Lumentum Holdings Inc. Q3 2023 Earnings Call
Good day, everyone and welcome to the momentum holdings third quarter.
2023 earnings call.
Participants will be in a listen only mode.
Please note today's event is being recorded for replay purposes.
During the presentation you can register to ask a question by pressing star followed by one on your telephone keypad.
At this time I would like to turn the conference call over to Kathy Top Vice President of Investor Relations. Mr. <unk>. Please go ahead.
Thank you and welcome to momentum fiscal third quarter 2023 earnings call. This is Kathy Todd.
Tim as Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer at <unk>.
Ali 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 and beliefs regarding synergies that recent acquisitions, including Neo photonics financial and operating results macroeconomic trends trends and expectations for our products and technology are Ed markets market.
Opportunities and customers and our expected financial performance, including our guidance as well as statements regarding our future revenues financial model and 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 the SEC, including the risk factors described in the quarterly report on Form 10-Q to be filed for the quarter ended April one 2023.
The forward looking statements provided during this call are based on momentum as reasonable beliefs and expectations as of today.
<unk> undertakes no obligation to update these statements.
As required by applicable law.
Please also note that 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.
The mentioned this press release with the fiscal third quarter 2020 results and the accompanying supplemental slides are available on our website at www Dot <unk> dot com under the investors section.
That I will turn the call over to Alan.
Thank you Kathy and good morning, everyone.
Third quarter results were within the range, we announced in April and we believe we are currently under shipping end market demand across our business.
Customers, who had built up large inventories due to supply concerns are bringing down inventory the supply risks and constraints are.
I'm confident about our overall competitiveness and market share positions.
Optical communications and commercial lasers segment.
Believe that mid to long term demand trends are very favorable.
Data traffic will continue to grow at a relentless rate and networks and data centers will need to keep pace with a double digit increase in data capacity each year.
Momentum ability to both functionally and vertically integrate co product is a key differentiator for us.
And will enable our customers and they come in carrier and special Division Multiplexing era.
As more and more optical fiber lit up across the globe.
New automotive solid state Lidar and industrial applications are emerging Brook, photonics, where we lead and reliability performance and manufacturing scale.
Our commercial lasers business is expanding beyond our traditional applications into high growth areas such as solar cell.
Semiconductor electric vehicle and display manufacturing.
In the nearer term, we are prioritizing expense control accelerated attainment of acquisition synergies and cash generation, while we continue to deliver on new product and technology roadmap and customer satisfaction.
Now, let me provide some detail on our third quarter results.
Telecom and Datacom revenue was down 24% sequentially, but up 20% year on year with sequential declines across most major product lines due to customer inventory digestion.
IC supplier did not significantly limit our revenue during the quarter.
Well, there's a mixed outlook among our market and product line.
Current visibility indicates that telecom and datacom demand start to recover from this customer inventory correction late in the second half of the calendar 2023 we have a growing set of cable msos and wireless network customers that are turning to our tunable excess molecules to expand data bandwidth in metro access fiber.
Deep and wireless <unk> front haul applications.
This is a significant multi hundred million dollar per year market opportunity for us, which we expect will play out over the coming years.
In the third quarter revenue from these products grew 17% sequentially and doubled year on year to a new quarterly revenue record.
Our new 25 G tunable excess module will be a key enabler for customers upgrading legacy fiber nodes.
Natural access networks, leveraging next generation distributed access architecture.
However, as we transition customers from <unk> to 'twenty five G. In the coming quarters, we may see some revenue lumpiness.
Our advanced programs are key enablers of our customers' next generation network architectures.
Just starting to be deployed giving us confidence and continued market share growth and future demand.
Well third quarter rotor revenue was down sequentially due to the customer inventory digestion I discussed previously it was up from the same quarter last year.
Year over year growth was driven by broader adoption of next generation wrote them by market, leading customers along with improved IC supply the adoption of coherent applicable module with wide network operators is another significant long term opportunity for us.
We are highly vertically integrated across the photonics and electronic components that enable high speed plausible form factors.
At OFC are 800 G E. R product demo was very well received by our customers.
Cloud data centers are being designed to support artificial intelligence and machine learning applications, which bodes well for us as we extend our technology leadership to an even broader array of products that enable higher capacity and lower power consumption and latency as we highlighted at well let's see.
We are on track with our 200 gig per lane emails for 800 gig and one six terabits per second application.
To enter production in the second half of calendar 2023 and ramp throughout calendar 2024.
