Coherent Corp.

Q3 2023 Earnings Conference Call


spk12: their supply chain shortages to managing their inventory surpluses. These affected our telecom and datacom businesses about equally. Datacom revenues were $294 million compared to $332 million in Q3 of FY22, and telecom revenues were $245 million compared to $222 million also in Q3 FY22. We believe this is a temporary interruption in the growth trajectory of these markets that will continue into FY24. We also believe that the fundamental growth drivers of our communications market are intact, including increasing internet traffic, the proliferation of network devices, and increased broadband and mobile data rates. While Datacom will be partially affected in the short term by the temporary pullback in investments in infrastructure, including the metaverse, it is expected to come back strongly, driven by the deployments of hyperscale computing and for artificial intelligence and machine learning. In fact, we believe that we are at another inflection point in a decade-long megatrend forming with artificial intelligence and machine learning and we expect these trends to account for more than half of all Datacom transceiver shipments by 2028. Despite the current Datacom market reset, our industry-leading position in 200G and above remains very strong. Our leadership in this area derives from the vertical integration of our high-speed lasers, optics, and electronics in our transceiver modules, and our ability to scale to meet aggressive volume ramps of the world's leading data center operators. In addition to the growth of our 200G and 400G DataCom transceivers, we are accelerating our 800G shipments in anticipation of exponential growth beginning in FY24. In telecom, we are a vertically integrated market leader with our coherent transceivers and disaggregated solutions. Once the growth resumes, we expect all of these products to continue to grow at double-digit percentages annually. We continue to invest in a broad product portfolio to address evolving requirements of our customers who are focusing their resources on developing new platforms, and we are engaged in intense design and activity in response to multiple new opportunities ahead. These opportunities in telecom stem from disaggregation and are being increasingly led by hyperscalers who, through their continued build-out of metro, regional, and submarine networks, are also driving paradigm shifts in the transport network architecture. With our existing telecom transceiver portfolio and our differentiated DSP technology roadmap, we plan to launch the first 100G coherent solution for network edge applications. We expect that the planned $65 billion investment in broadband access from the Infrastructure Investment and Jobs Act will be a major catalyst for our optical communications business. Finally, as space is the new frontier, we are seeing a strong increase in demand for our differentiated products for satellite communications. In industrial, Our revenues in the quarter were $438 million, down 3% sequentially. However, we saw sustained strength in semiconductor cap equipment front-end sales, which grew 15% year over year and 8% sequentially, and includes our EUV lithography products, whose sales grew 30% sequentially. Lasers for both semiconductor wafer inspection and spike annealing set quarterly records and have a strong outlook at least through the rest of the calendar year. Our leading display customers lowered their demand outlook by greater than 35% due to a decrease in factory utilization based on lower demand, the lowest in four years. This led to a decrease in our forecasted service business in Korea. In the quarter, a big highlight was that our sales of display spare parts into China surpassed those of Korea for the first time, giving a clear sign of market growth in China, even though we see some sluggish demand for mobile devices. We expect these short-term consumer demand and inventory-related headwinds will resolve as we move towards the calendar Q3 release of the next-gen smartphones from industry leaders. Such a trend also aligns with the widely announced new Gen 8.5 FAB investments in China that we believe will drive a strong recovery in our OLED business into calendar year 24. In the month of March, we set an all-time record for sales into the laser aftermarket in North America. We continue to experience strong welding design wins for our kilowatt ARM fiber lasers, and our high-YAG beam delivery solutions as a result of the acceleration of EV and battery factories around the world. Instrumentation was up 4% sequentially to $125 million as we continue to set records in this market through strength across the board led by applications in immunology and laser-assisted procedures. Sales of our ultra-fast laser-based advanced imaging systems for neuroscience increased as well and we had our strongest quarter in scientific