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spk03: Good day, everyone, and welcome to the Lamentum Holdings Fiscal Fourth Quarter and Fiscal Year 2023 Earnings Call. All participants will be in the 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 Ta. Vice President of Investor Relations. Ms. Ta, please go ahead.
spk16: Thank you, and welcome to Lumentum's fiscal fourth quarter 2023 earnings call. This is Kathy Ta, Lumentum's 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 synergies with recent acquisitions, including neophotonics, financial and operating results, macroeconomic trends, trends and expectations for our products and technology, our 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 1, 2023, and those in the 10-K for the fiscal year ended July 1st, 2023 to be filed by Lumentum with the SEC. The forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum 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. Lamentum's press release with the fiscal fourth quarter and full year 2023 results and accompanying supplemental slides are available on our website at www.lamentum.com under the Investors section. With that, I'll turn the call over to Alan.
spk12: 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, 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 in support of our customers' needs now and into the future. In the near term, we are facing significant headwinds as both our direct and end 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 24 compared to calendar 23 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 23, our full year revenue was up 3% from fiscal 22. Also, fourth quarter revenue and EPS were both above the midpoints 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 the same time, we continue to focus on our customers to drive an even stronger partnership and a differentiated level of satisfaction. Rotem revenue was especially strong in Q4 with increased sequential shipments across all Rotem product categories. Also, our commercial lasers business grew sequentially, particularly in new applications of ultra-fast 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 C plus L band as well as extended C and extended L-band architectures are underway in 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 customers' photonics roadmaps, which will use 130 gigawatt and 200 gigawatt data rate coherent technologies. We are developing these high-speed products in both discrete and integrated form factors, paving the way for enhanced performance in metro and long-haul applications, as well as new applications at the edge of the network. With the addition of the teams from our neophotonics and IPG acquisitions and the capabilities to develop DSPs and RFICs, 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 800G 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 or CW lasers for silicon photonic applications that connect server racks in AI 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 racks, and between servers and storage. We also believe that Datacom pixel growth will be meaningful in the next several years as copper is replaced by short-reach multi-mode optical links. As stated earlier, we expect telecom and datacom revenue to be up in calendar 24 from calendar 23 as customers reduce their inventory levels of our products and our shipment rate is more in sync within market demand. Before I provide additional detail on the 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 this 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 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 24. The lower revenue in tunable access modules was partially offset by sequential increases in narrow line with tunable lasers and rotem shipments across several leading customers. In fiscal 23, 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 23, we doubled our manufacturing capacity for tunable access modules in 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 with tunable lasers and our advanced rotums are key enablers of our customers' next generation network architectures that are just starting to be deployed. We saw sequential growth in narrow-line with tunnel lasers and across all major categories of ROADMs, including low port count, high port count, and contention-less M-by-N platforms. Also, fiscal 23 ROADM revenue grew 22% from fiscal 22, driven by the adoption of these advanced ROADM 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, 800G transceivers can provide the bandwidth while also reducing latency. The new 800G transceivers utilize eight different wavelengths at 100G per lane, triggering orders for our EML products and driving a return to growth for our EML product line. Additionally, we are seeing strong demand for our high-power CW lasers for customers utilizing silicon photonics to build 800G transceivers. In calendar 24, our 200 gig per lane EMLs will enable the next generation of transceivers with capacity of up to 1.6 terabits. We expect to start ramping shipments of 200 gig EML products in calendar 24, and customer qualifications of 800G and 1.6 terabit transceiver designs are well underway. We expect our 200G 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 24. In 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 24 3D sensing revenue will be lower than that of fiscal 23 due to our assumption around 3D sensing end 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 23 commercial lasers revenue was up 8% from fiscal 22. 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 ultra-fast 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 ultra-fast 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 in markets. We expect continued rapid growth in new applications for our ultra-fast lasers to partially offset these near-term headwinds. Although we expect our shipments in the near term to be soft, I'm very confident about Lumentum's mid- to long-term prospects, given the current softness is primarily driven by high inventory levels, the fundamental in-market and technology trends driving our growth expectations are strong and unchanged, and Lumentum is investing 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 Wajid, 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 Lumentum as we execute upon our strategy. With that, Wajid.