Our high speed pixels are starting to be deployed for short reach connections within data centers, where optical communications are replacing copper connections due to data speed requirement.
Also as we highlighted at OFC momentum is uniquely positioned to develop new photonics solutions, including high power laser right engine in coordination with leaders in the high performance computing market.
Given the fast pace of innovation and the increasing demands placed on photonics technologies, we expect that the photonics market for AI will rapidly grow reaching the size of the existing Ethernet peptides market within the next five years.
Turning to industrial and consumer Q3 was down from Q2 and down year over year as expected due to smartphone seasonality and end market demand.
On the smartphone market, we continue to ramp new automotive and industrial sensing applications for an expanding set of customers.
Third quarter revenue had approximately $3 million of automotive related applications.
Our current automotive revenue reflects significant contributions from early adopters of automotive Lidar in China.
Recent engagements with a global set of tier one customers gives us confidence in new lidar revenue opportunities over the coming years as well as our confidence in our ability to significantly grow our revenue in this market.
We expect our fiscal year 'twenty for <unk> sensing revenue will be lower than that of fiscal 'twenty three due to our expectations around three D sensing and market demand.
Pricing and the possibility of an additional competitor on a certain socket opportunity in fiscal 'twenty four.
In the third quarter commercial lasers revenue was down 16% sequentially and down 6% from the same quarter last year.
We achieved over 70% year on year growth in ultrafast laser revenue, which was more than offset by lower fiber and solid state laser shipments.
Our growth in ultrafast lasers is being driven by new applications, particularly in solar cell manufacturing.
We expect that as these new laser applications grow we will gain further share in ultrafast lasers.
Based on the latest customer forecast, we expect commercial lasers demand to be soccer over the next several quarters due to the macro factors impacting end market and customer inventory digestion.
Although we expect the overall demand environment is likely to be challenging in the near term I'm very confident about momentum mid to long term prospects given fundamental end market and technology trends driving our growth expectations are unchanged.
Momentum is uniquely positioned to serve our customers at scale with our functional and vertical integration capabilities.
Robust pipeline of design wins, and leading product Roadmaps, and we have financial and structural resilience built into our business model.
In the near term we are focused on expense controls, while maintaining crucial R&D to continue to drive the forefront of innovation.
Before turning it over to watch it I would like to thank our employees around the world for their folks.
This dedication as they continue to execute upon our strategy with that.
Yes.
Thank you Alan net revenue for the third quarter was $383 $4 million, which was down 24, 2% sequentially and down 3% year on year.
During the quarter, we had two greater than 10% customers both in the telecom market and there were no 10% customers in the consumer market.
GAAP gross margin for the third quarter was 29, 2% GAAP operating loss was 13, 4%.
And GAAP diluted net loss per share was <unk> 57.
Third quarter non-GAAP gross margin was 48%, which was down sequentially and year on year.
Merrily, driven by product mix and lower revenue.
Purchases of third party brokers declined to nominal levels in the quarter.
Third quarter non-GAAP operating margin was 13, 4%, which decreased sequentially and year on year due to product mix and lower revenue.
Third quarter non-GAAP operating income was $51 $4 million and adjusted EBITDA was $77 million.
Third quarter, non-GAAP operating expenses totaled $104 $9 million or 27, 4% of revenue.
non-GAAP operating expenses were down $5 $4 million from Q2 with tight expense controls and synergies more than offset seasonal increases in operating expenses.
Three non-GAAP SG&A expense was $42 $8 million non-GAAP R&D expense was $62 $1 million interest and other income was $9 2 million on a non-GAAP basis due to higher interest rates on our cash and investments.
Third quarter non-GAAP net income was $51 8 million and non-GAAP diluted net income per share was <unk> 75, a fully diluted share count for the third quarter was $68 7 million shares on a non-GAAP basis, our non-GAAP tax rate remains at <unk>.
14, 5%.
Moving to the balance sheet, we ended the quarter with $167 billion in cash and short term investments.
Accelerate the integration of Neo photonics products into our global manufacturing footprint and attain synergies without impacting customer deliveries, we plan to carry elevated inventories for a period of time.
However, we expect inventories to decline by approximately $40 million exiting calendar year 2023, as we continue to focus on cash generation.
Also we expect a moderation in capex spending over the next few quarters.
Turning to segment details.
Third quarter optical communications segment revenue at $335 $1 million.
<unk> 25, 3% sequentially, primarily driven by the inventory dynamics that Alan already discussed.
Optical communications segment non-GAAP gross margin at 48% decrease sequentially and year on year, primarily due to lower revenue and the impact of new photonics product margins.
