Q4 2022 Lumentum Holdings Inc Earnings Call
Provided during this call are based on dimensions reasonable beliefs and expectations as of today.
Momentum undertakes no obligation to update these statements except as required by applicable law.
Please also note unless otherwise stated all financial results and projections discussed in this call are non-GAAP .
non-GAAP financials are not to be considered as a substitute for or superior to financials prepared in accordance with GAAP.
They mentioned press release with the fiscal fourth quarter 2022 results and the accompanying supplemental slides are available on our website at www dot momentum dot com under the investors section.
This includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP results.
With that I'll turn the call over to Alan.
Thank you Kathy and good morning, everyone.
This is truly an exciting time for momentum.
We have an expanding set of use cases, where our market leading photonics products.
With the close of vehicle autonomy, and yesterday's announced purchase of Ipg's telecom transmission product lines, we have a more comprehensive product portfolio than ever before.
We expect fiscal 'twenty three revenue to be up more than 25% from fiscal 'twenty two at the midpoint of our outlook.
And as I look ahead, we forecast healthy double digit growth in our telecom and Datacom business over a multiyear period.
In fiscal 'twenty, two we achieved record revenue in Datacom <unk> coherent components pump lasers tunable products in subsea components with company profitability above expectations.
Fiscal fourth quarter revenue was above our midpoint with both operating margin and earnings per share exceeding the top end of our guidance.
We are well positioned for double digit growth into fiscal 'twenty, three and beyond due to strong fundamental drivers and our <unk>.
Telecom and Datacom businesses.
On August 3rd we completed our acquisition of Neo Photonics, which increases momentum has exposure to the rapidly growing 400 gig and above optical communication opportunities.
Even better partner for our customers and expands our photonics toolkit into areas, such as ZR and ZR plus modules.
Silicon Photonics high bandwidth coherent components ultra narrow line with external cavity tunable lasers, and RF integrated circuits.
The feedback from our customers on this transaction has been very positive as they appreciate the logic of adding new photonics products and capabilities to our portfolio.
I'm also delighted to welcome the talented neo photonics team to the company and I can't wait to see what our combined innovation engine comes up with mix.
Yesterday, we announced the purchase of Ipg's telecom transmission product lines.
As we have mentioned previously there is a significant opportunity in providing tunable transceivers into the cable and wireless network operator market.
This acquisition augments, our product offering addressing this opportunity.
This acquisition also brings a talented team developing communication Ics, including coherent DSP, which complements the IC capabilities, we obtained from the <unk> acquisition.
This brings vertical integration opportunities in future coherent Transceivers. In addition to our 400 G ZR and ZR plus products, including those targeting opportunities within the data center and at the edge of the network.
We are making progress to increase the supply of third party materials and Ics that are limiting our ability to meet the very strong customer demand.
For our telecom products.
The diligent work of our supply chain team enabled a 16% sequential growth in telecom datacom revenue in the fourth quarter, but demand still exceeded supply by approximately $100 million.
We expect sequential growth again in the first quarter. We do however expect shortages to continue at least until the first half of calendar 2023.
Now, let me provide some detail on our fourth quarter and full year results.
As I mentioned earlier telecom and Datacom revenue was up 16% quarter on quarter.
In fiscal 'twenty, two our 10 G tunable transceiver products achieved record revenues with particular strength in metro access and fiber deep applications for cable and wireless networking customers.
We are investing to double our manufacturing capacity for our <unk> and upcoming 25 G tunable transceiver products and our wafer Fabs and our back end Assembly and test factories supporting.
Supporting the rapid transition to our differentiated technology by cable Msos and wireless network, operator customers to support their increasing needs for bandwidth.
In fiscal 'twenty two we also set new revenue records for our subsea components, which were up 65% year over year and four our terrestrial pump lasers, which were up 49% year over year.
Typically increases in sales of these products is a leading indicator of future demand, which adds to our confidence of continued growth in our telecom product lines.
In the quarter rhodium revenue grew 23% sequentially.
While <unk> growth has been slowed by IC supply shortages the mix continues to shift to newer more advanced products.
In Q4 high Port count and M by and <unk> comprised over 70% of the revenue mix.
This richness of the mix towards newer and more advanced <unk> is consistent with our customers being in the early phases of new network deployments.
It is also another leading indicator of future demand for our telecom products, including transmission products, which we bolstered with the Neal Photonics acquisition.
In Datacom as expected we grew emo revenue to a new quarterly record in the fourth quarter and achieved a new annual record for fiscal 'twenty two.
We nearly doubled our internal manufacturing capacity for <unk> products in fiscal 'twenty, two enabling us to better support the robust customer demand for our 100 G per lane solutions.
We are also driving the next phase of Datacom industry roadmap with our 200 G per lane emails per one six terabits per second applications.
We expect these to enter production as we exit fiscal 'twenty, three and are engaged with multiple customers and design in activities.
These leading edge chips.
Looking ahead to our first quarter, we expect telecom and Datacom revenue to be up sequentially due to strong demand and improvements in IC supply.
While growth continues to be gated by IC supply, we believe that we will shrink the gap between supply and demand from the more than $100 million level in Q4 to approximately $75 million in Q1.
Turning to industrial and consumer Q4 revenue was down from Q3 due to normal seasonality in <unk>.
We are executing on our strategy to expand our <unk> sensing and lidar platforms into applications beyond smartphones.
As we've discussed previously our product pipeline for automotive industrial and consumer use cases is growing and.
