How should we think about the operating leverage as growth recovers in Telecom and Datacom in calendar ‘24 from a margin perspective? Obviously, it’s unlikely that you’re going to get back to the high 40s gross margin, but I want to get a better sense for maybe gross margin trajectory as we move through the balance of this – the next four quarters into maybe fiscal ‘25. Thank you.
Alan Lowe: Yes. Thanks, David. I’d say on the under-shipping question, I’d say that clearly, at the revenue levels that we’re having today, our customers are shipping out more than we’re shipping in. And I think 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 had talked about lowering their CapEx, but not significantly. So I’d say that 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 hyperscaler side, AI is really consuming a lot of the inventory that we had shipped over the last couple of years.
And now we’re starting to see signs that things could pick up before the end of the year in the hyperscalers. But in the normal carrier space, I’d say that’s probably premature until calendar ‘24. Wajid, do you want to take the operating leverage question?
Wajid Ali: Yes, sure. So on operating leverage at the revenue levels we’re currently seeing for the back half of this calendar year, you can appreciate that we’re having a lot of underutilization charges within our internal factories due to the lower revenue levels and our desire to bring down our company inventory to a more normalized level. As the back half of the fiscal year moves on, our expectation is that we’ll really have three things working for us. One is, is that we’re expecting to continue with our synergy plans that we’ve done that we’ve executed on quite well to date on 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, is that our Datacom business is a chip business. And so we’re expecting to see improved demand in that part of the business 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, 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.
David Vogt: Great. Thanks, Wajid. I will get back in the queue.
Kathy Ta: Thank you, David.
Operator: Your next question comes from the line of Alex Henderson from Needham. Please go ahead.
Alex Henderson: Great. Wanted to start off with the comment on 3D sensing that the business would be flat into the September quarter. Historically, the June quarter is a seasonally softer quarter versus 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.
Chris Coldren: Hey, Alex, this is Chris. Thanks for the question. Yes, I think a couple of things go into our outlook. I think as we’ve alluded to on prior calls that we anticipated the impact of having an additional competitor in the mix. And so that and current demand environment were both factored into our guidance, and that’s what’s impacting the sequential and year-over-year comps you’re asking about.
