coherent's focus in 2023, nearly every product press release is on lasers. In fact, 14 press releases in 2023 addressed new laser technology and two on optical communications. None on SiC. In other words, the company is attempting to pump up awareness of its loss-leading Laser Segment.

In the 3Q earnings call when asked about capex, Mattera's comment was "full speed ahead on the business plan."

But capex is expensive, and Coherent spends 35-50% of its capex budget for SiC. I estimate its capex at $320 million in CY2022 growing to $475 million in 2023.

With the significant amount of debt from the acquisition, which I discuss below and show in Table 1, along with loses in the Laser Segment and reduced revenues, capex money is tight.

Coherent has a total shareholder equity of $7.5B and total debt of $4.4B, which brings its debt-to-equity ratio to 59.4%. Its total assets and total liabilities are $14.1B and $6.7B respectively. Coherent's EBIT is $232.4M making its interest coverage ratio 0.9. It has cash and short-term investments of $901.0M.

Coherent

Since the closing date of the acquisition on July 1, 2022, Coherent has been below its 200-day moving average, as shown in Chart 5.

YCharts

Chart 5

As the macro environment improves later in 2023, and coupled with the companies "aligning our cost structure with market realities," I fully anticipate continued growth, and re-affirm my Buy rating.

This free article presents my analysis of this semiconductor sector. A more detailed analysis is available on my Marketplace newsletter site Semiconductor Deep Dive. You can learn more about it here.

This article was written by

Dr. Robert N. Castellano, is president of The Information Network www.theinformationnet.com. Most of the data, as well as tables and charts I use in my articles, come from my market research reports. If you need additional information about any article, please go to my website.

I will soon be initiating an investor newsletter. Information to register will be online on my website.

I received a Ph.D. degree in chemistry from Oxford University (England) under Dr. John Goodenough, inventor of the lithium ion battery and 2019 Nobel Prize winner in Chemistry. I've had ten years experience in the field of wafer fabrication at AT&T Bell Laboratories and Stanford University.

I have been Editor-in-Chief of the peer-reviewed Journal of Active and Passive Electronic Devices since 2000. I authored the book "Technology Trends in VLSI Manufacturing" (Gordon and Breach), "Solar Panel Processing" (Old City Publishing), "Alternative Energy Technology" (Old City Publishing). Also in the solar area, I am CEO of SolarPA, which uses a proprietary nanomaterial to coat solar cells, increasing the efficiency by up to 10%. I recently published a fictional novel Blessed, available on Amazon and other sites.

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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