Our third quarter laser segment revenue at $48 3 million was down 15, 6% sequentially and down five 7% year on year.
Third quarter lasers gross margin of 44% was down sequentially and year on year, primarily due to an inventory reserve due to a fiber laser product transition.
And lower volumes, we expect product margins and lasers to recover after shipments fully shift to the new laser platform and manufacturing volumes return.
Now, let me move to our guidance for the fourth quarter of fiscal 2023, which is on a non-GAAP basis and is based on our assumptions as of today.
We expect net revenue for the fourth quarter of fiscal 2023 to be in the range of $350 million to $380 million. Within this Q4 revenue forecast, we anticipate modest growth in telecom and datacom to be offset by a decline in <unk>.
<unk> trio and consumer.
We expect fourth quarter lasers revenue to be approximately flat with the third quarter.
Based on this we project fourth quarter operating margin to be in the range of eight 5% to 11, 5%.
Diluted net income per share to be in the range of 45.
The 65 cents.
Our non-GAAP EPS guidance for the fourth quarter is based on a non-GAAP annual effective tax rate of 14, 5%.
And these projections also assume an approximate share count of 69 million shares.
With that I'll turn the call back to Kathy to start the Q&A session.
Okay.
Thank you Jay before we start the Q&A session I would 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.
Now, let's begin the Q&A session.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone keypad.
Star followed by one on your telephone keypad.
To withdraw your question Press Star followed by two I'm pleased to also remember too and mutual microphone wouldn't speak.
Yeah.
Okay and our first question comes from Simon Leopold from Raymond James Simon. Your line is now open. Please go ahead.
Thanks, I appreciate that.
Sure.
Going on in the telecom and Datacom.
Segment, and let me explain what im looking for here.
Is your supply chain constrained during much of 2022, particularly I recall <unk>, because we couldnt get the FPGA. So I guess I'm trying to get a better sense of how much inventory your customers can be holding and what's the composition within the segment of that inventory is at all plug of bowls mixture help us understand.
Seeing that thanks.
Yes Simon.
It's broad with respect to the inventory at our customers from our perspective.
Indicated by.
What we forecast to ship in the June quarter, and what we think we're going to be shipping in the second half of the calendar year. So I wouldn't say, it's any one particular product line, although I would say that.
To your point <unk> and wrote them line cards with constraint heavily over the past year, and that's where I think a lot of.
It was built up and therefore, a reduction as we indicated in the script in a.
Rhodium revenue load of line card revenue.
In the March quarter, we expect that to continue into the.
The June quarter and beyond.
Supply constraints have been relieved and customers know they can get the product I think they are very comfortable now lowering their inventory levels to reflect the actual sell through to their customers and so as we said also we believe we are dramatically under shipping in market demand.
And as that happens over the next couple of quarters or so.
We will get to an equilibrium, where it will start shipping again to end market demand as our customers and then just as my follow a normal life.
Our pre announcement and that that looked much lighter than we expected I know you had guided some sequential decline, but nonetheless. This is a market that had been holding up so I'd like to see if you could talk about what's changed there and how long does this relative weakness in.
Commercial lasers last in your view.
Yeah.
Yes Simon.
As we also highlighted the ultrafast laser business is growing very well, 70% year on year growth as we get into the market I'd say the slowness came from a couple of areas one of which is the transition we talked about in the fiber laser but also headwinds in the overall semiconductor demand industry. So.
The semiconductor industry as we supply solid state lasers into processing semiconductor so.
Some softening that we see as well.
Yeah.
Thank you Simon.
Our next question comes from Jimmy <unk> from J P. Morgan.
Your line is now open. Please go ahead.
Yes, hi, Thanks for taking my questions I guess, Alan you mentioned and even in the last response in your prepared remarks that you believe you are under shipping true demand and I'm.
I wanted to get your thoughts around.
How do you think about sort of the right run rate what is the sort of right level of demand right now how much do you believe you are under shipping related to that.
And maybe just extending that.
Seeing second half will have a recovery is that essentially the math that you're doing in terms of how much you're under shipping and how much inventory you're digesting gets you to that sort of second half recovery or is that what your customers are telling them. Thank you.
Follow ups.
Sure I think it's hard to say how much we're under shipping although.
Clearly the reduction in revenue in the March quarter.
<unk> tells US we are under shipping relative to an end customer demand and we expect that as our customers have announced their earnings in the coming quarters their inventory levels will come down over time, and so that's an indicator of under shipping in market demand although visibility is.
