Q1 2024 Lumentum Holdings Inc Earnings Call

Good day, everyone and welcome to the momentum holdings first quarter fiscal year 2024 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 are quiet immediate assistance. Please press star zero for the operator.

I would now like to turn the conference call over to Kathy powers, Vice President of Investor Relations. Mr. <unk>. Please go ahead.

Thank you and welcome to the venture this fiscal first quarter 2024 earnings call.

Kathy Todd momentum as Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer.

Wajid 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 recent acquisitions, including <unk> and Neo photonics financial and operating results macroeconomic trends trends and expectations for our products and technology our end markets.

The 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.

Encourage you to review our most recent filings with the SEC, particularly the risk factors described in the 10-K for the fiscal year ended July one 2023, and our 10-Q that will be filed soon.

The forward looking statements provided during this call are based on the debentures reasonable beliefs and expectations as of today.

Dementia 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 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.

As I mentioned in press release with the fiscal first quarter results and accompanying supplemental slides are available on our website at www dot momentum dot com under the investors section.

With that I'll turn the call over to Alan.

Thank you Kathy and good morning, everyone.

We're thrilled to welcome the cloud light team to momentum the.

The addition of cloud lights products to our portfolio positions momentum as a leader in providing photonics to cloud operators at a time when artificial intelligence is rapidly accelerating growth in the datacenter market.

We believe we mentioned served opportunity within data centers has expanded more than fivefold as a result of the cloud like acquisition.

For years <unk> has been supplying differentiated high speed products to leading hyperscale customers with custom products to address unique customer needs as well as standard products to address a broad range of hyperscale customer requirements.

In the last 12 months over 90% of cloud lights revenue was derived from 400 G and higher speed products.

And the most recent quarter over half of cloud lights optical transceiver revenue was derived from 800 G. Transceivers in calendar 2024, we anticipate strong growth in cloud and networking revenue driven by accelerating AI compute requirements and a resumption of shipping more in line with end market demand.

Also in calendar 2024, we expect cloud applications to drive over 30% of momentum cloud and networking revenue.

Our cloud customers are responding very positively to this transaction.

This combination results in a broader portfolio of differentiated products and technology.

It also enhances the security of supply for our customers given our broader combined global manufacturing footprint and high levels of vertical integration momentum is well equipped to address future cloud technology Roadmaps as AI models drive an exponential increase in compute and networking requirements.

<unk>.

I would also like to highlight that starting with this fiscal year, we are updating our financial segment reporting to better reflect the rapidly changing market opportunities ahead.

Financial reporting is now focused on two large and growing end market segments.

One <unk>.

Cloud and networking.

And two industrial tech within cloud and networking the clarification of the network is blurring the lines between our historical served markets of telecom and Datacom.

Cloud data center and traditional telecom operators are increasingly purchasing the same types of data transmission products.

We anticipate the emergence of new applications for optical switching technology, not only to serve the growing complexity of long haul and metro networks, but also to support the high optical link density required for AI training models and the data center.

Our customer mix is changing as well.

The addition of cloud life brings much more direct sales to cloud operators and infrastructure providers.

We are also increasingly serving cloud and networking operators directly for their data center interconnect and edge networking applications.

To better align our reporting with these market trends the telecom product lines and the Datacom product lines are now included in the cloud and networking segment.

Turning to the industrial Tech segment, our portfolio of imaging sensing and laser products aligns with industry, four <unk> and 5.0 trends.

Industrial sensing applications require high accuracy and determining distance speed and displacement and are increasingly turning to laser based approaches.

Leading edge semiconductor solar cell and.

Connick component manufacturing require the beam precision and short pulse duration of ultrafast lasers to produce precise cuts and features to better reflect the growing importance of precision photonics across this broad application space, the industrial and consumer and commercial lasers product lines are now.

Within the industrial Tech segment.

Now I'll summarize our fiscal first quarter results.

As we reported last week first quarter revenue and EPS were above the midpoint of our guidance ranges.

Through cost controls and efficient operations, we are managing the factors that are in our control.

While we continue to see very strong growth in the demand for our data center chips as well as our newly acquired intra datacenter Transceivers. This strength is being offset by the telecom and industrial inventory drawdown activities.

Due to this inventory correction, we believe we continue to ship below end market demand as.

As we navigate this transition period, we are delivering as planned on our product roadmaps and synergy attainment with respect to our Neoplatonic acquisition.

