Good day, everyone and welcome to the Lumentum Holdings Third Quarter Year 2023 Earnings Call. All participants will be in a listen-only mode. Please note today's event is being recorded for replay purposes. During the presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. At this time, I would like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead. Thank you and welcome to Lumentum's Fiscal Third Quarter 2023 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 synergies of recent acquisitions including 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, including the risk factors described in the quarter report on Form 10-Q to be filed for the quarter ended April 1st, 2023. 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 third quarter 2023 results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investor section. With that, I'll turn the call over to Alan. Thank you, Kathy and good morning, everyone. Third quarter results were within the range we announced in April and we believe we are currently under shipping in market demand across our business. Customers who had built up large inventories due to supply concerns are bringing down inventories as supply risks and constraints are easing. I am confident about our overall competitiveness and market share positions in our optical communications and commercial laser segments, and believe that mid-to-long-term demand trends are very favorable. Data traffic will continue to grow at a relentless rate and networks and data centers will need to keep pace with a double-digit increase in data capacity each year. Lumentum's ability to both functionally and vertically integrate photonics is a key differentiator for us and will enable our customers in the coming carrier and spatial division multiplexing era as more and more optical fiber is lit up across the globe. New automotive solid-state LiDAR and industrial applications are emerging for photonics where we lead in reliability, performance, and manufacturing scale. Our commercial lasers business is expanding beyond our traditional applications into high-growth areas such as solar cell, advanced semiconductor, electric vehicle, and display manufacturing. In the nearer term, we are prioritizing expense controls, accelerated attainment of acquisition synergies, and cash generation, while we continue to deliver on new product and technology roadmaps and customer satisfaction. Now, let me provide some detail on our third quarter results. Telecom and Datacom revenue was down 24% sequentially but up 20% year-on-year with sequential declines across most major product lines due to customer inventory digestion. IC supply did not significantly limit our revenue during the quarter. While there is a mixed outlook among our markets and product lines, current visibility indicates that telecom and datacom demand will start to recover from this customer inventory correction late in the second half of the calendar 2023. We have a growing set of cable, MSO, and wireless network customers that are turning to our tunable access modules to expand data bandwidth in metro access, fiber deep, and wireless 5G front haul applications. This is a significant multi-$100 million per year market opportunity for us, which we expect will play out over the coming years. In the third quarter, revenue from these products grew 17% sequentially and doubled year-on-year to a new quarterly revenue record. Our new 25G tunable access module will be a key enabler for customers upgrading legacy fiber nodes in metro access networks leveraging next-generation distributed access architecture. However, as we transition customers from 10G to 25G in the coming quarters, we may see some revenue lumpiness. Our advanced ROADMs are key enablers of our customers' next-generation network architectures that are just starting to be deployed giving us confidence in continued market share growth and future demand. While third quarter ROADM revenue was down sequentially due to the customer inventory digestion I discussed previously, it was up from the same quarter last of year. Year-over-year growth was driven by broader adoption of next-generation ROADMs by market-leading customers along with improved IC supply. The adoption of coherent pluggable modules by network operators is another significant long-term opportunity for us. We are highly vertically integrated across the photonics and electronic components that enable high-speed pluggable form factors. At OFC, our 800G ZR product demo was very well received by our customers. Cloud data centers are being designed to support artificial intelligence and machine learning applications, which bodes well for us as we extend our technology leadership to an even broader array of products that enable higher capacity and lower power consumption and latency, as we highlighted at OFC. We are on track with our 200 GB per lane EMLs for 800 GB and 1.6 TBps applications, and expect to enter production in the second half of calendar 2023 and ramp throughout calendar 2024. Our high-speed VCSELs are starting to be deployed for short-reach connections within data centers, where optical communications are replacing copper connections due to data speed requirements. Also, as we highlighted at OFC, Lumentum is uniquely positioned to develop new photonics solutions, including high-power laser array engines, in coordination with leaders in the high-performance computing market. Given the fast pace of innovation and the