Tech Giants Report Strong Earnings: Applied Materials, Coherent, and Lumentum Shine in Q3-Q4 2024

Earnings call: Applied Materials posts record revenues in Q3 FY2024 By Investing.com

Applied Materials, Inc. (AMAT) reported robust financial results for the third quarter of fiscal year 2024, with record revenues and earnings at the higher end of the guided range. The company, a leader in materials engineering solutions, is capitalizing on the increasing demand for semiconductors, which is spurred by significant technological advancements in areas such as artificial intelligence (AI), the Internet of Things (IoT), and clean energy. Applied Materials delivered a strong operational performance and expects continued growth, with a focus on leading the AI race through energy-efficient computing. In summary, Applied Materials continues to demonstrate strong financial health and strategic positioning in the semiconductor industry. The company's commitment to innovation and its broad portfolio of enabling technologies are expected to drive future growth and market share gains in the rapidly evolving tech landscape. With a clear focus on operational excellence and shareholder returns, Applied Materials is poised for continued success in the dynamic semiconductor market. Applied Materials, Inc. (AMAT) has shown resilience and growth potential as reflected in its recent financial results. To further understand the company's market position and future outlook, let's consider some key insights from InvestingPro. InvestingPro Data highlights a market capitalization of $175.39 billion, underscoring Applied Materials' significant presence in the industry. The company's P/E ratio stands at 24.98 for the last twelve months as of Q2 2024, which is relatively high, suggesting investors have high expectations for future earnings growth. Despite a slight decline in revenue growth of -0.51% over the last twelve months, the company maintains a strong gross profit margin of 47.18%, indicating efficient operations and cost control. InvestingPro Tips provide additional context to the company's performance and strategic positioning. Applied Materials has raised its dividend for 6 consecutive years and has maintained dividend payments for 20 consecutive years, reflecting a commitment to shareholder returns. This is particularly relevant to the article's mention of the company's plans to distribute profits through dividends and buybacks. Additionally, 18 analysts have revised their earnings upwards for the upcoming period, which aligns with the article's bullish outlook on the company's potential for accelerating growth in leading-edge markets. For readers interested in a deeper dive into the company's prospects, there are 17 additional InvestingPro Tips available at https://www.investing.com/pro/AMAT, offering valuable insights for investors and industry watchers alike. Operator: Welcome to the Applied Materials Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. I would now like to turn the conference over to Michael Sullivan, Corporate Vice President. Please go ahead, sir. Michael Sullivan: Good afternoon, everyone, and thank you for joining Applied's third quarter of fiscal 2024 earnings call. Joining me are Gary Dickerson, our President and CEO, and Brice Hill, our Chief Financial Officer. Before we begin, I'd like to remind you that today's call contains forward-looking statements which are subject to risks and uncertainties that could cause our actual results to differ. Information concerning the risks and uncertainties is contained in Applied's most recent Form 10-Q filing with the SEC. Today's call also includes non-GAAP financial measures. Reconciliations to GAAP measures are found in today's earnings press release and in our quarterly earnings materials, which are available on our website at ir.appliedmaterials.com. And with that introduction, I'd like to turn the call over to Gary Dickerson. Gary Dickerson: Thanks, Mike. With record revenues in our third quarter, and earnings towards the high-end of our guided range, Applied Materials continues to deliver strong results in 2024. Secular trends are growing our available market, and our unique and connected portfolio of capabilities, products and services, positions us to outperform the industry over the longer term. At our recent investor event at SEMICON West, leaders from our semiconductor business shared their perspective on the powerful, multi-decade technology trends driving the industry forward, and explained the role Applied is playing to enable the next generations of semiconductor technology. In today's call, I will summarize some of the key themes we talked about at that event including: how advancing energy-efficient computing performance is critical to deploying AI at scale, why the energy-efficient computing roadmap is increasingly enabled by materials engineering and Applied Materials, and how we are working in new ways to accelerate this complex roadmap and create new growth opportunities for Applied. Semiconductors provide the foundation for tectonic shifts in technology that will reshape the global economy over the next several decades, including AI, IoT, robotics, electric and autonomous vehicles, and clean energy. These multi-trillion-dollar global inflections are increasing demand for chips and driving the need for significant advances in semiconductor technology. The biggest tectonic shift of all is AI, and the race for AI leadership will, in large part, be determined by which companies in the semiconductor industry are first to deliver substantial improvements in energy-efficient compute performance. In our discussions with leading AI companies, they are telling us that reducing power-per-operation is now more important than increasing operations-per-second. They are also talking about the need to drive a 10,000 times improvement in performance-per-watt over the next 15 years. Evolutionary innovation is insufficient to deliver improvements of this magnitude, and we are seeing the emergence of a new industry playbook made up of major device architecture inflections in logic, memory and advanced packaging. These device architecture inflections are increasingly enabled by materials science and materials engineering where Applied is the clear market and technology leader. For AI, the advanced chips in the datacenter, used for training AI models, are built upon four critical categories of semiconductor technology: leading-edge logic, high-performance DRAM, high-bandwidth memory enabled by die-stacking technology and advanced packaging to connect the logic and memory chips together in a single integrated package. In leading-edge logic, key device inflections, in both transistor and interconnect, are currently moving from chipmakers' R&D pilot lines to high-volume production. The transition from FinFET to gate-all-around transistors grows Applied's available market for the transistor module from around $6 billion to approximately $7 billion for every 100,000 wafer-starts-per-month of capacity. We also expect to gain share through the gate-all-around transition and we're on track to capture more than 50% of the process equipment spending for the transistor fabrication steps. For the interconnect module, our available market is also about $6 billion for every 100,000 wafer- starts-per-month. We forecast this will also grow by about $1 billion with the implementation of Backside Power Delivery, and we expect to win more than 50% of the applications we address in interconnect when Backside Power ramps in volume manufacturing. In DRAM, we have also established clear leadership in process equipment, and are in a great position for future growth. Over the past decade, we have grown our market share in DRAM by around 10 points. As DRAM plays a critical role in energy-efficient computing performance, there is a huge focus on advancing the roadmap. The next major DRAM inflection, from 6F-squared to 4F-squared, or vertical transistor architectures, is materials-enabled, and we expect our market opportunity to grow by approximately 10% to around $6.5 billion for each 100,000 wafer-starts-per-month of capacity. We also expect to increase our share based on our position to enable the 4F-squared inflection. In addition, we believe the subsequent transition to 3D DRAM will grow our addressable market by an incremental 15%, further compounding Applied's opportunity. In the die-stacking technologies that enable high-bandwidth memory, we also have strong leadership positions, both in micro-bump and through-silicon via. We have seen demand for high-bandwidth memory accelerating in 2024 and expect to generate more than $600 million of HBM packaging revenue this year, which is approximately six times 2023. Overall, including HBM, we expect revenue from our advanced packaging product portfolio to grow to approximately $1.7 billion in 2024. We believe this business can double in size over the next several years, as heterogenous integration is more widely adopted and we introduce new solutions that grow our addressable market. Advanced logic, high-performance DRAM, high-bandwidth memory, and advanced packaging are all great examples of how future device architecture inflections are increasingly enabled by materials engineering. As a result, we expect materials engineering, as a percentage of total wafer fab equipment, to grow in both logic and memory through the coming node transitions. At the same time, thanks to our inflection-focused approach to R&D, and the strong positions we've established at these future device architecture inflections, we expect to capture more of the expanded opportunities we serve. The value of bringing next-generation semiconductor technology to market faster has never been greater. At Applied, our strategy and investments are focused on accelerating the industry's roadmap to support the highest growth-rate global inflections spanning: AI datacenters, edge-AI and IoT, robotics, electric vehicles and clean energy. This strategy is enabled by three pillars: First, we have built a broad, unique and connected portfolio of highly enabling technologies. As well as providing traditional, best-in-class unit processes, we can co-optimize, combine, and integrate our technologies to deliver more comprehensive solutions that address higher-value challenges for our customers. These integrated 'fab-in-a-fab' solutions have grown from approximately 20% of our semiconductor products revenue in 2019 to around 30% today. We expect demand for our integrated products to continue growing, both at the leading-edge and from our ICAPS customers who are serving specialty markets. Second, we are changing the way we work inside and outside the company. Over the past five years, we have built new capabilities and dedicated teams focused on module integration, device design and simulation, data analytics and AI, advanced packaging, and ICAPS. At the same time, we are driving earlier, deeper and more extensive collaboration with our customers and partners to win the device architecture inflection races, accelerate mutual success rates, and increase investment efficiencies. To further support these collaborative partnerships, we will build out our global EPIC platform over the next several years, which is specifically designed for high-velocity innovation and commercialization of next-generation technologies. And third, we are helping customers transfer new technology into high-volume manufacturing faster and then optimize performance, yield, output, and cost in their factory operations. This is supporting double-digit growth in services, with a high percentage of our service revenue coming from subscriptions in the form of long-term agreements. Overall, AGS delivered another record quarter, which is their 20th consecutive quarter of year-on-year growth. Before I hand over to Brice, I will quickly summarize. Applied Materials is delivering record results in 2024, and we are in a great position to benefit from secular growth trends over the longer-term. Semiconductors are the foundation for tectonic shifts in technology which will reshape the global economy over the next several decades. This is driving increasing demand for chips as well at the need for significant advances in semiconductor innovation. The race for AI leadership depends on delivering significant improvements in energy-efficient compute performance in the range of 10,000 times over the next 15 years. The need for more energy-efficient compute is driving major device architecture inflections within the semiconductor roadmap that are enabled by materials engineering and Applied Materials' innovations. This expands our served market and is accretive to our share, and the increasingly complex industry roadmap creates new collaboration and growth opportunities for Applied, enabled by our broad, unique and connected portfolio of capabilities, products and services. Finally, as you may be aware, Mike Sullivan will be retiring at the end of this calendar year and handing the reigns to Liz Morali, who recently joined Applied as our new Head of Investor Relations. I would like to say a huge thank you to Mike for his many contributions to the success of our company and congratulate him on an outstanding career. Now, over to Brice. Brice Hill: Thank you, Gary. And I'd like to thank our teams for their strong execution this quarter which enabled us to deliver record revenue, improved operational performance, and healthy gross margin. Today, I'll summarize the market environment, discuss our Q3 performance, and share our Q4 outlook. As Gary mentioned, Mike Sullivan plans to retire from Applied at the end of this calendar year. Liz Morali has joined Applied as our new Vice President of Investor Relations. Mike and Liz are working on a smooth handoff of the IR function beginning with our November earnings call. I hope you'll join Gary and me in congratulating Mike on his extraordinary career and leadership, and welcoming Liz to Applied Materials. Beginning with the business environment, our revenue in Q3 as well as our outlook for Q4 reflect the industry's focus on the major inflections Gary highlighted earlier. We are seeing particularly strong pull related to AI and data center computing. Specifically, our DRAM system shipments remained strong even as DRAM sales in China decline as anticipated. Adoption of high-bandwidth memory and other forms of advanced packaging continues to grow. And in foundry-logic, leading-edge investment is growing each quarter and becoming a larger percentage of our mix while ICAPS demand remains strong overall. Turning to our Q3 performance, we delivered record revenue of $6.78 billion, which was up 5% year-over- year, with growth in all three segments. Operationally, we saw improvements in a number of key metrics such as manufacturing cycle times, linearity and on-time delivery. These improvements give me confidence that we are preparing the company to more efficiently support the growth we are forecasting in the years ahead. The strong operational performance helped us deliver non-GAAP gross margin of 47.4%, which was up 100 basis points year-over-year. Non-GAAP operating expenses of $1.26 billion were up 8% year-over-year, and over 70% of the increase was driven by R&D programs aimed at the technology inflections Gary described. Non-GAAP EPS of $2.12 was up 12% year-over-year and $0.01 below our highest EPS quarter ever. Turning to cash flows and profit distributions in Q3, we generated nearly $2.4 billion in operating cash flow and over $2 billion in free cash flow. We distributed nearly $1.2 billion to shareholders including the first $0.40 per-share dividend and $861 million in stock buybacks. Turning to the segments, Semiconductor Systems sales were $4.92 billion in Q3, up 5% year-over-year. Segment non-GAAP operating margin was 35%, up 130 basis points year-over-year. From a device perspective, our DRAM sales grew nearly 50% year-over-year to $1.16 billion. Our DRAM sales in China declined sequentially as we anticipated, and this contributed to our company revenue in China declining by 11 percentage points sequentially to 32%, which is in line with our longer-term average inclusive of Semi Systems, AGS and Display. Our NAND memory sales grew 10% year-over-year to $203 million. Our foundry-logic sales were down 4% year-over-year to $3.56 billion. Leading-edge foundry-logic demand was lower year-over-year but continued to strengthen on a sequential basis. We continue to expect to generate more than $2.5 billion in system revenue from gate-all-around nodes this calendar year, with the potential to more than double next year. Our ICAPS business remained strong overall, with pockets of weakness in the auto and industrial end markets. Longer term, we expect the ICAPS market to remain around half the foundry-logic market as major inflections in IoT, autonomous and electric vehicles, and the global energy transformation are expected to drive mid- to high-single-digit, through-cycle growth in ICAPS semiconductors well into the future. We are investing in new products to compete in more areas of the ICAPS semiconductor and packaging ecosystem. We are also working with our customers to enable new power and sensor device architecture inflections using our co-optimized and integrated materials systems. Next, Applied Global Services delivered record revenue of $1.58 billion in Q3, which was up 8% year-over- year. AGS recurring parts, services and software revenue grew more than twice as fast as overall segment revenue during the quarter. AGS non-GAAP operating margin of 29.6% was up 230 basis points year-over-year, and non-GAAP operating profit was a record $467 million. From a business perspective, customer factory utilization continued to strengthen during the quarter across memory, foundry-logic and advanced packaging. Our leading indicators of future AGS growth remain positive. Our installed base of systems and chambers increased 7% year-over-year, and our average revenue-per-unit increased even more. Our average subscription agreement length increased to 2.8 years, and the renewal rate was above 90%. We continue to expect AGS to grow at a low double-digit rate over the long term. As a reminder, the consistency of our profitable growth in services gives us confidence in our ability to continue to increase our dividend per share. In fact, over the past 10 years, we have increased the dividend per share at a compound annual growth rate of approximately 15%. Moving to Display, Q3 revenue of $251 million was up 7% year-over-year, and segment non-GAAP operating margin was 6.4%. While LCD equipment spending remains low, we are becoming more confident that the OLED technology found in smartphones will be adopted in notebook PCs and tablets whose larger screen sizes will require a significant increase in capital investments. Applied has built a leadership position in deposition and e-Beam metrology technologies for the display industry and we are well positioned to enable our customers to convert the notebook PC and tablet markets to OLED technology over the coming years. Now, I'll share our guidance for Q4. We expect company revenue of $6.93 billion, plus or minus $400 million, and non-GAAP EPS of $2.18, plus or minus $0.18, both up 3% year-over-year at the midpoint. Within this outlook, we expect Semi Systems revenue of around $5.1 billion, which is up 4% year-over-year, AGS revenue of about $1.61 billion, which is up 9% year-over-year, and Display revenue of around $200 million. We expect non-GAAP gross margin to be approximately 47.4%, and non-GAAP operating expenses to be around $1.275 billion. Finally, we are modeling a tax rate of 12.5%. Thank you, and now Mike, let's begin the Q&A. Michael Sullivan: Thanks, Brice. To help us reach as many people as we can, please ask just one question on today's call. If you have another question, please re-queue and we'll do our best to come back to you later in the session. Operator, let's please begin. Operator: Certainly. [Operator Instructions] Our first question comes from the line of CJ Muse from Cantor Fitzgerald. Your question, please. CJ Muse: Yeah, good afternoon. Thank you for taking the question. I guess, for my question, I was hoping you could speak to how your outlook for WFE in the second half of the year and for all of 2025 has evolved over the last three months. Obviously, tremendous strength, anything AI related, but elsewhere kind of seasonal at best. So I guess, first part of the question is, can you share with us how you're thinking about your silicon business in the second half of calendar '24 versus the first half? And then, the early signs that you see today and how that informs kind of your view both positive and negative into 2025? Thanks so much. Brice Hill: Okay, CJ, thanks for joining the call. I think what we're seeing in the business today when we look at Q3 and our Q4 outlook, very strong energy around the AI inflections that Gary talked about. So, leading-edge is accelerating. We highlighted that in the prepared remarks. We're -- our forecast for $2.5 billion of gate-all-around related equipment in this fiscal year, we haven't changed that forecast. That stays the same. And when we think about DRAM and HBM memory, those kind of all go along with this energy we're seeing around the AI inflections and investments in that area. At the same time, our ICAPS business in both Q3 and Q4 remains very strong. We think that's robust. We can dig into that a little bit more during the call. But if anything, over the last 30 days, you ask us how we're feeling about the outlook, I would say the ICAPS business continues. It seems like every quarter, we sort of raise our expectations with respect to ICAPS. So, a lot of energy around leading-edge. ICAPS remaining strong. A very strong year for DRAM and HBM. Those are kind of key themes. For '25, we're not giving specific guidance, but we just say, we're pretty enthusiastic about gate-all-around and the technologies we've talked about on the leading-edge. Operator: Thank you. And our next question comes from the line of Stacy Rasgon from Bernstein Research. Your question, please. Stacy Rasgon: Hi, guys. Thanks for taking my question. I wanted to dig into the China revenues a little bit. So, 32% of revenue this quarter. It sounds like a lot of that was DRAM. I guess, was it all DRAM? And then, in the guidance for next quarter and I guess your expectations going forward from there, do you expect the China mix to be staying around these levels in the low 30% or does it go higher or lower? Is there anything else going on with China that we need to be aware of? Brice Hill: Great. Thanks for joining, Stacy. So, yeah, on the 32%, I'll shift your perspective on that just a little bit. So, the 32% is almost no DRAM to China. So, you've got it right. Our business mix to China declined to 32%. And if I think back in time, just to remind everybody, if we go just over a year back, it was like 17% mix to China. We were having supply chain issues. So, it was very low at that point. In the last three quarters, we bounced up to the mid-40%s while we served the DRAM that we could ship and that's the prior three quarters. And we feel this quarter 32% is probably normal for us or in the normal range for us, that's across our entire business for shipments to China. And what it really represents is ICAPS. And the ICAPS market in total has been very robust. We think it will be a record year in our fiscal year for ICAPS. And China also, we would call it robust. There's -- we're adding customers. Utilizations are improving. It's a wide variety of products and factories. So, we think that market is robust both in Q3 and in Q4. So that gives you a sense of what's happening for us. And then, next quarter, we'll have a small amount of DRAM, but nothing like we've had the prior three quarters. Stacy Rasgon: So, is it fair to say that you still see the mix in the low-30%s next quarter to China? Brice Hill: Yeah, we expect that mix approximately normal, which we call 30% for the next quarter, yes. Operator: Thank you. And our next question comes from the line of Srini Pajjuri from Raymond James. Your question, please. Srini Pajjuri: Thank you. Brice, just to follow-up to the previous question on China DRAM, obviously, you said it's near zero levels. Can you talk to your visibility as to when -- if you're seeing any hope on the horizon? Do you expect DRAM to come back at some point in China? And then, also ICAPS, you said the demand is pretty strong in China. Can you talk to what kind of trends you're seeing outside of China for ICAPS? Thank you. Brice Hill: Yes. Thanks, Srini. Thanks for joining. So, yeah, the China DRAM in Q3 and Q4 will be at nominal levels. We have speculated you may see new investments in DRAM there. I don't have any comments to make on that specifically for the roadmap, but I would say that DRAM globally is very strong, should be a very, very strong year for DRAM. Of course, that includes some of that China volume, but we think that goes along with the mix to HBM and utilizations in DRAM have improved and there's a lot of energy around the high-bandwidth memory for the leading-edge systems. And then, on the ICAPS side, no surprise here for probably anybody. We expect the edge technologies that we describe as ICAPS to grow mid- to high-single-digits over time. And that's driven by the inflections that we talk about, which is clean energy, renewable power, electrification, those sorts of -- AI edge sensors, all those sorts of usages. So mid- to high-single-digits is our view long term. And when we look at China for both Q3 and Q4 and the entire ICAPS business, I said before, it's probably going to be a record for us in our fiscal year. And it's not just China, we've had regions, other regions grow during this quarter. Srini Pajjuri: Got it. Thanks, Brice. Operator: Thank you. And our next question comes from the line of Vivek Arya from Bank of America (NYSE:BAC) Securities. Your question, please. Vivek Arya: Thanks for taking my question. I'm curious if we should bake in the impact of any CapEx cuts that were announced recently at Intel. What does that imply for just the overall WFE market for the remainder of the year and into next year? From your comments, it doesn't seem like it's having a big impact. Is the assumption that whatever CapEx has been cut there is being increased somewhere else, or just what are the puts and takes? Because it is a fairly sizable CapEx cut, which we are saying is more WFE in terms of the mix. Brice Hill: Yes. Thanks for joining, Vivek. Our outlook, we're not changing our outlook. We're still saying $2.5 billion on the leading-edge for gate-all-around in this fiscal year. And when we think about next year, we've just had -- we've had every quarter accelerating this year in the leading-edge and we think that's being driven by a lot of the excitement around AI and AI datacenter. So, we get as you -- I think you know, we get regular updates from our customers and our outlook that we've just given for Q4 is up to date with all of our customers. So, I think we tend to think of the market as a macro level. Customers update us all the time, but no real change to our view for leading-edge looking forward. Vivek Arya: Thank you, Brice. Operator: Thank you. And our next question comes from the line of Chris Caso from Wolfe Research. Your question, please. Chris Caso: Yes, thank you. Good evening. Question is on foundry-logic, and perhaps you could give some color on the growth you're expecting into '25 driven by some of the new process nodes such as gate-all-around as compared to capacity, because we know foundry capacity has -- additions have taken a pause here. Are you seeing any signs of that starting to improve either as you go through the second half of '24 into '25? Brice Hill: Yes. Thanks, Chris, and thanks for joining. When we think about leading-logic, actually I'll make a comment for utilizations. We've seen utilizations improve in every single end market this quarter and our expectation is for that to continue next quarter. So, DRAM, NAND, ICAPS and leading-edge. And no change to our expectation on absolute leading-edge investment, gate-all-around technologies, not changing our number for this fiscal year. And we do think it's a harbinger for acceleration next year as we look forward. We're not giving a guide for '25, but we think there's a lot of energy around the AI markets and we see that in HBM, we see that in DRAM, we see that in leading-edge acceleration. So, we'll hope that those trends continue. Operator: Thank you. And our next question comes from the line of Krish Sankar from TD Cowen. Your question, please. Krish Sankar: Yeah, hi. Thanks for taking my question. Gary or Brice, I'm kind of curious about -- I know you don't want to comment on next year, but qualitatively, you see there's optimism on DRAM and NAND WFE is growing, but if you strip out HBM, you're beginning to see big demand in memory pricing, moderate for DDR and NAND compared to the first half of this year. So, I'm curious how to think about DRAM and NAND WFE next year relative to this year, and what end markets actually drive up spending next year? Brice Hill: Okay, Chris. You're right, we won't give a guide for '25 specifically, but we do think that DRAM -- even outside of HBM, we do think that DRAM will put new capacity in place, so we expect investment in DRAM. There has been additions in wafer start capacity in DRAM, and there's more allocation of the DRAM capacity to HBM as you sort of highlight. So, the investment level there is higher than NAND. Looking forward to NAND, NAND still remains fairly low, but we did see, as I highlighted, utilizations improving. I would call them probably normal range for both DRAM and NAND. We see prices improve. We saw inventory positions improve at the vendors. So, we think it's a more positive environment looking forward than prior quarters for actually both memory technologies. Joseph Moore: Great. Thank you. It looks like you had some good solid growth from the services business again. Are you benefiting there from the utilization increases in memory that you just talked about? Are you seeing offsetting utilization declines on the ICAPS services side? And then, any indication of customers worry about export controls, stockpiling on spares, anything like that? Just any puts and takes around that service growth? Thank you. Brice Hill: Hi, Joe. Yes, thank you. Services business, very exciting for us. We grew 8% year-over-year in Q3, 9% is our expectation for Q4. And just a reminder for everybody, we expect low double-digit growth going forward. We're expanding our services book with customers, kind of getting into information, AI-related services that help them ramp et cetera. We actually did expect a little more growth in Q3. We had thought we would grow double-digits this year. We're just short of that, and it's because utilization, while it grew, it grew a little bit less than we -- or a little bit slower than we thought. So, there's good news here. Utilizations are improving across the whole system, 8% year-over-year growth for us, and we expect that to pick up, as I highlighted, as we go into Q3 and looking forward. And just one other comment just for the rest of the investors. The other thing with this business since it's mostly recurring revenue for us about 85%, that gives us a very stable operating profit and growing. And so, we think about our dividend as being enabled by the profits from the services business and that gives us confidence we'll be able to raise our dividend looking forward. Gary Dickerson: Hi, Joe. Just maybe a little bit more color. If you look at what really all of our customers are focused on, there is a race for these new device architectures and the complexity is going up a significant. And in the prepared remarks, I talked about, about 30% of our tools are these integrated platforms that have a high degree of complexity. So, as these customers are racing to bring these new devices, complex devices to market, and also we're shipping more and more of these integrated platforms with multiple technologies, that also gives us a really good tailwind. Joe Quatrochi: Yeah, thanks for taking the question. Wanted to ask about the advanced packaging. I think based on the revenue expectations you have for HBM and advanced packaging, it implied basically that the non-memory advanced packaging relatively unchanged year-over-year. Is that the right way to think about it? And if so, why wouldn't that grow this year? Brice Hill: I think so, Joe. In our forecast, we highlighted that advanced packaging was $1.1 billion last year, should grow to $1.7 billion this year, and we highlighted that $600 million of the growth would come from HBM-related equipment. So, I think you're thinking about it right. It was probably stable this year with HBM, high-bandwidth memory, driving the growth in that area. And again, we would point back to the energy around high performance systems and sort of the race Gary talks about to develop systems optimized for the AI workload. So, there's a lot of energy there at this point. And then just the last thing is we have highlighted that, that total packaging business sort of, to your point, $1.7 billion, we think it has the opportunity to double over several years looking forward given the energy around advanced packaging technologies. So, we'll keep investing there. Operator: Thank you. And our next question comes from the line of Toshiya Hari from Goldman Sachs (NYSE:GS). Your question, please. Toshiya Hari: Hi. Thank you so much for taking the question. I was hoping you could speak to gross margins and how you're thinking about profitability going forward, the puts and takes price, Brice. And Gary, you talked about complexity growing and how things like IMS contributing toward 30% of your business and that number growing over time. I would think your ability to price would improve going forward. What am I missing in terms of again the puts and takes as it pertains to gross margins? Thank you. Brice Hill: Okay. Thank you, Toshiya. I'll start on that. So, 47.4% gross margin for us in the quarter. We're actually very pleased with our performance in cost and pricing this quarter. And I'll just highlight as our mix to China, which are generally smaller customers declined during the quarter to 32%, that gave us some headwinds on the gross margin side. We were able to get some pricing performance and also some cost improvements and improvements in managing our inventory that helped us offset that mix decline and deliver 47.4% in the quarter. Since the China mix is 32%, we call that normal. I'll say now that 47.4% should be approximately our baseline level. And then, we look forward, we've talked about a goal of getting to 48% or higher next year, that's still our goal. We think we can make improvements going forward. There's a couple of headwinds if services or display grow faster than the core business that can be a headwind. But that's still our goal and we think we'll make -- continue to make cost and pricing improvements. And then, Gary on the... Gary Dickerson: Yeah, Toshiya, again, our focus is really to enable our customers to accelerate their innovations for these new architectures especially around AI datacenter. That datacenter will pass smartphones and PCs relative to wafer starts. Everybody is focused on energy-efficient computing. So, these inflections are incredibly important for the entire ecosystem. Whoever gets there first wins big and everybody else is left behind. So, we're driving tremendous innovations in foundry-logic, leading-edge, high-bandwidth memory, DRAM, there's new architecture inflections, I talked about 4F-squared, advanced packaging. So, our positions in all of those inflections are very strong. We're on track to capture more than 50% of the inflection spending as those new devices ramp. And our goal is to move the needle for our customers and for Applied, and that includes how we drive value for them and how we drive our margins higher. Toshiya Hari: Thank you. Operator: Thank you. And our next question comes from the line of Harlan Sur from JPMorgan (NYSE:JPM). Your question, please. Harlan Sur: Yeah, good afternoon. Thanks for taking my question. So, as we look at those companies that are pushing the absolute limits on advanced manufacturing technologies like 2-nanometer and 3-nanometer, and they're maxing out their [radical field] (ph) limits, they're also pushing advanced packaging technologies. Their design -- these are the guys that are designing the AI and accelerated compute GPUs, accelerators, for example. So, what we're hearing is that most of today's designs on these next-generation chips are targeting [indiscernible] second half of '25 and beyond. They're specifically focused around these new 3D SoIC architectures. So, using hybrid bonding, chip-stacking approach, 3-nanometer on 3-nanometer die, 2-nanometer die on 3-nanometer die. The manufacturability challenges here are pretty significant, right? But similar to your front-end integrated solutions, I mean, the team has been working on an integrated hybrid bonding system with some of your partners. What's the timeline for introducing these integrated solutions? And will you be trying to intercept these next-generation of 3D SoIC solutions coming to market, let's say, in the 2026 timeframe? Gary Dickerson: Hi, Harlan. Thanks for the question. So, heterogeneous integration is one of the biggest areas of focus for Applied and for the entire industry. At our AI event, along with AMD (NASDAQ:AMD) at SEMICON, there was a discussion around driving 100x improvement in energy-efficient computing. So again, this is the big race that everybody is focused on, and certainly packaging is a key part of that. So, we're in deep engagements, really multiple technology nodes, five, 10 years out into the future, and there's going to be tremendous innovations. If you look even at new DRAM technologies like 4F-squared or high-bandwidth memory, you're going to see adoption of hybrid bonding technologies that are going to be really important for those parts of this ecosystem. And you mentioned what's happening from a logic standpoint. So, I think the great thing for Applied is we have this broad portfolio in packaging. We have, as you mentioned, the hybrid bonding, digital lithography. We have other new technologies in the pipeline that even expand our portfolio further. We have an advanced full flow packaging lab in Singapore, where we're driving co-innovation with our customers to accelerate those architecture inflections. So, I think this is going to be one of the most exciting segments of the market going forward. We're at about $1.7 billion today. We've talked about doubling the packaging revenue over the next few years. And I think it's going to keep going from there. Again, this is a really key part of the industry drive for energy-efficient computing. Harlan Sur: Thank you, Gary. Operator: Thank you. And our next question comes from the line of Charles Shi from Needham & Company. Your question, please. Charles Shi: Hi, good afternoon. I want to follow-up on the China question. Looks like your China revenue has well past the peak around almost the $3 billion per quarter level. Now it's down to like in the low $2 billion. And based on the commentary, it sounds like you are still expecting roughly 40%-ish of the China revenue growth year-on-year. But I mean, should the current dollar revenue level sustain into this year? I'm just hoping if you can give us any color because that would imply the China revenue probably is going down year-on-year, roughly 15%, 20% next year. I know you're not guiding, but that will be the conclusion I draw up on all the commentary you provided. Plus, I do want to get a little bit more insights. If I compare the China revenue performance of Applied Materials with some of your process control peers like KLA, they were expecting China to be flat into the second half, but you're obviously seeing a half of the half decline. Since you have the PDC business and I was hoping you definitely will have some insights into what drives the dispersion there. Thank you. Brice Hill: Okay, Charles. Thanks for joining. I think I would separate between ICAPS, the edge technology markets and the DRAM market for China. We had three quarters with elevated shipments that we described where we caught up on what was allowed from a DRAM perspective. If you separate that out, we're currently not expecting that to repeat at least nothing near that magnitude for next year. So that leaves us with the ICAPS market. And what we expect in the ICAPS market, our Q3 and Q4 and all of this year has been very strong in ICAPS. When we look at China in particular, utilizations are improving. We're adding customers. We've got a large number of factory projects that are building out. So, if you strip out your estimate for those extraordinary DRAM shipments the last three quarters, our expectation over time is that the ICAPS market will grow. We say mid- to high-single-digits. We will make a call for next year, but we would expect growth over time. Operator: Thank you. And our next question comes from the line of Brian Chin from Stifel. Your question, please. Brian Chin: Hi, there. Good afternoon. Thanks for letting us ask a question. So, if I look at the past three years, past three 10-Ks, TSMC was your largest customer. But they weren't 10% in either the April or January quarters. Taiwan, as a geography, was a little higher this quarter. Did TSMC cross the 10% threshold in fiscal 3Q? And then, even bigger picture, this overall pattern would seem to suggest a pretty favorable year-over-year compare moving into 2025 when you think about the type of spending gate-all-around and expansions being discussed. And so just kind of wanted to get maybe your view on that. Brice Hill: Yes. TSMC was a 10% customer in Q3 and we think obviously they're a large part of that leading-edge investment when