Q4 2023 Lumentum Holdings Inc Earnings Call
Good day, everyone and welcome to <unk> holdings fiscal fourth quarter and fiscal year 2023 earnings call.
All participants will be in a listen only mode. Please also note today's event is being recorded for replay purposes.
Following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator.
At this time I would like to turn the conference call over to Kathy <unk>, Vice President of Investor Relations. Mr. <unk>. Please go ahead.
Thank you and welcome to <unk> fiscal fourth quarter 2023 earnings call.
This is Kathy Todd momentum as Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer.
Roger to 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 and beliefs regarding synergies with recent acquisitions, including photonics.
Financial and operating results macroeconomic trends trends or expectations for our products and technology are end 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, particularly the risk factors described in the quarterly report on Form 10-Q for the quarter ended April <unk> 2023.
And those in the 10-K for the fiscal year ended July one 2023 to be filed by dimension with the SEC.
The forward looking statements provided during this call are based on momentum reasonable beliefs and expectations as of today.
Debenture undertakes no obligation to update these statements except as required by applicable law.
Please also note that unless otherwise stated all financial results and projections discussed on 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 mental this press release with the fiscal fourth quarter and full year 2023 results and the accompanying supplemental slides are available on our website at www dot dementia dot com under the investors section.
With that I'll turn the call over to Alan.
Thank you Kathy and good morning, everyone.
We are extremely optimistic about the long term secular demand drivers in the markets in which we participate and lead. Additionally.
Additionally, our efforts and investments to grow our share in our existing markets and adjacent markets are generating positive traction that will benefit us for years to come.
Our focus on technology and product leadership will ensure our growth and differentiation and support of our customers' needs now and into the future in the near term we are facing significant headwinds as both our direct and in customers actively work to reduce their elevated inventory levels.
We believe that the current customer inventory correction cycle will continue through the balance of the calendar year, and therefore, our shipments will be well below end market demand.
Even at these depressed shipment levels. We believe we are continuing to grow our market share outside of the consumer market.
We are seeing meaningful demand strengthening for our datacom chips as hyperscale customers prepare to ramp AI capacity.
We believe that our telecom and Datacom revenue will be up in calendar 'twenty four compared to calendar 'twenty three as inventory levels should return to more appropriate levels at our customers and their customers.
Despite the inventory headwind, we experienced in the second half of fiscal 'twenty three our full year revenue was up 3% from fiscal 'twenty two.
Also fourth quarter revenue and EPS were both above the midpoint of our guidance ranges, we announced last quarter.
Our acquisition integration is going very well and in fact, we have completed our ERP consolidation and are now running on one company wide ERP system.
We are tracking ahead of our previously announced synergy plans, while we continue to deliver on our new product and technology Roadmaps at.
At the same time, we continue to focus on our customers to drive an even stronger partnership and a differentiated level of satisfaction.
<unk> revenue was especially strong in Q4 with increased sequential shipments across all <unk> product categories.
Also our commercial lasers business grew sequentially, particularly in new applications of ultrafast lasers for the solar cell market.
As I indicated earlier long term demand trends for photonics products continue to be extremely favorable.
Generational upgrades to see plus L band as well as extended C and extended L band architectures are underway and the backbone of networks, where our transmission and transport products are highly differentiated and enabling for our customers.
We are designing products for the next generation of our customer's photonics, Roadmaps, which we used 130 gigabyte and 200 gigabyte data rate coherent technologies.
We are developing these high speed products in both discrete and integrated form factors paving the way for enhanced performance and metro and long haul applications as well as new applications at the edge of the network.
With the addition of the teams from our Neo Photonics, and IPG acquisition and the capabilities to develop dsp's and RFID fees, we believe that our vertically integrated approach to these high speed transmission products will give us the lowest product cost in the industry.
In addition, we demonstrated our coherent 800 G. ZR technology earlier this year, which we believe is the industry's first which will provide high speed connectivity with extended reach for data center interconnect within metropolitan areas.
Turning to cloud data centers as I indicated earlier, we are seeing increased customer activity for AI in the data center and expect this to translate to increased shipments of our chip level products for 800 gig transceivers.
We have broadened our datacom product portfolio with continuous wave CW lasers for silicon photonic applications connect server racks, and aric clusters, which require higher data rates, while consuming less power.
Starting in fiscal Q1, we expect a return to sequential growth in our Datacom revenue.
The data center optical component market is projected to grow sharply over the next four to five years to accommodate the increased traffic associated with AI as customers employ ever higher bandwidth interconnects between racks within rack and between servers and storage.
We also believe that datacom fixed oil growth will be meaningful in the next several years as copper is replaced by short reach multimode optical links.
As stated earlier, we expect telecom and Datacom revenue to be up in calendar 'twenty four from calendar 'twenty three as customers reduced their inventory levels of our products and our shipment rate is more in sync with end market demand.
Before I provide additional detail on our fourth quarter results I would like to address the topic of China's export controls placed on gallium and germanium.
We have determined that our existing supply is sufficient for the medium term and therefore, we expect that these controls will have little to no impact on our manufacturing output.
We will continue to monitor the situation and work with our suppliers to source material outside of China to mitigate any long term impacts of these controls.
Now, let me turn to the fourth quarter and full year results.
Telecom and Datacom revenue was down 2% sequentially, but up 2% year on year.
As expected, we saw a sequentially lower shipments of tunable access modules in the quarter.
