Lumentum Holdings Inc. (NASDAQ:LITE) Q1 2024 Earnings Call Transcript

Lumentum Holdings Inc. (NASDAQ:LITE) Q1 2024 Earnings Call Transcript November 8, 2023

Lumentum Holdings Inc. beats earnings expectations. Reported EPS is $0.35, expectations were $0.27.

Operator: Good day, everyone, and welcome to the Lumentum Holdings First Quarter Fiscal Year 2024 Earnings Call. All participants will be in a listen-only mode. Please also note, today’s event is being recorded for replay purposes. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead.

Kathy Ta: Thank you, and welcome to Lumentum’s fiscal first quarter 2024 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 recent acquisitions, including Cloud Light and 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 10-K for the fiscal year ended July 1, 2023, and our 10-Q that will be filed soon. 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.

Lumentum’s press release with the fiscal first quarter results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. With that, I’ll turn the call over to Alan.

Alan Lowe: Thank you, Kathy, and good morning, everyone. We are thrilled to welcome the Cloud Light team to Lumentum. The addition of Cloud Light’s products to our portfolio positions Lumentum as a leader in providing photonics to cloud operators at a time when artificial intelligence is rapidly accelerating growth in the data center market. We believe Lumentum’s served opportunity within data centers has expanded more than five-fold as a result of the Cloud Light acquisition. For years, Cloud Light has been supplying differentiated high-speed products to leading hyperscale customers, both custom products to address unique customer needs, as well as standard products to address a broad range of hyperscale customer requirements.

In the last 12 months, over 90% of Cloud Light’s revenue was derived from 400G and higher-speed products. In the most recent quarter, over half of Cloud Light’s optical transceiver revenue was derived from 800G transceivers. In calendar 2024, we anticipate strong growth in Cloud & Networking revenue, driven by accelerating AI, computer requirements and a resumption of shipping more in-line with end market demand. Also, in calendar 2024, we expect cloud applications to drive over 30% of Lumentum’s cloud and networking revenue. Our cloud customers are responding very positively to this transaction. This combination results in a broader portfolio of differentiated products and technology. It also enhances the security of supply for our customers, given our broader combined global manufacturing footprint and high levels of vertical integration.

Lumentum is well-equipped to address future cloud technology roadmaps as AI models drive an exponential increase in compute and networking requirements. I would also like to highlight that starting with this fiscal year, we are updating our financial segment reporting to better reflect the rapidly changing market opportunities ahead. Our financial reporting is now focused on two large and growing end market segments: one, Cloud & Networking; and two, Industrial Tech. Within Cloud & Networking, the cloudification of the network is blurring the lines between our historical served markets of telecom and datacom. Cloud data center and traditional telecom operators are increasingly purchasing the same types of data transmission products. We anticipate the emergence of new applications for optical switching technology not only to serve the growing complexity of long-haul and metro networks, but also to support the high optical link density required for AI training models in the data center.

Our customer mix is changing as well. The addition of Cloud Light brings much more direct sales to cloud operators and infrastructure providers. We are also increasingly serving cloud and networking operators directly for their data center interconnect and edge networking applications. To better align our reporting with these market trends, the telecom product lines and the datacom product lines are now included in the Cloud & Networking segment. Turning to the Industrial Tech segment. Our portfolio of imaging, sensing, and laser products aligns with Industry 4.0 and 5.0 trends. Industrial sensing applications require high accuracy in determining distance, speed, and displacement, and are increasingly turning to laser-based approaches. Leading-edge semiconductor, solar cell, and electronic component manufacturing require the beam precision and short-pulse duration of ultrafast lasers to produce precise cuts and features to better reflect the growing importance of precision photonics across this broad application space.

The industrial and consumer and commercial lasers product lines are now included within the Industrial Tech segment. Now, I will summarize our fiscal first quarter results. As we reported last week, first quarter revenue and EPS were above the mid-points of our guidance ranges. Through cost controls and efficient operations, we are managing the factors that are in our control. While we continue to see very strong growth in the demand for our data center chips, as well as our newly acquired intra-data center transceivers, this strength is being offset by the telecom and industrial inventory drawdown activities. Due to this inventory correction, we believe we continue to ship below end market demand. As we navigate this transition period, we are delivering as planned on our product roadmaps and synergy attainment with respect to our NeoPhotonics acquisition.