In automotive we are ramping production of multi junction VIX full arrays.
Long range Lidar products and products for in cabin driver monitoring systems.
We are also the supplier of record for building automation and occupant sensing reference designs.
In the consumer space, we are working closely with multiple customers, who are developing extended reality solutions.
While we execute on our long term strategy in <unk> as we have mentioned previously we expect share normalization and normal price reductions in the coming smartphone cycle.
We expect smartphone <unk> sensing revenue in fiscal 'twenty three to be reduced by approximately 40% to 50% from last year's run rate starting from our first fiscal quarter.
As such we expect first quarter industrial and consumer revenue to be up only modestly from the prior quarter.
We are still optimistic about our <unk> sensing business has applications in automotive the meta Bruce.
<unk> will begin to ramp.
Underscoring this in the fourth quarter, we recognized approximately $2 million in revenue from automotive applications and we expect this to grow in the first quarter.
In fiscal 'twenty, two our commercial lasers revenue was up 59% from fiscal 'twenty one.
In the fourth quarter revenue was up 39% from the same quarter last year.
Approximately half of the revenue was driven by fiber lasers, serving industrial applications with the other half derived from ultrafast lasers solid state lasers gas lasers, and our laser in the service business.
These solid results reflect a growing set of applications.
Introduction of new products and growth into new markets and with new customers such as in solar cell and EV battery processing.
Looking ahead to the first quarter, we expect laser revenue to grow quarter on quarter to a new record level.
To summarize.
I am very excited about our future.
We're well positioned to capitalize on the increasing use of photonics growing use cases across multiple end markets.
Over the coming years, our products are critical to multiyear cloud and network infrastructure expansion and deployments are accelerating.
Underscoring this at the mid point of our revenue guidance, we expect first quarter telecom datacom and laser revenue to be up over $130 million or 45% compared to the same quarter last year.
About half of this growth is organic despite ongoing supply constraints.
To capitalize on these trends in communications consumer and industrial end markets. We are accelerating R&D investments during fiscal 'twenty, three which we believe will accelerate topline growth in fiscal 'twenty four and beyond.
These investments include coherent DSP.
800, <unk> and higher speed communication technologies.
Laser sources for high performance computing architectures, and the adoption of AI and data centers.
Industrial sensing and <unk> imaging.
And in cabin sensing for automotive and industrial lasers for electric vehicle and battery manufacturing.
<unk> will quantify the impact of this on our fiscal 'twenty three outlook.
I would like to thank our employees around the world for all of their hard work and resilience that has put us in such a great position in our markets and to grow strongly over the coming years.
With that I'll turn it over to Wajid.
Thank you Ireland net revenue for the fourth quarter was $422 1 million, which exceeded the midpoint of our guidance range net revenue was up six 8% sequentially and up seven 7% year on year.
GAAP gross margin for the fourth quarter was 43% GAAP operating margin was 13, 1% and GAAP diluted net income per share was 49.
Fourth quarter non-GAAP gross margin was 54%.
Which was up sequentially and year on year, primarily driven by higher revenue.
During the quarter, we accumulated $8 $2 million in extra ordinary charges to acquire IC components from various brokers to satisfy customer demand.
These incremental charges were excluded from the non-GAAP gross margin.
Fourth quarter non-GAAP operating margin was 28, 8%, which increased sequentially and year on year due to higher revenue and was above the high end of our guidance range fourth quarter non-GAAP operating income was $121 $6 million and adjusted EBITDA.
$142 million.
Quarter, non-GAAP operating expenses totaled $91 1 million or 21, 6% of revenue.
SG&A expense was $41 million R&D expense was $50 1 million.
Other income and expense was a net income of $1 $2 million on a non-GAAP basis.
Fourth quarter non-GAAP net income was $105 million and non-GAAP diluted net income per share was $1 47, which was above our guidance range provided on our last call.
Our fully diluted share count for the fourth quarter was 71 5 million shares.
Our non-GAAP tax rate remains 14, 5%.
Turning to the full year results fiscal 'twenty two net revenue was $1 71 billion.
Which was down one 7% from fiscal 'twenty, one primarily due to component shortages gating our ability to meet the strong demand as Alan indicated earlier.
GAAP gross margin for fiscal 'twenty, two was 46% GAAP operating margin was 17, 7% and GAAP diluted net income per share was $2 68.
Full year fiscal <unk> non-GAAP gross margin was 51, 6%, which was up 70 basis points relative to fiscal 'twenty, one due to product mix and lower relative manufacturing costs.
Fiscal year 'twenty, two non-GAAP operating margin at 38% was flat from that of fiscal 'twenty, one and above our business model fiscal.
Fiscal 'twenty two non-GAAP operating income was $527 million and adjusted EBITDA was $608 6 million.
For fiscal 'twenty, two our fully diluted share count was $74 2 million shares non-GAAP net income was $449 2 million and non-GAAP diluted net income per share was $6 five.
Moving to the balance sheet, we generated $459 $3 million in cash from operations in fiscal 2022.
Ending the year with cash and short term investments of $2 $5 5 billion.
During the fourth quarter, we generated $114 3 million in cash from operations and purchased one 3 million shares for $103 $3 million.
As of the end of the fourth quarter, we have purchased a total of $9 1 million momentum shares in the last two fiscal years, reflecting our confidence in long term growth.
Turning to segment details fourth quarter optical communications segment revenue at $379 million increased 8% sequentially due to improved components supply and robust demand in our telecom business optical communications segment gross margin.