spk04: Thank you, Alan. Net revenue for the fourth quarter was $370.8 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 gross margin for the fourth quarter was 24.2%. Gap operating loss was 15.1%. and GAAP diluted net loss per share was 88 cents. Fourth quarter non-GAAP gross margin was 36.7 percent, 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 9.1 percent, 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 $102.4 million, or 27.6 percent 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 59 cents. 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%. Turning to the full year results, fiscal 23 net revenue was $1.77 billion, which was up 3.2% from fiscal 22. Gap gross margin for fiscal 23 was 32.2%. Gap operating loss was 6.5%. And gap diluted net loss per share was $1.93. Full year fiscal 23 non-gap gross margin was 43.2%, which was down relative to fiscal 22. Fiscal year 23 non-gap operating margin was at 19.2%. down from fiscal 22. Fiscal 23 non-GAAP operating income was $339.2 million, and adjusted EBITDA was $431.7 million. For fiscal 23, 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. On to the balance sheet. Cash and short-term investments increased $346 million sequentially to $2 billion, primarily driven by our convertible note offering. During fiscal 23, we generated $179.8 million in cash from operations, of which $49.2 million was generated in fiscal Q4. During the quarter, we purchased 2.67 million shares for $139.8 million, which includes 2.34 million shares repurchased concurrent with the issuance of our 2029 convertible notes. As we make progress on the integration of Neophotonics 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 23 as we continue to focus on cash generation. Turning to segment details. Fourth quarter optical communications segment revenue at $320.5 million decreased 4.4% sequentially and down 13.6% year on year. Optical communications segment non-GAAP gross margin at 36.1% decreased sequentially and year on year. Our fourth quarter laser segment revenue at $50.3 million was up 4.1% sequentially and down 1.8% year-on-year. Fourth quarter lasers non-GAAP gross margin of 40.6% was up sequentially but down year-on-year. Now let me move to our guidance for the first quarter of fiscal 24, 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 24 to be in the range of $300 to $325 million. 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 percent and diluted net income per share to be in the range of 20 cents to 35 cents. Our non-GAAP EPS guidance for the first quarter is based on a non-GAAP annual effective tax rate of 14.5 percent. 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 24 compared to calendar 23, 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 23. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy?
spk16: 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.
spk03: 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 touchstone phone. Again, that's star followed by the number one. If you would like to withdraw your request, please press star followed by the number two. Your first question comes from the line of Mehta Marshall from Morgan Stanley. Please go ahead.
spk02: Again, Mehta Marshall from Morgan Stanley. Your line is now live. Please go ahead. Sorry. Thank you so much.
spk15: having a buttons day. Just in terms of, you know, how you guys are evaluating, you know, how much of this is inventory correction versus potential for share loss, or just not being involved in certain platforms, just how are you kind of evaluating that given, you know, kind of repeated kind of step downs, and maybe more particularly on the telecom business, maybe as a first question.
spk12: Yeah, thanks, Meta. 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 share normalization and 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. So I firmly believe that the slowdown in revenue is really mostly inventory correction and has really nothing to do with share.
spk15: Great. I mean, just as a follow-up, just how do you examine kind of what or get a sense of what the inventory positions are and is kind of the belief that revenue would resume kind of in the revenue growth would resume in the calendar 24 period based on, you know, when people are telling you that they want to start to get equipment again or is it a matter of you know, that's when you think that budgets will open up from your customers and they're expecting it. I guess just is that an expectation or is that backed by kind of conversations you're having with customers?
spk12: Yeah, I wouldn't say it has to do with releasing of 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. I'd say that we're seeing some signs of inventory absorption faster than expected at some of the hyperscalers where we expected that to take longer. I think AI is helping with that, both inside the data center as well as in the data center interconnect space. I think from that perspective, you know, that's why we're confident about calendar 24 being higher than calendar 23. And those are really in-depth conversations with customer executives and really viewing our inventory in their locations and at their contract manufacturers. And, you know, that's why we believe that the next couple quarters are going to take to get rid of that inventory.
spk15: Great. Thank you. I'll pass it on.
spk03: Thank you. Your next question comes from the line of David Ball from EBS. Please go ahead.