Not perfectly clear for us I'd say that.
We believe that a couple of quarters of this under shipping should then alleviate that those.
Inventory levels so that.
As we exit the calendar year, we're more shipping into our customers, what they're shipping out and Thats what gives us confidence.
Getting back to a more normalized level of shipments.
Through the towards the end of the calendar year.
Okay got it and just a follow up on industrial and consumer based on your guidance for the fourth quarter Youre, implying most of the sequential decline in revenue at the midpoint comes from that segment that would put you at one of the lowest revenues you've done in that segment.
Going back quite a few years.
Is that again, you're thinking about sort of in sell through for the customer primary customer you have being weaker or is this more of a reflection of inventory digestion. Even at this customer that's probably impacting you in that in the coming in this quarter in the fiscal fourth quarter. Thank you.
Hi, Mike This is Chris I would say.
What's most important to keep in mind in three D sensing when you're looking at prior years, there's obviously the sharing normalization that we've highlighted previously.
A very significant driver of reduction year over year and relative to the past.
On top of that obviously.
And market.
And pricing a bit.
I don't think Theres anything else that we can really comment on particular surround quantifying end market.
At this time.
Okay. Thank you thanks for taking the questions.
Thanks Bruno.
Bruno could we have our next question please.
Our next question comes from Alex Anderson from need him. Alex. Your line is now open. Please go ahead.
Great. Thanks.
So I wanted to delve into the AI commentary you made obviously thats one of the bright spots.
And the commentary.
And try to understand the scope of the products that you have that.
Allow you to.
Compete in that market.
Are you able to compete into.
It's just the Ethernet side or are you able to also compete into.
The infiniband side of it.
As the VIX.
Copper replacement part of that.
How rapidly do you think that that business will grow to offset any pressures.
In traditional datacom.
Yeah.
Yeah. Thanks, Alex This is Chris let me tackle that I would say you got to think of this and in Timeframes that in the nearer term the next quarters.
It's really driving volumes, if you will of our existing products.
Our new products to be launched as you highlighted pixels.
<unk> hundred gig <unk> that will be in mass production here soon that will be a copper replacement.
As well as the 200 gig per lane, <unk> and helping to accelerate digestion.
Inventory that's already built so that.
Of our products are already out there.
That's the next couple of quarters as we look to the next few years, what you're referencing is theres new architectures that are.
Customers or new customers lets say are seeking to launch that are intensive with new.
Optical architectures I think we went through some of this center OFC presentation.
Where we are co developing solutions with with let's say.
Players that are leading.
Not traditionally in the networking side, but maybe more traditionally in.
AI and and compute side of things.
For next generation data centers, so there's kind of a couple of waves of <unk>.
Product intersects for us.
So just going back to the to the original question when do you think that that.
Really kicks in as a primary driver is it tens of millions of dollars of revenue.
In the back half of the calendar year or is this.
Something that takes a lot longer to ramp.
I think that the.
Back half of the calendar year will really be still in that phase of inventory digestion on existing products I think the new stuff, we're talking about is more.
One to two years out.
But going back to the existing products as we get into calendar 'twenty. Four then I think we'll really see a reacceleration in the existing products given the inventory should be burned off at that point in time.
Yeah.
If I could just one last question.
Torrey Reserve that you mentioned.
That was in the non-GAAP numbers, what was the size of that.
Hi.
But it was.
<unk> $4 million.
Great. Thanks.
Okay. Thank you Alex operator can we have our next question. Please.
Our next question comes from meta Marshall from Morgan Stanley . Your line is now open. Please go ahead.
Great. Thanks Alan.
Maybe I just wanted to kind of get a sense from you kind of coming back to <unk> question just about.
We're not only seeing kind of the.
Over ordering their system vendors might have done for you guys to build inventory, but their customers also kind of over ordered for supply chain issues as well on their part and so just how are you judging.
How much kind.
And demand there is.
I guess given that there could or just the duration of this inventory digestion period, just given some of the over ordering that this system the vendors might have seen as well.
Yes, it's hard for me to comment on what our customers are seeing I can I can comment on what we're seeing from our customers that is.
Products, where there is strong demand and deployments we are continuing to ship.
There wasn't a buildup of inventory, but where there was and I think where there was fear of inability to get enough product for when their customers needed. It.
Seeing now that since the supply chain that eased those.
Those inventory levels are coming down through this under shipping what we believe and the market demand is so.
Beyond that it's hard to say.
