Ladies and gentlemen, thank you for standing by, and welcome to the Coherent Corp. FY '23 First Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to your host, Mary Jane Raymond, Chief Financial Officer. You may begin.

Thank you, Kevin, and good morning. I'm Mary Jane Raymond, the Chief Financial Officer here at Coherent Corp. Welcome to our earnings call today for the first quarter of fiscal year 2023. This is our first earnings call as Coherent Corp., and the call is being recorded on Wednesday, November 9, 2022. With me today on the call is Dr. Chuck Mattera, our Chair and Chief Executive Officer. After our prepared remarks, both Dr. Mark Sobey, President of the Laser segment; and Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Materials segment, will join us during the Q&A to better explain the unique benefits of our strategy, the results we are reporting today as well as the exciting prospects we have to expand our footprint in our broad markets as we go forward. For today's call, the press release and investor presentation are available in the Investor Relations section of our website, coherent.com. Our fiscal year '22 ESG report for legacy II-VI is also on the website. It highlights key points of our Board and employee diversity, namely the 46% of our Board are women and are persons of color and that 49% of our workforce are women as well as our investments to support STEM and educational advancement. The report also details our products that are critical to improvements in global energy efficiency and the increasing sustainability of our locations that produce them. In fiscal year '22, 29% of our legacy II-VI energy consumption came from renewable resources. 100% of our European legacy sites are on renewable energy sources, and we exited this year purchasing approximately 38% of our electricity from renewable sources in our legacy facilities. I think you'll like this report when you get a moment to read it. Today's results discussion includes certain non-GAAP measures. Non-GAAP financials are not a substitute for nor superior to financials prepared in accordance with GAAP. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's documents. I remind you that during this call, we'll be making certain forward-looking statements, including, but not limited to, statements regarding macroeconomic trends, expectations for our products and technology, trends in our markets and our expected financial performance, including our guidance. In addition, we will discuss expectations regarding the recent acquisition of Coherent Inc., including market opportunities and expected synergies. All forward-looking statements are based on current expectations, forecasts and assumptions and involve risks and uncertainty that could cause actual results to differ materially from the statements made today. Our comments should be viewed in the context of the risk factors detailed in our most recent Form 10-K filing for the fiscal year ended June 30, 2022. Coherent assumes no obligation to update the information discussed during this call, except as required by law. With that, let me turn it over to Dr. Chuck Mattera. Chuck?

Thank you all for joining us today. Nearly 18 months ago, when we were selected as the winner of an intense 3-way competition to acquire the company that was long seen as the industry's gold standard of laser technology, we embarked on a new chapter of our bold strategy to diversify and expand our exposure and participation in growth markets that are inflecting due to irreversible mega trends. These include Industry 4.0 in the technology and scale transitions that are underway in mobile and intelligent networks out to the edge; the Internet of Things to support AR and AI services; and also those consistent with our vision of a world transformed through innovations vital to a better life today and the sustainability of future generations, including our silicon carbide and battery materials that enable the electrification of transportation, an important long-term contributor to the reduction of global CO2 emissions. So with the acquisition of Coherent finally having closed on July 1, when we enthusiastically got underway, it is from this new base of unique technology endowments, a deep penetration into multiple ecosystems, strong customer intimacy, new business models that include products and service, and the addition of a huge influx of extraordinary and diverse talent to the broad base we had before that we endeavor to deliver sustainable long-term shareholder value. On September 8, 2022, we transitioned to our new name, Coherent Corp., launched our new brand and began trading with a new ticker symbol COHR. We adopted the name Coherent because it has the universal meaning of bringing things together. And I believe that a great excitement that stems from some of our really cool stuff will emerge as we bring our extraordinary talent closer together. We hit the ground running together, and we haven't skipped a beat since.…