Of course, we are also excited about the new opportunities that Cloud Light brings starting in the current quarter as we leverage their leading transceiver technology to deliver the fastest speed products to cloud customers. Now let me provide more detail on our segment level results in Q1. Cloud & Networking revenue was down 20% sequentially and down 36% year-on-year, with broad-based softness across most of our networking product lines, partially offset by sequential growth in intra-data center lasers and tunable access module. This is as we have expected, given the inventory correction underway at our networking customers. Robust cloud data center demand is currently the strongest growth driver for our Cloud & Networking business. As data centers are designed to support the high bandwidth requirements of AI workloads, 800 gig transceivers can provide that bandwidth while also reducing latency.

For our transceiver customers, their new 800 gig transceivers utilize eight different wavelengths at 100 gig per lane, triggering orders for our chip-level photonics and driving growth for our EML product line. We are also seeing an increase in deployments of 800G transceivers that are supplied by our Cloud Light business, and we are working with our new team to enable them to ramp even more rapidly. Over time, we also expect to supply custom-designed high-power CW laser arrays for leading AI hardware architectures to provide the high bandwidth, low latency optical interconnects essential for training and inference applications. In calendar ’24, our 200 gig per lane EMLs will enable the next generation of transceivers with capacity of up to 1.6 terabits.

We are shipping qualification samples of our 200 gig EMLs now and expect to ramp production in calendar ’24 with customer qualifications of 800 gig and 1.6 terabit transceiver designs well underway. We expect that 200 gig per lane optics will be the workhorse of hyperscale data centers for years to come once these qualifications are completed. Through Cloud Light, Lumentum is now a leader in high-speed active optical cables, or AOCs, as well as VCSEL-based transceivers to cloud customers to fulfill their short-reach connectivity requirements for new AI and machine learning cluster architectures. In addition, we’ve been developing high-speed 100 gigabit per second VCSELs and VCSEL arrays for these short-reach optical links, and we expect to ramp these shipments meaningfully in calendar ’24.

Moving on to our high-speed transmission product developments, we are receiving positive customer feedback on our next generation of 130 gigabaud and 200 gigabaud data rate coherent technologies. These high-speed products will be available in both discrete and integrated form factors to enable enhanced performance in metro and long-haul applications. In addition, at the ECOC conference last month, we received positive customer feedback on our coherent 800 gig ZR product. We believe we are the first to market with this capability, which will provide high-speed connectivity with extended reach for data center interconnect within metropolitan areas. Turning to Industrial Tech. Fiscal Q1 was up 4% sequentially from Q4, driven by the expected uptick in our 3D sensing business with a new smartphone product ramp partially offset by softness in fiber lasers as our leading fiber laser customer works to bring down inventory.

Industrial Tech is down 40% year-over-year as expected, primarily due to more intense competition for market share on a certain 3D sensing socket, end market demand and pricing, as discussed previously. Based on our latest customer forecasts, we continue to expect industrial lasers demand to be soft into calendar 2024 due to customer inventory digestion and macro factors impacting end markets. However, we expect the rapid growth in new applications for ultrafast lasers to partially offset these near-term headwinds given growth in new solar cell manufacturing applications. To summarize, our market outlook is currently a tale of two dynamics. On the other hand, outside of the data center customers, we are facing continued headwinds from networking and industrial customer inventory digestion.

In all of our end markets, we are committed to our long-term R&D roadmaps, and we are positioning the company for the robust growth of photonics opportunities that we see ahead. Before turning it over to Wajid, I would like to again welcome our new employees from Cloud Light, and thank all of our employees and our customers around the world for their focus and dedication as they continue to collaborate and partner with Lumentum. With that, Wajid?

Wajid Ali: Thank you, Alan. Net revenue for the first quarter was $317.6 million, which was down 14% sequentially and down 37% year-on-year. During the quarter, we had three greater than 10% customers, two of which are in Networking and one 10% customer in the Industrial Tech market. GAAP gross margin for the first quarter was 24.1%, GAAP operating loss was 25.4%, and GAAP diluted net loss per share was $1.02. First quarter non-GAAP gross margin was 34.9%, which was down sequentially and down year-on-year, primarily driven by product mix, factory underutilization, and lower revenue. First quarter non-GAAP operating margin was 3.3%, which decreased sequentially and year-on-year. First quarter non-GAAP operating income was $10.6 million, and adjusted EBITDA was $34.6 million.