spk01: Great. Thank you very much for taking my question. And just two for me. One, Alan, you know, going back to the inventory question, I guess, can you kind of help us understand, you made a comment that you think you're undershipping to industry demand, where that demand might be today, and how you see that demand sort of progressing as we moved through this sort of more challenging period of time in 23 into 24. That kind of colors your view about recovering back to growth in calendar 24. 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, consumer 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 and calendar 24 from a margin perspective. You know, obviously, it's unlikely that you're going to get back to the high 40s gross margin, but want to get a better sense for maybe gross margin trajectory as we move through the balance of this, you know, the next four quarters into maybe fiscal 25. Thank you.
spk12: Yeah, thanks, David. I'd say on the undershipping question, I'd say that, you know, clearly at the revenue levels that we're having today, our customers are shipping out more than we're shipping in. And I think that's really due to the fact that they've built up inventory over the last few years when there was fear that components would not be available. So I do believe that that's the case. That said, there are some North America carriers that have talked about lowering their CapEx, but not significantly. So I'd say that you know, the demand for bandwidth continues to be robust, and there's nothing that's going to slow that down. I would say that, again, on the hyperscalers side, you know, AI is really consuming a lot of the inventory that we had shipped over the last couple years, and now we're starting to see signs that things could pick up before the end of the year in the hyperscalers, but in the normal carrier space, I'd say that's probably premature until calendar 24. Wajid, you want to take the operating leverage question?
spk04: Yeah, sure. So, you know, on operating leverage at the revenue levels we're currently seeing, you know, for the back half of this calendar year, you can appreciate that we're having a lot of underutilization charges within our internal factories, you know, 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 on, our expectation is that we'll really have three things working for us. One is that we're expecting to continue with our synergy plans that we've executed on quite well to date on neophotonics. And the consolidation of the factories in the back half of this calendar year should start to show through the P&L in calendar 24. The second thing is that our Datacom business is a chip business. And so, you know, we're expecting to see improved demand in that part of the business, you know, through calendar 24 and even actually in the back half of this calendar year as well. And so that should give us some uplift. And then like Alan talked about, you know, once the telecom business becomes more normalized, the underutilization charges should reverse themselves and we should see improvement. So those are kind of the three tailwinds from this point in time that can help us.
spk07: Great. Thanks, Wajid. I'll get back in the queue.
spk03: Thank you, David. Your next question comes from the line of Alex Henderson from Needham. Please go ahead.
spk06: Great. I wanted to start off with the comment on 3D sensing that business would be flat into the September quarter. Historically, the June quarter is a seasonally softer quarter. The September and December quarters are seasonally stronger. Can you parse a little bit between is that a late start because of some production issues and therefore we make up a little bit of the 3D sensing in the fourth quarter or is it truly as steep a decline as the numbers would indicate. I think if it's flat sequentially, that's 60-some-odd percent decline year-over-year, so it's a pretty steep number.
spk09: Hey, Alex. This is Chris. Thanks for the question. Yeah, I think a couple things go into our outlook. I think as we've alluded to prior calls that we've anticipated the impact of having an additional competitor in the mix. And so that and current demand environment are both factored into our guidance. And that's what's impacting the sequential and year-over-year comps you're asking about.
spk06: Yeah. So again, 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 in the December quarter? Or should we be using that as the new level of seasonal strong period?
spk09: I would say it's a little early to guide that product plan for that timeframe, but I would think you should think about it being flattish between the two quarters.
spk06: Great. The second question I had for you is 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 period. at least in Datacom. Telecom 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 to 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 trajectory from the expectations that you gave last quarter to the expectations you gave this quarter on that business and within telecom as well? Has it steepened as a result of excess cutbacks and shipments at the service providers? What's the linearity of the demand structure there? Did it fall off towards the end of the quarter?
spk12: Well, let me take them one at a time. 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 in January. a lot. And I'd say that, in fact, we're 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 that's 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 24. So Datacom, I think, is on the right trajectory. On Telecom, I'd 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 in our ability to produce what they need when they need it, and that 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 it originally anticipated. So I'd say, you know, nothing really changed there other than, you know, inventory levels need to come down further and that, therefore, we're shipping into our customers less than they're shipping out to the carriers, which in turn should take care of that problem and more normalized as we get into calendar 24. Okay. Thank you. Thanks, Alex.
spk03: Your next question comes from the line of Samik Chatterjee from JP Morgan. Please go ahead.