increasing demands placed on photonics technologies, we expect that the photonics market for AI will rapidly grow, reaching the size of the existing Ethernet photonics market within the next five years. Turning to industrial and consumer, Q3 was down from Q2 and down year-over-year as expected due to smartphone seasonality and end market demand. Beyond the smartphone market, we continue to ramp new automotive and industrial sensing applications for an expanding set of customers. Third quarter revenue had approximately $3 million of automotive-related applications. Our current automotive revenue reflects significant contributions from early adopters of automotive LiDAR in China. Recent engagements with a global set of tier one customers gives us confidence in new LiDAR revenue opportunities over the coming years, as well as our confidence in our ability to significantly grow our revenue in this market. We expect our Fiscal Year 2024 3D sensing revenue will be lower than that of Fiscal 2023 due to our expectations around 3D sensing end market demand, pricing, and the possibility of an additional competitor on a certain socket opportunity in Fiscal 2024. In the third quarter, commercial lasers revenue was down 16% sequentially and down 6% from the same quarter last year. We achieved over 70% year-on-year growth in ultrafast laser revenue, which was more than offset by lower fiber and solid-state laser shipments. Our growth in ultrafast lasers is being driven by new applications, particularly in solar cell manufacturing. We expect that as these new laser applications grow, we will gain further share in ultrafast lasers. Based on the latest customer forecasts, we expect commercial lasers demand to be softer over the next several quarters due to the macro factors impacting end market and customer inventory digestion. Although we expect the overall demand environment is likely to be challenging in the near term, I'm very confident about Lumentum's mid to long-term prospects given fundamental end market and technology trends driving our growth expectations are unchanged. Lumentum is uniquely positioned to serve our customers at scale with our functional and vertical integration capabilities, our robust pipeline of design wins, and leading product roadmaps. A nd we have financial and structural resilience built into our business model. In the near term, we are focused on expense controls while maintaining crucial R&D to continue to drive the forefront of innovation. Before turning it over to Wajid, I would like to thank our employees around the world for their focus and dedication as they continue to execute upon our strategy. With that, Wajid? Thank you, Alan. Net revenue for the third quarter was $383.4 million, which was down 24.2% sequentially and down 3% year-on-year. During the quarter, we had two greater than 10% customers, both in the telecom market, and there were no 10% customers in the consumer market. GAAP gross margin for the third quarter was 29.2%, GAAP operating loss was 13.4%, and GAAP diluted net loss per share was $0.57. Third quarter non-GAAP gross margin was 40.8%, which was down sequentially and year-on-year, primarily driven by product mix and lower revenue. IC purchases at third-party brokers declined to nominal levels in the quarter. Third quarter non-GAAP operating margin was 13.4%, which decreased sequentially and year-on-year due to product mix and lower revenue. Third quarter non-GAAP operating income was $51.4 million and adjusted EBITDA was $77 million. Third quarter non-GAAP operating expenses totaled $104.9 million or 27.4% of revenue. Non-GAAP operating expenses were down $5.4 million from Q2 with tight expense controls and synergies that more than offset seasonal increases in operating expenses. Q3 non-GAAP SG&A expense was $42.8 million. Non-GAAP R&D expense was $62.1 million. Interest and other income was $9.2 million on a non-GAAP basis due to higher interest rates on our cash and investments. Third quarter non-GAAP net income was $51.8 million, and non-GAAP diluted net income per share was $0.75. Our fully diluted share count for the third quarter was 68.7 million shares on a non-GAAP basis. Our non-GAAP tax rate remains at 14.5%. Moving to the balance sheet. We ended the quarter with $1.67 billion in cash and short-term investments. To accelerate the integration of NeoPhotonics products into our global manufacturing footprint and attain synergies without impacting customer deliveries, we plan to carry elevated inventories for a period of time. However, we expect inventories to decline by approximately $40 million exiting calendar year 2023 as we continue to focus on cash generation. Also, we expect a moderation in CapEx spending over the next few quarters. Turning to segment details. Third quarter optical communication segment revenue at $335.1 million decreased 25.3% sequentially primarily driven by the inventory dynamics that Alan already discussed. Optical communication segment non-GAAP gross margin at 40.8% decreased sequentially and year-on-year, primarily due to lower revenue and the impact of NeoPhotonics product margins. Our third quarter laser segment revenue at $48.3 million was down 15.6% sequentially and down 5.7% year-on-year. Third quarter lasers gross margin of 40.4% was down sequentially and year-on-year primarily due to an inventory reserve due to a fiber laser product transition and lower volumes. We expect product margins in lasers to recover after shipments