we think about the gate-all-around technologies and lot of the energy being driven there as we look forward. One of the other callers talked about the need for innovation and Gary talked about the need for innovation on leading-edge. There's a lot of energy around that. We see acceleration each quarter on -- of this year on leading-edge and really haven't changed our outlook as we've moved through the year. Brian Chin: Okay. Thank you. Operator: Thank you. And our next question comes from the line of Blayne Curtis from Jefferies. Your question, please. Blayne Curtis: Hey, thanks for letting me ask a question. I was maybe a little confused on some of the history with ICAPS and the strength. I thought you were talking about last quarter that segment kind of being down slightly. I think you just said mid- to high-single-digits. So, maybe I have my reference point wrong, but also maybe it'd be helpful if you could just talk about the growth you saw in July, 15% sequentially for foundry-logic. Can you just relate that to leading-edge in ICAPS? I think the reception is leading-edge is very strong, but it sounds like your comments on ICAPS are suggesting that ICAPS is also strong. But then I'm trying to put that all with like the comment that it's going to be 50% of the mix, which I think that -- I thought that business is running a lot higher. So, if you kind of just help the full history and then how July played out would be helpful. Brice Hill: Yes. Thanks, Blayne. So, in the quarter, we did see strength in both end markets, leading-logic and ICAPS. Leading-logic is accelerating every quarter this year and we said ICAPS is very strong and continues to be strong throughout the year. This will probably be a record year for us in ICAPS for our fiscal year anyway. And so, leading-logic is accelerating based on the gate-all-around investments and the AI trends that we're talking about. And then, ICAPS, the mid- to high-single-digits was a longer-term forecast. We've had utilizations improving. And when we think about that market, we don't give a guide for next year, but we think there will be continued growth in the mid- to high-single-digits as all those different end markets like AI sensors, electrification, autonomous vehicles, renewable energy, all those end markets continue to build out and grow faster than GDP. That's our expectation. Blayne Curtis: Thanks for that. Operator: Thank you. And our next question comes from the line of Jed Dorsheimer from William Blair. Your question, please. [Operator Instructions] Jed Dorsheimer: Hey, thanks for taking my question. Just a two-part one on the ICAPS, Gary. So first, in that business, I was just over in some of your -- some of the fabs or your customers over in Malaysia last week and it seems like capacity expansion outside of China has started again after some of the EV pressures have shifted to opportunities in power density in datacenters. So, I'm just wondering if you could comment on that. And then secondly, just as it relates to services for ICAPS, is that the same as on leading-edge or are there nuances in terms of the amount and timing there? Thanks. Gary Dickerson: Hi, Jed. Yeah. So, ICAPS, we're very bullish on ICAPS longer term. Brice talked about kind of mid-, high-single-digit growth rates in ICAPS over time, growth driven by all of those different segments, IoT, industrial automation, robotics, really edge computing also for AI, we think that's going to be a really strong business over -- I think many of the people on the call know that over five years ago, it's actually April 12, 2019, we formed our ICAPS group. And since we formed that group, just to focus on that market for IoT, communication, auto power and sensors, we've had share gains in that market. We've introduced more than 20 major new ICAPS products. And this group is just completely focused on innovation in those device segments. And there are races that are happening there. Your comment on what's happening on the different device segments, if you look at power electronics, there will be some major architecture inflections that will happen there that are important for electric vehicles and renewable energy. And we have an ICAPS architecture innovation group working -- co-innovating with our customers on those new ICAPS architectures. That's part of the strategy that we've built over the last five years. We have new products that are in the pipeline that will serve large ICAPS' new segments and new products for cost competitive applications. So again, it's been a big focus for us over a number of years. We've built tremendous capabilities. From a service standpoint, ICAPS is also a good market for us, and that's part of that overall growth opportunity for us, not only on systems where we've gained a significant amount of share. I'm very positive on how we're positioned. The actions that we've taken, I think really position us going forward in ICAPS. Brice, I don't know if you want to add anything else. Brice Hill: No, I would just say that two of our regions grew during this Q3. So, if the question is, is there investment in other areas of the world? Absolutely. And we expect that to continue. Thanks for the question, Jed. Michael Sullivan: And operator, we have time for two more questions, please. Operator: Certainly. And our next question comes from the line of Mehdi Hosseini from Susquehanna. Your question, please. Mehdi Hosseini: Yes. Thanks for taking my question. Just a very quick follow-up for Brice. If you could give us an update with the progression towards that 48%, 49% gross margin target, I assume that's for fiscal year '25? And how the funding for the EPIC R&D center, which I think is a $4 billion project is going to impact those targets? Thank you. Brice Hill: Okay. Thanks, Mehdi. So, the update -- the gross margin at 47.4%, we expect to make -- we talked about very gradual improvements as we work towards that 48%, and that would still be my expectation. You see actually the movement between last quarter and this quarter was modest. We fought those headwinds that we had from a mix perspective. On the EPIC, we did get the notice that we're not getting the grants, but EPIC, that's an important platform for us. It stands for Equipment, Process Innovation and Commercialization. It's going to allow us to accelerate co-innovation with all of our customers. We are continuing with that investment. It will elevate our CapEx as we look forward. And we are benefiting from the investment tax credit that's related to those types of projects. So, we still do have some help from the government from that perspective. And just a couple other modeling notes since we're on CapEx. So, as we look forward, the CapEx will -- for the EPIC center and in general will be at a higher run rate than we've had in the past. If you look forward in your modeling, just wanted to highlight that Q1 will be our normal step-up for pay-related increases and that you can look at the history to see what that step-up should look like if you're modeling that. And then the last piece would be our tax rate. Tax rate next year expectation will be 14% versus the 12.5% this year as more of our mix will be -- more of our worldwide mix will be US related. So that will change the tax mix. So thanks for the opportunity to get those in there. Gary Dickerson: Yeah, Mehdi, this is Gary. Maybe just a little bit more color on EPIC. As we've talked about, the whole industry is in a race to be first to market to deliver innovations for energy efficient computing. So, we -- in discussions with our partners, our customers and partners, we really believe that EPIC can enable us to innovate the way we innovate, really innovate in parallel, so accelerating both for our customers and partners and for Applied, our ability to bring those energy-efficient innovations to market. So, the concept we're getting tremendous traction and pull with our customers and partners. And we also think of EPIC as a global platform. So, where we make investments is going to be based on incentives, talents, proximity to innovation ecosystem. So, we are moving forward for sure with this EPIC concept. Very good traction with customers. And again, over the last several years, we've built out this innovation engine inside Applied Materials. We have architecture innovation teams that are working on ICAPS. They're working on foundry-logic and DRAM and packaging. We have this unique and connected portfolio of materials innovations that are crucial for all of those major inflections. So, EPIC is a way for us to innovate the way we innovate to move all of that in parallel to accelerate all of these major inflections that are crucial for AI, datacenter and all those major tectonic shifts in technology that we talked about earlier. But again, where we invest is going to be based on incentives, talent and proximity to local innovation ecosystem. Michael Sullivan: Great. Thanks, Mehdi, for your question. I think we're approaching the end of the hour. So, Brice, I'm going to go ahead and ask if you have any closing thoughts for us. Brice Hill: Okay. Thanks, Mike. From my perspective, I'm pleased that the investments we've been making in the technology roadmap inflections and also in our operational capabilities are showing up in our financial results this quarter on both the revenue and gross margin lines. I believe we put the company in a great position to grow along with megatrends like datacenter AI as a whole host of new technologies come to market across leading-edge, foundry-logic, DRAM, advanced packaging and ICAPS specialty chips. We have the fuel we need to keep driving the materials engineering roadmap with our customers, while also distributing profits to our shareholders through dividends and buybacks. Gary will be at the Goldman Sachs Conference in San Francisco on September 11, and I hope to see many of you at the Citi Conference in New York on September 4. Mike, thank you, and please close the call. Michael Sullivan: Okay. Thanks, Brice. And we'd like to thank everybody for joining us today. A replay of today's call is going to be available on the IR page of our website by 5 o'clock Pacific Time. Thank you for your continued interest in Applied Materials. Operator: Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Coherent Corp. (COHR) Q4 2024 Earnings Call Transcript

Samik Chatterjee - JPMorgan Jeff Koche - Raymond James Tom O'Malley - Barclays Meta Marshall - Morgan Stanley Karl Ackerman - BNP Paribas Vivek Arya - Bank of America Papa Sylla - Citi Ruben Roy - Stifel Jack Egan - Charter Equity Research Ananda Baruah - Loop Capital Good day, and thank you for standing by. Welcome to the Coherent Corp. FY '24 Fourth Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Paul Silverstein, Senior Vice President, Investor Relations and Corporate Communications. Paul Silverstein Good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO; and Rich Martucci, Coherent's Interim CFO. During today's call, we will provide a financial and business review of the fourth quarter of fiscal 2024 and the business outlook for the first quarter of fiscal 2025. Our earnings press release can be found in the Investor Relations section of our company website at coherent.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements or predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files with the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important risk factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the first quarter of fiscal 2025. If at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum such as a press release or publicly announced conference call. We'll refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliations of these non-GAAP financial measures to GAAP financial measures that can be found on the Investor Relations section of our website at coherent.com. Now let me turn the call over to Jim Anderson, our CEO. Jim Anderson Thank you, Paul, and thank you, everyone, for joining us on our call today. It's been a little over two months since I joined Coherent, and I'm more excited today about the potential of this company and the opportunity for shareholder value creation than the first day I joined. I want to start by thanking my predecessor, Chuck Mattera, for his over 20 years of service to the company, including his last eight years as CEO. Chuck's tireless dedication and leadership of Coherent has had a tremendous lasting impact on the company. And on behalf of all of our employees and our Board of Directors, I want to once again thank him for his service and wish him all the best. I'd also like to take the opportunity to thank my new Coherent teammates for the incredibly warm welcome to the company. In these first weeks, I've met with employees at many of our locations across the world. I'm deeply impressed with the exceptional depth and breadth of talent as well as the determination and hard work of my teammates. I look forward to working side-by-side with them to unlock the full potential of the company. Since joining Coherent, I've received a number of questions from employees and shareholders regarding my initial impressions on the business and our long-term strategic direction. I've also been asked about my reasons for joining Coherent and what drew me to this opportunity. Let me start with what I found the most attractive about joining Coherent. Simply put, it was a combination of the innovation this company is driving and the revenue growth potential that's ahead of us. Innovation is the lifeblood of the technology industry and Coherent is a deeply innovative company. Over the course of my career in the tech industry, I've worked at many innovative companies. And I can tell you firsthand that the innovation happening every day in this company is absolutely world-class. Innovation is in the company's DNA. We innovate at a foundational physical level that underpins critical advancements in many of today's most important and demanding growth applications. Innovation is what this company was founded on, and I believe that's why the company has thrived over 50 years. And I want to ensure that we continue to cultivate this culture of innovation for the next 50 years. Of course, innovation is only meaningful if it ultimately has impact on people's lives and translates into shareholder value creation. The second thing that attracted me to Coherent is our marketing product position and our ability to impact and drive large secular growth opportunities. The addressable market for our products and innovation is over $60 billion and growing quickly. Coherent is an industry leader across many product lines, and we're driving innovation in secular growth applications that will change how we live and work. One of the most exciting growth opportunities is our optical transceiver technology, which underpins and drives the high-speed connectivity required by new AI data centers. While I believe this is a tremendous opportunity for the company, there are many other examples of secular growth opportunities ahead of us. Opportunities such as next-generation telecom systems, advanced displays, semi-cap equipment for next-gen fabs, industrial automation and robotics, EVs, and many others. We are well positioned across multiple long-term secular growth markets. My responsibility is to translate our innovation engine and growing market opportunity into market-leading revenue growth, expanding profitability, and industry-leading shareholder value creation. To achieve these goals and unlock shareholder value, I'm focused on three key areas of improvement: number one, our culture; number two, our strategy; and number three, our execution. On the culture front, I love our innovation-focused culture, which we will absolutely continue to embrace but there's also opportunity for improvements in our culture. We have to move faster and be more agile. Speed is a competitive advantage. To this end, we've initiated changes to simplify our organizational structure, empower our leaders, streamline decision-making, accelerate execution, and ultimately, deliver our innovative products to market faster for our customers. Ultra-change takes time, but I'm excited about some of the early results I've already seen across the company. Moving to strategy. We have a very diverse portfolio of product lines and assets, and we have a significant opportunity to further optimize and focus this portfolio for growth and profitability. To that end, in June, we initiated a portfolio review to assess each element of our product portfolio across the strategic and financial criteria. We plan to use this assessment as the foundation for making investment and capital allocation decisions moving forward. Across our portfolio, we have strong growth engines that need the right level of investment to realize their full growth potential. However, we also have product lines and assets that are nonstrategic and underperforming. We will shift investment to the areas of greatest opportunity, and we will divest or stop investment in underperforming areas. Doing so will drive greater focus, concentrate our OpEx and CapEx dollars on our strongest growth and profit engines, accelerating the deleveraging of our balance sheet, and enhance our EPS and cash flow growth. While I won't be going into the specific areas of investment and disinvestment on today's call, we plan to hold an Investor and Analyst Meeting in the coming quarters that will lay out our strategy for the company. This will include our market growth opportunity, our key technology and product line growth investments and our operational strategy as well as our long-term target business model. Finally, the third area of focus for improvement is operational excellence. I believe we have significant opportunity to improve our operational efficiency and effectiveness moving forward. Let me touch on a few examples of the opportunity ahead of us. After meeting with many of our top customers and partners, it's clear to me that we can improve our revenue growth by engaging our customers in a more strategic way that is less transactional and more focused on building deep multigenerational partnerships. Our customers definitely view us as an industry innovator, but we need to improve our roadmap execution fidelity, accelerating our time to market on key technology transitions and become a trusted innovation partner to our customers. We also need to ensure we're leveraging the broader ecosystem and working more closely with our key partners. Beyond top line growth, we need to improve our gross margin. Frankly, our gross margin is too low. I believe we should be operating at a consistent, sustainable gross margin level above 40%. On pricing, it's clear we have room for improvement. Our team is implementing a new pricing optimization strategy across our businesses to appropriately balance competitive pricing with fair payment for the innovation that we deliver to our customers. On the cost side of the gross margin equation, we have multiple areas for improvement. For example, we need to improve our product yields, our overall asset utilization, and our make-versus-buy decisions. Gross margin improvement will take time but we are determined to drive a disciplined roadmap of margin expansion. On operating expenses, we need to improve return on investment. For R&D, while innovation requires investment, those investments must be focused, efficient and offer high return. Today, our R&D investment is spread too thin. We will focus our R&D investment on the areas of greatest growth potential and eliminate investment in highly speculative projects that lack a strong business case. On SG&A, we need to drive greater efficiency. We will execute on our in-flight synergy and efficiency programs while finding new ways to better leverage our significant scale. Ultimately, our goal is to increase cash generation. Consistent growth, gross margin improvement and better OpEx efficiency will help. However, we also need to improve our return on capital expenditures. We will align our CapEx investments with our overall portfolio strategy and focus on our areas of greatest growth and profitability. With better operational discipline, I believe we have opportunity to significantly increase our free cash flow and accelerate our pace of debt reduction and deleveraging. Our near-term capital allocation priorities are: first, to fund our organic growth engines; and second, to deleverage our balance sheet as quickly as possible. I believe the combination of an enhanced culture along with strategic portfolio optimization and operational execution improvements will help put us on a path of sustained market-leading growth, enhanced profitability and cash generation and a strong balance sheet. As I mentioned earlier, I look forward to sharing more details about our plans and specific business metrics and targets at an upcoming Investor and Analyst Meeting. One of my near-term priorities is to fill the CFO role. We're considering both internal and external candidates and making good progress on the search. Once the new CFO is in place, we'll set a specific date for our Investor and Analyst Meeting. I'll now switch gears and provide some brief comments about our fiscal fourth quarter results. Revenue in Q4 increased by approximately 9%, both sequentially and year-over-year, driven primarily by strong growth in our datacom transceivers for AI data-centric deployments. Non-GAAP gross margin expanded by 145 basis points sequentially due primarily to recovery from the transitory issues that impacted our Q3. Non-GAAP EPS grew by 16% sequentially and by almost 50% year-over-year as a result of top line growth and margin expansion. Let me summarize what we're seeing in our business by end market vertical. In the communications end market, Q4 revenue increased by 10% sequentially and by 19% year-over-year. We experienced strong growth in datacom, where Q4 revenue grew 16% sequentially and 58% year-over-year due primarily to AI and data center demand. We saw strong sequential growth in our 800G datacom transceiver revenue in Q4 and are also seeing increasing orders in backlog for the current and future quarters. We also delivered initial samples of our 1.6T datacom transceivers, which we expect to begin ramping in calendar 2025. Our new datacom optical switch platform is progressing well and is generating significant customer engagement, and we expect to enter customer trials in calendar 2025. Growth in datacom was partially offset by a 6% sequential and 38% year-over-year decline in telecom revenue due to end market weakness. Although we expect the telecom end market to remain weak in the near term, we also expect to ramp our new 100G ZR and 400G ZR+ Coherent transceivers over the course of our fiscal year. Overall, we expect the communications market to be a strong long-term growth factor for the company. In the industrial end market, revenue increased 2% sequentially and 5% year-over-year. Our display capital equipment vertical saw a growing demand in Q4 for Excimer Laser Annealing and related services driven by expanded OLED adoption in the smartphones and the inception of OLED adoption into laptop and tablet computers, with the latter essentially doubling long-term demand for OLED screen area production. In our other industrial verticals, we saw relatively stable revenue in aggregate. While we expect overall industrial end market demand to be soft in the near term, we believe we are well positioned for growth over the long term, given our multiple growth opportunities in this segment, driven by new product introductions such as our fiber laser platform for cutting and our new line being annealing systems for GenAI display fabs. In our two remaining markets, electronics and instrumentation, each of which account for less than 10% of our total revenue, we saw a sequential revenue growth, and both end markets remain long-term growth opportunities for us. In summary, about two months in, I'm even more excited about the opportunity to unlock significant shareholder value based on the depth and breadth of our innovation, the size of the market opportunities we address, and the potential to improve our operational execution. We're expecting strong growth in our datacom business over the coming quarters. And while some near-term softness persists in our telecom and industrial end markets, we expect fiscal 2025 overall to be a solid growth year for the company. I'll now turn the call over to our Interim CFO, Rich Martucci. Overall, I'm very pleased with the continued sequential financial progress we made in the fourth quarter of fiscal 2024. We delivered a strong quarter with sequential revenue growth and healthy improvement in our gross and operating margins, which drove sequential earnings per share growth. Fourth quarter revenue was $1,314,000,000, representing an increase of 8.7% sequentially and 9.1% versus the prior year. From a segment perspective, networking revenue increased 10% sequentially and by 16% year-over-year. Materials segment revenue increased 17% sequentially but decreased 3% year-over-year, and our laser segment revenue increased by 1% sequentially and by 7% year-over-year. Our fourth quarter GAAP gross margin of 32.9% improved by 255 basis points sequentially and by 437 basis points versus the prior year. Our non-GAAP fourth quarter gross margin of 37.2% improved by 135 basis points sequentially and 132 basis points versus the prior year. Sequential improvements were primarily due to our increased revenue volume and resolution of the transitory margin issues that we cited in the preceding quarter, including the recovery in our datacom AI transceiver yield and resolution of the power failure issue that depressed both of our silicon carbide revenue and gross margin. Our fourth quarter GAAP operating expenses were $339 million compared to $344 million in the prior quarter and $499 million in the year ago quarter. Fourth quarter non-GAAP operating expenses were $266 million compared to $250 million in the prior quarter and $248 million in the year ago quarter. The sequential increase in non-GAAP operating expenses includes year-end bonus and benefit adjustments and term loan refinancing fees. Looking ahead, we plan to continue to be disciplined in managing our SG&A expenses, now ensuring that we invest in our product portfolio. Our fourth quarter restructuring expenses included in GAAP operating expenses were $14 million compared to $12 million from the preceding quarter and $119 million in the year ago quarter. Our restructuring synergy and site consolidation plans are progressing in line with previously communicated expectation in terms of both costs and savings. Our fourth quarter 4.8% GAAP operating margin increased by 296 basis points compared to 1.8% in the prior quarter and by 1,769 basis points compared to an operating loss of 12.9% in the year ago quarter, driven by improvements in both gross margin and operating expense leverage. Our fourth quarter 17% non-GAAP operating margin increased by 191 basis points compared to 15.1% in the prior quarter and by 162 basis points compared to 15.4% in the year ago quarter, driven by improvements in both gross margin and operating expense leverage. Our fourth quarter interest expense was $68 million compared to $73 million in the preceding quarter and $79 million in the year ago quarter. The full year FY '24 GAAP tax rate was negative 7.5% compared to 27% in the previous year. The full year FY '24 non-GAAP tax rate was 20.7% compared to 18.2% in the previous year. Fourth quarter GAAP earnings per diluted share was negative $0.52 loss compared to a $0.29 loss in the prior quarter and $1.54 loss in the year ago quarter. Fourth quarter non-GAAP earnings per diluted share was $0.61 compared to $0.53 in the preceding quarter and [$0.31] in the year ago quarter. We generated $162 million in cash from operations in the fourth quarter compared to $117 million in the prior quarter and $182 million in the year ago quarter. Fourth quarter capital expenditures were $100 million versus $93 million in the preceding quarter and $93 million in the year ago quarter. Free cash flow, net of the $49 million of capital funded by the silicon carbide LLC minority interest investment, was $111 million. We paid down $64 million in debt during the quarter and a total of $229 million for all of fiscal 2024. Total debt at the end of FY '24 is $4.17 billion. Unrestricted cash increased to $926 million from $899 million in the prior quarter. Restricted cash set aside for our silicon carbide LLC subsidiary decreased to $858 million from $889 million in the preceding quarter. In summary, moving forward, the company will continue to be laser focused on investing in organic growth, improving operating leverage, prudent capital investment, and executing on paying down debt. Now I will turn to our guidance for the first quarter of fiscal 2025. Revenue is expected to be between $1.27 billion and $1.35 billion. Non-GAAP gross margin is expected to be between 36% and 38%. Total operating expenses are expected to be between $260 million and $280 million on a non-GAAP basis. Tax rate for the quarter is expected to be between 20% and 23% on a non-GAAP basis. EPS is expected to be between $0.53 and $0.59 on a non-GAAP basis. Operator, that concludes our formal comments. We can now open the call for questions. [Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan. You may proceed. Samik Chatterjee Hi. Thanks for taking my question. And Jim, I look forward to working with you. I guess the first question that I want to do sort of throw your ways really in relation to, you said it's early days in terms of the strategic assessment you're doing. Just maybe help us think about what are the sort of early reads you have around the portfolio from there? You talked about core and noncore. Maybe what's the criteria using or the lens that you're looking at from deciding core and noncore? And how much of the sort of implication is on operating the company more efficiently relative to maybe delevering the balance sheet in terms of priority of these actions? And I have a quick follow-up if you'll allow me. Thank you. Jim Anderson Yes. Thank you, Samik. Thanks for the question. I appreciate it. Yes, on the portfolio assessment, happy to talk a little bit more about that. I'm really pleased with the work that the team's been doing on this over the last couple of months. And think about the portfolio assessment as really work that we're doing to really build a foundation for our strategy going forward. And the ultimate goal of it is to really make sure that the company is concentrating all of its assets, whether that's OpEx or CapEx, on the areas of greatest growth and profitability over the long term. And so that's really the ultimate goal. And the way we're approaching it is we're stepping back and looking at the entire company portfolio. We're breaking down the company and each one of its individual product line divisions. And then we're grading each one of those on a set of strategic and financial criteria. And then what we're doing is putting each one of the businesses into one of four categories. I'm happy to share a little bit more about that. The four categories are what do we think are big growth engines for the company moving forward? What are the profit engines? What are the kind of longer-term bets that the company is making? And then what are those businesses that we think are nonstrategic or underperforming? When you say growth engines, those are -- obviously, those are businesses that we believe are going to drive long-term above-market growth for us. Profit engines, our businesses that may be growing a little slower but are generating really healthy levels of profit. Long-term bets or businesses that we're investing in today that have a longer ROI than typical for us but may have a big payoff at the end. And then the nonstrategic and underperforming businesses are really businesses that just don't fit with the overall portfolio or significantly underperforming our financial targets. And really with that foundation built, and that work is really concluding through the course of this month, we'll be taking a set of actions to concentrate our assets, our investment on those areas of greatest growth, as I said, and then either divesting or shutting down investment in those underperforming or nonstrategic businesses. So certainly expect to hear more about that from us over the coming quarters. really happy to share more about that at the Investor and Analyst Day that we're planning in the future. I think you also asked about delevering the balance sheet. That's certainly a big focus of ours as well. And I look at that delevering opportunity as really could be driven by two things. To the extent that we do decide to divest any businesses, the proceeds of those divestitures could be used to pay down the debt. But also just setting aside the portfolio assessment, I talked about some of the operational execution improvements we want to drive, really focused on driving better, for instance, gross margin, better profit margins. And obviously, that yields better cash flow, which would help us accelerate debt paydown, but that certainly delivering the balance sheet is a key focus as well. Samik Chatterjee Got it, got it. And if you'll allow me for a quick follow-up, I know you talked about gross margins being sustainably above 40% is how you're thinking about the business. If you sort of look at the gross margins today, do you think the effective sort of the biggest gap between where your aspiration is and what sort of the companies delivering today? Is that pricing or is that sort of these underperforming businesses? Once that's sort of done and dusted, you sort of get back to that sustainable range? Maybe just help me in sort of what's the biggest gap you're identifying between where the company should be and where the gross margins are today. Jim Anderson Yes. It's a great question, Samik. And I would say it's really a combination of, some of it is underperforming businesses that are significantly -- that have gross margins that are significantly below our corporate average. But also, if you set that aside, pricing, I think there's both opportunities on pricing as well as cost structure. And I mentioned this a little bit in my prepared remarks. On pricing, I do believe that there's things that we can do to improve our pricing discipline moving forward. And some of those ideas that I'm bringing with me is somewhat what I did in prior companies, where we applied some advanced, think about it, as pricing analytics, pricing strategies that really are targeted at making sure that we're competitive on price but also that we're getting fair value for the innovation that we're bringing to market. So I think there's a pricing initiative that we've kicked off around better pricing discipline. I expect that to yield gross margin improvement. But then also cost. Look, I think there's a number of different areas across the company where we need to be focused on driving better cost structure, and I mentioned a few of those in the prepared remarks. I think product yields, we have improvement to drive there, asset utilization. And then I think the third area that I mentioned was better make versus buy decisions, making sure that we're leveraging the bigger ecosystem where it makes sense to making sure that we're applying our assets to where we're driving increased differentiation or that's providing our customers some sort of significant advantage. But that's sort of the three different areas I'm thinking about in terms of gross margin improvement. Thank you. Our next question comes from Jeff Koche with Raymond James. You may proceed. Jeff Koche Yes, thanks. This is Jeff Koche for Simon Leopold. I just wanted to hit on the gross margin a little bit deeper. Maybe you can talk about the glide path and like what kind of time frame do you see getting to that 40%-plus range? And really hitting on maybe that buy-versus-make decision, you had a competitor -- one of your competitors last night talking about the indium phosphide lasers being booked out through the end of 2025 is in the 200G per lane. Maybe just update your thoughts around that for in-house production there. Thank you. Jim Anderson On the first part of your question, the glide path, that's definitely a topic that we want to cover at that Investor Day that I mentioned. So we'll be scheduling that in the coming quarters. And what we'll do is, as part of that Investor Day, it's not just lay out the company's strategy but give an overall business model target for the company in a sense of what our timing is of the time frame to achieve that business model target, including the gross margins. But this will definitely be a key focus area for us moving forward. And look, gross margin improvement takes time. Whether it's pricing or cost reductions, those take work. But we're determined to drive a steady roadmap of improvement moving forward. So you'll hear more about from us around the timing of those gross margin improvements in the quarters ahead. And then on the second part of your question, make-versus-buy, look, I think the way to think about this is one of the benefits that Coherent has versus our competitors, and it's a benefit that our customers see every day, is there's a number of places where we're vertically integrated. And we build, for instance, not just the datacom transceiver but we build a number of the components that go into that transceiver. And to the extent that, that provides us differentiation or faster time to market or generates real value for our customers, that's fantastic and we will continue to do that. But what I want to make sure that we're careful about is not just building it internally for the sake of building it internally, but to the extent that there's external providers or an ecosystem that we can leverage that's competitive in terms of technology and cost with the internal option, I'd rather use those resources to focus those on areas that we can truly differentiate and add value for our customers. So I just want to make sure that we're being objective moving forward on make-versus-buy and being smart about how we leverage. Our next question comes from Tom O'Malley with Barclays. You may proceed. Tom O'Malley Hi Jim. Thanks for taking my question and great to meet you. I look forward to working with you as well. But I kind of wanted to ask on the optical opportunity and the transceiver business in general. I realize you just joined the business and there were a lot of metrics kind of floating around, and I'm sure you don't want to marry yourself to any of those right away. But in your initial days at the business, clearly, the big growth engine Coherent has been this 800G ramp and then in the future, potentially the 1.6T ramp as well. But when you look at kind of what was advertised to you when you were first looking at this job and then kind of got underneath the covers and looked at that optical opportunity, could you maybe speak qualitatively about your expectations in that business? I understand that you'll have an Analyst Day and maybe put some more numbers on it, but just broadly, your feelings on that business and what that growth engine could look like for Coherent over the next couple of years? And then I had a follow-up. Jim Anderson Yes. Thank you, Tom, for the question. Yes, the short answer is it's better than I thought before I joined the company. So I had a sense of always as Coherent as a leader in optical transceivers specifically for datacom. And obviously, there's tremendous build-out happening now with AI data centers. And I have my own sense of what that sort of growth trajectory would look like, before I joined the company. It's stronger than what I had thought. And we've seen, just over the last, I would say, gosh, four to six weeks as I've spent a lot of time with our top customers across the - across all of our different product lines, but especially in our datacom business, I've gotten a much better sense for the opportunity that's in front of us, and I would say it's a very strong opportunity. And we continue to see demand strengthening, forecast strengthening, billings, backlog. So yes, we knew this as a really key growth area for the company. The 800G ramp is very exciting for us. And then also, I was really pleased with the team's execution on the 1.6T. They delivered samples of 1.6T just over the past few weeks, month. I think that was a key milestone for us, and we're looking forward to ramping 1.6T next year. But yes, I think it's an exciting growth area for the company. Now I'll say that, but I also want to make sure that we recognize that there are other growth areas, within the company as well. I know I'm excited about datacom and AI data centers. But there's a number of other good areas of growth within the company. I mentioned a few of them in my prepared remarks. So one of the things I think is the strength of Coherent is, not just the innovation that I talked about. But we do have a wide portfolio of growth opportunities across our other businesses as well. And I think that makes for a really strong long-term portfolio, a diversified portfolio of growth moving forward. So - and yes, definitely, I'll share more thoughts on all of those growth engines at Investor Day. Thomas O'Malley Perfect. And then the second one, is just a little more tactical in regards to kind of what we heard last night from your competitor who is talking about an improving telecom market into the September quarter. It sounded as though you were a little more cautious. Just could you describe what you're seeing from those customers just in the short-term? This is less of kind of a long-term strategic question. But just a sense check on, are you seeing that market recovering with legacy products? Are new product introductions kind of picking up? That's what was kind of echoed last night, newer products kind of growing