spk11: Thank you for taking my questions. I guess from the first one, if I can just ask you to delve a bit more into the AI-related demand that you're seeing, how much of that are you seeing in terms of interest on the VIXL side versus EML? when you think about also the customer set there, how much of the engagement is hyperscalers versus other newer sort of companies coming into the ecosystem. Any thoughts in terms of what you expect that demand to look like in a couple of videos would be useful and have a follow-up. Thank you.
spk12: Let me address that, and I'll ask Chris to add on. I'd say you're right. It's beyond the hyperscalers, 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 of our products to meet the needs of those unique situations where the data bandwidths are just And so I'd say that that's really more of an impact in calendar 24, but that work has been going on now, and those products will come to market in the calendar 24 stage. I'd say that what we're seeing today is more EML-based driven 800-gig transceivers that both use our CW high-power lasers for silicon photonics, as well as eight EMLs for each transceiver. Because those are the products that are available today that can use, that can satisfy that bandwidth need that the hyperscalers are going through. So that's what we're seeing. As far as Vixels are concerned, you know, we're going through the qualification work on those 100 gig Vixels I talked about. And we see that really starting in a meaningful way to contribute to our revenue in calendar 24.
spk09: Yeah, and I'd also add that in addition to the Vixels, which are just ramping, and the EMLs were market leader, and we also, there's 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 in Datacom to be able to address different parts of the data center and different approaches to the same parts of the data center. And we do anticipate significant uptick in the market in Datacom in the coming 12 months relative to kind of the, obviously, the down year that we have at being a chip supplier over the last year. And, you know, this is going to be a multi-year phenomenon that we definitely believe that you're talking, you know, tens of percent keggers for AI-related deployments over the next few years. So very exciting opportunity for us.
spk11: Got it. And for my follow-up, just rotating back to the results and the guide for the fiscal first quarter, I think with 3D sensing in the past, you've obviously had a certain seasonality to the business through a year. Any thoughts of how you're thinking about seasonality this year? Should investors expect So as you get to be on one queue to see sort of sustained sequential growth in the business or given some of your comments about the sort of calendar year being inventory digestion impacted, it's really more of a step up into the second half of the fiscal year. And I think where I'm trying to get to is we all understand the earnings power of the business at this run rate is depressed because of the lower demand or the inventory digestion. in terms of revenue increasing, your OPEX savings coming through, what do you see as the normalized run rate for the business where you want to exit the yield?
spk12: Well, normalized is hard to say. I'd say in the short term, you know, the next couple quarters, telecom is going to be tough. And, you know, as we said, 3G sensing, you can think about being flat. Lasers is going to be, you know, down sequentially from Q1, in Q1 and You can think of that as being flat with fiber lasers going down in Q2, but being offset by our ultra-fast lasers. So I think then the real mover between Q1 and Q2 is the datacom demand, and that's really going to be gated by our ability to supply that demand. And so I would say that there's some small uptake in Q2. And then assuming that the inventory is taken care of over the next five months, then we should start seeing some pickup in the first half of calendar 24. And then normalized demand happens when we're shipping into our customers exactly what they're shipping out. And I think we're confident we can get back to the levels of revenue we've had in the past and then You know, with our model, the operating leverage is pretty immense, and we should see, you know, significant bounce back when we get up to that $400 to $450, even $500 million in revenue. And I think that's doable, you know, in the not-too-distant future.
spk11: Okay. Thank you. Thanks for taking my questions.
spk03: Thank you, Samik. Your next question comes from the line of George Nodder from Jefferies. Please go ahead.
spk05: James Meeker- I got thanks very much, I wanted to ask about the gross margin performance in the quarter. James Meeker- You know down gosh roughly 400 basis points sequentially on a pretty similar revenue number I guess i'm wondering if there's. James Meeker- Certainly, the lower 3D sensing, you know, is an element of that, I suppose, but I wonder if there's some excess and obsolete inventory charges there or anything else that drove that you know big sequential step down thanks.
spk04: Yeah, so you're right. So the 3D sensing number did come down into Q4. Excess and obsolescence was pretty normal from a run rate standpoint. It was really under utilization. So, you know, 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 OpCom and our lasers business pretty significantly. And we're seeing that really flow through into the back half of the calendar year.