fully shift to the new laser platform and manufacturing volumes return. Let me move to our guidance for the fourth quarter of Fiscal 2023, which is on a non-GAAP basis and is based on our assumptions as of today. We expect net revenue for the fourth quarter of Fiscal 2023 to be in the range of $350 million to $380 million. Within this Q4 revenue forecast, we anticipate modest growth in telecom and datacom to be offset by a decline in industrial and consumer. We expect fourth quarter lasers revenue to be approximately flat with the third quarter. Based on this, we project fourth quarter operating margin to be in the range of 8.5% to 11.5% and diluted net income per share to be in the range of $0.45 to $0.65. Our non-GAAP EPS guidance for the fourth quarter is based on a non-GAAP annual effective tax rate of 14.5%. These projections also assume an approximate share count of 69 million shares. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy? 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. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. To withdraw your question, press star followed by two, and please do also remember to unmute your microphone when it's your turn to speak. Okay. Our first question comes from Simon Leopold from Raymond James. Simon, your line is now open. Please go ahead. Thanks. appreciate that. I'm turning on in the telecom and datacom segment and let me explain what I'm looking for here, is you were supply chain constrained during much of 2022, particularly I recall ROADMs because we couldn't get the FPGA. I'm trying to get a better sense of how much inventory your customers can be holding and what's the composition within the segment of that inventory? Is it all pluggables, mixture? Help us understand that. Thanks. Yeah, Simon. You know, it's broad with respect to the inventory at our customers from our perspective, as indicated by, you know, what we forecast to ship in the June quarter and what we think we're going to be shipping in the second half of the calendar year. I wouldn't say it's any one particular product line, although I would say that, to your point, ROADMs and ROADM line cards were constrained heavily over the past year. That's where I think a lot of inventory was built up. Therefore, a reduction, as we indicated in the script, in our ROADM revenue and ROADM line card revenue in the March quarter. We expect that to continue into the June quarter and beyond as supply constraints have been relieved and customers know they can get the product. I think they're very comfortable now lowering their inventory levels to reflect the actual sell-through to their customers. As we said also, we believe we are dramatically under shipping end market demand. As that happens over the next couple of quarters or so, you know, we'll get to an equilibrium where we'll start shipping again to end market demand as our customers' inventories get more normalized. A pre-announcement, that looked much lighter than we expected. I know you had guided some sequential decline, nonetheless, this is a market that had been holding up. I'd like to see if you could talk about what's changed there and how long does this relative weakness in commercial lasers last in your view? Yeah, Simon. As we also highlighted, the ultrafast laser business is going very well, 70% year-on-year growth as we get into new markets. I'd say the slowness came from a couple of areas, one of which is the transition we talked about in the fiber laser, but also headwinds in the overall semiconductor demand industry. In the semiconductor industry, as we supply solid-state lasers into processing of semiconductors. That's some softening that you see as well. Thank you, Simon. Our next question comes from Samik from JP Morgan. Samik, your line is now open. Please go ahead. Yeah. Hi. Thanks for taking my questions. Alan, you mentioned, even in the last response and in your prepared remarks that you believe you're under shipping to demand. I wanted to get your thoughts around sort of how do you think about sort of the right run rate? What is the sort of right level of demand right now? How much do you believe you're under shipping related to that? Maybe just extending that, you're seeing second half will have a recovery. Is that essentially the math that you're doing in terms of how much you're under shipping and how much inventory you're digesting gets you to that sort of second half recovery or is that what your customers are telling you? Thank you and I have follow-up. Sorry. Sure. I think, it's hard to say how much we're under shipping, although, you know, clearly the reduction in revenue in the March quarter tells us we are under shipping relative to end customer demand. We expect that as our customers, announce their earnings in the coming quarters, their inventory levels will come down over time. That's an indicator of under shipping in market demand. Although, you know, visibility is not perfectly clear for us. I'd say that, you know, we believe that a couple of quarters of this under shipping should then alleviate those elevated inventory levels so that, you know, as we exit the calendar year, we're more shipping into our customers what they're shipping out, and that's what gives us confidence of, you know, getting back to a more normalized level of shipments, you know, towards the end of the calendar year. Okay. Got it. Just to follow up on industrial and consumer, based on your guidance for the fourth quarter, you're