Coherent Corp. (COHR) Earnings Call Transcript & Summary

Good morning, how are you all? We're here at 9:00, so I think we'll go ahead and get started. I'm Mary Jane Raymond, the Chief Financial Officer at Coherent Corp. We also have with us today Dr. Giovanni Barbarossa, our Chief Strategy Officer and the President of the Materials segment; and more importantly, Dr. Chuck Mattera, our Chair and Chief Executive Officer. Welcome to our briefing today, both to all of you in the room and all of you on the phone, on the webcast. If you wouldn't mind, it would be helpful if you could mute your phones. Today's event will run for about 90 minutes. It's about 45 minutes of presentations, and we'll use the rest of the time for questions. Coherent's broad technology portfolio enables many of today's exciting megatrends. We will showcase today 2 of those areas, one in display and the other in life sciences, to highlight a couple of the opportunities that are developing pursuant to these growing market trends. Our first speaker will be Dr. Kai Schmidt, Senior Vice President and General Manager of the Excimer Laser business unit. Kai will discuss our unique position in display equipment. And you will hear how our differentiating platform technologies continue to enable this evolving market. Our second speaker is Dr. Christopher Dorman. He is the Senior Vice President and General Manager of the solid-state laser business in Europe. Chris will explain how our laser technology is enabling megatrends in medicine through genetic sequencing, flow cytometry, optogenetics and multiphoton microscopy. Kai and Chris will share their insights into the markets and how they see them evolving. They will highlight important trends and upcoming catalysts that we believe have the potential to drive inflection points in these markets, which is making for an even more exciting future for us. As a reminder, any forward-looking statements we may make today are given in the context of today only. They may contain risk factors that are subject to change, possibly materially. We do not undertake any obligation to update these statements to reflect events subsequent to today, except as required by law. A list of our risk factors can be found in our Form 10-K filed for the year ended June 30, 2022. The presentation materials today are available on the Investor Relations tab of our website, coherent.com. With that, let me turn it over to Dr. Kai Schmidt. Kai?