Thank you, Chuck. The Q1 FY '23 quarterly market and geographic breakdown of our $1.34 billion of revenue can be found on Page 8 of the investor presentation. It is worth pointing out the new geographic breakdown of the company. Q1 FY '23 revenue are now distributed by 53% in Americas, 18% in Europe, 14% in Korea and Japan combined, and 11% in China. Our Q1 non-GAAP gross margin was 40.3%, and the non-GAAP operating margin was 21.3%. Supply chain costs were $7 million and are not excluded to arrive at non-GAAP results. At the segment level, the non-GAAP operating margins were 19.7% for networking, 27.2% for materials and 18.3% for lasers. GAAP operating expenses, SG&A plus R&D, were $401 million in Q1. Excluding $35 million of amortization, $48 million of stock compensation and $61 million of transaction and integration costs, non-GAAP OpEx was $256 million or 19% of revenue. Total stock comp is expected to be $35 million per quarter in each of Q2, Q3 and Q4. The Q1 amount is affected by the vesting stock compensation of $18 million for change of control. Synergies were off to a good start in the quarter with $3 million in the quarter and $12 million on an annualized basis due to the retirement of several senior executives and the planned elimination of positions. Quarterly GAAP EPS was a loss of $0.56, and non-GAAP EPS was $1.04 with after-tax non-GAAP adjustments of $222 million in total. Currency accounted positively for $0.07 in the non-GAAP EPS primarily from the weaker euro and R&D. The diluted share count for the GAAP results was 133 million shares. And for the non-GAAP results, the share count was 149 million shares. The GAAP and non-GAAP EPS calculations are on Tables 6 and 7 of the press release.…

[Operator Instructions] Our first question comes from Ananda Baruah with Loop Capital.

Congrats on a nice start here and on what appears to be really solid execution and focus. Two quick ones, if I could. Chuck, just to start, what are your thoughts on macro and your thinking as we head into 2023? Does the backlog, which is super substantive right now, does that isolate you? Or I guess, sort of backstop you to an extent? And then also, what businesses would you believe could be the most sensitive to macro should companies begin to feel greater pressure in '23? And I have a quick follow-up.

Okay. Thanks, Ananda. Thanks for your question and your comments. Well, we have a strong backlog. The sales force is busy working to secure an even greater backlog to the extent we can. The macro environment, however it is, it's the same for everybody. Our job is to step it up into -- out to what anybody else can do in this market. And as far as the markets go, well, we're diversified. It's part of our strategy. We'll never get it to a spot where all markets are all firing at the same level. And so our job is to work to secure as much as we can while we can and to position ourselves for the future. Because even those markets that are maybe only growing a little slower today, we have great prospects for their future as well, and our portfolio is aiming for it.

Excellent. And then a follow-up is gross margin was very nicely stronger than at least we had anticipated, and OpEx dollars were actually nicely lower than we had anticipated. And just so -- and would love context around contributors to the gross margin strength. And do you think it's sustainable? And then Mary Jane, I guess, the same on the OpEx dollars. Did they come in sort of more efficient than you had anticipated? And do you think that's sustainable as well?

So I would say that, first of all, the gross margin, as we talk about every single quarter, is a fight every day. So not necessarily predictable, but I would say that the company continues to work on that very, very hard. Notwithstanding having $1.34 billion, I’d say overall currency probably helped the margin by about $5 million. And I would say beyond that, we probably had about $8 million help from an expense point of view from currency. But having said that, we do get rather busy on the synergies early. And the first thing we do to be sure that we can capture all the synergies is to stop hiring. So that is one thing that paused as we got to know all of our new colleagues on the – in the laser segment, and they got to know us. And I will tell you that we will continue to fight on that OpEx for a long, long time. Because at the end of the day, the company’s goal under any circumstances is to be sure that we are able to invest that money well, particularly on the R&D line.

[Operator Instructions] Our next question comes from Paul Silverstein with Cowen.

Mary Jane, given the investment, clearly is focused on your leverage relative to macro, any thoughts you can share as to how quickly you expect or hope to deleverage and how you get there in terms of CapEx plans for the year alongside of the interest expense?

Sure. Well, obviously, the first thing that we did was the success we had in taking out the convert in stock. So that took out $345 million of it. Historically, what we've said about the pay down of the debt, just let's deal with the pay down for a minute, was that actually we didn't expect that much in the first quarter because the goal in the first quarter was to launch all the synergies first, which sometimes come with cost. Having said that, given that the Fed has not necessarily led off on what they think they may do this year and what we thought would be ongoing stability in the interest rates in 2024 actually also may change, that has caused us to give new thought to what we would do potentially this year in bringing down the leverage through paydown as well this year. We're not moving away from what we originally said, which was that was in 24 months, we expect it to be at 2.5x growth. And I think that plus the EBITDA -- the continued work on the EBITDA, I think, will help us from a deleveraging calculation point of view. But the real issue is trying to moderate and stay within our range, if not lower, on our interest expense.

