Q2 2023 Lumentum Holdings Inc Earnings Call
Good day, everyone and welcome to the momentum holdings second quarter fiscal year 2023 earnings call.
Participants will be in listen only mode.
Please also note today's event is being recorded for replay purposes.
You will have the opportunity to walking question at the end of the presentation, if you'd like to register your question. Please press star followed by one on your telephone keypads. Please.
Please note we will be taking one question and one follow up per person.
At this time I'd like to turn the conference call over to Kathy <unk>, Vice President of Investor Relations. Mr. <unk>. Please go ahead.
Welcome to the mentioned fiscal second quarter 2023 earnings call. This is Kathy Todd mentioned as Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer.
Lee Chief Financial Officer, and Chris Coldren, Senior Vice President and Chief strategy and corporate development Officer.
Today's call will include forward looking statements, including statements regarding our expectations regarding our recent acquisitions, including Neil Photonics, such as expected synergies and financial and operating results macroeconomic trends.
And expectations for our products and technology are markets market opportunity and customers and our expected financial performance, including our guidance as well as statements regarding our future revenues.
National model and our margin targets.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risk factors described in our SEC filings.
We encourage you to review our most recent filings with SEC, including the risk factors described in our quarterly report on Form 10-Q to be filed for the quarter ended December 31st 2022, and those in the 10-K for the fiscal year ended July 2nd 2022.
The forward looking statements provided during this call are based on momentum 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.
Momentum is press release with the fiscal second quarter of 2023 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.
Our second quarter financial and operational performance was very strong led by robust demand from our telecom and commercial lasers customers.
Operating margin and earnings per share were both above the high end of our guidance range with revenue above the midpoint.
But Chad will cover this more in detail in the next section.
As expected sequentially higher revenue from telecom and commercial lasers customers in the quarter offset the anticipated reduction in revenue from certain cloud customers due to inventory digestion.
And at a major consumer customer due to reduced smartphone production.
As discussed over the past several years sure normalization has occurred in our consumer business lessening our exposure to the cyclical market.
Nearly 90% of our total revenue is now derived from infrastructure markets, which are driven by durable long term secular trend.
Which we serve with highly differentiated products and technologies.
Momentum lights up the optical fiber of the most advanced cloud carrier submarine and <unk> mobile networks across the globe.
The technology, we provide enables compute data and communications infrastructure to scale from there.
The performance.
Cost and power consumption standpoint.
We enable higher precision new materials, and cleaner and more energy efficient processes be used in the microelectronics industry.
The type of lasers, we supply are key to manufacturing of electric vehicles energy storage solutions and solar cells.
Our technology leadership position is stronger than ever due to successful investments in developing new products and technologies as well as the two acquisitions. We closed this past August .
We are now six months in.
Integrating these acquisitions and tracking ahead of plan, realizing overall cost synergies, which contributed to our profitability and earnings per share results being above our guidance ranges.
Our technology capabilities and manufacturing scale make momentum the innovation partner of choice for our customers.
We have the communication industry's broadest photonic capabilities, including high bandwidth coherent and direct detect optical components and modules ultra.
<unk> narrow line width tunable lasers.
<unk> optical amplification and wrote them solutions.
Coherent DSP and RF integrated circuits, as well as silicon and indium phosphide photonic integrated circuit.
In close partnership with our customers we enabled.
The deployment of the industry latest high capacity 400, 608 hundred G cloud and core network solution.
In addition, due to the escalating data traffic at the edge of the network customers are deploying our products originally developed for core network applications at the edge.
Edge or access part of the network.
Revenue from edge networking products was up 40% year on year in the second quarter and is now a major component of our telecom business.
We're confident that our technology leadership position in solutions for advanced compute data and communication infrastructure will continue to provide a tailwind for <unk> long term growth.
Now, let me provide some detail on our second quarter results.
Telecom and Datacom revenue was up 44% year on year, driven by organic and inorganic growth in telecom.
Within this.
Growth from telecom customers with substantially higher, but partially offset by inventory digestion at certain cloud customers.
Revenue growth continues to be limited by supply shortages of Ics from third parties.
We have made significant progress over the last year on closing supply gaps, which has enabled our growth to date.
At the end of the second quarter remaining IC supply shortages resulted in approximately $60 million of unsatisfied customer demand.
This is a modest improvement from the $80 million cap articulated in our last call.
Revenue was especially strong at products, which play into the industry's transition to 400 G and above speeds and next generation network, including narrow line width tunable lasers tunable Transceivers for network edge applications high speed coherent components and modules as well as our latest wrote them.
<unk>.
We achieved a new core.
Orderly revenue record and narrow line width, tunable lasers, which are key enablers of all coherent transmission solutions, including 400 gig ZR and ZR plus modules and.
And our customers' latest 600 gig and 800 gig transmission system.
We also set a quarterly revenue record with our tunable Transceivers for network edge applications, where a growing set of cable msos and wireless network operator customers use our modules to expand data bandwidth in metro access fiber deep and wireless <unk> front haul.
<unk>.
Coherent components, serving 400 G and above applications also achieved record revenue with approximately half of the quarterly revenue and coherent components coming from the highest data rate applications at 608 hundred gig.
Second quarter Rhodium revenue grew 45% in the same quarter last year due to continued strong demand and improved access to critical Ics.