Thank you, Mary Jane. Also, good morning from my side. Displays our window into the connected world. Nearly every consumer device today has a display. A smartphone without a display is impossible to imagine. Displays are getting larger and more interactive in our homes and in our cars. State-of-the-art displays are slim, bendable, high resolution and have a wide color gamut. Future displays will range in size from tiny ones for AR/VR applications to more than 100-inch in diagonal for very large wall TVs. Today, I will walk you through how the market opportunity for Coherent will grow over time from now to what's next and beyond. We will begin by describing our strong position now in the current market for manufacturing equipment designed to produce OLED displays for smartphones. We will then move to what's next by reviewing the catalysts driving an expansion of the OLED manufacturing equipment market, thanks to new capabilities in manufacturing larger OLED displays, which are better suited for tablets and laptops. Then finally, we will look at what's beyond with yet another large incremental market opportunity this time for micro LED display manufacturing driven both by very large displays, such as for 4K wall TVs and on the other end of the spectrum by very tiny ones for extended reality. Let's begin with now the market for OLED display manufacturing equipment for smartphones. OLED displays are nearly perfect displays. They have a high dynamic range. They can be operated at high frame rates to ensure a blur-free video experience. OLED displays can be made rigid or flexible. There are numerous examples and very nice rollable prototypes shown by several display manufacturers. There are well above 150 different process that's required to manufacture OLED displays. Coherent provides the lasers and optical systems for at least 4 essential process steps. The first is laser annealing of the thin film transistors so they can meet their performance requirements. Without the laser anneal backplane, there would not have been any state-of-the-art OLED display and phone. The second is laser lift-off, which is the process of detaching a flexible or foldable display from its rigid production carrier. The third and the fourth are laser cutting of fully processed individual displays and laser drilling of holes for cameras and sensors that are user facing. The first of the 4, laser annealing, contributes by itself to about 20% to 25% of the laser segment revenue, and we expect that to continue. For every $10 spent on new annealing systems, there is $1 to $2 for laser lift-off equipment if the OLED display is flexible or rollable and, similarly, about $1 to $2 revenue for laser cutting and drilling equipment. OLED displays will continue to gain market share in all display applications but remain dominant in the smartphone area. In the smartphone market, the total number of unit panels, including all display technologies sold globally is expected to grow at a CAGR of 3% over the next 5 years. OLED displays, more specific flexible OLED smartphone displays, are expected to increase at an 8% CAGR. The fact that flexible and foldable OLED displays will progressively gain share over rigid displays is a favorable trend for Coherent, as it implies, growing market for laser lift-off. The portion of rigid OLED displays and smartphones will nearly stay constant, but these will find more and more adoption in IT displays and automotive displays. Altogether, we expect the market to increase by 30% calculated from the area of the display. Coherent is by far the market leader in lasers and optical systems used for annealing in display fabs around the world, but mainly in Korea and China. The lasers are called Excimer lasers. Their mission consists of high energy pulses of ultraviolet light. This light is shaped to form a line of light in an optical system called line beam. Annealing OLED panels with such an optical system is very robust. It features a large process window and is very well suited for 24/7 production environment. Each laser requires regular maintenance and replacement of consumables, such as this gas discharged tube and other parts. This generates a constant revenue flow for each system installed and used. We have more than 200 annealing system installations, which represents more than 300 Excimer lasers in use annually. As we mentioned earlier, the display annealing business is between 20% and 25% of the laser segment revenue, and we expect that to continue at least through the end of the decade. Service, including consumables, is in the range of 50% to 70% of overall display annealing revenue, depending on fab build-out and consumer demand. An important point to remember is that the annealing process developed by Coherent over decades is the de facto standard and process of record for annealing OLED displays worldwide. This makes the barrier to entry into the annealing market very high. That barrier to entry will only be getting higher as I will soon explain. So far, I have been discussing our position in the OLED display manufacturing market as it relates to smartphones. This is the now. I will then move to what's next, larger OLED displays for tablets and laptops. Over the last decades, the display industry has developed standards for the production of displays based on the size of raw glass material called mother glass. Today's mainstream is Generation 6 or Gen 6 mother glass, which is approximately 1 meter 50 1-meter 80. This is used for smartphone OLED display production, whether rigid, flexible or foldable. The next generation of mother glass size will be Gen 8, which is 2-meter 20 by 2-meter 50, doubling the area compared to Gen 6. The number of displays per mother glass increases by the same magnitude, enabling significant economies of scale. The cost of operation of the equipment is basically equivalent for Gen 6 and Gen 8 fabs. As a result, the cost per display decreases as the number of displays per mother glass increases. In addition, the larger glass size gives more flexibility in processing different display sizes. Gen 8 mother glass size is the future. It enables the expansion of the OLED display manufacturing equipment market for tablets, laptops and computer monitors, which is