Of course, we are also excited about the new opportunities that cloud brings starting in the current quarter as we leverage their leading transceiver technology to deliver the fastest speed products to cloud customers.

Now, let me provide more detail on our segment level results in Q1 cloud and networking revenue was down 20% sequentially and down 36% year on year with broad based softness across most of our networking product lines, partially offset by sequential growth in intra datacenter lasers and tunable <unk>.

This module. This is as we had expected given the inventory correction underway at our networking customers.

Robust cloud data center demand is currently the strongest growth driver for our cloud networking business.

As data centers are designed to support the high bandwidth requirements of AI workloads 800 gig transceivers can provide that bandwidth while also reducing latency.

For our transceiver customers their new 800 gig transceivers utilized eight different wavelengths at 100 gig per lane, triggering orders for our chip level photonics and driving growth for our <unk> product line.

We are also seeing an increase in deployments of 800 G. Transceivers that are supplied by our cloud business and we are working with our new team to enable them to ramp even more rapidly.

Over time, we also expect to supply custom designed high power CW laser arrays for leading AI hardware architectures to provide the high bandwidth low latency optical interconnects essential for training and inference applications in calendar 'twenty, four or 200 gig per lane.

<unk> will enable the next generation of Transceivers with capacity of up to one six terabits.

We are shipping qualification samples of our 200 gig emails now and expect to ramp production in calendar 'twenty four with customer qualifications of 800 gig and one six terabits transceiver designs well underway.

We expect that 200 gig per lane optics will be the workhorse of Hyperscale data centers for years to come once these qualifications are completed.

Cloud light momentum is now a leader in high speed active optical cables or <unk> as well as VIX. So based transceivers to cloud customers to fulfill their short reach connectivity requirements for new AI and machine learning cluster architectures.

In addition, we've been developing high speed 100 gigabit per second pixels, and VIX will raise for the short reach optical links and we expect to ramp these shipments meaningfully in calendar 'twenty four.

Moving onto our high speed transmission product developments, we are receiving positive customer feedback on our next generation of 130, gigabyte and 200 gigabyte data rate coherent technologies.

These high speed products will be available in both discrete and integrated form factors to enable enhanced performance in metro and long haul applications.

In addition.

At the <unk> Conference last month, we received positive customer feedback on our coherent 800 gig ZR product.

We are the first to market with this capability, which will provide high speed connectivity with extended reach for data center interconnect within metropolitan areas.

Turning to industrial Tech fiscal Q1 was up 4% sequentially from Q4, driven by the expected uptick in our <unk> sensing business with a new smartphone product ramp partially offset by softness in fiber lasers, as our leading fiber laser customer works to bring down inventory in <unk>.

Real Tech is down 40% year over year as expected primarily due to more intense competition for market share on a certain three D sensing socket and.

End market demand and pricing as discussed previously.

Based on our latest customer forecasts, we continue to expect industrial lasers demand to be soft into calendar 2024, due to customer inventory digestion and macro factors impacting end markets. However, we expect the rapid growth in new applications for ultrafast lasers to partially offset this.

These near term headwinds given growth in new solar cell manufacturing applications.

To summarize our market outlook is currently a tale of two dynamics on the other hand outside of the data center customers. We are facing continued headwinds from networking and industrial customer inventory digestion.

In all of our end markets. We are committed to our long term R&D roadmaps and we are positioning the company towards the robust growth photonics opportunities that we see ahead.

Before turning it over to watch it I would like to again welcome our new employees from cloud light and <unk>.

Thank all of our employees and our customers around the world for their focus and dedication as they continue to collaborate and partner with momentum.

With that budget.

Thank you Alan net revenue for the first quarter was $317 $6 million, which was down 14% sequentially and down 37% year on year.

During the quarter, we had three greater than 10% customers two of which are in networking and 110% customer and industrial tech market.

GAAP gross margin for the first quarter was 24, 1%.

GAAP operating loss was 25, 4% and GAAP diluted net loss per share was $1 two.

First quarter non-GAAP gross margin was 34, 9%, which was down sequentially.

<unk> down year on year.

I'm merely driven by product mix factor.

Factory under utilization and lower revenue.

First quarter non-GAAP operating margin was three 3% which decreased sequentially.

And year on year.

First quarter non-GAAP operating income was $10 $6 million and adjusted EBITDA was $34 $6 million.

First quarter non-GAAP operating expenses totaled $100.1 million or 31, 5% of revenue down $2 3 million from Q4 and down $6 $6 million from the year ago.