I would say, though however that.
We're very confident in our share position and our new product design funnel and our new product wins with our customers. So that gives us confidence that as this inventory gets burned off over the next few quarters that we'll be in a position to ship.
End market demand and we believe that there are still fundamental drivers that will drive in market demand.
To use these new products and continue to drive revenue growth for us as we get into calendar 'twenty four and beyond.
Okay got it and just as a follow up question.
Your commentary about fiscal 'twenty four.
Lower than fiscal 'twenty three on three D sensing or are there just is there a general estimate.
Kind of what the cumulative effect of pricing.
Sure normalization and just kind of end market demand would lead to in fiscal 'twenty four of our fiscal 'twenty three and three D sensing.
Hi, Matt Yeah, I think it's a little premature to guide to full year on three D. Sensing at this point.
The key point here is that since we highlight in the prepared remarks that debt.
End market demand.
Prices go down year over year, and the likelihood of potential for a new competitor on.
One of the sockets that we lead on in the past I'll suggest that it will be down.
Year over year.
Okay, great. Thank you.
Thanks, Matt could we have the next question please.
Our next question comes from Tom <unk> from Barclays.
Your line is now open. Please go ahead.
Hey, Thanks for taking my question I'm going to get a little specific on the on the technology and share side and hopefully you can do your best to answer it but you talked about losing share in <unk> something I know you're tired of the story, but it still does matter to move to move the numbers a little bit into the end of this fiscal year can you just talk about when you look.
Losing share I think it's.
Pretty widely reported that there is a new entrant in the world facing center is there a reason why share would be coming out of your pocket and not your competitors that you split that with today or do you see that entrant.
Kind of taking share equally from the bulk of you just walk through to the best of your ability why that would be the case.
Yes.
I think it's premature.
Sure.
To know exactly what's going to happen on the next generation of phones. We wanted to highlight that there is potential that one socket.
Could be could be bringing in a new supplier and I don't think there'll be any difference on the impact on us or our competitor with respect to that.
Supplier, if they come in and if they are able to ramp I think it'll be equally.
Shifting to that new supplier.
Yeah.
Does that answer your question, Tom got it and then.
It did.
And then on on the gross margins you don't breakout.
The gross margins on the guidance, but just looking at what's implied.
It seems like the core telecom and Datacom gross margin continued to be under pressure I know you guys have synergies rolling in on the New York side, but could you just breakdown, where youre seeing that weakness is it in the legacy momentum products or are you seeing the gross margin pressure on the acquired <unk> products and are still waiting for some of those synergies to come in.
Yes, Hi, Tom.
I'll take that one yes, so on the synergy side I mean, most of the synergies that we've seen to date has been.
So as you saw our operating expenses.
Significantly quarter to quarter from Q2.
And then through Q3.
Well as you know in prior quarters during the fiscal years, we've taken appropriate actions there.
The cost of goods sold synergy.
We're going to see most of that in the first.
Back half of it before we'll do a lot of the consolidation activities.
In the back half of this.
Calendar year and start to see some of those synergies flow through.
And in the first part of calendar 'twenty four.
Now on the margin for this quarter in particular, we made a note that were planning on reducing our inventory levels.
Over the remaining part of the calendar year.
As we do that we will see.
Some some under absorption within.
Our manufacturing facilities as we continue to keep the infrastructure in place.
So that we can absorb a rebound.
<unk>.
In early 2000, <unk>. So so youll see some of that and that will be impacting our gross margins over the next.
A few quarters.
So just just to be clear, you're further reducing utilization inside of your own facilities.
Yes, yes, that's right yes.
Yes, it's mostly things like depreciation that will continue to impact us for a couple of quarters.
Yes.
Okay. Thank you Tom.
We have our next question Bruno.
Our next question comes from Christopher Rolland from Tai Chi Christopher Your line is now open. Please go ahead.
Hey, guys. Thanks for the question.
So I guess my first question is.
How do you see is this the trough.
For <unk>.
Do you see it kind of ramping from here.
Like how should we be thinking about a new run rate and then.
What portion of this for next quarter is actually industrial so we can get a sense of that versus consumer.
Yes.
<unk>.
Typically the June quarter is the low low quarter seasonality wise given that this is really the last quarter of the prior model.
Inventory does come down as the as our main customer starts production in the September quarter of the new devices. So this is the typical trough in any any.
<unk>.
In any three D sensing cycle for our main customer.
So.
I think.
End user demand.
We'll pick up in the September ended December quarter.