First quarter non-GAAP operating expenses totaled $100.1 million, or 31.5% of revenue, down $2.3 million from Q4 and down $6.6 million from the year-ago quarter due to tight expense controls. Q1 non-GAAP SG&A expense was $39.1 million. Non-GAAP R&D expense was $61 million. Interest and other income was $16.8 million on a non-GAAP basis due to higher interest rates on our cash and investments. First quarter non-GAAP net income was $23.4 million and non-GAAP diluted net income per share was $0.35. Our fully diluted share count for the first quarter was 67 million shares on a non-GAAP basis. Turning to the balance sheet. Our cash position decreased during the quarter due to a few key items. We used $30 million in cash to purchase our wafer fab and campus in the UK.

This purchase reflects our confidence in the longevity of indium phosphide technology to address the ever-growing need for higher and higher performance telecom transmission components. In order to capture our COGS synergies from the NeoPhotonics acquisition, we are pre-building nearly $30 million of inventory to help facilitate the factory consolidation happening over the next few months. And we had an annual Japan tax payment of approximately $17 million, as well as expenses related to the Cloud Light acquisition. As a result, cash and short-term investments decreased $69 million sequentially to $1.94 billion. To streamline operations and achieve synergies, we will be consolidating NeoPhotonics back-end manufacturing facilities, and therefore, we expect an under-absorption of capacity relating to these moves during Q2 and Q3.

By the end of Q4, as we ramp up production of NeoPhotonics’ products within Lumentum’s manufacturing footprint, we expect to shift buffer inventory, enabling these manufacturing costs to align with the rest of our production. In addition, as we continue to focus on cash generation, we expect our internal inventories to decline throughout the balance of the fiscal year. Turning to segment details. For the benefit of our investors, we have expanded our earnings press release to include tables of historical financial data that are reformatted into our new segment categories. First quarter Cloud & Networking segment revenue at $229.7 million decreased 19.8% sequentially and was down 36.2% year-on-year. Cloud & Networking segment non-GAAP reporting profit at 10.4% decreased sequentially and year-on-year.

Our first quarter Industrial Tech segment revenue at $87.9 million was up 4.3% sequentially and down 40.1% year-on-year. First quarter Industrial Tech non-GAAP reporting profit of 17.4% was up sequentially, but down year-on-year. Now let me move to our guidance for the second quarter of fiscal ’24, which is on a non-GAAP basis and is based on our assumptions as of today. We expect net revenue for the second quarter of fiscal ’24 to be in the range of $350 million to $380 million. Within this Q2 revenue forecast, we anticipate Industrial Tech to be down sequentially with Cloud & Networking to be up sequentially with the addition of a partial quarter of Cloud Light revenue. Based on this, we project second quarter non-GAAP operating margin to be in the range of 2% to 4%, and diluted net income per share to be in the range of $0.25 to $0.35.

Our non-GAAP EPS guidance for the second quarter is based on a non-GAAP annual effective tax rate of 14.5%. These projections also assume an approximate share count of 67.4 million shares. In terms of expectations beyond Q2, as Alan mentioned, we do expect a return to growth in Cloud & Networking 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. With that, I’ll turn the call back to Kathy to start the Q&A session. Kathy?

Kathy Ta: 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.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have our first question coming from the line of Simon Leopold from Raymond James. Please go ahead.

Simon Leopold: Great, thanks for taking the question. I’ll start off with a very easy one. Just want to get an understanding of what your assumption is for the contribution from Cloud Light into the — in the guidance for the December quarter. And because that’s so easy, I’ll give you my second question now. I’m wondering if you could maybe unpack a bit what you see going on in the ZR market now in that — I know we’ve had a period of inventory absorption and during the ECOC trade show, it sounded like there was maybe some visibility to that market improving. If you could maybe unpack what you’re seeing in that segment, both from a laser perspective as well as your own ZR devices? Thank you.

Alan Lowe: Thanks, Simon. The Cloud Light revenue is the revenue that they’re going to ship from when we announced it closing, which was yesterday. So, about seven-and-a-half weeks of revenue. And we talked about trailing over $200 million, so you can extrapolate what you think the two months will be. And we’re not going to actually break that out in any further detail. As far as the ZR market visibility is concerned, I think with all of what’s going on inside the data centers with AI and machine learning, we’ve seen a pickup in ZR demand, in fact, probably earlier than we would have expected otherwise. And so, I’d say that, that has some healthy tailwind to it for data center interconnect, and we’ve seen some of that come through some of our hyperscale customers in new demand for the ZR modules. Chris, do you have anything else to add on either of those?

Chris Coldren: No. I think that’s great.

Kathy Ta: Thank you, Simon.

Operator: Thank you. Your next question comes from the line of Samik Chatterjee from JPMorgan. Please go ahead.