At 49, 8% increase sequentially and year on year, primarily due to higher revenue.
Our fourth quarter laser segment revenue at $51 2 million.
Was flat sequentially and was up 39% year on year.
Fourth quarter lasers gross margin at 54, 5% was a new record for this business driven by higher volumes and improved utilization.
Before turning to our guidance given the number of moving parts in our business, including the two acquisitions. We just closed I would like to add some color on our outlook for fiscal 'twenty three.
The <unk> synergies these acquisitions are operating well below our target model and we plan to accelerate our R&D spending to capture new opportunities that we have with our broader set of products and capabilities. We also continue to experience supply chain challenges.
And as previously discussed we are experiencing share normalization in <unk>.
Therefore, we would like to provide some expectations around the business and give a onetime fiscal 2023 financial outlook to aid investors in modeling the company.
We expect that our largest three D sensing customer will comprise between 10% to 15% of our company revenue in fiscal 'twenty three.
Also we expect the second half of our fiscal year, we will have improved IC supply compared to the first half, which will allow growth to accelerate and result in second half company revenue being larger than that of the first half.
Based on all of this we expect fiscal 'twenty three revenue to be in the range of $2. One to two <unk> two 5 billion with an operating margin in the range of 24% to 26% and earnings per share between six to $7.
<unk>.
This fiscal 'twenty three margin performance is below our target model due to acquisitions and accelerated R&D investments. However, our 50% gross margin and 30% operating margin model continues to be our target as.
As we execute on acquisition synergies and work down shortages in supply and we begin to realize the benefits from the accelerated R&D investments, we expect to return to our target financial model.
Now onto our guidance for the first quarter of fiscal 'twenty, three which is on a non-GAAP basis and is based on our assumptions as of today.
We expect net revenue for the first quarter of fiscal 'twenty three to be in the range of $490 million to $520 million. This includes approximately eight weeks of revenue from Neo photonics.
As Alan indicated earlier, we are closing the gap between supply and our customers demand for our products. Our Q1 guidance incorporates approximately $75 million of impact to revenue driven by shortages of third party components.
Based on this we project first quarter operating margin to be in the range of 25% to 27% and diluted net income per share to be in the range of $1 45 to $1 70.
Our non-GAAP EPS guidance for the first quarter is based on a non-GAAP annual effective tax rate of 14, 5%.
These projections assume an approximate share count of 71 5 million shares.
Our share count estimate of 71 5 million shares for Q1, non-GAAP EPS guidance utilizes the treasury stock method and deriving the number of shares.
This reflects our intent to pay for the principal amount of our convertible debt in cash through operations or future financing give.
Given this is how we intend to operate the company. We will continue to use this method for the foreseeable future and deriving our non-GAAP EPS.
For GAAP purposes, our Q1, EPS will follow accounting standard ASU 2020, dash <unk> and the related if converted method. We expect this to result in a share count of approximately 96 million shares.
Before wrapping up I would like to offer some comments on the Neo Photonics acquisition.
Given the complementary nature of our business with that of Neo photonics, we expect to generate more than $50 million in annual run rate synergies within the next two years cost of goods synergies are expected to comprise more than 60% of this total driven by manufacturing infrastructure and supply chain.
<unk> operating expense synergies will be driven by aligning and integrating our organization and by serving a similar customer base.
We are just two weeks into our integration work and will provide updates on our progress in the coming quarters.
With that I'll turn the call back to Kathy to start the Q&A session Kathy.
Thank you Jay before we start the Q&A session I'd like to ask everyone to keep to one question and one follow up.
This should help us get to as many participants as possible before the end of our allotted time.
Operator, let's begin the Q&A session.
Thank you if you'd like to ask your question. Please press star followed by one on your telephone keypad give you lots of detour. Your question. Please press star followed by two when preparing to ask two questions. Please ensure you're on mute locally.
Our first question comes from Alex Henderson of Needham Alex Your line is now open.
Thanks.
Let me start off with just a clarification I thought you said in the text.
<unk> the presentation that you expect to get to 30% operating margin your outlook for FY 'twenty three is 24% to 26% operating margin does that the delta between the.
The integration of Neo photonics in the acquisition from IPG.
That causes that.
Could you clarify what you think the these two acquisitions will do in terms of accretion or dilution to the FY 'twenty three numbers.
Sure Hi, Alex.
Yes so.
The current year, we're going to be faced with some headwinds obviously, we had talked about the fact that we would go through a bit of a transition period with the acquisition.
Neil Photonics and that would have a headwind on our overall operating model.
In addition to that.
With the latest purchase.
We announced yesterday that comes with increased R&D expenses as well as we invest in DSP.
DSP technology. So the two of those things combined are having a headwind for fiscal year 'twenty three our 30% operating margin continues to be our target model and as we work through the synergies for Neo photonics and as we get the benefit from the acquisition that we saw that we announce.
Yesterday, we will also see some incremental synergies within our neo photonics product lines, specifically as we see VR products ramp up so the two of those things combined.
It should provide some leverage as well as bringing incremental earnings on a standalone basis as well.
The new Photonics acquisition is accretive day, one and so we're seeing some accretion even in our fiscal Q1.
From that acquisition.
The IPG acquisition is not accretive in.
In Q1, and and it will be a headwind during the year I would say the two of them combined are still net accretive.
On a full year basis, hopefully that answers your question.
Yes, so I'm still confused I thought you had said in the text of the presentation that you're expecting a 30% operating margin is that incorrect.