As we expand our customer base and current customers complete near term product transitions and reduce inventory levels. We expect this business to return to growth in fiscal 'twenty four.
The lower revenue in tunable access modules was partially offset by sequential increases in narrow line width, tunable lasers, and rhodium shipments across several leading customers.
In fiscal 'twenty, three our tunable access module product line achieved new record revenues growing 57% year over year with strength in metro access and fiber deep applications.
These products enable cable msos and wireless network operators to improve network performance, while avoiding the cost of replacing existing infrastructure.
In fiscal 'twenty, three we doubled our manufacturing capacity for tunable access modules and our wafer fab and our back end Assembly and test factories to address the anticipated growth.
In our shipments to these customers.
Our ultra narrow line width tunable lasers, and our advanced <unk> are key enablers of our customers' next generation network architectures that are just starting to be deployed.
We saw sequential growth and narrow line width tunable lasers and across all major categories of <unk>, including low port Count high Port count and contention less and buy in platforms.
Also fiscal 'twenty three Rotem revenue grew 22% from fiscal 'twenty to driven by the adoption of these advanced Rotem architectures.
Cloud data centers are being redesigned to support the high bandwidth requirements of AI workloads.
These workloads require several times more bandwidth than traditional cloud computing.
At this early stage of AI hardware deployment.
<unk> Transceivers can provide the bandwidth.
Also reducing latency.
The new 800 gig Transceivers utilized eight different wavelengths and 100 gig per lane triggering orders for our <unk> products and driving a return to growth for our <unk> product line.
Additionally, we are seeing strong demand for our high power CW lasers for customers utilizing silicon photonics to build eight energy transceivers.
In calendar 'twenty, four or 200 gig per lane emails will enable the next generation of Transceivers with capacity of up to one six terabits.
We expect to start ramping shipments of 200 gig email products in calendar 'twenty four.
And customer qualifications of 800 G and one six terabits transceiver designs are well underway.
We expect our 200 G per lane optics to be the workhorse of Hyperscale data centers for years to come.
To further address the connectivity requirements for AI and machine learning clusters, we have been developing high speed pixels for short reach connections between servers and switches in these systems and we expect to begin to ramp these shipments meaningfully in calendar 'twenty four.
And the longer term, we also expect to supply even higher power CW lasers for leading AI hardware architectures to provide the high bandwidth low latency optical interconnects essential for training and inference applications.
Turning to industrial and consumer fiscal Q4 was down from Q3 and down year over year as expected due to smartphone seasonality and end market demand.
We continue to expect our fiscal 2040, <unk> sensing revenue will be lower than that of fiscal 'twenty three due to what our assumption around <unk> sensing and market demand pricing and an additional competitor on a certain socket as discussed previously.
In the fourth quarter commercial lasers revenue was up 4% sequentially, but down 2% from the same quarter last year.
Overall fiscal 'twenty three commercial lasers revenue was up 8% from fiscal 'twenty two.
We achieved a 35% sequential growth in ultrafast laser revenue and over 25% sequential growth in fiber lasers, which was partially offset by sequentially lower solid state laser shipments primarily for semiconductor applications.
Our growth in ultrafast lasers is being driven by new applications, particularly in solar cell processing.
We expect that as demand for these new types of applications grows we will continue to gain share in the ultrafast lasers.
Based on our latest customer forecasts, we expect overall commercial lasers demand to be softer over the next several quarters due to customer inventory digestion and macro factors impacting end markets.
We expect continued rapid growth in new applications for our ultrafast lasers to partially offset these near term headwinds.
Although we expect our shipments in the near term to be soft I am very confident about momentum mid to long term prospects given the current softness is primarily driven by high inventory levels.
The fundamental end market and technology trends driving our growth expectations are strong and unchanged and momentum is invest in R&D to capitalize upon the long term growth drivers and is uniquely positioned to serve our customers at scale with 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 as we partner with our customers.
Before turning it over to watch Ed I would like to thank our employees and our customers around the world for their focus and dedication as they continue to collaborate and partner with momentum as we execute upon our strategy.
With that budget.
Thank you Alan net revenue for the fourth quarter was $378 million, which was down 3% sequentially and down 12% year on year.
As Alan mentioned this revenue level was not unexpected and was driven primarily by the customer inventory digestion, we have seen and expect to persist through the end of the calendar year during the quarter, we had three greater than 10% customers all in the telecom market with no.
10% customers in the consumer market gap.
GAAP gross margin for the fourth quarter was 24, 2% GAAP operating loss was 15, 1% and GAAP diluted net loss per share was <unk> 88.
Fourth quarter non-GAAP gross margin was 36, 7%, which was down sequentially and year on year, primarily driven by product mix factory Underutilization and lower revenue.
Fourth quarter non-GAAP operating margin was nine 1% which decreased sequentially.
And year on year.
Fourth quarter non-GAAP operating income was $33 $7 million and adjusted EBITDA was $59 4 million.
Fourth quarter non-GAAP operating expenses totaled $102 four.
$4 million or 27, 6% of revenue.
non-GAAP operating expenses were down $2 5 million from Q3 due to tight expense controls Q4, non-GAAP SG&A expense was $40 7 million.
non-GAAP R&D expense was 61 7 million.
Interest and other income was $13 3 million on a non-GAAP basis due to higher interest rates on our cash and investments.