quite significant. The larger OLED displays for these IT devices are forecasted to grow quickly at about 50% CAGR over the next 5 years. And we already know of plans for 5 Gen 8 OLED fabs. They will be located in the leading display manufacturing countries, Korea and China, with the first of those to come online in late calendar year 2024. While the market is evolving to Gen 8 fabs, we are also innovating and advancing our laser annealing technology. And in doing so, we are increasing the barrier to entry even further. Our new annealing -- laser annealing system is based on a solid-state laser instead of an Excimer laser. This new solid-state laser called Python is designed and optimized for Gen 8 OLED gets. Python enables an improved annealing quality at higher throughput and lower cost of operation. These are the 3 main significant benefits for our end customers, the display manufacturers. That development is the result of 10 years of our technology leadership in display manufacturing technology. The combination of Gen 8 glass sizes with our new annealing system will lower the cost per display of the annealing step by nearly 50%. That's an impressive figure. We were able to achieve this huge leap in innovation because we have been so close to that business for so long time. We are, in fact, very excited because in March, next month, we will be shipping the first demonstration unit, including the Python laser, to a major integrator in Korea. I've told you about the now, OLED displays for smartphones; and what's next, OLED displays for IT devices. But we also have an eye on what's beyond. Display technology itself is evolving. We gain insight into these trends very early because customers will turn to their trusted suppliers to share their road maps. The success of laser annealing with Excimer lasers was critical for our customers a few years ago to enable them to create the market for smartphones. Such success drives very close customer intimacy, which, in turn, continues to increase the barrier to entry into the market. The new display technology is based on MicroLEDs. TVs based on MicroLEDs offer performance comparable to the best OLED TVs on the market, but they have a substantially higher level of brightness, and that's the key differentiator. Because of their brightness, we believe that MicroLEDs will be adopted in mass production for high-end TVs and ultra-large wall displays in the next 3 to 5 years. These high-end TVs will be greater than 60-inch in size and will support 4K resolution or more. Displays based on MicroLEDs also consume much lower power than displays based on OLED. They are therefore favored for display that are battery-operated, especially in products where the battery size is very limited. This is, for example, the case for variable devices such as watches, smart glasses and other extended reality headsets. The trade-off is that MicroLEDs are expected to be higher in cost for many years, possibly forever. So the only market that will adopt the technology either brightness and lower power consumption can command the price premium. It is likely that smartphones and IT devices will continue with OLED technology. Therefore, the market for MicroLED display manufacturing equipment is incremental to the market for OLED display manufacturing equipment. Let's talk about how Coherent enables MicroLED display manufacturing. MicroLED and OLED displays share similar performance characteristics that are enabled by Coherent's laser annealing process. But MicroLED displays another process, which is completely new and specific to that technology. And here's the reason why. MicroLEDs are tiny LEDs with sizes today in the range of 10 to 50-micrometer with a clear road map to 5 micrometer, which will reduce the cost of this place. Handling and manipulating such small objects with high precision can only be done with lasers, in fact, lasers with the wavelength so small that they need to operate in the deep ultraviolet wavelengths range. So in addition to the laser annealing, we invented a new process called laser transfer, which operates in the deep ultraviolet. With our capabilities to design very high-precision optical systems, Coherent enabled what's called the laser-induced forward transfer process, which was invented specifically for these tiny micro LEDs. This new process enables the transfer of micro LEDs from the wafer to the final display with incredible precision and speed. In fact, our laser transfer process is 2 orders of magnitude faster than any other existing technology. This is absolutely critical for the viability of MicroLED displays, if you consider for a moment the target application of very large displays with 4K resolution and higher. The majority of the MicroLED display manufacturing revenue opportunity will therefore be from a combination of incremental laser annealing equipment and laser transfer. We believe that this amounts to more than $1 billion of incremental revenue over the next 10 years, taking a reasonably conservative view that our addressable market would be only 10% of the total addressable market for MicroLED TVs, larger than 60-inch, which equates to around 4 million TVs annually. In summary, I have given you an overview of our activities in the market for display manufacturing. As you can see, lasers are critical to realizing some of the most sophisticated consumer products, including every smartphone in this room. Just like in industrial applications, lasers are increasingly the solution to enable the next generation of technology, and we expect to see this with next IT devices. In the future, our lasers will be just as critical for really large, high resolution and high brightness displays based on MicroLEDs as well as for tiny screens on wearable devices. As consumer electronics prices fall, consumers choose larger displays and the market for display manufacturing equipment growth. Assuming that we will continue to maintain our high market share for Gen 8 investments in Korea and China, leveraging our new optimized annealing system, the main growth will be driven by the increasing number of installed systems and service revenue growth for the years to come. Thank you very much. I would like now to turn over to Dr. Chris Dorman.