Joe Cardoso: Hi. Good morning, guys. This is Joe Cardoso on for Samik Chatterjee. Yeah, first question for me. Can you just give us some granularity relative to the underlying trends you’re seeing in telecom? I think one of your peers in the space suggested it’s seeing a bottom in the September quarter itself and expects it to begin to recover in subsequent quarters, and while another suggested it’s more of a mid-2024 phenomenon. Just curious where you are landing on that spectrum and what’s driving your confidence there. And then I have a follow-up.

Alan Lowe: Sure. I’d say we’re kind of in between in that — we still are under-shipping end market demand and I’d say that we’ve seen some end market demand softening, frankly. And so, that’s why we continue to see muted demand for our telecom products. That said, I do think that we’ll see inventories being reduced in this time period as well as December, but I’d say there’s probably still some inventory consumption going on even into early parts of calendar ’24.

Joe Cardoso: No, I got it. Thanks. I appreciate the color, Alan. And then, just relative to the non-Cloud Light datacom business, you had been talking about ramping capacity there, including some rehiring of headcount. I believe you were moving to a larger wafer size, et cetera. So, a bunch of moving pieces. I guess, can you just give us an update on how that is tracking? And then just whether with Cloud Light on the books now, does that help you accelerate some of these initiatives relative to what you were doing in terms of ramping capacity for the legacy piece of the datacom business? Thanks for all the questions.

Alan Lowe: Sure. The datacom EML market is very robust and we are on allocation again unfortunately, but our capacity is coming online as we had projected and as we had discussed on prior calls. But the demand, again, is even more robust, given that the hyperscalers really want to go to 800 gig. And if you go with an EML solution, most of those solutions have eight chips as opposed to four chips to get to 400 gig. So, doubling of the chips per transceiver means more and more datacom chips. So, we’ve seen extreme growth in that business, and we are still on track to go to increased wafer size in calendar 2024. So, all that work is going on in the fab, while at the same time, we are growing our capacity from the capital additions we made earlier this year that are coming online, as well as, as you said, bringing back employees and hiring to be able to meet the demands, although we’re still on allocation today on EMLs because they did come back much faster than we had actually expected.

So, our backlog is strong through the balance of the fiscal year, and we expect that to continue to grow into fiscal ’25, especially as we bring on 200 gig per lane EMLs, and I think we’re going to be in a very strong leadership position there as well. In Cloud Light, Cloud Light’s designs are — today are both multi-modal VCSEL-based, and so we’re expecting to use our VCSEL designs to do product in-feeds and drive costs down and margins up, as well as silicon photonics-based. And so, we’re working with Cloud Light’s team today on how do we get our CW laser more prevalent in their designs as we move forward. So, it doesn’t impact our EML capacity per se, but it does give us opportunities for margin improvement over time.

Joe Cardoso: Understood. Very clear. Thanks, Alan.

Alan Lowe: Great. Thanks.

Kathy Ta: Thank you.

Operator: Our next question comes from the line of Meta Marshall from Morgan Stanley. Please go ahead.

Meta Marshall: Great, thanks. Maybe first question just on, whether you have kind of ironed out more of what CapEx investment you think Cloud Light will take during the year? And then, maybe as a second question kind of building off of Simon’s question, you mentioned kind of the 800 ZR getting positive reception at ECOC. Just when would you expect that to kind of ramp into production? Thanks.

Alan Lowe: So, as you can imagine, the Cloud Light ramp has been very steep. And one of the things that we work with them on is to make sure that they continue to invest pre-acquisition, and they have. So, they’ve been continuing to grow their capacity. As far as future CapEx requirements, I’d say it’s a little early in that. We have been getting very positive feedback from hyperscalers, customers, and we expect that the acceleration of growth will be even stronger than expected. So, I think it’s a little bit early to really determine are we going to further accelerate or stay on the path that they were on. I would say, we’re probably going to have to accelerate CapEx as we’ve gotten feedback again from not only existing customers but new customers that they don’t have much footprint in as they view this really as an extreme positive of a diversification of a U.S.-headquartered company and manufacturing footprint that is more global than current existing Cloud Light.

So, I think we’ll have to wait on that and give you an update on our CapEx plans for Cloud Light on the next call or some future meeting. As far as the 800 gig ZR ramp, I think we’re still at the demonstration stage today. And again, positive feedback at ECOC. We’ve got to get from where we are today to beta samples and qualification samples, and then it takes a couple thousand hours of testing to get to production. So, I’d say that’s really more of an early fiscal ’25 and late calendar ’24 type of initial ramp. But again I think we’re positioned quite well with what we think will be first to market on that product. So, very, very happy with progress there.