at customers. Just the puts and takes on what - you're seeing in the telecom market just, because visibility has been pretty bad, inventory levels have been high. Where are we at in that correction kind of off the bottom? Thank you. Jim Anderson Yes. Thanks Tom. I'm going to separate it out into just purely end market comments versus I'll come back and talk about some of the new products that we have ramping here. So just purely end market, yes, I guess we're taking a more cautious view on the market. I don't believe that we're completely out of the woods as an industry on the telecom market. Significant destocking has happened in that market and that's good, right? The telecom market have built up significant inventory that's I think most of that destocking is largely behind us. But I think there is - there are still pockets of inventory that are out there. And so, our whole look on the telecom market through the next, I would say, at least six months and probably into the following six months, is a bit more of a cautious outlook. Now, it could be that we're wrong and it ends up being better, or stronger than that, but we're taking a more cautious view on that. Now that's all end market comments. Now set that aside, I'll switch over to Coherent specifically. We, against that market backdrop, we do have a number products that are ramping that are pretty exciting. The number - and I mentioned in the prepared remarks, both the 100G and then the 400G ZR and ZR+ that will ramp throughout the course of this year. And obviously, since you're ramping over the course of this year. They have a bigger impact in the second half of our fiscal year. So I think that we do have some growth tailwinds behind us in terms of our own products. But I think in terms of the market, we're expecting that to be - to continue to be soft. Thanks a lot. Next question. Thank you. Our next question comes from Meta Marshall with Morgan Stanley. You may proceed. Meta Marshall Great. Thanks. I'll start with a question non-AI just to focus on some other areas of the business. The material business looked to have kind of better-than-expected performance throughout the quarter. Was some of that just improvement on silicon carbide yields that had kind of encumbered last quarter? Were there any other markets worth calling out that improved there? And then maybe just as a second question. On the datacom side, I know the focus is on 400G and up, but just any recovery you guys are seeing in kind of demand for the non-AI speed transceivers? Thanks. Jim Anderson Thank you. And on the first part of your questions on the materials business, yes, we did see some pickup in the materials business from Q3 to Q4. And you're right, actually, a good chunk of that was the production issues that we had on silicon carbide in Q3. We were able to catch up on those issues - or catch up on that demand in Q4. And so, we had a little bit of depressed demand or depressed shipments in Q3. We were able to catch up on that in Q4. So some of that sequential gain is, yes, certainly due to that silicon carbide catch-up. And then on the second part of your question, I called that it was on datacom, but I didn't quite hear the end of the question. Would you mind repeating the end of that datacom question? Meta Marshall Yes, just demand for kind of the non-AI speeds or the kind of sub 400G. I know that had been an area of more depressed demand, but if you're seeing any changes there. Jim Anderson Got it, okay. The sub 400G. We're expecting that to be relatively stable. So, we don't expect to see any huge growth from that or a huge decline. We're modeling that moving forward as relatively stable. Thank you. Our next question comes from Karl Ackerman with BNP Paribas. You may proceed. Karl Ackerman Yes, thank you. Jim, you spoke about the need to have less transactional revenue and the ability to improve pricing going forward. Given your innovation and leadership in high-speed optical transceivers, could you discuss the breadth of hyperscale engagements within datacom. And whether this customer demand is resulting in extended volume commitments, and order visibility provided to you so that you may enable those customers to meet their data center build-outs? Thank you. Jim Anderson Yes. Thanks, Karl. So definitely, we're seeing - we have a very good breadth of customers. If you look at 800G, our breadth of customers continues to grow. It's grown on a quarter-over-quarter basis in terms of those customers that are ramping 800G and are in full production. And so the breadth of customers feel really good about and continues to grow. And then on the second part of your question around extending visibility, yes our visibility or the other way to look at it is our order book has continued to improve over the last 90 days. Especially over, I would say, the line of six to eight weeks, it certainly improved. And that's given us visibility not just through the end of this calendar year, but in the first half of next calendar year, so really through the rest of our fiscal year here. And that order book continues to strengthen for the datacom business, which we view as very positive. And so, we're definitely focused on making sure we meet that increasing demand. Thank you. Our next question comes from Vivek Arya with Bank of America. You may proceed. Vivek Arya Thanks for taking my question. Jim, you mentioned the strong order book for your optical transceivers extending several quarters. I'm curious, are you seeing any impact at all, positive or negative, because of changes in NVIDIA's product schedule or does that have no impact? And then just given the strength in the order book, how does the pricing and gross margin shape up when you look at the next several quarters? Do you think it can improve from here? Or do you think that margins in this business may still be dilutive to the overall business? Jim Anderson Yes. Thanks, Vivek. On the first part, on the part that was about the order book, yes, we continue - as I said, we continue to see the order book strengthen. I think you asked about a particular customer. I can't comment on that particular customer, or really any particular customer. But I can say that in aggregate, we're continuing to see, again, the order book strengthen and demand growing, which is good. On the pricing and gross margin, in general, what we would usually see in the transceiver market is the newer speed grades like 800 and then, soon to be 1.6T generally carry higher gross margins than the older speed grades, right? The older speed grades are usually become commoditized over time. And so, to the extent that we're ramping the newer speed grades, that's certainly generally a tailwind for us. But a lot of my comments earlier on gross margin are really focused at the aggregate company level, not just in datacom but at an aggregate company level. I believe that there's opportunity for us to improve our pricing discipline, to have a better optimized pricing strategy across the company, across all of our product lines. And then also, there's a number of cost structure improvements that I think the company has opportunity to improve, not just in datacom, but across some of our other product line as well. Vivek Arya And for my follow-up, so you're guiding the current quarter roughly, kind of flat sequentially. What are the puts and takes from the different segments? And I know you're not guiding to December, but should we assume that those same end market trends follow in December also? Or do you think that there is the prospect for some sequential improvement as we look at December just from a broad end market perspective? Thank you. Jim Anderson Yes, Vivek, on the September quarter, the one that we currently guided, yes, we guided roughly flat sequentially. We would expect the datacom business, as we're just talking about, we would expect the datacom business to be sequentially up. But some of our other businesses tied to the telecom, and the industrial markets to be sequentially either flat or sequentially down. And so that offsets some of the datacom growth. And if you look at the midpoint of our guide, obviously, our guide is a range, right? And that's what we're seeing for the current quarter that we're in. For the December quarter, I'll probably save those comments until the next earnings call, we'll give more insight into what we're seeing in the December quarter, and maybe into the beginning of the next calendar year as well. Thank you. Our next question comes from Atif Malik with Citi. You may proceed. Papa Sylla Thank you. This is Papa Sylla for Atif. Thank you for taking my question. I guess my first question was around the industrials business. I guess just looking at it sequentially, we saw a little bit of a deceleration versus last quarter. So we were just wondering if you can touch a little bit on the percentage there or perhaps just touch on A, at that last quarter, kind of some difficulties such as precision manufacturing, EUV, semicap back-end and how they are doing this quarter? Jim Anderson Yes, thanks for the question. Yes, on kind of the broad base of industrials in aggregate, we did see a little bit of sequential improvement in aggregate in the industrials from Q3 to Q4. But moving into the current quarter, as I just mentioned on a prior question, we're assuming that both the telecom as well as the industrial space are, they're kind of flat sequentially, or there are some segments that are sequentially down. And that offsets - we're assuming that offsets some of the datacom sequential growth that we're expecting in the current quarter. Papa Sylla Got it. And for my quick follow-up, I wanted to touch a little bit on the AI front, on the laser front of things for 1.6T. So I guess our understanding is that from an industry-wide perspective, all three technologies, so VCSEL, EML, SIFL - have their own pockets of demand. So we were just wondering, from your end, can you touch on engagement across those three and kind of what those mix look like currently? And then what they might look like maybe two, three quarters down the line? Jim Anderson Yes. I think one of the great things about Coherent is, look, we have a really wide portfolio of technology. And so we're -- we develop our own VCSELs, we manufacture our own VCSELs. We do the same in EML. Indium phosphide, we develop and manufacture in-house. So we both develop and manufacture a number of those lasers in-house. But then where it makes sense, we also source some of those lasers externally as well, right? And so for 1.6T, we'll - or any technology beyond that as well, we'll always make best use whatever we think is the best technology to bring the most advanced, most innovative product to market for our customers. Whatever gives us the biggest technical advantage versus our competition and the biggest differentiation for our customers, we'll always select that technology, whether it's developed in-house, or whether we source it externally, we'll select the best technology that benefits our customers. So I think, I probably won't give any prognostication on 1.6T and how much of it will be VCSEL versus other technologies. But we'll probably share more about that as we get closer to 1.6T production ramp. Thank you. Our next question comes from Ruben Roy with Stifel. You may proceed. Ruben Roy Thank you. And hi, Jim. I wanted to - I know you had a lot of questions on strategy and I appreciate the commentary high level, Jim. But I wanted to just maybe talk about pricing optimization one more time. And you talked about some successful turnarounds that you've had, and I've watched the last one, which was tremendous and in short order. And I'm just wondering if you could comment a little bit, given that the breadth of products, end markets, customers, et cetera, is a lot different. I think at Coherent then at the last turnaround that you were working on. So just how are you thinking about timing? And kind of is this a multiyear strategy from an optimization strategy to get some of those margins that you want to get to? Or any kind of high-level commentary on that would be helpful? Jim Anderson Yes. Thanks, Ruben. Look, businesses - Coherent is a different business. Every business has its own dynamics, and Coherent itself has a wide range of different businesses within its portfolio. So it's a little bit different business-by-business. But as I spend time with both our business leaders, our general managers, our sales team as well as time with our customers, I do think there's opportunity for us to be better in terms of our pricing discipline and how we price our products in the market. And again, finding and striking that right balance, between being competitive in the market, but making sure we get paid for the innovation that we drive. And I think that there are some approaches, strategies, tactics and analytics that I've used in my past across multiple different businesses. Now I think our universal and can be applied to some of the businesses within Coherent as well. And so that's certainly what we're working on. Now we've kicked off already sort of bigger pricing optimization strategy work we're driving that across the company. Now that does take time. It doesn't - it's not something that turns on like a light switch. Some of those initiatives take longer time to achieve. Some of those are near term, some can provide short-term benefit. But there's a wide range of initiatives that we're beginning to drive and those yield benefit over time. And as I mentioned earlier, when we get to the Investor Day and we give our longer-term business model targets, including gross margin, we'll give some sense about what we think the progression towards those business model targets, including gross margin, will be over time. Ruben Roy Very helpful. Thanks Jim. I guess just a quick follow-up. It sounds like you're saying that you started some of these actions. Are there any other strategic actions that you've implanted currently? Or is most of it on the come? Jim Anderson Definitely, in the category gross margin expansion, we've initiated a number of, as I mentioned, pricing optimization strategies. But we're also working on product cost. So we also kicked off a number of focused product cost activities. And that's something we're driving with sort of equal focus is how do, we drive better product cost structure within the company. And given that we're a manufacturing company, there's a lot more - there's a lot of knobs for us to turn in terms of driving better cost structure, whether it's better asset utilization, higher yields for our products, et cetera. There's a number of different places we're focused to drive better product cost structure moving forward. Thank you. Our next question comes from Jack Egan with Charter Equity Research. You may proceed. Jack Egan Hi, guys. Thanks for taking the questions. I just had one other follow-up. So last quarter, you mentioned a 30% increase in bookings for the laser segment, but it's still - revenue-wise, it's still been kind of hovering in the $350 million, $355 million range for the past three quarters. So I was just curious, is that due to those various positives and negatives in the industrial and telecom sectors or markets kind of offsetting each other? Or is there anything else at play there? Jim Anderson Yes. Thanks, Jack. It's actually due more to the time from when a booking is made in lasers to when it's shipped. Those are generally longer lead times, and so it has more to do with just the natural lead time of that business. And there's latency from when those bookings are placed until when the product is actually shipped. So it's more about just the natural lead times of that business. Jack Egan Got it. Okay. And then with the silicon carbide CapEx kind of out of the equation now, I was wondering where, are your CapEx priorities now other than expanding 800G? Jim Anderson Yes. I would say the number one priority in terms of CapEx and setting aside silicon carbide is making sure that we have the capacity in place to support the growing demand that we're seeing in the datacom business. And so right now, 800G capacity, but we're also building out 1.6T capacity as well and making sure we're ready for that ramp. So yes, I would say that's our priority one right now in terms of capital expense. Thank you. Our next question comes from Ananda Baruah with Loop Capital. You may proceed. Ananda Baruah Hi, yes, thanks, guys. Good afternoon. Thanks for taking the question. Yes, Jim, great to meet you and look forward to working with you. Just one for me. Do you have any thoughts, Jim, on - this is a transceiver question. Do you have any thoughts, early thoughts on potential for share gains, kind of share gain percent over the next couple of years? And have you guys - have you yet begun to see the big data center customers begin to sort of index more towards U.S.-based transceiver producers? Thanks. Jim Anderson Yes. Thanks, Ananda. That's a great question. As I have spent time with some of those large data center CSP customers, I think there's clearly opportunity for us to gain share at those customers, due to a number of different dynamics. And look, when you look at Coherent, not only are we a technology leader in transceivers, and I think a technology leader that you can rely on over the course of multiple generations, historically moving forward, but we have an incredibly resilient supply chain. And I would say the - from supply chain resiliency, we are the most resilient supply chain in the industry. And so, I think our big data center, datacom CSP customers are - if they haven't recognized that already, they're definitely having more appreciation for that. So I think the combination of our technology and supply chain resiliency gives us the opportunity to win significantly more share of wallet with those big customers over the coming quarters and years. So thanks for the question, Ananda. Thank you. I would now like to turn the call back over to Jim Anderson for any closing remarks. Jim Anderson Thank you, operator, and thanks again for everybody joining us on our call today. So just to wrap it up, I'm super excited about the opportunity ahead of us at Coherent. And I want to once again thank all of my new Coherent teammates for all their hard work, dedication and all the innovation they drive every day. While we have many strengths, we also have areas of opportunity for improvement, to translate our incredible innovation engine and growing market opportunity, be it to outstanding shareholder value creation moving forward. Thanks again for your support and look forward to updating you on our progress moving forward. Operator that concludes our call. Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Coherent (COHR) Q4 2024 Earnings Call Transcript | The Motley Fool

Good day, and thank you for standing by. Welcome to the Coherent Corp FY '24 fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to your speaker today, Paul Silverstein, senior vice president, investor relations and corporate communications. Paul Silverstein -- Senior Vice President, Investor Relations Good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO; and Rich Martucci, Coherent's interim CFO. During today's call, we will provide a financial and business review of the fourth quarter of fiscal 2024 and the business outlook for the first quarter of fiscal 2025. Our earnings press release can be found in the investor relations section of our company website at coherent.com. I would like to remind everyone that during our conference call today, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are predictions based on information that is currently available and that actual results may differ materially. We refer you to the documents that the company files from the SEC, including our 10-Ks, 10-Qs, and 8-Ks. These documents contain and identify important risk factors that can cause the actual results to differ materially from those contained in our projections or forward-looking statements. This call includes and constitutes the company's official guidance for the first quarter of fiscal 2025. If, at any time after this call, we communicate any material changes to this guidance, we intend that such updates will be done using a public forum, such as a press release or publicly announced conference call. We will refer to both GAAP and non-GAAP financial measures during this call. By disclosing certain non-GAAP information, management intends to provide investors with additional information to permit further analysis of the company's performance and underlying trends. For historical periods, we provided reconciliation of these non-GAAP financial measures to GAAP financial measures that can be found on the investor relations section of our website at coherent.com. Now, let me turn the call over to Jim Anderson, our CEO. Jim Anderson -- Chief Executive Officer Thank you, Paul, and thank you, everyone, for joining us on our call today. It's been a little over two months since I joined Coherent, and I'm more excited today about the potential of this company and the opportunity for shareholder value creation than the first day I joined. I want to start by thanking my predecessor, Chuck Mattera, for his over 20 years of service to the company, including his last eight years as CEO. Chuck's tireless dedication and leadership of Coherent has had a tremendous lasting impact on the company. And on behalf of all of our employees and our board of directors, I want to once again thank you for your service and wish you all the best. I'd also like to take the opportunity to thank my new Coherent teammates for the incredibly warm welcome to the company. In these first weeks, I've met with employees at many of our locations across the world. I'm deeply impressed with the exceptional depth and breadth of talent, as well as the determination and hard work of my teammates. I look forward to working side by side with them to unlock the full potential of the company. Since joining Coherent, I've received a number of questions from employees and shareholders regarding my initial impressions on the business and our long-term strategic direction. I've also been asked about my reasons for joining Coherent and what drew me to this opportunity. Let me start with what I found most attractive about joining Coherent. Simply put, it was a combination of the innovation this company is driving and the revenue growth potential that's ahead of us. Innovation is the lifeblood of the technology industry, and Coherent is a deeply innovative company. Over the course of my career in the tech industry, I've worked at many innovative companies. And I can tell you firsthand that the innovation happening every day in this company is absolutely world class. Innovation is in the company's DNA. We innovate at a foundational physical level that underpins critical advancements in many of today's most important and demanding growth applications. Innovation is what this company was founded on, and I believe that's why the company has thrived over 50 years. And I want to ensure that we continue to cultivate this culture of innovation for the next 50 years. Of course, innovation is only meaningful if it ultimately has impact on people's lives and translates into shareholder value creation. The second thing that attracted me to Coherent is our marketing product position and our ability to impact and drive large secular growth opportunities. The addressable market for our products and innovation is over $60 billion and growing quickly. Coherent is an industry leader across many product lines, and we're driving innovation in secular growth applications that will change how we live and work. One of the most exciting growth opportunities is our optical transceiver technology, which underpins and drives the high-speed connectivity required by new AI data centers. While I believe this is a tremendous opportunity for the company, there are many other examples of secular growth opportunities ahead of us. Opportunities such as next-generation telecom systems, advanced displays, semi-cap equipment for next-gen fabs, industrial automation and robotics, EVs, and many others. We are well-positioned across multiple long-term secular growth markets. My responsibility is to translate our innovation engine and growing market opportunity into market-leading revenue growth, expanding profitability, and industry-leading shareholder value creation. To achieve these goals and unlock shareholder value, I'm focused on three key areas of improvement: number one, our culture; number two, our strategy; and number three, our execution. On the culture front, I love our innovation-focused culture, which we will absolutely continue to embrace. But there's also opportunity for improvements in our culture. We have to move faster and be more agile. Speed is a competitive advantage. To this end, we've initiated changes to simplify our organizational structure, empower our leaders, streamline decision-making, accelerate execution, and ultimately deliver our innovative products to market faster for our customers. Ultra change takes time, but I'm excited about some of the early results I've already seen across the company. Moving to strategy. We have a very diverse portfolio of product lines and assets, and we have a significant opportunity to further optimize and focus this portfolio for growth and profitability. To that end, in June, we initiated a portfolio review to assess each element of our product portfolio across the strategic and financial criteria. We plan to use this assessment as the foundation for making investment and capital allocation decisions moving forward. Across our portfolio, we have strong growth engines that need the right level of investment to realize their full growth potential. However, we also have product lines and assets that are nonstrategic and underperforming. We will shift investment to the areas of greatest opportunity, and we will divest or stop investment in underperforming areas. Doing so will drive greater focus, concentrate our opex and capex dollars on our strongest growth and profit engines, accelerating the deleveraging of our balance sheet, and enhance our EPS and cash flow growth. While I won't be going into the specific areas of investment and disinvestment on today's call, we plan to hold an investor and analyst meeting in the coming quarters that will lay out our strategy for the company. This will include our market growth opportunity, our key technology and product line growth investments, and our operational strategy, as well as our long-term target business model. Finally, the third area of focus for improvement is operational excellence. I believe we have significant opportunity to improve our operational efficiency and effectiveness moving forward. Let me touch on a few examples of the opportunity ahead of us. After meeting with many of our top customers and partners, it's clear to me that we can improve our revenue growth by engaging our customers in a more strategic way that is less transactional and more focused on building deep, multigenerational partnerships. Our customers definitely view us as an industry innovator. But we need to improve our roadmap execution fidelity, accelerating our time to market on key technology transitions, and become a trusted innovation partner to our customers. We also need to ensure we're leveraging the broader ecosystem and working more closely with our key partners. Beyond top-line growth, we need to improve our gross margin. Frankly, our gross margin is too low. I believe we should be operating at a consistent, sustainable gross margin level above 40%. On pricing, it's clear we have room for improvement. Our team is implementing a new pricing optimization strategy across our businesses to appropriately balance competitive pricing with fair payment for the innovation that we deliver to our customers. On the cost side of the gross margin equation, we have multiple areas for improvement. For example, we need to improve our product yields, our overall asset utilization, and our make-versus-buy decisions. Gross margin improvement will take time, but we are determined to drive a disciplined roadmap of margin expansion. On operating expenses, we need to improve return on investment. For R&D, while innovation requires investment, those investments must be focused, efficient, and offer high return. Today, our R&D investment is spread too thin. We will focus our R&D investment on the areas of greatest growth potential and eliminate investment in highly speculative projects that lack a strong business case. On SG&A, we need to drive greater efficiency. We will execute on our in-flight synergy and efficiency programs while finding new ways to better leverage our significant scale. Ultimately, our goal is to increase cash generation. Consistent growth, gross margin improvement, and better opex efficiency will help. However, we also need to improve our return on capital expenditures. We will align our capex investments with our overall portfolio strategy and focus on our areas of greatest growth and profitability. With better operational discipline, I believe we have opportunity to significantly increase our free cash flow and accelerate our pace of debt reduction and deleveraging. Our near-term capital allocation priorities are: first, to fund our organic growth engines; and second, to deleverage our balance sheet as quickly as possible. I believe the combination of an enhanced culture along with strategic portfolio optimization and operational execution improvements will help put us on a path of sustained market-leading growth, enhanced profitability and cash generation, and a strong balance sheet. As I mentioned earlier, I look forward to sharing more details about our plans and specific business metrics and targets at an upcoming investor and analyst meeting. One of my near-term priorities is to fill the CFO role. We're considering both internal and external candidates and making good progress on the search. Once the new CFO is in place, we'll set a specific date for our investor and analyst meeting. I'll now switch gears and provide some brief comments about our fiscal fourth quarter results. Revenue in Q4 increased by approximately 9%, both sequentially and year over year, driven primarily by strong growth in our datacom transceivers for AI data-centric deployments. Non-GAAP gross margin expanded by 145 basis points sequentially due primarily to recovery from the transitory issues that impacted our Q3. Non-GAAP EPS grew by 16% sequentially and by almost 50% year over year as a result of top-line growth and margin expansion. Let me summarize what we're seeing in our business by end market vertical. In the communications end market, Q4 revenue increased by 10% sequentially and by 19% year over year. We experienced strong growth in datacom, where Q4 revenue grew 16% sequentially and 58% year over year due primarily to AI and data center demand. We saw strong sequential growth in our 800G datacom transceiver revenue in Q4 and are also seeing increasing orders in backlog for the current and future quarters. We also delivered initial samples of our 1.6T datacom transceivers, which we expect to begin ramping in calendar 2025. Our new datacom optical switch platform is progressing well and is generating significant customer engagement, and we expect to enter customer trials in calendar 2025. Growth in datacom was partially offset by a 6% sequential and 38% year-over-year decline in telecom revenue due to end market weakness. Although we expect the telecom end market to remain weak in the near term, we also expect to ramp our new 100-gig ZR and 400-gig ZR+ Coherent transceivers over the course of our fiscal year. Overall, we expect the communications market to be a strong long-term growth factor for the company. In the industrial end market, revenue increased 2% sequentially and 5% year over year. Our display capital equipment vertical saw a growing demand in Q4 for excimer laser annealing and related services driven by expanded OLED adoption in the smartphones and the inception of OLED adoption into laptop and tablet computers, with the latter essentially doubling long-term demand for OLED screen area production. In our other industrial verticals, we saw relatively stable revenue in aggregate. While we expect overall industrial end market demand to be soft in the near term, we believe we are well-positioned for growth over the long term, given our multiple growth opportunities in this segment, driven by new product introductions, such as our fiber laser platform for cutting and our new line being annealing systems for gen AI display fabs. In our two remaining markets, electronics and instrumentation, each of which account for less than 10% of our total revenue, we saw a sequential revenue growth. And both end markets remain long-term growth opportunities for us. In summary, about two months in, I'm even more excited about the opportunity to unlock significant shareholder value based on the depth and breadth of our innovation, the size of the market opportunities we address, and the potential to improve our operational execution. We're expecting strong growth in our datacom business over the coming quarters. And while some near-term softness persists in our telecom and industrial end markets, we expect fiscal 2025 overall to be a solid growth year for the company. I'll now turn the call over to our interim CFO, Rich Martucci. Rich Martucci -- Interim Chief Financial Officer Thank you, Jim. Overall, I'm very pleased with the continued sequential financial progress we made in the fourth quarter of fiscal 2024. We delivered a strong quarter with sequential revenue growth and healthy improvement in our gross and operating margins, which drove sequential earnings-per-share growth. Fourth quarter revenue was 1.314 billion, representing an increase of 8.7% sequentially and 9.1% versus the prior year. From a segment perspective, networking revenue increased 10% sequentially and by 16% year over year. Materials segment revenue increased 17% sequentially but decreased 3% year over year. And our laser segment revenue increased by 1% sequentially and by 7% year over year. Our fourth quarter GAAP gross margin of 32.9% improved by 255 basis points sequentially and by 437 basis points versus the prior year. Our non-GAAP fourth quarter gross margin of 37.2% improved by 135 basis points sequentially and 132 basis points versus the prior year. Sequential improvements were primarily due to our increased revenue volume and resolution of the transitory margin issues that we cited in the preceding quarter, including the recovery in our datacom AI transceiver yield and resolution of the power failure issue that depressed both of our silicon carbide revenue and gross margin. Our fourth quarter GAAP operating expenses were 339 million compared to 344 million in the prior quarter and 499 million in the year ago quarter. Fourth quarter non-GAAP operating expenses were 266 million compared to 250 million in the prior quarter and 248 million in the year-ago quarter. The sequential increase in non-GAAP operating expenses includes year-end bonus and benefit adjustments and term loan refinancing fees. Looking ahead, we plan to continue to be disciplined in managing our SG&A expenses, now ensuring that we invest in our product portfolio. Our fourth quarter restructuring expenses included in GAAP operating expenses were 14 million compared to 12 million from the preceding quarter and 119 million in the year-ago quarter. Our restructuring synergy and site consolidation plans are progressing in line with previously communicated expectation in terms of both costs and savings. Our fourth quarter 4.8% GAAP operating margin increased by 296 basis points compared to 1.8% in the prior quarter and by 1,769 basis points compared to an operating loss of 12.9% in the year ago quarter, driven by improvements in both gross margin and operating expense leverage. Our fourth quarter 17% non-GAAP operating margin increased by 191 basis points compared to 15.1% in the prior quarter and by 162 basis points compared to 15.4% in the year-ago quarter, driven by improvements in both gross margin and operating expense leverage. Our fourth quarter interest expense was 68 million compared to 73 million in the preceding quarter and 79 million in the year-ago quarter. The full year FY '24 GAAP tax rate was negative 7.5% compared to 27% in the previous year. The full year FY '24 non-GAAP tax rate was 20.7% compared to 18.2% in the previous year. Fourth quarter GAAP earnings per diluted share was negative $0.52 loss compared to a $0.29 loss in the prior quarter and $1.54 loss in the year-ago quarter. Fourth quarter non-GAAP earnings per diluted share was $0.61 compared to $0.53 in the preceding quarter and $0.41 in the year-ago quarter. We generated 162 million in cash from operations in the fourth quarter compared to 117 million in the prior quarter and 182 million in the year-ago quarter. Fourth quarter capital expenditures were 100 million versus 93 million in the preceding quarter and 93 million in the year ago quarter. Free cash flow, net of the 49 million of capital, funded by the Silicon Carbide LLC minority interest investment, was $111 million. We paid down 64 million in debt during the quarter and a total of 229 million for all of fiscal 2024. Total debt at the end of FY '24 is 4.17 billion. Unrestricted cash increased to 926 million from 899 million in the prior quarter. Restricted cash set aside for our Silicon Carbide LLC subsidiary decreased to 858 million from 889 million in the preceding quarter. In summary, moving forward, the company will continue to be laser-focused on investing in organic growth, improving operating leverage, prudent capital investment, and executing on paying down debt. Now, I will turn to our guidance for the first quarter of fiscal 2025. Revenue is expected to be between 1.27 billion and 1.35 billion. Non-GAAP gross margin is expected to be between 36% and 38%. Total operating expenses are expected to be between 260 million and 280 million on a non-GAAP basis. Tax rate for the quarter is expected to be between 20 and 23 on a non-GAAP basis. EPS is expected to be between $0.53 and $0.59 on a non-GAAP basis. Operator, that concludes our formal comments. We can now open the call for questions. Operator [Operator instructions] Our first question comes from Samik Chatterjee with JPMorgan. You may proceed. Samik Chatterjee -- Analyst Hi. Thanks for taking my question. And, Jim, I look forward to working with you. I guess, the first question that I want to do sort of throw your way is really in relation to -- you said it's early days in terms of the strategic assessment you're doing. Just maybe help us think about what are the sort of early reads you have around the portfolio from there? You talked about core and noncore. Maybe what's the criteria using -- or the lens that you're looking at from deciding core and noncore? And how much of the sort of implication is on operating the company more efficiently relative to maybe delevering the balance sheet in terms of priority of these actions? And I have a quick follow-up, if you'll allow me. Thank you. Jim Anderson -- Chief Executive Officer Yeah. Thank you, Samik. Thanks for the question. I appreciate it. Yeah, on the portfolio assessment, happy to talk a little bit more about that. I'm really pleased with the work that the team's been doing on this over the last couple of months. And think about the portfolio assessment as really work that we're doing to really build a foundation for our strategy going forward. And the ultimate goal of it is to really make sure that the company is concentrating all of its assets, whether that's opex or capex, on the areas of greatest growth and profitability over the long term. And so, that's really the ultimate goal. And the way we're approaching it is we're stepping back and looking at the entire company portfolio. We're breaking down the company and each one of its individual product line divisions. And then, we're grading each one of those on a set of strategic and financial criteria. And then, what we're doing is putting each one of the businesses into one of four categories. I'm happy to share a little bit more about that. The four categories are: what do we think are big growth engines for the company moving forward; what are the profit engines; what are the kind of longer-term bets that the company is making; and then, what are those businesses that we think are nonstrategic or underperforming. You know, when you say growth engines, those are -- obviously, those are businesses that we believe are going to drive long-term, above-market growth for us: profit engines or businesses that may be growing a little slower but are generating really healthy levels of profit; long-term bets or businesses that, you know, we're investing in today that have a longer ROI than typical for us but may have a big payoff at the end. And then the nonstrategic and underperforming businesses are really businesses that just don't fit with the overall portfolio or significantly underperforming our financial targets. And really, with that foundation built, and that work is really concluding through the course of this month, we'll be taking a set of actions to concentrate our assets, our investment on those areas of greatest growth, as I said, and then either divesting or shutting down investment in those underperforming or nonstrategic businesses. So, you know, certainly expect to hear more about that, you know, from us over the coming quarters. really happy to share more about that at the investor and analyst day that we're planning in the future. I think you also asked about delevering the balance sheet. That's certainly a big focus of ours as well. And I look at that delevering opportunity as really could be driven by two things. To the extent that we do decide to divest any businesses, the