Fourth quarter non-GAAP net income was $40 2 million and non-GAAP diluted net income per share was <unk> 59.
Our fully diluted share count for the fourth quarter was 68 6 million shares on a non-GAAP basis, our non-GAAP tax rate remains at 14, 5%.
Yes.
Turning to the full year results fiscal 'twenty three net revenue was 177 billion.
Which was up three 2% from fiscal 'twenty to GAAP gross margin for fiscal 'twenty. Three was 32, 2% GAAP operating loss was six 5% and GAAP diluted net loss per share was $1 93.
Full year fiscal 'twenty three non-GAAP gross margin was 43, 2%, which was down relative to fiscal 'twenty two.
Fiscal year 'twenty three in non-GAAP operating margin was at 19, 2% down from fiscal 'twenty to fiscal 'twenty three non-GAAP operating income was $339 $2 million and.
<unk> EBITDA was $431 7 million.
For fiscal 'twenty, three our fully diluted share count on a non-GAAP basis was $69 1 million shares and non-GAAP net income was $315 3 million and non-GAAP diluted net income per share was $4 56.
Onto the balance sheet cash and short term investments increased $346 million sequentially to $2 billion, primarily driven by our convertible note offering during fiscal 'twenty three we generated 179 eight.
<unk>.
And cash from operations.
H $49 $2 million was generated in fiscal Q4.
During the quarter, we purchased 267 million shares for $139 $8 million, which includes $2 three 4 million shares repurchase concurrent with the issuance of our 2029.
Vertical notes.
As we make progress on the integration of Neo photonics products into our global manufacturing footprint.
And attain synergies without impacting customer deliveries, we plan to carry elevated inventories over the short term.
However, we expect inventories to decline by approximately $30 million exiting calendar year 'twenty three as we continue to focus on cash generation.
Turning to segment details fourth quarter optical communications segment revenue at $325 million decreased four 4% sequentially and down 13, 6% year on year.
Optical communications segment non-GAAP gross margin at 36, 1% decrease sequentially and year on year, our fourth quarter laser segment revenue at $53 million was up four 1% sequentially and down one eight.
8% year on year fourth quarter lasers, non-GAAP gross margin of 46% was up sequentially, but down year on year.
Yeah.
Now, let me move to our guidance for the first quarter of fiscal 'twenty, four which is on a non-GAAP basis and is based on our assumptions as of today. We expect net revenue for the first quarter of fiscal 'twenty four to be in the range of 300 to 325 million.
<unk>.
Within this Q1 revenue forecast, we anticipate telecom and Datacom and commercial lasers to be down sequentially, driven primarily by customer inventory dynamics. We have discussed we expect industrial and consumer to be approximately flat sequentially.
Based on this we project first quarter non-GAAP operating margin to be in the range of 1% to 4% and diluted net income per share to be in the range of 20.
<unk> 35.
Our non-GAAP EPS guidance for the first quarter is based on a non-GAAP annual effective tax rate of 14, 5%. These projections also assume an approximate share count of 67 million shares.
In terms of expectations beyond Q1.
As Alan mentioned, we do expect a return to growth in telecom and Datacom shipments in calendar 'twenty four compared to calendar 'twenty three as customer inventory levels are reduced and our shipment rate is more in sync with end market demand.
Our synergy plan that we communicated at our March Investor event at OFC is proceeding ahead of schedule in terms of operating expense reductions, we will exit certain manufacturing facilities at the end of this calendar year, which will deliver significant cost of goods sold synergies over the subsequent.
Quarters overall, we remain on track to the total synergy plan of $80 million in annualized savings that we articulated previously and we have achieved over half of the savings in fiscal year 'twenty three with that I'll turn the call back to Kathy to start the Q&A session Kathy.
<unk>.
Thank you Wajid 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, let's begin the Q&A session.
Thank you ma'am, ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the number one on your Touchtone Sally again, Thats Star followed by the number one if you would like to withdraw your request. Please press star followed by the number.
Thank you.
Your first question comes from the line of meta Marshall from Morgan Stanley . Please go ahead.
Again meta Marshall from Morgan Stanley . Your line is now live. Please go ahead.
Alright, thank you so much.
Having the buttons day.
Just in terms of.
How you guys are evaluating how much of this inventory correction versus potential for share loss or just not being involved in certain platforms is how are you kind of evaluating that given kind of.
Repeat it kind of step downs, and maybe more particularly on the telecom business maybe on the first question.
Yes, Thanks, Matt.
As we said in the remarks earlier, we believe we're not losing any share other than in the consumer space, where we've been talking about that sure normalization in the third competitor I'd say in telecom, we're very confident in our ability to continue to hold share if not gain share, especially as we introduce new products.
I firmly believe that.
Slowdown in revenue in the is really.
Mostly inventory correction and has really nothing to do with share.
Great.
Follow up just how do you examined kind of what.
I will get a sense of what the inventory positions are.
Is kind of the belief that.
Revenue would resume kind of in the revenue growth would resume in the calendar 'twenty four period based on.
When people are telling you that they want to start to get back.
<unk> again or is it a matter of.
That's when do you think that budgets will open up from your customers and they were expecting I guess is that an expectation or is that backed by kind of conversations youre, having with customers.
Yes, I wouldn't say it has to do with releasing it budgets I think it's primarily due to the inventory levels on their balance sheets and their desire to lower those given the availability of components and the availability of us to supply so.