Thank you, Kai. The World Health Organization estimates that the number of people over age 60 will increase from 1 billion in the year 2019 to more than 2 billion in the year 2050. Degenerative diseases cancer and Alzheimer's require challenging solutions. In the last 5 years, we've put an inflection point in our ability to analyze, manipulate and understand the genetic building blocks of the human body. Photonics technologies are driving this inflection point in modern medicine, underpinning the techniques needed for these solutions. From lab-based science, through diagnostic tools and on to genetic engineering, delivering personalized therapies, Coherent's products and technologies are at the heart of this advancement. There are 3 key fundamental elements to this revolution and 3 stages in the development of this technology. The 3 key elements to this revolution in medicine are: a biological sample, a fluorophore and photons. The addition of a fluorophore to a biological material, a cell, a gene sequence or brain tissue enables it to interact with light, measuring, imaging, counting and sorting of biological material is enabled. Light is the perfect tool for biological measurement. The 3 key stages of our technology are fundamental research, development of instrumentation, that is the tools for measurement and processing; and finally, the development of therapeutics. Together, this is called translational science, and it is underpinned by the interaction of the fluorophore and the photon. I'd like to explore today a few examples of these advances that are enabled by Coherent's technology in the lab, instrumentation and in delivery. I'll elucidate how this enables personalized medicine and also provides the tools to keep an aging population healthy. I'll cover current events, the near future and the long-term megatrends, in other words, now, next and beyond. Today, nothing is more illustrative of the power of photonics and fluophores than the COVID pandemic, where a rapidly evolving photonic toolkit has been deployed. The last 3 years of headlines have been dominated by the number of COVID cases detected by PCR tests, reports on the evolution, spread of mutations and articles on the efficacy of vaccines and other therapeutics. Each one of these technologies and techniques is underpinned by Coherent technology. In 2019, the term PCR would mean nothing to the public. Today, this 3-letter acronym can be in a newspaper headline without the need of explanation. If you were tested during the pandemic, there is a good chance it was by a real-time reverse transcription polymerase chain reaction, an RT-PCR, a PCR test. First, you are swapped, then probed, which selectively binds to the RNA sequences of the virus attacked with fluorescent dye molecules. Then the sample is thermally cycled and the fluorescent signal is measured with time. If the target RNA sequences are present, the signal doubles with each cycle. Coherent provides key components for PCR testers, and we responded to the challenge of massively expanded demand by doubling manufacturing capacity of thin film filters for PCR testers and ramped production of thermoelectric assemblies used to generate the highly controlled temperature conference cycles. Another critically important technique used in the fight against COVID is flow cytometry. COVID-19 has a dramatic effect on the human immune system. Flow cytometry is at the forefront of quantifying that impact designing therapeutics and testing vaccines. Coherent's OBIS and Sapphire lasers and the integrated systems with multiple lasers, Coherent's Selects of photonic engine of these devices. These same lasers are also at the heart of many high-throughput gene sequencing instruments. Very high-resolution cameras map the sequences of hundreds of millions of target DNA molecules simultaneously. Using this method, the complete genome of SARS-CoV-2 virus was sequenced in just a few hours. Sequencing of the virus genome has identified suitable targets for synthetic vaccines. This knowledge of the virus' genetic makeup also allows researchers to understand how SARS-COV-2 is mutating to track new variants and to ensure that PCR tests and treatments remain effective. PCR testing, flow cytometry and gene sequencing were rapidly deployed and effectively used in the pandemic as they are already part of the arsenal of doctors and medical researchers. COVID has allowed a glimpse into that toolkit of scientists. It has also accelerated the development of techniques to tackle cancer, Alzheimer's and degenerative diseases. This, in turn, is rapidly accelerating progress in personalized medicine, opening up a huge market opportunity for our products. With the world's over-60 population expected to double from 1 billion in 2019 to 2 billion in 2050, medicine requires rapid technological advancement. The health care industry must shift from reactive treatment of symptoms to preventive care that looks at early intervention and prediction. New technologies will increase access, improve outcomes and lower costs while also enabling providers to better understand, monitor and treat the underlying mechanisms and causes of chronic diseases. Personalized medicine requires biological and genetic analysis of the individual. The tools for this analysis are the same as those used in the fight against COVID. An attack strategy to tackle cancer starts with these systems. Gene sequencing tumors, looking for the mutations, which cause rapid cell division or probing for a virus which provokes an immune reaction and a misguided repair mechanisms are all analyses enabled by the multiple wavelengths of our OBIS lasers. The analyses enabled doctors to create targeted treatment strategies for the individual, such as medication, which block cell division prevents an immune response or attacks tumor cells at an identified attack point. Targeted therapies can minimize the side effects of the current and targeted treatment regimes. Flow cytometry analyzes thousands of cells per second and could sort them. A biological sample, such as blood or bone marrow, and a suspension of single cells is then labeled with a fluorescent marker or multiple fluorescent markets, which bind to specific cellular targets and are then made into a linear stream and passed through laser light. Multiple measurements of this light are taken, the light which forward scatters, the light which scatters to the side and the fluorescence. A vast amount of data is collected. Modern cytometries use 5 different OBIS lasers at different wavelengths and up to 40 cellular markers simultaneously. They use a technique called high-dimensional flow cytometry, which yields a huge amount of data on the immune system. Such high throughput screening tests are fast and automated and can quickly test a large number of cells to quantify the efficacy of therapeutics. Gene sequencing instruments use similar lasers and also have extremely high throughput. But the fluorophores are designed to attach to specific base pairs of DNA, rather than specific cell locations. Very high-resolution cameras map the sequences of hundreds of millions of target DNA molecules simultaneously. The cost to sequence a genome has dropped from millions of dollars to just a few hundred. Editing DNA is driving cures for diseases of aging and cancer, in many cases, in just 1 dose. Medicines, which are designed by chemistry-based science, will be replaced by individual treatments created by cell or gene-based approaches, leading to more targeted drugs and forging a path to making many cancers a disease of the past. We've looked at the developments taking place now, the COVID pandemic. And what's coming next? Personalized medicine. I'd like also to give you a view of what's beyond and already on the horizon for photonics-based research, the coming revolution in brain medicine. The aging population is fueling dramatically increased research into neurodegenerative diseases such as Alzheimer's, motoneuron disease and Parkinson's