As it does typically in most of what we're seeing is that impacting our outlook for fiscal 'twenty four.
Is the share shifting that we talked about.
That.
<unk> has been coming for the last four or five years is now coming through to fruition and now it's more normalized.
As <unk> indicated we don't have a 10% customer and consumer anymore and.
And as far as industrial industrial is low single digits on a quarterly basis of low single digit million dollars.
Okay, that's very helpful.
And then secondly, if we could talk about your 200 gig per lean AML.
$801 60.
When do you expect this to ramp.
Considerably for you guys and then any update on your CW lasers, and when do you think that could.
That could contribute.
Yes, Thanks, Chris.
Those products are are now sampling to customers and and working with customers to to be ready for the ramp I would say timing is later this calendar year and heading into the next <unk>.
Helander year.
<unk> four four I mean, we are shipping today CW lasers.
A couple of different flavors for folks that use them and silicon photonic applications.
But.
More significantly.
Then in calendar 'twenty four.
Great. Thanks, so much Chris.
Thank you Chris.
Could we have our next question.
Our next question comes from Ruben Roy from Stifel. Your.
Your line is now open. Please go ahead.
Thanks, very much another element, Chris I Wonder if you could characterize how you are looking at some of the opportunities around <unk> sensing and industrial Iot et cetera, obviously still early days, but what needs to happen would you say.
Get into more meaningful ramp is this a question of pricing or.
More testing if you can kind of walk us through how you're thinking about.
The ramps over the next 18 to 24 months that'd be helpful.
Yes, I mean, I think the largest opportunity at least on a very long term basis as the automotive space.
Really.
Aid as Lidar.
As well as in cabin.
And those just long very long development cycles in the automotive industry measured in five year increments in some ways.
And we've been engaged for quite a while but we.
Numerous customers with the focus on really planting seeds with.
Various.
Lidar architecture types.
To ensure that as decisions are made by the.
And customers that.
We ended up in the ultimate.
Solutions that they pick I think youre going to see the next.
Two years.
<unk> still in much more modest.
Growth for these industrial and automotive applications as we highlighted on the call you know shifting $3 million a quarter, which at the chip level is is significant.
If you will we do expect that that lidar modules.
Modules will grow too.
Let's say over the next three to five years, a multibillion dollar market and then the light our chips being maybe 10 or 15% of that.
If you will and then five years after that so we're talking about 10 years out is it.
Tens of billions of dollar market, if you will for Lidar modules, So I would say.
It's a long game that we're playing but fortunately it leverages chip technology, which is something that we can leverage across multiple end markets.
Thanks, Chris I appreciate that and a quick follow up or was it on that topic.
You talk to the gross margin understood on.
Sort of the dynamics around telecom.
As consumer.
It seems like we're going to be running at.
A different run rate as you think about the rest of this year and potentially next year with competitive dynamic.
Changing a bit.
Is that impacting the way you're thinking about gross margins, maybe from a longer term perspective.
Yeah.
Yes.
Yes, so our I mean, our.
Our longer term gross margin targets really haven't changed.
A lot of the reductions we saw.
And gross margins this quarter did come from.
Between.
Chips and and module business obviously.
Sure.
Urgent muscles, but a lot of the decline came from.
Overall utilization of the factories in shipments and so.
We will see our telecom datacom business, a rebound as well as lasers rebound.
In the calendar year 2004, we should start to see.
<unk> gross margins and our overall operating margins from the levels that we're delivering right now and so we really haven't come off.
What we talked about at OFC around our mid term target model.
Okay.
Sorry, I would be I would be I would be.
I would be missing the whole comment around securities as well, we'll see.
A real uptick.
And synergy activity flowing through our P&L in the first part of the calendar year.
The favorable impact that will have on our overall operating model.
Thank you Ruben sooner because we have our next question. Please.
Our next question comes from Vijay Arya from Bank of America Vivek.
Vivek. Your line is now open. Please go ahead.
Hi, This is Blake on for Vivek. Thank you for taking my question.
First just touching on the telecom and Datacom side I was wondering if you can.
Just got Sop pricing holding up in this environment and if youre seeing any competitors price more aggressively in the current environment and how you view that risk in general.
Yeah.
Yeah, we're not seeing any change in the dynamic of pricing I think.
The dynamic has changed from five years ago.
To what it is today, where we partner with our customers and provide long term price.
Agreement that.
Tied to share of their spend in that particular product and that usually starts when we.
To develop a product together. So there is a varying degree of those types of long term agreements as well as annual type agreement that.