I would say that.
As we look at the next few quarters telecom is going to be tough.
Through the balance of the calendar year, and I'd say that were seeing some signs of <unk>.
Inventory absorption faster than expected at some of the Hyperscale are is where we expected that to take longer. So I think AI is helping with both.
Both inside the data center as well as in the data center interconnect space. So I think from that perspective.
That's why we're confident about calendar 'twenty for being higher than calendar 'twenty three and those are really in depth conversations with customer executives and really viewing.
Viewing our inventory in their locations and their contract manufacturers and that's why we believe that the next couple of quarters Theyre going to take.
Take to get rid of that inventory.
Great. Thank you I'll pass it on thanks Meda.
Thank you. Your next question comes from the line of David Buck from UBS. Please go ahead.
Great. Thank you very much for taking my question just two for me.
One Allen going back to the inventory question I guess can you kind of help US understand you made a comment that you think you're under shipping to industry demand where that demand might be today, and how you see that demand sort of progressing as we move through this sort of more challenging period of time in 'twenty three 'twenty four that kind of colors.
Your view about.
Recovering.
Back to growth in calendar 'twenty four and then maybe a longer term question I'll just give you both at the same time when you think about mix of the business today obviously.
Industrial is a lot smaller than it was last year.
And presumably that's a relatively strong gross margin business, how should we think about the operating leverage as growth recovers in telecom and Datacom in calendar 'twenty four from a margin perspective, obviously, it unlikely that youre going to get back to the high <unk> gross margin, but wanted to get a better sense for maybe gross margin trajectory as we move through the balance of this.
The next four quarters into maybe fiscal 'twenty five thank you.
Yes, Thanks, David I would say on the under shipping.
The question I would say that.
Clearly.
At the revenue levels that we're having today our customers are.
Shipping out more than we're shipping in and I think thats really due to.
The fact that they've built up inventory over the last few years win win.
Fear that.
Components would not be available. So I do believe that Thats. The case that said there are some north America carriers that have talked about lowering their capex, but.
But not significantly so I would say that.
The demand for bandwidth continues to be robust.
Theres nothing thats going to slow that down I would say that again on the hyperscale side.
AI is really consuming a lot of the inventory that we had shipped.
Over the last couple of years and now we're starting to see signs that.
Things could pick up before the end of the year in the Hyperscale.
But in the normal carrier space I would say, that's probably premature until calendar 'twenty. Four why did you do you want to take the operating leverage question, yes, sure. So on operating leverage at the revenue levels. We're currently seeing.
For the back half of this calendar year you can appreciate that we're having a lot of underutilization charges within our internal factories.
Due to the lower revenue levels, and our desire to bring down our company inventory to a more normalized level.
As the back half of the fiscal year moves.
<unk> on our expectation is that we'll really have three things working for US. One is is that we're expecting to continue with our synergy plans that we've done that we've executed on quite well to date on new photonics and the consolidation of the factories in the back half of this calendar year should start to show through.
Through the P&L in <unk>.
Calendar 'twenty four.
The second thing is is that our datacom.
Our business is a chip business and so.
We're expecting to see improved demand.
In that part of the business.
Through through calendar 'twenty, four and even actually in the back half of this calendar year as well and so that should give us some some uplift and then like Alan talked about.
The telecom business could becomes more normalized the.
The underutilization charges should should reverse themselves and we should we should see improvement. So those are those are kind of the three tailwind from from from this point in time that can help us.
Great. Thanks, a lot and then I'll get back in the queue.
Thank you David.
Your next question comes from the line of Alex Henderson from Needham. Please go ahead.
Great.
To start off with the comment.
Three D sensing that business would be flat into the September quarter historically.
The June quarter is a seasonally softer quarter September and December quarters.
Seasonally stronger can you parse a little bit between is that a late start because of some production issues and therefore, we can make up a little bit of the three D sensing in the fourth quarter or is it.
Truly a.
And Stifel.
Decline as the numbers would indicate I think if it's.
If it's flat sequentially. That's 60, some odd percent decline year over year, so it's a pretty steep number.
Hey, Alex This is Chris Thanks for the question, Yes, I think couple.
A couple of things go into our outlook I think as Lee alluded to on prior calls.
We've anticipated the impact of having an additional competitor a next and so that and current demand environment for both factored into our guidance.
And thats whats impacting the sequential and year over year comps you're asking about.
Yeah, So Ken.
So the question is is there a shift between September and December historically September has actually been a little stronger than the December quarter.
Is this a late start to some extent and therefore, a little bit more on the December quarter should we be using that as the new level.
Seasonal strong period.
I would say, it's a little early too.
Got that product line for that timeframe, but I think you should think about it being flattish between the two quarters okay.
Great.
Second question I had for you.
Looking at the broader context of.
The trajectory of demand I think we started back in the September timeframe, saying that we were going into an inventory correction.
At least in Datacom.
<unk>, obviously started later than that but you had initially thought that by the end of.
The June quarter and into the end of the summer.
Datacom would start to recover then you pushed it out too.
At the end of.
The fourth quarter calendar.
At this point it sounds like that's holding but it may be a little bit steeper initial decline.
Can you talk a little bit about what's going on relative to the.
<unk>.
Trajectory.
From the expectations that you gave last quarter or two the expectations. You gave this quarter on that business and within the telecom as well.
Has it hasnt steepened as a result of.