implying most of the sequential decline in revenue, at your midpoint comes from that segment that would put you at one of the lowest revenues you've done in that segment, sort of going back quite a few years. Is that, again, you're thinking about sort of in sell-through for the primary customer you have being weaker, or is this more, again, a reflection of inventory digestion, even at this customer that's probably impacting you in that, in the coming, in this quarter, in the fiscal fourth quarter? Thank you. Hi, Samik. This is Chris. I would say what's most important to keep in mind in 3D sensing when you're looking at prior years is obviously the share normalization that we've highlighted previously. That's a very significant driver of reduction year-over-year and relative to the past. On top of that, obviously, you know, end market and pricing a bit. I don't think there's anything else that we can really comment on particulars around or quantifying end market at this time. Okay. Thank you. Thanks for taking my questions. Thanks, Samik. Bruno, could we have our next question, please? Our next question comes from Alexander Henderson from Needham. Alex, your line is now open. Please go ahead. Great, thanks. I wanted to delve into the AI commentary you made, obviously that's one of the bright spots in the commentary and t ry to understand the scope of the products that you have that allow you to compete in that market. Are you able to compete into just the Ethernet side or are you able to also compete into the InfiniBand side of it? Is the VCSEL copper replacement part of that? How rapidly do you think that business will grow to offset any pressures in traditional datacom? Yeah. Thanks, Alex. This is Chris. Let me tackle that. I would say you got to think of this in, you know, time frames that in the nearer term, the next N quarters, it's really deriving volumes, if you will, of our existing products or new products to be launched. As you highlighted, VCSELs, 100 GB per lane VCSELs that will be in mass production here soon. That will be a copper replacement as well as the 200 GB per lane EMLs and, you know, helping to accelerate digestion of inventory that's already built. That's of our products that are already out there. That's the next couple of quarters. As we look to the next few years, what you're referencing is there's new architectures that customers or new customers, let's say, are seeking to launch that are intensive with new optical architectures. I think we went through some of this at our OFC presentation, where we are co-developing solutions with, let's say, players that are leading, not traditionally in the networking side, but maybe more traditionally in AI and compute side of things for next generation data centers. There's kind of a couple waves of product intersects for us. Just going back to the original question. When do you think that, you know, really kicks in as a primary driver? Is it, you know, tens of millions of dollars of revenue, you know, in the back half of the calendar year or is this something that takes a lot longer to ramp? I think the back half of the calendar year will really be still in a phase of inventory digestion on existing products. I think the new stuff we're talking about is more one to two years out. Going back to the existing products as we get into calendar 2024, then I think we'll really see a re-acceleration in the existing products, given the inventory should be burned off at that point in time. If I could just insert one last question. The inventory reserve that you mentioned, that was in the non-GAAP numbers. What was the size of that? Hi, Alex. It was approximately $4 million. Great. Thanks. Okay. Thank you, Alex. operator, can we have our next question, please? Our next question comes from Meta Marshall from Morgan Stanley. Meta, your line is now open. Please go ahead. Great. Thanks. Alan, maybe I just wanted to kind of get a sense from you kind of coming back to Samik's question just about, you know, we're not only seeing kind of the over ordering the systems vendors may have done for you guys to build inventory, but their customers also kind of over ordered for supply chain issues as well on their part. Just how are you judging, you know, how much kind of end demand there is given that there could or just the duration of this inventory digestion period, just given some of the over ordering that the systems vendors might have seen as well? Yeah. Meta, it's hard for me to comment on what our customers are seeing. I can comment on what we're seeing from our customers, and that is, you know, products where there's strong demand and deployments, we're continuing to ship, where there wasn't a buildup of inventory, but where there was, and I think where there was fear of inability to get enough product, for when their customers needed it, we're seeing now that since the supply chains have eased, that those inventory levels are coming down through this under shipping of what we believe in market demand is. beyond that, it's hard to say. I would say though, however, that, you know, we're very confident in our share position and our new product design funnel and our new product wins with our customers. That gives us confidence that as this inventory gets burned off over the next few quarters, that we'll be in a position to ship at end market demand. We believe that there are still fundamental drivers that will drive end market demand to use these new products