disease. These progressive neurological disorders present not only a devastating human cost, but also a huge financial burden. The global cost of dementia exceeded USD 1 trillion in 2018. The sheer complexity of the human brain presents massive challenges for investigation. The interaction of light with biological material, again, by fluorophores has unlocked new techniques in understanding the brain. Three-dimensional high-resolution imaging of the mammalian brain, in vivo or in vitro, as unlocked -- was unlocked by the introduction of a technique called multiphoton microscopy in 1990. Fluorophores are introduced into the brain, allowing its structure to be imaged. Previous imaging techniques used a single photon to excite a fluorophore in a process called confocal microscopy, which is great for imaging in 2 dimensions. In multiphoton microscopy, the photon is replaced by 2 photons, each of exactly half the energy, which can be delivered precisely to a specific location in 3 dimensions. These photons are produced by what physicists call an ultra-fast laser, which has a pulse length of about 100 femtosecond, which is 100 millionths of 1 billionth of a second. This precise delivery of an extremely short pulse of light at an exact wavelength and at a tiny spot that can be shifted in 3 dimensions enables high-resolution imaging of live brains. The power of multiphoton microscopy is that it provides images of both the brain structure and its operation. In addition to this already amazing capability, multiphoton microscopy has recently been augmented by a revolutionary advancement called optogenetics. Optogenetics goes beyond imaging and allows activation and inhibition of neurons by light, no longer a read setup, but a read right interaction. Cells in the brain are made sensitive to light by a genetic modification. And upon a flash of light, neurons can be fired. Optogenetic tools are cracking the puzzle of how the brain works, probing the functions of learning and memory. The brain is mapped using a multiphoton microscopy, determining the location of neurons using a Coherent Chameleon or Axon laser. An ultrafast laser, a Chameleon or Monaco laser, is focused on specific chosen -- specific chosen neuron or a group of neurons, which promotes ions to travel through the cell membrane and fire. Through this method, a neural pathway is activated to form a new neural pathway. We are at an inflection point in neuroscience with current advancements allowing scientists to monitor the activity of hundreds of cells in 3 dimensions in an animal that performs natural or learned behavior. Selectively firing neurons with light during an animal's activity confirms that these specific cells are crucial to the observed behavior. The ability to watch memories for and to program new neural pathways is leading to a dramatic advancement in our understanding of brain physiology and laying the groundwork for advances in the treatment of neurodegenerative diseases. Coherent's optical technology, has enabled the fight against COVID, is underpinning the revolution in personalized medicine, and is at the front of optogenetics research. The evolution of techniques from the lab to treatment sees laser technology evolving alongside this medical advancement. In 1994, flow cytometry was a research technique requiring a Coherent ion laser, the size of a desk and consuming over 10 kilowatts of electrical power. 2001, the Coherent Sapphire laser was launched, about the size of a spectacle case. And flow cytometry was enabled in instruments with higher throughput. And today, the technique is enabled by the Coherent OBIS core laser, the size of a small matchbox. This enables us to package multiple OBIS lasers into an integrated package and eliminate the need for our customers to undertake complex beam delivery challenges. Coherent has followed and enabled the journey from lab to instrument. Over the last 20 years, we've launched the broadest spectrum of laser colors with increased performance, especially in the ultraviolet, in the smallest packages and at lower cost points enabling our customers to build the most capable, compact and cost-effective instruments. Integrating these lasers with optics and control electronics into light engines has been a focus for the last 5 years. This enables our customers to buy a more cost-effective, higher performing, smaller package, allowing us to capture a larger part of the addressable market. Multiphoton microscopy and optogenetics are earlier in the translational path. However, Coherent is laying the groundwork for the continuing revolution in multiphoton science. In 1990, these laser systems were unwieldy beasts, spanning an optical table and requiring careful nursing by a PhD physicist, Coherent released the Chameleon laser for this market in 2007 when research was still in its infancy. A fully automated and single box, the system no longer required the attendant physicist, and the market expanded rapidly. More recently, the Axon laser a fraction of the cost and size, positions Coherent well as multiphoton microscopy and optogenetics translate from the lab and into biological instrumentation. Each step on this translational evolution sees dramatically increased volumes. Over 3,000 Chameleon lasers were shipped to research labs, generating over $0.5 billion in sales since launch in 2007. We expect that these already impressive numbers will increase dramatically when the technique shifts from research to instrumentation. In the life sciences instrumentation market, Coherent has shipped more than 150,000 OBIS and Sapphire lasers since 2001. Next-generation instrumentation technologies will reduce platform size, improve measurement speeds, increase accessibility and enable higher sensitivity. Today's instrumentation techniques will evolve to point-of-care technology, multiplying the installed base of technology from centralized facilities to doctors' offices or even the home. In the race to deploy this personalized medicine revolution, instrumentation vendors will develop new platform designs, drive decreasing times to market, reduce costs and improve performance. These applications use and integrate Coherent's materials, optics, lasers and thermoelectrics. Instrumentation manufacturers may externally source components for these products and integrate in-house, and Coherent is well placed in all of these product areas. Others may not have the optical, thermal or system integration expertise internally. And it will then become critical to choose a vertically integrated supply partner that can offer a broad portfolio across different applications. Coherent is unique in this position as its products span all of these applications, both on the component and subassembly level and can support all aspects of the design cycle. Coherent understands biological instrumentation, offers multiple components throughout the system and has the capability to vertically integrate into higher-level subassemblies and subsystems. From materials and lasers to optics and thermoelectrics either at the component level or as part of an integrated subassembly or subsystem, Coherent offers a diversified product and application portfolio that enables life sciences, instrumentation manufacturers to innovate whilst achieving their cost and performance objectives. Looking over the last 5 years, legacy II-VI and legacy Coherent both grew at a compound annual growth rate of about 15%. This is about twice the overall growth rate of the market that analysts are predicting over the next 5 years. Personalized medicine will continue to drive strong demand for our products. We expect to continue to grow our revenue in instrumentation significantly faster than the market not only because of our market opportunities now and coming up next in personalized medicine but also because of what's beyond. The market opportunities that we see emerging through optogenetics rising to the challenges of neurodegenerative disorders. Thank you. And now back to Mary Jane.