Meta Marshall: Great, thanks.

Kathy Ta: Thank you, Meta.

Operator: Thank you. Our next question comes from the line of David Vogt from UBS. Please go ahead.

David Vogt: Great. Thanks, guys, for all the color. I’m just going to try maybe triangulating again on this Cloud Light transaction. So I think, Alan, in your prepared remarks, you suggested that the business should accelerate to about 30% growth in calendar year ’24. If I just do some really quick math, does that assume your legacy business returns to growth in ’24 based on sort of the disclosure that Cloud Light has about $200 million of revenue growing, obviously relatively rapidly? And then in conjunction with that, from a margin perspective, I know you talked about it on the last call, as it being sort of a slightly accretive transaction with regards to the first 12 months post-closing. But can you maybe share with us sort of the margin profile of this business relative to the existing sort of Cloud & Networking part of the business pre the transaction? Thanks.

Alan Lowe: Yeah, let me take the first question and then I’ll have Wajid talk about Cloud Light margins. So, I think you’re right about the growth rate. And again, as I said to Meta’s earlier question, feedback has been very positive. And when we turn those — that feedback into orders, we could grow faster. But again, I think that’s a little early. But the impact on — I don’t think Cloud Light has any impact on the legacy business except that we’re very much closer to the cloud customers. And we’re not going to guide more than one quarter at a time. We’re actually not going to split up legacy versus Cloud Light in the future. But I’d say that as we talked about, we do believe we’re under-shipping end market demand and inventories are reducing.

So, we do anticipate that in the first half of ’24 that there’s probably a pickup. More matching our shipments within customer consumption, probably in Q4. So, I would expect that we would see a pickup in Q4 from today’s level. But Q3 is a little bit hard to call right now. Wajid?

Wajid Ali: Yeah, David, so on the margin profile, we certainly see a lot of opportunity with Cloud Light. With the rapid growth that we’re expecting in the business, there’s some natural leverage that we should see at Cloud Light. And there’s also a lot of opportunity with our existing manufacturing footprint to help that part of the business grow while utilizing some of the manufacturing capacity that we’ve also got. And then, probably the most important thing, which our R&D teams are going to be working with their R&D teams over the next few weeks, is really our plans around vertical integration. And those plans around vertical integration can provide quite a bit of upside from an in-feed standpoint on their own raw materials.

So having said that, what we’ve communicated previously is that the Cloud Light business is currently operating in the low-teens from an operating margin standpoint and in the high-teens from an EBITDA standpoint. Our expectation that we’ve communicated is that, through the opportunities that we see that we can certainly get that business into the high-teens from an operating margin standpoint over the next 24 months. As the teams dig in more with their R&D teams, we’ll be able to update our thinking around that in future quarters, but that’s currently where our thinking is in terms of the business.

David Vogt: Great. Thank you, guys.

Kathy Ta: Thank you, David.

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

Vivek Arya: Thank you for taking my question. First question, I know you gave a 30% growth potential for Cloud Light, but that’s more like a three to five year. Is it fair to say that they’re growing faster than that? When I look at a lot of the compute deployments, they are growing like a 40%, 50% type of CAGR. So, is it fair to assume that at least in the near- to medium-term, Cloud Light could be growing more at a 40%, 50% rather than a 30% rate?

Alan Lowe: Yeah, I think that’s fair. Given the introduction and rapid growth at 800 gig, we expect that Cloud Light should be able to grow faster than that 30% CAGR. That is a multi-year number. As 800 gig has been introduced, we highlighted that Cloud Light’s revenue in the most recent quarter was more than 50% 800 gigs. So, we’ll be highly leveraged to the growth of that as customers at the leading edge of AI deployments continue to shift to the 800-gig speed.

Vivek Arya: Thank you. And for my follow-up, I just wanted to kind of double check the accretion math or the potential accretion math. So first of all, when you say something is accretive, are you talking on an EBITDA level? Are you talking on an operating income level? At an EPS level? So, if you could define what accretion means? And let’s say if you define accretion on an EPS level, then is it immediately accretive, or will it be accretive sometime in the fiscal year when we put in all the puts and takes of the financial income, right, that is being lost on other fab consolidation activities and so forth? So, when is it actually potentially accretive on an EPS perspective in your opinion?

Wajid Ali: So, Vivek, we’ve communicated this earlier. We believe it’s immediately accretive to earnings per share. And the way we do the math on the earnings per share is the operating income we expect to generate from Cloud Light on a standalone basis without synergies and compare that to what we’re earning in our short-term overnight money market rates. And so, we just take a look at those two to determine accretion. And based on that, the transaction is immediately accretive. And that accretion only improves as we go through some of the synergy actions I spoke about earlier.