proceeds of those divestitures could be used to pay down the debt. But also, just setting aside the portfolio assessment, I talked about some of the operational execution improvements we want to drive, really focused on driving better, for instance, gross margin, better profit margins. And obviously, that yields better cash flow, which would help us accelerate debt paydown, but that, certainly, delivering the balance sheet is a key focus as well. Samik Chatterjee -- Analyst Got it, got it. And if you'll allow me for a quick follow-up, I know you talked about gross margins being sustainably above 40 is how you're thinking about the business. If you sort of look at the gross margins today, do you think the effective sort of the biggest gap between where your aspiration is and what sort of the companies delivering today, is that pricing, or is that sort of these underperforming businesses? Once that's sort of done and dusted, you sort of get back to that sustainable range. Maybe just help me in sort of what's the biggest gap you're identifying between where the company should be and where the gross margins are today. Jim Anderson -- Chief Executive Officer Yeah. It's a great question, Samik. And I would say it's really a combination of, some of it is underperforming businesses that are significantly -- that have gross margins that are significantly below our corporate average. But also, if you set that aside, pricing, I think there's both opportunities on pricing, as well as cost structure. And I mentioned this a little bit in my prepared remarks. On pricing, I do believe that there's things that we can do to improve our pricing discipline moving forward. And some of those ideas that I'm bringing with me is somewhat what I did in prior companies, where we applied some advanced, think about it, as pricing analytics, pricing strategies that really are targeted at making sure that we're competitive on price but also that we're getting fair value for the innovation that we're bringing to market. So, I think there's a pricing initiative that we've kicked off around better pricing discipline. I expect that to yield gross margin improvement. But then also cost. Look, I think there's a number of different areas across the company where we need to be focused on driving better cost structure. And I mentioned a few of those in the prepared remarks. I think product yields, we have improvement to drive there, asset utilization. And then, I think the third area that I mentioned was better make-versus-buy decisions, making sure that we're leveraging the bigger ecosystem where it makes sense to making sure that we're applying our assets to where we're driving increased differentiation or that's providing our customers some sort of significant advantage. But that's sort of the three different areas I'm thinking about in terms of gross margin improvement. Thank you. Our next question comes from Jeff Koche with Raymond James. You may proceed. Jeff Koche -- Raymond James -- Analyst Yes, thanks. This is Jeff Koche for Simon Leopold. I just wanted to hit on the gross margin a little bit deeper. Maybe you can talk about the glide path and, you know, like what kind of time frame do you see getting to that 40%-plus range? And, you know, really hitting on maybe that buy-versus-make decision, you had a competitor -- one of your competitors last night talking about the indium-phosphide lasers, you know, being booked out through the end of 2025 is in the 200 gig per lane. Maybe just update your thoughts around that for, you know, in-house production there. Thank you. Jim Anderson -- Chief Executive Officer Yeah. Thanks, Jeff. On the first part of your question, the glide path, that's definitely a topic that we want to cover at the investor day that I mentioned. So, we'll be scheduling that in the coming quarters. And what we'll do is, as part of that investor day, it's not just lay out the company's strategy but give an overall business model target for the company in a sense of what our timing is of the, you know, time frame to achieve that business model target, including the gross margins. But this will definitely be a key focus area for us moving forward. And look, gross margin improvement takes time. Whether it's pricing or cost reductions, those take work. But we're, you know, determined to drive a steady roadmap of improvement moving forward. So, you'll hear more about from us around the timing of those gross margin improvements in the quarters ahead. And then, on the second part of your question, make-versus-buy, look, I think the way to think about this is one of the benefits that Coherent has versus our competitors, and it's a benefit that our customers see every day, is there's a number of places where we're vertically integrated. And we're -- we build, for instance, not just the datacom transceiver, but we build a number of the components that go into that transceiver. And to the extent that that provides us differentiation or faster time to market or generates real value for our customers, that's fantastic and we will continue to do that. But what I want to make sure that we're careful about is not just building it internally for the sake of building it internally, but to the extent that there's external providers or an ecosystem that we can leverage that's competitive in terms of technology and cost with the internal option, I'd rather use those resources to focus those on areas that we can truly differentiate and add value for our customers. So, I just want to make sure that we're being objective moving forward on make-versus-buy and being smart about how we leverage. Our next question comes from Tom O'Malley with Barclays. You may proceed. Tom O'Malley -- Analyst Hi, Jim. Thanks for taking my question, and great to meet you. I look forward to working with you as well. But I kind of wanted to ask on the optical opportunity and the transceiver business in general. I realize, you know, you just joined the business and there were a lot of metrics kind of floating around, and I'm sure you don't want to marry yourself to any of those right away. But in your initial days at the business, clearly, you know, the big growth engine Coherent has been this 800G ramp and then in the future, potentially, the 1.6T ramp as well. But when you look at kind of, you know, what was advertised to you when you were first looking at this job and then kind of got underneath the covers and looked at that optical opportunity, could you maybe speak qualitatively about your expectations in that business? I understand that you'll have an analyst day and maybe put some more numbers on it. But, just broadly, you know, your feelings on that business and what that growth engine could look like for Coherent over the next couple of years. Yeah. Thank you, Tom, for the question. Yeah, so the short answer is it's better than I thought before I joined the company. So, I had a sense of always as, you know, Coherent as a leader in optical transceivers specifically for datacom. And obviously, you know, there's tremendous build-out happening now with AI data centers. And I have my own sense of what that sort of growth trajectory would look like before I joined the company. It's stronger than what I had thought. And we've seen just over the last, I would say, gosh, you know, four to six weeks as I've spent a lot of time with our top customers across the -- across all of our different product lines, but especially in our datacom business, I've gotten a much better sense for the opportunity that's in front of us. And I would say it's a very strong opportunity. And we continue to see demand strengthening, forecast strengthening, billings, backlog. So, yeah, we view this as a really key growth area for the company. The 800-gig ramp is very exciting for us. And then, also, I was really pleased with the team's execution on the 1.6T. They delivered samples of 1.6T just over the past few weeks, month. I think that was a key milestone for us, and we're looking forward to ramping 1.6T next year. But, yeah, I think it's an exciting growth area for the company. Now, I'll say that, but I also want to make sure that we recognize that there are other growth areas within the company as well. I know I'm excited about datacom and AI data centers. But there's a number of other good areas of growth within the company. I mentioned a few of them in my prepared remarks. So, one of the things I think is the strength of Coherent is not just the innovation that I talked about, but we do have a wide portfolio of growth opportunities across our other businesses as well. And I think that makes for a really strong long-term portfolio, a diversified portfolio of growth moving forward. So -- and, yeah, definitely, I'll share more thoughts on all of those growth engines at investor day. Tom O'Malley -- Analyst Perfect. And then, the second one is just a little more tactical in regards to kind of what we heard last night from your competitor who is talking about an improving telecom market into the September quarter. It sounded as though you were a little more cautious. Just could you describe what you're seeing from those customers just in the short term? This is less of kind of a long-term strategic question. But just a sense check on, you know, are you seeing that market recovering with legacy products? Are new product introductions kind of picking up? That's what was kind of echoed last night, newer products kind of growing at customers. Just the puts and takes on what you're seeing in the telecom market just because visibility has been pretty bad, inventory levels have been high. Where are we at in that correction kind of off the bottom? Thank you. Jim Anderson -- Chief Executive Officer Yeah. Thanks, Tom. Look, I'm going to separate it out into just purely end market comments versus I'll come back and talk about some of the new products that we have ramping here. So, just purely end market, yeah, I guess we're taking a more cautious view on the market. I don't believe that we're completely out of the woods as an industry on the telecom market. You know, significant destocking has happened in that market, and that's good, right? The telecom market had built up significant inventory that's -- I think most of that destocking is largely behind us. But I think there is -- there are still pockets of inventory that are out there. And so, our whole look on the telecom market through the next, I would say, at least six months and probably into the following six months, is a bit more of a cautious outlook. Now, it could be that we're wrong and it ends up being better, or stronger than that, but we're taking a more cautious view on that. Now, that's all end market comments. Now, set that aside, I'll switch over to Coherent specifically. We -- against that market backdrop, we do have a number products that are ramping that are pretty exciting. The number -- and I mentioned in the prepared remarks, both the 100-gig and then the 400-gig ZR and ZR+ that will ramp throughout the course of this year. And obviously, since you're ramping over the course of this year, they have a bigger impact in the second half of our fiscal year. So, I think that, you know, we do have some growth tailwinds behind us in terms of our own products. But I think in terms of the market, we're expecting that to be -- to continue to be soft. Thank you. Our next question comes from Meta Marshall with Morgan Stanley. You may proceed. Meta Marshall -- Analyst Great. Thanks. I'll start with a question non-AI just to focus on some other areas of the business. The material business looked to have kind of better-than-expected performance throughout the quarter. Was some of that just improvement on silicon carbide yields that had kind of encumbered last quarter? Were there any other markets worth calling out that improved there? And then maybe just as a second question. On the datacom side, I know the focus is on 400-gig and up. But just any recovery you guys are seeing in kind of demand for the non-AI speed transceivers? Thanks. Jim Anderson -- Chief Executive Officer Thank you. And on the first part of your questions on the materials business, yeah, we did see some pickup in the materials business from Q3 to Q4. And you're right, actually, a good chunk of that was the production issues that we had on silicon carbide in Q3. We were able to catch up on those issues -- or catch up on that demand in Q4. And so, we had a little bit of depressed demand or depressed shipments in Q3. We were able to catch up on that in Q4. So, some of that sequential gain is, yes, certainly due to that silicon carbide catch-up. And then on the second part of your question, I called that it was on datacom, but I didn't quite hear the end of the question. Would you mind repeating the end of that datacom question? Meta Marshall -- Analyst Yes, just demand for kind of the non-AI speeds or the kind of sub 400-gig. I know that had been an area of more depressed demand, but if you're seeing any changes there. Jim Anderson -- Chief Executive Officer Got it, OK. The sub 400-gig. We're expecting that to be relatively stable, so we don't expect to see any huge growth from that or a huge decline. We're modeling that moving forward as relatively stable. Thank you. Our next question comes from Karl Ackerman with BNP Paribas. You may proceed. Karl Ackerman -- Analyst Yes, thank you. Jim, you spoke about the need to have less transactional revenue and the ability to improve pricing going forward. Given your innovation and leadership in high-speed optical transceivers, could you discuss the breadth of hyperscale engagements within datacom and whether this customer demand is resulting in extended volume commitments and order visibility provided to you so that you may enable those customers to meet their data center buildouts? Thank you. Jim Anderson -- Chief Executive Officer Yeah. Thanks, Karl. So, definitely, we're seeing -- you know, we have a very good breadth of customers. You know, if you look at 800 gig, our breadth of customers continues to grow. It's grown on a quarter-over-quarter basis in terms of those customers that are ramping 800 gig and are in full production. And so the breadth of customers, we feel really good about and continues to grow. And then, on the second part of your question around extending visibility, yes, our visibility or the other way to look at it is our order book has continued to improve over the last 90 days. Especially over, I would say, the line of six to eight weeks, it certainly improved. And that's given us visibility not just through the end of this calendar year, but in the first half of next calendar year, so really through the rest of our fiscal year here. And that order book continues to strengthen for the datacom business, which we view as very positive. And so, we're definitely focused on making sure we meet that increasing demand. Thank you. Our next question comes from Vivek Arya with Bank of America. You may proceed. Vivek Arya -- Analyst Thanks for taking my question. Jim, you mentioned the strong order book for your optical transceivers extending several quarters. I'm curious, are you seeing any impact at all, positive or negative, because of changes in NVIDIA's product, you know, schedule? Or does that have no impact? And then, just given the strength in the order book, how does the pricing and gross margin shape up when you look at the next several quarters? Do you think it can improve from here? Or do you think that margins in this business may still be, you know, dilutive to the overall business? Jim Anderson -- Chief Executive Officer Yeah. Thanks, Vivek. On the first part, on the part that was about the order book, yeah, we continue -- as I said, we continue to see the order book strengthen. I think you asked about a particular customer. I can't comment on that particular customer, or really any particular customer. But I can say that, you know, in aggregate, we're continuing to see, again, the order book strengthen and demand growing, which is good. On the pricing and gross margin, you know, in general, what we would usually see in the transceiver market is the newer speed grades like 800 and then, you know, soon to be 1.6T generally carry higher gross margins than the older speed grades, right? The older speed grades are usually become commoditized over time. And so, to the extent that we're ramping the newer speed grades, that's certainly generally a tailwind for us. But a lot of my comments earlier on gross margin are really focused at the aggregate company level, not just in datacom but at an aggregate company level. I believe that there's opportunity for us to improve our pricing discipline, to have a better optimized pricing strategy across the company, across all of our product lines. And then, also, you know, there's a number of cost structure improvements that I think the company has opportunity to improve, not just in datacom, but across some of our other product line as well. Vivek Arya -- Analyst And for my follow-up, so you're guiding the current quarter roughly kind of flat sequentially. What are the puts and takes from the different segments? And I know you're not guiding to December, but should we assume that those same end market trends follow in December also? Or do you think that, you know, there is the prospect for some sequential improvement as we look at December just from a broad end market perspective? Thank you. Jim Anderson -- Chief Executive Officer Yeah, Vivek, on the September quarter, the one that we currently guided, yeah, we guided roughly flat sequentially. We would expect the datacom business -- as we're just talking about, we would expect the datacom business to be sequentially up, but some of our other businesses tied to the telecom and the industrial markets to be sequentially either flat or sequentially down. And so, that offsets some of the datacom growth. And if you look at the midpoint of our guide, obviously, our guide is a range, right? And that's what we're seeing for the current quarter that we're in. For the December quarter, I'll probably save those comments until the next earnings call. We'll give more insight into what we're seeing in the December quarter and maybe into the beginning of the next calendar year as well. Thank you. Our next question comes from Atif Malik with Citi. You may proceed. Papa Sylla -- Citi -- Analyst Thank you. This is Papa Sylla for Atif. Thank you for taking my question. I guess my first question was around the industrials business. I guess, just looking at it sequentially, we saw a little bit of a deceleration versus last quarter. So, we were just wondering if you can touch a little bit on the percentage there or, perhaps, just touch on, A, at that last quarter, kind of some difficulties such as precision manufacturing, EUV, semi-cap back-end, and how they are doing this quarter. Jim Anderson -- Chief Executive Officer Yeah, thanks for the question. Yes, on kind of the broad base of industrials in aggregate, we did see a little bit of sequential improvement in aggregate in the industrials from Q3 to Q4. But moving into the current quarter, as I just mentioned on a prior question, we're assuming that both the telecom, as well as the industrial space are. They're kind of flat sequentially, or there are some segments that are sequentially down. And that offsets -- we're assuming that offsets some of the datacom sequential growth that we're expecting in the current quarter. Papa Sylla -- Citi -- Analyst Got it. And for my quick follow-up, I wanted to touch a little bit on the AI front, on the laser front of things for 1.6T. So, I guess, our understanding is that from an industrywide perspective, all three technologies, so VCSEL, EML, SiPhL, have their own pockets of demand. So, we were just wondering, from your end, can you touch on engagement across those three and kind of what those mix look like currently, and then what they might look like maybe two, three quarters down the line? Jim Anderson -- Chief Executive Officer Yeah. I think one of the great things about Coherent is, look, we have a really wide portfolio of technology. And so, you know, we're -- we develop our own VCSELs, we manufacture our own VCSELs. We do the same in EML. Indium phosphide, we develop and manufacture in-house. So, we both develop and manufacture a number of those lasers in-house. But then, where it makes sense, we also source some of those lasers externally as well, right? And so for 1.6T, you know, we'll -- or any technology beyond that as well, we'll always make best use whatever we think is the best technology to bring the most advanced, most innovative product to market for our customers. Whatever gives us the biggest technical advantage versus our competition and the biggest differentiation for our customers, we'll always select that technology. Whether it's developed in-house, or whether we source it externally, we'll select the best technology that benefits our customers. So, I think -- I probably won't give any prognostication on 1.6T and how much of it will be VCSEL versus other technologies. But, you know, we'll probably share more about that as we get closer to 1.6T, you know, production ramp. Thank you. Our next question comes from Ruben Roy with Stifel. You may proceed. Ruben Roy -- Analyst Thank you, and hi, Jim. I wanted to -- I know you had a lot of questions on strategy, and I appreciate the commentary high level, Jim. But I wanted to just maybe talk about pricing optimization one more time. And you talked about some successful turnarounds that you've had, and I've watched the last one, which was tremendous and in short order. And I'm just wondering if you could comment a little bit, given that, you know, the breadth of products, end markets, customers, etc., is a lot different, I think, at Coherent than, you know, at the last turnaround that you were working on. So, just, you know, how are you thinking about timing? And kind of is this a multiyear strategy from an optimization strategy to get some of those margins that you want to get to? Or, you know, any kind of high-level commentary on that would be helpful. Jim Anderson -- Chief Executive Officer Yeah, thanks, Ruben. Look, you know, businesses -- Coherent is a different business. You know, every business has its own dynamics, and Coherent itself has a wide range of different businesses within its portfolio. So, it's a little bit different business by business. But, you know, as I spend time with both our business leaders, our general managers, our sales team, as well as time with our customers, I do think there's opportunity for us to be better in terms of our pricing discipline and how we price our products in the market. And again, finding and striking that right balance between being competitive in the market, but making sure we get paid for the innovation that we drive. And I think that there are some approaches, strategies, tactics, and analytics that I've used in my past across multiple different businesses that I think are universal and can be applied to some of the businesses within Coherent as well. And so, you know, that's certainly what we're working on. Now, we've kicked off already sort of bigger pricing optimization strategy work. We're driving that across the company. Now, that does take time. It doesn't -- it's not something that turns on like a light switch. Some of those initiatives take longer time to achieve, some of those are near term, some can provide short-term benefit. But there's a wide range of initiatives that we're beginning to drive, and those yield benefit over time. And as I mentioned earlier, when we get to the investor day and we give our longer-term business model targets, including gross margin, we'll give some sense about what we think the progression toward those business model targets, including gross margin, will be over time. Ruben Roy -- Analyst Very helpful. Thanks, Jim. I guess just a quick follow-up. It sounds like you're saying that you started some of these actions. Are there any other strategic actions that you've implanted, you know, currently? Or is most of it on the come? Jim Anderson -- Chief Executive Officer Definitely, in the category gross margin expansion, we've initiated a number of, as I mentioned, pricing optimization strategies. But we're also working on product cost. So, we also kicked off a number of focused product cost activities. And that's something we're driving with sort of equal focus is how do we drive better product cost structure within the company. And, you know, given that we're a manufacturing company, there's a lot more -- there's a lot of knobs for us to turn in terms of driving better cost structure. Whether it's better asset utilization, higher yields for our products, etc., there's a number of different places we're focused to drive better product cost structure moving forward. Our next question comes from Jack Egan with Charter Equity Research. You may proceed. Jack Egan -- Charter Equity Research -- Analyst Hi, guys. Thanks for taking the questions. I just had one other follow-up. So, last quarter, you mentioned a 30% increase in bookings for the laser segment, but it's still -- you know, revenue-wise, it's still been kind of hovering in the 350 million, 355 million range for the past three quarters. So, I was just curious, is that due to those various positives and negatives in the industrial and telecom sectors or markets kind of offsetting each other? Or is there anything else at play there? Jim Anderson -- Chief Executive Officer Yes. Thanks, Jack. It's actually due more to the time from when a booking is made in lasers to when it's shipped. Those are generally longer lead times, and so it has more to do with just the natural lead time of that business. And there's latency from when those bookings are placed until when the product is actually shipped. So, it's more about just the natural lead times of that business. Jack Egan -- Charter Equity Research -- Analyst Got it. OK. And then, with the silicon carbide capex kind of out of the equation now, I was wondering, where are your capex priorities now other than expanding 800 gig? Jim Anderson -- Chief Executive Officer Yeah. I would say the number one priority in terms of capex and setting aside silicon carbide is making sure that we have the capacity in place to support the growing demand that we're seeing in the datacom business. And so, you know, right now, 800-gig capacity, but we're also building out 1.6T capacity as well and making sure we're ready for that ramp. So, yeah, I would say that's our priority one right now in terms of capital expense. Thank you. Our next question comes from Ananda Baruah with Loop Capital. You may proceed. Ananda Baruah -- Analyst Hi, yes, thanks, guys. Good afternoon. Thanks for taking the question. Yes, Jim, great to meet you and look forward to working with you. Just one for me. Do you have any thoughts, Jim, on -- this is a transceiver question. Do you have any thoughts, early thoughts on potential for share gains -- kind of share gain percent over the next couple of years? And have you guys -- have you yet begun to see the big data center customers begin to sort of index more toward U.S.-based transceiver producers? Thanks. Jim Anderson -- Chief Executive Officer Yeah. Thanks, Ananda. That's a great question. As I have spent time with some of those large data center CSP customers, I think there's clearly opportunity for us to gain share at those customers due to a number of different dynamics. And look, when you look at Coherent, not only are we a technology leader in transceivers, and I think a technology leader that you can rely on over the course of multiple generations, historically moving forward, but we have an incredibly resilient supply chain. And I would say the -- from supply chain resiliency, we are the most resilient supply chain in the industry. And so, I think our big data center, datacom CSP customers are -- if they haven't recognized that already, they're definitely having more appreciation for that. So, I think the combination of our technology and supply chain resiliency gives us the opportunity to win significantly more share of wallet with those big customers over the coming quarters and years. Thank you. I would now like to turn the call back over to Jim Anderson for any closing remarks. Jim Anderson -- Chief Executive Officer Thank you, operator, and thanks again for everybody joining us on our call today. So, just to wrap it up, I'm super excited about the opportunity ahead of us at Coherent. And I want to once again thank all of my new Coherent teammates for all their hard work, dedication, and all the innovation they drive every day. While we have many strengths, we also have areas of opportunity for improvement to translate our incredible innovation engine and growing market opportunity into outstanding shareholder value creation moving forward. Thanks again for your support and look forward to updating you on our progress moving forward. Operator, that concludes our call. Operator Thank you. This concludes the conference. Thank you for your participation. [Operator signoff]

Earnings call: Lumentum Holdings eyes $500M quarterly revenue by end of 2025 By Investing.com

Lumentum Holdings Inc . (NASDAQ:LITE), a prominent player in the optical and photonic products sector, has reported fourth-quarter fiscal year 2024 earnings that surpassed the midpoint of their guidance for revenue and earnings per share (EPS). The company has seen a substantial rise in orders for Datacom chips and is actively expanding its customer base in the data center market. Despite facing challenges in the cloud and networking segment and the industrial tech segment due to weak end market demand, Lumentum remains confident in its growth prospects. The company is focusing on scaling up its production capacity and leveraging breakthrough technologies to support data center compute scaling. With a target to grow quarterly revenue to $500 million by the end of 2025, Lumentum is also investing in new cloud and AI opportunities to significantly elevate its cloud business. Lumentum Holdings is poised to capitalize on the burgeoning demand for optical products in the data center and cloud computing sectors. With strategic investments and a clear focus on technology innovation, the company is well on its way to achieving its ambitious revenue targets in the coming years. Lumentum Holdings Inc. (LITE) has recently been in the spotlight for its strategic moves in the optical and photonic products sector, particularly with a focus on expanding its data center market presence. To provide a deeper financial perspective, let's delve into some key metrics and insights from InvestingPro. InvestingPro Data highlights that Lumentum's market capitalization stands at $3.08 billion, reflecting the company's substantial size in its industry. Despite a challenging year with a revenue decline of 21.81% in the last twelve months as of Q3 2024, Lumentum's gross profit margin remains relatively strong at 29.14%. This suggests that while the company is facing top-line pressure, it is maintaining a degree of profitability in its core operations. An InvestingPro Tip worth noting is that management has been aggressively buying back shares, which could signal confidence in the company's future prospects and a commitment to returning value to shareholders. This is particularly interesting as the company does not pay dividends, indicating a strategic choice to reinvest in the business and buy back stock instead. Another critical InvestingPro Tip is that analysts predict the company will be profitable this year, which aligns with Lumentum's positive outlook on achieving significant growth in 2026 and 2027, primarily in the cloud business. This forward-looking sentiment is essential for investors considering the company's future revenue and earnings potential. For those seeking more detailed analysis, InvestingPro offers additional tips on Lumentum Holdings Inc., which can be found at https://www.investing.com/pro/LITE. These insights could provide investors with a more comprehensive understanding of the company's financial health and future trajectory. Operator: Good day everyone and welcome to the Lumentum Holdings Fourth Quarter Fiscal Year 2024 Earnings Call. All participants will be in a listen only mode. Please also note today's event is being recorded for replay purposes. [Operator Instructions]. At this time, I'd like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead. Kathy Ta: Thank you and welcome to Lumentum's fiscal fourth quarter and full year 2024 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, Executive Vice President and 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 strategies, trends and expectations for our products and technologies, including demand, our customers, our end markets and market opportunities, our expectations and beliefs regarding recent acquisitions, including cloud light, macroeconomic trends and our expected financial and operating 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, particularly the risk factors described in our most recent 10-Q and in our 10-K that will be filed soon. 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 fourth quarter and fiscal 2024 results and accompanying supplemental slides are available on our website at www.Lumentum.com under the investors section. With that, I'll turn the call over to Alan. Alan Lowe: Thank you, Kathy, and good afternoon, everyone. We exceeded the midpoint of our guidance for both revenue and EPS for the fourth quarter. We booked record orders for Datacom chips used in data center applications and saw emerging positive trends in the broader networking market. We made significant progress in executing our strategy to grow our cloud business and broaden our customer base, including a new and substantial cloud and AI module opportunities. Lumentum is emerging as a leading provider of photonics solutions for cloud data center operators and AI infrastructure providers. Our comprehensive photonics portfolio built on differentiated in-house technology and proven volume manufacturing delivers innovative solutions that address the critical challenges of connectivity bottlenecks and power consumption. To achieve our cloud and AI goals, we are implementing a three-pronged strategy. First, we are focused on expanding our customer base to include multiple data center operators and AI infrastructure providers as they migrate to higher speeds. Second, we are scaling up capacity for component and module production at established Lumentum facilities outside of China. And third, we are executing on our differentiated technology roadmaps to support data center compute scaling across future generations of optical interconnect technologies and data center architectures. I would like to elaborate on our progress in each of these areas. Our first priority is to expand our customer base within the data center market by leveraging our advanced high-speed optical transceiver capabilities and proven laser transmitter components. As the industry transitions to higher speeds, our differentiated technology becomes increasingly valuable to these customers. Within data centers, the shift to 200G lane speeds, particularly in 1.6T optical transceivers, plays to our strengths. The growing importance of single-mode optics and in the Indium Phosphide lasers, driven by the limitations in multi-mode optics, aligns well with our market and technology leadership positions. Our industry-leading 100G EML transmitter components have established a strong reputation for performance, quality, and reliability and are currently shipping in record volumes. Our proven capabilities position us favorably as the industry adopts 200G per lane technologies. Our 200G EMLs are being qualified by multiple customers for integration into their transceivers and subsequent deployment in a wide range of cloud and AI infrastructures. We anticipate being a key laser supplier in initial 1.6T transceiver deployments as we ramp up 200G EMLs later this fiscal year. In Q4, we achieved record volume shipments of EMLs and secured substantial bookings, which we will be working to fulfill throughout fiscal 2025. This includes initial orders for 200G EMLs from leading AI customers. Based on this momentum, we foresee continued strong EML shipments throughout fiscal 2025 and into fiscal 2026. Additionally, we are supplying differentiated laser sources for silicon-metonics-based transceivers, further broadening our content opportunity within the data center market. We've also made significant progress on our newest 800G and initial 1.6T transceiver product developments. We are deeply engaged with multiple customers and we have received favorable feedback after providing product samples to these customers. We have secured a major award with one new customer and are actively working to finalize additional awards with multiple customers. The second prong of our cloud strategy involves expanding manufacturing capacity for both optical transceivers and optical components at established Lumentum facilities outside of China. This expansion is critical to supporting our cloud customers growing AI and cloud workloads while ensuring supply chain security. As mentioned earlier, Indium Phosphide lasers are essential for scaling data center infrastructure. Due to overwhelming demand for our critical technology, our Indium Phosphide capacity is fully subscribed to at least the end of calendar 2025. And therefore, we can only meet this demand by growing capacity. In the current fiscal first quarter, we have already invested $43 million in our Indium Phosphide wafer fab facilities and we expect to continue to invest in our Indium Phosphide capacity over the next several quarters to keep up with the growing demand of these enabling laser technologies. Although the industry faces a broad shortage of Indium Phosphide lasers, over time, our capacity additions will help mitigate these constraints. However, we anticipate that our production output will remain on allocation through at least the end of calendar 2025. Our significant capacity expansion for optical transceivers in our facility in Thailand is progressing as planned with the first production line scheduled to start operations this quarter. Based on current engagements with multiple hyperscale cloud operators and AI infrastructure customers, we expect to complete additional phases of our manufacturing capacity expansion over the next 18 months to keep up with the expected strong demand. Finally, the third prong of our cloud strategy focuses on delivering differentiated technologies to address the evolving challenges of data center scaling, encompassing both increased data link capacity and enhanced energy efficiency. We are actively collaborating with leading edge customers to deliver breakthrough technologies that will support multi-year cloud and AI infrastructure roadmaps. Optical switching, a critical component of future cloud and AI networking architectures presents a significant opportunity for us at Lumentum. Our optical switch products in development offer advantages in power efficiency, increased bandwidth, reduced latency, flexibility, and agility. We have shipped evaluation units to multiple customers and the initial feedback has been overwhelmingly positive. Another key technology area is enabling the transition to high density, low power optical links for future generations. Our ultra high power laser technologies have attracted considerable interest from cloud and AI infrastructure customers developing high density optical interconnects. Our heritage of delivering high performance, high reliability lasers in high volume production environment position us favorably for this emerging market. Lastly, we are focused on enabling the shift to speeds beyond 200G per lane, such as the 400G per lane generation. Our advanced Indium phosphide and photonic integrated circuit capabilities honed through years of experience in data center and high performance telecom applications are essential to meeting future demands. While the deployment of these products and technologies is a few years away, these are long-term developments requiring early investment and close customer collaboration. We are actively engaged with customers and their R&D teams and together we are shaping the future of optical technology. Now let me move to additional fiscal fourth quarter revenue and product highlights. As expected, our cloud and networking segment had a challenging quarter with revenue declining 19% sequentially and 11% year-over-year. While overall demand for telecom products was soft in the quarter as expected, we are encouraged by several positive trends emerging within this part of our business. We saw an increase in shipments for narrow line with tunable lasers used in 400 ZR modules for data center interconnect applications. With our design wins, we anticipate maintaining a leading market share position in laser components for ZR and ZR plus applications this fiscal year and in the coming years. While there's still lingering industry inventory challenges, we are encouraged by recent indications of improvement in the traditional networking market. Recent weeks have brought increased customer demand to our newest leading edge coherent transmission and next generation transport products along with continued signs of customer inventory normalization. Consistent with this, advanced ROADM demand is showing promise with growing demand for integrated C+L band solutions and high port count ROADM products. In leading edge coherent transmission, we are seeing excellent demand trends for 130 gigabyte coherent products and encouraging early traction with our 200 gigabyte products. This is driven by customer demand for increased capacity and spectral efficiency fueled by continued bandwidth demand growth. Our broad set of design wins and differentiated technology and manufacturing capabilities position us for continued