In the long term as Burton said, whether you are targeting.
Yes that continues there continues to be our target model yes.
Long term, we haven't changed our covenant model, yes, our long term target model Thats right.
So just going to the IPG supplemental cede the floor can you give us some sense of the scaling of that business.
What kind of revenue bases attached to it or what kind of cost structures attached to it.
Yes, Hi, Alex Thanks for the question the revenue is really not material.
At this point, we expect to be able to grow it with our sales force and but it's still not going to move the needle much there the real.
Jim There is the team and the progress that they've made on DSP technology, and so we're going to continue to make those investments and in fact ramp up those investments to be able to get out the first DSP, but also work with the team.
On the roadmap for future DSP so.
As with any kind of large scale semiconductor development. It is not for the pain apart and there is incremental R&D needed to be able to develop leading edge DSP and so we believe that we're positioned well to be able to make those investments and have those returns come.
In fiscal 2004 and beyond.
I see so that's a fairly large investment in DSP, so that youre, making okay. Thanks.
Yes, thanks, Alex Thanks for the questions Alex.
Thank you. Our next question comes from George Notter Jefferies. George Your line is now open. Please go ahead.
Hi, guys. Thanks, very much I guess I wanted to ask you about your comments on share normalization.
If I look at the revenue guidance.
It feels it layer in neo photonics, it feels like Youre missing $55 60, plus million dollars in sales as we roll into the September quarter.
Maybe talk about the impact on share normalization, what's going on there.
What you expect going forward would be great. Thanks.
Sure George Thanks for the question.
It's been I think Brian Youre six of.
Smartphone ramps and we've had a disproportionately very very large share of that business and we've been talking about share normalization for quite some time.
It is coming to that time and as we said in the pre.
In the script, we expect the smartphone revenue forward momentum to be down between 40% and 50% year on year and we're starting to see that even in the first quarter. So.
We expect <unk> sensing for smartphones to be up modestly in the first quarter, whereas in prior years. This was the quarter where we're at.
Be dramatic until we're seeing general amortization, starting as soon as this first quarter.
And is this a is this a permanent change in the business and is there something to systematic to your products relative to your competitors that is creating that show normalization any more sort of root cause would be great.
Well I think root causes that.
Any any large scale consumer electronics.
Company wants to have diversity of supply in and they've been working on that.
For years, and I think finally after six years, they've gotten more diversity of supply that said, we are still working diligently with.
That customer as well as other customers to be the design partner of choice and we expect that there will be fluctuations in share and we expect to have moments of time, where we gain a lot of that share back, but we'll have to see I think what we've tried to do is provide the most likely outcome for not only Q1 before.
Fiscal 'twenty three and that's why we were very specific in that lower revenue from smartphones of 40% to 50% in the year.
Got it okay. Thank you very much.
Thanks, George and thanks George.
Okay.
Our next question comes from Simon Leopold of Raymond James Simon. Your line is now open. Please go ahead.
Great I appreciate you taking the question.
First one for Roger you gave us I think.
Pretty good detail on whats going on with.
The convertible debt treatment and your commitment to settle in cash.
Could you.
Blaine how it affects the balance sheet I think it's my understanding that your debt.
That also goes up higher and just if you could walk us through that and then I've got a follow up on the telecom trend.
Yes, so the impact on the balance sheet.
Start to see less of an amortization of the debt discount back to the convertible debt. So that's certainly something that well.
I'll call out in our fiscal Q1, I think I think the more important thing is from a balance sheet standpoint.
Sure.
We'll start to have a maturity in fiscal 'twenty.
<unk> 24 on March 24 on the first $450 million of convertible debt and so what you'll start seeing is us.
Working our capital structure, so that we can.
Pay for the principal maturity.
By March of 'twenty, 'twenty, four and obviously, we have enough cash on the balance sheet to comfortably do that and our expectation is that we should be able to generate sufficient cash.
In addition to what we currently have to be able to cover that and then as you know our convertible.
Convertible debt.
Due until.
2026, where we also have a similar commitment in some of our plants. So.
So thats best the reason, we've chosen to take the accounting treatment the way that we have.
And so that that would go from about one nine to about $2 4 billion is that the right calculation.
That's correct that's about right yes.
Okay, great. Thank you I appreciate that and then I wanted to see Alan you gave us some nice color on the Rotem trends, which I'm happy to see that.
Snapping back could you dig into a little bit about what you see going on in transmission and then your views on the ZR market opportunities now that you've got.
Near Photonics within the business and I'm looking for this is more of the.
The sort of fiscal 'twenty three longer term outlook not not just next quarter. Thank you.
Sure. Thanks, Simon yes.
<unk> wrote them through up strongly and we're probably the product line that we're most constrained by IC supply and so as that freeze up we should see continued growth in <unk> on.
On the transmission side.
<unk>.
Coherent components high speed coherent components were up 250% year on year, we expect that to continue to grow as we come out with very.
Very high performance modulator.
Modulators and tunable lasers, and now with the addition of Neo photonics receivers and ultra narrow line width external cavity tunable lasers, so pretty exciting times there on the transmission side and as we've talked about in the script.
10 gig and soon to be 25 gig.
Is really ramping steeply and we're adding capacity to actually double that.
As the MSR market and wireless market is really adopting this for the higher bandwidth in the tune ability of those products.
On the ZR market I think it's still fairly early days as we've been getting more.
More and more into what.