Okay. And a quick follow-up, if I may. And my apologies, I heard -- Chuck, I heard your response to the previous question. I heard your comments on the call, and I can see the numbers. So it sure doesn't look like there's an issue. But you just had VIAVI last week and Lumentum this week, both referenced some beginning of macro pressure. In VIAVI's case, it was field test units. And what they said was that OpEx like carriers was coming down, and that's always a precursor to CapEx declines. And then you had Lumentum reference some pockets of weakness among web scalers. Again, from your numbers and comments, it doesn't seem to be a problem. But I want to ask you the direct question: are you seeing any signs of concern from a customer market, product market perspective at a macro level?

Yes. Thanks, Paul. Paul, I'm going to ask Giovanni to take it.

Paul, thanks for the question. No, we don’t see at all any weakness from that perspective. In fact, we think that we can say at least we have visibility, let’s say, until the first half of the calendar year, calendar 2023, very strong demand. And – but I also want to underline that it is the result of the combination of the strength of the investments of the customers that we have as well as significant share gains, particularly on the high-speed side of the demand from 200, 400, 800G where, thanks to the differentiation that we have, we can really take advantage of the need of such type of products. And so we continue to gain share versus the competition. So the two are very strong, and they – we are not seeing any weakness as maybe others have reported.

[Operator Instructions] Our next question comes from Dave Kang with B. Riley.

My first question is regarding your fiscal 2Q outlook. Just wondering if you can give us a bit more color on your three different segments, how we should think about it. And my follow-up question is regarding your Excimer laser. What's the typical lead times for that product?

We would expect -- on the first question, we would expect good contributions from all three of the segments.

Thanks, Dave, for your question. Mark, would you like to comment on the Excimer question?

I didn't hear the Excimer question. Could you ask one more time, please?

Yes. Sure. What's the typical lead times?

Typical lead times for our annealing systems are around six months?

Yes. Excimer, yes, for annealing -- flat panel and annealing.

Yes. For Excimer flat panel annealing, the lead times are typically about six months.

Got it.

Did you hear that, Dave? Okay.

Yes, I did. Yes.

[Operator Instructions] Our next question comes from Mark Miller with Benchmark.

Congratulations on the record sales. You're probably aware of the new U.S. restrictions on equipment shipments into China. I'm just wondering, is there any impact to you on Coherent, especially for linemen tools that are going into China?

Okay. Giovanni, would you like to take that?

Mark, thanks for the question. Absolutely. First of all, as you probably know, there are no UV equipment sales into China. So since that's the vast majority of the market that we address with our parts, we have zero impact from that perspective. Now if you go on to deep-UV and other part of the semicap equipment world, we have seen less than 5% impact on the short-term demand from our customers. And again, it's mostly because we address the segment of the market for which the restriction has been applied, which is on the high end. And so the demand continues strong. And in any case, China wasn't in the loop to begin with. So we haven't really experienced -- short term, at least, we don't see any weakness.

You mentioned moderating 3D shipments after a strong quarter in the first half of fiscal '23. How much of that is due to macro? And also if you could talk about any of your opportunities outside of the consumer electronics market for 3D sensing.

Yes. Thanks, Mark. So first of all, I wanted to make sure it's clear that our numbers were about sensing, which includes 3D sensing. And so we'll follow the typical seasonal trends. And as we said in the prepared remarks, and we have really not seen any effect from a customer demand standpoint from, let's say, weaknesses in some of the geographical areas that -- where products have been assembled and completed. So demand has been unaffected for us. So it's very strong. And so we haven't really seen any weakness from that standpoint.

It's mainly just seasonal effects that you're talking about?

Correct.

Our next question comes from Simon Leopold with Raymond James.

One on the hyperscale trends that you called out, Chuck, in the prepared remarks. You said you expect hyperscale to grow in the second half of fiscal '23. And I guess, to me, I'm wondering whether or not that implies that you saw any softness from hyperscale in your September quarter or what your expectation is implied for your December forecast, whether you're seeing some inventory absorption or slowing from that group of customers near term. And that's what you were trying to point out was you expect that growth to resume in the first half of calendar '23. And then I've got a quick follow-up for Mary Jane.