Shipments of him by and wrote them grew 78% and high Port Count <unk> grew over 70% from the same quarter last year, representing a broader adoption of these next generation <unk> with market leading customers.
As anticipated inventory digestion at certain cloud customers and their module manufacturers resulted in a sequential decline in datacom laser chip revenue.
As highlighted on our last call, we expected the hyperscale customers to reduce their inventories of our laser chips during the second quarter.
And now we expect that this will continue throughout most of calendar 'twenty three.
Looking ahead on the technology roadmap cloud data centers will be designed for artificial intelligence and machine learning applications, which bodes very well for us as we extend our technology leadership to even higher speed laser chips.
We are on track with our 200 gig per lane <unk> core one six terabits per second application and expect to enter production as we exit fiscal 'twenty three.
We are also broadening and diversifying our product portfolio for intra data center applications with differentiated high speed vessel.
<unk> and high power CW lasers, and receivers photo diodes for Silicon Photonics solutions.
For example, we expect to ramp production of our new 100 gig per lane Nixle during fiscal 2000 port.
This is a major new opportunity for us and addresses the accelerating transition from copper to optical fiber and shorter reach datacenter applications, especially those for machine learning and artificial intelligence.
Turning to industrial and consumer Q2 was down from Q1 as expected.
During the quarter, we saw incrementally weaker overall demand for consumer pixels.
We continue to focus on ramping new automotive and industrial applications for our technology.
In the second quarter, we recognized approximately $3 million in revenue from automotive and Iot applications and we expect this revenue to grow significantly in the coming years as these opportunities ramp.
At this year's CES show.
Strong customer engagement across all applications with <unk> sensing and lidar, including from numerous automotive customers.
We have a broad multi pronged approach to solid state lidar and automotive with a wide range of design wins with market, leading customers, who are pursuing a variety of in cabin and light our approaches.
In the second quarter commercial lasers revenue was up 7% sequentially and 16% from the same quarter last year.
Well fiber lasers for metal cutting and welding continues to be our largest commercial lasers product line products for emerging high growth applications in solar display and electric vehicle manufacturing are becoming more meaningful.
We now expect them to increase in our mix in the coming quarters.
Underscoring this ultrafast laser revenue in the quarter more than doubled from the same period last year due to expanded use case.
Attempt to ablate laser was recognized with the 2022 innovators award at laser focus world due to our innovative design, which enables faster processing time and micro machine the applications for OLED displays.
Conductor Ics printed circuit boards and solar cells. We are very excited about our lasers product roadmap, which will expand our addressable market further in the coming years.
I'm very confident about momentum future, given our differentiated portfolio of innovative products and technologies.
Our strong foundation of intellectual property and our significant opportunities for long term growth in the cloud networking and advanced manufacturing markets.
I'm also very confident in our ability to grow into adjacent markets extend product leadership and expand profitability over the long term.
In addition, we have made tremendous progress towards achieving our corporate responsibility goals, including our drive to a net zero carbon footprint by 2030.
Momentum has also been named by Newsweek as one of America's most responsible companies for a second consecutive year in recognition of our achievements in ESG.
Finally, I would like to thank all of our employees around the world for all their hard work and resilience as they continue to execute upon our strategy.
With that I'll turn it over to watch it.
Thank you Alan net revenue for the second quarter was $506 million, which was above the midpoint of our guidance range net revenue was flat sequentially and up 13, 3% year on year.
GAAP gross margin for the second quarter was 32, 8% GAAP operating margin was negative four 3%.
GAAP diluted net income per share was a net loss of 46.
Primarily driven by one time charges related to acquisitions and restructuring activities.
Quarter non-GAAP gross margin was 44, 9%, which was down sequentially and year on year as expected.
Primarily driven by product mix, including new Photonics revenue.
During the quarter, we incurred $11 $7 million, an extra ordinary charges to acquire IC components from various brokers to satisfy customer demand. These incremental charges were excluded from non-GAAP gross margin as disclosed in our filings.
Second quarter non-GAAP operating margin was 23, 1%, which decreased sequentially and year on year due to product mix, including from our recent acquisitions, but was above the high end of our second quarter guidance range second quarter non-GAAP operating income was $116 7 million.
And adjusted EBITDA was $133 4 million second quarter, non-GAAP operating expenses totaled $110 3 million or 21, 8% of revenue.
SG&A expense was $45 9 million R&D expense was $64 $4 million interest and other income was $5 1 million on a non-GAAP basis due to higher interest rates on our cash and investments second.
Second quarter non-GAAP net income was $104 1 million and non-GAAP diluted net income per share was $1 52, both of which were above the high end of our guidance range provided on our last call net income per share performance was in part driven by accelerated acquisition synergies.
<unk> our cost savings actions taken late in Q2 and higher interest income on our cash and investments I will provide more color on our structural cost improvements in the guidance section of my prepared remarks, our fully diluted share count for the second quarter was $68 6 million on a non-GAAP .
Our non-GAAP tax rate remains at 14, 5%.
Moving to the balance sheet, we ended the quarter with $1.68 billion in cash and short term investments, which was up $55 5 million from Q1.
During the quarter, we had some one time restructuring costs as we accelerated the attainment of acquisition synergies and drove some structural cost reductions.