and continue to drive revenue growth for us as we get into calendar 2024 and beyond. Got it. Just as a follow-up question, you know, noted your commentary about Fiscal 2024 b eing lower than fiscal 2023 on 3D sensing, is there a general estimate, just of kind of what the cumulative effect of pricing and share normalization and just of kind of end market demand would lead to in Fiscal 2024 over Fiscal 2023 in 3D sensing? Hi, Meta. Yeah. I think it's a little premature to guide the full- year on 3D sensing at this point. I think the key point here is as we highlighted in the prepared remarks that, you know, end market demand, prices go down year-over-year and, you know, the likelihood or potential for a new competitor on one of the sockets that we've led on in the past all suggest that it will be down year-over-year. Okay, great. Thank you. Thanks, Meta. Bruno, could we have the next question, please? Our next question comes from Tom O'Malley from Barclays. Tom, your line is now open. Please go ahead. Hey, thanks for taking my question. I'm going to get a little specific on the, on the technology and share side, and hopefully you can do your best to answer it. You talked about losing share in 3D sensing, and I know you're tired of this story, but it still does matter to move the numbers a little bit into the end of this fiscal year. Can you just talk about when you look at losing share, I think it's pretty widely reported that there's a new entrant in the world-facing sensor. Is there a reason why share would be coming out of your pocket and not your competitors that you split that with today or do you see that entrant kind of taking share equally from the both of you? Just walk through to the best of your ability why that would be the case. Yeah. Y ou know, I think it's premature to know exactly what's going to happen on the next generation of phones. We wanted to highlight that there is potential that one socket could be bringing in a new supplier. I don't think there'd be any difference on the impact on us or our competitor with respect to that third supplier if they come in and if they're able to ramp. I think it'll be equally share shifting to that new supplier. Did that answer your question, Tom? Got it. It did. On the gross margins, you don't break out the gross margins on the guidance. Just looking at what's implied, it seems like the core telecom and datacom gross margin continue to be under pressure. I know you guys have synergies rolling in on the Neo side, could you just break down where you're seeing that weakness? Is it in the legacy Lumentum products or are you seeing the gross margin pressure on the acquired Neo products and are still waiting for some of those synergies to come in? Thank you. Yeah. Hi, Tom. I'll take that one. Yeah. On the synergy side, I mean, most of the synergies that we've seen to date have been, as you saw our operating expenses come down quite significantly quarter to quarter from Q2, and then to Q3, as well as, you know, in prior quarters during the fiscal year as we've taken appropriate actions there. On the cost of goods sold synergy, we're going to see most of that in the back half of our Fiscal 2024. We'll do a lot of the consolidation activities in the back half of this calendar year and start to see some of those synergies flow through in the first part of calendar 2024. Now on the gross margin for this quarter in particular, we made a note that we're planning on reducing our inventory levels, you know, over the remaining part of the calendar year. As we do that, we will see, you know, some under absorption within our manufacturing facilities as we continue to keep the infrastructure in place, so that we can absorb a rebound in early 2024. You'll see some of that and that will be impacting our gross margins over the next few quarters. You're just to be clear, you're further reducing utilization inside of your own facilities? Yes. Yes. That's right. Yes. Yeah. It's mostly things like depreciation that will continue to impact us for a couple of quarters. Thank you. Okay. Thank you, Tom. Do you have our next question, Bruno? Our next question comes from Christopher Rolland from SIG. Christopher, your line is now open. Please go ahead. Hey, guys. Thanks for the question. My first question is, you know, how do you see? Is this a trough for 3DS? Do you see it ramping from here? You know, like, how should we be thinking about a new run rate? What portion of this for next quarter is actually industrial so w e can get a sense of that versus consumer? Thanks. Yeah. typically the June quarter is the low quarter, seasonality-wise, given that this is really the last quarter of the prior model, and inventory does come down as our main customer starts production in the September quarter of the new devices. This is the typical trough in any 3D sensing cycle for our main customer. You know, I think end user demand will pick up in the September and the December quarter, as it does typically. Most of what we're seeing that's impacting our outlook for Fiscal 2024 is the share shifting that we talked about, that, you know, has been coming for the last four or five years is now coming to fruition. Now it's more normalized. As Wajid indicated, we don't have a 10% customer in consumer anymore. As far as industrial is low- single digits and on a quarterly basis of low single-digit $1 million. Okay, that's very helpful. Secondly, if we could talk about your 200 GB per lane EML, you