Okay. Thanks. Simon, what I said was regarding our data center customers, we continue to forecast hyperscale growth in the second half of this year. To answer your question and maybe put a finer point on it, we expect our datacom business to grow sequentially and steadily in the year. Does that help you?

Yes. I guess what I'm sort of wondering, and I'm not trying to split hairs, but whether or not you saw a little bit of softness. Clearly, your numbers were fine this quarter and the guidance is good, but whether or not that particular group of customers was softer than you expected in your September quarter?

It was not. But Giovanni, do you want to add to that?

So while some hyperscalers may have redistributed the demand over time and maybe some has shown some weakness or at least decide to slow down, it's the mix of customers that we have actually is not affected by that at all. So we don't really see that weakness. And as I said earlier, the fact that we continue to gain share of the high-speed side of the market helps our growth in general, right? So it's a combination of factors. The mix of customers, none of those that again -- have redistributed the demand over a longer period of time and then the fact that we're getting share. So the combination of the two ultimately is pretty good outlook for us.

Great. No, I appreciate that. And then just a quick follow-up for Mary Jane was you called out the $0.07 benefit from foreign exchange rates. And I want to make sure I understand that that's basically internationally located employees being paid in local currency, and therefore, it translates back to fewer dollars. And if that's correct, if we assume currency stayed stable in the December quarter, you'll see a similar benefit, and that's what's implied in your December guidance. Is that correct?

It depends how you – what you’re comparing it to. If you compare it to Q1, it’s because it’s like to Q1 if you compare it to last year, or something else, yes. But we are assuming that the currencies stay in the relative relationship that they have at this time and were prevailing in Q1.

Our next question comes from James Ricchiuti with Needham.

So thanks for the color, by the way, on the export -- U.S. export restrictions. I wanted to ask a question also about the laser business. If we think about some of the forecasts for the WFE market and the expectations that the market could be down anywhere from -- in excess of 20% next year, in calendar '23. I'm wondering how you're viewing that part of the laser business. Or do you just see more of an offset in the display-related portion of the laser business that's capital equipment?

Thank you, Jim. Mark?

Jim, thanks for the question. So two parts to the answer, perhaps, Jim. Certainly, to quote one of our customers, the impact on China is non-zero, but as Giovanni indicated, is probably less than 5% of our semi business; and the laser segment, less than 2% of our overall business in the laser segment. We're buffered by a large installed base, which really helps. We've thousands of ultraviolet lasers that have -- need to be refurbished every 2 to 3 years. Some have been in service for more than 20 years with our customers asking us to commit to support for another 10. And that service revenue underpins our strong baseline business kind of irrespective of just annual WFE spend. So certainly, the outlook for next year is tempered relative to what we've seen this year. But clearly, I think we all believe the long-term trend is very positive.

And then if I could, just a follow-up question. I certainly -- I could appreciate given the diversity of the portfolio you have some insulation here from, but I'm just wondering what you're seeing in -- across the industrial business by geography in terms of China, Europe, North America and just given in light of the macro concerns that people have expressed.

That's another good question, Jim. I think we have a diversity of products and services that we sell into the industrial markets. We certainly have the benefit of a very strong backlog. We've -- we're -- in some markets, for example, medical device manufacturing, we're #1; in other markets, we're maybe #2 and 3. We think we've got lots of share upside in industrial. So we're beginning to see maybe the first softening in some of the European customer base. But again, we've got the benefit of a very healthy backlog. And again, our diversity of markets in the industrial sector, I think really -- I think gives us confidence that we're looking at a pretty strong outlook for the year.

Got it. Congratulations on a nice start, by the way.

Thank you.

Our next question comes from Samik Chatterjee with JPMorgan.

I guess for the first one, if I could sort of get some help on understanding the revenue guide for the full year here. Of your comments have indicated that demand is remaining robust, maybe some pockets of weakness here and there. But largely sort of a strong backlog, strong demand. And I'm trying to think about the sort of guidance for revenue to remain sort of flat half-over-half at the midpoint and particularly any insights on sort of what you're seeing in book-to-bill, et cetera, to give us some sense of what's driving that revenue guide. Because I believe -- I mean we've been more used to seeing the company ramp through the year in terms of revenue. And I have a follow-up.

