Good day, everyone, and welcome to the Lumentum Holdings Fourth Quarter Fiscal Year 2022 Earnings Call. All participants will be in listen-only mode. Please also note that today's event is being recorded for replay purposes. Thank you. 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.

Thank you, operator. Welcome to Lumentum’s fiscal fourth quarter 2022 earnings call. This is Kathy Ta, Lumentum’s Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer; Wajid Ali, Chief Financial Officer; and Chris Coldren, Senior Vice President, and Chief Strategy and Corporate Development Officer. Today’s call will include forward-looking statements, including statements regarding our expectations regarding our two recent acquisitions, including market opportunity, expected synergies, financial and operating results and expectations regarding accretion, strategies of the combined company and benefits to customers in the markets in which we operate as well as the impact of COVID-19 on our business and continuing uncertainty in this regard, including macroeconomic trends, trends and expectations for our products and technology, our markets, market opportunity and customers, and our expected financial performance, including our guidance as well as statements regarding our future revenues, our financial model and our 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 the quarterly report on Form 10-Q for the quarter ended April 2, 2022. And those in the 10-K for the fiscal year ended July 2, 2022, to be filed by Lumentum with the SEC within 60 days of our fiscal year-end. 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, 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 for the fiscal fourth quarter 2022 results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. This includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP results. With that, I’ll turn the call over to Alan.