Quarter due to tight expense controls Q.

Q1, non-GAAP SG&A expense was $39 $1 million.

non-GAAP R&D expense was.

It was $61 million interest and other income was 16 $8 million on a non-GAAP basis due to higher interest rates on our cash and investments.

First quarter non-GAAP net income was $23 $4 million and non-GAAP diluted net income per share was 35 cents.

Our fully diluted share count for the first quarter was 67 million shares on a non-GAAP basis, turning to the balance sheet, our cash position decreased during the quarter due to a few key items.

Used $30 million in cash to purchase our wafer fab and campus in the UK.

This purchase reflects our confidence in the longevity of indium phosphide technology to address the ever growing need for higher and higher performance telecom transmission components.

In order to capture our Cogs synergies from the Neo Photonics acquisition, we're pre building nearly $30 million of inventory to help facilitate the factory consolidation happening over the next few months.

And we had an annual Japan tax payment of approximately $17 million as well as expenses related to the cloud late acquisition.

As a result cash and short term investments decreased $69 million sequentially.

The $1 $94 billion.

To streamline operations and achieve synergies, we will be consolidating Neil photonics backend manufacturing facilities and therefore, we expect an under absorption of capacity relating to these moves during Q2 and Q3.

By the end of Q4, as we ramp up production of Neo photonics products within momentum as manufacturing footprint, we expect to ship buffering inventory, enabling these manufacturing costs to align with the rest of our production.

In addition, as we continue to focus on cash generation, we expect our internal inventories to decline throughout the balance of the fiscal year.

Turning to segment details.

For the benefit of our investors we have expanded our earnings press release to include tables of historical financial data that our reformatted into our new segment categories.

First quarter cloud and networking segment revenue at $229 7 million decreased 19, 8% sequentially and was down 36, 2% year on year.

Cloud and networking segment non-GAAP reporting profit at 10, 4% decreased sequentially and year on year, our first quarter Industrial Tech segment revenue at $87 $9 million was up four 3% sequentially and down 40.

1% year on year.

First quarter industrial Tech non-GAAP reporting profit of 17, 4% was up sequentially.

But down year on year.

Now, let me move to our guidance for the second 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 second quarter of fiscal 'twenty four to be in the range of $350 million to $380 million.

Within this Q2 revenue forecast, we anticipate industrial tech to be down sequentially with cloud and networking to be up sequentially with the addition of a partial quarter of cloud light revenue.

Based on this we project second quarter non-GAAP operating margin to be in the range of 2% to 4%.

Diluted net income per share to be in the range of 25.

To 35.

Our non-GAAP EPS guidance for the second quarter is based on a non-GAAP annual effective tax rate of 14, 5%.

These projections also assume an approximate share count of 67 4 million shares.

In terms of expectations beyond Q2, as Alan mentioned, we do expect a return to growth in cloud and networking shipments in calendar 'twenty four compared to calendar 'twenty three as customer inventory levels are reduced and our shipment rate is more than.

Zinc with end market demand.

With that I'll turn the call back to Kathy to start the Q&A session.

Kathy.

Thank you <unk> 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.

Thank you ladies and gentlemen, we will now begin the question and answer session. So do you have a question. Please press star followed by the number one on your Touchtone filing.

Please turn Comed acknowledging your request should you wish silicon from reporting process. Please press star followed by the number too.

If you are using a speaker phone please lift your handset before pressing.

We have our first question coming from the line of Simon Leopold from Raymond James. Please go ahead.

Great. Thanks for taking the question I'll start off with a very easy one.

Just wanted to get an understanding of what your assumption is for the contribution from cloud light into the in the guidance for the December quarter, and because they're so easy I'll give you. My second question now I am wondering if you could maybe unpack a bit what you see going on in the ZR market.

Now in that I know, we've had a period of inventory absorption and during the <unk> trade show it sounded like there was maybe some visibility to that market improving.

If you could maybe unpack what you're seeing in that segment, both from a laser perspective as well as your own VR devices. Thank you.

Okay. Thanks Simon.

The cloud light revenue is the revenue they're going to ship from when we announced the closing which was yesterday, so about seven and a half weeks of revenue and we've talked about trailing over $200 million. So you can extrapolate what you think.

The two months will be and we're not going to actually break that out in any further detail as far as the ZR market visibility is concerned I think with all of what's going on inside the data centers with AI and machine learning, we've seen a pickup in <unk>.