know, 800, 1.6 TB. When do you expect this to ramp considerably for you guys? Any update on your CW lasers and when you think that could that could contribute? Yeah. Thanks, Chris. Those products are now, you know, sampling to customers and working with customers to be ready for the ramp. I would say, you know, timing is later this calendar year and heading into the next calendar year, both for, I mean, we are shipping today CW lasers of a couple different flavors for folks that use them in silicon photonic applications but m ore significantly, again in calendar 2024. Great. Thanks so much, Chris. Thank you, Chris. Bruno, could we have our next question? Our next question comes from Ruben Roy from Stifel. Ruben, your line's now open. Please go ahead. Thanks very much. Either Alan or Chris, I wonder if you'd characterize how you're looking at some of the opportunities around 3D sensing in industrial auto IoT, et cetera. Obviously still early days, but what needs to happen, would you say, to get into more meaningful ramps? Is this a question of pricing or, you know, more testing? If you can kind of walk us through how you're thinking about, you know, the ramps over the next 18 months, 24 months, that'd be helpful. Yeah, I mean, I think the largest opportunity, at least on a, you know, very long-term basis, is the automotive space, really, you know, ADAS, LiDAR, as well as in-cabin. You know, those, it's just long, very long development cycles in the automotive industry, measured in, you know, five-year increments in some ways. And we've been engaged for quite a while, but you know, we with numerous customers, with the focus on really planting seeds with various LiDAR architecture types, to ensure that as decisions are made by the end customers, that we end up in the ultimate solutions that they pick. I think you're going to see the next, you know, two years, being still in much more modest growth for these industrial and automotive applications. As we highlighted on the call, you know, shipping $3 million a quarter, which at the chip level is, you know, significant, if you will. We do expect that LiDAR modules will grow to, let's say, over the next three to five years, a multi-billion dollar market, and then the LiDAR chips being maybe 10% or 15% of that, if you will. Then, you know, five years after that, so we're talking about 10 years out, it's, you know, tens of billions of dollar market, if you will, for LiDAR modules. It's a long game that we're playing, but fortunately, it leverages chip technology, which is something that we can leverage across multiple end markets. Thanks, Chris. I appreciate that. A quick follow-up for Wajid on that topic. Wajid, you talked to the gross margin, understood on sort of the dynamics around telecom. You know, as consumer, you know, seems like we're going to be running at a different run rate, you know, as you think about rest of this year and potentially next year with competitive dynamic, changing a bit. You know, how is that impacting the way you're thinking about gross margins maybe from a longer term perspective? Yeah. Hi, Ruben. Yeah, I mean, our longer term gross margin targets really haven't changed. A lot of the reductions we saw in gross margins this quarter did come from, you know, a mix between, you know, chips and module business, obviously, as chips generally have higher margin levels. A lot of the decline came from just overall utilization of factories and shipments. As we'll see our telecom/datacom business rebound as well as lasers rebound into calendar year 2024, we should start to see improvements in our gross margins and our overall operating margins from the levels that we're delivering right now. You know, we really haven't come off, you know, what we talked about at OFC around our midterm target model. Yeah. Thank you. Sorry, I would be missing the whole comment around synergies as well, where we'll see, you know, a real uptick, and synergy activity flowing through our P&L in the first part of the calendar year, and the favorable impact that will have, on our overall operating model. Thank you, Ruben. Bruno, could we have our next question, please? Our next question comes from Vivek Arya from Bank of America. Vivek, your line is now open. Please go ahead. Hi, this is Blake Freeman on for Vivek. Thank you for taking my question. First, just touching on the telecom and datacom side, I was wondering if you can, you know, discuss how pricing's holding up in this environment, and if you're seeing any competitors price more aggressively in the current environment, and how you view that risk in general. Yeah, you know, we're not seeing any change in the dynamic of pricing. I think, you know, the dynamic has changed from five years ago to what it is today, where we partner with our customers and provide long-term price agreements that are tied to share of their spend on a particular product. That usually starts when we decide to develop a product together. There's a, you know, varying degree of those types of long-term agreements, as well as, you know, annual type agreements that, you know, were done, you know, several months ago. I wouldn't say there was any dynamic change in pricing as we look at telecom and datacom. Got it. Just as a follow-up to kind of go back to the gross margin side of things. I know you discussed, you know, your current 3D sensing position, as well as managing utilization. I'm just kind of curious, you know, as we kind of view a