Vivek Arya: Understood. Thank you.

Kathy Ta: Thanks, Vivek.

Operator: Thank you. Our next question comes from the line of George Notter from Jefferies. Please go ahead.

George Notter: Hi guys, thanks very much. I’m just curious if you guys have gotten any other feedback on the Cloud Light acquisition from your other datacom customers. I think obviously you’re competing with some of those folks increasingly. I’m just wondering if in the last week or two you’ve had any more feedback. Is this something that becomes problematic for the rest of the datacom business or non-issue? Thanks.

Alan Lowe: Yeah, thanks, George. As you can imagine, I’ve had many discussions with our very important transceiver customers to assure them that our partnership is still very solid and they’re very, very important to us. And I think there’s plenty of demand to go around. And we’ve acted like strong partners with them over time. So, I’d say that the alternative is that they buy from another competitor or they buy from someone that they’ve trusted for years. And so, I don’t see any negative implication with respect to our transceiver customers and their demand on us for EMLs, VCSELs, and DMLs for that matter. So, I think so far so good. The feedback has been positive. And we have not seen any demand shifts as a result of the announcement from a week or two ago.

George Notter: Got it. Thank you very much.

Alan Lowe: Thanks, George.

Kathy Ta: Thank you, George.

Operator: Our next question comes from the line of Christopher Rowland from Susquehanna. Please go ahead.

Christopher Rowland: Hey, guys. Thanks for the question. One of your competitors spoke of a strong ramp in 800G starting in March. I was wondering if you could kind of describe the shape of your 800G ramp here over the next 12 to 18 months. And they were going to see kind of as a result of this strong growth, sequential growth each quarter of next year. I was wondering if you would see something similar on your horizon.

Wajid Ali: Hey, Chris. Yes, I would say we would see very similar commentary that both from the chip standpoint that we are shipping a lot of EMLs and have very strong demand that we expect continues over the next four-plus quarters as 800 gig continues to ramp. And then from the Cloud Light acquisition, their revenue is, as we’ve highlighted on the call, increasingly focused on 800 gig. And that is in its very early days, that market is just emerging and will continue to ramp up into the future. So yes, we believe the 800 gig portion of our cloud business will continue to grow into the foreseeable future.

Christopher Rowland: Okay. I don’t know if you had a take on sequential growth in each quarter of next year, calendar year. But for my second question, I wanted to talk about kind of custom engagements for laser designs by both system vendors, holistic system and — vendors, but also hyperscalers out there. And I don’t know if it’s possible to break out cloud networking demand, so 51 terabit switches versus AI, but how do you think this mixes out for next year as well? Thank you.

Chris Coldren: Yeah. So, a couple pieces. So, on the last bit with regards to where our products are landing, if you will, AI versus non-AI, we don’t have 100% visibility to that. But our belief is that for the next year, at least, most of the growth or the primary growth in the market is driven by AI-driven applications. And then going back to custom laser designs, or if you will, yes, we are engaged with both, as you said, system providers, if you will, as well as cloud operators directly, hyperscalers. On custom laser solutions as well as now with Cloud Light custom transceiver solutions as AI continues to push the performance envelope and stress from power consumption, latency, and other requirements that are really critical to AI workloads.

And that’s one of the benefits of this combination, that we’re bringing together unique manufacturing capabilities from Cloud Light, bringing together our unique chip manufacturing so that when we partner with customers, we have the full tool chest, if you will, to address the challenges of next generation roadmaps that they’re looking to implement sooner than later.

Christopher Rowland: Thanks, Chris.

Kathy Ta: Thank you, Chris.

Operator: Thank you. Our next question comes from the line of Ananda Barua from Loop Capital. Please go ahead.

Ananda Barua: Yeah, good morning, guys, and thanks for taking the question. Yes, I’ll just stick to transceivers as well. Do you guys see, and this would probably be for Chris or Alan, any latency points or sticking points getting Cloud Light — now that you’ve closed the deal, getting Cloud Light volumes to kind of what you call run rate? Then I have a quick follow-up.

Alan Lowe: Could you clarify what you mean, Ananda?