Thanks, Samik. Compared to the combined pro forma revenue, I think we will see growth. But at the end of the day, the main thing that we're also trying to keep in mind is the effects of currency on that revenue, right? So just in the first quarter, we had 16% currency effects on the revenue. So that's part of it. If you just multiply that by 4, not that, that may be exactly how it goes, but it's $60 million or $70 million. But generally speaking, I'd say that when we look at the combined number for the company compared to where the pro forma was, we're expecting to see some decent growth as the year goes on, as Chuck already said.

Okay. Okay. So let me move to the second question. In terms of the operating margins, your networking margins improved significantly sequentially with sort of limited change in the revenue profile, whereas it was interesting with your compound semi margins sort of remained similar sequentially even despite a significant move up in revenue. So I'm just wondering if you can help me understand that. Why not more of a volume leverage sort of in compound semi versus networking, which seem to have how much more material improvement in margins?

So I would have said – well, first of all, a couple of things. In the networking business, they had a very, very strong mix in the transceiver business this quarter. They have also continued to work hard on moderating what their supply chain challenges have been, both in terms of physical product and the costs that are involved in that. And more importantly, on their operating efficiency. I mean it continues to be a goal for us to moderate the cost of operations. I would say probably the other thing that helped them in fairness is that because the RMB was weak, it probably translated there. It’s not probably. It did translate their cost to a lower level. So there’s probably a currency effect on that to some extent, which is a lesser of an extent in materials. Materials generally has around the world, almost all of its sales and dollars in a significant part of their cost in dollars. So that’s one aspect of that. But second of all, materials also had a very, very good quarter in the fourth quarter as well. And generally speaking, I would say that overall – my original range on materials was that it would be 23% to 25% in terms of its resting margin. So we’re happy to see it at 26% and 27%. But I don’t know given their mix at this particular time that it actually grows by, say, 100 or 150 basis points every quarter. And they had significantly less on currency.

The next question comes from Vivek Arya with Bank of America.

For my first one, I'm curious, what is the implied range of gross margins, Mary Jane, for Q2 and for the fiscal year? And what about Coherent products makes it tougher to get a tighter gross margin range? Is it just the mix? Is it the variability between products? Is it just pricing competition? So just any views on gross margins would be very helpful.

The company doesn't guide on gross margins, but I would say that, as we've said consistently, our goal is to try and keep that margin over 40%, and we will continue to do that. And Vivek, just tell me again, what was your question on the laser's margin?

Sorry, just overall gross margins for Q2 and for the full year. So let's say if the mix you think -- if the mix you're planning for Q2 comes through and the mix you're planning for the full year comes through, what is the range of gross margins that -- so for example, if we take the midpoint of your full year range, can gross margins be over 40%?

Well, the company hasn't changed its range from 38% to 42%, just for a whole number of reasons, not to mention the COVID issues that we're still seeing, particularly in Fuzhou. But I would say, if you took the midpoint of that, it would be 40%. But I -- we do not guide on gross margin. So that's the answer to the first part of the question. What is the laser question you were asking?

No. Not the laser question. I was just saying that what about the company's mix makes it tougher to get a tighter range of gross margins?

Well, I think at this point, we are still really learning, first of all, the laser products, which nonetheless are very good margins, there's no question about that. And given that the company saw some pretty nice margin improvement just between Q4 on a pro forma basis 2Q one together. I think we will continue to work with the laser segment to ensure we understand that and potentially take that margin up. That's the first thing. The second thing is there was an awful lot of changes in the macro factors with respect to networking that our team worked very, very well through this quarter. But at least when we think about it, we know that, that could still recur. And then finally, on the material side, the materials team also continuing to see some of the effects of supply chain shortages. And on the industrial part of their business, the first quarter during this quarter is normally their lowest seasonal quarter in the year. So over time, I think we will work on tightening or raising that gross margin range. But at the end of the day, the company does not guide on gross margin.

And for my follow-up on silicon carbide, how should we think about the contribution to sales and the required CapEx requirements for this fiscal year? And in general, the strategy around silicon carbide, you have just one large player who is spending billions in CapEx to stay as a leader on the substrate side. And then you have a number of customers who plan to in-source capacity. So just kind of a near-term question on the sales and the CapEx for silicon carbide in fiscal '23. And then the longer term, question on the strategy as to how you differentiate between these two extremes, right, from a competitive perspective in the market.