demand recovery as we look out, beyond the June quarter, maybe at a high level, can gross margins, you know, decline from, you know, the June levels, or could that just kind of any color there at a high level of how it progresses through the, through the year? More detail would be great. Yeah. I mean, there's It's here. There's a number of moving pieces that could, you know, really impact us, especially as it, as it comes to mix and even within telecom as it comes to mix on our various product lines. you know, what I will say is that, you know, we noted in our prepared remarks that we are planning on bringing down our inventory levels by approximately $40 million exiting the calendar year. That is going to have an impact on overall gross margins, at least in the back half of this calendar year. As we get back to more normalized levels, in the first part of calendar 2024, we'll have the tailwind of cost of goods sold synergies, as well as what Alan talked about, which is us shipping closer to what is end market demand. Both of those should have a favorable tailwind. Yes, you know, in the first part of our fiscal year, we will have a headwind, especially around our desire to bring down inventory levels, but then we should see an uptick with synergies and shipments being more reminiscent of what end market demand is. Those two should help us. That's the right way I think we're thinking about it, and that's how we think you may want to think about it. Thank you. Thanks, Blake. Bruno, could we have our next question, please? Our next question comes from George Notter from Jefferies. George, your line is now open. Please go ahead. Hi there. Thanks very much, guys. I'm trying to get a sense for what the right revenue run rate for the company is under a normalized scenario. If I look back, you guys shipped a couple, $500 million quarters. Obviously, those were predicated on inventory build. Now we're guiding for $350 million to $380 million here in the June quarter. Obviously, you know, there's a huge gap in there. I have to confess, it's really hard to, I think, try to get an understanding of what the normalized revenue run rate here is, you know, as the market normalizes in terms of inventory digest. What comments do you guys have about, you know, where this business shakes out ultimately on top line? Yeah, George. As we said, we think we're under shipping in market demand. The guidance for the June quarter reflects that, you know, how much we're under shipping and what the end market demand is three quarters from now, very difficult to have a crystal ball around that. With that said, again, 3D sensing, low quarter is June. Lasers, I think, is at a lower level than we would expect it in normal times as we are going through a product transition, and we expect calendar 2024 to pick up in lasers. You know, should we be where we had originally guided the March quarter? I think that's probably more reflective of end market demand. As, you know, the market grows in high- single digits to low double- digits on a CAGR basis for telecom and datacom, I think there's a lot of catalysts that are going to drive even more rapid growth rates than that, given, you know, what we're seeing inside the data center and between data centers in support of AI and machine learning. You know, I don't think there's any reason we can't get back to those levels. It's a matter of when we're going to get back to those $500 million levels, given, you know, the inventory digestion and whatever happens in the macro environment, as we look at calendar 2024. Great. Thank you. Thanks, George. Thank you, George. Bruno, could we have our next question, please? Sure. Our next question comes from Ananda Baruah from Loop Capital. Ananda, your line's now open. Please go ahead. Yeah, thanks, guys. Good morning for taking the questions. Just two quick ones if I could. One's really a question and clarification. Chris, on your prior remarks about sort of where you guys will be contributing to sort of AI build out, the way I interpreted your remarks were, certainly in the photonics, you know, does your data center chip business also sort of contribute to that? I would think yes. I also heard some other areas as well across the laser and photonics portfolio. Could you just clarify that's accurate? Is there any like super early days, but is there any way to context for us, you know, what portion of the overall portfolio has some exposure in any way that's useful? I have a quick follow-up. Thanks a lot. Yeah, thanks. Yeah, it would go back to that in the nearer term, it's the data center chip business, as you alluded to, which both has, you know, what we've been known for, high speed EMLs transitioning to higher speed, but also the addition of high speed VCSELs and the growth of high power, CW lasers used for silicon photonic architectures. Those are what I've referenced as more nearer term as in the next 10 quarters. As we look to the next couple years, we anticipate the data center architectures, will evolve to more application-specific equipment, if you will, and that application-specific equipment will have, you know, maybe in addition to the standard, Ethernet type, connects more proprietary, interconnects, using, in a sense, custom-designed transmission links. That's where our engagement, with leaders in the space is really important, taking our broader, photonics capabilities, around lasers, and transmission, in general, as well as in some cases, optical