Demand in fact, probably earlier than we would have expected otherwise and so I'd say that that has some healthy.

Tailwind to it.

For data center interconnect and we've seen some of that come through.

Some of our hyperscale customers and new demand towards the ZR modules Chris.

Chris do you have anything else to add on either of those.

I think that's a great.

Thank you Simon.

Yeah.

Thank you. Your next question comes from the line.

Chetan <unk> from Jpmorgan. Please go ahead.

Hi, Good morning, guys. This is Joe Cardoso on for Sonic charity.

Yes first question for me can you just give us some granularity relative to the underlying trends youre seeing in telecom I think one of your peers in the space suggested it seeing a bottom in the September quarter itself and expect it to begin to recover in subsequent quarters and while another suggests that it's more of a mid 2024 phenomenon. Just curious where you are landing on that spectrum and what's driving your car.

Evidence there and then I have a follow up.

Sure I'd say, we're kind of in between in that.

We still are under shipping end market demand and I would say that we've seen with.

Some end market demand softening frankly.

And so that's why we continue to see.

Muted demand for our telecom products.

I do think that we will see inventories being reduced.

In this time period as well as December.

But I'd say theres, probably still some <unk>.

Inventory consumption going on even into early part of calendar 'twenty Corp.

Got it. Thanks I appreciate the color Alan and then just relative to the non cloud like Datacom business, you had been talking about ramping capacity there, including some really hiring of head count I believe you were moving to a larger wafer size et cetera. So a bunch of moving pieces I guess can you just give us an update on how that is.

Tracking and then just whether with cloud like on the books now does that help you accelerate some of these initiatives relative to what you were doing in terms of ramping capacity for the legacy piece of the Datacom business. Thanks for all the questions.

Sure.

The datacom.

<unk> market is.

Very robust and.

We are on allocation again, unfortunately, but our capacity is coming online as we had projected and it has as we have discussed on prior calls, but the demand again is even more robust given.

The Hyperscale is really wanted to go to 800 gig and if you go with the email solution. Most of those solutions have eight ships as opposed to core chips to get to 400 gig so.

A doubling of the chips per transceiver means more and more datacom chips. So we've seen extreme growth in that business.

And we are still on track to go to increased wafer size in calendar 2024. So all of that work is going on in the fab while at the same time, we are growing our capacity from the capital additions. We've made earlier this year that are coming online as well as you said, bringing back employees and hiring to be able.

To meet the demands although we are still on allocation today on IMO because they did come back much faster than we had actually expected so.

Our backlog is strong through the balance of the fiscal year end.

And we expect that to continue to grow into fiscal 'twenty, five, especially as we bring on 200 gig per lane <unk> and I think we're.

Being a very strong leadership position there as well.

And cloud like club lights designs are.

Today are both multi modal pixel based and so we're expecting to use our VIX will designs to do product emptied and drive costs down and margins up as well as silicon Photonics based and so we're working with.

Cloud lights team today on how do we get our CW laser and more prevalent in their designs as we move forward. So it doesn't impact our ml.

Capacity per se, but it does.

It does give us opportunities for margin improvement over time.

Understood very clear thanks Alan.

Great. Thanks, Thank you.

Thanks, Scott churn comes from the line of meta Marshall from Morgan Stanley. Please go ahead.

Great. Thanks.

Maybe first question just on whether you have kind of ironed out more of what Capex investment you think color light will take during the year and then maybe as a second question kind of building off of Simon's question. You mentioned kind of the 800 D are getting positive reception that E C O.

He just when would you expect that to kind of ramp into production.

So as you can imagine.

The crowd right ramp is.

It's been very steep and.

One of the things that we worked with them on is to make sure that they continue to invest.

Pre acquisition and they have so they have been continuing to grow their capacity.

As far as future.

Capex requirements I'd say, it's a little early and that we have been getting very positive feedback from.

Hyperscale as customers and we expect that the acceleration of growth will be even stronger than expected. So I think it's a little bit early to really determine are we going to.

Further accelerate or stay on the path that they were on I would say, we're probably going to have to accelerate capex.

As we as we've gotten feedback again from not only existing customers, but new customers that they don't have much footprint and as they do you view this really as an extreme positive of AR.

Diversification of U S headquartered company.

And manufacturing footprint that is more global than current existing cloud right. So.

I think we'll have to wait on that and give you an update on our Capex plans for club laid on the next call.