Turning to segment details second quarter optical communications segment revenue at $448 $8 million decreased 1% sequentially, primarily driven by a decline in the industrial and consumer which was mostly offset by growth in telecom and datacom.
Optical communications segment non-GAAP gross margin at 43, 9% decrease sequentially and year on year, primarily due to product mix and the impact of the Neo Photonics acquisition, our second quarter laser segment revenue at $57 2 million was.
It was up seven 1% sequentially and up 16% year on year second quarter lasers gross margin of 52, 4% was approximately flat sequentially.
Now, let me move to our guidance for the third quarter of fiscal 'twenty, three which is on a non-GAAP basis and is based on our assumptions as of today when.
When we acquired Neo Photonics, we highlighted $50 million and synergy opportunities with $20 million in annual operating expense opportunities within the first fiscal year and then another $30 million cost of sales synergies as we exit the second critical year.
Have already exceeded our $20 million cost savings target.
Operating expense synergies over the last six months of integration activity, we have executed well on our operating expense reduction plans and are confident we will exceed our initial synergy targets in December we took additional actions that will structurally improve the long term operating costs of the company.
The benefits of these actions is reflected in our diluted net income per share guidance for Q3.
As we execute on our integration and synergy plans I will provide more details in future quarters.
Our Q3 guidance reflects our expectation of reduced cloud and consumer end market revenue.
By constraints on telecom products and a few million dollars sequential decline in lasers revenue.
We expect net revenue for the third quarter of fiscal 'twenty three to be in the range of $430 million to $460 million. Our Q3 guidance incorporates approximately $60 million of impact to revenue driven by continued shortages of third party components based on this we project third quarter.
Operating margin to be in the range of 17% to 19% and diluted net income per share to be in the range of $1 to $1 15.
Our non-GAAP EPS guidance for the third quarter is based on a non-GAAP annual effective tax rate of 14, 5%. These projections also assume an approximate share count of 69 4 million shares.
Turning to our annual outlook due to substantial structural improvements in our operating expenses and tight cost controls, we anticipate fiscal 'twenty three EPS will be above the midpoint of our previous fiscal 'twenty three outlook of $4 65 to.
$5 65 per share.
To a new range of $5 15.
The $5 45 per share.
We expect that our fiscal 'twenty three revenue will be at the low end of our previously articulated annual outlook of one $9 billion to $2.05 billion.
This implies Q4 revenue will be approximately flat from Q3, given our assumption of growth in our telecom and Datacom business off.
Set by seasonally lower consumer revenue, we expect that Q4 will still be constrained by IC supply.
I am extremely pleased with the progress our team has made in synergy attainment and we are now in an excellent position to exceed our $50 million synergy savings target with.
That I will turn the call back to Kathy to start the Q&A session happy.
Thank you <unk> 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.
Now, let's begin the Q&A session.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad.
You'd like to withdraw your question. Please press star followed by two when comparing to ask a question. Please ensure you're on mute locally.
Our first question comes from Simon Leopold of Raymond James Simon. Your line is open. Please go ahead.
Thanks for taking the question I wanted to see if maybe you could build a bridge or unpack a little bit more.
The outlook for the telecom and Datacom segment being down in the March quarter, because I guess there are a handful of things that are contemplating as as factors, but just want to understand better than that.
No you've got some seasonal slowing from the Chinese new year simply the factory workers going home.
Wondering if maybe there is incremental supply chain issues baked in or whether we can attribute the decline more to the weakness youre seeing from Hyperscale just looking on pack that drivers. Thank you.
Yes, thanks for the question Simon.
Yes, our guidance for Q3.
Telecom datacom coming down really mostly because of the.
Slowing and cloud customer and the supply chain that goes into the cloud.
And we are still continuing to have challenges with semiconductors as we indicated in the in the in.
In the script, we still anticipate $60 million of.
Slide demand primarily in telecom.
Got it.
As we exited the third quarter.
Thanks.
Quick easy hour.
Yes, it's pretty simple.
You did mention earlier cost synergies coming out from the acquisition.
And you exceeded your own guidance on earnings.
Just wondering what you had baked in.
When you provided the original forecast for the synergies and how much youre exceeded them by roughly you were about $11 million to $12 million below our opex assumptions and I'm trying to just make sure I understand where it's coming from.
Yes, hi, there Simon yes, so probably for the fiscal quarter Q2.
We were able to impact operating expenses by about $5 million to $7 million.
Incrementally better in the quarter than we had thought coming in.
To the quarter.
From a total synergy standpoint, basically what's happening is that the first year synergy targets that we had set for ourselves have gotten pulled into the first six months.
And so we're being able to see the benefit of that.
Undoubtedly in our fiscal Q2, but in the fiscal Q3 and fiscal Q4 outlook.
We've provided given that we've got a lower revenue level.
We're at the lower end of our previously announced outlook on revenue. So that's really what's happening from a from a synergy standpoint.
Okay. Thanks, Simon Thank you.
Our next question comes from Tom O'malley of Barclays. Your line is open. Please go ahead.
Good morning, guys. Thanks for letting me ask a question here I just I just wanted to ask on the industrial consumer and particularly the <unk> sensing side in December .