All right. So first of all, we said that with respect to the investments that we're making, we would expect in the sort of '25, '26 period that the company would probably have start to see as a percentage of silicon carbide as a percentage of revenue moving into the 8% or 10% place from where it is today as we continue to make progress on devices. With respect to the capital investment that we're making during the entire last 10 years, we've probably doubled the CapEx -- excuse me, doubled the capacity of silicon carbide, every 18 months as opposed to some other competitors who actually had a pause in the middle of that period of time. But nonetheless, we do expect to spend roughly over $1 billion over the next 10 years, the majority of which will be in the first five and the majority of which will be CapEx. Having said that, the company continues to look at as it gets larger how it thinks about manufacturing things, including, not speaking about just silicon carbide specifically, but in general, whether or not it could be advantageous to the company's growth to have partners in certain areas of the manufacturing. And silicon carbide would be an area where we do think about that, but we think about it for everything at this point. As the company gets larger, it may not make sense to have absolutely everything fully vertically integrated. Chuck, what would you like to add?

Well, let's ask Vivek. Do you have any follow-up question, Vivek?

Just that one. Chuck, just the overall strategy as to is there room in the market for Coherent just given the one really large substrate player and then the desire of many of your customers to in-source that capacity over time. So what -- where is that window for Coherent to become sustainably profitable in this business?

Well, okay. Vivek, let's come back to the capital, too. I would say about 1/3 of our capital this year is going to go into this business. We're going to compete on the basis of the competencies that we have, including the quality, the technology and the scale that we have and we're putting in place. We're introducing new platforms on the basis of market opportunities that we clearly have in front of us. And we believe that we can have a strong, profitable, growing, differentiated business just in materials. But in addition to that, we continue to invest and making very, very good progress both on devices and on modules. The game is going to inflect and unfold here in this decade, in the next few years. And I believe that we're already well positioned, and we're going to continue to establish the front that we need to, and the base that we need to, to grow from that. I have very much confidence in our ability to do that, and we're well underway. Let me just make one other comment. This market is going to be so big. I simply -- we can't see that we'll -- there's not enough capacity in the market today, and there's going to be no one player that can serve this entire market. No one's going to build a whole industry on one player. And we intend to be one of the leaders that not only have already emerged but are sustainably in the pack, okay?

Our next question comes from Sidney Ho with Deutsche Bank.

My first question is on the -- your semicap exposure. I think organically from the [II-VI], the extrusion was only 5%. But I think the Coherent for the legacy Coherent is more like 45%. Now it's all part of this industrial market that you guys disclosed. But if you look at that in totality, we used to think your organic II-VI is mostly tied to UV system produced. But how should we think about the drivers of this segment for the entire company? How much is tied to -- what is the type equipment spending or certain segments of that? And how much is tied to back-end packaging and maybe on the display side?

Okay. Thanks, Sidney. Sidney, I think what we'll do is let's let Mark and Giovanni both give some color on the semicap businesses in their segments.

Sidney, thanks for the question. So specific to the laser segment, semicap revenue for us accounts for between 15% to 20% of our overall lasers rig revenue. The areas that we predominantly play in, as you know, are ultraviolet laser-based inspection for reticles and bare wafer and patterned wafer as well as infrared lasers for junction annealing. So those are our main markets specific to the semicap industry. And as I reaffirm, it's between 15% and 20%. I would say it's growing probably at the higher end of that range. But I think an earlier number you quoted was substantially higher. I'm not completely clear if that was addressed at the laser segment or your prior experience with[indiscernible] before. But it's definitely less than 20%.

Thanks, Mark. Giovanni, would you like to add?

Sidney, thanks for the question. As I said earlier, again, we have the benefit of -- on the materials segment to address the high end of the market in terms of the [indiscernible], if you like. And so we're really seeing no slowdown. In fact, if anything, we continue to invest to support the capacity needed to address the demand that we see. So it's been really exciting for us to address these high-end applications because there are high margins, we are differentiated. We mentioned many times in the past that we have several sort store parts in some of these tools. And so we really see the benefit of years as years of investment having gained this kind of leading position in supplying our immersion tables, wafer trucks, mirrors, all kind of components that go into these -- for both front-end and back-end tools for the semicap customers.