leadership in these important products in the coming years. We expect our cloud and networking business to show sequential improvement in fiscal Q1. Now let me move to our industrial tech segment. Our industrial tech segment revenue increased 2% sequentially, but declined 36% year-over-year as expected. Like others in this space, we continue to face challenges due to the weak end market demand and high levels of customer inventory. In industrial tech, we continue to focus on developing innovative industrial laser products that address rapidly growing applications. The growing demand for higher precision is driving a transition from picosecond to femtosecond lasers. These lasers with their extremely short pulses offer more precise material processing without significant heat damage, opening new possibilities in sensitive applications such as semiconductors, displays, and advanced chip packaging. These market areas are in turn driven by the growth of AI. The immense computational demands of AI require significant advancements in semiconductors and innovative packaging technologies to support high performance computing. We're actively collaborating with leading semiconductor equipment manufacturers to develop ultra fast lasers for interposer and advanced semiconductor packaging. In the fourth quarter, we also successfully delivered both high and low power FemtoBlade demo units for advanced display applications. Looking to fiscal Q1, we expect Industrial Tech to be down sequentially due to continued weak end market demand and ongoing customer inventory adjustments with a modest seasonal increase in 3D sensing revenue. To summarize, we have made significant progress in executing our strategy to grow our cloud business. We booked record orders for Datacom chips and are investing in additional production capacity to help us meet customer demand. We have made excellent progress with multiple new high speed optical transceiver customer engagements, including securing a major transceiver award with one new customer. We are actively working to secure additional awards from other new customers. Our robust pipeline of cloud customer engagements and improving trends in the traditional networking market reinforce our confidence in the target we highlighted on our last earnings call. This is to grow quarterly revenue to $500 million by the end of calendar 2025. We foresee continued significant growth into 2026 and 2027. We are executing on new cloud and AI opportunities that we expect will elevate our cloud business to a multi-billion dollar annual run rate in the coming years. Before turning the call over to Wajid, I want to express my sincere gratitude to all our employees and customers worldwide for their unwavering focus, dedication, and collaborative spirit. With that, Wajid. Wajid Ali: Thank you, Alan. Fourth quarter revenue of $308.3 million and non-GAAP EPS of $0.06 were above the midpoint of our guidance ranges. GAAP gross margin for the fourth quarter was 16.6%, GAAP operating loss was 43.3%, and GAAP diluted net loss per share was $3.72 with a large portion of the GAAP net loss primarily driven by restructuring charges, amortization of acquired intangibles, and evaluation allowance related to certain tax assets. Due to the historical GAAP losses of the company and a backward looking calculation to determine the requirement for valuation allowances on deferred tax assets, the company determined the need to record a valuation allowance of $139.8 million to its U.S. deferred tax assets on the company's balance sheet as of the most recent fiscal period. Given the business opportunities ahead and the growth expectations Alan highlighted, we believe in the future, we will be in a position to release this allowance and use the related asset. To increase investments in programs that accelerate our exposure to significant new AI opportunities, we decided to stop our in-house development of certain communications ASICs, including coherent DSPs and RFICs. We believe we can meet customer needs using ASICs from third-party partners while reallocating significant R&D spending towards new cloud and AI customer programs. As a result of this decision, in Q4 we recorded $35.8 million of restructuring and related charges, including a $29.1 million write-off of in-process research and development in tangible assets. Turning to our non-GAAP results, fourth quarter non-GAAP gross margin was 32.2%, which was down sequentially and year-on-year on lower revenue. In future quarters, we anticipate company gross margin will sequentially increase as manufacturing utilization improves due to an improved telecom outlook, as well as an increase in Datacom laser shipments. Fourth quarter non-GAAP operating loss was 0.3%, which was down sequentially and year-on-year on lower revenue. Fourth quarter non-GAAP operating loss was $0.8 million and adjusted EBITDA was $25.9 million. Fourth quarter non-GAAP operating expenses totaled $100 million or 32.4% of revenue. A decrease of $4.3 million from the third quarter and down $2.4 million from the year ago quarter. The lower operating expense in Q4 was achieved despite increased R&D spending on our Datacom transceivers given the strong customer traction that Alan spoke of earlier. Q4 non-GAAP SG&A expense was $35.1 million, non-GAAP R&D expense was $64.9 million. Interest and other income was $5.4 million on a non-GAAP basis driven by interest earned on our cash and investments. Fourth quarter non-GAAP net income was $4 million and non-GAAP diluted net income per share was $0.06. Our fully diluted share account for the fourth quarter was 68.3 million shares on a non-GAAP basis. Turning to the full year results, fiscal '24 net revenue was $1.36 billion, which was down 23.1% from fiscal '23. GAAP gross margin for fiscal '24 was 18.5%. GAAP operating loss was 31.9% and GAAP diluted net loss per share was $8.12. Full year fiscal '24 non-GAAP gross margin was 33%, which was down relative to fiscal '23 due to lower overall demand and factory utilization. Fiscal year '24 non-GAAP operating margin was 2.8% down from fiscal '23 due to lower gross margin. Fiscal '24 non-GAAP operating income was $37.8 million and adjusted EBITDA was $140.5 million. For fiscal '24, our fully diluted share account on a non-GAAP basis was 67.7 million shares. Non-GAAP net income was $68.7 million and non-GAAP diluted net income per share was $1.01. Turning to the balance sheet, during the fourth quarter, our cash and short-term investments increased by $16 million to $887 million, this increase was primarily due to improved working capital performance as we achieved a $22 million sequential reduction and momentum's overall inventory levels. In Q4, we invested $24 million in CapEx, primarily driven by high-speed transceiver capacity additions at our Thailand manufacturing site. As we move through fiscal '25 and beyond, we're focused on expanding our high-speed transceiver capabilities and capacity in Thailand to support 800G, 1.6T, and eventually 3.2T transceivers. We anticipate an elevated level of capital expenditures in fiscal '25 to proactively meet the anticipated surge in demand for high-speed transceivers and Datacom components. Turning to segment details, fourth quarter cloud and networking segment revenue at $254.7 million decreased 18.8% sequentially and decreased 11.1% year-on-year. Cloud and networking segment profit at 10.1% decreased sequentially and decreased year-on-year. Our fourth quarter industrial tech segment revenue at $53.6 million was up 1.7% sequentially and down 36.4% year-on-year. Fourth quarter industrial tech segment loss of 0.4% improved sequentially. Year-on-year segment profit declined. Now let me move to our guidance for the first quarter of fiscal '25, which is on a non-GAAP basis and is based on our assumptions as of today. We expect net revenue for the first quarter of fiscal '25 to be in the range of $315 million to $335 million. At the midpoint, we expect to show year-over-year revenue growth when compared to Q1 of fiscal 2024. This Q1 revenue forecast includes the following assumptions. Cloud and networking to be up sequentially, primarily driven by an improvement in telecom networking demand and Industrial Tech to be approximately flat sequentially with decreased industrial laser shipments offset by a modest uptick in 3D sensing due to typical seasonality. Based on this, we project first quarter non-GAAP operating margin to be in the range of 0% to 3% and diluted net income per share to be in the range of $0.07 to $0.17. Our non-GAAP EPS guidance for the first quarter is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume an approximate share count of 68.8 million shares. Please note this guidance includes certain expenses that were previously excluded from our non-GAAP presentation. Mainly those related to abnormal excess capacity that in Q4 and prior periods were excluded from our non-GAAP results. This change in presentation reduces our Q1 EPS guidance by approximately $0.05 compared with our prior presentation methodology. For clarity, our Q1 non-GAAP EPS guidance of $0.07 to $0.17 includes the impact of the new presentation. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy Ta: Thank you, Wajid. To allow everyone an opportunity to ask questions, please keep to one question and one follow-up. Now let's begin the Q&A session. Operator: We will now begin the Q&A session. [Operator Instructions]. The first question is from the line of Samik Chatterjee with JP Morgan. Your line is now open. Samik Chatterjee: Thanks for taking my questions, and I'll ask both of my questions at the same goal. So I guess the first one was in relation to the new customer announcement that you highlighted in your prepared remarks. Can you give us a bit more color in relation to sort of the type of customer, whether it's a web scaler, or how should we think about the type of the customer, and how are you thinking about the magnitude of the opportunity relative to the run rate of your module business at this time? And for my follow-up, just in terms of the Q4 to Q1, I think you mentioned sequential growth in telecom. Didn't really hear you talk about any sort of guidance on the Datacom side. So if you can just help us how to think about Datacom between Q4 and Q1, and also if it's not going sequentially, then what is driving the sequential decline in revenue in the Datacom business between Q4 and Q1? Thank you. Alan Lowe: Yes, thanks, Samik. I'd say we don't want to comment too much on what type of customer, but you can imagine, we use the word major and big, so it's big. I would say that run rate-wise, I think it comes down to how well we execute. And so, we will earn as much business as we earn from our customer, given our execution, and so, so far we're off to a good start. And as I said in the prepared remarks, our operation in Thailand, first production line is ready this quarter. And so, we'll be shipping first units out of Thailand this quarter with qualifications happening and ramp beginning early part of calendar 2025. So consistent with what we've said in the past. So as far as comparison to run rate stuff, that's really going to be very variable given we have to earn it and we have to execute well with good quality and performance and delivery. So I hesitate to comment more on that, but certainly the customer that we have said, we've gotten the award on certainly consumes a lot and certainly could be as big, if not bigger. On the second question, sorry, go ahead. Samik Chatterjee: It was on the sequential brand in Datacom? Alan Lowe: Yes, we're not going to break out Datacom versus Telecom. But what we did say was that we, we've seen some improvements in Telecom. So you can expect that that's going to grow quarter-on-quarter. And as we said in the last earnings call, we're in a product transition. And so the Q4, Q1 numbers are depressed. And so that's coming to fruition and we expect that'll pickup in our fiscal second quarter. Operator: Thank you. The next question is from Alex Henderson with Needham and Company. Your line is now open. Alex Henderson: Thanks. So I was hoping you could talk about the capacity and ramp timing on both the chips business as well as the transceiver business at Cloud Light. My understanding is that coming out of the June quarter, you should be fairly flattish in that business in terms of available capacity. And that new capacity should be coming on stream in the December quarter and ramping starting kind of in the first half of calendar year '25. Can you give us any sense of that cadence and what those plans might look like now versus what they looked like say three months ago? Alan Lowe: Yes, as we said, again, in the prepared remarks, we had record bookings for our chip business and we invested $43 million already this quarter in our fab capacity to address that. So you're right. It takes time for that to come online, but we should see incremental capacity in the first half of calendar '25, but in the short term, it's relatively fixed given the cycle time of the fab, et cetera. So I'd say on the chip business where, in fact, in all CapEx, we meet monthly and evaluate if we need to order more or less to hold off. And so that's the discipline we're trying to put into the process to make sure that we have the capacity when our customers need it and that we don't have too much idle capacity that are increasing our fixed costs with that business. On the transceiver side, as I said before, the initial line is up in Thailand this quarter, so we'll be shipping samples, but we won't really get any volume shipments out of Thailand until the first calendar quarter of '25 when the qualifications that our customers have been done and the ramp up starts there, but we'll have growing capacity through calendar '25 and that's why we said about our confidence in that achieving the $500 million per quarter by the end of 2025, calendar-wise. Kathy Ta: Thanks, Alex. Did you have a follow-up question? Alex Henderson: Yes, just to follow up on the telecom side, I'm a little surprised that the telecom component space is recovering in the September quarter, given the high level of capacities that is, or the inventories that are out at the customers, the OEMs. Can you talk a little bit about what product areas that you're seeing that in? And how fast do you think that the inventories are going to come down based on the demand you're seeing? Alan Lowe: Yes, you're right, Alex. There is still inventory in our customers and beyond. It's like we've seen strength in products that we weren't shipping a year ago or two years ago during the pandemic and so therefore there's no inventory built up of these products. So the 130 gigabyte coherent components, the 200 gigabyte coherent components are just starting today. And then our new ROADM products that we weren't shipping a year ago are seeing strong demand in our integrated C+L as well as new and differentiated high port counts, WSS. So that's kind of what we're seeing. We are seeing strength in the narrow line with tunable lasers as that has -- I think the data center interconnect business has burned off a lot of the inventory, given people are having to place data centers further apart and no longer can connect them within a campus because of the power requirements. So I'd say that's in general, what we're seeing the strengths in telecom. Operator: Thank you. The next question is from Simon Leopold with Raymond James. Your line is now open. Simon Leopold: Great. Thanks for taking the question. First one I wanted to ask is maybe if you could give us a little bit more color on the products associated with the new Datacom award. Specifically, I think these would be 800 gig and I'm guessing single mode products, but wondering whether or not there's more to it than a single product line, any color there? And as a follow-up, I also want to understand, on your telecom business in the June quarter, you had originally talked about a 30 million sequential decline. And so I'm trying to get a better understanding of did that occur? And when we think about the recovery and sequential growth in September, how close are we getting back to sort of the prior run rates before the June quarter? Thank you. Alan Lowe: Yes, thanks Simon. As I said, I don't want to comment too much about specific customers, but I would say that you're right. People aren't designing new products to deal with old technology. So this is the leading edge 800 gig single mode transceiver that we feel very confident in our ability to develop and to ship to and qualify for this customer. On the telecom question, Chris, do you want to take that one? The revenue coming down June quarter -- that happened in the June quarter for telecom. Your question was telecom, right, Simon? Simon Leopold: Yes, I wanted to understand sort of, you know, if you drop 30 and you go up five, well, that's still a big distance from where you used to be. Alan Lowe: Yes, I don't know the specifics. I would say that, as we said, the telecom and Datacom business is up mostly from the telecom strength. And so, as we said before, the transition period for our Datacom transceiver business is happening Q4 and Q1, and we expect that to grow in Q4. So most of the growth in Datacom and telecom is coming from telecom bounce back from a really a low point in the June quarter. Operator: Thank you. The next question is from George Notter with Jefferies. Your line is now open. George Notter: Hi, thanks very much. I'm just curious if you guys have an Nvidia (NASDAQ:NVDA) qualification on this 800 gig single mode transceiver? Alan Lowe: Yes, we're not going to comment on who the customer is, George. I would say that -- as I said before, most customers are working with us on products they don't already have. And so, for instance, we are designing 1.6 terabit transceivers, and the performance is quite good. We plan on sampling customers this quarter on 1.6T. So, there's a few leaders that would be consuming that. And so, you can imply what you want from that, but we're not going to speak specifically about any individual customer. George Notter: Got it, okay. And then, the transceiver customer, I guess I'm, based on something you said, I was curious about whether or not this contractor relationship is just a framework arrangement, or are there certain minimum volumes or minimum market share that you're being given by this customer? Anything you can say in terms of first source, second source, third source? I'd love any more details you can provide. Thanks. Alan Lowe: Well, this is a new product, right? And so, it comes down to our ability to execute. And so, we will earn share, or earn more share, I should say, as we execute. And I think the combination of U.S. headquartered company, manufacturing in Thailand, there's certainly fear of what happens in the next election, and the tariffs impact the ability to be competitive when shipping out of China. So, I think we've got a lot of good things going in our favor, and then it'll come down to how well we execute the ramp. And I think we're very well-positioned to capture a significant amount of share there. Meta Marshall: Great, thanks. Don't know if I'll get an answer here, but it's worth an ask. You've mentioned kind of the $500 million quarterly run rate exiting calendar '25, but just how should we think about kind of the Datacom capacity between chips and trans viewers as you would have exiting fiscal '25? And then maybe just a second question there. Has anything changed with kind of the ramp patterns of kind of your lead customer today on transceivers and their design shift as we exit kind of calendar '24? Thanks. Alan Lowe: Yes, I'd say, let me start with the chips adding capacity. We are adding capacity. We should see significant growth above market growth in our chip output over the next 12 months. And I think that's why we are, and we have more orders than that. So it's really constrained by our ability to add capacity, improve yields and then transition to 200 gig per lane chips. And so I would say that as the shift from 100 gig to 200 gig kicks in, there's a pickup in revenue per chip that we should experience as well. On the transceivers, as I said before, the monthly capital meetings where we determine how much capacity to put in place is what we're going through. And it's based on traction with customers and qualifications and awards and things like that. So we're certainly making sure we put the infrastructure in place, the facilities in place to support well over what I'm talking about for the $500 million per quarter in overall revenue. So I think it comes down to execution and our ability to win the mind share and market share for each customer we're working with. As far as the lead customer, I really don't want to talk specifics about customers, but I just reiterate what I had said before, which was product transitions happening in Q4 and Q1, and then we expect a pickup in revenue and Datacom in the December quarter. Thomas O'Malley: Hey, Alan, thanks for taking my question. I just wanted to get a clarification on the new major transceiver award with the new customer. So can you just explain to me the difference with what you kind of define as an award versus a win versus a qualification? Because I just -- and correct me if I'm wrong, I think you said that qualification would happen in Q1 and it'd be out of the Thailand facility. And I believe you said that also the Thailand facility wouldn't be ready until calendar Q1. So, if the product is getting qualified in Q1, can you talk about the timeframe that that would launch and what is an award versus what is a qualified product just because you would imagine that it's hard to have revenue from something until it's actually qualified. So am I making a mistake here in the timeframe that I'm laying out? Alan Lowe: Well, you're generally accurate. I'd say just a correction, our first production line in Thailand is operational this quarter, and we plan to build and ship product this quarter for the qualification. Now it takes them months to get the qualification work done. And so, it's not done until it's done, to your point, absolutely. Now we're staging material because we're confident in our ability to perform. We're staging capital to be able to support the volumes they're talking about. So I'd say from that perspective, it really gets down to us performing. Now, if the product doesn't work, they're not going to buy a product that doesn't work. And so you're right, we have to be qualified. We have to have quality and we have to have the ability to ramp. And we're making sure that we are controlling what we can control, which is the product quality, the design, the capacity and the materials to support this customer who's critically important for us. Thomas O'Malley: So I guess the follow-up is what would be different from an award versus the, yes, thank you, Kathy. Yes, what would be the difference between an award and what you're doing with other hyperscale or potential customers? Like, are you committing more capital to them? Because it sounds like if you're not qualified, isn't this just kind of R&D work on a potential future customer, which all other kind of development would kind of fall under? Alan Lowe: Not really. I mean, each of these customers don't want to work with eight suppliers, right? So they have to down select to the ones that they're going to spend their engineering time with and they have chosen us. And so, we're not the only person for sure, but it's the choice that they've made and they've given us something that says, we're awarded the business, that we have to earn it and we have to perform as with anything that we develop for customers. So I'd say it's different than just working with the customer. I've chosen you out of the suppliers that I can choose. And again, for multiple reasons, proven technology, proven vertical integration, U.S. headquartered, outside of China manufacturing. So there's a lot of reasons that this customer chose us. And now we just have to perform out of Thailand, which is new to us, but I have confidence in the team to be able to execute. Kathy Ta: Thank you, Tom. Operator: Thank you. The next question is from Ruben Roy with Stifel. Your line is open. Ruben Roy: Yes, thank you. Alan, I was wondering if you could comment a little bit on sort of how you're thinking about 1.6 terabit timing. 90 days ago, we talked about back after this year, perhaps into next year, but any changes on sort of timing of ramps? I think there's some dependence on switch availability and a limited number of customers potentially ramping in 2025. So any detail on how you're thinking about that would be helpful? Thank you. Alan Lowe: Yes, I think our focus is really controlling what we can control, which is providing customer samples this quarter with high quality, high reliability, high performing 1.6T transceivers. And so we have multiple designs in the works that look very promising. And we're working hand in hand with, as you say, the few customers that would be interested in this today, because most are still working to get to 800 gigs. So that's our focus. When the customers need it, we will have it. And whether there's a switch soaking issue or other issues, we're not going to be shipping transceivers unless everything is ready to go. But that said, we want to be ready when they say go. And so that's why we're working on it now and have multiple designs, working with multiple customers to get that done. Ruben Roy: And a quick follow-up for Wajid. Yes, just a quick follow-up for Wajid on the gross margin comment. Just around thinking through record shipments of MLAs and sort of expectations for that ramp to continue into year-end, if you can give us any more detail on how you're thinking about the gross margin progression as you get into fiscal '25? Wajid Ali: Yes, thanks, Ruben. Yes, so as we mentioned in our prepared remarks, both the benefit of an improved telecom outlook giving us better manufacturing utilization across our multiple factories is certainly giving us a tailwind on gross margins moving into the new fiscal year. Along with that, the record Datacom shipments that Alan talked about fulfilling that backlog is going to also give us a tailwind given that it's chip business, as you know. And then the transition over into 200 GEMLs being a larger part of that mix will also provide a tailwind for us. So that'll progress through the quarters as those shipments happen. Vivek Arya: Thanks for taking my question. So Alan, in the path towards getting to $500 million, what does your telco business need to be as part of that $500 million, i.e. what assumptions are you making for the recovery in telco to get to that landmark by the end of next calendar year? Alan Lowe: We don't need much growth in telecom. It doesn't -- we're not counting on that. We're covering back to pandemic levels because I think that was overstated shipments. And so, certainly higher than we were in the June quarter because that I think is probably the low point for us for telecom shipments. So we expect some improvement throughout calendar 2025 but not huge growth in telecom. Most of it's coming from EML chips, transition to 200 gig, optical -- Datacom, optical switching that should kick in by calendar 2025 as well as one or two transceiver wins. And that's really all we need to be able to get to $500 million. Vivek Arya: All right. My follow-up on the transceiver side, how substitutable do you think our products from the different suppliers? Like how do you think the customer will allocate share, right? What's going to be the level of visibility that are your products better suited for some specific accelerator or switch combination? How would you know what your share is? How would you know what your share could be potentially next year? Alan Lowe: Yes, I think it comes down to the performance and security of supply. And so, again, back to having manufacturing outside of China, and I know a lot of our partners who buy our chips are moving outside of China but we have an established footprint with thousands of employees there and good engineers. So we have credibility in our site in Thailand to be able to ramp up high quality product and earn share. And I think that it gets back to -- I think where a lot of these questions are going, how much are we going to get? We're going to get what we earn and we plan to earn a lot. So I think it comes down to being able to provide what they need when they need it and make sure we have the capacity and the materials and the people and the engineers to be able to drive high quality product and earn their business. Now, there is interoperability and we have to work with the various switch providers to make sure there is. But the specs are pretty consistent and clear. So we know what we need to do to be able to interrupt as needed. Operator: Thank you. The next question is from Karl Ackerman with BMP Paribas. You may proceed. Karl Ackerman: Yes, thank you. First off, I guess, could you discuss why you are stopping in-house development of coherent DSPs? Is that related to limited uptake for 100 gig coherent in the access market or are there other factors to consider? As you address that question, are you seeing any pause in coherent optics demand broadly, at least for DCI applications? Thank you. Alan Lowe: Yes, I'd say that we have a fixed amount of R&D we can spend and we're shifting to where we can make a big difference into markets that are growing faster. And so the combination of that, so we're adding more to the Datacom transceiver business, combination of that and the partnering with third parties, both from our customers as well as from third party independent chip manufacturers allows us that ability to get what we think we need to get at a overall cost of ownership that's less than developing a three nanometer DSP. So from that perspective, I have confidence in our ability to secure DSPs at competitive prices, to be able to address the data center interconnect market. But that said, we believe, I believe that pivoting from spending on DSPs to spending on higher growth markets like inside the data center will pay off and pay dividends. Kathy Ta: Do you have a follow-up, Carl? Okay, operator, can we take our next question, please? Operator: Absolutely. The next question is from Ananda Baruah with Loop Capital. Your line is now open. Ananda Baruah: Yes, thanks guys. Congrats on the progress. Thanks for taking the question. I just have just one here, and they may be false as a clarification category, but Alan, with the new win and the way that you're talking about doing some shipping this quarter, are you guys tracking ahead on the data center qual sort of dynamic that you began to talk about, I think back in LSC? I guess just as I recall it, it was mostly quals were going to take place kind of around the beginning of the year. And I know, as Tom talked about, there's some language here, but so let me just ask it that way. Are you tracking ahead of some of the qual activity? That'd be helpful. Thanks a lot, guys. A - Alan Lowe: Yes. Thanks, Ananda. I'd say we're tracking right on schedule. We had to finish out a clean room. We've done that in our timeline facility. We've now equipped it. We're ready to start building qualification units, and so that's right on track. And as you say, the qualification won't be done until late this calendar year. It will allow us to ramp production into the January timeframe. So that's right on track for what at least our internal plan has been and what I thought we had discussed at OFC earlier this year. Operator: Thank you. The next question is from Tim Savageaux with Northland Capital Markets. Your line is now open. Tim Savageaux: Hey, good afternoon. I want to focus back on capacity from a couple of different perspectives. Maybe relative to what you've got now, you mentioned you're at capacity in indium phosphide or EMLs. Can you quantify the extent of the planned capacity addition there over, I don't know, the next year? Are you doubling, tripling capacity, what have you? And really same question relative to your current run rate on the module side. I think that was expected to come down this quarter with the product transition. What sort of capacity are you looking to add in Thailand relative to that, and it sounds like it's a fluid situation, but over what timeframe, I guess? Alan Lowe: Sure. I'd say the chip one is easy because equipment has to be there today for it to make much of a difference this fiscal year. But as I said earlier, we're planning on growing capacity faster than the market is growing, and the market is expected to grow 30 to 40% this year. So it's not doubling. That would take a lot of effort and a lot of capital and probably would distract the team if we tried to double in 12 months, it's just not feasible. I'd say that on the chip side, you can think of something north of 40% from the June quarter to next June quarter. And then on the run rate for transceivers, we are, as you say, we're down from where we were in the March quarter. We're putting capacity in as the opportunities come to fruition. And as I said before, we've made sure we have the shell construction of clean rooms ready, and that's kind of the cheaper thing that needs to happen. And then we can put equipment in much more rapidly. Like we talked about with this first win, we're putting capacity in place that will be ready to go at the end of this year to ramp production into early part of next year. So I hesitate to say, we're going to go from X dollars to 2X dollars, but on the transceivers, it's certainly we're able to do more than two to 3X of what we've done in the past -- in the next 12 months. Tim Savageaux: Got it. Yes. Understood. And for a quick follow-up, would that capacity in Thailand be entirely incremental? Or are you moving capacity over from China effectively, or shutting that down at all? Are you maintaining that as a base? And I'll leave it there. I don't want to get greedy here. A - Alan Lowe: Yes, that's a good question. I'd say that initially it's incremental because customers don't want us to move existing products, but as we bring on new products, we'll be ramping them more up outside of China than adding more capacity inside of China. So that over time, over the next couple of years, there'll be a transition to mainly in Thailand, or I should say outside of China, because that's what our customers want. And I think having a center of excellence in Thailand gives us that capability to move capacity and add capacity in Thailand with our workforce that we've got there. Kathy Ta: Thanks, Tim. Joel, I'd like to be able to squeeze in one more question if we could. Operator: Absolutely. The next question is from Richard Shannon with Craig-Hallum. Your line's now open. Richard Shannon: Great, guys. Thanks for taking my question. I think I'm going to spend most of my questions on one multi-part here. Some of the topic was asked earlier about how to think about your path from current guidance revenues to the $500 million plus level ending next calendar year. And your response to that question was pretty interesting in a number of ways, Alan. Maybe I'll broach two or three of them here, where you said you didn't need much telecom to get there. Expecting most of it from EML chips, also transition 200 giga-EMLs , Datacom optical switching, and some transceiver stuff here. I'm not sure if that last part was intended to be in like ascending or descending order of contribution, but maybe a comment on that, that would be great. And I guess specifically, I'm quite interested in two aspects of this, one of which is the optical switching, is that expected to be a meaningful contributor to this growth to get to 500 million? And then also, are you not expecting much from telecom, or is that just upside if you get it? Thank you. Alan Lowe: That is a multi-part question. I'm glad I wrote it down. Thanks, Richard. I'd say there was no method in my rambling of priorities. I'd say, if you wanted me to do that, I'd say transceivers would be number one growth area. I'd say that optical switching is probably bigger in calendar '26 than -- and less, I wouldn't say less meaningful because I think we're counting on meaningful revenue in '25, but really setting us up for significant growth in '26 on the optical switching inside the data center. And I already talked about EMLs, north of 40% growth over the next 12 months. And then, I'd say that I've been hoping that telecom will be bouncing back for the last year. And so I'm not counting on that anymore, although we are seeing some growth in the short term. I do think that we don't need to get back to the pandemic levels. And we're not counting on that when we give you that projection for $500 per quarter. So I'd say it's really all about execution on transceivers and awards and EMLs and the transition to 200 gig where the revenue per unit is more than it is for the 100 gig. So I hope that answered your question. Richard Shannon: And that added quite a bit to it, Alan. Thank you very much. That's all for me. Alan Lowe: Okay, great. Thanks, Richard. Kathy Ta: Thank you, Richard. So with that, I think we're going to wrap the Q&A portion of the call. And I'll pass the call back over to Alan for some concluding remarks. Alan Lowe: Thanks, Kathy. And thank you, everyone. I'd like to just leave you with a few thoughts as we wrap up the call. Our agility and photonic leadership position equip us to navigate current market challenges and opportunities. Momentum is at the forefront of the data center revolution, driving chip scale photonics, automated manufacturing and hyper scale cloud partnerships. We are rapidly scaling manufacturing and R&D to capitalize on cloud opportunities and to meet surging data rate demands. As we discussed in prior quarters, the Cloud Light acquisition is accelerating our high speed transceiver qualifications and production positioning us for multi-billion dollar cloud revenue and over $500 million quarterly revenue by the end of calendar 2025. Thank you all for joining our call today. We look forward to seeing you again at investor conferences and upcoming meetings this quarter. Have a great day. Operator: That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

Lumentum Holdings Inc. (LITE) Q4 2024 Earnings Call Transcript