When you look at that market, you've talked about a normalization of share for a while now but I just wanted to get an update there in terms of normalization or do you view that market is split equally or do you see yourselves, losing additional share there just because if you look at the numbers between the two view it looks like share's moved away.
Any comments on what is a normalization of share and where that stands today. Thank you.
Yeah, I'll give you my thoughts on it and then Chris can chime in as well.
We've been talking about sure sure normalization for years now and it is.
Finally come in if you look at.
Our reduction in <unk> sensing revenue year on year.
Cut in about half and so that's what we would have expected I can't comment on what our competitors are saying or doing but.
Everything is coming in as we expected Chris you have additional comments on that.
Yeah, I would just echo it's difficult.
Compare to competitors, but certainly.
They sell more than VIX holes and sell into more than just three D sensing and the sensing application universe.
And as Alan highlighted.
We expect it to 50% down.
And the first half of this year and that's what's happened in that baked in our expectations around share.
As well as other normal year over year.
Price downs and things like that.
Got it and then just as a follow up.
Through the December quarter, you saw some of your end customers actually beat estimates quite quite robustly and they called out supply chain kind of work throughs.
Could you just talk about your guiding that telecom business down into the March quarter can you talk about what the supply chain looks like with your end customers do you see inventory on their balance sheets obviously.
They are beating on the revenue side, but they're talking about backlog coming down just any update on the health there of that ecosystem just given the fact that you kind of see March down and then Youre, indicating June flattish from a total company perspective, so any comments there would be helpful. Thank you.
Yes, sure Tom I'd say, our network equipment and network equipment manufacturing customers backlog are continuing to be very robust.
Their inventory is growing as you say and we can see it on their balance sheet, but.
Their demand on us is extremely strong.
Soft part of the market that we see is where the customer is the cloud service provider, but given the backlog at our customers.
Don't see that as a huge concern over the long term as the carriers are continuing to have to invest to meet the ongoing continued growth in bandwidth demand.
Yeah, and I'd add only that.
Tom your suggestion that well revenue going into the fourth quarter, maybe at the company level flat as we said in the prepared remarks, obviously theres additional seasonality in <unk> sensing and so we expect telecom to go up into the fourth quarter.
Our telecom and Datacom.
<unk>.
Okay. Thanks, Tom. Thank you. Our next question comes from Christopher Rolland of GE. Christopher Your line is open. Please go ahead.
Thanks for the question guys.
Yes. My first question is around gross margin.
So if I look at optical comms in particular, you guys were kind of mid 50 is a little over a year ago mid Forty's now can you talk about.
The trajectory as we look forward.
Is this is this now the trough.
And what does that kind of recovery in gross margin look like.
When might we be able to get north of 50 again for <unk>.
That business.
Yes, hi, there, it's wajid I'll start off on that yeah. So you're absolutely right. Our gross margins have come down year over year, primarily because.
Our chip businesses, both our Datacom business in our three D. Sensing businesses have historically had higher gross margins than the rest of our telecom.
And transmission product lines and so as we've seen the mix shift we had highlighted very early on with the Neo Photonics acquisition that we would see a.
A shift from a gross margin standpoint, now we've been able to offset some of that as we've started.
Going through our synergy actions and as we go through the $30 million of synergy actions that we had highlighted.
At the onset of the acquisition and we've highlighted on that recall after that.
We expect that most if not all of that benefit.
We will actually come through in our op comm gross margins.
With the factory consolidations in the backend consolidations that we see happening in executing on.
We've actually already begun most of the planning on it but as we execute on it in fiscal 'twenty four we will see the benefit of that come through as well you've noted that we've talked about the inventory digestion.
Happening over the next couple of quarters within our Datacom product lines and as that recovers.
Should see favorable impact as those revenue levels increase as well so that's really our path to increasing our gross margins in our op comm business.
Yes.
That's fantastic and then just following up on op coms as well two other kind of lines of questioning first of all I wanted to follow up on your Datacom.
So I believe you pushed out that weakness from the first half to the full year.
Was wondering.
Did you just get a fresh view on the amount of inventory.
At cloud customers I'd like to know why that was pushed out and then also if you could perhaps talk about this migration from 400 to 800 does that play into this as well and then finally in outcomes wrote them.
And anything on that market and would you believe your supply.
Normalized with demand at this point.
Yes, that's quite a follow on.
So I'd say the change in Datacom outlook.
In duration of the digestion two fold one is inventory we knew the inventory was there.
Secondly is the cloud growth and the capex spending over the cloud providers.
If their growth slows their need to deploy more data centers and the interconnection of those data centers less and so that's why we wanted to set expectations that it's going to take a few quarters to get through that inventory I would say the migration to 800 gig is just economically.
Is the right thing to do for the those cloud providers and so they are very excited to make that transition and as we said that transition will happen.
Late this fiscal year and ramp through fiscal 'twenty four.
And then on rhodium supply I'd say that the primary area of <unk> and wrote them line cards, where we're being impacted the most with respect to the supply chain challenges at Ics, we have so.
I would say.
70% year over year growth on high end and contingent within by and is a pretty good indicator that those are the products that are leading the market and we expect continued growth in that market as new networks get deployed.
We're really excited about the progress on <unk> and next generation <unk> that we expect to come out in fiscal 'twenty four.