since pre-COVID times. We shipped our 100,000th OBIS mini laser, and we added several new design wins for our light engine solutions where we combine the lasers and optics that form the engine of our customers' products. It is our strategy to enable customers to source the entire laser light illumination side of their systems from Coherent, accelerating their time to market, time to quality, and time to cost. We believe that we can grow our revenue in the years to come well ahead of the market by expanding this addressable market. At the other end of the optical spectrum, we shipped our 50th meter-class optic for the 30-meter telescope with more than 150 units to go before completion over the next several years. Meanwhile, the James Webb telescope continues to send back mind-bending images, and we are proud of Coherent's contributions as the prime supplier of the world's most advanced space and terrestrial imaging systems. In electronics, our revenues were $139 million, up 121% year-over-year, led by consumer electronics for sensing. Our customer intimacy in this market gives us confidence that the long-term opportunity in consumer electronics is much broader than just pixels for 3D sensing. However, we expect lower revenue from just under 10% to 3% or less of our annual revenues for the next 18 to 24 months as some design changes take effect. We believe that sensing will ultimately become ubiquitous in metaverse hardware and wearables as well as in LIDAR and other emerging applications. Our strategic engagements are growing across them all. Regarding our outlook that we will discuss today, it reflects a degree of caution around customer buying patterns in the near term. While June was traditionally Legacy 26's strongest quarter, the macro factors we are experiencing along with seasonality will result in lower revenues sequentially. We will continue to stay focused on cost controls, synergy realization, and cash generation while we align our costs to market realities. We will work to restructure and transform the company and position our product portfolios for sustainability to enable timely resumption of our growth as the market turns up. Our synergy and restructuring plans will further enhance our competitive position by driving greater scale and focus at existing sites and affording increased flexibility and efficiency, product roadmap alignment, and access to lower cost structures. We have completed a rigorous analysis of these plans, a careful assessment of the effects on our people, and believe that these moves will position us to achieve both short and long-term commitments. With respect to our silicon carbide business, it grew more than 40% year over year. This business continues to be one of our top priorities. Therefore, our equipment investments in the silicon carbide platform expansion were, again, about half of our total capital investment. The market is showing signs of a prolonged period of severe capacity constraints forming. We are extremely well positioned, as we have steadily gained share in what we believe will be an underserved market for many years to come. We are increasingly asked by our customers to support a continuously increasing demand, and we have also often been asked by investors what our end game is for this business. Even with the $1 billion investment over 10 years that we announced in August of 2021, the gap between projected supply and demand is accelerating. And so we now believe that the market leader who emerges will be the incumbent who is able to timely close the gap and serve the market needs. This will require a relentless focus on operational excellence and the results orientation that is a natural part of our company culture. and it will also require an even greater commitment to investment. We see a unique opportunity to further accelerate our growth through either accelerated investment and or deeper strategic partnerships. To that end, we have commenced the review of the strategic alternatives for our silicon carbide business. This review is focused on effectively serving the market at the same time while maximizing long-term shareholder value for our coherent shareholders by considering a range of potential alternatives. These include a sale, joint venture, minority investment, or simply staying the course with the continued execution of our business plan. We remain firmly committed to our customers, employees, and our shareholders, and will continue to invest in capital capacity, and technology innovations, including expanding our portfolio so as to become a full-line supplier of silicon carbide-powered devices and modules. We can give no assurances as to the outcome of this process, and following our Q&A session today, we do not intend to make any further public comment regarding this matter until we have a material development to disclose. With that, I'll turn it over to Mary Jane. Mary Jane?