spk05: 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 the way to read that?
spk04: Yes, that's fair. Yes, that's fair.
spk05: That's right. And then is there some strategy here to kind of... you know, I don't know, I guess produce a softer gross margin in the June quarter, take that underutilization hit, you know, all at once then, and then you can kind of clean that effect up, you know, going into the September quarter, or is it just some of the strategy in terms of how you run your utilization?
spk04: Yeah, 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'll start to see the benefit of of that probably in the January timeframe, because we'll be out of the facilities in the November, December timeframe this year. So we'll start to see the impact of that in our fiscal Q3. So that'll be, you know, pretty sizable. And then it's really production coming back up at all of our facilities to a more normalized level. So those are really kind of the only two ways that you can improve that.
spk12: Yeah, just to add to that, though, I'd say that the June quarter Datacom was below on Datacom, and those chips that are produced in our fabs absorb a lot. And as that ramps back up, we should see, you know, a better absorption and utilization of the fabs that we have in Japan making Datacom chips.
spk10: Yes.
spk05: 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?
spk04: Well, 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, in Sagamahara where our Datacom chips are produced, that inventory is turning very fast. So as the finished goods are coming out, it's being shipped. But at our Rose Orchard facility where we have internal wafer fabrication, that's moving a little bit more slowly, as well as what we've got in Thailand that's built up for 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 5BU inventory turns. Got it. Thank you very much.
spk03: Thanks, George. Your next question comes from the line of Michael Genovese from Rosenblatt. Please go ahead.
spk13: Hey, great, thanks. I want to dig in on this guidance for telecom and datacom to be up for the year. I guess in fiscal 24, my first question is, is that more of a datacom comment, that datacom will be way up, or are we saying that telecom will also be up as well year over year?
spk12: Yeah, Michael, I think what we said was that calendar 24 would be up from calendar 23. given that we believe the next two quarters of telecom shipments are going to be depressed, given the inventory reductions that are happening at our customers and at the end customer. So not fiscal year, year over year. I'd say calendar year, we're pretty confident that telecom will be up in calendar 24 from calendar 23. That said, again, I'd say Datacom is going to grow sequentially each quarter between now and the end of calendar 24.
spk13: Okay, that makes sense. That's a calendar comment. Thanks for that clarification. And I guess my other question is, you know, when I look at the Datacom, you know, 800G and above AI opportunity, you guys are in EMLs, and it looks like they're trying to, you know, privatizing Mixels as well. I guess my question is, you know, are there any other parts of the Datacom market now with this improvement? You know, I'm not sure. Sorry, Michael.
spk12: We couldn't hear your last question. I think the question, though, was around are there any other parts other than EMLs and VIXLs that are showing signs of demand growth? Is that your question, or have we lost you?
spk02: Oh, yeah, no, I'm sorry. Here, I hope this is back. Mr. Genovese has disconnected.
spk03: Is it okay to proceed to the next question?
spk12: Yeah, maybe we try to answer the question if we understood it right and we can talk about, you know, different kinds of lasers, CW lasers and such, Chris.
spk09: Yeah, certainly our focus is on serving the hyperscale technology Cloud market, primarily, though, our transceiver customers that we supply to also certainly supply into the enterprise and markets. So, again, supplying EMLs is the largest product line, and that's primarily playing now into the transition to 800 gig. And we will also have 200 gig per lane EMLs coming up in calendar 24 ramping. And that's for either a next generation of 800 gig transceivers and then the eventual transition to 1.6 terabit per second. We highlighted the Vixels ramping so that we have a broader product portfolio as well as CW lasers to intersect 800 gig and 1.6 terabit silicon photonic based approaches.
spk12: Yes, just the only other thing is we're providing a series of different types of lasers to address the antenna band as well.
spk02: Okay, Lara, we'll take the next question.
spk03: Your next question comes from the line of Ananda Barua from Loop Capital. Please go ahead.
