We’ve talked about — I mentioned in my prepared remarks, automotive, what we’re seeing for FY ’25 and our assumption is not based on end market growth. Our assumption is based on new program wins. We’re talking about wins that we already have under the belt. We’ve already booked those and it’s just a matter of delivering those next year, obviously, but not expecting some big miracle layer for the end market to change substantially. If it does, it will actually be an opportunity for us. But right now, if you just assume a 10%, even in this bad environment in FY ’24, we’re close to 10%. So there’s no reason to expect automotive to be substantially lower than 10%. And then if you take health care and maybe a 5% growth, again, it’s a very modest growth.
If you add up this AI automotive and health care alone, that’s about $2 billion of revenue. You’re talking about 5% to 6% margin, even more if you get leverage out of it. So at 6%, you’re talking $120 million of that $130 million, $140 million incremental income that I mentioned is needed for the $10.65. It’s already there in just these three end markets and the balance of all the end markets. And I’m talking about semi cap, which, by the way, is showing very strong signs of a recovery that’s coming. It’s not here, but a lot of customers have changed the way they talk about their own businesses, and that’s changing quite a bit in the positive direction. So we do expect not this year, we’re not talking about calendar year ’24. But in calendar year ’25, we do expect very high probity of sharpish sort of recovery there.
Renewables totally agree, it’s slowing. Digital print and retail, steady Eddie and then connected devices as the basin FY ’24 is so low that even a small little increase there you certainly see the $130 million, $140 million of income that we’re talking about is not difficult to get to. And then if you look at the margin play, obviously, there’s mix going on, this mix shift that we continue to talk about. And the cost optimization, you’ll also have a full year impact of our cost optimization efforts that we’ve undertaken in FY ‘24. So I hope I answered your question from a risk perspective. Look, the risk is very low. If you look at – if you break down the individual components of what we’re talking about for FY ‘25, the $10.65 sounds highly achievable.
Ruplu Bhattacharya: Okay. Thanks for all the details. Appreciate it.
Michael Dastoor: Welcome, Ruplu.
Operator: Thank you. Our next questions come from the line of Mark Delaney with Goldman Sachs. Please proceed with your questions.
Mark Delaney: Yes. Good morning and thanks for taking my question. The company mentioned an expectation to have about $6 billion of AI-related revenue in fiscal ’25. Better understand how you’re defining AI-related revenue? And then maybe also help us understand out of that $6 billion, how much is coming from data center and then how much are some of these other end market opportunities where you see some AI opportunities like health care?
Kenny Wilson: Yeah. Hey, Mark. So the blend of it is as — I would say that probably just north of half of it is data center related maybe slightly — maybe two-thirds of it and the balance would be optics and advanced switching really. It’s that kind of order of magnitude.
Michael Dastoor: And Mark, if I could just add, if you look at our data center revenue and again, remind you that’s net revenue. It’s net of consignment effect. Our gross volumes are growing at a really good pace. It’s in that 25%, 30% growth range obviously doesn’t show up in the revenue. But it will show up in the margin because that is what we’re adding value on. So I think the number by itself, just the revenue number, net revenue can be a little misleading. You’ve got to look through — look at volumes. Volumes are going up 25%, 30% in that particular space.
Mark Delaney: Okay. That’s helpful. But just to clarify, so would any rack for hyperscale or be counted as AI or does it need to have GPUs in it? Just trying to understand sort of the categorization of AI versus some of these other broader categories.
Michael Dastoor: No, it has to have some GPU attached. Most of our business now has shifted from the legacy server business to AI-related GPU, predominantly in our cloud business.
Adam Berry: Yeah. We just — we opened a new facility like six months ago that’s pretty much all doing a GPU like — in that space.
Mark Delaney: Helpful. My other question was on margins. Mike, you mentioned fixed cost recoveries is one reason for the margin resiliency in fiscal ’24. Maybe you can help us speak to how secure the recoveries are? Is that something that you still need to go out and negotiate? And then maybe talk a little bit around your ability to still achieve a 6% EBIT margin over the longer term. Thanks.
Michael Dastoor: Yeah. The recoveries are already done, Mark. It’s not based on our future event. It’s already agreed upon. So it’s very secure. Can you repeat your second question?
Mark Delaney: Your ability to get to the 6% EBIT margin in the longer term, which is something I think you said could be achievable. I don’t think you put a specific time frame on it, but to what extent do you think you’re still tracking to eventually get a 6% or higher non-GAAP EBIT margin? Thanks.
Michael Dastoor: Right. So we will exit at FY ’24 at 5.6%. We’re being very sort of conservative by saying 5.7% plus for FY ’25. I think getting to 6% is not is not five years from there. It’s maybe a year or so away from FY ’25. So we’re getting closer and closer to that 6%. And I think the margin story is definitely in our favor right now. It’s all the business that we’re seeing. That is all higher margin mix shift.
Mark Delaney: Thank you.