spk09: Thank you, Chuck. Our backlog of $2.6 billion landed as we expected it would. Our Q3 non-GAAP gross margin was 37.3%, and the non-GAAP operating margin was 17.5%. Supply chain costs were minimal in Q3. At segment level, the non-GAAP operating margins were 13.6% for networking, 27.5% for materials, and 14.6% for lasers. During the quarter, with the sudden downturn in revenue, we carried approximately $15 million of underabsorbed capacity, and the gross margin was also affected by $8 million in FX and $7 million due to mix. Our operating expenses, SG&A plus R&D, were 19.8% of sales on a non-GAAP basis. The non-GAAP items were 62 million in amortization, 29 million in stock comp, and 16 million of transaction and integration costs. Total stock comp is expected to be 26 to 30 million in Q4. Synergies have now reached $66 million on an annualized basis, and we are making good progress in all categories. With respect to further details, on our cost savings actions, our 100 to 125 million of targeted cost reductions are in addition to our 250 million of cost synergies. These cost reductions are expected to be at least 130 by fiscal year 27. The FY23 through 25 cumulative savings are expected to be between 200 and 300 million dollars and the cost to achieve them are approximately 150 to 200 million, including severance, retention, new net labor costs in the lower-cost locations, facility moves, short-term duplicate costs, and lease termination costs, along with IT consolidation. Quarterly non-GAAP EPS was 58 cents against a diluted share count of 141 million shares. GAAP and non-GAAP EPS calculations are on tables six and seven of our press release. Interest expense in the quarter was $75 million, and for the nine months ended March 31st, interest expense was $208 million. Our total interest cost for fiscal year 23 is expected to be $281 million to $284 million. The March 31st cash balance was $901 million, just $12 million below the 1231 balance. After paying down $78 million of debt in Q3, our total debt position on March 31st was $4.5 billion. Using the trailing 12 months of adjusted EBITDA on a pro forma basis for the combined company at March 31st, The gross leverage was 3.5 times and the net leverage was 2.8 times with the synergy credit, including the cost savings and the synergy credit of $312 million that is allowed by our credit facility definition. The gross leverage is 2.9 times and the net leverage is 2.3 times. Note that the $38 million of synergies are already in the results. The total of $312 and $38 million equals $350. The additional $100 million of savings is worth two-tenths of a turn on leverage. Let me just restate the leverage without the synergy credit. As of March 31st, the gross leverage was three and a half times and the net leverage was 2.8 times without the synergy credit. With the synergy credit, it's 2.9 times gross, and the net leverage is 2.3 times gross. 2.3 times net. Our effective tax rate in the quarter was 154%, and the non-GAAP tax rate for the quarter was 19%. We expect the tax rate for fiscal year 23 to be between 30% to 32%, assuming the current mix of earnings, and no adoption of new or additional tax rulings. Turning to the outlook for Q4 FY23, our outlook for revenue for the fourth fiscal quarter ending June 30, 2023, is expected to be $1.125 billion to $1.175 billion and earnings per share on a non-GAAP basis to be 33 to 43 cents per share. On a full year basis, our revenue outlook is 5.08 to 5.15 billion. Our non-GAAP EPS estimate assumes that the preliminary effects of purchase accounting are added back to the GAAP EPS other than the depreciation that is $5 million per quarter. The share count is 142 million shares for the entire non-GAAP EPS guidance range, and both Series A and B are anti-dilutive. This means Series A and B dividends should be deducted from net income, and the shares should not be included in the share count. The EPS calculation, including the dividend treatment, is detailed on Table 8 of the press release for the guidance range. This table also shows the earnings at which the Series B preferred stock is dilutive All of the foregoing is at today's exchange rates. For the non-GAAP earnings per share, we add back to the GAAP earnings pre-tax amounts of 190 to 210, including 95 million in amortization, 27 million in stock comp, and 70 to 80 million for integration and restructuring. The actual dollar amount of non-GAAP items, the tax rate, the exchange rates, the purchase price accounting, and the share count are all subject to change. As a reminder, our answers today may contain forecasts from which our actual results may differ materially due to a variety of factors. These include changes in mix, customer requirements, supply chain availability, competition, and economic conditions, to name a few. With that, Kevin, you may open the line for questions. Actually, let me amend one last thing. In our guidance range, the add-back are $95 million in amortization, $27 million in stock comp, and $70 to $85 million for integration and restructuring. All right, then. Kevin, you can open the line for questions.
spk14: Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 1-1 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Ananda Bruja with Loop Capital. Your line is open.
spk04: Hi. Good morning, guys. Really appreciate taking the questions here. I guess just to start, this could be for both Chuck and Mary Jane. How are you thinking – well, I guess how would you describe, you know, sort of visibility as you think about it? And then also – With regards to backlog, how are you relating to the backlog now? Do you think of it any differently than you did 90 days ago? And then I have a quick follow-up. Thanks.
spk12: The backlog is still strong. The customers are definitely changing their ordering patterns given the shorter lead times and their work off on inventory. That's not all of them, but that's a general theme. And I'm still feeling pretty good about it, at least for the next couple of quarters.