Lumentum Holdings Inc. (NASDAQ:LITE) Q4 2024 Earnings Conference Call August 14, 2024 5:30 PM ET Company Participants Kathy Ta - Vice President, Investor Relations Alan Lowe - President & Chief Executive Officer Wajid Ali - Executive Vice President & Chief Financial Officer Chris Coldren - Senior Vice President, Chief Strategy & Corporate Development Officer Conference Call Participants Samik Chatterjee - JP Morgan Alex Henderson - Needham and Company Simon Leopold - Raymond James. George Notter - Jefferies Meta Marshall - Morgan Stanley Tom O'Malley - Barclays Ruben Roy - Stifel Vivek Arya - Bank of America Karl Ackerman - BMP Paribas Ananda Baruah - Loop Capital Tim Savageaux - Northland Capital Markets Richard Shannon - Craig-Hallum. Operator Good day everyone and welcome to the Lumentum Holdings Fourth Quarter Fiscal Year 2024 Earnings Call. All participants will be in a listen only mode. Please also note today's event is being recorded for replay purposes. [Operator Instructions]. At this time, I'd like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead. Kathy Ta Thank you and welcome to Lumentum's fiscal fourth quarter and full year 2024 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, Executive Vice President and 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 strategies, trends and expectations for our products and technologies, including demand, our customers, our end markets and market opportunities, our expectations and beliefs regarding recent acquisitions, including cloud light, macroeconomic trends and our expected financial and operating 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, particularly the risk factors described in our most recent 10-Q and in our 10-K that will be filed soon. 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 fourth quarter and fiscal 2024 results and accompanying supplemental slides are available on our website at www.Lumentum.com under the investors section. With that, I'll turn the call over to Alan. Alan Lowe Thank you, Kathy, and good afternoon, everyone. We exceeded the midpoint of our guidance for both revenue and EPS for the fourth quarter. We booked record orders for Datacom chips used in data center applications and saw emerging positive trends in the broader networking market. We made significant progress in executing our strategy to grow our cloud business and broaden our customer base, including a new and substantial cloud and AI module opportunities. Lumentum is emerging as a leading provider of photonics solutions for cloud data center operators and AI infrastructure providers. Our comprehensive photonics portfolio built on differentiated in-house technology and proven volume manufacturing delivers innovative solutions that address the critical challenges of connectivity bottlenecks and power consumption. To achieve our cloud and AI goals, we are implementing a three-pronged strategy. First, we are focused on expanding our customer base to include multiple data center operators and AI infrastructure providers as they migrate to higher speeds. Second, we are scaling up capacity for component and module production at established Lumentum facilities outside of China. And third, we are executing on our differentiated technology roadmaps to support data center compute scaling across future generations of optical interconnect technologies and data center architectures. I would like to elaborate on our progress in each of these areas. Our first priority is to expand our customer base within the data center market by leveraging our advanced high-speed optical transceiver capabilities and proven laser transmitter components. As the industry transitions to higher speeds, our differentiated technology becomes increasingly valuable to these customers. Within data centers, the shift to 200G lane speeds, particularly in 1.6T optical transceivers, plays to our strengths. The growing importance of single-mode optics and in the Indium Phosphide lasers, driven by the limitations in multi-mode optics, aligns well with our market and technology leadership positions. Our industry-leading 100G EML transmitter components have established a strong reputation for performance, quality, and reliability and are currently shipping in record volumes. Our proven capabilities position us favorably as the industry adopts 200G per lane technologies. Our 200G EMLs are being qualified by multiple customers for integration into their transceivers and subsequent deployment in a wide range of cloud and AI infrastructures. We anticipate being a key laser supplier in initial 1.6T transceiver deployments as we ramp up 200G EMLs later this fiscal year. In Q4, we achieved record volume shipments of EMLs and secured substantial bookings, which we will be working to fulfill throughout fiscal 2025. This includes initial orders for 200G EMLs from leading AI customers. Based on this momentum, we foresee continued strong EML shipments throughout fiscal 2025 and into fiscal 2026. Additionally, we are supplying differentiated laser sources for silicon-metonics-based transceivers, further broadening our content opportunity within the data center market. We've also made significant progress on our newest 800G and initial 1.6T transceiver product developments. We are deeply engaged with multiple customers and we have received favorable feedback after providing product samples to these customers. We have secured a major award with one new customer and are actively working to finalize additional awards with multiple customers. The second prong of our cloud strategy involves expanding manufacturing capacity for both optical transceivers and optical components at established Lumentum facilities outside of China. This expansion is critical to supporting our cloud customers growing AI and cloud workloads while ensuring supply chain security. As mentioned earlier, Indium Phosphide lasers are essential for scaling data center infrastructure. Due to overwhelming demand for our critical technology, our Indium Phosphide capacity is fully subscribed to at least the end of calendar 2025. And therefore, we can only meet this demand by growing capacity. In the current fiscal first quarter, we have already invested $43 million in our Indium Phosphide wafer fab facilities and we expect to continue to invest in our Indium Phosphide capacity over the next several quarters to keep up with the growing demand of these enabling laser technologies. Although the industry faces a broad shortage of Indium Phosphide lasers, over time, our capacity additions will help mitigate these constraints. However, we anticipate that our production output will remain on allocation through at least the end of calendar 2025. Our significant capacity expansion for optical transceivers in our facility in Thailand is progressing as planned with the first production line scheduled to start operations this quarter. Based on current engagements with multiple hyperscale cloud operators and AI infrastructure customers, we expect to complete additional phases of our manufacturing capacity expansion over the next 18 months to keep up with the expected strong demand. Finally, the third prong of our cloud strategy focuses on delivering differentiated technologies to address the evolving challenges of data center scaling, encompassing both increased data link capacity and enhanced energy efficiency. We are actively collaborating with leading edge customers to deliver breakthrough technologies that will support multi-year cloud and AI infrastructure roadmaps. Optical switching, a critical component of future cloud and AI networking architectures presents a significant opportunity for us at Lumentum. Our optical switch products in development offer advantages in power efficiency, increased bandwidth, reduced latency, flexibility, and agility. We have shipped evaluation units to multiple customers and the initial feedback has been overwhelmingly positive. Another key technology area is enabling the transition to high density, low power optical links for future generations. Our ultra high power laser technologies have attracted considerable interest from cloud and AI infrastructure customers developing high density optical interconnects. Our heritage of delivering high performance, high reliability lasers in high volume production environment position us favorably for this emerging market. Lastly, we are focused on enabling the shift to speeds beyond 200G per lane, such as the 400G per lane generation. Our advanced Indium phosphide and photonic integrated circuit capabilities honed through years of experience in data center and high performance telecom applications are essential to meeting future demands. While the deployment of these products and technologies is a few years away, these are long-term developments requiring early investment and close customer collaboration. We are actively engaged with customers and their R&D teams and together we are shaping the future of optical technology. Now let me move to additional fiscal fourth quarter revenue and product highlights. As expected, our cloud and networking segment had a challenging quarter with revenue declining 19% sequentially and 11% year-over-year. While overall demand for telecom products was soft in the quarter as expected, we are encouraged by several positive trends emerging within this part of our business. We saw an increase in shipments for narrow line with tunable lasers used in 400 ZR modules for data center interconnect applications. With our design wins, we anticipate maintaining a leading market share position in laser components for ZR and ZR plus applications this fiscal year and in the coming years. While there's still lingering industry inventory challenges, we are encouraged by recent indications of improvement in the traditional networking market. Recent weeks have brought increased customer demand to our newest leading edge coherent transmission and next generation transport products along with continued signs of customer inventory normalization. Consistent with this, advanced ROADM demand is showing promise with growing demand for integrated C+L band solutions and high port count ROADM products. In leading edge coherent transmission, we are seeing excellent demand trends for 130 gigabyte coherent products and encouraging early traction with our 200 gigabyte products. This is driven by customer demand for increased capacity and spectral efficiency fueled by continued bandwidth demand growth. Our broad set of design wins and differentiated technology and manufacturing capabilities position us for continued leadership in these important products in the coming years. We expect our cloud and networking business to show sequential improvement in fiscal Q1. Now let me move to our industrial tech segment. Our industrial tech segment revenue increased 2% sequentially, but declined 36% year-over-year as expected. Like others in this space, we continue to face challenges due to the weak end market demand and high levels of customer inventory. In industrial tech, we continue to focus on developing innovative industrial laser products that address rapidly growing applications. The growing demand for higher precision is driving a transition from picosecond to femtosecond lasers. These lasers with their extremely short pulses offer more precise material processing without significant heat damage, opening new possibilities in sensitive applications such as semiconductors, displays, and advanced chip packaging. These market areas are in turn driven by the growth of AI. The immense computational demands of AI require significant advancements in semiconductors and innovative packaging technologies to support high performance computing. We're actively collaborating with leading semiconductor equipment manufacturers to develop ultra fast lasers for interposer and advanced semiconductor packaging. In the fourth quarter, we also successfully delivered both high and low power FemtoBlade demo units for advanced display applications. Looking to fiscal Q1, we expect Industrial Tech to be down sequentially due to continued weak end market demand and ongoing customer inventory adjustments with a modest seasonal increase in 3D sensing revenue. To summarize, we have made significant progress in executing our strategy to grow our cloud business. We booked record orders for Datacom chips and are investing in additional production capacity to help us meet customer demand. We have made excellent progress with multiple new high speed optical transceiver customer engagements, including securing a major transceiver award with one new customer. We are actively working to secure additional awards from other new customers. Our robust pipeline of cloud customer engagements and improving trends in the traditional networking market reinforce our confidence in the target we highlighted on our last earnings call. This is to grow quarterly revenue to $500 million by the end of calendar 2025. We foresee continued significant growth into 2026 and 2027. We are executing on new cloud and AI opportunities that we expect will elevate our cloud business to a multi-billion dollar annual run rate in the coming years. Before turning the call over to Wajid, I want to express my sincere gratitude to all our employees and customers worldwide for their unwavering focus, dedication, and collaborative spirit. With that, Wajid. Wajid Ali Thank you, Alan. Fourth quarter revenue of $308.3 million and non-GAAP EPS of $0.06 were above the midpoint of our guidance ranges. GAAP gross margin for the fourth quarter was 16.6%, GAAP operating loss was 43.3%, and GAAP diluted net loss per share was $3.72 with a large portion of the GAAP net loss primarily driven by restructuring charges, amortization of acquired intangibles, and evaluation allowance related to certain tax assets. Due to the historical GAAP losses of the company and a backward looking calculation to determine the requirement for valuation allowances on deferred tax assets, the company determined the need to record a valuation allowance of $139.8 million to its U.S. deferred tax assets on the company's balance sheet as of the most recent fiscal period. Given the business opportunities ahead and the growth expectations Alan highlighted, we believe in the future, we will be in a position to release this allowance and use the related asset. To increase investments in programs that accelerate our exposure to significant new AI opportunities, we decided to stop our in-house development of certain communications ASICs, including coherent DSPs and RFICs. We believe we can meet customer needs using ASICs from third-party partners while reallocating significant R&D spending towards new cloud and AI customer programs. As a result of this decision, in Q4 we recorded $35.8 million of restructuring and related charges, including a $29.1 million write-off of in-process research and development in tangible assets. Turning to our non-GAAP results, fourth quarter non-GAAP gross margin was 32.2%, which was down sequentially and year-on-year on lower revenue. In future quarters, we anticipate company gross margin will sequentially increase as manufacturing utilization improves due to an improved telecom outlook, as well as an increase in Datacom laser shipments. Fourth quarter non-GAAP operating loss was 0.3%, which was down sequentially and year-on-year on lower revenue. Fourth quarter non-GAAP operating loss was $0.8 million and adjusted EBITDA was $25.9 million. Fourth quarter non-GAAP operating expenses totaled $100 million or 32.4% of revenue. A decrease of $4.3 million from the third quarter and down $2.4 million from the year ago quarter. The lower operating expense in Q4 was achieved despite increased R&D spending on our Datacom transceivers given the strong customer traction that Alan spoke of earlier. Q4 non-GAAP SG&A expense was $35.1 million, non-GAAP R&D expense was $64.9 million. Interest and other income was $5.4 million on a non-GAAP basis driven by interest earned on our cash and investments. Fourth quarter non-GAAP net income was $4 million and non-GAAP diluted net income per share was $0.06. Our fully diluted share account for the fourth quarter was 68.3 million shares on a non-GAAP basis. Turning to the full year results, fiscal '24 net revenue was $1.36 billion, which was down 23.1% from fiscal '23. GAAP gross margin for fiscal '24 was 18.5%. GAAP operating loss was 31.9% and GAAP diluted net loss per share was $8.12. Full year fiscal '24 non-GAAP gross margin was 33%, which was down relative to fiscal '23 due to lower overall demand and factory utilization. Fiscal year '24 non-GAAP operating margin was 2.8% down from fiscal '23 due to lower gross margin. Fiscal '24 non-GAAP operating income was $37.8 million and adjusted EBITDA was $140.5 million. For fiscal '24, our fully diluted share account on a non-GAAP basis was 67.7 million shares. Non-GAAP net income was $68.7 million and non-GAAP diluted net income per share was $1.01. Turning to the balance sheet, during the fourth quarter, our cash and short-term investments increased by $16 million to $887 million, this increase was primarily due to improved working capital performance as we achieved a $22 million sequential reduction and momentum's overall inventory levels. In Q4, we invested $24 million in CapEx, primarily driven by high-speed transceiver capacity additions at our Thailand manufacturing site. As we move through fiscal '25 and beyond, we're focused on expanding our high-speed transceiver capabilities and capacity in Thailand to support 800G, 1.6T, and eventually 3.2T transceivers. We anticipate an elevated level of capital expenditures in fiscal '25 to proactively meet the anticipated surge in demand for high-speed transceivers and Datacom components. Turning to segment details, fourth quarter cloud and networking segment revenue at $254.7 million decreased 18.8% sequentially and decreased 11.1% year-on-year. Cloud and networking segment profit at 10.1% decreased sequentially and decreased year-on-year. Our fourth quarter industrial tech segment revenue at $53.6 million was up 1.7% sequentially and down 36.4% year-on-year. Fourth quarter industrial tech segment loss of 0.4% improved sequentially. Year-on-year segment profit declined. Now let me move to our guidance for the first quarter of fiscal '25, which is on a non-GAAP basis and is based on our assumptions as of today. We expect net revenue for the first quarter of fiscal '25 to be in the range of $315 million to $335 million. At the midpoint, we expect to show year-over-year revenue growth when compared to Q1 of fiscal 2024. This Q1 revenue forecast includes the following assumptions. Cloud and networking to be up sequentially, primarily driven by an improvement in telecom networking demand and Industrial Tech to be approximately flat sequentially with decreased industrial laser shipments offset by a modest uptick in 3D sensing due to typical seasonality. Based on this, we project first quarter non-GAAP operating margin to be in the range of 0% to 3% and diluted net income per share to be in the range of $0.07 to $0.17. Our non-GAAP EPS guidance for the first quarter is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume an approximate share count of 68.8 million shares. Please note this guidance includes certain expenses that were previously excluded from our non-GAAP presentation. Mainly those related to abnormal excess capacity that in Q4 and prior periods were excluded from our non-GAAP results. This change in presentation reduces our Q1 EPS guidance by approximately $0.05 compared with our prior presentation methodology. For clarity, our Q1 non-GAAP EPS guidance of $0.07 to $0.17 includes the impact of the new presentation. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy Ta Thank you, Wajid. To allow everyone an opportunity to ask questions, please keep to one question and one follow-up. Now let's begin the Q&A session. Question-and-Answer Session Operator We will now begin the Q&A session. [Operator Instructions]. The first question is from the line of Samik Chatterjee with JP Morgan. Your line is now open. Samik Chatterjee Thanks for taking my questions, and I'll ask both of my questions at the same goal. So I guess the first one was in relation to the new customer announcement that you highlighted in your prepared remarks. Can you give us a bit more color in relation to sort of the type of customer, whether it's a web scaler, or how should we think about the type of the customer, and how are you thinking about the magnitude of the opportunity relative to the run rate of your module business at this time? And for my follow-up, just in terms of the Q4 to Q1, I think you mentioned sequential growth in telecom. Didn't really hear you talk about any sort of guidance on the Datacom side. So if you can just help us how to think about Datacom between Q4 and Q1, and also if it's not going sequentially, then what is driving the sequential decline in revenue in the Datacom business between Q4 and Q1? Thank you. Alan Lowe Yes, thanks, Samik. I'd say we don't want to comment too much on what type of customer, but you can imagine, we use the word major and big, so it's big. I would say that run rate-wise, I think it comes down to how well we execute. And so, we will earn as much business as we earn from our customer, given our execution, and so, so far we're off to a good start. And as I said in the prepared remarks, our operation in Thailand, first production line is ready this quarter. And so, we'll be shipping first units out of Thailand this quarter with qualifications happening and ramp beginning early part of calendar 2025. So consistent with what we've said in the past. So as far as comparison to run rate stuff, that's really going to be very variable given we have to earn it and we have to execute well with good quality and performance and delivery. So I hesitate to comment more on that, but certainly the customer that we have said, we've gotten the award on certainly consumes a lot and certainly could be as big, if not bigger. On the second question, sorry, go ahead. Samik Chatterjee It was on the sequential brand in Datacom? Alan Lowe Yes, we're not going to break out Datacom versus Telecom. But what we did say was that we, we've seen some improvements in Telecom. So you can expect that that's going to grow quarter-on-quarter. And as we said in the last earnings call, we're in a product transition. And so the Q4, Q1 numbers are depressed. And so that's coming to fruition and we expect that'll pickup in our fiscal second quarter. Samik Chatterjee Okay. Thank you. Kathy Ta Thank you, Samik. Operator Thank you. The next question is from Alex Henderson with Needham and Company. Your line is now open. Alex Henderson Thanks. So I was hoping you could talk about the capacity and ramp timing on both the chips business as well as the transceiver business at Cloud Light. My understanding is that coming out of the June quarter, you should be fairly flattish in that business in terms of available capacity. And that new capacity should be coming on stream in the December quarter and ramping starting kind of in the first half of calendar year '25. Can you give us any sense of that cadence and what those plans might look like now versus what they looked like say three months ago? Alan Lowe Yes, as we said, again, in the prepared remarks, we had record bookings for our chip business and we invested $43 million already this quarter in our fab capacity to address that. So you're right. It takes time for that to come online, but we should see incremental capacity in the first half of calendar '25, but in the short term, it's relatively fixed given the cycle time of the fab, et cetera. So I'd say on the chip business where, in fact, in all CapEx, we meet monthly and evaluate if we need to order more or less to hold off. And so that's the discipline we're trying to put into the process to make sure that we have the capacity when our customers need it and that we don't have too much idle capacity that are increasing our fixed costs with that business. On the transceiver side, as I said before, the initial line is up in Thailand this quarter, so we'll be shipping samples, but we won't really get any volume shipments out of Thailand until the first calendar quarter of '25 when the qualifications that our customers have been done and the ramp up starts there, but we'll have growing capacity through calendar '25 and that's why we said about our confidence in that achieving the $500 million per quarter by the end of 2025, calendar-wise. Kathy Ta Thanks, Alex. Did you have a follow-up question? Alex Henderson Yes, just to follow up on the telecom side, I'm a little surprised that the telecom component space is recovering in the September quarter, given the high level of capacities that is, or the inventories that are out at the customers, the OEMs. Can you talk a little bit about what product areas that you're seeing that in? And how fast do you think that the inventories are going to come down based on the demand you're seeing? Alan Lowe Yes, you're right, Alex. There is still inventory in our customers and beyond. It's like we've seen strength in products that we weren't shipping a year ago or two years ago during the pandemic and so therefore there's no inventory built up of these products. So the 130 gigabyte coherent components, the 200 gigabyte coherent components are just starting today. And then our new ROADM products that we weren't shipping a year ago are seeing strong demand in our integrated C+L as well as new and differentiated high port counts, WSS. So that's kind of what we're seeing. We are seeing strength in the narrow line with tunable lasers as that has -- I think the data center interconnect business has burned off a lot of the inventory, given people are having to place data centers further apart and no longer can connect them within a campus because of the power requirements. So I'd say that's in general, what we're seeing the strengths in telecom. Kathy Ta Thank you, Alex. Alex Henderson New products as opposed to older products. Alan Lowe Yes. Alex Henderson Thanks, I appreciate the clarity. Alan Lowe Thanks, Alex. Operator Thank you. The next question is from Simon Leopold with Raymond James. Your line is now open. Simon Leopold Great. Thanks for taking the question. First one I wanted to ask is maybe if you could give us a little bit more color on the products associated with the new Datacom award. Specifically, I think these would be 800 gig and I'm guessing single mode products, but wondering whether or not there's more to it than a single product line, any color there? And as a follow-up, I also want to understand, on your telecom business in the June quarter, you had originally talked about a 30 million sequential decline. And so I'm trying to get a better understanding of did that occur? And when we think about the recovery and sequential growth in September, how close are we getting back to sort of the prior run rates before the June quarter? Thank you. Alan Lowe Yes, thanks Simon. As I said, I don't want to comment too much about specific customers, but I would say that you're right. People aren't designing new products to deal with old technology. So this is the leading edge 800 gig single mode transceiver that we feel very confident in our ability to develop and to ship to and qualify for this customer. On the telecom question, Chris, do you want to take that one? The revenue coming down June quarter -- that happened in the June quarter for telecom. Your question was telecom, right, Simon? Simon Leopold Yes, I wanted to understand sort of, you know, if you drop 30 and you go up five, well, that's still a big distance from where you used to be. Alan Lowe Yes, I don't know the specifics. I would say that, as we said, the telecom and Datacom business is up mostly from the telecom strength. And so, as we said before, the transition period for our Datacom transceiver business is happening Q4 and Q1, and we expect that to grow in Q4. So most of the growth in Datacom and telecom is coming from telecom bounce back from a really a low point in the June quarter. Simon Leopold Thank you. Kathy Ta Thank you Simon. Operator Thank you. The next question is from George Notter with Jefferies. Your line is now open. George Notter Hi, thanks very much. I'm just curious if you guys have an Nvidia qualification on this 800 gig single mode transceiver? Alan Lowe Yes, we're not going to comment on who the customer is, George. I would say that -- as I said before, most customers are working with us on products they don't already have. And so, for instance, we are designing 1.6 terabit transceivers, and the performance is quite good. We plan on sampling customers this quarter on 1.6T. So, there's a few leaders that would be consuming that. And so, you can imply what you want from that, but we're not going to speak specifically about any individual customer. George Notter Got it, okay. And then, the transceiver customer, I guess I'm, based on something you said, I was curious about whether or not this contractor relationship is just a framework arrangement, or are there certain minimum volumes or minimum market share that you're being given by this customer? Anything you can say in terms of first source, second source, third source? I'd love any more details you can provide. Thanks. Alan Lowe Well, this is a new product, right? And so, it comes down to our ability to execute. And so, we will earn share, or earn more share, I should say, as we execute. And I think the combination of U.S. headquartered company, manufacturing in Thailand, there's certainly fear of what happens in the next election, and the tariffs impact the ability to be competitive when shipping out of China. So, I think we've got a lot of good things going in our favor, and then it'll come down to how well we execute the ramp. And I think we're very well-positioned to capture a significant amount of share there. George Notter Great, okay, super. Thank you very much. Kathy Ta Thank you, George. Operator Thank you. The next question is from the line of Meta Marshall with Morgan Stanley. Your line is now open. Meta Marshall Great, thanks. Don't know if I'll get an answer here, but it's worth an ask. You've mentioned kind of the $500 million quarterly run rate exiting calendar '25, but just how should we think about kind of the Datacom capacity between chips and trans viewers as you would have exiting fiscal '25? And then maybe just a second question there. Has anything changed with kind of the ramp patterns of kind of your lead customer today on transceivers and their design shift as we exit kind of calendar '24? Thanks. Alan Lowe Yes, I'd say, let me start with the chips adding capacity. We are adding capacity. We should see significant growth above market growth in our chip output over the next 12 months. And I think that's why we are, and we have more orders than that. So it's really constrained by our ability to add capacity, improve yields and then transition to 200 gig per lane chips. And so I would say that as the shift from 100 gig to 200 gig kicks in, there's a pickup in revenue per chip that we should experience as well. On the transceivers, as I said before, the monthly capital meetings where we determine how much capacity to put in place is what we're going through. And it's based on traction with customers and qualifications and awards and things like that. So we're certainly making sure we put the infrastructure in place, the facilities in place to support well over what I'm talking about for the $500 million per quarter in overall revenue. So I think it comes down to execution and our ability to win the mind share and market share for each customer we're working with. As far as the lead customer, I really don't want to talk specifics about customers, but I just reiterate what I had said before, which was product transitions happening in Q4 and Q1, and then we expect a pickup in revenue and Datacom in the December quarter. Meta Marshall Great, thanks. Kathy Ta Thanks, Meta. Operator Thank you. The next question is from Tom O'Malley with Barclays. Your line is open. Thomas O'Malley Hey, Alan, thanks for taking my question. I just wanted to get a clarification on the new major transceiver award with the new customer. So can you just explain to me the difference with what you kind of define as an award versus a win versus a qualification? Because I just -- and correct me if I'm wrong, I think you said that qualification would happen in Q1 and it'd be out of the Thailand facility. And I believe you said that also the Thailand facility wouldn't be ready until calendar Q1. So, if the product is getting qualified in Q1, can you talk about the timeframe that that would launch and what is an award versus what is a qualified product just because you would imagine that it's hard to have revenue from something until it's actually qualified. So am I making a mistake here in the timeframe that I'm laying out? Alan Lowe Well, you're generally accurate. I'd say just a correction, our first production line in Thailand is operational this quarter, and we plan to build and ship product this quarter for the qualification. Now it takes them months to get the qualification work done. And so, it's not done until it's done, to your point, absolutely. Now we're staging material because we're confident in our ability to perform. We're staging capital to be able to support the volumes they're talking about. So I'd say from that perspective, it really gets down to us performing. Now, if the product doesn't work, they're not going to buy a product that doesn't work. And so you're right, we have to be qualified. We have to have quality and we have to have the ability to ramp. And we're making sure that we are controlling what we can control, which is the product quality, the design, the capacity and the materials to support this customer who's critically important for us. Thomas O'Malley So I guess the follow-up is what would be different from an award versus the, yes, thank you, Kathy. Yes, what would be the difference between an award and what you're doing with other hyperscale or potential customers? Like, are you committing more capital to them? Because it sounds like if you're not qualified, isn't this just kind of R&D work on a potential future customer, which all other kind of development would kind of fall under? Alan Lowe Not really. I mean, each of these customers don't want to work with eight suppliers, right? So they have to down select to the ones that they're going to spend their engineering time with and they have chosen us. And so, we're not the only person for sure, but it's the choice that they've made and they've given us something that says, we're awarded the business, that we have to earn it and we have to perform as with anything that we develop for customers. So I'd say it's different than just working with the customer. I've chosen you out of the suppliers that I can choose. And again, for multiple reasons, proven technology, proven vertical integration, U.S. headquartered, outside of China manufacturing. So there's a lot of reasons that this customer chose us. And now we just have to perform out of Thailand, which is new to us, but I have confidence in the team to be able to execute. Kathy Ta Thank you, Tom. Operator Thank you. The next question is from Ruben Roy with Stifel. Your line is open. Ruben Roy Yes, thank you. Alan, I was wondering if you could comment a little bit on sort of how you're thinking about 1.6 terabit timing. 90 days ago, we talked about back after this year, perhaps into next year, but any changes on sort of timing of ramps? I think there's some dependence on switch availability and a limited number of customers potentially ramping in 2025. So any detail on how you're thinking about that would be helpful? Thank you. Alan Lowe Yes, I think our focus is really controlling what we can control, which is providing customer samples this quarter with high quality, high reliability, high performing 1.6T transceivers. And so we have multiple designs in the works that look very promising. And we're working hand in hand with, as you say, the few customers that would be interested in this today, because most are still working to get to 800 gigs. So that's our focus. When the customers need it, we will have it. And whether there's a switch soaking issue or other issues, we're not going to be shipping transceivers unless everything is ready to go. But that said, we want to be ready when they say go. And so that's why we're working on it now and have multiple designs, working with multiple customers to get that done. Ruben Roy Got it. Thank you. Kathy Ta Do you have a follow-up Ruben? Ruben Roy And a quick follow-up for Wajid. Yes, just a quick follow-up for Wajid on the gross margin comment. Just around thinking through record shipments of MLAs and sort of expectations for that ramp to continue into year-end, if you can give us any more detail on how you're thinking about the gross margin progression as you get into fiscal '25? Wajid Ali Yes, thanks, Ruben. Yes, so as we mentioned in our prepared remarks, both the benefit of an improved telecom outlook giving us better manufacturing utilization across our multiple factories is certainly giving us a tailwind on gross margins moving into the new fiscal year. Along with that, the record Datacom shipments that Alan talked about fulfilling that backlog is going to also give us a tailwind given that it's chip business, as you know. And then the transition over into 200 GEMLs being a larger part of that mix will also provide a tailwind for us. So that'll progress through the quarters as those shipments happen. Ruben Roy Thank you. Kathy Ta Thanks, Ruben. Operator Thank you. The next question is from Vivek Arya with Bank of America. Your line is now open. Vivek Arya Thanks for taking my question. So Alan, in the path towards getting to $500 million, what does your telco business need to be as part of that $500 million, i.e. what assumptions are you making for the recovery in telco to get to that landmark by the end of next calendar year? Alan Lowe We don't need much growth in telecom. It doesn't -- we're not counting on that. We're covering back to pandemic levels because I think that was overstated shipments. And so, certainly higher than we were in the June quarter because that I think is probably the low point for us for telecom shipments. So we expect some improvement throughout calendar 2025 but not huge growth in telecom. Most of it's coming from EML chips, transition to 200 gig, optical -- Datacom, optical switching that should kick in by calendar 2025 as well as one or two transceiver wins. And that's really all we need to be able to get to $500 million. Vivek Arya All right. My follow-up on the transceiver side, how substitutable do you think our products from the different suppliers? Like how do you think the customer will allocate share, right? What's going to be the level of visibility that are your products better suited for some specific accelerator or switch combination? How would you know what your share is? How would you know what your share could be potentially next year? Alan Lowe Yes, I think it comes down to the performance and security of supply. And so, again, back to having manufacturing outside of China, and I know a lot of our partners who buy our chips are moving outside of China but we have an established footprint with thousands of employees there and good engineers. So we have credibility in our site in Thailand to be able to ramp up high quality product and earn share. And I think that it gets back to -- I think where a lot of these questions are going, how much are we going to get? We're going to get what we earn and we plan to earn a lot. So I think it comes down to being able to provide what they need when they need it and make sure we have the capacity and the materials and the people and the engineers to be able to drive high quality product and earn their business. Now, there is interoperability and we have to work with the various switch providers to make sure there is. But the specs are pretty consistent and clear. So we know what we need to do to be able to interrupt as needed. Kathy Ta Thanks, Vivek. Vivek Arya Thank you. Operator Thank you. The next question is from Karl Ackerman with BMP Paribas. You may proceed. Karl Ackerman Yes, thank you. First off, I guess, could you discuss why you are stopping in-house development of coherent DSPs? Is that related to limited uptake for 100 gig coherent in the access market or are there other factors to consider? As you address that question, are you seeing any pause in coherent optics demand broadly, at least for DCI applications? Thank you. Alan Lowe Yes, I'd say that we have a fixed amount of R&D we can spend and we're shifting to where we can make a big difference into markets that are growing faster. And so the combination of that, so we're adding more to the Datacom transceiver business, combination of that and the partnering with third parties, both from our customers as well as from third party independent chip manufacturers allows us that ability to get what we think we need to get at a overall cost of ownership that's less than developing a three nanometer DSP. So from that perspective, I have confidence in our ability to secure DSPs at competitive prices, to be able to address the data center interconnect market. But that said, we believe, I believe that pivoting from spending on DSPs to spending on higher growth markets like inside the data center will pay off and pay dividends. Kathy Ta Do you have a follow-up, Carl? Okay, operator, can we take our next question, please? Operator Absolutely. The next question is from Ananda Baruah with Loop Capital. Your line is now open. Ananda Baruah Yes, thanks guys. Congrats on the progress. Thanks for taking the question. I just have just one here, and they may be false as a clarification category, but Alan, with the new win and the way that you're talking about doing some shipping this quarter, are you guys tracking ahead on the data center qual sort of dynamic that you began to talk about, I think back in LSC? I guess just as I recall it, it was mostly quals were going to take place kind of around the beginning of the year. And I know, as Tom talked about, there's some language here, but so let me just ask it that way. Are you tracking ahead of some of the qual activity? That'd be helpful. Thanks a lot, guys. A - Alan Lowe Yes. Thanks, Ananda. I'd say we're tracking right on schedule. We had to finish out a clean room. We've done that in our timeline facility. We've now equipped it. We're ready to start building qualification units, and so that's right on track. And as you say, the qualification won't be done until late this calendar year. It will allow us to ramp production into the January timeframe. So that's right on track for what at least our internal plan has been and what I thought we had discussed at OFC earlier this year. Ananda Baruah Okay, great. Kathy Ta Thanks, Ananda. Ananda Baruah That'd be helpful. I appreciate it. Thanks. Kathy Ta Thank you. Joe, could we have our next question, please? Operator Thank you. The next question is from Tim Savageaux with Northland Capital Markets. Your line is now open. Tim Savageaux Hey, good afternoon. I want to focus back on capacity from a couple of different perspectives. Maybe relative to what you've got now, you mentioned you're at capacity in indium phosphide or EMLs. Can you quantify the extent of the planned capacity addition there over, I don't know, the next year? Are you doubling, tripling capacity, what have you? And really same question relative to your current run rate on the module side. I think that was expected to come down this quarter with the product transition. What sort of capacity are you looking to add in Thailand relative to that, and it sounds like it's a fluid situation, but over what timeframe, I guess? Alan Lowe Sure. I'd say the chip one is easy because equipment has to be there today for it to make much of a difference this fiscal year. But as I said earlier, we're planning on growing capacity faster than the market is growing, and the market is expected to grow 30 to 40% this year. So it's not doubling. That would take a lot of effort and a lot of capital and probably would distract the team if we tried to double in 12 months, it's just not feasible. I'd say that on the chip side, you can think of something north of 40% from the June quarter to next June quarter. And then on the run rate for transceivers, we are, as you say, we're down from where we were in the March quarter. We're putting capacity in as the opportunities come to fruition. And as I said before, we've made sure we have the shell construction of clean rooms ready, and that's kind of the cheaper thing that needs to happen. And then we can put equipment in much more rapidly. Like we talked about with this first win, we're putting capacity in place that will be ready to go at the end of this year to ramp production into early part of next year. So I hesitate to say, we're going to go from X dollars to 2X dollars, but on the transceivers, it's certainly we're able to do more than two to 3X of what we've done in the past -- in the next 12 months. Tim Savageaux Got it. Yes. Understood. And for a quick follow-up, would that capacity in Thailand be entirely incremental? Or are you moving capacity over from China effectively, or shutting that down at all? Are you maintaining that as a base? And I'll leave it there. I don't want to get greedy here. A - Alan Lowe Yes, that's a good question. I'd say that initially it's incremental because customers don't want us to move existing products, but as we bring on new products, we'll be ramping them more up outside of China than adding more capacity inside of China. So that over time, over the next couple of years, there'll be a transition to mainly in Thailand, or I should say outside of China, because that's what our customers want. And I think having a center of excellence in Thailand gives us that capability to move capacity and add capacity in Thailand with our workforce that we've got there. Kathy Ta Thanks, Tim. Joel, I'd like to be able to squeeze in one more question if we could. Operator Absolutely. The next question is from Richard Shannon with Craig-Hallum. Your line's now open. Richard Shannon Great, guys. Thanks for taking my question. I think I'm going to spend most of my questions on one multi-part here. Some of the topic was asked earlier about how to think about your path from current guidance revenues to the $500 million plus level ending next calendar year. And your response to that question was pretty interesting in a number of ways, Alan. Maybe I'll broach two or three of them here, where you said you didn't need much telecom to get there. Expecting most of it from EML chips, also transition 200 giga-EMLs , Datacom optical switching, and some transceiver stuff here. I'm not sure if that last part was intended to be in like ascending or descending order of contribution, but maybe a comment on that, that would be great. And I guess specifically, I'm quite interested in two aspects of this, one of which is the optical switching, is that expected to be a meaningful contributor to this growth to get to 500 million? And then also, are you not expecting much from telecom, or is that just upside if you get it? Thank you. Alan Lowe That is a multi-part question. I'm glad I wrote it down. Thanks, Richard. I'd say there was no method in my rambling of priorities. I'd say, if you wanted me to do that, I'd say transceivers would be number one growth area. I'd say that optical switching is probably bigger in calendar '26 than -- and less, I wouldn't say less meaningful because I think we're counting on meaningful revenue in '25, but really setting us up for significant growth in '26 on the optical switching inside the data center. And I already talked about EMLs, north of 40% growth over the next 12 months. And then, I'd say that I've been hoping that telecom will be bouncing back for the last year. And so I'm not counting on that anymore, although we are seeing some growth in the short term. I do think that we don't need to get back to the pandemic levels. And we're not counting on that when we give you that projection for $500 per quarter. So I'd say it's really all about execution on transceivers and awards and EMLs and the transition to 200 gig where the revenue per unit is more than it is for the 100 gig. So I hope that answered your question. Richard Shannon And that added quite a bit to it, Alan. Thank you very much. That's all for me. Alan Lowe Okay, great. Thanks, Richard. Kathy Ta Thank you, Richard. So with that, I think we're going to wrap the Q&A portion of the call. And I'll pass the call back over to Alan for some concluding remarks. Alan Lowe Thanks, Kathy. And thank you, everyone. I'd like to just leave you with a few thoughts as we wrap up the call. Our agility and photonic leadership position equip us to navigate current market challenges and opportunities. Momentum is at the forefront of the data center revolution, driving chip scale photonics, automated manufacturing and hyper scale cloud partnerships. We are rapidly scaling manufacturing and R&D to capitalize on cloud opportunities and to meet surging data rate demands. As we discussed in prior quarters, the Cloud Light acquisition is accelerating our high speed transceiver qualifications and production positioning us for multi-billion dollar cloud revenue and over $500 million quarterly revenue by the end of calendar 2025. Thank you all for joining our call today. We look forward to seeing you again at investor conferences and upcoming meetings this quarter. Have a great day. Operator That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