Excess cutbacks in shipments at the service providers.
What what's the linearity of the the demand structure there did it fall off towards the end of the quarter.
Well, let me take them one at a time, but I'd say on the Datacom.
Market.
As you said in September we talked about it getting better in the summer and we're seeing that.
<unk>.
A lot and I'd say that in fact, we are seeing it so much that.
We probably ratcheted back our capacity more than we should have on Datacom. That's now in full force to accelerate.
The output of our Datacom chips, and so I think thats why we talked about Q1 being up from last quarter and then we expect to see sequential growth in our Datacom chip business through the balance of this year as well as into calendar 'twenty for it Datacom I think is on the right trajectory.
On telecom.
Say that.
Our customers are telling us that they want to bring down the inventory to normal levels and I think the confidence that they have and our ability to produce what they need when they need it.
The component suppliers, including semiconductors are going to be there when they need it gives them confidence that they can live with even less inventory than originally anticipated. So I'd say nothing really changed there other than inventory levels need to come down further.
Therefore, we're shipping into our customers less and they're shipping out to the carriers, which in turn should take care of that problem and more normalize as we get into calendar 'twenty four.
Okay. Thank you.
Thanks, Alex.
Your next question comes from the line of Sandy.
From JP Morgan. Please go ahead.
Hi, Thank you for taking my questions.
First one if I can just ask you to tell a little bit more into b related demand that you're seeing.
Much of that.
Are you seeing in terms of interest on the <unk> side versus the <unk> and when you think about also the customer said there how much coffee engagement as hyperscale those losses, although a newer set of companies coming into the ecosystem.
Any thoughts in terms of what do you expect that demand to look like in a couple of years would be useful and helpful. Thank you.
Yes, let me address that and then I'll ask Chris to add on.
Youre right its beyond the hyper scaler and so we've collaborated with.
A lot of the new customers for us that are leading the way in AI and figuring out how do we then customize a.
Product laser high power laser or external laser source to satisfy the future needs of AI in a unique way. So we are doing customization.
<unk> of our products to meet the needs.
Of those unique situations, where the data bandwidth or just.
Huge and so I'd say that that's really more of an impact in calendar 'twenty four but that work has been going on now.
And those products will come to market.
In the calendar 'twenty four stage I would say that what we're seeing today is more ml based driven 800 gig transceivers that.
Both use our CW high power lasers for Silicon photonics, as well as a <unk> for each transceiver.
Because those are the products that are available today that can use that can satisfy that bandwidth needs that the hyperscale or as they're going through.
So that's what we're seeing as far as VIX. Those are concerned we're going through the qualification work on those 100 gig pixel as I talked about.
And we see that really starting in a meaningful way to contribute to our revenue in calendar 'twenty four.
Yes, and I would also add that in addition to the Knicks holes, which are just ramping.
And in the email elsewhere, we're a market leader and we also had our CW lasers that power certain silicon photonic solutions. So we've really focused as we've commented in prior calls of broadening our product portfolio and Datacom.
To be able to address.
Different parts of the datacenter and different approaches.
To the same parts of the data center and we do anticipate significant uptick in the market.
Data com in the coming 12 months relative to kind of the obviously the down year that we have it being a chip supplier over the last year.
And this is going to be a multiyear.
And I'll note that we definitely believe that.
You are talking tens of percent CAGR is for.
AI related deployments over the next few years, so very exciting opportunity for us.
Got it got it.
So my follow up just getting back to the results and the guide for the fiscal fourth quarter I think with.
<unk> sensing in the past, you've obviously had a certain seasonality to the business to have you any thoughts of how you're thinking about seasonality. This year should investors expect sort of as you get to beyond one Q2 see sort of sustain sequential growth in the business or given some of your comments about the sort of calendar <unk>.
Inventory digestion impacted it's really more of a step up into the second half of the fiscal year than I think what I'm trying to get to as we all understand the earnings power of the business.
Greed is depressed because of the lower demand or the inventory digestion, but in terms of revenue increase in your opex savings coming through where do you see as a normalized run rate for the business, where you what Brexit.
Well normalized it's hard to say I would say in the short term. The next couple of quarters telecom is going to be tough.
And as we said <unk> you can think about being flat lasers is going to be.
Down sequentially from Q1 in Q1, and you can think of that as being flat with fiber lasers going.
Going down in Q2, but being offset by our ultrafast lasers. So I think that then the real mover between Q1 and Q2 as the Datacom demand and that's really going to be gated by our ability to meet that.
Supply that demand until I would say that there is some.
<unk> uptake in Q2, and then assuming that the inventory is taken care of over the next five months and we should start seeing some pickup in the first half of calendar 'twenty four and then normalize demand as happens when we're shipping into our customers.
Xactly, what they're shipping out and I think we're confident we can get back to the levels of revenue we had in the past and then.
Our model.
Operating leverages as pretty immense and we should see significant bounce back when we get up to that 400 to 450, even $500 million in revenue and I think that's that's that's doable.
In the not too distant future.
Okay. Thank you thanks for taking my questions.
Thank you Patrick.
Your next question comes from the line of George Notter from Jefferies. Please go ahead.
Hi, guys. Thanks, very much I wanted to ask about the gross margin performance in the quarter.
Yes down.
Roughly 400 basis points sequentially on a pretty similar revenue number I guess I am wondering if there is a.