Ananda Barua: Yeah. So, I mean, I guess is everything in place, is it as simple as just taking the orders in and shipping them out? Or given that — sort of given that they’re newly absorbed into the organization, given that your balance sheet and your kind of street credit, so to speak, may open up new opportunities for them, given the manufacturing capability they have in place, are there things that could be required that could, in the near term, cause some latency to getting those orders out the door as they come in? So just wondering, is the mechanism is it just set up to work smoothly and elegantly right now taking the orders in and send them out, or is there something that needs to be put into place or accomplish near-term to get the orders to run rate revenue?

Alan Lowe: Yeah. I mean, the Cloud Light team is not lacking orders, if that’s what you mean. So I think, as I said earlier, capacity plans and CapEx plans have continued to be able to ramp to the kind of volumes that they had visibility to prior to the acquisition. That said, I do think we will see further demand acceleration and that could take additional capacity in — as well as additional factory footprint. And I think that would be then accelerated with the acquisition and that we have factory footprint that we could expand into today. Given that we’re all of 24 hours into the close and we have a team there now, we’re sorting all that out, frankly, and we hope not to screw it up, frankly. So, they’ve been doing very well.

We’re trying to stay — we’re trying to let them do their stuff and not distract them as they’re going up a very, very steep ramp. But that said, we’re here to help them. And I think the combination is really a winner from my discussions with those cloud customers.

Ananda Barua: Yeah, that’s super helpful. That’s super helpful. And I guess just in that regard, sort of the follow-up would be, given you made two acquisitions in the — you’re sort of in the pluggable space in the last 12 months or so — sort of 12 to — four to six quarters, could you stay active in this area? It’s obviously an area of interest. Do you have everything you need? Or do you think — does it make sense that you could keep looking from a tech perspective?

Alan Lowe: Yeah. I mean we’re always looking. I think our focus is making sure we finish the acquisition synergies of NeoPhotonics, and Wajid talked about that. The back-end factory consolidation is happening now, and we’ll get the benefit of those synergies at the end of this fiscal year, and that’s meaningful. So, we have to finish that and we have to make sure that the Cloud Light acquisition goes up the ramp effectively to meet the demand of what’s going on in the hyperscalers and AI/ML stuff. So, I think we have our hands full today for the next several quarters. But that said, we’re always looking and always interested in what we might be able to tuck-in to give us another competitive advantage over our competition. Chris, do you have anything else to add there?

Chris Coldren: I was just going to say that to reiterate that I think Ananda is hitting a key point that we have had a deliberate strategy to build out both technology, manufacturing on the component capabilities over the last N number of years, and then that’s translated into now getting more pluggable transceiver capabilities. And as Alan highlighted, as that all has come together now, we’ve got time to put all those pieces together and fully realize the benefits of those acquisitions and the post-acquisition organic work we are performing to really unlock the value and the multiplier effect between all of these acquisitions. But we are continuing to look. We are not done, if you will, building out our technology and product portfolios. But for the time being, we’ve got a lot of work to do to realize the maximum potential of what we’ve already taken on.

Ananda Barua: Thanks, guys.

Kathy Ta: Thanks, Ananda.

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

Mike Genovese: Great. Thanks. First, can you talk — can you guys talk more about the optical switch opportunity for AI? How — more about that technology and sort of how far away revenues are? And is that a MEMS-based product? I’m curious.

Chris Coldren: Hey, Mike. So, in today’s data centers, obviously, there’s a lot of bandwidth going around and as we’ve seen in core telecom networks for years being able to reconfigure the network optically and electronically brings a lot of value in hyperscale network operators or cloud operators rather, are beginning to realize that being able to reconfigure bandwidth optically within data centers is a key capability. There’s a range of technology that can be applied. In our case, it’s certainly will involve MEMS. I would say, in terms of time to market, a little premature to talk about an exact timeframe, but I think over the next year, you’re going to hear a lot more about it as prototypes begin to ship.

Mike Genovese: Okay, great. Thanks, Chris. And I guess something maybe more immediate then, your competitor yesterday spoke about some near-term opportunity where they expected sequential growth because of some transport opportunities in China, WSS, ROADMs and AMPs. Are you seeing anything similar to that?

Alan Lowe: Yeah. I mean we’ve seen the China mobile tender is happening, and it’s really — it’s kind of nice to get a customer to expedite WSSs and the components that go around them. So, we’ve been in the midst of that, and we’re trying to meet that demand for tender. And I think it’s meaningfully large and it’s an opportunity and I think one that will drive calendar ’24 volumes more meaningful for that specific opportunity. But that’s, I think, more of a unique situation where the deployments are happening — or the bidding is happening and the deployments will happen early parts of next year. So yes, that is an opportunity. We are seeing that. And I’ve been on the phone with the executives there to help them get what they need when they need it.

