Christopher Rolland: Hey, thanks for the question. And this one is for Matt. Just kind of an amazing revision here on the electro-optics portion. Since you’ve seen this inflection, you probably done some more research here, how are you thinking about the attach rate for these products per GPU, call it, is it one for one? Are you thinking it could be two for one? I’ve seen some research that suggests depending on how many layers there are, could even be three per one. And is the revenue that we’re talking about here, all 800-gig PAM4 DSPs? Is there anything else related in that as well? Thanks.
Matt Murphy: Yeah. Thanks, Chris. Yeah, I think it’s fairly similar to our view last quarter. We were pretty clear about the direct attach, which was the one-to-one you mentioned. Understanding that as you get to the upper layers of the network, there is more, and there is a range and you probably size the range. We’re still I think refining our exact models there, so I don’t know if I have an exact number to give you. But I think you’re thinking about it the right way, starting at the direct attach and then building higher. And the second part of your question, it’s all 800-gig for AI, at this point. We have strong traction on our next-generation products at 1.6T, which would be starting sometime next year. The products that are at frequencies lower than 800 gigabits are typically served for the traditional cloud infrastructure, which is also seeing a recovery as well. So, hopefully that’s helpful.
Christopher Rolland: Fantastic. Thanks, Matt.
Operator: The next question is from Ross Seymore with Deutsche Bank. Please go ahead.
Ross Seymore: Hi, guys. I don’t know if this one is for Matt or Willem. But I just wanted to talk about the puts and takes to next year’s gross margin, and I know you’re not guiding that far out with any specifics. But it seems like you’re going to have a number of custom products that will be going up in the data center side, the storage side should recover at some point in time. But the general question is if custom products tend to be lower gross margin and storage and some other areas like enterprise eventually come back cyclically, how do we think about the puts and takes in your gross margin versus that 64% to 66% historical target range?
Willem Meintjes: Yeah, Ross, maybe I can start and Matt can add. So, when you look back, certainly over the last couple of years, we’ve grown both our carrier and ASIC business sort of faster than the rest of the business. And we were able to maintain our gross margin within our target range. We’re targeting to get back to that 64% exiting this year and then to maintain that through next year. But clearly, it’s sort of early to decide exactly how big the ASIC ramp is next year. Now if we do show outsized growth there, that would negatively impact our gross margin, but certainly our view is that, that would be very accretive to operating income and to EPS. But it’s too early right now to know exactly the extent of that. Hopefully, that’s helpful, Ross.
Matt Murphy: And Ross, maybe — it’s Matt, I’ll just add. I think the — clearly, the custom business carries a lower gross margin, we’ve been very open about that. But I think looking out to next year, it’s a little early to call it, right? We don’t know the rate of recovery for storage, that’s a big part of the equation. We also have what’s the — even within like AI and cloud, what’s the optics revenue going to be versus the custom stuff. You’ve got automotive continuing to perform well and growing, which is a higher-than-average gross margin category for us. So, we’ve got a lot of irons in the fire relative to various businesses that may or may not pick up at different times. As Willem said, we had a pretty consistent ability to manage gross margins in the range that we were targeting, understanding there is mix issues all the time.
We’ve been going through a period here Q1, Q2, and Q3, where we’ve had it for a longer period, I’d say, unfavorable gross margin relative to our traditional mix. But it’s such a dynamic environment, it’s really hard to call the ball exactly, Ross, on when all those markets sort of burn through inventory, kickback back in, what is the recovery look like. But when we look at it a very high level, we continue to believe we have a very nice balanced portfolio of different products, technologies with different business models behind them that generate different gross and operating margin profiles. And as an example, like Willem said just because some of these custom programs are at lower than corporate average gross margin, especially if they ramp significantly, they are extremely accretive to operating margin and operating income at the bottom line level, which ultimately over time is what we’re laser-focused on is driving earnings per share and driving operating profits for the company.
So, high-level answer, but maybe it just frames it up, we need a little more time in front of us to really figure out what that looks like for next year.
Ross Seymore: Fair enough. Thank you.
Operator: The next question is from Vivek Arya with Bank of America. Please go ahead.
Vivek Arya: Thank you for taking my question. Matt, I was hoping you could help us size how big storage is. Currently, in the quarter you reported both kind of data center and outside of data center. And I forgot whether you mentioned whether that’s going to be up/down/flat in Q3 and Q4, or can it kind of hold at these low levels? And what are you looking for to inform you as to when it starts to grow sequentially, like how much excess inventory is out there, or do you think that it can actually hold at these low levels? So, just help us kind of set what the right baseline view is of storage as you get into next year.
Matt Murphy: Sure, thanks, Vivek. It’s a great question, okay, I think it’s in some ways a million-dollar question. Let me tell you where we’re at so far. So, obviously, Q1 was very, very low in terms of our storage revenues, and in particular, we’re really talking about data center storage, if you think about it. The consumer piece is kind of hung in there because of some the specific applications we have. But that’s — what’s moving the needle is the data center side. In Q2, it had recovered, which was nice to see. It was coming off a bottom, right around $100 million, let’s call it, something like that. And then, from there, we said in our prepared remarks, Q3 we’d see a modest recovery again. So that would be up. It’s still not sloping towards I think where we thought it was going to be a quarter or two ago relative to the year-end exit rate, and I think most of the end customer commentary suggests this is more of a first half of ’24 type of recovery.