spk00: Yeah, good morning, guys, and thanks for taking the question. Yeah, just a couple of I could as well. I mean, I guess just sticking with... you know, with Datatom chips and lasers. Um, is it, I guess I've been trying to frame for myself how meaningful this could become, uh, as a part of your business. And I think I just sort of clarified this, correct me if I'm wrong. I believe that on the company's sort of prior, prior rev, you know, let's, let's say believe, um, 12 months ago before things really started, uh, before the hyperscalers really started to work down their inventory, the run rates at which you were thinking could occur back then, which I think got to the kind of 240, 250, 260 level annually, would sort of suggest if you could still achieve those and you have more of a tailwind on current run rates, you could begin to see sort of 15, 16% of the company once achieved the beyond. And I think those are primary emails. Uh, now you have what's going on. Jenny, I related, you're doing some new Vixel work. And I know, I know a bunch of the CTs out at OFC, um, but there's CW laser work talking about incentive and laser work as well. You know, Could we be in a situation in eight quarters where, like, 20% of the company is, you know, is Gen AI data comp chip laser related? And I just have a super quick follow-up after that. Let's get your thoughts there. Thanks.
spk12: Yeah, good question. I think it depends on how fast the other parts of our business grows. But I think, you know, your numbers are not – too far off. I'd say that we have gone down significantly over the last year from Datacom revenue standpoint, both from the standpoint of unit shipments are way down and average prices have gone down in this past year. So we're in the midst of growing that. I'd say that you're certainly within the next eight quarters. Could we get back to the kind of 240 to 260 annually? Yeah, absolutely. And I think we're putting capacity in place to do that. 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. So that certainly could be a significant growth driver from where we are today.
spk00: Yeah, Alan, that's really helpful. And I guess the quick follow-up is, Like, longer term, what's your view on, you know, sort of Neophotonics VR technology's role in data center, you know, for AI related at all? And that's it for me. Thanks.
spk12: Yeah, we're very, very happy with the acquisition of Neophotonics and the technology and the team that came along with that. I'd say that there was a buildup of inventory of ZR and ZR modules at certain hyperscalers. I think that that is being consumed, and we're starting to see signs of life, frankly, of hyperscalers needing more ZR modules. We're also providing a lot of the components to go into the world's ZR market. And so from that perspective, we're we're happy with the whole AI-driven data center demand, but also data center to data center, there's a lot of bandwidth going between them. So, I don't know, Chris, any other thoughts?
spk09: Yeah, I mean, I think that, you know, one of the theses 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 closed at about the point where they also realized they had a lot of inventory. So now that inventory is beginning to clear at hyperscalers, we do expect ZR to be one of the products that recovers earlier in our telecom portfolio. And then with the level of vertical integration we have, Customers are very excited about us as a 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 and next generation solutions that follow on beyond the current 400 gig products.
spk00: That's great context. Thanks a lot, guys.
spk03: Thanks, Amanda. Your next question comes from the line of Tom O'Malley from Barclays. Please go ahead.
spk14: Hey, good morning, and thanks for taking the question. I just wanted to square just a couple comments you've made. So I think that in response to Ananda's question, you talked about getting back to a greater than $200 million run rate in the datacom business, but then on a question about Q2 in 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, you know, maybe in retrospect, we would have not taken down capacity as 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 23? I think you started the year around 50 million. Is that something you'll be able to get to or is capacity going to hold you back really
spk12: until the back half of calendar year 24 which would be your fiscal year 25. thank you yeah i would say it's certainly not a lack of demand that would get us there so i'd say that you know in calendar 24 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 dollar run rate 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 the underutilization. But I'd say that, you know, the cycle time on Datacom chips is such that, you know, starting wafers today doesn't really impact you know, the next four months. So it is a long cycle time. We're working on that as well. And that's why we're 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.
spk14: Gotcha. That's helpful. And then just on the technology side, and this may be just a broader question, but I just wanted to hear your take here is, you know, if you look at the early days of AI here, there's obviously some drivers that are pointing more towards EML, but clearly there's a lot of drivers that are pointing more towards Vixel. And you guys are looking to ramp that product, I guess. The question is, if you look at the market for lasers today in AI, how would you split out the percentage of lasers that are being used between VIXEL, CW, and EML. And do you think that just given that maybe there's some more VIXELs early on that you're missing out on some of that opportunity? Or if it's the other way around, just any color would be helpful there. Thank you.
