Kathy Ta: Thank you, Karl.
Operator: Our next question comes from Dave Kang from B. Riley. Your line is now open.
Dave Kang: Thank you. Good morning. Just one more question on the Datacom segment. So, with that pause or dip in June and September, how should we think about Datacom revenue for those two respective quarters?
Alan Lowe: Yes.
Wajid Ali: I think
Alan Lowe: It’s —
Wajid Ali: Go ahead.
Alan Lowe: Go ahead. Okay, yes, let me take that. I’d say we’re still working on what that dip looks like and clearly our customer is looking to help us smooth that dip. And so, I would think from a modeling standpoint it could be down 30% through that transition period. But again, that’s a matter of still working through. And then, can we pull in the new products into the September quarter that would make that June quarter the low? And I think that’s probably the case, as we have made tremendous progress on the new products and the demand for those new products are strong. So, I’d say you can model kind of a dip in the June quarter with a slight pickup in the September quarter, but that’s a little bit dynamic.
Dave Kang: Got it. And then, my second question is on the telecom. Just wondering, you talked about tunable lasers. Just wondering how big that business is and also can you — any update on the ROADM segment?
Wajid Ali: Yes, Dave, we don’t break those products out specifically, but I think maybe a key point, as Alan highlighted on the call, or in a previous question, is both of those products are ones where there are more inventory out there, given the position we have and the criticality we are to our customers and the supply challenges around semiconductors or ICs a year ago or so that’s an area where inventory was built quite heavily. So, for example as our ZR modules ourselves are ramping up, tunable lasers aren’t yet. There will be a time lag, here of a quarter or two before they start to recover given the amount of inventory that’s out there. So, unfortunately, the situation is that some of the major product lines that we have driven a lot of our historical revenues are the ones that where there are high levels of inventory that are remaining to burn off in the coming couple of quarters.
Dave Kang: Thank you.
Kathy Ta: Thank you, Dave.
Operator: Our next question today comes from Ruben Roy from Stifel. Your line is now open. Please go ahead.
Ruben Roy: Thank you. I hope my first question is quick, because you guys have been talking about this quite a bit. But Chris, I think this is for you in answer to previous questions around this little bit of applause in the June-September quarters on the transceiver technology. I just wanted to make sure I understood. That’s a design change, 100% related to kind of your product and not because of other network elements. Is that the right way to think about it?
Chris Coldren: I would say, well, maybe a slightly different, which is to say that the customer wants to purchase different products, then we have to make a new product. And so, there is a period ramping down the old before we ramp up the new. And that’s what presented the dip.
Ruben Roy: Okay.
Chris Coldren: Customers trying to improve system or network performance, if you will through a different sort of product design.
Ruben Roy: Okay, thank you for that. And then, on the industrial side, you have outside a pretty fencing you’ve got the inventory consumption at a large customer, and obviously macro weakness ongoing. I’m wondering if you could kind of sort out the macro side of it, how has design activity been, Alan, I know you have gotten some new products out there with some of the fast industrial lasers. Are you seeing any sort of pick up in design activity or discussions around either additive manufacturing or otherwise, I’m just curious how you’re thinking about over the next 12 to 18 months?
Alan Lowe: Yes, good question. I would say, as we said in the script, a lot of new applications, I would say, the one that we are ramping today is primarily around solar processing and manufacturing, and our laser gives them a differentiated efficiency of the solar cells. So, as you can imagine, 1% efficiency or even a fraction of a percent efficiency for solar cells is a big deal. And so, for whatever reason our unique capability in our ultrafast lasers had a lot of attraction in that space. And similarly, we are seeing a lot of design activity around other applications, and we have talked about those on the call around EV batteries, and PCBs, and displays that are coming to fruition, and will turn into business really in the second-half of calendar ’24 and into ’25. So, yes, a lot of activity and a lot of success with respect to our Femto second and Pico second lasers.
Ruben Roy: Thank you.
Kathy Ta: Thanks, Ruben.
Operator: Our next question today comes from Vivek Arya from Bank of America. Your line is now open. Please go ahead.
Vivek Arya: Thank you for taking my question. And I just wanted to nail down what we have heard so far about June and September. So, it seems like June is at least $30 million below March levels, all else being equal. And then, September it recovers, but maybe doesn’t get back to March levels, but I wanted to confirm that. And if June and September are both below March levels, then what happens to gross margins? Are they also below March levels? I just wanted to make sure that we just connect all the dots that we have heard so far on the call.
Alan Lowe: Wajid, I think you are on mute.