Okay. That's helpful. My follow-up question and maybe one for Mary Jane. Can you help us to think how we should look at quarterly expenses -- operating expenses over the next few quarters, including the impact of all the synergies that you're getting from the deal? Maybe just using the baseline of, I think, $256 million in Q1, how do you think it will end up by the end of the fiscal year?

First of all, I would say that generally speaking, we are likely to see about $65 million achieved on an annualized basis during the first year on synergies. That does not mean that you take $256 million and drop it by $65 million. On an annualized basis, I would say we would probably be able to maintain this year. It may go down slightly from a round of 19. But given that our target had been 20 to 23, even being at 19, we’re down a little bit, though, as I said, currency helped us a bit. But I would expect that the goals, for example, in SG&A is to moderate the absolute dollar amount as we go forward from the combined company, moderate any growth. So that’s one element of synergy. On the engineering side, I do think the company will still strive to look at having its engineering at about the 9% of sales level. From the pro forma company, if we just look at fiscal year ‘22 was about 10.4%. So if that stays at about 9% or 9.5%, you would see that coming down. Whether or not all that’s achieved during fiscal year ‘23, I can’t really say. But generally, the delivery of the synergies across the $250 million was expected to be something like $65 million, $90 million and then the balance in the third year. The reason there's more in the third year is because to the extent that we look at, say, two leases in the same area where one comes off the lease is moving things to maybe to a common space, say, one company has a larger site in the same city, that just takes longer. So those are the types of things that we tend to have as well as the renegotiation of long-term contracts.

Our next question comes from Richard Shannon with Craig-Hallum.

I think my first one is on the fiscal '23 sales guidance with the ranges there. Chuck, maybe if you can talk about what would lead you to get to either the low end or the high end. And specifically, if you can address any specific dynamics by segment or any timing issues? Or is it just a matter of kind of macro dynamics here as you get to the edge of that guidance?

We started that -- this year in this quarter. We haven't stepped out into this maybe in 6 or 7 years, giving this kind of long-range guidance even on the revenue. And we've done it because we have this diversified business, and we have really good visibility, we believe. The biggest single uncertainty that's in -- that we're looking down into is the supply chain. And after that, COVID is right behind it in China. And nobody knows how that's going to play out. It's still a long time to go to the fourth quarter. I think it's a very, very solid view that we have today about what we're going to go and aspire to do. Of course, we need to have orders and order coverage all the way till the end. We're working on that. And the supply chain in COVID, those will be -- is a little bit out of our control, COVID, for sure. In supply chain, we're doing everything we can to mitigate it. Those would be the two, okay?

Okay. That's helpful, Chuck. And my follow-on question is just on backlog here. It kind of relates to some of the dynamics you just mentioned here. But how are you expecting kind of corporate-wide lead times to trend over the next couple of quarters? Obviously, lead times pretty much everyone in hardware technology have expanded here. Supply chain is a little bit of an issue, but do you see the lead times coming down? And what, if any, impact do you see that having on backlog?

Well, we're not expecting or forecasting a substantial change in the lead times. And we -- our plans are based on what we have in front of us as far as that goes. We're constantly working to improve our own lead times and our overall ability to manage carefully any changes in the inventory for a good part of that. That's the best I can say.

Our next question comes from Tim Savageaux with Northland Capital Markets.

Congratulations on the results. On the telecom side, I thought you heard -- I heard you call out some strength or activity in cable TV networking infrastructure early in the call, Chuck, in your prepared comments. I'd just like to get a little more color on that. And just as a follow-up, you talked about a record quarter in sensing. It seems like that you had a pretty big one a little while ago or a couple of years ago. So it seems like that may have as much as doubled sequentially for you. What is the outlook given the seasonality into the December quarter for 3D sensing? And that's it for me.

Okay. Thank you, Tim. Tim, I'm going to ask Giovanni to take both. But as it relates to telecom and MSO or cable TV infrastructure, we think about them in the same -- kind of in the same bucket different from datacom. So telecom and cable TV infrastructure are related. And with that in mind, let me just add, we are extremely well positioned in the largest of these cable TV infrastructure customers that we have. And our business is growing, growing very well, and I expect that will continue to do so throughout this year. Giovanni, would you like to add to that?