Or some future meeting as far as the 800 gig ZR ramp I think we're still at the demonstration stage today and again positive feedback you COC.

We've got to get to from where we are today too.

Data samples in qualification samples and then it takes a couple of thousand hours of testing to get to production. So I'd say, that's really more of a.

Early fiscal 'twenty five in late calendar 'twenty four type of initial ramp.

But again I think we're positioned quite well with what we think will be first to market.

That product, so very very happy with progress there.

Great. Thanks.

Thank you.

Yeah.

Our next question comes from the line of David <unk> from UBS. Please go ahead.

Great. Thanks, guys for all the color I'm, just going to try and maybe Triangulating again on this cloud by transaction. So I think Alan in your prepared remarks, you suggested that the business should accelerate to about 30% growth in calendar year 'twenty four.

If I just do some really quick math does that assume your legacy business returns to growth in 'twenty four based on sort of the disclosure that cloud right. That's about $200 million of revenue growing obviously relatively rapidly and then in conjunction with that from a margin perspective, I know you've talked about it on the last call as it being sort of.

Slightly accretive transaction with regards to the first 12 months post closing.

But can you maybe share with us sort of the margin profile of this business relative to the existing sort of cloud and networking part of the business pre the transaction. Thanks.

Yeah, Let me take the first question and then I'll have what did talk about.

Club like margins.

No.

I think youre right about the growth rate and again as I said to the meadows earlier question.

<unk> has been very positive and when we turned those that feedback into orders we could grow faster.

But again I think thats a little early.

But the impact on I don't think cloud light has any impact on the legacy business, except that we're very much closer to the to the cloud customers.

And we're not going to guide more than one quarter at a time.

We're actually not going to split up legacy versus cloud light in the future, but I would say that as we've talked about we do believe we're on.

Under shipping end market demand and inventories are reducing so we do anticipate that.

In the first half of 'twenty for that Theres, probably a pick up.

More matching.

Our shipments within customer consumption.

Probably in Q4, so I would expect that we would see a pickup in Q4 from today's levels, but Q3 is a little bit hard to call right now.

Budget.

Yes.

David.

So on the margin profile, we certainly see a lot of opportunity.

With cloud light with the rapid growth that we're expecting in the business. There is some natural leverage that we should see.

Icloud light.

And there's also a lot of opportunity with our existing manufacturing footprint to.

To help that part of the business grow while utilizing some of the manufacturing capacity that we've also got.

And then probably the most important thing, which our R&D teams are going to be working with their R&D teams over the next few weeks is really our plans around vertical integration.

And those plans around vertical integration can provide quite a bit of upside.

From from from an increased standpoint on their own raw materials.

So having said that what we've communicated previously.

The cloud business is currently operating in.

In the low teens from an operating margin standpoint, and in the high teens from an EBITDA standpoint.

Our expectation that we've communicated is that.

Through through the opportunities that we see that we can certainly get that business.

And to the high teens from an operating margin standpoint over the next 24 months.

As the teams begin more with their R&D teams will be able to.

Update our thinking around that in future quarters, but that's currently where we are.

Our thinking is.

In terms of the business.

Great. Thank you guys.

Thank you David.

Our next question comes from the line of Vivek Arya from Bank of America Securities. Please go ahead.

Alright. Thank you for taking my question first question I know you gave at 30%.

Growth potential for our cloud light, but that's more like a three to five years is it fair to say that they're growing faster than that.

And I look at a lot of the compute deployments.

They are growing like a 40% 50% type of CAGR. So is it fair to assume that at least in the near to medium term cloud light could be growing more at a 40, 50% rather than a 30% rate.

Yes, I think Thats fair.

Given the the.

Introduction and rapid growth at a 800 gig.

We expect that our cloud like should be able to grow faster than that 30% CAGR that is a multi multi year.

Number.

At 800 gig has been introduced we highlighted that <unk> revenue in the most recent quarter was more than 50% 800 gig. So it will be highly leveraged to the growth of that as customers.

The leading edge of.

AI deployments.

Continue to ships to the 800 gig speed.

Thank you and for my follow up just wanted to kind of double check.

Sure.

Accretion.

Matt or the potential accretion Matt. So first of all when you say something is accretive are you talking on a EBIT down level are you talking on operating income level at an EPS level. If you could define what accretion means and let's say to be defined accretion on an EPS level then is it.

Immediately accretive or will it be accretive sometime in the fiscal year. When we put in all the puts and takes of the financial income.