The ZR and ZR plus products from from Neil Photonics into our portfolio and we expect that to ramp up over the coming years.
And then with the addition of the IPG.
The acquisition from yesterday, our expectations are that we have a full portfolio of DSP that then make us more competitive.
And that in that market.
Again, though we will be relying on third party suppliers board USPS for quite some time, but we expect that.
That investment in DSP technology, and the acquisition, we announced yesterday will really put us in a very very strong position in ZR ZR plus and beyond.
Thank you.
Thanks Shannon.
Next question comes from Tom O'malley of Barclays. Your line is now open. Please proceed.
Hey, good morning, guys and thanks for taking my question I just wanted to dive back into the normalization of <unk> sensing sure you guys have been pretty vocal about calling this calling this out before and you've also mentioned that in this coming year youre going to be below that long term guidance of kind of flattish down five five.
But in your prepared remarks here youre, saying that Theres really no difference in terms of ASP degradation than normal and when you just take where you guys have been historically from a share perspective down to even 50.
<unk>, 50% share you don't really even get close to that debt down 40 or 50. So could you just talk about any new trends that might be going on there maybe weakening the coming year from a technology perspective, or if there are potentially sockets that you had originally thought you would get that you are no longer in competition for perhaps you're shifting a little more than you would have thought originally.
Just any color there just because that number is pretty extreme.
Hey, Tom Thanks for the question this is Chris.
I guess I would roll back in and say.
If you look back a year ago or so.
New chips were introduced that are smaller and lower priced if you if you recall and over the past year, though we largely offset.
That reduction the share gains so over the past 12 months I think we've had.
Even higher than our historical outsized positions. So I guess I would argue that.
Sure normalization effect is quite significant and so if you layer on on.
On top of that our normal price.
The reduction year over year for like for like types of chips. We ended up with the kind of declines that we mentioned in the prepared remarks.
Nothing structural going on or changes.
That are that are impacting.
Our outlook it really goes back to the share normalization combined with price reductions that are in the normal range for chip.
Chips that have been sold same year over year.
Quote and mature for hey.
A very rapid pace consumer electronics world.
Helpful and then just on the.
The supply chain it seems like moving into the September quarter Youre getting some some IC is coming through the door that are there.
Loosing things up could you just talk to the cadence that you expect to see that loosen up through the December quarter, you are getting $25 million of about $100 million right out of the gate, but do you see it further loosening into December or do you anticipate to continue carrying some of that constraint all the way through the end of the calendar year. Thank you.
Yes, Tom.
Our supply chain team has done a great job and has been a relentless with our suppliers and have done a really great job and I think one of the dynamics we have seen.
In the June quarter, and even into the first half of the September quarter is.
Less necessity for these brokers spot buys and so the supply from the normal channel is getting better in many cases now that doesn't mean that we have.
All of the Ics, we need we still are struggling for several of them, but I do expect that as the broker broker.
Broker market becomes less relevant to us we will start seeing a better supply of chips that said, we need to begin getting chips in the next 30 days in order to impact our ability to produce product in the December quarter, and Thats still constrained and that's why we talked about having the supply shortages into the first half of calendar.
2023, so we do expect that the December quarter will be better than the September quarter, but still highly constrained given the strong demand we're seeing in our telecom products.
Thank you guys.
Thanks, Tom.
Thank you. Our next question comes from meta Marshall of Morgan Stanley Mehta. Your line is now open.
Great. Thanks, maybe following up on the last question.
Kind of the loosening theyre seeing a supply is there any of that from redesigns kind of coming into effect or is that mostly just from fail ability of kind of needed products coming available and then second question on just on the industrial lasers piece.
You noted.
Some growth potential with growth in new markets, but just wanted to get a sense of is there any macro impact youre seeing kind of on the core industrial lasers business. Thanks.
Sure.
As we've talked about on prior calls we have been doing some redesign work.
So I'd say that that is helping but I'd say the general supply availability of semiconductors has gotten.
Gotten better, but still not where we need it to go so I'd say, it's a combination of both.
The heavier impact as the overall supply.
On some suppliers that were big problems for a six months ago.
Really no longer a problem and we're getting fewer surprises.
Last minute surprises that were very frequent in prior quarters on.
On the industrial lasers question.
We are developing a lot of new lasers, both from fiber lasers higher power fiber lasers, as well as ultrafast lasers that allow us to get into new markets and new customers and so we're seeing is diversification of our customer base into new applications and we mentioned the.
The solar processing solar cell processing as well as EV battery processing and so those are big markets that are growing quickly that we believe we have.
Good inroad there.
That should lead us to continued growth through fiscal 2023 and beyond as far as the macro environment, we're not seeing any macro environment concerns on industrial production or lasers consumption.
So so far so good on that front.
Great. Thank you.
Thanks, Matt.
Thank you. Our next question comes from Christopher Rolland of Susquehanna Christopher Your line is now open.
Hi, guys. Thanks for the question.
This one is probably for Wajid, maybe if you can talk about some of the.
Moving parts on gross margin Opex.
Into September I know, we have that combined op margin, but how that plays out and then I guess the transaction closed at the beginning of August . So do we still have another third to embed into the December quarter.
Yes.
Yes, Chris.
<unk>.
Moving into the first quarter from the fourth quarter, we're seeing.
Modest improvements.
Across all of our product lines.
Alan mentioned earlier normally we see a pretty big uptick moving into Q1 from Q4 with our <unk> sensing business, we're not seeing.
As much of that it is quite modest moving into Q1, our gross margin profile.