spk04: Got it. And actually, I'll make this one my follow-up. Chuck, I guess that is to say you guys have described the backlog for a while now as a high-quality backlog. And so it sounds like that's still your opinion. And while orders may be getting moved around, sounds like. I guess, is it fair to say you're not seeing significant cancellations? It's more like push-outs and reordering of timing of backlog orders? Thanks.
spk09: That's right. We are not seeing any significant cancellations. And in fact, the main thing that is moving in the backlog is, as we mentioned, is that customers are returning to more typical order patterns. So in some markets, that may be 13 weeks visibility or 26 weeks visibility, whereas during the period of intensive supply chain shortages, some customers had visibility for us out as long as a year in order that we could share that with the suppliers. I got it.
spk04: Thanks a lot, guys. Super helpful.
spk14: Our next question comes from Simon Leopold with Raymond James. Your line is open.
spk06: Thanks for taking the question. The first one I wanted to ask is more kind of a philosophical one, is Given the results today, you didn't choose to pre-announce the quarter that was below your guidance. Just wondering sort of how you think about that from a policy perspective. And then in terms of my follow-up, I'll ask both now because the first one is pretty easy, is when we think about the trend here, do you think of June as sort of setting a bottoming Based on everything you see today, I understand it could change. If it is a bottoming, how long do you think it could last? Thank you.
spk09: So with respect to the pre-announce, we determined that our best message was delivered in connection with the full earnings call and the Q&A, as well as the discussions that we have with many of you. So we did think about that very carefully, and that was the conclusion we came to. Simon, I'm sorry. With the second part of your question, you were asking how long do we expect the bottom to last? Was that it?
spk06: More or less, yes. I guess it's two parts in that is sort of June setting a bottom and then how long do we expect this phase last?
spk12: Simon, as I said, I expect it to last into FY24. I'm not prepared to say in which quarter in FY24 do I think an inflection point takes place. We're preparing to have at least this level of demand and probably a little bit of upside that we're working to get for at least another one or two quarters at least.
spk06: Thank you.
spk14: Our next question comes from Jed Dorshop or William Blair. Your line is open.
spk05: Thanks, and thanks for taking my question. I guess first one, maybe, Chuck, is a follow-up to that previous. You know, it looks as if everything that's kind of tied to consumer, whether directly or indirectly, is kind of, you know, where you're seeing the biggest or the quickest slowdown, i.e., display, OLED, and And I guess as you think about the credit markets that have largely seized and, you know, unlikely to kind of open, which is probably the visibility, I guess what would – as you think about shifting priorities within your business – Is that how you're thinking about that comment in terms of, you know, bouncing off of what may be a bottom? Or are you anticipating sort of a return in that display side of the business, maybe by micro LEDs? And I have a follow-up.
spk12: Okay. Mark, do you want to take that?
spk02: Can you hear me okay?
spk12: Yes.
spk02: Yeah, so we definitely saw a softening, as Chuck mentioned, in specifically our service business out of Korea. We do clearly see everything we read from other people's quarterly reports is clearly we're seeing some slowing in mobile demand, some display inventory adjustment both at the end users as well as at our customers. So we definitely see that today. We would expect seasonally with Most of the leading smartphone manufacturers launch new products in our first quarter in the July to September timeframe. So we would expect to see that come back and we usually get the pre kind of quality build towards the end of the year. So I think certainly on the speaking specifically to the display side, we definitely would expect that to recover somewhat in the second half of the year. But your observation that it's tied broader to consumer, I think is pretty accurate.
spk09: What I would say, Jed, though, is that for the third quarter, the actual largest drop that was at least not as we expected was in communications. We had expected consumer, at least on the consumer electronics side, the smaller electronics, let's call it, we had expected a seasonal decline in that. But it was actually communications that fell very, very quickly in the quarter.
spk05: Got it. That's helpful. Thank you for the color. As my follow-up question, just as it relates to the strategic – your strategic review of the silicon carbide business, I'm curious, have you secured strategic – how should I say this? I guess materials, like graphite, for example – You have a pretty aggressive build-out plan of the billion dollars over the next 10 years, and I'm just wondering if from a supply chain you have kind of removed any potential barriers that, as you think about that strategic review, might be helpful. Thanks.