Being lost to another fab consolidation activities and so forth. So when does that actually potentially accretive on an EPS perspective in your opinion.

So vivek we've communicated this earlier.

We believe it's immediately accretive to earnings per share.

And the way we do the math on the earnings per share is the operating income we expect to generate.

From cloud light on a standalone basis without synergies.

And compare that to what we're earning.

Our short term overnight.

Market rates and so we just take a look at those two to determine accretion and based on that.

The.

Action is immediately accretive and that accretion only improves.

As we go through some of the synergy actions I spoke about earlier.

Understood. Thank you.

Thanks Vivek. Thank you.

Our next question comes from the line of George Notter.

From Jefferies. Please go ahead.

Hi, guys. Thanks, very much I'm just curious if you guys have gotten any other feedback on the cloud light acquisition from your other datacom customers I think obviously.

You are competing with some of those folks increasingly I'm just wondering if in the last week or two you've had any more feedback is is this something that becomes problematic for the rest of the datacom business or or non issue. Thanks.

Yes, Thanks George.

As you can imagine I've had many discussions with our very important transceiver customers to assure them that our partnership is still very solid and they're very very important to us and I think there is plenty of demand to go around.

And we've acted like strong partners with them over time, so I would say that.

The alternative is that they buy from another competitor.

Or are they buy from someone that they've trusted for years and so I don't I don't see any negative implication with respect to our transceiver customers and their demand on us or emails VIX holes in Dms for that matter. So I think so far so good feedback has been positive and we have.

Not seeing any demand shifts as a result of the announcement from.

A week or two ago.

Got it thank you very much.

Thanks, George Thank you George.

Our next question comes from the line and Christopher Rolland from Susquehanna. Please go ahead.

Hey, guys. Thanks for the question.

One of your competitors spoke of a strong ramp in 800 G. Starting in March.

I was wondering if you could kind of describe the shape of your 800 G ramp here.

Over the next 12 to 18 months.

And they were going to see kind of as a result of this strong growth sequential growth each quarter of next year I was wondering if you would.

See something similar on on your horizon.

Hey, Chris Yes, I would say, we would see very similar commentary that.

Both from the chip standpoint that we are shifting a lot of.

Emails and had very strong demand that we expect continues.

Over the next four plus quarters.

<unk> hundred gig continues to ramp and then from the cloud late acquisition.

Their revenue is as we've highlighted on the call.

Increasingly.

Focused on 800 gig and that is in its very early days that market is just emerging and will continue to ramp.

Off into the future. So yes, we believe the 800 gig portion of our cloud business, but can you continue to grow.

Into the foreseeable future.

Okay.

If you had to take on sequential growth in each quarter of next year calendar year, but.

For my second question I wanted to talk about.

Kind of customer engagements for laser designs bypass.

System vendors holistic system invent vendors, but also hyper scaler.

Out there and.

I don't know if its possible to kind of break out.

Cloud networking demand so 51.

Terabits switches versus AI, but how do you think thats mixes out for next year as well. Thank you.

Yeah.

<unk>.

So.

Couple of pieces so on.

The last debt with regards to.

Tore where where our products are landing if you will AI versus non AI, we don't have 100% visibility to that but our belief is that for the next year at least most of the growth or the primary growth from the market is driven by AI driven applications.

And then.

And then going back to custom laser designs or if you will yes, we are engaged with both.

As you said system.

Providers, if you will as well as cloud.

Operators correctly hyper scaler on custom laser solutions as well as al with cloud like custom transceiver solutions as AI.

AI continues to push the performance envelope.

And stress from power consumption.

Latency and other requirements that are really critical to AI workloads and.

That's one of the benefits of this combination that we.

We're bringing together unique manufacturing capabilities from cloud like bringing together our unique chip.

Chip manufacturing.

So that when we partner with customers with a full full tool chest. If you will to address the challenges of <unk>.

Next generation.

Roadmaps that theyre looking to implement.

Sooner than later.

Thanks, Chris.

Thank you guys. Thank you.

Our next question comes from the line of Ananda Baruah from loop capital. Please go ahead.

Yeah, Good morning, guys and thanks for taking the question.

Yes, I'll, just I'll, just stick with Transceivers as well.

Do you guys see and this would probably be for Chris or Alan.

Any latency points, there or sticking point getting getting cloud right.

Now that you've closed the deal getting cloud like volumes that Canada would be call it run rate.