Chris do you have anything to add on any of those topics.
Yes, Matt I would say that that the.
Transition or I wouldnt call. It transition the add of the 800 gig because I think 400 gig is still.
Going to grow over the next N number of years and as 800 gig is added that only adds to the opportunity and as we've highlighted in the script that the exciting opportunity for us we're participating today in some certain 800 gig architectures that are just just beginning to hit the market, but as we <unk>.
Produced 200 gig E. <unk> that enables an even more cost effective 800 gig architecture, and so a great opportunity for us and.
There's not a lot of inventory of that given that's brand new right. So that should be something thats incremental.
Yeah.
Thank you Chris.
Thank you. Our next question comes from stomach cancer <unk> of J P. Morgan stomach. Your line is open. Please go ahead.
Yes, hi, thanks for taking my questions I have.
Maybe if you can start on supply and I'm curious you indicated the supplied.
Slide backdrop, improving modestly.
As you look at the March quarter.
The feedback that you've seen from the industry is.
Even though the broader sort of supply environment is improving the problems quickly and on Ics might be broadening to more suppliers than before.
Just wondering what are you seeing are you Jim.
Leasing just sort of consistent improvement across your supply base or is it sort of similar to what the others are the feedback that we've received that the problem might be broadening across more suppliers not kind of a follow up thank you.
Yes, I'd say in general.
Things are better.
But as we've said all along we need all of the parts to be able to ship a product and so.
As we see analog Ics and even passives become a problem.
Or D commitment we've seen.
<unk>.
More decommitments last minute do too.
Factory issues or COVID-19 issues or what have you.
It's not behind us by any means and so I'd say, we're seeing exactly what you said which is.
General improvement, but.
Still have problems that we're working through and surprises that we've incorporated into our guidance.
Alright, okay.
And just to follow up on Datacom I think some of the automotive market you would make those that have reported have indicated that the 200 gig plus more deals that are doing well with the cloud customers.
It seems to be a ramp on that front, just wondering sort of.
If we should be thinking about your datacom business being positioned differently with the Martin you would make goes what do you mean the question was that you work with.
Also sort of give us some guide.
You didn't say dumps off is there sort of another leg down when do we think about datacom revenues from.
These levels that you're seeing as you indicated sort of draws out through the end of deal are there what do you see more risk in terms of additional step downs.
Sort of what are you seeing with inventory with the customer. Thank you.
Yes, I think sandvik this is Chris I'd clarify that.
The module makers are our customers and so.
I think as we maybe alluded to in the prepared remarks that.
Our view is that there is inventory digestion, both at the cloud operator.
Buying transceivers, but as well the transceiver manufacturers that are our direct customers also.
Have high levels of inventory. So you can imagine a scenario where.
They are continue to shift.
Using or leveraging our chips that we've already provided in terms of a leg down.
Zinc and we've highlighted this previously that the March quarter or timeframe is is where we see.
The low point for us in the.
Datacom chip business I think the new development logistics.
Back up from that point is probably going to be a little more gradual based on the latest discussions with industry participants.
Great. Thank you Shannon.
Thank you. Our next question comes from Alex Henderson of Needham Alex. Your line is open. Please go ahead.
Great. Thanks.
I was hoping you could talk through the dynamics around pricing typically the March quarter.
10%, 15% type price declines in it.
Are we seeing any of that.
Pricing is much flatter this year than traditional <unk>.
Similarly on.
On the flip side of that what are you seeing on the supply chain side.
Pricing to you.
Obviously, you've talked about $60 million and constraints, but what about on the pricing side.
And the margin impact of the <unk>.
Apply chain.
A piece of the equation.
Can you give us some guidance on that and then as Youre looking out into the.
The June quarter do you expect this inventory correction to result in some non seasonal pricing changes. Thanks.
Yes, Alex.
I would say that Youre right.
Pricing environment with between Us and our customers is very different than the 10% to 15% in some cases prices are actually going up.
But overall, we're in this for the long term with our customers and so we're trying not to take advantage of the short term with really focusing on helping them win in the market and helping us have long term supply agreements with our customers. So.
The price dynamics are very very different and youre right its much much flatter than traditionally.
I'd say pricing to us from our suppliers.
Has moderated with respect to the price increases we saw a year or so ago.
That said, we're still going out to the broker market.
When we need to to satisfy our customer demand.
We're having to pay spot buy.
Premiums.
That impact our cash.
We're seeing less of that.
Frankly.
More recently.
But we're still in that game for some period of time and then in the June quarter. Your inventory digestion question does that around datacom or debt.
Is that something so.
Well.
There is ultimately as things start to normalize given the flatness of pricing over the last two years does that pricing start to creep back into the equation.
A downward pressure maybe on the non seasonal basis.
But rather on a cyclical basis.
I see okay, yes.
Said earlier, we're working with our customers too.
Try to satisfy their short term needs for price reductions, but also our longer term needs to have.
Agreements in place that extend a year or two.
And that's what we're working on a win win solution with our customers that would then ensure that we have set prices with them and we have set share agreements with them.
Extend beyond the short term.
So I'd say that as inventory, whereas supply becomes available that 60 or $70 million of unsatisfied backlog will be satisfied, but we don't see that happening in the June quarter. We see continued challenges as we need to get the the semiconductors in house by April in order to make the shipments for June .