We're done.
Several months ago. So I wouldn't say there was any dynamic change in pricing as we look at telecom and Datacom.
Alright, and then just a follow up to kind of go back to the gross margin side of things.
You discussed your current three D sensing position as well as imagine utilization. So I'm just kind of curious as we kind of view of demand recovery as we look out beyond the June quarter, maybe at a high level.
Margins declined from June levels.
That just kind of any color there at a high level, how it progresses through the year in more detail it would be great.
Yes.
There's a number of moving pieces that could.
It really did impact us, especially as it comes to mix in and.
And even within telecom as it comes to mix on our various product lines.
What I will say is that we noted in our <unk>.
Prepared remarks that we are planning on bringing down our inventory levels by approximately $40 million.
Exiting the calendar year that is going to have an impact.
On overall gross margins at least in the.
Back here.
And then as we get back to more normalized levels.
The first part of calendar 'twenty four we will have to.
Tailwind.
Cost of goods sold synergies.
As Alan talked about which is us shipping closer to end market demand and so both of those should have a favorable tailwind. So so yes on the first part of our fiscal year, we will have a headwind, especially around our desire to bring down inventory levels, but then we should see.
Tick with synergies and.
Shipments being more reminiscent of what that market demand is so those two should help us. So that's the right way I think we're thinking about it and that's how we think you may want to think about it.
Thank you.
Thanks Blake.
And there are no could we have our next question. Please.
Our next question comes from George Notter from Jefferies. Your line is now open. Please go ahead.
Okay.
Hi, there thanks, very much guys I'm trying to get a sense for what the right revenue run rate for the company is under a normalized scenario.
If I look back you guys shipped a couple of $500 million quarters. Obviously those were predicated on inventory build now we are guiding for $3 50 to $3 80.
Here in the June quarter, obviously.
There's a huge gap in there and.
I have to confess it's just it's really hard to try.
Trying to get a understanding of what the normalized revenue run rate here is.
As the market normalizes in terms of inventory Digest. So what comments do you guys have about where this business shakes out ultimately on topline.
Yes George.
As we said we think we're under shipping end market demand and I think that's going to the guidance for the June quarter reflects that.
How much we're under shipping and what the end market demand is three quarters from now very very difficult to have a crystal ball around that.
Said again <unk> low quarter as June .
Lasers I think.
Is it a lower level than we would expect it in normal times as we are going through a product transition and we expect.
Calendar 2004 to pick up in lasers.
So should we be where we had originally guided the March quarter, I think that's probably more reflective of in market demand and then as the market grows in the high single digits low double digits on a CAGR basis for telecom and Datacom and I think theres a lot of catalysts that are going to drive.
I've, even more rapid growth rate than that given what we're seeing.
Inside the data center and between data centers in support of AI and machine learning so.
I don't think there's any reason we can't get back to those levels. It's a matter of when we're going to get back to those $500 million levels given.
The ending inventory digestion and whatever happens in the macro environment.
As we look at calendar 'twenty one.
Okay.
Great. Thank you.
Yeah.
Thanks, George Thank you George.
Yeah.
No because we have our next question please.
Sure. Our next question comes from Amanda Baruah from Loop capital Amanda. Your line is now open. Please go ahead.
Yeah.
Yeah. Thanks, guys. Good morning for taking the question.
Just two quick ones if I could.
A question and clarification.
Chris.
Your prior remarks about.
Sort of where you guys will be contributing to sort of AI buildout.
Is it I guess, what I, what I the way I interpreted your remarks were.
Certainly in the at the Tonics.
Yeah.
Does your data center chip business also.
So to contribute to that I would think yes, and then I also heard some other areas as well across the laser and photonics portfolio. So could you just clarify that that that's accurate and is there any like super early days, but is there any way the context for us.
Kind of.
What portion of the overall portfolio had some exposure in any way that's useful and then I have a quick follow up thanks a lot.
Okay.
Yes. Thanks.
Yes, It would go back to that in the nearer term.
It's the data center chip business as you alluded to.
Which both both has what we've been known for high speed <unk> transitioning to higher speed.
But also the addition of high speed VIX holes and the growth of high power <unk>.
W lasers used for silicon photonic architectures.
Those are what I referenced is more nearer term.
And quarters as we look to the next couple of years, we anticipate that data center architectures.
<unk> will evolve to more application specific equipment, if you will and that application specific equipment will have.
Maybe in addition to the standard Ethernet type.
Connects more proprietary.