Thank you, Kathy, and good morning, everyone. This is truly an exciting time for Lumentum. We have an expanding set of use cases for our market-leading photonics products. With the close of NeoPhotonics and yesterday’s announced purchase of IPG’s telecom transmission product lines, we have a more comprehensive product portfolio than ever before. We expect fiscal ‘23 revenue to be up more than 25% from fiscal ‘22 at the midpoint of our outlook. As I look ahead, we forecast healthy double-digit growth in our telecom and datacom business over a multiyear period. In fiscal ‘22, we achieved record revenue in datacom EMLs, coherent components, pump lasers, tunable products, and subsea components with company profitability above expectations. Fiscal fourth quarter revenue was above our midpoint, with both operating margin and earnings per share exceeding the top end of our guidance. We are well positioned for double-digit growth into fiscal ‘23 and beyond due to strong fundamental drivers in our telecom and datacom businesses. On August 3rd, we completed our acquisition of NeoPhotonics, which increases Lumentum’s exposure to the rapidly growing 400 gig and above optical communication opportunities, creates an even better partner for our customers, and expands our photonics toolkit into areas such as ZR and ZR+ modules, silicon photonics, high-bandwidth coherent components, ultra-narrow linewidth with external cavity tunable lasers and RF integrated circuits. The feedback from our customers on this transaction has been very positive, as they appreciate the logic of adding NeoPhotonics products and capabilities to our portfolio. I am also delighted to welcome the talented NeoPhotonics team to the company, and I can’t wait to see what our combined innovation engine comes up with next. Yesterday, we announced the purchase of IPG’s telecom transmission product lines. As we have mentioned previously, there is a significant opportunity in providing tunable transceivers into the cable and wireless network operator market. This acquisition augments our product offering, addressing this opportunity. This acquisition also brings a talented team developing communication ICs, including coherent DSPs, which complements the IC capabilities we obtained from the NeoPhotonics acquisition. This brings vertical integration opportunities in future coherent transceivers in addition to our 400G ZR and ZR+ products, including those targeting opportunities within the data center and at the edge of the network. We are making progress to increase the supply of third-party materials and ICs that are limiting our ability to meet the strong customer demand for our telecom products. The diligent work of our supply chain team enabled a 16% sequential growth in telecom and datacom revenue in the fourth quarter, but demand still exceeded supply by approximately $100 million. We expect sequential growth again in the first quarter. We do, however, expect shortages to continue at least until the first half of calendar 2023. Now, let me provide some detail on our fourth quarter and full year results. Telecom and datacom revenue was up 16% quarter-on-quarter. In fiscal ‘22, our 10G tunable transceiver products achieved record revenues with particular strength in metro access and fiber deep applications for cable and wireless networking customers. We are investing to double our manufacturing capacity for our 10G and upcoming 25G tunable transceiver products in our wafer fab and our backend assembly and test factories, supporting the rapid transition to our differentiated technology by cable MSO and wireless network operator customers to support their increasing needs for bandwidth. In fiscal ‘22, we also set new revenue records for our subsea components which were up 65% year-over-year and for our terrestrial pump lasers, which were up 49% year-over-year. Typically, increases in sales of these products are a leading indicator of future demand, which adds to our confidence of continued growth in our telecom product lines. In the quarter, ROADM revenue grew 23% sequentially. While ROADM growth has been slowed by IC supply shortages, the mix continues to shift to newer, more advanced products. In Q4, high port count and MxN ROADMs comprised over 70% of the revenue mix. This richening of the mix toward newer and more advanced ROADMs is consistent with our customers being in the early phases of new network deployments. It is also another leading indicator of future demand for our telecom products, including transmission products, which we bolstered with the NeoPhotonics acquisition. In datacom, as expected, we grew EML revenue to a new quarterly record in the fourth quarter and achieved a new annual record for fiscal ‘22. We nearly doubled our internal manufacturing capacity for EML products in fiscal ‘22, enabling us to better support robust customer demand for our 100G per lane solutions. We are also driving the next phase of the datacom industry roadmap with our 200G per lane EMLs for 1.6 terabit per second applications. We expect these to enter production as we exit fiscal ‘23 and are engaged with multiple customers in design-in activities for these leading-edge chips. Looking ahead to our first quarter, we expect telecom and datacom revenue to be up sequentially due to strong demand and improvements in IC supply. While growth continues to be gated by IC supply, we believe that we will shrink the gap between supply and demand from the more than $100 million level in Q4 to approximately $75 million in Q1. Turning to industrial and consumer, Q4 revenue was down from Q3 due to normal seasonality in 3D sensing. We are executing on our strategy to expand our 3D sensing and LiDAR platforms into applications beyond smartphones. As we’ve discussed previously, our product pipeline for automotive, industrial, and consumer use cases is growing. In automotive, we are ramping production of multi-junction VCSEL arrays, long-range LiDAR products, and products for in-cabin driver monitoring systems. We are also the supplier of record for building automation and occupant sensing reference designs. In the concert space, we are working closely with multiple customers for developing extended reality solutions. While we execute on our long-term strategy in 3D sensing, as we have mentioned previously, we expect share normalization and normal price reductions in the coming smartphone cycle. We expect smartphone 3D sensing revenue in fiscal ‘23 to be reduced by approximately 40% to 50% from last year’s run rate, starting from our first fiscal quarter. As such, we expect first quarter industrial and consumer revenue to be up only modestly from the prior quarter. We are still optimistic about our 3D sensing business as applications in automotive, the metaverse, and industrial begin to ramp. Underscoring this, in the fourth quarter, we recognized approximately $2 million in revenue from automotive applications, and we expect this to grow in the first quarter. In fiscal ‘22, our commercial laser revenue was up 59% from fiscal ‘21. In the fourth quarter, revenue was up 39% from the same quarter last year. Approximately half of the revenue was driven by fiber lasers serving industrial applications, with the other half derived from ultrafast lasers, solid-state lasers, gas lasers, and our laser service business. These solid results reflect a growing set of applications, introduction of new products, and growth into new markets and with new customers, such as in solar cell and EV battery processing. Looking ahead to the first quarter, we expect laser revenue to grow quarter-on-quarter to a new record level. To summarize, I am very excited about our future. We are well positioned to capitalize on the increasing use of photonics and growing use cases across multiple end markets. Over the coming years, our products are critical to multiyear cloud and network infrastructure expansion, and deployments are accelerating. Underscoring this, at the midpoint of our revenue guidance, we expect first quarter telecom, datacom, and lasers revenue to be up over $130 million or 45% compared to the same quarter last year. About half of this growth is organic, despite ongoing supply constraints. To capitalize on these trends in communications, consumer, and industrial end markets, we are accelerating R&D investments during fiscal ‘23, which we believe will accelerate top line growth in fiscal ‘24 and beyond. These investments include coherent DSPs and 800G and higher-speed communication technologies, laser sources for high-performance computing architectures and the adoption of AI and data centers, industrial sensing and 3D imaging, LiDAR, and in-cabin sensing for automotive and industrial lasers for electric vehicle and battery manufacturing. Wajid will quantify the impact of this on our fiscal ‘23 outlook. I would like to thank our employees around the world for all of their hard work and resilience that has put us in such a great position in our markets and to grow strongly over the coming years. With that, I’ll turn it over to Wajid.