Mike Genovese: Okay. Perfect. Thanks for the color. Thanks, Alan.

Alan Lowe: Thanks, Mike.

Kathy Ta: Thank you, Mike.

Operator: Question comes from the line of Ruben Roy from Stifel. Please go ahead.

Ruben Roy: Yeah, thank you. To just follow up there, Alan, you did mention that you’re — I think, over the last 90 days, it sounded like you started to see some areas of telco softness. I was wondering if that was a geography-based comment or customer or end market-based comment. Any additional detail there, please.

Alan Lowe: I think it’s just echoing what I think you’ve heard from some of our network equipment manufacturers around regional softness and an inventory at the North America carriers. So I don’t think it’s anything new and enlightening. It’s kind of more of the same that we’ve seen that is making us be cautious about the outlook for current quarter and into early calendar ’24.

Ruben Roy: Okay. Got it. Thank you. And then as a follow-up, probably for Chris. With even more focused on data center optics, I was wondering if you can give us an update on how you’re thinking about the coherent DSP project? And whether or not longer term, you think there’s spot for that team and what you’re planning on with data center optics there?

Chris Coldren: Yeah. So certainly, we continue to make great progress in developing our coherent DSP, which is one of — another puzzle piece, if you will, in our pluggable module strategy. So, we expect that we will start evaluating our latest 400-gig parts in calendar ’24, early calendar ’24. And yeah, I think it’s a critical capability both for the data center interconnect opportunity. And over the longer run, in fact, we expect that technology to penetrate further inside of the data center as well, I think you referenced.

Alan Lowe: And maybe if I could add to that, Ruben…

Ruben Roy: Thank you.

Alan Lowe: If I could add to that as well, we have been building out not only our DSP team but other RFIC team to have critically-enabling components in-house to address that margin stacking of the independent IC company. So that — those teams have been building out, and we’ve started to see the benefits of things like TIAs and drivers that having that in-house is a big benefit for us.

Ruben Roy: Very helpful. Thank you.

Alan Lowe: Sure.

Kathy Ta: Thanks, Ruben.

Operator: And we have our next question coming from the line of Dave Kang from B. Riley. Please go ahead.

Dave Kang: Thank you. Good morning. First question is regarding your comments on telecom. So, how much decline are we — should we expect in the December quarter? Are we talking a slight decline or still like a high-single digit to maybe even double-digits?

Alan Lowe: Yeah, I don’t think we had indicated that there’d be a decline. I think what we’re indicating is that we’re still shipping below end customer consumption. And so, it’s muted with respect to being back to parity with regard to us building and shipping what our customers are shipping and deploying. And so that’s more the comments than it’s going the wrong direction because we’re already at a very low level.

Dave Kang: Got it. And then regarding your comments about C&N being up in calendar ’24 year-over-year, I assume that was organic, right?

Alan Lowe: I’m sorry, I missed the beginning of the question. What being up?

Dave Kang: Cloud & Networking, I think — I believe you said it’s going to be up calendar ’24. It’s organic, right?

Alan Lowe: I would say both organic and inorganic, we expect that to be up. Yes.

Dave Kang: Okay. So just to be clear, I mean, even without Cloud Light, C&N will be up next year, next calendar year?

Alan Lowe: Yeah.

Dave Kang: Yeah. Okay. Just wanted to clarify that. Thank you. Okay.

Alan Lowe: Sure.

Kathy Ta: Thanks, Dave.

Operator: Thank you. There are no further questions at this time. I’d now like to turn the call back over to Mr. Alan Lowe for final closing comments.

Alan Lowe: Great, and thank you. I’d like to leave you with a few thoughts as we wrap up this call. First, I would like to extend a very warm welcome to the Cloud Light team joining Lumentum. The talented Cloud Light team already excels at delivering the highest speed optical transceivers to cloud data center operators and infrastructure providers. I very much look forward to our R&D teams working together to see what else is possible to deliver even more leading-edge product innovations to our customers. In addition, our business fundamentals are solid for the mid- to long-term as we serve the exponential growth in data center bandwidth required by the artificial intelligence, machine learning, mobile, carrier and cloud computing markets.

New industrial applications are driving demand for our advanced imaging and sensing products, and our commercial lasers are expanding into high-growth applications beyond our traditional markets. We are committed to investing in innovation to meet customer needs today and in the future. With that, I would like to thank everyone for attending, and we look forward to talking with you again at investor conferences and upcoming meetings in the coming weeks. Thank you.

Operator: 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.