Wajid Ali: Sorry. Thank you. Hi, Vivek. So, I think that sounds about right. We do try to guide one quarter at a time, just given the number of customers that we have that are over 10%, and the type of volatility we can see. But based on the information we provided, that’s probably about the right math. Our gross margins, we are going — well, gross and operating margins, we should be able to see some of the synergies flowing through in our June and September quarter, that we talked about earlier. We have achieved $60 million exiting the December quarter, and we are expecting additional synergies to help us a little bit in March and probably more in June. And so, we should be able to see the benefit of that flowing through. And so, gross margins should be probably about flat, at least into the June quarter with some improvement into the September quarter.
Some of the new programs that Alan talked about do require some incremental R&D expenses for those large hyperscale customers. And so, we won’t be backing off on those. And so, OpEx will modulate between June and September as well. I think that’s the right way to think about it. Sorry, just for clarification, 30% Datacom down, not the company down in the June quarter, right?
Vivek Arya: Right. At $30 million, right?
Chris Coldren: Yes, $30 million, it’s about $30 million-ish, yes.
Vivek Arya: My follow-up, how do you think about your balance sheet right now? Net leverage is kind of higher than peers. And so, how do you think about the balance sheet right now? Do you think you need to do anything extraordinary to shore it up. And in general, how should we think about just cash flow generation this year? So, just any comment on the balance sheet would be helpful. Thank you.
Chris Coldren: Yes. So, we exited the December quarter with a little over $1.2 billion in cash. Our expectation is that we’ll continue to generate cash flow from operations, both in the March quarter and in the June quarter as well. We are making some incremental investments in capital in our Thailand facility that Alan talked about. And so, that’ll modulate between March and June just depending on when the CapEx comes in and when we pay for it. We have a convertible debt due in March, in the middle of March. And so, our expectation is that we’ll be able to pay that often the cash that we have on the balance sheet. And that still leaves us with a comfortable level of cash exiting that payoff. So, we’re quite comfortable with the level of debt we have, both on a gross and a net basis, just kind of given those dynamics.
Vivek Arya: Thank you.
Kathy Ta: Thanks, Vivek. So, Drew, I think we have time just for one more question.
Operator: Okay. Our next question comes from Ananda Baruah from Loop Capital. Your line is now open. Please go ahead.
Ananda Baruah: Good morning, guys. Thanks for taking the question. Just sort of going back to the transceiver comp, Alan, Chris, what’s a good way to think about overall Gen AI exposure right now? I guess, how big would you size your kind of Gen AI related business in the December quarter? And I guess, what’s a good way to think about, and you can include ZR in there if you think did that belong? Sounds like, Alan, you in your prior remarks, you think it to some degree, you think it belonged. And then, what’s a good way to think about sort of, I guess kind of like the growth rate of those of how you size that Gen AI-related business over the next 12 to 24 months. And there are a lot of moving parts with new customers and programs and stuff like that coming on, but any context, both of those questions would be probably pretty useful for us. Appreciate it.
Chris Coldren: Sure. I would say as we highlighted on the call, the Cloud Light revenue around $60 million and will be going up significantly here in the March quarter with a full quarter of it. I think the vast, vast majority of that given the vast, vast majority of that is 800 gig is going into AI platforms. If you were, look beyond that, then obviously we’ve got our Datacom, chip business, which is several tens of millions of dollars a quarter as well adding into that. I would be cautious to start throwing in, some of the telecom revenue at this point. Certainly, data going in and out of the data centers is relevant, but I think that’s more of a longer term story as more data centers are built purpose built and spread out further for power consumption reasons that will start to really drive the telecom space.
Now, going back to the revenue pieces that I highlighted between the Cloud Light transceivers and our Datacom chips, I expect, I mean obviously, we’ve talked about kind of dip here over the coming quarters. But if we were to look at that over several year periods to smooth those out, I think the industry expecting that, AI is growing at a 50% CAGR or something like that over the next three plus years. So, I think we’ve got an opportunity to grow at least as fast as that, if not faster, given our more modest overall market share, but having all of the essential ingredients to be able to be a share gainer.
Ananda Baruah: That’s helpful, Chris. I appreciate. I’ll leave it there. Thanks a lot.
Kathy Ta: Thank you so much, Ananda. And now I think we’re going to turn the call back over to Alan for some closing remarks.
Alan Lowe: Great. Thank you, Kathy. I would like to leave everybody with a few thoughts as we wrap up the call. We are confident in our agility and leadership position to navigate the current market environment. Lumentum stands at the forefront of the data center revolution from pioneering chip scale photonics to automated manufacturing and to new and growing partnerships with hyperscale cloud customers and infrastructure providers. Our Cloud Light acquisition has already proven to be a success with a fantastic team and valuable insight propelling our high speed transceiver production to meet surging demand. With that, I would like to thank you for attending today’s call, and we look forward to meeting you again at investor conferences, upcoming meetings and at the OFC Show in San Diego. Thank you.
Operator: That concludes today’s 2024 Lumentum earnings conference call. You may now disconnect your line.