spk12: Thank you, Jed. You got it. We pay a lot of attention to the supply chain, and it involves both the equipment that we need for the expansion of the crystal growth operation, as well as the critical and strategic raw materials. We have a full court press on that as a matter of course. We've had that for years, and we'll maintain that all the way up the curve. Thank you.
spk14: Our next question comes from Jim with Needham & Company. Your line is open. Hi.
spk16: Thank you. Just a question on the industrial and particularly on the semi-cap side. It looks like you're still seeing fairly strong trends in that business, which is a little bit counter to what some other folks are seeing. What's your line of sight as you think about the semi-cap portion, Chuck, over the next couple of quarters?
spk12: Thank you, Jim. We definitely... We had a real strong quarter in Q3. We outdid even the forecast that we had by a little bit. I think the back end of the line will continue to be moved a little backward and maybe a little bit forward. I think that's the place where we're going to see things slide to the right a little longer. But the front end of the line and our ability to serve it seems to have just a steady, steady demand. I don't see that driving any change to our underlying business for a semi-cap equipment. So in summary, front end, full speed ahead, the back end of the line for laser wafer inspection. That's the place where I think we could see some softness in the next one or two quarters.
spk16: Got it. And maybe just a clarification on a previous question, and I just want to make sure I'm understanding this correctly. The improvement that you, I think, are suggesting in the display business with utilization in the second half of the calendar year, yeah, you have a somewhat unique line of sight because you have some line of sight with your consumer electronics customers, and you're having conversations, obviously, on the OLED side with your um customers in korea and china is this consistent with what you're hearing from both customers uh if you will in terms of some increase in utilization and some improvement in the second half of the calendar year in that part of the business yeah i asked mark to add some color to it about what we're expecting in the fall yeah i think the statement was i think the way
spk02: the statement was phrased as accurate, we're certainly getting indications from our customers that would indicate to us that there would be a pickup certainly in utilization and service demand in the second half of the calendar year or the first half of our FY24. Thank you.
spk14: Our next question comes from Christopher Roland with Tusquehanna. Your line is open.
spk07: Hey, guys. Thanks for the question. I know you can't talk too much about strategic plans for SICK, but I did want to know a little bit more about it, just broad strokes, and why you guys want to partner versus going it alone. Is it the sheer amount of capital that's involved, or is it kind of sharing the load of potential risk involved, or is it really more looking for like a large captive customer to use the material? Just broad strokes, wondering why the partnership and the change there.
spk12: Okay, I'll ask Bob to address it, but I would say we have large captive customers already and more trying to get more of our mind share and our capacity. Bob, would you address the rest of the question, please?
spk11: Yeah, sure. Thank you, Chris. Well, first of all, we are bullish on the silicon carbide market in general. And what we're seeing is that the market demand is not only growing, but it's accelerating. So the growth is accelerating. We are at an inflection point. And the industry, we believe, is supply constrained today and will remain so. So given the increased pace of the market, we think that now is the right time really to look at all of our strategic options. And I'd say a lot of the things that you mentioned are for sure things that are on our mind. both the amount of capital investment, the opportunity to bring strategic partners to the table to help both with that financial responsibility and with strategic alternatives as we think through where the business is going to go. So all of those are on our minds. The thing that we are doing now and we think is the right thing to do is to start a formal process and really take a good hard look at all of our options and then read and react against those options and and do the right thing to serve the market and to address our shareholder value.
spk07: Yeah, I think that's really interesting. I'm looking forward to seeing what comes of it. Your inventory is a little elevated, around 160 plus days. I was wondering about kind of utilizations or underutilizations. And then you kind of talked about some footprint consolidation as well. How should we think about that and how should we think about that affecting overall company utilizations when you're done?
spk09: So with respect to the inventory being somewhat elevated, we have a plan that is very strict and actually led by Chuck to actually get that inventory down. So we ourselves think the inventory is elevated and it is very very important to continue to drive to bring that down with respect to the footprint consolidation which as you're correct does have a can have an effect on the inventory level there is no question that the consolidation of certain sites will help the utilization of our manufacturing floor space to a very, very good extent. That's a very important goal here.
spk07: Great. Thanks so much. I don't know if you could put any numbers to that or not, but yeah, thank you.