Thank you, Alan. Net revenue for the fourth quarter was $422.1 million, which exceeded the midpoint of our guidance range. Net revenue was up 6.8% sequentially and up 7.7% year-on-year. GAAP gross margin for the fourth quarter was 43%. GAAP operating margin was 13.1% and GAAP diluted net income per share was $0.49. Fourth quarter non-GAAP gross margin was 50.4%, which was up sequentially and year-on-year, primarily driven by higher revenue. During the quarter, we accumulated $8.2 million in extraordinary charges to acquire IC components from various brokers to satisfy customer demand. These incremental charges were excluded from the non-GAAP gross margin. Fourth quarter non-GAAP operating margin was 28.8%, which increased sequentially and year-on-year due to higher revenue and was above the high end of our guidance range. Fourth quarter non-GAAP operating income was $121.6 million, and adjusted EBITDA was $142 million. Fourth quarter non-GAAP operating expenses totaled $91.1 million or 21.6% of revenue. SG&A expense was $41 million. R&D expense was $50.1 million. Other income and expense was a net income of $1.2 million on a non-GAAP basis. Fourth quarter non-GAAP net income was $105 million, and non-GAAP diluted net income per share was $1.47, which was above our guidance range provided on our last call. Our fully diluted share count for the fourth quarter was 71.5 million shares. Our non-GAAP tax rate remains 14.5%. Turning to the full year results. Fiscal ‘22 net revenue was $1.71 billion, which was down 1.7% from fiscal ‘21, primarily due to component shortages gating our ability to meet the strong demand, as Alan indicated earlier. GAAP gross margin for fiscal ‘22 was 46%, GAAP operating margin was 17.7%, and GAAP diluted net income per share was $2.68. Full year fiscal non-GAAP gross margin was 51.6%, which was up 70 basis points relative to fiscal ‘21 due to product mix and lower relative manufacturing costs. Fiscal year ‘22 non-GAAP operating margin at 30.8% was flat from that of fiscal ‘21 and above our business model. Fiscal ‘22 non-GAAP operating income was $527 million and adjusted EBITDA was $608.6 million. For fiscal ‘22, our fully diluted share count was 74.2 million shares. Non-GAAP net income was $449.2 million, and non-GAAP diluted net income per share was $6.05. Moving to the balance sheet. We generated $459.3 million in cash from operations in fiscal 2022, ending the year with cash and short-term investments of $2.55 billion. During the fourth quarter, we generated $114.3 million in cash from operations and purchased 1.3 million shares for $103.3 million. As of the end of the fourth quarter, we have purchased a total of 9.1 million Lumentum shares in the last two fiscal years, reflecting our confidence in long-term growth. Turning to segment details. Fourth quarter optical communications segment revenue at $370.9 million increased 8% sequentially due to improved component supply and robust demand in our telecom business. Optical communications segment gross margin at 49.8% increased sequentially and year-on-year, primarily due to higher revenue. Our fourth quarter lasers segment revenue at $51.2 million was flat sequentially and was up 39% year-on-year. Fourth quarter lasers gross margin at 54.5% was a new record for this business, driven by higher volumes and improved utilization. Before turning to our guidance, given the number of moving parts in our business, including the two acquisitions we just closed, I would like to add some color on our outlook for fiscal ‘23. Before synergies, these acquisitions are operating well below our target model, and we plan to accelerate our R&D spending to capture new opportunities that we have with our broader set of products and capabilities. We also continue to experience supply chain challenges. And as previously discussed, we are experiencing share normalization in 3D sensing. Therefore, we would like to provide some expectations around the business and give a one-time fiscal 2023 financial outlook to aid investors in modeling the company. We expect that our largest 3D sensing customer will comprise between 10% to 15% of our company revenue in fiscal ‘23. Also, we expect the second half of our fiscal year will have improved IC supply compared to the first half, which will allow growth to accelerate and result in second half company revenue being larger than that of the first half. Based on all this, we expect fiscal ‘23 revenue to be in the range of $2.1 billion to $2.25 billion with an operating margin in the range of 24% to 26%, and earnings per share between $6 to $7. This fiscal ‘23 margin performance is below our target model due to acquisitions and accelerated R&D investments. However, our 50% gross margin and 30% operating margin model continues to be our target, as we execute on acquisition synergies and work down shortages and IC supply, and we begin to realize the benefits from the accelerated R&D investments we expect to return to our target financial model. Now, on to our guidance for the first quarter of fiscal ’23, 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 ‘23 to be in the range of $490 million to $520 million. This includes approximately eight weeks of revenue from NeoPhotonics. As Alan indicated earlier, we are closing the gap between IC supply and our customers’ demand for our products. Our Q1 guidance incorporates approximately $75 million of impact to revenue, driven by shortages of third-party components. Based on this, we project first quarter operating margin to be in the range of 25% to 27% and diluted net income per share to be in the range of $1.45 to $1.70. Our non-GAAP EPS guidance for the first quarter is based on a non-GAAP annual effective tax rate of 14.5%. These projections assume an approximate share count of 71.5 million shares. Our share count estimate of 71.5 million shares for Q1 non-GAAP EPS guidance utilizes the treasury stock method in deriving the number of shares. This reflects our intent to pay for the principal amount of our convertible debt in cash through operations or future financing. Given this is how we intend to operate the company, we will continue to use this method for the foreseeable future in deriving our non-GAAP EPS. For GAAP purposes, our Q1 EPS will follow accounting standard, ASU 2020-06 and the related if-converted method. We expect this to result in a share count of approximately 96 million shares. Before wrapping up, I would like to offer some comments on the NeoPhotonics acquisition. Given the complementary nature of our business with that of NeoPhotonics, we expect to generate more than $50 million in annual run rate synergies within the next two years. Cost of goods synergies are expected to comprise more than 60% of the total, driven by manufacturing infrastructure and supply chain efficiencies. Operating expense synergies will be driven by aligning and integrating our organization and by serving a similar customer base. We are just two weeks into our integration work, and we’ll provide updates on our progress in the coming quarters. With that, I’ll turn the call back to Kathy to start the Q&A session. Kathy?