spk09: Yeah, I would say from the end market opportunity in unit quantities, the VIXEL arrays and 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 when, and being a leader in the EML, so that indicates why the VIXL is such a good opportunity for us to grow in addition to just market growth, to grow share. In terms of CW, CW and EML sort of compete with each other a little bit in that certain silicon tonic architectures are able to do the, needed distance or reach that the EMLs at the lower end do. So there is a little bit of cannibalization or zero sum between those two, but that's why we introduced and have both sets of products. Now, that said, EMLs will lead the transition to the 200 gig per lane, and so we expect EMLs to really be the workhorse of the longer reach AI links.
spk12: And just a note that while the units are about the same, the VIXL costs or price are significantly lower than the EMLs.
spk09: Yeah, so the market's much larger for the longer reach EMLs.
spk03: Thank you, Tom.
spk09: Thank you.
spk03: Your next question comes from the line of Vivek Arya from BFA Securities. Please go ahead.
spk10: Thanks for taking my questions. I was hoping you could help us quantify what percentage of your Q4 sales were related to AI. Were they all in lasers or telecom, datacom segment? Just where do the AI-related sales show up and how large were they in the quarter?
spk09: Yeah, I think the primary products going to AI would obviously be our datacom business. We don't break that out, but it's you know, sub-10% of company revenue. That said, we don't know when we ship an EML to a customer, whether that's going in an enterprise customer or a cloud AI customer at this point. But what we do expect, and as Alan has highlighted, that the growth we are seeing going forward is primarily AI-driven.
spk10: So sub-10% of your data comp segment is AI. or EML related?
spk09: No, I would say a very high percentage of our Datacom revenue is EML related. It's just that the Datacom business is a smaller percentage of the overall company revenue given it's a chip-based business. So lower ASP, high margin, but lower ASP.
spk10: And for my follow-up, I'm just trying to think about the path back to growth. For the overall company, it seems like Q2 will probably, you know, 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 we should be thinking about meaningful sequential growth or do you think seasonality and mix could play out differently this year?
spk12: Yeah, I would say seasonality probably doesn't play as much as it has in the past. And when you look at the March quarter, just given how much less we're shipping into our customers today than they're shipping out. So I think it all comes down to 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 gigawatt, 200 gigawatt type products, as well as some new products we have in Rotems and other that should drive demand growth in Q1, regardless of inventory situation, because they're new products and they don't exist in the inventories today. So I'd say it just depends. Thank you.
spk16: Thanks, Rebecca. Lara, I think we have time for one more question, please.
spk03: Thank you, ma'am. Our last question will come from the line of Jeff Coates from Raymond James. Please go ahead.
spk07: Yeah, 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 want to know what your thoughts on that forecast are. Do you think that's reasonable? And, you know, I guess your strategy and your milestones that you're targeting for that business would be helpful.
spk09: um sure i i think that's not a i'm not not familiar with the exact numbers you referenced but it is not inconsistent with our assumptions around uh growth and the overall datacom market particularly driven driven by uh ai is there like follow-up go ahead yeah yeah i'm just wondering um um too if i got this right that the uh
spk07: Did you say that if Neophotonics was up or down sequentially in the quarter? And is it safe to say that the majority of the downtick in September and December is going to be in the legacy telecom business and that Neo is going to do is more, I guess, that that inventory digestion with the ZRs is more played out? Is that fair to say?
spk12: Yeah, Jeff, you know, 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, in the narrow line with tunable lasers. I think I said we're seeing growth again in expectations for ZRs as we move forward, but I'd say that... Neo products in the June quarter were down from previous, and we expect as the inventory of whether it's the narrow line with Tunable Lasers or other products that we got through the acquisition, as those burn down, we're going to see growth across the board. So I wouldn't say it's anything specific to legacy versus Neo products. It's an inventory issue at our customers that we're trying to take care of.
spk07: Perfect. Thanks.
spk12: Thanks, Jeff.
spk16: Thank you. Lara, I think we'll turn the call back over to Alan for some closing remarks.
spk12: Thanks, Kathy. Thank you, everyone. I'd like to leave everyone with a few thoughts as we wrap up the call. You know, as I said before, mid- to long-term fundamentals are solid for our business as we serve the exponential growth in network bandwidth in the artificial intelligence, machine learning, mobile, carrier, and cloud computing markets. New industrial applications are emerging for our imaging and sensing products, and 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 at investor conferences and upcoming meetings in the coming weeks. Thank you all for attending.
spk03: Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.
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