And I have a quick follow up.

Could you clarify what you what you mean, Amanda Yeah tell us I mean, I guess is everything in place isn't as simple as just taking the orders and shipping them out.

Or.

Given that yes.

Sort of given given that their new newly absorbed into the organization given that your balance sheet.

And Youre kind of street cred, so to speak May open up new opportunities for them.

Given that manufacturing capability they have in place.

Are there things that could be required that could in the near term caused some latency.

Getting those orders out the door right now so just wondering you know as the mechanism to get set up to work smoothly and elegantly right now taking the orders instead of that or is there a <unk>.

Something that needs to be put into place.

Or accomplish near term.

To get that to get the the the orders to run rate revenue.

Yes.

The <unk> team is not lacking orders if thats, what you mean, so I think as I said earlier capacity plans and Capex plans has continued to be able to ramp to the kind of volumes that they had visibility to prior to the acquisition that said I do think we will see.

Further demand.

Acceleration and that could take additional capacity.

As well as.

Additional factory footprint and I think that would be then.

Accelerated with the acquisition and that we have factory footprint that we could expand into today.

Given that we're all of.

24 hours into the close and we have a team there now we're sorting all that out frankly, and we hope not to screw it up frankly, so they've been doing very well, which we're trying to stay we're trying to let them do their stuff and not distract them as theyre going up a very very steep ramp but that said we're here to help them.

And I think the combination is really a winner from my discussions with those cloud customers.

Yeah, that's super helpful. That's Super helpful and I guess just.

In that regard, it's sort of a follow up would be.

Given you made two acquisitions.

In that you started in the plug a hole space.

No.

In the last 12 months or so.

For the 12, 4% to six quarters.

Could you stay active in this area.

It's obviously an area of interest.

Do you have everything you need or do you think it does it make sense that you could keep looking.

From a tech perspective.

Yeah, I mean, we're always looking at.

I think our focus is making sure. We finished the acquisition synergies of Neo photonics, and what you've talked about that.

The backend factory consolidation is happening now and we will get the benefit of those synergies at the end of this fiscal year and that's meaningful so we got to finish that and we have to make sure that the cloud light acquisition goes up the ramp effectively.

To meet the demands of what's going on in the Hyperscale is an AI ml stuff. So.

I think we have our hands full today for the next several quarters.

But that said, we're always looking and always interested in what we might be able to tuck in to give us another competitive advantage over our competition.

Yes.

Okay.

Chris do you have anything to add.

Okay.

I was just going to say that.

<unk> two <unk>.

Iterate that I think can andhra hitting a key point that we have had a deliberate strategy to build out both.

<unk>.

Technology manufacturing on the component capabilities over the last N number of years, and then thats translated into now getting more plausible transceiver capabilities.

And as Alan highlighted is that all come together now we've got got time to put all those pieces together and fully realize the benefits of those acquisitions and the post acquisition organic work, we are performing too.

It really unlock the value and the multiplier effect between all of these acquisitions, but we are continuing to look.

We are we are not done if you will building out our technology and product portfolios, but for the time being we've got a lot of work to do to realize the maximum potential of what we've already taken off.

Thanks, guys.

Thanks Amanda.

Your next question comes from the line of Mike Genovese from Rosenblatt Securities. Please go ahead.

Okay.

Great. Thank you.

Can you guys talk could you guys talk more about the optical switch.

Switch opportunity.

For AI.

More about that technology and sort of how far away revenues are and is that is that a mems based product.

I'm curious.

Yeah, Hey, Mike So.

In today's data centers, obviously there is.

A lot of a lot of bandwidth going around and.

As we've seen in <unk>.

For telecom networks for for years being able to reconfigure the network optically and electronically brings a lot of value in.

Hyperscale network operators are our cloud operators, rather are beginning to realize that being able to reconfigure bandwidth optically within data centers is a key.

A key capability.

There's a range of technology that that can be applied in our case it certainly will involve mems.

I would say in terms of time to market.

Little premature to talk about an exact timeframe, but I think over the next.

Year, Youre going to hear a lot more about it as as prototypes begin to ship.

Okay, great. Thanks, Chris.

I guess, something maybe more maybe more immediate than your competitor yesterday.

Spoke about some some near term opportunity, where they expected sequential growth.

Because of some.

Transport opportunities in China, WSI Williams and amps.

Are you seeing any anything similar.

That.

Okay.