We're still seeing challenges and think it's going to go into.
Early into the second half of the calendar year.
Second follow up question is on the technology front, there are a couple of moving pieces that.
I was hoping you could address the first one is that we've heard that there is a new.
Module going into the.
Primary three D sensing customer.
And the new additions that that is pretty meaningfully changed from the prior module and I'm wondering if that is a function of your design or somebody else's.
And then second.
You talked about delays in the timing and the ramp.
On the Datacom I'm, assuming that that is not a relation to any missed windows on getting the new products up and then third off of this.
Broader question.
<unk> is taking off in most of the cloud customers is there a impact from changing the architecture of the Datacom.
Telecom.
Network for AI impacting your business.
Can you address the technology side of those those key pieces. Thanks.
Yeah, Thanks, Alex Great question.
Maybe kind of started with the Datacom and then circle back around to <unk> sensing so in the Datacom side of things.
The.
Period.
Uh huh.
Extended digestion.
Is not driven by any missing any product window I think it just is generally driven by.
Cloud Capex trends end to end.
Perceived probably.
Economic outlook by customers or end customers in terms of the AI architecture, Yes, I think that it's a tremendous opportunity for momentum and folks like momentum.
Because not only talk about transitioning to higher speeds, but youre looking at copper moved into optical and very inter connect.
Dense or rich architecture.
And therefore, we expect an acceleration in volumes and as we highlighted in the prepared remarks, we're broadening our technology or product offering within the Datacom portion of bar Telecom and Datacom business. We've been really focused on <unk>. That's what we had when we.
Got out of the module business, but over the past couple of years expanding.
Nixle photo diode.
High power lasers for Silicon Photonics, and CPO architectures, So we'll have a broader.
Product off.
Offering that plays into this very rapidly expanding interconnect dense or rich AI architecture typically around the three D sensing yet not sure what is being referenced but.
I don't think its appropriate to comment or speculate on a specific customer program or are what's going to happen next year, we remain focused on being the innovation partner and the best proven supply partner for our customers and we remain very competitive in that space.
Okay. Thank you Alex.
Thank you. Our next question comes from meta Marshall of Morgan Stanley .
Is open please go ahead.
Great. Thanks.
I know, we've kind of circled around it but I guess I was just surprised to see the broker fees increased pretty meaningfully this quarter from the past couple of quarters and so just wanted to get a sense of was that some acute increase in fees towards the end of the quarter just as some of the China reopening.
<unk>.
Pieces made the environment, a little bit more acute.
Or just kind of what led to kind of that pretty dramatic step up and then just it seems as if youre, saying they'll step down but just.
You expect to kind of go back to some of the more normalized.
What is your view that we'd get back to a less dramatic broker fees being paid and then maybe just follow up question for me just any update on kind of the DSP development efforts.
Hi, Matt.
I'll start off with the broker and then Alan can talk about the DSP side of it basically what you saw happening is as inventory was being flushed out.
With the increased supply the broker charges were a little bit higher and so the reason they were lower last quarter is not because our purchases.
Were lower but it was really just the time that it took for it to go through the lead time offsets in our manufacturing process pick up the rest of the components that were needed in order to ship the final product.
And so with the improvements we saw.
In fiscal Q2, and our ability to actually deliver to our customers you would see a corresponding increase in.
And that charge simply because of the swing from inventory into cost of sales.
It's more of an accounting matter rather than a business issue, we have actually seen our purchases.
Core broker bought inventory decrease and we expect.
The decrease in the coming quarters as well as its just a couple of components suppliers that we are now struggling with to fulfill our demand Alan DSP.
Yes, thanks for the question.
Yes, very excited about the team.
We brought on from the IPG IPG acquisition.
Not only on DSP, but also rfc's from Neo photonics and what Boe.
Both companies are both acquisitions bring to us on silicon photonics.
But on the DSP front, we're focused primarily on getting the tape out done for our first USB and continuing to drive our roadmap, but primary focus is get the tape out done get the product into.
ZR and ZR plus module.
And then.
We'll see what happens from there are primarily primary focus for the DSP is internal consumption.
To really drive the cost of the ZR type module down to the lowest possible.
Cost point.
And DSP was the last piece that we needed. So we have all of the other components. If you look at the D. R.
Tunable laser modulator receiver RF Ics the DSD, we've got at all so we are the broadest range of broadest proved.
Provider vertically integrated on that on those module and so as we finish up that DSP I think we'll have a <unk>.
Very very competitive offering at 400 G. And then we're going to we're going to continue to work with the merchant market on next generation DSP, but.
We are.
Going out our roadmap and building up the team to be able to do more than one DSP at a time, so very very exciting time.
Thanks Peter.
Our next question comes from George Nasser of Jefferies. George Your line is open. Please proceed.
Hi, guys. Thanks, very much you mentioned that you made some organic cost reductions in the business I guess I'm just curious about.
What segments of the business you are taking cost out.
What what types of costs anything you can tell us there would be great.
Hi, George it's mostly on the G&A side, a little bit on SG&A, but primarily the reductions that we saw.
During the quarter were on.
On the G&A side, where we see a little bit of opportunities from a product rationalization standpoint.