switching, all will be brought, to bear. It does impact, a more broad, piece of our company than just the data com or data center business that today is the primary driver. Maybe I can add to that as well. Yeah. That's Yeah. That's great. Yeah. Just one other thing to add to Chris' commentary is, you know, we've seen very strong demand for our subsea cable deployment, where we provide components that amplify the signal at the bottom of the ocean. We're seeing a lot of the demand for subsea coming from the hyperscalers as they connect those large data centers. Whether that's a precursor to expectations on AI or machine learning or not, it is an area that we've seen strong demand, and these are big investments that take, you know, one year or more to deploy. You know, I think we're seeing some leading indicators that this is an area of growth for us as well. Alan, thanks for that. The quick clarification is, just given the guidance for the June quarter, you know, kind of telco data com slightly up, slightly up Q- over- Q. Are you essentially calling kind of the bottom here June quarter in your telco data com business combined? Should we think of flattish through the remainder of the year until demand picks up? Thanks. That's it for me. Thanks. Yeah. We're reluctant to guide more than one quarter at a time. You know, we are seeing some strength in the June quarter on coherent components for high speed coherent modules. Whether that continues into the September and December quarter, it's hard to say. We are expecting kind of a continued level of revenue or I should say inventory digestion, and certainly in the September quarter and then partially into the December quarter. It's, I would say flattish kind of outlook. You know, we'll give you more input on that in August when we have our next call. Thank you, Ananda. Bruno, I think we have time for one more question, and then we'll turn it over to Alan for some final remarks. Perfect. Our next question comes from Mike Genovese from Rosenblatt Securities. Mike, your line's now open. Please go ahead. Okay, great. Thanks for getting me on the call. Just can we get specific color on datacom? You know, I think that inventory correction started a couple of quarters ago. The question is the inventory correction over but, you know, now there's sort of some order pushouts in the cloud or, you know, any color you could give us on specific to the datacom business would be helpful. Thank you. Yeah, Mike. I'll give you my perspective, and then maybe Chris can chime in. Yeah, it has been the past few quarters where we've been talking about a slowdown in datacom and the inventory build at the cloud providers, hyperscalers, you know, as they were ordering several quarters in advance because of the shortages in calendar 2022, they were ordering or some of them were ordering at an expectation that they would grow at a certain rate in the, you know, 30% tp 40% range. As they've announced, their growth rates are significantly lower than that. It takes longer time to burn off that inventory than originally expected. We're seeing the inventory burn off. It's still at some customers and some of our module manufacturers still, you know, a quarter or more of inventory there. Our expectations are that the demand for AI and machine learning will help the consumption of this inventory so that, you know, by the end of the calendar year, we'll start shipping into the datacom market more, like the end market consumption. In the interim, you know, there's still inventory in the channel there. Okay, great. My follow-up, or, you know, separate kind of question on commercial, Industrial Lasers. You know, the first half of this year had some pretty tough compares, you know, going into, you know, next year at a lower run rate. But, you know, how should we think about year-over-year, in 2024 in that business? Thanks, Mike. I would say we're going to see as we highlighted in the prepared remarks, that lasers will come down a little bit, given it's tied to, as Alan highlighted, semiconductor, end markets as well as macro manufacturing, if you will. We believe that it will come down in the next several quarters. Obviously, it was kind of ramping up through the year. In the net, we suspect that, at least as we look to customer forecasts at this point that FY 2024 will be lower than FY 2023 was for commercial lasers directionally. Okay, great. Thanks. I didn't want to beat the dead horse on the 3DS. You know, I appreciate the color on the other segments. Thank you. Thank you, Mike. I think now we'll turn the call back over to Alan for some closing remarks. Thank you, Kathy. I would like to leave you with a few thoughts as we wrap up this call. Mid to long-term fundamentals remain intact for our business as we serve the exponential growth in network bandwidth and artificial intelligence, machine learning, mobile, carrier, and cloud computing markets. New automotive and industrial applications are emerging for our imaging and sensing products, and applications for commercial lasers are expanding into new applications beyond our traditional markets. We remain committed to investing deeply in innovation to deliver on customer needs today and in the future. With that, I would like to thank everyone for attending. A nd we look forward to talking with you again at investor conferences and upcoming meetings in the coming weeks. Thank you and have a great day. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.