Certainly the lower three D sensing.
Yes, there is an element of that I suppose but I'm wondering if there is some excess and obsolete inventory charges, there or anything else that drove that big sequential step down.
Yes, so youre right. So the three D sensing number did come down into Q4.
Excess and obsolescence was pretty pretty normal from a run rate standpoint, it was really underutilization. So.
As as we've been working through where we really want our inventory to be outside of some of the pre builds that we're doing.
As part of our consolidation strategy.
We had.
A pretty hefty impact within our fiscal Q4 with Underutilization that hit both our op comm and our our lasers business pretty significantly and were seeing that really flow through into the back half of the calendar year.
Got it so is it fair to say that a good portion of the product that you shipped in the June quarter was then manufactured in prior quarters is that is that.
Sure.
Yes, that's fair Okay. That's great and then is there is there some.
Just your strategy here to kind of.
Yes.
I don't know I guess produces software gross margin in the June quarter.
Take that Underutilization hit all at once then and then you can kind of clean that effect up going into the September quarter or is it just some of the strategy in terms of how you run your utilization.
Yes, I mean really the only way to do it is to produce more and so or consolidate facilities. So we are consolidating facilities.
And we will start to see the benefit of.
Of that probably in the January timeframe, because it will be out of the facilities in the November December timeframe. This year. So it will start to see the impact of that.
Our fiscal Q3, so that will be.
Pretty pretty sizeable.
And then it's really a production coming back up at all of our facilities.
To a more normalized level. So those that's those are really kind of the only two ways that you can improve that.
Yes, just to add though I would say that the June quarter Datacom was below in Datacom and those chips that are produced in our fabs absorb a lot and as that ramps back up we should see a better absorption and utilization of the fabs that we have in Japan, making datacom chips, yes.
That's fair.
Got it okay and is that.
I was just going to say is that inventory.
Thanks for letting me follow on here is that inventory.
That you built up from a manufacturing perspective in the March quarter.
Is that inventory then consumed heading into the September period.
No no not all of it because if you take a look at our inventory turns it doesn't turn that fast so yes, some of it will flow through.
Into that already flowed through our fiscal Q4, and then some of it will flow through our Q1 a lot of it is very product level dependent so like Alan said and saga Mahara, where our Datacom chips are produced that inventory is turning very fast. So as the finished goods are coming out it's being shipped so.
But at our <unk> facility, where we have internal wafer fabrication, that's moving a little bit more slowly.
And as well as what we've got in Thailand.
Up four four lasers as well so it is a little bit dependent and because bom costs are lower on datacom chips the impact at a consolidated level doesn't show up as well as it does when you take a look at by Bu.
Inventory turns.
Got it thank you very much.
Thanks George.
Your next question comes from the line of Michael Genovese from Rosenblatt. Please go ahead.
Hi, great. Thanks, I wanted to dig in on this.
Guidance for telecom and Datacom to be up.
For the year I guess my foot in fiscal 'twenty for my first question is is that is that more of a datacom comment.
Tom will be rollout globally from the telecom.
We'll also be up as well year over year.
Yes, Mike.
Michael I think what we said was that calendar 'twenty four would be up from calendar 'twenty three given that we believe in next two quarters of telecom shipments are going to be depressed given the inventory reductions that are happening that are customers and at the end customers. So not fiscal year year over year, I'd say calendar.
Here, we're pretty confident that telecom will be up in calendar 'twenty four from calendar 'twenty three that said again I'd say datacom.
Going to grow sequentially each quarter between now and the end of calendar 'twenty four.
Okay that makes sense.
The comment on thanks for that clarification.
I guess my other question is when I look at the data com.
Yes.
800, and above the AI opportunity you guys are doing.
We will now.
It looks like we're trying to prioritize and missiles as well.
Yes My question is.
Are there any other parts of the Datacom market now with this improvement.
<unk>.
<unk>.
For others.
Okay.
Yes.
Light Louisiana.
<unk> <unk> <unk>.
<unk> Nikko.
<unk>.
Sorry, Michael we Couldnt hear your last question I think the question, though was around are there any other parts other than <unk> and VIX holes that are showing signs of demand growth is that your question or have we lost you.
No Im sorry here hopefully this is beth.
Mr. Genovesi has disconnected, maybe I will take it.
Proceed to the next question.
Yes, maybe ill try to answer the question if we understood it right and we can talk about.
Different kinds of lasers, CW lasers, and such Chris Yes, certainly our focus is on.
Certainly the Hyperscale.
Cloud market, primarily so our transceiver customers that we supply to also certainly supply into the enterprise and market. So again supplying.
Supplying.
<unk>.
Largest product line.
And that's primarily planned now into the transition to 800 gig and we will also have 200 gig per lane AML is coming up in calendar 'twenty for ramping.
And thats for either a next generation 800 gig transceivers.
And then the eventual transition to one six terabits per second.
We highlighted the VIX halts ramping so that we have a broader product portfolio as well as the CW lasers to intersect 800 gig and one six terabits.
Silicon photonic based approaches.
Yes, just the only other thing is we're providing a series of different types of lasers to address the incentive band as well.
Okay, we'll take the next question.
Your next question comes from the line of Ananda Baruah from loop capital. Please go ahead.
Yes, good morning, guys and thanks for taking the questions.
Yeah, just a couple of I could as well I guess just sticking with that.
Datacom chips and lasers.