Earnings call: TSS reports robust growth and strategic partnerships By Investing.com

Technology Support Services (TSS) held their second quarter 2024 earnings call, with CEO Darryll Dewan and CFO Danny Chism presenting a comprehensive overview of the company's financial health and strategic direction. TSS reported a substantial 33% year-over-year revenue growth, with notable improvements in operating income, net income, and adjusted EBITDA. Despite a decrease in total revenue, the company saw a gross profit increase due to a shift toward higher-margin services. Dewan emphasized the company's commitment to operational excellence and its strategic positioning to capitalize on the growing demand for AI and high-performance computing infrastructure. In summary, TSS's earnings call revealed a company in the midst of a significant growth phase, with a clear focus on operational excellence and strategic partnerships to navigate the challenges and opportunities of a rapidly evolving tech landscape. The company's financial results and forward-looking statements reflect a confident outlook for its role in the AI revolution and cloud computing markets. Technology Support Services (TSS) presented an encouraging second quarter of 2024, spotlighting a robust year-over-year revenue growth and a firm strategic direction towards high-margin services. To further understand the financial dynamics of TSS, let's delve into some key metrics and insights from InvestingPro. InvestingPro Data shows that TSS has a market capitalization of $65.16M, indicating the company's value in the market. The company is trading at a P/E ratio of 76.85, which, when adjusted for the last twelve months as of Q1 2024, slightly lowers to 74.47. This high P/E ratio may suggest investor confidence in the company's future earnings potential or a market premium for its growth prospects. Moreover, the substantial revenue growth of 99.0% over the last twelve months indicates that TSS is rapidly expanding its financial top line. An InvestingPro Tip highlights that TSS holds more cash than debt on its balance sheet, which is a positive sign of financial stability and operational flexibility. This could be particularly advantageous for the company as it explores avenues for capacity expansion and growth in the AI and cloud computing sectors. Another InvestingPro Tip points out that TSS is trading at a low P/E ratio relative to its near-term earnings growth. This suggests that the stock may be undervalued given its growth trajectory, which could be an attractive point for investors looking for growth at a reasonable price. For readers interested in a deeper analysis, there are 14 additional InvestingPro Tips available, which provide a comprehensive view of TSS's financial health and market position. These tips, along with detailed metrics, can be accessed through the InvestingPro platform. In summary, the InvestingPro Insights indicate that TSS is a company with solid financial health, significant growth potential, and a strategic focus on high-margin services, which aligns with the positive outlook presented during their earnings call. Operator: Good afternoon. My name is Brianna, and I will be your conference operator today. At this time, I'd like to welcome everyone to the TSS Second Quarter 2024 Earnings Call. Please note that today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [Operator Instructions] I will now turn the call over to Danny Chism, CFO. Please go ahead, sir. Danny Chism: Thanks, Brianna, and good afternoon, everyone. Thanks for joining us for TSS's conference call to discuss our second quarter 2024 financial results. Joining me today on this call is Darryll Dewan, the President and CEO of TSS. As we begin the call, I'd like to remind everyone to take note of the cautionary language regarding forward-looking statements contained in the press release we issued today. That same language applies to comments and statements made on today's conference call. This call will contain time-sensitive information as well as forward-looking statements, which are accurate only as of today, August 14th, 2024. TSS expressly disclaims any obligation to update, amend, supplement, or otherwise review any information or forward-looking statements made on this conference call or replayed to reflect events or circumstances that may change or arise after the date indicated except as otherwise required by applicable law. For list of the risks and uncertainties that may affect our future performance, please refer to our periodic filings with the SEC. In addition, we will be referring to non-GAAP financial measures. A reconciliation of the differences between these measures with the most directly comparable financial measures calculated in accordance with U.S. GAAP is included in today's press release. Darryll will kick off the call with an overview and commentary about the quarter and year-to-date performance. Then I'll provide more details about our financial quarter results. And then turn the call back over to Darryll, to recap our strategy and direction. Darryll? Darryll Dewan: Thank you, Danny, and welcome to our team. Danny joined us in early June, and he's already making a significant impact bringing energy and innovative ideas to help drive our growth strategy. With over three decades of experience, Danny has a proven track record of delivering sound financial strategies and improving operational efficiencies during periods of rapid growth. His expertise spans crucial areas that will be increasingly important to TSS, including transactional experience, capital raising, and Investor Relations. His addition to our leadership team is a key part of our ongoing commitment to building and strengthening our organization. Speaking of growth and opportunities, let me share some insights on our current position and future trajectory. 2024 marks a pivotal transition for TSS, building momentum for accelerated growth and expansion for 2025 and beyond. Our current trajectory demonstrates significant progress, setting the stage for even greater achievements ahead. On today's call, I will provide additional context to illuminate our position and share why we're optimistic and poised for acceleration. Our turnaround strategy has progressed through key milestones as we previously communicated in the earnings call and announcement. To review, we began with a comprehensive operational cleanup, completed in the first half of this year and culminating in our ISO certification. Next, through our investment in people, systems, and physical layout of our main facility, we successfully demonstrated our ability to scale within our current capacity, addressing a crucial concern for our customers. Now we're entering a third phase, ramping up revenue, earnings, and cash flow. We are already seeing the beginning of this growth as our Q2 results reflect. Our execution has been established by solid operational foundation and proven scalability, positioning us for accelerated expansion ahead. Our performance in the first half of this year underscores our significant progress. We delivered $28 million revenue, total revenue, a 33% year-over-year revenue growth while simultaneously investing in the business and expanding profitability. The growth was driven by our more profitable businesses, our systems integration facilities management. This growth translated to even more impressive bottom line results. Operating income surged 530%. Adjusted EBITDA increased 331%. And we achieved $1.4 million in net income, a remarkable turnaround from last year's $500,000 loss. Our financial performance stems from our unwavering focus on operational excellence, our commitment to strengthening and expanding our team, and our enhanced go-to-market efforts. This strategic approach has not only driven our financial success, but also solidified our position as a trusted partner in delivering infrastructure crucial for AI and high-performance computing occurring in our increasingly digital world. As we move forward, these results validate our strategy and set the stage for continued growth and innovation. We're not just improving our numbers, we're helping to shape the future of digital infrastructure. Operationally, our success is driven by our ability to execute, meet the demands of rapidly evolving AI landscape and a need for high-performance computing infrastructure while remaining responsive to our customers' needs. The demand for AI continues to catalyze our expansion, creating significant opportunities for TSS as we support our primary OEM partner, expand capacity, and enhance services to meet their needs, as well as those of other prospective partners and customers. Allow me to share some insights on the AI market, current state, cutting through the speculation to dominate headlines. AI presents significant challenges in infrastructure procurement and planning, primarily due to the rapid evolution of compute power. At the data center level, we're seeing an unprecedented surge in power density. Just recently, a single rack would typically consume 10 to 15 kilowatts of power. Today's AI racks push 80 kilowatts, and we anticipate soon reaching 120 to 150 kilowatts in the next couple of generations. Industry roadmaps project over 200 kilowatts within a couple of years. This is an incredible growth in power density in a remarkable short period of time. This swift advancement is causing uncertainty for data center equipment buyers, and may cause some lumpiness in our growth trajectory. However, there's no doubt that AI is dramatically accelerating the overall data center capacity pipeline. Moreover, this compute density increase brings a formidable challenge, heat. Cooling methodologies are evolving rapidly to keep pace with the increasing power density. This evolution presents both challenges and opportunities. TSS is positioned not just to adapt, but to lead in this rapidly changing landscape. Our nimble operational model enables us to adjust quickly as customers seek to make on-the-fly architecture changes, and our rapid testing capability provides more immediate feedback to customers by narrowing configuration options, including cooling. During Q2, we made a significant investment in our production capacity, which came online at the beginning of June. This expansion significantly increased our volume capacity, and decreased the cycle time to complete each rack within our existing facility. The expansion was driven by the surge in demand for server racks built in the pipelines of our customer, OEM customers. Our committed OEM customers are seeing the benefits of our actions and are very supportive. We have in recent times received customer funding for capacity and capability expansion to meet future needs, a compelling reflection of our customers' view of us as a partner. We continue to actively engage in discussions with them to further expand our capacity as we fulfill their needs and execute our goal to become a primary production partner for their future AI-related endeavor. We value our relationships. This is truly a partnership for success. Demand increased in Q2, and we began delivering complex AI integration solutions on time, and I want to stress, on time, including the first stage of a highly publicized program. That initial program began in June and is being carried out into Q3. As a result, we finished a quarter with a record run rate of rack integration revenue. Rack integration revenues from the first half of this year are just a bit under what we achieved for all of 2023. Our procurement business, where we sourced third-party hardware, software, and services, delivered another solid performance in Q2, although it was down slightly year-over-year. Following a modest forward Q2 -- Q3 projections for our procurement business indicate very robust growth, potentially surpassing $50 million in revenue for the quarter. For those familiar with our history, recall that our procurement segment often experiences quarter-to-quarter fluctuations due to size, timing, and revenue recognition methods of the deal. However, its overall trajectory remains upward, consistently contributing to our profitability. While we're encouraged by this growth trend, we maintain a prudent outlook on this business line and remain cautiously optimistic. Our modular data center business, or MDC business, continues to show year-over-year growth and remains a promising long-term opportunity for TSS. While the overall MDC market hasn't expanded at the rate analysts initially predicted, largely because rapid industry growth favored greenfield-type development over capacity augmentation using MDCs, modular data centers, we're now seeing signs of a potential shift. The challenges I've highlighted earlier, rapidly increasing compute density involving evolving cooling requirements, may finally usher in the area for modular solutions. Whether this materializes as predicted remains to be seen. However, TSS, we are strategically positioned to capitalize on this trend, particularly if AI clusters start being delivered as freestanding racks or modules. To be clear, the overall volume ramp that we've been anticipating is now underway. Our OEM customers have very robust pipelines and we're seeing deals begin to close. We believe our Q2 performance is a harbinger of the good things to come. Our strategic inclusion in key customer programs signals a bright future as OEM pipelines materialize. This growth trajectory may not be a smooth upward linear line. The pipeline deals of our OEM partners are large and we anticipate some variabilities the market adapts to rapid technological changes. But make no mistake, we're witnessing a dawn of a transformative era in our industry and TSS is at the forefront. This is not just exciting, it's validating. It confirms our strategy, our investments, and more importantly, the tireless efforts of our exceptional team. I'm proud of this team and as we navigate this dynamic landscape, we're just not riding the wave of AI revolution, we're helping to propel it forward. So now let me turn it back to Danny to discuss our numbers. Danny? Danny Chism: Thanks, Darryll. I'm excited to be here and excited to share the detailed financial results of another strong quarter for TSS. Before I jump into the earnings for the quarter, I'd like to make a couple of observations about our financial position. We again ended the period debt-free with an untapped available line of credit and just over $8 million of cash on hand. As Darryll mentioned earlier, an OEM partner with whom we work closely agreed to fund a significant portion of the capital investments we made during the quarter to enhance our capacity to rapidly build AI-enabled server and network racks for them. You can see this $1.7 million capital investment in our statement of cash flows. The portion of the reimbursement not yet amortized into revenue is included in our balance sheet as part of the deferred revenue balance. You'll also notice a $2.6 million increase in inventory compared to December 2023. That relates to configuration and systems integration work that was ongoing at the end of June. Our contract and other receivables also increased by just under $3.5 million. As the majority of our annual facilities maintenance management contracts were renewed July 1st and the invoices for those were sent out shortly before quarter end. The revenues for those, as in past years, will be recognized primarily over the next 12 months. Now I'd like to turn to the operating results for the second quarter. Ordinarily, I wouldn't be very enthusiastic about sharing with you a 16% decrease in our total revenue. However, if you look at the gross profit for the quarter, it's up 41%. Driven by a revenue shift mix to higher yielding services. The revenue decrease was driven by a $5.7 million or 54% decrease in our procurement revenue. It's a great business that adds to the bottom line and we'll take as much of it as we can get. Plus, it provides some cross-selling opportunities for systems integration work. The movements and revenues from the procurement business itself have a much smaller impact on our overall gross profit and bottom line than do movements in our facilities management and systems integration businesses. We had a 46% growth rate in revenues from facilities management activities. Largely tied to a couple of discrete projects during the quarter. And an impressive 108% increase in systems integration revenue. The last item is particularly exciting as it was driven largely by our starting to integrate AI-enabled RAC, which began late in Q2. At least in the near term, we expect the demand from this business to be a bit lumpy, as Darryll mentioned, with some spikes and valleys in demand from our OEM partners and customers. And somewhat dependent on the timing of the next generation of AI chip sets from the big chip manufacturers. That being said, in the first six months of the year, our systems integration team processed more than 80% of the system racks we integrated in all of 2023. As of the date of this call, we've already eclipsed the number of racks we integrated in a full fiscal 2023. Our SG&A expenses increased a bit in dollar terms and improved 8 percentage points to 59% of gross revenues from 67% this quarter last year. Through effectively leveraging our expense structure, the 41% growth in gross profits translated into a 74% improvement in operating income. Ending the current period at $1.7 million. Our net interest expense represents almost exclusively the cost of factoring our accounts receivable from our largest customer. This factoring arrangement ends up having an effective interest rate of only around 6%, a far lower rate than we could get if we were to utilize a bank loan or revolving line of credit to finance those receivables ourselves. The net result of the above factors is that net income swelled to $1.4 million, up 345% from this quarter last year. And EPS moved from $0.01 in the prior year period to $0.06 per share in the current period. Adjusted EBITDA, which excludes interest, taxes, depreciation, amortization, and stock-based compensation, was just under $2 million, up from $1.2 million this quarter last year. Now let's take a look at the six-month period into June 30 compared to the comparable period of 2023. Total revenues were up 33%. With a good portion of the overall growth in total revenues coming from higher-yielding services, our gross profit increased 48% to $7.3 million. Similar to what we saw in the quarter, our SG&A costs improved to 70% of gross profit from 90% in a prior year-to-date period. Adjusted EBITDA was a bit more than three-fold what we produced year-to-date last year, ending the period at $2.5 million. The gross value of procurement transactions processed in the second quarter of 2024 was $21 million, compared to $42.9 million in the second quarter of last year. In the current year-to-date period, we processed $40.9 million of gross value of procurement deals, compared to $49.6 million this period last year. Procurement revenues are highly dependent on the timing of customer needs and can fluctuate widely from quarter to quarter. All in all, it was a great quarter for us financially, and we look forward to achieving similar results as we continue to scale the business. With that, I'll turn the call back over to Darryll to share some insights into our expectations for the future and provide some closing comments. Darryll? Darryll Dewan: Thanks, Danny. It's great to have you on Board. Thank you. We, TSS, remain strategically positioned to drive growth in both the burgeoning generative AI market and traditional cloud computing. AI's transformative impact spans every sector, and TSS, alongside our partners, stands ready to meet this surging demand. Looking ahead, we anticipate continued growth in our rack integration business. The expansion of our capacity, completed in Q2, will yield significant benefits throughout the second half of 2024 and into 2025. Our ability to also provide on-site rack integration on a customer site with cabling services opens up new high-margin opportunities for TSS, expanding our total addressable market and customer base. Our expertise in handling complex integrations and our maintenance capabilities uniquely position us to capitalize on these trends and growing market demands. We believe we have the physical capacity to handle near-term growth that we anticipate. We also believe there is a potential demand looking into 2025 that might and may outstrip our capacity. We have begun initial exploration into further capacity expansion. Our procurement business remains strong despite quarterly fluctuations. In our modular data center business, while we've seen year-over-year improvement, we're now engaged in promising discussions with prospective customers. Our focus is on building a solid backlog to fuel revenue growth in 2025 and beyond. We're observing increased refresh activities in existing installations, though new builds are taking longer, particularly for AI solutions due to high GPU demand and anticipated technology releases. In the long term, we see potential synergy between AI and modular form factors, especially for use cases like autonomous vehicles and other time-sensitive applications in underserved areas. So, in conclusion, TSS now has the capacity, expertise, and track record to deliver for our partners and customers. We are very well positioned for the next wave of growth, and we continue to explore avenues to enhance our growth potential. I'm very optimistic of our future. I'm proud of our team. And with that, I'll open the lineup for any questions. Operator? Operator: [Operator Instructions] Our first question comes from Maj Soueidan with GeoInvesting. Please go ahead. Maj Soueidan: Hi, Darryll. Thanks for taking the call. I have a couple of questions, really, and then I'll just go in the queue then. So obviously, it looks like you've got some growth in your rack integration, which is what we've been waiting for to see how that looks. Or kind of getting an idea of what that looks like in terms of the bottom line, based on what you've done in terms of efficiencies. So I guess my question is a couple of things here. Number one, can you start giving us an idea in terms of how much of your integration business is rack, so we can maybe start modeling a little bit in terms of your 10x kind of capacity expansion kind of goals moving forward? And number two... Darryll Dewan: That's okay. Don't make this too complicated. I'm trying. Fair enough. Keep going, man. Maj Soueidan: No, because I'm in the airport here and I want to make a noise in here. And so we're getting a glimpse of what you can do when you scale here at a rack integration. Are there more efficiencies down the line as you keep on growing that business? We're just trying to get an idea of what the larger picture might look like. And maybe the same question, really, with as modular it gets going, trying to understand the larger picture there as we move forward. That's really it right now. Darryll Dewan: Okay. See if I can take this apart. So first of all, to your question on 10x. Yes, I think we're on track to go do that. That is measured in terms of the quantity of racks. The mix of racks is changing in that we're getting more -- I think we're planning for the future where there's going to be an increase in direct liquid cooled solutions as compared to what we have today. When I mentioned about heat and cooling, the future is looking like it's going to move to a larger percentage of direct liquid. So we've got to accommodate that in our capabilities in our factory. And what we're going to run out of is power. And we're not sounding like anybody else, right? I mean, customers are clamoring for power and they're trying to figure it out. And we're not that much different. So at some point, depending on the percentage and the timing and the forecast that we're going to get, we are planning for more power. And it may be at a different facility, being blunt. And we're going to do that really carefully. And we're not going to go just run away and just do it for the sake of doing it. But we're going to have to lean in and make some decisions on that pretty soon. Now, I think on the modular, and by the way, I think we've got the capacity to grow here depending on the mix of business. But if it rapidly shifts to direct liquid, then we're going to have to more rapidly move to another facility. We have some sites in mind. We're planning for it. But we're just not ready to fully make a decision on that. Danny Chism: Yes, if I can jump in for just a second. One point I would make there also is we do have the ability to do some direct liquid cool today. We have that infrastructure. It's just not at the volume that we expect that to be in the future. Darryll Dewan: Okay. And on your modular question, part of the issue, Maj, is the lead time for componentry. When I first joined the company, I was told, lead time is anywhere from eight to 12 months to get a container, to get the power units, et cetera. And I said, that's nonsense. We can fix that. Well, we can't. But we can build tighter relationships with the folks who are doing that work, like the Verdas, the Schneider's, the Eaton's, et cetera. And we're doing that. We're taking steps to go get closer to those partners. What's that translate to? We do have -- we have an internal goal on the backlog and the pipeline that we want to build that will turn into revenue in 2025 and beyond, given the lead time. We're not where we need to be yet. But we're making progress. We've got a couple of deals that have closed. And we've got a couple of others insight. And we're working as aggressively as we can. I don't know if I answered your question. But if I didn't, let me know. Maj Soueidan: Yes, that was good, yes. I mean, maybe I guess one of my questions, if we can get more specific on it, or just maybe yes or no on it. Do you think that there's more efficiencies that come down the line here as you scale? You know, we got a glimpse of it here in Q2. Do you think the margin profile improves as you scale the business, especially with the rack integrations type of business, I guess, and maybe even modular? Darryll Dewan: The answer, absolutely, yes. Maj Soueidan: Okay, that was important there. Cool, cool. Yes, that's all I have for now, man. Thanks. Darryll Dewan: All right. Thanks, bud. Good to hear your voice. Operator: Our next question comes from Jonathan Alvarado [ph], Private Investor. Please go ahead. Unidentified Analyst: Hi, congratulations. I've heard reports that you guys added around 200 employees during the second quarter. Is that true? Darryll Dewan: No, but we did add more people. Unidentified Analyst: Okay, and were they largely all put to work right away? Darryll Dewan: As soon as they hit the front door. Unidentified Analyst: All right. And we've heard reports that you're working on Elon Musk xAI Data Center. Is that true? Darryll Dewan: Jonathan, what we can't do is talk about the end user customer because it's very confidential to our relationship with our partner. So I wish I could answer that, but I can't. Unidentified Analyst: Okay. But you are a Dell (NYSE:DELL) Premier Partner, and would you get more work if Dell gets larger deals? Darryll Dewan: We are a Dell services partner, and we work very hard to get as much business as we can with our relationship. So it is our hope and our desire that as the market expands and Dell succeeds and potentially other customer partners succeed, we will succeed as well. We're also embarking on a game plan to go direct to the end user on certain services that would not be in conflict with any relationships that we do have with Dell or anybody else. And we're in the early stages of that. But right now, it's not material to report. Unidentified Analyst: And the current performance on your existing contracts that you just completed, does that set you up for more work on those same projects? Darryll Dewan: Jonathan, we hope so. We want as much business as we can get. So the better we do, the more we want. Unidentified Analyst: Great. Darryll Dewan: I would say, the level of expertise to which we executed, I think, demonstrates the skills that we've built internally and the expertise. And I do anticipate that will be recognized and probably should result in us winning more business. Unidentified Analyst: Great. Well, continued success. Thank you. Operator: Our next question comes from Paul Simon, Shareholder. Please go ahead. Unidentified Analyst: Hello. Congratulations and great results. I just have a couple of questions that I think you may not be able to answer based on your last answer. But I was going to ask, what percentage of your total revenue comes from relationship with Dell? Darryll Dewan: I think we can't talk about that publicly. Unidentified Analyst: No problem. No problem. Like I said, you can't answer it maybe because you just said you can't talk about relationships. That's fine. It's just something I had on my mind. But the second thing is you mentioned power. You mentioned power. And I'm curious about one. I haven't read anything about it or anything. I'm impressed with your results. Congratulations for everyone. I saw the stock jump up to $2.75 right before this thing. It's nice. Now, when you said power, are you considering solar or nuclear power or anything else to power these things? Because I understand that there's huge power demands. And like you said, you don't have enough power. Are there any other methods you're trying to use to make power, generate power? Darryll Dewan: Well, what we need is power to the facility, electric power. And it's measured in megawatts. We've got a good amount of megawatts of power in our current facility. And the lead time to go get additional megawatts is longer than we want. And like, so what do you do? You go to another facility and you do the pricing and the costing and you make a decision on timeframe and money. And we're looking at that. Solar, nuclear. If you think about what is, you know, consistent that you can count on, with probably nuclear probably comes the closest. But what I've seen so far is not many people want to put a nuclear portable unit next to their facility. Not yet anyway. I just purchased a company today that does something like that. It's called NNE. But anyway, that's not what I call it, of course. Unidentified Analyst: This company's making portable nuclear, or not so much portable, but more portable than what, you know, normal huge thing would be, like three-mile island or whatever they call it. No, it's pretty, on a truck, it's portable. So, anyway. Darryll Dewan: I looked at one company. We were introduced to a company that's based up in Silicon Valley that is doing something on a portable nuclear level. And we're engaged. I don't know if it's the same company, but what we're looking for, it simply is just that we need more power to the facility. And we'll consider anything. Anything that can help us get there, we'll consider. But realistically, in the short term, we haven't seen anything that really we could talk about today, besides regular power. Unidentified Analyst: Solar can be bad, depending on the weather. And also, you have to have a lot of land for that. Or actually, roof space. Actually, roof space usually works, or sometimes. But no, thanks for the answer. And thanks for the great results. Like I said, I just noticed the thing jumped up to $2.75. I don't know, it just happened right at the end of the day, I guess. Thank you for the great results. Darryll Dewan: Yes. And Paul, for you and all other investors, I think on behalf of not only myself, but the management team, we appreciate your trust in the business. And if you're going to put money into our company, we've got an obligation to do everything we can to give you a very good return on your investment. So, we're focused on that and customer value. So, thanks for your investment. Unidentified Analyst: Well, thank you, sir. And I have a feeling we're going to see a rise tomorrow, because I think these over-the-counter markets obviously don't do much extended hours. I think tomorrow you're going to see a huge rise. That's just a prediction. I can't guarantee anything. Darryll Dewan: Paul, we're just focused, we are focused on execution and everything else happens fifth grade. Execution, that's our goal. Unidentified Analyst: Well, that's okay. I don't buy any stock that I don't see as executing. I guarantee you that. And every single one I have is executing. And so, you are definitely one of them. A guy at E-Trade told me, hey, that thing doesn't have much volume. Hey, this, that, and the other. I said, dude, look, I'm going to buy it for $1.75 and let's see what you say. Now, it's $2.75. Let's see what he says tomorrow. Anyway, he was just saying these small cap things, there's no volume, there's this and that. I said, listen, man, I know how to analyze. I went to college and I have a finance degree. Listen, this company has dominated this entire year. So, don't tell me about small cap, large cap. If you dominate, you dominate. So, thank you very much and have a great next quarter. Darryll Dewan: Thanks, Paul. Appreciate it, bud. Operator: Our next question comes from Mitch Swergold, a Private Investor. Please go ahead. Unidentified Analyst: Hi, guys. Congratulations on a really great quarter. It looks like you're managing the growth of the company very, very effectively. I was impressed that you are receiving financing from your partner. Can you talk a little about the size and scale of that as well as how far in advance do you have to put the CapEx in before you can then generate revenue off of it? And then I have a follow-up question. Darryll Dewan: So, like earlier, I wish I could give you the answer to your question, but that's proprietary. Not out of disrespect to you. It's just private. And I'll underscore it by it doesn't come easy, and we are very respectful of our relationship with our partner and the fact that they put some money into what we're doing. It's a beautiful thing. As far as the other part of your question, I'm not quite sure I know how to answer that. Unidentified Analyst: Okay. The other question I have for you is I also have heard that you've done some significant hiring, so I just wondered if you can tell us, I think you had 80 employees at the end of last year. Can you tell us how many employees you had at the end of the quarter? Darryll Dewan: We've gone public before. We had 83, which is the last time we quoted any volume. And I think for the sake of confidentiality, we're not going to get into a whole lot more, but we've doubled at least our headcount, and we need to do that to accommodate. Go ahead. Unidentified Analyst: I didn't mean to interrupt you. So, in six months, you've more than doubled your headcount? Unidentified Analyst: Would it be safe to say that it's closer to triple than double? Darryll Dewan: No. I respect where you're going with it, but I don't want to go any further with it. Unidentified Analyst: Okay. Have you had a lot of turnover? Darryll Dewan: Not unexpected, based on the hiring trajectory we had. I've got to do a shout-out to our chief people officer and the management team. We were prepared and we were planning for growth at some point, and we did a lot of it through automation and heavy duty. We were interviewing and we were working weekends and nights, making this team what it is today. So, I just need to do a shout-out to the team, the management and leadership team, for making that happen. It would not have happened if we hadn't planned for it, we hadn't implemented some of the processes and the systems, and we had the people we've got in leadership positions. So, we did some really unique things in a very short period of time. Unidentified Analyst: That's great. Last question. Can you talk about the duration of, what kind of duration and revenue visibility do you have? Duration on the contract and revenue visibility for the coming quarters? Darryll Dewan: Let me answer it this way. We have much better signals today and information exchange between our factory leadership and also our partner than we've ever had. And while there's no guarantees in life, we have a working relationship, we've got trusted relationships that we know how it works. And I'm also ex-adult. So, not that that means a whole lot, other than when if you have any relationships with adult people, you know a lot of it's based on trust and integrity and relationship. And we really work hard on that, especially as it relates to future demand and investment decisions we make, because it impacts people. It impacts our business. And our partner knows that. So, it's a good, I call it bi-directional relationship, but I can't get into some of the details currently on the call. Please understand I'd like to, but I can't. Unidentified Analyst: Totally understand. Thanks so much for your candor. Darryll Dewan: Okay. You're welcome. Thank you. Operator: We have no further questions at this time. I will now turn the call back to Darryll Dewan for any closing remarks. Darryll Dewan: Yes. Thanks, Brianna. To everybody here on behalf of the leadership team, we really do appreciate everybody's support of the company and what we're doing. Your info and involvement is respected. We appreciate it. We're optimistic about the future. We know what we have to do. We're focused on ROI for everybody, return on investment, and profitable growth. So, thanks for participating in the call. Wish everybody a good evening and afternoon, wherever you're at. And wish us luck. Operator: This concludes today's conference call. Thank you all for your participation. You may now disconnect.