<unk> connects using in a sense that custom designed transmission links and that's where our engagement.
With leaders in the space is really important taking our broader <unk>.
<unk> capabilities around lasers.
And transmission in general as well as in some cases optical switching.
All will be brought.
To bear so it does impact a more broad piece of our company than just the Datacom or data center business today is the primary driver.
And maybe I can add to that.
Okay.
Yeah, just one other thing to add to Chris's commentary is.
We've seen very strong demand for our sub sub sea cable deployment, where we provide components that amplify the signal at the bottom of the ocean. So we're seeing a lot of the demand for subsea coming from the Hyperscale as they connect those large data centers, whether that's a precursor to.
<unk> expectations on AI or machine learning or not.
Is an area that we've seen strong demand and these are big investments that take.
A year or more to deploy so.
I think we're seeing some leading indicators that this is an area of growth for us as well.
Alan Thanks for that and I guess the quick clarification is just given given the guidance for the June quarter.
Telco datacom slightly up flat to slightly up Q over Q.
How are you.
Are you essentially calling kind of the bottom here June quarter in your in your telco Datacom business combined that should we think of flattish.
The remainder of the year until until demand picks up.
Thanks.
Thanks.
Yes.
We're reluctant to guide more than one quarter at a time.
We are seeing some strength in the June quarter on coherent components for high speed coherent modules.
And whether that continues into the September and December quarter, it's hard to say.
Are expecting kind of a.
A continued level of revenue.
Or I should say inventory digestion and certainly in the September quarter, and partially into the December quarter.
So.
I would say flattish kind of.
Outlook, but we.
We'll give you more input on that.
Just when we have our next call.
Thank you Ananda.
Buena I think we have time for one more question and then we'll turn it over to Alan for some final remarks.
Perfect.
Next question comes from Mike Genovese from closing bounce Securities. Mike. Your line is now open. Please go ahead.
Okay, great. Thanks for getting me on the call.
Just.
Can we get specific color on on Datacom.
I think that inventory correction has started a couple of quarters ago. So the question is is the inventory correction over but now there is sort of some order push outs in the cloud or any color you can give us on.
Specific to the Datacom business would be that would be helpful. Thank you.
Yeah, Mike.
I'll give you my perspective, and then maybe Chris can chime in.
It has been.
The past few quarters, where we've been talking about a slowdown in datacom.
The inventory build that.
Cloud providers Hyperscale is.
As they were ordering.
Several quarters in advance because of the shortages in calendar 2022.
They were ordering or some of them were ordering at a F.
The expectation that they would grow at a certain rate and.
30% to 40% range and as they've announced their growth rates are significantly lower than that.
It takes longer time to burn off that inventory than originally expected. So we're seeing the inventory burn off.
Still some customers in some of our module manufacturers still.
A quarter or more of inventory there.
And our expectations are that.
The demand for AI and machine learning will help.
The consumption of this inventory so that by the end of the calendar year, we'll start shipping.
Into the data center Datacom market more like the end market consumption, but in the interim there's still inventory in the channel there.
Okay, Great and then my follow up on that.
Separate question on commercial.
Industrial lasers.
The first half of this year had some pretty tough compares.
Okay.
Next year at a lower run rate.
So how do you how should we think about year over year in 'twenty four in that business.
Yeah. Thanks, Mike I would say, we're going to see as we highlighted in the prepared remarks that lasers will come down a little bit.
Given it's tied to as Alan highlighted semiconductor end markets as well as macro manufacturing if you will.
So we believe that it will come down.
In the next several quarters, obviously, it was kind of ramping up through the year.
But in the net we suspect that at least as we look to customer forecasts at this point that FY 'twenty four.
B lower.
In FY2023 was for commercial lasers directionally.
Okay, great. Thanks, I, just want to be the dead horse on the <unk> seller.
I appreciate the color on the other segments. Thank you.
Thank you Mike we creep I think now we will turn the call back over to Alan for some closing remarks.
Thank you Kathy I would like to leave you with a few thoughts as we wrap up this call.
Mid to long term fundamentals remain intact for our business as we serve the exponential growth in network bandwidth and artificial intelligence.
<unk> learning mobile carrier and cloud computing markets.
New automotive and industrial applications are emerging for our imaging and sensing products and applications for commercial lasers are expanding into new applications.
And our traditional markets we remain committed.
Committed to investing deeply in innovation 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.
Best for conferences and upcoming meetings in the coming weeks.
And have a great day.
Yeah.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines. Thank you.
Mm connect your lines. Thank you.