Kind of put aside Neil components for a moment.
Pretty similar to how we've been operating in fiscal Q4 with our business running right at our target model now once you layer in.
Eight weeks of Neo Photonics revenue and as you know the gross margins in that business.
<unk> lower than our target model that is having an impact.
The company overall.
The way to think about December I think it's quite fair to say, yes, you would add in another one third of revenue because we closed on August 3rd. So July revenues were not part of our fiscal Q1 guidance. So that should certainly be there.
For fiscal Q2, so that is the right way to think about it.
Okay, Great and then.
You guys talked about some broader opportunities for three D sensing and investing there.
Yes.
Maybe you can talk about these opportunities whether you think they can make a meaningful dent on what was left by.
But by your largest customer there and then I think you also mentioned oxygen sensing as well.
That sounds like a new market for me I don't know if you can expand on that as well.
Hey, Chris This is Chris great.
Great questions. So.
I guess starting off in terms of opportunities outside of our our lead customer that we've.
Driven majority of our revenue over the past several years.
Certainly the two big areas that always come off our extended reality in automotive so we.
Play into extended reality, we're tracking gesture control world facing or capturing the <unk> those are all <unk>.
Each of those separate uses requires a laser device so.
That's expected to be a significant opportunity over the next several years and then as well in the auto space, where the dollar content is also significantly.
Significantly higher we can capture perhaps tens of dollars per automobile just laser level alone and that number can be even higher.
In all solid state Lidar approaches, which we think will be the long term winner and many lidar applications.
I refer you back to I think earlier this year, we had at OFC analyst briefing. The slides can be found on our Investor Relations website, we're really highlight.
The dollar content opportunities in these applications as well at that briefing, we highlighted that over the next.
Three years or so that we were expecting a minus five to plus 5%.
For this business so as you can imagine Kevin.
The decline.
And this year that we do expect.
No crystal ball here, but a U or a V shaped type.
Recovery here in that business as these new applications start to ramp up and replace ultimately.
Some of the lost revenue, we have seen or expect in this coming year highlights. Please we said.
$2 million in the last quarter and automotive lidar at the laser chip level and remember laser chip level is.
Much smaller than the modules that they go into so that's a reasonable chunk of market share. If you will at the laser level on the oxygen sensor.
We're not participating in any chemical sensors or anything like that you may have heard us.
As you look to lidar as a form of imaging and industrial sensing that can be used in other applications.
In industrial settings.
And we're investing in R&D to accelerate those kinds of opportunities.
I believe that answers questions Craig.
It does thanks, Chris.
Thanks, guys.
Thank you. Our next question comes from Xiaomi chassis G of J P. Morgan Your line is now open.
Hi, Good morning, Thanks for taking my question I guess for the first one if I can agree that the long term model and you did reiterate the long term model.
Just wanted to see if you can just give us a sense of the timing that you're thinking in terms of when you get back to the long term model.
The Newport on any synergies that you called out a $50 million do we use but that doesn't get you all the way to the long term model. So how should we be thinking is it sort of a three year plus target to get back to the long term model any help there would be great I have a follow up thank you.
Yes, so sounds like a couple of things. So so first of all thanks for the question.
In terms of the long term model. So if you take a look at what's happening this year versus where we were last year. So last year, we ended up with gross margins at a company level above 51%.
And operating margins above 30%.
As we called out this year, we actually expect our core business without Neill photonics to continue to operate.
Within the $50 30 model at an approximate level. Despite the fact that our largest customer is expected to be a 10% to 15% customer in fiscal year 2023, and that was primarily or all of it was a chip based business, which has higher margins because of the way we service that market.
And so the reason that's happening is because our lasers business in our telecom business in our Datacom business are expected to improve in fiscal year 2023, and that's providing us with a lot of tailwind from an operating leverage standpoint over our fixed manufacturing costs. So that's one thing that we're expecting to continue into fiscal 'twenty.
For the fiscal 'twenty five is just the natural growth in that business will will aid us just like it is helping us in fiscal year 'twenty three so that's the first piece of it I think we also appreciate the second part of it is is the Nielsen views, but you called out $50 million.
I've said that we expect it to take us.
Two years.
To realize all those synergies.
Through our through our P&L.
As we execute against some of the integration work that we're just starting right now and we'll be providing updates on.
Every single quarter, and then the third pieces.
The IPG purchase that we just did.
<unk> talked quite a bit about the DSP investments, we're going to make those investments will have a very real benefit as we start shipping our own DSP and towards ZR and ZR plus.
Products I don't want to kind of get into the cost of goods sold and Bom cost benefits of having their own vertical integration of DSP, but I'm sure. You can appreciate the type of gross margin benefit that we'll have as we start vertically integrating those two products. So I think those are the three things that really give us confidence in our ability.
To move back to the long term model will it take.
24 months or so to kind of realize all of that yes, probably.
But that's how we're thinking about it and I think that's what's important given that our largest customer is not going to be a 10% to 15% customer versus what it was before.
Okay got it that's helpful and my follow up you talked about the working integration opportunity with IPG.
The acquisition of the IPG business.
Peter.
How should we think about sort of milestones in terms of.
What's your expectation in getting the <unk>, how should we think about sort of the opportunity on vertical integration and maybe more than the longer don't become a merchant supplier dsp's. How are you thinking about that.
Hey, Mike This is Chris.
I would say a couple of things for that first maybe hitting hitting the last 0.1st I mean, our focus is on internal supply vertical integration.