No. This is good. Maybe I’ll talk about the sensing outlook. We said that we’re going to experience the typical seasonality that we have experienced in the past. It’s just delivered by customer buying and ordering patterns. And so we just follow that. As we’ve seen, we had strong growth driven by some new applications and new products that we were able to launch together with our customers. And we expect the typical trend that we’ve seen in the past to slow down in the second half of the fiscal year and then eventually, come back again in the first half of the next fiscal year. In relative terms, we expect that demand to continue. But these are long-term investments that we have made to enable functionalities that not many companies can enable, many suppliers can enable. So we feel good about the prospects of this, as I call it, the general sensing market, which does include 3D sensing.

Our next question comes from Meta Marshall with Morgan Stanley.

A couple of just quick questions. Mary Jane, I guess, is it always the policy and integration to kind of stop hiring upfront just as you kind of assess kind of assess in-house? Or is there kind of something different about the environment that may do -- want to put in kind of a near-term hiring freeze? And then on the second piece, you mentioned kind of looking at alternatives on the leverage piece. Just wondering, is there a minimum cash threshold or just anything that we should be mindful of as you kind of assess the leverage position?

First of all, I would just encourage everyone on the phone not to use phrases like hiring freeze. First of all, it is always our policy to get to know our new colleagues first. As the two companies come together, it changes, what some of our global functions are. It changes what some of our leadership positions are. We do have people in a normal course in either company deciding that they're reaching their retirement age. That's one of the things you get to know just in the normal course, they're reaching retirement age. And we want to make sure that we have opportunities across the board for people to come into roles especially if they might be larger roles. So we do that every single time. Again, no one should be overreacting on anything about a hiring freeze. And frankly, most of my comments are probably more focused on SG&A than they are on R&D as a real important matter. But generally speaking, I think we do spend quite a lot of time in the beginning of our game plan just getting to know both companies. And given the public interaction that was done in the closing of the Coherent -- or the bidding on the Coherent in transaction, I would say both sides, advisers cautioned us to be perhaps less engaged pre-close than we were on previous large acquisitions. So there is a long tail here of getting to know each other. And I think both companies want to make sure they're doing things in concert. So that also naturally allows us a little bit of a pause as we think about expenses overall. You had a second part, Meta, I think.

The leverage piece and just how we should consider either minimum cash or just kind of considerations on that front.

Well, I think probably it's fair to say that the company probably thinks in terms of just maybe, call it, $500 million of cash to minimum. But generally speaking, we do have the revolver there that is largely undrawn. So if someone were to -- I don't know, one quarter, it went to [4 75]. I also wouldn't recommend anybody to jump out of window over that. But generally speaking, I think we do want to make sure that we can fund the company. We are looking at the capital budget. And while the paydown of the debt is a very, very important priority for this company, the creation of profitable earnings is the most important priority, is the #1 priority because that's advantageous to the cash flow as well. So therefore, the actual first priority is CapEx. I don't know to someone else's question earlier that we would necessarily dramatically moderate CapEx unless the market went in a certain direction, and we felt that was the prudent investment things to do.

Our next question comes from Tom O'Malley, Barclays.

Giovanni, the first one is for you. You're mentioning normal seasonality into the December quarter in the sensing business. Could you just remind us what normal seasonality is?

Well, normal seasonality means that we'll be higher than the previous quarter, and then it will come down in the third and fourth fiscal quarter.

Okay. And then just on the quarter, on the acquired asset, it looked like Coherent came in a bit higher than expectations. Legacy Coherent came in a bit higher than expectations. I was just curious, did you see any change in order patterns from Chinese customers in the quarter? I know it's a very small percentage of your sales that you're saying are impacted by potential bans. But did you see any change in ordering patterns there just for this quarter?

Tom, this is Mark. Tom, thanks for the question. So China represents a pretty small part of our overall lasers revenue, and we really didn't see any significant change in order patterns at all.

And I think we explained to investors on the, say, 6/30 quarter, at times we got questions that the supply chain was a challenge at the port of Shanghai will shut down or whatever. And I think the team’s worked well to kind of get to the revenue that they expected to.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Mary Jane Raymond for closing comments.

Thank you very much for joining us today. We look forward to speaking with you as time goes on here through the rest of the quarter, and we’ll talk to you again in February. So thank you so much for joining us, and we hope you have a very good day. Bye-bye.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.