We're doing that as well, but any savings that we're getting from that we're reinvesting into R&D. So thats really the way to think about it.
Yeah.
Got it okay. Thank you very much and then.
Any any sense for what the new photonics contribution was in the quarter.
In terms of revenue impact.
I know you guys gave us the number for last quarter I think it was $73 million over two months, but just curious what that looks like now.
Yeah.
Hey, George This is Chris yes, as we.
<unk>.
Well along in many of our integration plans, we're not going to be breaking out any separate Neil photonics contribution.
<unk> teams are one team working together products are beginning to be rationalized. So it's a little difficult to say what is new photonics, what its momentum at this point, where all the mental.
Yeah.
Okay. Thanks, so much Josh.
Thank you. Our next question comes from Ruben Roy of Stifel. Your line is open. Please proceed.
Thank you. Thanks for letting me ask a couple of questions here I had a follow up for Chris on the commentary around <unk> sensing I just wanted to make sure I understood. This correctly Chris.
When you think about the drivers of the downtick in the business you've got overall demand you've got shared share, which you've talked about and pricing I believe you said pricing the pricing environment is normal.
And you did talk about the share kind of being kind of where you thought it was going to be so the way to think about it I guess for this fiscal year is demand obviously lower.
But as you look ahead with consumer now down around 10% or so of revenue.
Do you think the pricing environment.
The environment is going to be similar for next year do you think we're going to grow off of that level any detail there would be helpful. Thank you.
Yeah.
I would say.
As you highlighted the year over year performance.
It's primarily driven by the share normalization as we've talked about we've had an outsized share position for many years and so it was really just a question of when and how steep that.
Reduction would come now that were more normalized.
I think that that is largely behind us pricing.
As you indicated is normal there is nothing unusual going on there over the past five.
Five years of this prices have come down in general unless there's a change in architecture. If you will where chip gets bigger or smaller that causes an adjustment in price and then from that point forward there tends to be more.
Year over year price downs like we we get from our IC suppliers and.
It's very normal as volumes go up.
This this year, obviously in the past near term the last quarter and looking ahead, there's obviously more going on there with regards to supply chain disruptions that our customer and perhaps.
Lower consumer demand.
But I think as we look ahead, our focus is on one.
Continuing to.
Do well and be a customer's innovation partner of choice in the consumer space, but as well broadening out into other new applications. We've got extended reality, we've got automotive and then perhaps even more exciting over a longer timeframe is in the industrial markets, where sensing technology.
<unk> will impact manufacturing <unk> warehouses, and that's an area where.
Not only can we supply lasers, but we can supply modules and subsystems leveraging a much broader base technologies.
Momentum offers so I think theres a lot of tailwind more broadly when we start talking about these expanded use cases and new applications. These new applications, perhaps higher.
Dollar content.
And.
Things like automobiles as an example or even.
Extended reality headsets tend to have more sensors per a given device so that amplifies the dollar content opportunity per unit.
Does that answer your question.
It really does thanks from all of that detail, Chris If I could just ask a very I hope a quick follow up in terms of the initial revenues being recognized out of auto Iot et cetera, how would you characterize those revenues or those sort of still proof of concept revenue. So I guess, what I'm trying to get out is is there.
Line of sight to an inflection in some of those non consumer markets for <unk>.
I'd say, it's more than proof of concept.
Especially in China the adoption of.
Lidar is becoming a reality.
So I'd say that the inflection point isn't in the very short term with respect to ramping but I would say that these are going into vehicles that.
Going out on the road and so.
I'd say that fiscal by the end of fiscal 'twenty four we should see.
A meaningful pick up.
In that business and we're excited about the broad range of.
Of customer engagements that we have and the design wins that we've been awarded so.
It's more of a long term investment.
<unk> to make and.
In the coming years, it should be more meaningful.
Thank you Ruben.
Thank you. Our next question comes from Ananda Baruah of loop capital. Your line is open. Please go ahead.
Yeah.
Hey, Thanks, guys. Good morning, Thanks for thanks for taking the question I.
I guess two quick ones, if I could Chris.
Chris you had mentioned that.
It was mentioned.
In the slide deck provides that saying that the demand was softer than anticipated.
Was there.
Production component to that as well as demand and end market component to that as well and then just a quick follow up.
Yes.
And I don't think there was any production component limiting us it was generally focused on customer demand and I think the factors that we've highlighted.
Customer supply chain disruptions.
That really impacted.
The second quarter being a little bit below where we had originally thought if you recall. These disruptions maybe began slightly before our last earnings call, but a continued if you will through the remainder of the year.
Yeah.
Got it helpful.
And how would you guys characterize the transceiver business right now and.
You have seen the demand transpire as an end to end customers.
And I guess any impact from trade inventory that you're seeing among customers and that's it for me. Thanks.
Yeah.
Are you referencing Datacom Transceivers telecom transceivers.
It sounds like we lost another well to be clear.
Oh go ahead.
And my back yes, I'm, just trying to get at in the Italic specifically.
Yes, so I would say that you're probably referencing Z yes.
Dr Transceivers coming out of in Dci modules, and things are going well on that front.
We participate in the transceiver market, both by supplying to other transceiver vendors and Thats the bulk of the.