spk09: I'm not in a position to put numbers to actual utilization just at this point in time. I mean, obviously, with the lower demand for this quarter, we have a lower utilization, so we would be coming off an artificially low base, but that is a good question. I'll think about that and see if we can answer that subsequently.
spk08: Thanks, guys.
spk14: Our next question comes from Sam McChatterjee with JPMorgan Chase. Your line is open.
spk13: Hi. Thanks for taking questions. Just on the first one, most of the demand challenges you're highlighting today on the networking side, we're well aware of the inventory situation. In the other segments, there's a bit of consumer demand. So a lot of them sound cyclical or other industry players have called them out as more cyclical And I'm just trying to match that up with your restructuring plans, which will obviously be multi-year sort of restructuring efforts and which is more suggestive of a structurally lower demand that you see for some of the segments. Or should I really be interpreting this as this is a sort of a cost improvement that you needed to enact anyways and was contemplated and maybe the macro is just sort of driving or triggering to take those actions sooner than you would have ideally taken them? And I have a follow-up. Thank you.
spk09: Yes, your latter point that we were contemplating these all along, and in some cases were contemplated by the laser segment even before the acquisition, and we've just chosen to accelerate them. So that is 100% correct. And I'll do your follow-up.
spk13: Yes, and the second was quick. Essentially, when I think about your synergy plans and then sort of the additional restructuring plans, is it fair to assume that the additional restructuring-based savings would be more in the networking and the material segments and less impactful on a sort of incremental basis to lasers? Is that the right way of thinking about it?
spk09: I would say that it's actually across all three segments. But given that we already have 250 in the synergies between the laser segment and the rest of the company, then the larger portion of the new restructuring savings, yes, probably does fall on the other two. But the restructuring does affect all three segments.
spk14: Thank you. Thanks for taking my question.
spk09: Sure.
spk14: Our next question comes from Sydney Ho with Deutsche Bank. Your line is open.
spk03: Great. Thank you. In the past, you guys talked about backlog normalizing to this $2.5, $2.6 billion level. And it looks like the normalization process is happening faster than at least we previously expected. Does that mean in your guidance, you're assuming no more additional work down of this excess backlog? And how about if you just look at the 12-month backlog? Because I know some of the orders are more than 12 months.
spk09: So on the first part of your question, actually, I think what I said is that we expected the backlog to land in the 2.4 to 2.5 range. So it may well be that it is a little bit faster, but I don't think that we've reached the level that we think could be the running backlog at 2.4 to 2.5. And I'm sorry, Sydney, I did not quite understand your second part.
spk03: Yeah, the second part, as I understand this, you have orders in the backlog that are longer than 12 months. So if I just look at the 12-month backlog, is that already normalizing?
spk09: Well, for sure, the 12-month backlog is already normalizing, yes. But we do have in several markets – several of our end markets, orders that go beyond 12 months. And in fact, I would say in the laser segment, 15 has been more their norm. So it is actually normalizing already. That is true. But I think the resting place, at least in my present estimate, is 2.4 to 2.5. Okay.
spk03: That's helpful. My follow-up question is on the saline carbide business. I understand you're going through the strategic review. But one of your large saline carbide customer has recently announced a supply agreement with the Chinese saline carbide supplier on 150 millimeter waivers, but also for future 200 millimeter. Can you talk about your view on any changes in the competitive landscape? And maybe does that have anything to do with the timing of this review? Thank you.
spk11: Tom? Yes, I'd be happy to take that question, Chuck. Our view of the market is really underpinned across the entire market, it's growing faster, the growth is accelerating, the supply is constrained. And I think in the context of what you're talking about, it's just an example of those things being true. And so as a result, if you believe that the market is constrained and it will remain like that for an extended period of time, and it will grow at an accelerating pace, then investing at a greater rate is the right thing to do. And we believe it's both the right thing to do and we think we have the right the right products, technology, quality, all the things that we need to serve the market. So we're bullish on the market and we remain committed to it.
spk03: Okay, thank you.
spk14: Our next question comes from Metta Marshall with Morgan Stanley. Your line is open.