We see coherent technologies.
Really proliferating beyond even the use cases, we just mentioned on ZR ZR plus as we start talking about even opportunities within the data center or at the edge of networks. So that's why we feel this is a very important long term.
Our investment in terms of.
Timeline or milestones.
Maybe a little little too early to set those in stone at this point and that the acquisition just closed yesterday, but I would say that we feel as we get out into the 'twenty four 'twenty five timeframe. That's when we can have product not just developed but are designed into.
Two are incorporated into our modules and.
Starting to ramp that customers. There is theres a lot of milestones beyond just developing that chip there is getting it into our into our modules and cause some customers to change.
But it's a very exciting development and also I think something that maybe to highlight it compliments. The IC capabilities that came over from from Neil Photonics, as well, which were largely focused on drivers. So when you look at it and we ended up with the Silicon photonic indium phosphide photonic integrated circuits, we end up high speed drivers.
Sure.
Those integrated circuits and now the digital coherent basics.
Really coming together as a whole.
Sort of.
Control of both.
Cost vertical integration in the supply chain and future transmission modules.
Okay, great. Thank you thanks al.
Sure.
Thanks, Amit.
Thank you next question comes from Rod Hall of Goldman Sachs. Your line is now open. Please go ahead.
Hey, guys. This is on more on for Rod I think most of the questions are answered, but I wanted to revisit <unk>.
Thoughts about Davita, we in terms of broader and more broadly the telecom cycle and what.
What innings do you think we are in terms of getting it investments.
Thank you.
Yes. Good question as we said in the script.
There's a lot of leading indicators of our telecom business, one of which is our pump lasers and submarine components that are really the first thing that needs to go into a network.
In order to start the deployment and then come wrote them and we're seeing as we said the advanced <unk> high port count and by him.
Being 70% of our revenue a road of revenue that is in Q4 is another leading indicator for telecom growth and then you get the transmission products coming on and.
We believe that we are in the early phases of these new network deployments in there.
Theres quite a runway and that's why we're confident not only in the growth rates, we're expecting in fiscal 'twenty, three but our expectations to have continued double digit growth rates into the years beyond 2023, So I'd say early stages product development and product portfolio is better than it's ever been in.
Confidence in the future growth is very very high.
Alright, Thanks, and just a follow up on that so how flexible would you think you are in terms of tweaking the operation scale throughput at low margins should you see a normalization in demand.
<unk> can be lumpy.
And thats it from my end thanks.
Yes, well, we haven't seen lumpiness in years and I think that's really a result of the competitive dynamic being very very different and that is.
When I was at one of our customers' designs, a new network or a new architecture for our network of their customers and they bet on the Nbn.
Buy it from us and.
The dynamic is very very different so we haven't seen that lumpiness for quite some time I think as we free up supply of semiconductors will see a smooth ramp up and that's why we talked about the second half of the fiscal year being stronger than the first half as those Ics come free we believe that our <unk>.
This will really thrive in the second half and continue to grow.
Strongly as a result of new products and.
Being in the early stages of deployments of these networks, Chris do you have anything else to add on that.
Yes, I think the only thing I'd add is also.
Our our mix of customers in the networking space has evolved over time as well that.
This year, we have a lot of sales with the cloud customers cable msos wireless operators directly and so on.
Our leverage to specific.
Carriers or network equipment manufacturers supplying to those carriers has been a bit more diversified as well. So I think that adds to as Alan said, there's a different competitive dynamic so.
Constantly.
Worried about losing share count on a very short term based.
Basis to to your competition, which can cause downward in your business, but also.
There's a lot more smoothing are averaging out over and network operators that we're now exposed to that should provide a lot more stability than the last 10 years, if you will.
Alright, Thanks, guys appreciate it.
Thank you.
Thank you.
Our next question comes from Ananda Baruah of loop capital and under your line is now open. Please go ahead.
Yeah. Thanks, Scott good morning lots of exciting stuff going on just a quick one if I could.
Could you give us a sense of how.
How we say that how we should understand they are ramping as conversations every time.
That's a lot with the Hyperscale is with regards to photonics.
I kind of X opportunity.
And at what point do you believe those conversations can result in.
I guess, an increased revenue scale atonic and Thats. It for me Thanks a lot.
Yes, I think it's a lot broader than just cloud our cloud operators, but I would say until August 3rd we were separate businesses.
And operating completely separately.
And and.
At this point, where we're very focused on getting in with the customers as well as obviously integrating the business.
And really helping them understand the value proposition of the combined company and we truly believe whether it's the neo photonics acquisition or the acquisition, we announced yesterday were talking about smaller in many ways. These days subscale businesses.
That being part of a larger entity there is a lot more opportunities and the kind of customers that you mentioned are very much worried about security of supply and the scale of their suppliers and we think that's something that we can help both of the acquisitions that have closed.
Ralph.
Thanks for the question.
Chris do you think you are thinking would be at 24 of that.
Is that unreasonable.
It does take a little bit of time, so I mean, I think there'll be benefits starting from day, one, but really where it starts to accelerate given the time to design in and get design wins.
Now customers allocate share commitments to us and to competitors, yet I think it will accelerate through 'twenty four.
That's helpful. Thanks, a lot guys.
Thank you.
Our next question comes from Tim <unk> of Northland Capital market. Tim. Your line is now open. Please go ahead.
Great made it in there.
Question is also kind of around long term modeling, obviously, you've got a lot of moving parts. This year.