Thanks a million to Chris and Kai. We will now turn to the Q&A portion of our day today. And I think the way we're going to do this is I think my colleagues are going to join me up here. So if we can have Chris and Kai, Chuck and Giovanni, that would be fantastic. For those of you on the phone, our leader of Corporate Communications, Mark Lourie, is monitoring the website, and he will help by calling out your questions to us, which we will answer. If you have a question, just please raise your hand, and we have some runners who will help us. So why don't we start with Ruben? And we'll be sure to get all of you in, we're usually pretty good at doing that. So just maybe tell us your name and your firm, and we'll go from there.

Great. Ruben Roy from Stifel. I had a question for Dr. Schmidt. I wanted to see if we could talk a little bit more about the laser-induced forward transfer process. Lift, I think, has been used in additive manufacturing. And is it a similar process for the display business? Or is it different? And also, is the incremental dollar add similar to some of the other processes that you talked about like lift-off and cutting?

So the laser lift-off is certainly a process which is -- since a long time around. So -- but what we did is for the specifics of the micro, the transfer, we optimized it. We did a lot of investigations, how you have to shape the beam, how you have to position the wafer and the target display, what the distance should be, et cetera, all those things together. So that's specific to microLED. So to answer the first part of the question. And yes, the second part of the question, I cannot comment on the laser additive manufacturing market because I'm not a specialist in that. I said $1 billion over 10 years. That's a conservative approach. What we take, might be more. But I think with the conservative estimation, we should be which would be fine.