Is it I guess I've been trying to frame for myself, how meaningful this can become.
As a part of your business and.
Thank you.
Just sort of clarify this correct me if I'm wrong I believe that on the company's sort of prior <unk>.
Prior RASM.
Let's say belief.
12 months ago before things really started.
Before the flood IP scale has really started job to work down their inventory.
So the run rate at which you were thinking.
Current back then.
Which I think.
To the kind of <unk> to $2 40 to 50 to 60 level annually.
Yes.
What would sort of see yet.
You could still achieve does it have more of a tailwind on current run rates you could begin to see you soon at <unk>, 16% of the company. Once you achieve the beyond and I think Thats a primary emails.
Now you have whats going on Jenny I relate it to your own.
And some new Dixville work and I know like in the Cte <unk> C, but the CW laser we're talking about laser work as well.
Yes.
Could we be in a situation in eight quarters, where like 20% of the company is.
Is it data.
Data comm chip laser related.
And then I just have a super quick follow up after that love to get your thoughts there. Thanks.
Yes. Good question I think it depends on how fast the other parts of our business grows.
Think.
Your numbers or not.
Two two.
Say that we have gone down significantly over the last year from Datacom revenue standpoint, both from a standpoint of unit shipments are way down.
Average prices have gone down in this past year. So we're in the midst of growing that I'd say that.
Certainly within the next eight quarters can we get back to the kind of.
$2 40 to $2 60 annually, yes, absolutely and I think we're putting capacity in place to do that and we have capacity as you remember three years ago, we've been continuing to add capacity. We're in the midst of going to larger wafers to address the demand we've seen in the long term.
Certainly it could be.
A significant growth driver from where we are today.
Yeah, that's really helpful and I guess, a quick follow up.
Like longer term, what's your view on.
Neoplatonic EI technologies wall.
In data center.
Great for AI related at all.
Thats It from me thanks.
Yes, we're very very happy with the acquisition of <unk> and the technology and the team that came along with that I would say that.
There was a buildup of inventory of ZR and <unk>.
And <unk> modules at certain Hyperscale is I think that that is being consumed and we're starting to see signs of life frankly, a hyperscale orders needing more ZR ZR.
Our modules, we're also providing a lot of the components that go into the worlds ZR market.
And so from that perspective.
We're happy with the holder AI driven.
Data center.
<unk> demand, but also.
Datacenter to datacenter Theres, a lot of bandwidth going between them. So I know Chris has any other thoughts, yes, I mean, I think the debt.
One of the pieces of the acquisition with regard to ZR was that we would provide a sort of stronger company. If you will to give customers confidence and that certainly is bearing out unfortunately as Alan highlighted that the acquisition closer to about the point, where they also.
Realize that had a lot of inventory so now that inventory is beginning to clear.
<unk>, we do expect <unk>.
Are you one of the products that <unk>.
Recovers earlier in our telecom.
Portfolio, and then with the level of vertical integration that we have.
Customers are very excited about the supplier because they view us as being able to both evolve obviously from a cost and volume standpoint, given our vertical integration, but also lead the transition to 800 gig.
Next generation solutions that follow on beyond the current 400 gig products.
That's great context, thanks, a lot guys.
Thanks Ananda.
Your next question comes from the line of Tom O'malley from Barclays. Please go ahead.
Hey, good morning, and thanks for taking the question I just wanted to square just a couple of comments you've made so I think in response to another question you talked about getting back to a greater than $200 billion run rate in the Datacom business, but then on a question about Q2 and the fiscal year in December you talked about just a moderate sequential increase just given the fact that you don't have the capacity.
And you said hey, maybe in retrospect, we would have not taken down capacity is much. So just to kind of put those two in perspective. If you look at this coming fiscal year are you guys going to be able to get back to the levels that you saw in fiscal year 'twenty. Three I think you started the year around $50 million is that something youll be able to get to or is capacity going to hold you back really until the.
Back half of calendar year, 'twenty, four which would be your fiscal year 'twenty cost. Thank you.
Yes, I would say, it's certainly not a lack of demand that would get us there. So I'd say that in calendar 'twenty four there's certainly enough demand. The question is can we get the capacity back up given that asps are down. So we have to actually produce a whole lot more chips to get to that $50 million run rate.
<unk>.
But that said the gross margin on those chips are still very very solid. So we're anxiously driving the team to grow the output and you're right. We took down capacity more than we should have but at the time. It was the right thing to try to drive.
To try to drive the Underutilization.
But I would say that the cycle time on Datacom chips is such that.
Starting wafers today, it doesn't really impact.
The next four months. So it is a long cycle time, we are working on that as well and Thats why were trying to dampen the expectations of rapid growth in the December quarter for Datacom, but we are expecting to see an uptick in datacom in the December quarter.
Got it that's helpful and then just on the technology side.
And this is maybe just a broader question, but I just wanted to hear your take here is if you look at the early days of AI here Theres. Obviously, some some drivers that are pointing more towards email, but clearly theres a lot of drivers that are putting more towards pixel and <unk>.
Looking to ramp that product I guess the question is if you look at the market for lasers today, and how would you split out the percentage of lasers that are being used between <unk>.
<unk> CW and <unk>.
And do you think that just given that maybe there is some more VIX was early on that you are missing out on some of that opportunity or if it's the other way around.
Just any color would be helpful. There. Thank you.