But at least heading into the year I think organically you were looking at.
Talking about double digit growth rates over multiple.
Multiple years now.
Looks like given what's happening in <unk>, you wouldn't have gotten there this year.
<unk>, but as we look further out and especially with an eye towards Chris's comments about a potential V shape recovery in <unk> is that still a reasonable expectation for the combined company in terms of double digit growth over the medium to long term.
Yes, hi, there.
So I'll start off and then certainly element and Chris can jump in as well so from a long term model standpoint, yes. So this year. If you if you take a look at our Standalone business, we're probably growing by 7% to 8% because we've probably had more of a step function drop.
Three D sensing demand.
Then than we were expecting coming into the year, although we've been messaging for.
For quite some time.
As we saw Q1 revenues come in or forecast coming from our customer we realized very quickly that.
That it is a good thing much faster than we expected so that is impacting us.
But if you take a look at our telecom and Datacom business on our lasers business, even without the acquisition of new Photonics.
<unk> to grow over 25%.
Fiscal 'twenty three versus fiscal 'twenty, two so certainly.
Neil Photonics, we're also expecting to have the type of tailwind.
That will allow that business on a standalone business on a standalone basis to grow into fiscal year, 'twenty, four as well and as Chris mentioned.
The combined sales team.
We should be able to do better than that as it comes.
And behind company so in the world with the rest of the business going into fiscal 'twenty four at a double digit growth rates and then some of the investments that we're expecting in <unk> sensing to start paying off and we're certainly comfortable with the outlook on the business.
We've provided in the past as it relates to long term growth.
Thanks very much.
Thanks, Tim.
Our next question comes from Richard Shannon of Craig Hallum. Richard Your line is now open. Please go ahead.
Hi, guys. Thanks for taking my question I'll, just ask one on <unk> sensing and specifically the non phone part of it.
It sounds like Youre getting some great activity, there, Chris and given that you talked about a three year timeframe with UFC presentation earlier. This year I will ask a question that context, which has given us a fairly big step down in your big customer here and the dynamics with with other non phone customers is it reasonable to think about.
Youre non phone <unk> sensing or I don't know call it imaging or something like that being at least as big as the phone market for you within that three year period of time.
I think in terms of the market.
Probably and certainly whether it's in year three of your forward.
In that timeframe given given the time to ramp these applications, but certainly I think as you talk about three years four years five years out we expect the non smartphone business to be as large or larger ultimately given the size of those opportunities I think it's just a question of what year that crew.
<unk> was over its probably in that that's why we got the minus five to plus five because it's very sensitive to that final year, but certainly in the gears three or four absolutely.
Okay Fair enough that's all for me Chris Thank you.
Thanks Richard.
Our final question of today comes from Michael Genovese, I say of Rosenblatt. Michael Your line is now open. Please go ahead.
Okay, great. Thanks.
Thanks, a lot first question just to clarify on.
Just sort of organic.
<unk> guide you through lasers, and they're expecting over 25% growth, but is that just because it's included with telecom and datacom or is lasers itself growing that quickly.
[noise] lasers itself is growing very rapidly.
Year over year.
<unk> was up 59%.
We expect that to continue to grow so what we were trying to say hey.
Putting aside the sheer normalization the rest of the business is humming and it's doing quite well telecom datacom and lasers, and we expect lasers to produced record levels of revenue in Q1 and continued to grow through the calendar year. So I was just through the fiscal year. So.
That was the reason for including them altogether.
Okay, Great and then finally I'm, Ken Kenny can you flesh out a little bit more on the DSP strategy from what I'm hearing here. It sounds like definitely you plan to make ZR ZR plus modules with with an internal DSP.
Do you then.
Expect to have your own DSP and other kinds of.
Of.
Transmission modules as well or is or should we think it would just be limited to or focused only on ZR.
No I think you can think of it as being VR being the first step.
Given that we announced the deal 25 hours ago, we're still trying to determine do we need to shift the roadmap from the existing roadmap do we need to add resources or AD spending or what is the one after that and so I would say that it's still early days, but.
We're not into the DSP business for one one DSP.
We're making this investment and acquisition.
For the long term and I think.
It'll position us quite well, especially as you put together the neoplatonic product.
Product and technology, ITG products and technology, and then what momentum had I think together it really puts us in a solid position for vertical integration and coherent components and modules.
Yes.
Okay. Thanks, Alan Congratulations on the deals and all the exciting stuff you have ahead.
Great. Thank you Michael Thank you Michael.
Hey, Charlie I think Thats all the questions that we have so I'd like to pass the call back over to Alan person concluding remarks.
Great. Thank you Cathy and thank you Charlie I'd like to leave you with a few thoughts as we wrap up this call. We have significantly improved our access to third party Ics and an increased our manufacturing capacity to support the ongoing demand strength.
Our fourth quarter results and first quarter guidance, certainly reflect the strength across our telecom datacom and commercial lasers business.
I'm also very excited about our acquisition of new Photonics and the purchase of the telecom transmission product lines from IPG and the breadth of the products and capabilities.
That we can now offer to our customers.
Together, we have a broad portfolio of best in class products and technologies.
We are committed to strongly invest in innovation and manufacturing capability to deliver on customer needs today and in the future.
With that I would like to thank everyone for attending and we look forward to talking with you again during upcoming Investor events, which you will find posted on our website.
Thank you.
Ladies and gentlemen, this concludes today's call. Thank you so much for joining you may now disconnect your lines.
[noise].
Yeah.