Rekor Systems, Inc. (REKR) Q2 2024 Earnings Call Transcript

Mike Latimore - Northland Capital Markets Noah Levitz - William Blair KC Ambrecht - Shay Capital Good afternoon, ladies and gentlemen, and welcome to today's Rekor Systems, Inc. Conference Call. My name is Diego, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. Before we start, I want to read you the company's abbreviated safe harbor statement. I want to remind you that statements made in this conference call concerning future revenues, results of operations, financial position, markets, economic conditions, products and product releases, partnerships and any other statements that may be construed as a prediction of future performance or events are forward-looking statements. Such statements can involve known and unknown risks and uncertainties and other factors, which may cause actual results to differ materially from those expressed or implied by such statements. We ask you that you refer to the full disclaimers in our earnings release. You should also review a description of the risk factors contained in our annual and quarterly filings with the SEC. Non-GAAP results will also be discussed on the call. The company believes the presentation of non-GAAP information provides useful supplementary data concerning the company's ongoing operations, and is provided for informational purposes only. I would now like to turn the presentation over to Mr. David Desharnais, President and CEO of Rekor Systems. David Desharnais Good afternoon, and thank you for joining us today. As I conclude my first full quarter as President and CEO of Rekor, I am pleased to share our solid progress in the quarter and strategic vision for the future. Over the past 90 days, since stepping into this role, I've delved deeply into every aspect of our business. I've been focusing on refining our financial processes, enhancing the work that we are doing in government relations and driving operational excellence across our sales team and field operations. My commitment is to establish and strengthen the governance structures and scaling mechanisms that will help transform Rekor into a more predictable growth engine. And I'm encouraged by the team's positive response to the direction and priorities that have set and the substantial progress we've made so far. Also, over the past three months, I've had the privilege of engaging with many of our investors and shareholders globally. Your insights have been invaluable to me, and I want you to know that I'm listening. Our conversations have reinforced three key themes: strong enthusiasm for our market position and opportunities, concerns about securing necessary capital to continue our significant growth trajectory amidst macroeconomic uncertainty and slow government contracting cycles; and finally, eagerness for meaningful customer traction. Today, I'll address these three areas and provide insight into our path forward. To begin with, let me stress that navigating the complex procurement processes of federal, state and local government agencies is challenging. But it also provides an opportunity with unparalleled long-range stability and growth potential. While we've been fielding our AI-based solutions in the transportation and traffic segments for just over a year at this point, namely our Discover and Command platforms. We have moved at a rapid pace, gaining awareness, preference and adoption across multiple states, including South Carolina, Georgia, Florida, New Mexico, Texas, Colorado, Ohio, Maryland, Oklahoma, Kansas, Oregon and multiple others in the works. However, it is important that we remain realistic given that the government contracting process is opaque at best and has its own pace and timeline. It is something that we will continue to be conservative with in setting expectations as it relates to timing of deals and expansion. Along this line, and as an update to our last earnings call, I wanted to update you on the upcoming deployment of up to 1,000 Discover and Edge units, equating to a potential upside of approximately $35 million in revenue, in one of the largest states in the U.S. as they finalized their AI policy. As of today, I'm pleased to share that we've initiated deployments in the region. However, progress has been hampered by continuous interruptions resulting from multiple storms of this hurricane season, most recently by Hurricane Debby. We don't control these things, of course, but the state does not permit anybody to work roadside in hazardous weather conditions in the period leading up to the storm, during the storm itself, of course, but also in the immediate aftermath. Understandably, this has impacted our expected timeline for deployments, as the state is prioritizing emergency response efforts for its citizens. But the initial sites we have already activated have performed flawlessly under these extreme conditions and have already proven to be mission-critical, delivering vital insights to the state's emergency operations center to support evacuation routes during these storms. This underscores the essential role our technology plays, further cementing Rekor as a trusted and indispensable partner in this state, which will pay dividends. As I also highlighted in the previous call, the transportation infrastructure industry is undergoing a massive and generational technology refresh, and that within our existing Southeast footprint alone, we see the potential to add 6,000 to 8,000 sites, which could generate an estimated $200 million to $300 million in cash flows over the coming years. Rekor's reputation as a trusted partner in the Southeastern states has never been stronger, and our success is being closely monitored by other states nationwide, as we continue to execute our growth strategy. Given our recent performance with these states during these crises, it only positions us more strongly for our continued expansion in the region. Our growing recognition and reputation, along with the ongoing infrastructure overhaul that is happening, puts us in an ideal spot to capitalize on this transformative period in the industry. So while we must continue to navigate the complex and often slow-moving procurement processes of state and local governments, it also provides us a unique opportunity for long-term and durable growth that we believe will benefit our investors in the long run. Despite the relatively short time we've been deploying our technology in market, we're experiencing continuous accelerated growth, and I'm confident in our ability to sustain this momentum. Later in the call, I'll discuss some of the new contracts we've secured during the last quarter and examples of meaningful traction we're experiencing. Before diving into these details, I'll now hand the call over to Eyal Hen, Rekor's CFO. He'll review our financial highlights for the quarter and discuss the proactive steps we're taking to solidify our capital position and protect our shareholders, as we navigate the uncertainties of the current macroeconomic environment and B2G domain. Eyal? Eyal Hen Thank you, David. Hello, everyone, and thanks for joining us today to discuss our results for the six and three months ended June 30, 2024. I would like to start with our recent announcement that we have just infused $15 million into the company for a facility that can provide up to another $20 million in capital should we need it. The agreement is designed with strong shareholder protection, including a $2.6 million monthly cap on prepaid balance conversions to equity, and a ban on short selling by the counterparty, which minimizes dilution and allows us to draw less capital or repay the notes early once our expected contracts materialize. Full details about this agreement have been provided in our 8-K concerning the financing, and I won't delve into them now. Suffice it to say that this gives us the necessary resources to address the recent government contract delays we've been facing. This injection of funds position us to meet our 2024 growth targets. And as is shown by our Q2 performance, we are making solid progress against this. We'll continue to drive operational efficiencies and carefully manage our cash flow to ensure it is used effectively, but at the same time, we have improved our metrics year-over-year and quarter-over-quarter. Going forward, some of the larger recurring revenue contracts we are pursuing may involve significant upfront installation expenses. If additional capital is needed for this implementation, we plan to prioritize non-dilutive financing options, such as issuing an additional series to our revenue sharing notes. We expect to continue to address our capital needs prudently, expanding our industry leadership and fulfilling our customer commitment as needed. In this regard, we have engaged B.C. Ziegler and Company, a specialty investment bank, to service as placement agent and market maker in connection with future issuances of our revenue-sharing notes. Over the past few months, we've been in discussions with them as well as with rating agencies to work on getting these notes rated, which should help reduce overall cost and improve their marketability. We anticipate continuing to use this structure, which aligns potential future debt to the growth of fully performing contracts as a primary funding source of additional growth capital. Now I'm pleased to talk about our financial highlights for the three and six months ended June 30, 2024. In the second quarter of 2024, our revenue reached a record revenue of $12.4 million, marking a significant growth of 45% increase from the $8.6 million in the same period last year. We also demonstrated a robust revenue growth quarter-over-quarter at over 27% above Q1 2024. In the six months ended June 30, 2024, we achieved $22.2 million in revenue, an increase of 51% from the $14.7 million we marked in the same period last year. Recurring revenue also increased by 8.9% from $5.8 million in the same quarter of 2023, compared to $6.3 million in the same quarter of 2024. Our adjusted gross margin for the three months ended June 30, 2024, was 53.5%, an increase from 51.8% in the second quarter of 2023. This increase was primarily due to higher margin mix of sales during this quarter. As previously explained, we expect a primary benefit of our technology refresh efforts to allow us to move from lower margin to higher margin sales over time. However, during the early growth phase we are in, this evolution may be choppy, as we saw at the beginning of this year. The adjusted gross margin for the six months ended June 30, 2024 was 50.2%, a decrease from 52.5% for the same period last year. The decrease is mainly due to the lower margins we experienced at the beginning of the year. We also continue to see improvements in our adjusted EBITDA loss. For our second quarter, it's now set at $5.8 million, an improvement of over 19% from the $7.2 million in the same period last year. The adjusted EBITDA loss for the six months ended June 30, 2024, was down to $15.2 million from $16.5 million in the same period last year. Lastly, another significant development in the second quarter of 2024 was the exercise of [3,675,000] warrants in June 2024, which resulted in $5.2 million of cash to the company, of which $3.2 million was received in July after the balance sheet date. Also in July, we sold our remaining 19.9% ownership of Global Public Safety for $1.5 million. And of course, as highlighted earlier, we received $15 million under our prepaid advance agreement, which has been structured to provide up to $35 million under appropriate circumstances. In summary, we are very pleased with our solid second quarter results and the synergistic and accretive impact of our recent acquisition. Our capital raise and the engagement with Ziegler are instrumental enablers in continuing to secure our leadership position in the industry. Our financial and operational strategies are designed to capitalize on future growth opportunities. Looking forward, we continue to be confident in the potential of our technological developments, strategic acquisitions and are grateful for continued support of our investors. Now I will turn the call back to David to cover additional business highlights from the quarter. David? As Eyal highlighted, we delivered a solid Q2, performing well against all metrics and achieving the highest top line revenue in our history. And with the capital now in place to support our continued growth, we are laser-focused on executing our customer expansion plans and driving what we expect will be a strong year-over-year growth, along with a healthy pipeline dynamic heading into 2025. Now I'd like to share some important business highlights from the quarter. As mentioned earlier, a major theme I probed from investors is the strong enthusiasm for our market position and opportunity and eagerness to see customer traction. I'm pleased to share that the progress we've made in the past quarter across each of our business segments is meaningful and continues to lay a solid foundation for continued growth. Rekor's industry reputation as the leader in roadway intelligence is steadily growing, with our brand and AI-based solutions gaining recognition across multiple high-profile forums and institutions. We are regularly invited to share insights and success stories in local and national media, underscoring our thought leadership in the future of AI and transportation. We were also proud to recently have the Baltimore Business Journal recognizes as the number one fastest-growing company in the region, as well as highlight our commitment to digitizing critical transportation infrastructure across the nation. Additionally, we were honored with a special invitation to join a high-profile panel alongside leaders from TxDOT and Amazon/AWS. During the event, the CIO of TxDOT highlighted Rekor's industry leadership and the significant impact of our technology in Texas. Notably, Rekor Command was credited with helping achieve a 29% reduction in secondary crashes and a 44-minute improvement in incident resolution times, underscoring our vital role in their mission-critical efforts to save lives on their roadways. This quarter, Rekor was prominently featured by ITS Americas as a leading force in the current and future landscape of AI for digital infrastructure and transportation. They highlighted multiple Rekor use cases, where we are proving to improve transportation and citizen safety across state and local roadways. This recognition, along with the award of multiple new technology patents we received this year, reflects our team's ongoing commitment to advancing the state-of-the-art of roadway intelligence. Our proven technology solutions are centered around our three growth pillars: public safety with our Scout platform, transportation management with Command and urban mobility with Discover. I'd like to start with our first growth pillar, public safety and Scout. Rekor's reputation as a leader in AI-based vehicle and license plate recognition is well known and continues to grow in what is a noisy and fragmented market. We believe that the future of this industry sector will be defined by open platforms and seamless integration into existing public safety infrastructure, principles that are central to our growth strategy. As such, our focus has been and remains on integrating our technology into existing law enforcement and security systems, while expanding our market reach through partnerships with OEMs, resellers and third-party channels. A key example of this strategy in action is our recently announced partnership with SoundThinking, a leading public safety technology company known for delivering AI and data-driven solutions to law enforcement, civic leaders and security professionals. SoundThinking is already trusted by thousands of public safety agencies across the U.S. By integrating Scout technology with their ShotSpotter gunshot detection solution, we are providing an end-to-end public safety offering through new go-to-market channels that immediately enhances public safety for major cities and strengthens Rekor's presence in key markets. In addition, this quarter, Scout was recognized by Amazon Web Services as the first in the industry to achieve the well-architected stamp of approval, joining the rest of our portfolio in the marketplace. This achievement is important because not only does this speak volumes about the strength and differentiation of our technology, but also brings Scout into the highly selective AWS Marketplace. It also expands our reach by enabling customers to access Scout through the AWS Partner Network and Amazon Business distribution and procurement channels. This positions us to integrate more seamlessly with leading technology platforms, ensuring that our offerings are accessible to a wider audience. Also, we expanded our relationship with NVIDIA as well as our participation in their Metropolis Partner Network, building upon NVIDIA's most advanced Jetpack technology for our customers. Our deep technical collaboration with NVIDIA powers our advanced computer vision and machine learning technologies, accelerating time to market for new features and simplifying customer adoption. Looking ahead in the Public Safety segment, we are focused on licensing our vehicle recognition SDK through third-party e-commerce platforms and developer portals. This approach will empower third-party developers to create new innovative market applications that leverage Rekor technology at their core. In addition to this, we're developing the next generation of Scout. Our next-gen platform not only promises to strengthen our leadership in the public safety sector, but also pave the way for continued growth and innovation across the industry and with our partners. Moving on to Pillar 2, our Transportation Management segment and the Rekor Command platform. Departments of Transportation are confronting an increasingly complex and demanding environment in their mission to ensure roadway safety and keep traffic moving. With the increase of sophisticated vehicles, the growing issue of distracted driving, aging roadway infrastructure and never-ending road work and traffic interruptions, the challenges are multiplying for these agencies. Compounding these difficulties are the deep organizational and data silos that DOTs must navigate to try to keep traffic flowing and people safe. The situation is further strained by the rapidly increasing retirement of seasoned DOT professionals from the agencies and the ongoing struggle to recruit skilled talent quickly enough to meet these escalating demands. The Rekor Command platform addresses these challenges by providing tools that are full stack solutions versus silos. And that leverage AI to process and integrate massive and disparate data sets, turning them into actionable insights that can be shared across departments and agencies in a single source of truth in the single payment blast. This comprehensive view of roadway and mobility data provides real-time visualization, situational awareness, predictive analytics and more, enabling agents seize to it effectively manage roadways despite the increasing demands and limited resources. As mentioned earlier, our work with TxDOT has been particularly impactful for Texas roadways and recognized across the U.S. Building on this momentum and an alignment with TxDOT's record-breaking $142 billion investment in transportation infrastructure over the next 10 years. We launched the Construction Partner Program this quarter with TxDOT. PPP is a vital citizen-facing app powered by Command designed to enhance mobility and roadway safety across Texas through real-time incident monitoring and work zone management. Additionally, in collaboration with TxDOT and the University of Texas at Austin, we developed an economic benefit calculator that assesses and validates the efficiency and monetary benefits of key metrics like crash reduction and congestion improvement, helping any transportation agency clearly understand and visually see the return on investment they make in our Command platform. But our progress isn't limited to Texas. We're pleased to also announce the initial adoption of the Command platform in Oklahoma and Kansas, further extending our reach and ability to drive influence and adoption across state lines as we build out a connected network of smart roadways both regionally and nationally. Similarly, in Oregon, Umatilla County announced their adoption of Command in conjunction with the state's connected vehicle ecosystem, bringing advanced roadway intelligence to the unique challenges facing rural areas and communities and supporting the work we're doing with Oregon DOTs road usage charge program statewide. These developments highlight the growing recognition and adoption of Command across the country. The expansion of our footprint in this segment underscores our commitment to transforming roadway and traffic management by delivering unprecedented visibility and insights that legacy systems just can't offer. Our solutions enable agencies to monitor traffic in real time, break the data and organizational silos and utilize AI-driven insights to respond to incidences faster, reduce response times and vastly improve the time it takes to get roads back to normal. Our continued innovations and strategic partnerships ensure that we will continue to lead the way in providing the technology and insights needed for smarter, safer and more efficient roadways. Last but not least, I'd like to share some progress that we've made this quarter in the third growth pillar, our Urban Mobility segment and our Rekor Discover platform. As mentioned in our last earnings call, the traffic data collection industry is at a pivotal moment, which is a significant growth driver for Rekor. We believe we are leading one of the largest legacy data collection technology refreshes in the U.S., where millions of outdated and legacy-based traffic study sites across the U.S. roadways will be replaced with advanced AI-driven solutions. Our Discover platform, initially built on the foundation of our 2022 acquisition of Southern Traffic Services and further strengthened by our acquisition of All Traffic Data earlier this year, has transformed the permanent and short-term traffic study landscape. It allows us to replace legacy systems with secure, connected and modular AI-based solutions that integrate seamlessly into existing infrastructure, greatly enhancing safety and sustainability for our customers. The platform's mission-critical status is clearly demonstrated recently during Hurricane Debby, where we supported multiple states in the Southeast in managing roadways and evacuation routes in real time, ensuring citizen safety during emergency operations. This quarter, I'm pleased to share that we were awarded over $15 million in new contracts, highlighting the strong demand for Discover and better traffic data management reporting as states look to modernize and digitize their legacy roadway infrastructure. Notably, we expanded our reach westward with statewide contracts in Ohio and Texas. These contracts not only cover the maintenance repair and replacement of existing infrastructure, but also pave the way to transition failing traffic data collection sites to AI across the state. It's worth noting that this new Texas contract is independent from the work we're already doing in Texas with Command, illustrating our land and expand strategy in action. Our approach is to penetrate a state by delivering clear value with one of our platforms and then expand to the next platform in our portfolio, and then the next. And along the way, we have the opportunity to continue to layer on new value-added services over the top, such as air quality, electric vehicle studies, weight in tonnage and more, increasing the value we deliver to the state and our revenue potential. As another example of customer traction, we also announced a new $1.5 million contract with Maryland Department of Transportation to deploy the Discover platform across some of the nation's most heavily used corridors, including I-95, I-495 and I-695. This win, which is over and above our AI-based class, count and speed offering, focuses on corridor management and sustainability, incorporating advanced environmental analytics like carbon reduction, EV, counting and air quality monitoring, weight and tonnage and volume by lane through our new Vehicle Insite solution. These enhancements will help Maryland improve traffic management while addressing environmental concerns, and this has further open the door to additional opportunities within the state. In addition, we also expanded into Colorado's Pitkin County, where we are deploying Discover in the highly trafficked Aspen area and surrounding region. This new contract includes our Discover class, count and speed offering, as well as air quality monitoring, once again showcasing our ability to grow our footprint by providing value-added services over the top of existing infrastructure. This project supports better roadway planning maintenance and sustainability in a region known to driving the environmental improvements. Looking ahead, we continue to see significant momentum and opportunities emerging for Discover. Our recent strategic partnership with MS2, a leader in transportation data management for states, is expanding our reach to dozens of new state DOTs and numerous cities and counties across the U.S. This collaboration, combined with our mission of collecting, connecting and organizing the world's mobility data to make it useful and accessible for unique insights, positions Rekor on a fast path to becoming the leading roadway intelligence data exchange for the industry, laying a strong foundation for the continued success, holding enormous and durable value at the core of our strategy. As we close out my first full quarter as CEO of Rekor, I'm encouraged by the solid progress we've made across all of our growth pillars. We've continued to navigate the complexities of government procurement, secured multiple multimillion dollar contracts and expanded our reach into key states like Ohio, Texas, Maryland, Colorado, Kansas and Oklahoma. Our strategic partnerships with industry leaders such as AWS, NVIDIA, SoundThinking and MS2 are further strengthening our market presence and positioning Rekor as a leader in providing roadway intelligence to the industry. As I mentioned earlier, in my discussions with many investors over the past 90 days, the key themes you raised such as market opportunities, capital needs and meaningful traction have been top of mind for me. We've made important strides in each of these areas in the quarter, securing necessary capital to continue our growth, winning new contracts and expanding our market footprint. While we remain cautious due to the inherent complexities and unpredictability of government contracting, the traction we've gained this quarter is a strong indication that we're on the right path. We're committed to building on this momentum and continuing to deliver our strategic vision. I look forward to updating you on our continued progress in Q3. Our first question comes from Michael Latimore with Northland Capital Markets. Please state your question. Mike Latimore All right. Thank you. Yes. Yes, great to see all the news recently contracts and with a 27% sequential growth in the quarter here. I guess, in terms of the -- this kind of large contract you highlighted here, 1,000 units potentially, I guess, one, are those basically going to go into locations that you currently manage, and you upgrade them? Or are there also new locations embedded in that? And then what's your thought on time to get all these deployed now? David Desharnais Hi there. Mike, good to have you on the call. Thanks for the question. So in terms of the large contract, yes, we do have management responsibility for a number of these. But it's a mixture of existing as well as new areas that otherwise would not have been done. The mixture of areas that would have normally been done with portable or short-term, that will move to a more permanent solution because now it can be done. So that's a lot of new opportunity there for us. But to answer your direct question, it is a mixture of existing ones that are scheduled for replacement and new ones that otherwise could not have been done. Mike Latimore Great. And it sounds like you have started to deploy the units. And is there -- what -- over what -- how many months or quarters do you expect to be able to deploy the 1,000, let's say? David Desharnais Well, we would expect that -- it's probably -- like it depends on, I would say, a few things. Like in the area -- Like in -- I hope you understand, there's expected and predicted to be about 20 to 24 named storms in the area, 8 to 12 hurricanes between June and November. So again, if those didn't happen, clear sunny days, I would say that we'd probably be in the 6-month range to get that through with existing resources. And it could go higher based on that. But I'd say that's what I would expect. Mike Latimore Yes. Yes. Okay. Yes. I'm near to the Gulf Coast and very attuned to those forecasts. And then is the pricing model here -- and maybe you can't talk about it, is the pricing model kind of the hardware and maintenance one or the full subscription one? David Desharnais In the cases that we're talking about, because we're talking about a regional area, it varies by the states in the Southeast. But the one in particular that I'm referring to is a mixture of hardware and subscription bundle together. So paid upfront in the way that the state would like to do that through their procurement processes. But it very much is over time. But I would say it is bundled together. Mike Latimore Okay. Great. And then on the Texas news you just had. You characterize that as, I think, kind of maintenance and repair. I guess one, is that -- just to clarify that, that's what that deal is about. And then two, do you see an opportunity in Texas similar to the one -- the large one we just discussed? David Desharnais So on the Texas opportunity, one of the things that we do well, and we're trusted to do is looking to -- well, evaluating, maintaining, replacing, repairing existing infrastructure. That, frankly, what makes us incredibly valuable to the states. But the opportunity to have line of sight on every device on the roadway is the provision to also replace with AI. So right now, we have access to both of those opportunities, and we're just getting started. So we need to make sure that we're being able to extract every single dollar and earn every single dollar from that opportunity, and it will equate to both existing maintenance as well as replacement for AI. Mike Latimore Great. And just last one on ATD. How is that tracking with your expectations? Have they helped with some of these recent wins? David Desharnais Actually very well. I'm very pleased with the acquisition as we have been over time with our STS acquisition as well. Excellent team, it broadened the market for us. We're doing work in new states that we've never done. And also now integrating our AI technologies into the workflow. So I really truly could not be happier with that team and also with the progress we're making in terms of integration, but also new business. So yes, very well, actually. Mike Latimore Yes, great. Thanks a lot. Best of luck this year. Thank you. [Operator Instructions] Our next question comes from Noah Levitz with William Blair. Please state your question. Noah Levitz David, Eyal good afternoon. This is Noah Levitz on for Louie DiPalma. Thank you for taking my questions. To start off, as it relates to your new partnership with SoundThinking for PlateRanger, just to gain some more color, how is your solution going to stack up versus some of the existing solutions already on the market? Will it be priced comparatively to some of the others? And then can you also elaborate on any other differentiators that you're going to provide? David Desharnais So yes, a very good question. We're excited about this relationship. SoundThinking is a respected name and brand in the law enforcement area. And so we're thrilled with the opportunity to work with them. In terms of our go-to-market and pricing, that's really up to how SoundThinking wants to approach their market. They've got a large installed base that, that will expand into, including vehicle recognition and LPR and the connection with PlateRanger, which is powered by Rekor under the hood of that and connecting to their ShotSpotter, how does it compare competitively. One of the things I can say objectively through third-party benchmarking is that Rekor's license plate recognition and vehicle recognition technology is the top of the stack. So from a competitive nature, we still very -- feel very good about that. In terms of how SoundThinking and their ShotSpotter technology stacks up, we believe, and we've heard enough evidence from our customers that this is a leading technology in the market. So to me, it's like chocolate and peanut butter coming together, so you really have an end-to-end solution now for law enforcement to have the tools that they need to increase public safety. And so pricing, it's going to be up to how SoundThinking, which is to structure that with our customers, not us. So I can't comment on that. But our solution together with SoundThinking is where we are effectively working with SoundThinking as a channel to market. And so again, the rest of that engagement will support it, but it really starts with SoundThinking. Does that help you understand, Noah? Noah Levitz Yes. No, that was very helpful. And then just a little follow-up on that. Will it be utilizing solar? There's a lot of traction with solar power LPR cameras. So I was interested if PlateRanger will also be doing that? David Desharnais Yes. Yes, indeed, it will. The technology, again, from a physicality standpoint is Rekor technology under the hood, both from a hardware perspective as well as the software perspective and the AI agents that run. So we've always been solar. So solar is absolutely part of it. And it's, in fact, a strong differentiator for us as well. And our next question comes from KC Ambrecht with Shay Capital. Please state your question. KC Ambrecht Thank you very much for taking the question. David, good update to hear this quarter. Just a couple of clarifications here. The $35 million contract that you guys mentioned last quarter that you talked about today, I assume based on the hurricane comment there, it's probably Florida. But I just wanted to get a sense that if it's over six months just at the minimum, which it sounds like it's probably going to be more just depending on how it's following this time of the year. That adds about $6 million of -- like $6 million, if it's equal, if it's straight line, that adds about $6 million of revenue a quarter. How do we think about profitability for Rekor when a contract this size comes online? David Desharnais I'm trying to understand -- I don't know -- Eyal, maybe you understand the question better than I do? KC Ambrecht I mean you guys lost $5.5 million of EBITDA this quarter. And if you start bringing in this contract, that should add $6 million a month in revenue, if you just say it's going to take six months, it's a $35 million contract. How do we think about -- how does that impact your profitability? David Desharnais So you wouldn't do it all at once. Let me make sure I understand. So effectively, over a span of, say, six months, you're going to be putting an x number per week, per month and per quarter, et cetera. So you're going to ramp into that over time. And so -- and the way that contract would be structured here is that it would be paying upfront. So you would realize that linearly through the period of time. As fast as you can put things in, the faster that turns on. Does that answer -- am I getting to the heart of your question, K.C.? And then how much of that would be like hardware versus kind of a SaaS type contract? Is it 50-50? Is it more hardware than SaaS? Like how do we think about that? Yes, K.C., it's more on the hardware upfront and the SaaS is over time. So to your question on the $6 million every month, that's not $6 million maybe in cash if it all go well, but the revenues are only for the hardware, and some of the SaaS as we recognize as we go. The contracts talk about three years upfront for SaaS. So we recognize it all the time. KC Ambrecht Okay. And then you mentioned previous questions talked about Texas. How big can Texas be? Can it be the same size as this type of contract over time? Or is it a different size? David Desharnais So we're -- that's a really important question, K.C. Texas is the largest roadway network in the United States. And so if you think about the miles of road there, you can imagine a disproportionate amount of sensors, right? And so the opportunity there, it's a big state. The other state that you're referring to is also a large state, one of the top 5 in the nation. So landing in these states and being able to expand, as I described also in Texas during my prepared remarks. The opportunity there is enormous for sure. And so a lot of sensors, a lot of roadways and statistically from what we understand from our customers and as they've described the stuff that's on roadways today, a half to 2/3 aren't really producing the results they need. So it provides a tremendous opportunity for sure. KC Ambrecht Okay. And then lastly, you guys mentioned Georgia in your prepared commentary. It wasn't clear that you guys were there before. How big is Georgia today on an annual basis in your numbers? Yes. We do not provide numbers per customer, but this is one of the largest customers that we have. And to your point, Georgia is over 30 years customer with STS before the acquisition. It's a very large customer. KC Ambrecht And did you upsell Georgia when you took over that company, STS? Did you increase the size of that contract? Eyal Hen Yes, the size of contracts no, but we did put AI units in Georgia. The current contract with Georgia is some sort of fixed price, we did increase the overall revenues from Georgia, yes, based on other parameters but not from the existing contracts. We have other source of revenues in Georgia as well. It's the relationship that we have with Georgia and help us expand beyond the current contract. KC Ambrecht Okay. So you guys just outlined -- I'll say Florida, but you can say hurricane state, Georgia and Texas is three significant states in the union. So that's good to see. And then this new facility you set up with Ziegler, I think it Ziegler -- can you just kind of walk through like the strategy behind that? What type of loan to values you're getting on contracts? Like how it's structured? Like have you dropped in a new state, say, like on the West Coast, that's of size and it's a significant capital, how much credit are you going to get against the contract? Eyal Hen Are you talking about the revenue sharing contract? KC Ambrecht No, the new financing facility you guys announced today. I think -- I think it's called Ziegler. Eyal Hen No. So I think you're confusing with the thing. We announced a prepaid advanced agreement, which is some sort of convertible. Yes, that's the $15 million upfront that we get. It's an equity basically, that we get upfront cash. We oversee a $15 million upward cash, and there will be a conversion over time to retain the same. With Ziegler, it's the same structure that we set back in 2023. It's called revenue-sharing note. Yes. So in this structure, actually, when we have a new contract, which is paid for data as opposed to the contract that we talked before on the $35 million, which became upfront on the hardware, some of the states, the procurement require pay for data. They don't want to own the hardware. So they pay a smaller monthly fees for SaaS, for maintenance, the hardware and the software. And with the current structure that we have on the revenue sharing notes, we get $0.50 for every dollar, meaning if we have $30 million worth of total contract value three years -- over three years, the current indenture said that we can grow up to 50%, so $15 million. That's just the current structure with the revenue sharing notes. KC Ambrecht Okay. Great. And then, David, now that you've been there really starting to run the company for over a quarter now, but have been there for a couple of years. What's your expectation for profitability considering that you have these large contracts coming online? When do you kind of cross that threshold? David Desharnais Yes. We have ambitions here in 2024, but I believe that given the hurricane season and such that it may bleed into 2025, but early 2025. So that's what I can tell you. But there's a lot of time between now and the end of the year, and we have a lot of stuff that's being executed. So again, we'll wait and see, but that's -- if I would be direct and fair, I would say we have optimism, but again, we have a practical thing about the deal with too. So we'll see how this goes, but we may bleed into 2025 in the first half. KC Ambrecht Okay. Great. A lot of momentum. Thank you very much for the time. [Operator Instructions] We have an additional question from Michael Latimore with Northland Capital Markets. Please state your question. Michael Latimore, you might have yourself muted. Go ahead. Mike Latimore Hi, there we go. Thanks. Yes. Just on these recent Command wins, can you explain the kind of the competitive dynamic there? Is there anything you're replacing? Or is this greenfield? And how does it roll out? Does it roll out statewide or is it go kind of city-by-city? David Desharnais Yes. Thanks, Mike. So Command from the contracts that we announced here, this is regional based, not statewide for Oklahoma and Kansas City -- or Kansas City, sorry, Kansas State. It was what I meant to say. What's really interesting about that -- so it is regional, and we fully expect that will extend into the state. One of the things that I'm pleased to say is coming into the new role, as we are entering these smaller communities, that's a very important strategic move for us because it gives us a footprint with less friction. At a state level, you're dealing with a completely different dynamic. So being able to enter a state at a regional level is an accelerated pace, and that's the situation with these two that I talked about, in particular with Kansas as well as Oklahoma. Oregon, we talked about the work that we're already doing in Oregon. What this represents in Oregon, in particular, Umatilla County, this is a rural community that actually sees an enormous amount of traffic, surprisingly. And along that line, have the same challenges that they're facing at the state level. So this allows them to start doing two things. First of all, operate off the same source of truth and same pane of glass as the statewide, but they didn't have access to the system. So now they have access to the system, and it also connects into the future of the connected vehicle ecosystem that is going -- that we're working on with Oregon. So it's a little different dynamic. But to net it out, I would say that the regional approach is a very fast path relative to a state approach. It could take 18 months sometimes for a state, and these can be done in months. It really helps to pave the way for future expansion. And if you -- and you know you're in the Gulf area -- Gulf Coast area, right? Texas buts up to Oklahoma, that buts up to Kansas. And you can kind of see an I-35 corridor going through there that becomes interesting across state lines. Nobody does that, Mike. So this is really, really an interesting thing that we expect to continue to expand both at the state level, which we're excited about the progress we're making there, but also at the regional level, local level like we're seeing. Mike, you asked the second. You asked the second question. I just remembered. The sort of -- like you're replacing something or -- we're not replacing anything. We're replacing, I don't know, spreadsheets and cameras. You know what I mean, like whatever the traditional approach would be. So this is not like some displacement of some ATMS system or something like that. So just to answer that question. Mike Latimore That makes sense, yes. So it's sort of like the digitization of that function as well, just like with Discover? And then on gross margin, that was up nicely sequentially. How should we think about gross margin kind of going forward here? Eyal Hen Mike, thank you for the question. As I mentioned on the call, we anticipate for the long run to have higher gross margin as we refresh old technology with our technology. In the meantime, it will be a little choppy, but we do anticipate to see the trajectory of growth as we can see here -- around 50% to 55%. And as we start to refresh more and more of this old technology with our technology. We anticipate the gross margin to be above 60%, 65%. Our next question comes from [Ray Yacko]. Please state your question. Unidentified Analyst Yes. Thanks for taking my call. With your partnership with SoundThinking and the rollout of PlateRanger, I believe, in September, will they go back to their existing customers that they have and offer it to them also? Or is it just their forward customers going forward? And do you also expect any other partnerships by the end of the year? David Desharnais Ray, that's a great question. So listen, I can't speak for them, but I can tell you what we're observing, right? Because as they master the go-to-market for that on their timing, our expectation, and we're already seeing it, is that they are going into an existing customer base. I mean they've got a brilliant solution, but not a way to do vehicle recognition or LPR. So that complement is a no-brainer. And we've already done public webinars on this with their communities and stuff like that. So it's on. And that's a natural thing for them to do, and we're seeing that happen. How they're doing that sort of in the out years, I would expect the same, but I can't speak for them. I'm sure you can understand, but that would be a logical thing to do, yes. Unidentified Analyst And my second question is, with the share price being $0.12, $0.11 off the 52-week low, do you believe the profitability is what's holding the share price down at this time if you had mentioned profitability been pushed back to early quarter next year or maybe half of next year? David Desharnais Yes. That's a crystal ball type of question. There's so many things that affect the stock price. But I would say, yes, one of the things that has been really clear to me, and we're really thrilled to talk about today was the progress and the traction that we're getting, and I would consider it meaningful traction with customers that we've been working with. And I think as we look forward, the value of the company is, we believe, to be substantial. And we're in it for the long-term, and we believe we're making the right decisions. We think the stock will be valued accordingly. In the short run, day-to-day, yes, I can't speak to the fluctuations, but our profitability, and frankly, our ability to continue to intercept the opportunity ahead, I think that was the big question with the ability to close sort of the concerns around capital, which we've done. The ability to be able to demonstrate meaningful customer traction, which we've done. And frankly, our technology position, I think we're doing the right things, and we're going to continue to do more of those. And so I can't speak to the crystal ball of the market, but we're going to continue to do what we're doing, which is executing against our plan. Unidentified Analyst Yes. As a shareholder, I've been around for a long time. So I'm not the day-by-day guy, but I've been around since like the BFDI days. So I'm not going anywhere, and I like the division has been set. So -- and my last question is -- I haven't mentioned, I believe, last quarter either. What about Mastercard? Has there been any updates with Mastercard? David Desharnais No. With Mastercard, that's a -- that predates my time even at the company. And I think that program -- I don't work for Mastercard. I don't know what they're doing on that program. That's a Mastercard program. And so we're not engaged in expanding that program with them. So from that standpoint, I would say that there's nothing new to report on that. We do see opportunities in the QSR space, which is the quick service restaurant domain that we think is actually very, very interesting without a Mastercard. So we're not tethered to that. But I'd say stay tuned, right? Stay tuned on that for additional information. But the Mastercard piece, there's no updates on that for the reasons I mentioned. Unidentified Analyst Okay. And one last question I just thought of. Going back a couple of quarters ago with the State of Ohio and uninsured motorists' program. Nobody else seemed interested in that. I mean, it's just beside the State of Ohio that I believe you had to contract with? Yes, no problem, I'm just making it clear. Yes. Oklahoma, very good results. The state is overwhelmingly happy. This is something that's tied to legislation and such that it's done at a state-by-state level. So the merits are there. They're very clear. The roads are way safer. Uninsured motorists are off the roads. So for all the things that you and I would care about being on the road and knowing that the people that we're driving with, I mean that's all good in the Oklahoma market. How the other states want to do it, it's unpredictable. Legislation is legislation. So the merits are there, but we don't control the legislation part. Thank you. And that's all the time we have for questions today. I'll now hand the floor back to management for closing remarks. David Desharnais Well, thank you all for your questions and for joining us today. We've covered a lot of ground from our financial strategies and market opportunities to the progress we're making across each of our segments. So as we move forward, we remain committed to executing our plan, addressing your concerns and driving value at the end of the day. We're excited about the opportunities ahead and confident in our ability to deliver on these commitments. So thank you again for your support, and we look forward to updating everyone on our Q3 call. Thank you. This concludes today's conference. You may disconnect your lines at this time. Have a wonderful day.