Yeah, I would say from the end market opportunity unit quantities, the victrola raise and and so basically short reach and longer reach that's really what we're talking about are not that different from a volume standpoint. So therefore, that's go ahead and being a leader in the Enel. So.
That indicate why the VIX was such a good opportunity for us to.
Gross.
In addition to just market growth to grow share in terms of CW CW in AML sort of compete with each other a little bit in that.
Certain selling photonic architectures.
We are.
Are able to do that.
Needed distance our reach that AML is at the lower end do so.
There is a little bit of cannibalization or near zero sum between those two but thats why we introduced and have both sets of products now that said.
<unk> will lead the transition to the 200 gig per lane.
So we expect <unk> to really be the work horse of.
It's a longer reach AI links.
Note that while the <unk> units are about the same the VIX or cost or price are significantly lower than the <unk>.
So the market is much larger for for the longer reach P&L.
Thank you Tom Thank you.
Your next question comes from the line of.
Vivek Arya from BFA Securities. Please go ahead.
Alright, thanks for taking my questions.
Was hoping you could help us quantify what percentage of your <unk>.
Q4 sales were related to AI.
Are they all in lasers Telecom Datacom segment.
Where do the AI related sales show up in how large was the in the quarter.
Yes, I think.
The primary.
Products <unk> would obviously be our datacom business, we don't break that out but it's it's.
Sub 10% of company revenue.
That said.
We don't know when we ship in AML to customer, whether that's going into an enterprise customer or a cloud AI customer at this point, but we will we do expect and as Alan has highlighted that the growth. We are seeing going forward is primarily AI driven.
So sub 10% of your Datacom segment or the other.
Just wanted to.
No I would say very high percentage of our Datacom revenue is <unk> related it's just the datacom business.
As a smaller percentage of the overall company revenue given it's a chip based business so lower asps.
High margin, but lower asps.
Got it and for my follow up I'm, just trying to think about the path back to growth for.
For the overall company seems like Q2 will probably could be in the same range as Q1 and Q3 has in the past tended to have seasonal headwinds.
But I don't know whether the mix now is different so is it really fair to think that Q4 is the earliest you should be thinking about meaningful sequential growth or do you think seasonality and mix could play out different differently. This year.
Yeah, I would say seasonality probably doesn't play as much as it has in the past and when you. When you look at the March quarter, just given how.
How much less we're shipping into our customers today than they were shipping out so I think it all comes down to there.
Their inventory levels and when does that equalization happen.
We think that it's going to take until at least December but that said, we're going to see some strength in demand for new products and I talked about the 130 gigabyte 200, gigabyte type products as well as some new products, we have in <unk> and other that that should drive demand growth in Q1, regardless of inventory.
Situation, because they are new products and they don't exist in the inventories today, So I would say.
It just depends.
Yeah.
Thank you.
Thanks, Vivek, Laura I think we have time for one more question. Please.
Thank you ma'am our last question will come from the line of Jeff Cohen from Raymond James. Please go ahead.
Yes, Thanks, guys, Jeff with Raymond James in for Simon.
So.
One of your big competitors put out a forecast for the Datacom transceiver market.
Basically calling for.
Roughly 5 billion increase from 2023.
Through 2028.
I just wanted to know what your thoughts on that forecast or do you think thats reasonable and.
Sure.
I guess your strategy and your.
Your your milestones that you are targeting.
For that business would be helpful.
Yeah.
Sure.
I think thats not are not familiar with the exact numbers you referenced but it is not in consistent with our assumptions around growth in the overall datacom market, particularly driven driven by AI.
Hey, Simon is there likely follow ups.
Go ahead, yes, yes, Im just wondering.
Two if I got this right that the.
Did you say the neo photonics was up or down sequentially in the quarter and is.
Is it safe to say that.
Yeah.
The majority of that.
The downtick in September and December is going to be in the legacy.
Telecom business and that that Neil is going to do it more.
I guess that that inventory digestion with Drs as mark laid out is that fair to say.
Yes, Jeff.
The.
The delineation between neo products and legacy products. After a year is pretty much gone so.
We're still seeing strength as we talked about and narrow line width tunable lasers.
I think I said were seeing growth again in.
Expectations for <unk> as we move forward, but.
I would say that.
Neo products in the June quarter were down from previous and we expect as the inventory of <unk>.
The narrowed to narrow line width tunable lasers or other products that we got through the acquisition is burned down we're going to see growth across the board. So I wouldn't say, it's anything specific to.
Legacy versus new products, it's an inventory issue at our customers that we're trying to take care of.
Perfect. Thanks.
Okay.
Thanks, Jeff.
You.
Laura I think we will turn the call back over to Alan for some closing remarks. Thanks Kathy thank.
Thank you everyone I'd like to leave everyone with a few thoughts as we wrap up the call.
As I said before mid to long term fundamentals are solid for our business as we serve the exponential growth in network bandwidth and the artificial intelligence machine learning mobile carrier and cloud computing markets.
New industrial applications are emerging for our imaging and sensing products in our commercial lasers are expanding into high growth applications beyond our traditional markets.
We are committed to investing deeply in innovation to deliver on our customers' 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.
Investor conferences in upcoming meetings in the coming weeks. Thank you all for attending.
Thank you Sir ladies.
Ladies and gentlemen, this concludes your conference call for today.
Thank you for participating and ask that you. Please disconnect your lines have a lovely day.