I guess just a quick follow-up on the TAM or SAM assumption. That's for the entire MicroLED market, right, small to large displays?.

Yes, mostly large displays because we are in a display equipment manufacturing business and our opportunity scales with the area. So small displays.

Ananda.

Ananda Baruah, Loop Capital. Two, if I could, just I guess sticking there, how do these new opportunities impact the display cycle, the classic display cycle? How would you see that changing in the coming years, if at all? And then if you -- while we have you, if you can give us any sense of where you think we are right now in the display cycle and what the dynamics of that might look like over the next couple of years, that would be helpful. And then I'd love to ask a follow-up of Chris also, if I could.

You're pressing your luck there, buddy.

Good. So the first question was regarding the position, where we are on the cycle with respect to transitioning eventually to MicroLED. So as of today, you see a number of announcements from companies saying they want to go MicroLED. You see that our products already shipped from companies with -- based on MicroLED. They are certainly not that small yet, and they are really expensive in the moment, so nothing for the broad market. So the estimation we have is based on the knowledge of the market based on the feedback we get from the display customers is really 3 to 5 years. That's the time we see until it reaches, let's say, a broader market.

Got it. And just quickly for Chris. Any thoughts on sort of market size, acceleration of market size? Like when do you think all of this starts to manifest?

These are all long-term there are very long-term trends. And we've been on the journey of flow cytometry and gene sequencing and PCR testing. And for many years, they evolve from the lab. They go through instrumentation. They evolve through therapeutics. And each of these different techniques is on that journey. So each is marching in the direction of growth. So it's difficult to answer specifically whether one is going to fire at any one point. But these are all part of the general large megatrend towards personalized medicine and brand science.

Jim Ricchiuti with Needham & Company. A couple of questions on the display side. I just want to make sure I understand. Python is a new tool for manufacturing the OLED back plane. Is there a retrofit opportunity just given the cost efficiencies that you're talking about versus with the installed base that you have?

Yes, good question. So you need to know Python and solid-state laser operates at a different wavelength than the Excimer laser. So there are around about 40-nanometer wavelength difference that has no effect on the annealing result. In fact, with Python, as I said, the laser annealing result is even better than with VYPER with our existing platform. But due to the fact that it uses the different wavelengths, if you think about an upgrade scenario, it would mean that the customer has to exchange all the optical elements because they are -- they have coatings, which are wavelength specific. And if you do this, then it's a significant investment, so all the optics and the laser. If you ask whether customers would do this, it's a difficult question. Maybe, I would guess if a fab is aged 10 years or more, then they might decide to upgrade an entire fab that could well be. But we think for the moment, Python is our answer and strategy for Gen 8. That's where we designed it for, and that's where we start marketing it.