The revenue participate in that market today, but as Alan highlighted.
We have our own ZR ZR plus business.
With the new Photonics acquisition.
Good design wins.
And our big focus today is leveraging the combined company's capabilities to bring costs down and drive more design wins, and we anticipate that will be a tremendous growth opportunity for us over the next couple of years given that that the <unk>.
Our <unk> markets.
Going to be a multibillion dollar market.
And especially as the transition to 800 gig long term tailwind.
Thanks Ananda.
Thank you. Our next question comes from Vivek Arya of Bank of America Merrill Lynch. Your line is open. Please go ahead.
Thanks for taking my question I'm trying to understand whether your commentary about datacom demand being soft is that momentum specific.
A single customer a single product type tank or does it.
Rod commentary on Datacom demand being softer.
As an industry across the board for most of the year.
Okay.
I would say that it's more end market softness in the cloud providers and so.
For momentum, we sell Datacom chips to both the cloud providers as well as the module manufacturers and as the crowd.
As the cloud providers slowed the deployments of data centers. They slowed this appointment.
Consumption of Datacom modules and so what we're seeing is is that inventory being depleted but the.
Slower growth of.
Cloud.
That has been very public from those end customers.
Basically close the consumption of what was originally thought to be much stronger and so our.
Our view on this is a temporary issue that we will get through and very excited about the broadening of product.
We address AI and machine learning so.
I wouldn't say, it's a momentum specific it's more of a in the market.
Change that we've seen that's temporary.
Understood and for my follow up.
Realistically does your three D sensing business start to grow with a normal seasonal pattern from September onwards, or we should still be looking out for any sequential share shifts that could prevent that from happening I just wanted to make sure that at this point.
What youll see has share normalized out or is there any.
More to go on a sequential basis as they get to a better second half calendar half of the year. Thank you.
Yes, I mean, I think that that business will continue to be.
Sure.
Seasonal if you will so we expect going from third.
Third quarter into the fourth quarter would decline and then fourth quarter going into the first quarter would grow so.
So yes, we would we would expect that seasonal factors will become.
More significant than they have in the last couple of quarters for that normalization process has unfolded.
Yes, Thank you vivek.
Our next question comes from Mike <unk> of Rosenblatt, Mike. Your line is open. Please proceed.
Okay.
Okay fantastic Thanks for last.
I wanted to ask somebody else has asked about the commercial lasers business. It was up to $57 million all time record guiding it sequentially down.
Can it get bigger than that can you eventually get into the <unk>.
Whats the immediate medium medium term outlook for commercial lasers.
Yes, we're very excited.
Excited about lasers in the growth year on year, our laser business grew 30%.
And the trailing 12 months and so we're gaining share in lasers and Thats really.
Due to the innovation and new product introduction as we talked about the new markets that we're getting them. So.
Would fully expect it to continue to be able to grow over the long term as we introduce new products, especially in our ultrafast lasers.
Which is getting great adoption by these new market. So yes.
Yes.
We're excited about the long term outlook of organic growth and on the lasers business.
Okay great.
Question is just on telecom.
As you think about again, the medium term or couple of year to three year outlook for telecom is there still confidence that this is a.
Sustainable double digit growth market for multiple years.
Yeah.
Yes.
I'll give you my comment or has that has that changed with the <unk>.
Well, I think certainly macro headwinds and uncertainty.
Uh huh.
Not not thinking that every year, we're going to be 10% every year I would say long term growth of bandwidth requirements.
And if you look over time it grows at 10% and so I think.
Over the midterm to your point.
Setting aside what happens in the economy.
<unk>.
The the trend rate or the growth rate should be 10% of telecom, Chris do you have any I think that.
Yes, and I think the only thing I'd add is that on a pro forma.
Form of ACO that momentum plus Neil had we been together a year earlier, the telecom and Datacom business certainly opt in.
Teens percent, if you will in the first half of <unk>.
Our fiscal 'twenty three compared to the first half of fiscal 'twenty. Two so so the growth has been there despite the.
The supply chain challenges and a softening.
Softening or the digestion of inventory coming from the cloud and market. So I think that's demonstrated.
And our customers having tremendous backlog is also very encouraging so I think that opportunity is there, but obviously as you pointed out there is macro factors that that that loom out there that I don't think anybody has seen impact.
At our customer level at this point, but.
Very difficult to handicap as they look out the next year or next two years.
Thanks, Mike.
Thank you Mike.
Yeah.
Unfortunately this is all the time, we have for the Q&A session. Today, so have that kind of too Alan Lowe for any closing remarks.
Great. Thank you Charlie I would like to leave you with a few thoughts as we wrap up the call I'm very excited about the tremendous opportunities ahead of us as we scale our business to serve the exponential growth in network bandwidth and the artificial intelligence machine learning mobile carrier and cloud computing markets.
We have a proven playbook to win with our best in class products and technologies and to leverage. These technologies in other markets. We are committed to investing deeply in innovation and our manufacturing capabilities to deliver on customer needs today and into the future with that I would like to thank everyone for attending.
Dean.
And we look forward to talking with you again at like 2023 momentum Investor Technology event on March seven at the OFC Tradeshow, you'll find registration information about this event and other upcoming investor events on our website. Thank.
Thank you very much for attending.
Yeah.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
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