Yes, I mean, we've seen the China mobile tender is happening and it's really.

It's kind of nice to get a customer to expedite.

W assesses and the components to go around them. So we've been in the midst of that and we're trying to meet that demand or that tender and I think its meaningfully large and.

It's an opportunity and I think one that will drive calendar 'twenty four.

Volumes more meaningful for that specific opportunity, but thats I think more of a unique.

<unk>, where.

The deployments are happening or bidding is happening in the deployments will happen early parts of next year. So yeah that is an opportunity we are seeing that and I've been on the phone with the executives there too.

To help them get what they need when they need it.

Perfect. Thanks for the color Thanks, Tom.

Thanks, Mike Thank you Mike.

Question comes from the line everything Roy from Stifel. Please go ahead.

Yes. Thank you.

Just follow up there Alan you did mention that Youre I think over the last 90 days it sounded like you're starting to see some areas of telco softness.

I was wondering if that was the geography based comment or customer or.

And market based comment any any additional detail there. Please.

I think it's.

Just echoing what I think you've heard from some of our network equipment manufacturers around.

Regional softness and inventory at the North America carriers, So I don't think its anything.

New and enlightening, it's kind of more of the same that we've seen that is making us be cautious about.

The outlook for our current quarter and and.

Into early calendar 'twenty four.

Okay got it. Thank you and then as a follow up probably for Chris.

With that with.

Even more focus on data center optics I was wondering if you can give us an update an update on how you're thinking about the coherent DSP.

Project, and whether or not longer term you think theirs.

Spot for that team and what you're planning on with this and Robin.

Yes, so certainly we continue to make great progress in developing our coherent DSP.

As one of another puzzle piece, if you will and are plausible module strategy. So we expect that we will we will.

Start evaluating.

Our latest 400 gig.

Parts in calendar 'twenty for early calendar 'twenty, four and yes, I think it's a critical capability both for for the data center interconnect opportunity and over the longer run in fact, we expect that technology to penetrate further insight.

The data center as well I think you referenced.

And maybe if I could add to that Reuben is if I could.

Added to that as well we have been building out not only our DSP team, but other RFC team to have critically enabling components in house to address.

That margin stacking up the independent <unk> companies. So that those teams have been building out and we've started to see the benefits of things like <unk> and drivers that.

Having that in house is a big benefit for us.

Very helpful. Thank you.

Okay.

Thanks Julien.

<unk>.

We have our next question coming from the line of Dave Kang from B Riley. Please go ahead.

Thank you. Good morning first question is regarding your comments on telecom.

So how much.

Glenn how are we should we expect in the December quarter I'll be talking in a slight decline or it's still like a high single digits, maybe even double digits.

Yes, I don't think we had indicated that there'll be a decline I think what we're indicating is that that we're still shipping below and.

And customer consumption and so it's muted with respect to.

Being back to parity with regard to us building and shipping what our customers are shifting and deploying it. So that's more the comment then then its going the wrong direction, because we're already at a very low level.

Got it and then regarding your comments about CNN.

Being up.

In calendar 'twenty four year over year I assume that was all organic right.

I'm, sorry, I missed the beginning of the question.

Clouded in networking I think I believe you said you are going to be upheld under 24 organic right.

I would say both organic and inorganic we expect it to be up yes.

Okay. So just to be clear I mean.

Even without cloud like.

CNN will be up next year next calendar year, yeah. Okay. Just wanted to clarify that thank you.

Thanks, Dave.

There are no further questions at this time I would now like to turn the call back over to Mr. Alan Lowe for final closing comments.

Great and thank you I would like to leave you with a few thoughts as we wrap up this call first I would like to extend a very warm welcome to the cloud by team joining momentum.

The talented <unk> team already excels in delivering the highest speed optical transceivers to cloud data center operators and infrastructure providers.

I very much look forward to our R&D R&D teams working together to see what else is possible to deliver even more leading edge product innovations to our customers.

In addition, our business fundamentals are solid for the mid to long term as we serve the exponential growth in data center bandwidth required by the artificial intelligence machine learning mobile carrier and cloud computing markets.

New industrial applications are driving demand for our advanced imaging and sensing products and our commercial lasers are expanding into high growth applications beyond our traditional markets.

We are committed to investing in innovation to meet 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 at investor conferences and upcoming meetings in the coming weeks.

Thank you.

Thank you, Sir ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask could you. Please disconnect your lines have a lovely day.

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Thank you.

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