Is there a -- there's been a significant recurring revenue stream associated with the ELA tool. This tool sounds like there would not be .

No, there would also be a revenue stream associated with the service for Python, but it would be in addition to what we have on the Excimer laser annealing side, yes.

And then final question, if I may. You talked about the number of Gen 8 fabs that you expect 5 through 8 fabs planned over the next couple of years. Will -- are you -- is it your expectation that those fabs will have the ELA technology or Python later in some of these fabs coming online?

So definitely some. So I cannot answer whether all but some, for sure.

Meta?

Meta Marshall, Morgan Stanley. Either Chuck or Giovanni, just -- you guys have done a great job with different acquisitions of kind of finding other products to sell into the markets that the acquired companies have sold into and kind of vice versa. And so this is a great overview on kind of the core Coherent businesses. But just other opportunities that you see to kind of sell into health care and display or other areas where you feel like you can take Coherent into other areas you had already been in?

Okay. So I'll take a shot. Well, when we announced the deal, we went well beyond display and the life sciences opportunities, right? We said that -- we thought that the synergies with the legacy II-VI [Indiscernible] was really around industrial lasers. If you recall, and then of course, the fourth one was the aerospace defense. So these are very exciting on their own, but we went well beyond these 2 market application, whether it's consumer -- display for consumers or automotive, whatever the application is for displays or whether it's for scientific or therapeutic's application for the lasers that Chris talked about. In addition to those, we really envision that industrial, the combination of 2 companies on the industrial applications, but again, they go through from cutting, welding, drilling, cladding, you name it. And then the aerospace defense, we thought they were going to be incredibly synergistic not only from a cost standpoint, which we quantify but, most importantly, on the top line, which we never quantified, but we expect that to be significant.

Okay. Next question, please. Sidney.

Sidney Ho with Deutsche Bank. I want to go back to the display business. You talked about smartphone likely staying with OLED, mostly because of the high cost. Do you see any part of the smartphone adopting micro LED, even maybe at the very high end, just like what you're seeing in the TV market? And are your customers even talking to you about adopting MicroLED and smartphones?

Yes, it's very good -- great question. We would love to have an answer to that. So I think if you approach this from the technical side, smartphone is very challenging. So you have about 10 million pixel on a smartphone, on a high-end smartphone. The PPI number is very high. So you have to transfer the tiny marker LEDs 10 million into high -- with a high -- very, very high position to the spot on the display. So we think TV, that's something which will happen much earlier because there, the distance from pixel to pixel is on the order of 500 micrometer. So that's a completely different world compared to a smartphone. But we cannot comment whether some smartphone maker will go into that for their very high-end smartphones. So we never thought that the smartphone costs above $1,000. But meanwhile, that's normal. So could well be.

That's fair. Maybe a follow-up question. Just looking at the different technologies. Can you talk about the competitive landscape in MicroLED for the tools that you make both for laser annealing and the transfer. I think the annealing is quite mature already, and you guys are pretty strong in that area. But how about the transfer process? Are there other alternatives that are not laser-induced?

There are other technologies for the transfer. But as I said, so those technologies from -- as we judge it today, they are much slower. So if you just think about 24 million pixels you have to transfer for TV, with all the technologies known today, it would take you like a couple of 10 hours to do 1 TV. So -- and with our approach, we bring it down to a couple of 10 minutes. And so the question -- the answer is there are other technologies, but we think they are not viable with respect to speed and throughput to be used for mass production.

Let's take a pause, Mark, and see if you have any on the phone.

Yes. So we have a question online from Michael Genovese. Corning recently called out near-term weakness in display demand in China and also weakness in supply due to labor in China. Is this a market with a strong mid- and long-term outlook but has some issues near term?

I would say that, first of all, with respect to the mid- and long-term outlook, it's very, very good. We continue to see very strong demand in this area. Notwithstanding let's say, from one quarter to the next, it might have some change in volume. But at the end of the day, it's a very, very strong demand market. And for sure, the mid- to long-term trends are very good. Is that fair, Kai?

Yes. I think that's...

Go ahead, Mark.