spk01: Yes, sorry. One question on just whether you're seeing any changes to pricing in Datacom in this environment. I know your expectations were that pricing was going to stay relatively stable, particularly at the high speed, but just as demand has softened, you know, are your expectations still for that? And then maybe just kind of secondarily on that, you know, I know when you guys bought the Finisar business, the idea was you would kind of keep some of that vertical integration that that business had had. does this happening in the market kind of change how you think about that business going forward or just alternatives to production on that business? Thanks.
spk10: Giovanni, do you want to take? Yeah, Aimee, so keep in mind that on the Datacom side, we are ramping fast and mostly weighted on the 200G and above data rates. And so in that case, the price pressure is more on the dollar per bit that obviously we need to deliver than actually the individual ASP of the product, right? So in other words, the focus is on lowering the cost of the traffic, not necessarily by lowering the price of the product, but by lowering the price of the dollar per bit that is delivered with the solution. So that has been going on for quite some time, and fortunately we are seeing strong demand for the high data rate transceivers. And so we don't really see anything out of the ordinary right now because we have maybe a couple of quarters of softness. That's not definitely changing the pricing pattern that we've seen in the past, so no much difference there.
spk09: And then with respect to the question that you are asking on, have we changed our view on the vertical integration for transceivers?
spk12: Let me take that. The short answer is no. We're deriving substantial benefits and advantage by having the model. And what we're going to stay focused on is working through any underutilization of the capacity. and getting our footprint into the lowest cost structure we possibly can and introducing new components, new lasers, new optics, new electronics. Those in combination with the model that we have for the assembly and testing will sustain our advantage.
spk01: Great. Thank you.
spk14: Our next question comes from Mark Miller with the Benchmark Company. Your line is open.
spk15: But what are you thinking about in terms of taxes for the current quarter and fiscal 24 will be a benefit and in what percent?
spk09: So my expectation is that the tax rate is probably in the neighborhood of about 25%. And as you know, for this year, the tax rates a little bit all over the place with respect to purchase accounting, what's deductible and what's not. So that's that. But I think overall for the total year, it should be around 30.
spk15: Okay. It'll be a tax benefit for the current quarter?
spk09: On the losses, yes.
spk15: Okay. Thank you.
spk00: Our next question comes from Reuben Roy with Stiefel. Your line is open. Your line is open.
spk08: Sorry, everybody, I was on mute. A follow-up for Chuck or Bob on the silicon carbide discussion. As you start the formal review process, Chuck, has anything changed with the way you're thinking about investing? You've been spending 50% of CapEx on silicon carbide. Do you pause that? Do you accelerate it, given what you're seeing in the market? I'd love to understand how you're thinking about kind of the near-term spend for SICK. Full speed ahead on the business plan. Okay, that was easy enough. And then a follow-up. I think you mentioned that Datacom and Telecom were equally impacted with the near-term environment. I'm just wondering if you could walk us through. I know there's a lack of visibility as you think about the next couple of quarters, but you did say that Datacom should be short-term. You've got some markets that are inflecting like AI today. Is that something that you have a little bit of visibility into when you might see Datacom come back? Is it next quarter or the quarter after? Any other detail would be great. Thank you.
spk12: I alluded to intense design in activity that we have. This AI opportunity, but not only the AI opportunity, the 800G deployments, they are heating up in terms of planning. And that's going to be a focal point in FY24. And I do believe that we may have, because we're working hard to position ourselves to have maybe a little bit greater opportunity than what we currently have factored into our plans. But it's too early to call that. And I think the next couple of quarters, we're just going to have to watch it carefully. We're working intensely in terms of capacity, getting new products in position to ramp. I think we're uniquely positioned to be able to go from zero to 100 miles an hour when it comes to deployments of new systems, and our customers know that, and I believe they're counting on us to be able to do that. We just need a clear sign as to, you know, the rate of acceleration, and that's what we're working on. Appreciate it. Thanks, Fred.
spk14: And I'm not showing any further questions at this time. I'd like to turn the call back over to Mary Jane.
spk09: Thank you very much to everyone for joining us today. We appreciate your participation, and we'll talk to you soon. Bye-bye.
spk14: Ladies and gentlemen, this does conclude today's conference. You may now disconnect and have a wonderful day.

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