Thank you, Wajid. Before we start the question-and-answer session, I would like to ask everyone to keep to one question and one follow-up. This should help us get to as many participants as possible before the end of our allotted time. Operator, let's begin the Q&A session.

Our first question comes from Alex Henderson of Needham.

Thanks. Let me start off with just a clarification. I thought you said in the text of the presentation that you expected a 30% operating margin, yet your outlook for FY23 is 24% to 26% operating margin. Is that the delta between the integration of NeoPhotonics and the acquisition from IPG that causes that? And could you clarify what you think these two acquisitions will do in terms of accretion or dilution to the FY23 numbers?

Sure. Hi, Alex. Yes. This year, we will be encountering some challenges. We previously mentioned that the acquisition of NeoPhotonics would lead to a transition period impacting our operating model. Additionally, the recent purchase we announced yesterday will result in higher R&D expenses as we invest in DSP technology. Together, these factors are creating headwinds for fiscal year 2023. Our target operating margin remains at 30%. As we work through the synergies from NeoPhotonics and benefit from yesterday's acquisition, we expect to see additional synergies from our NeoPhotonics product lines, particularly as ZR products increase. These combined factors should provide leverage and generate extra earnings on a standalone basis as well. The NeoPhotonics acquisition is immediately accretive, and we are already seeing some accretion in our fiscal Q1 from it. However, the IPG acquisition is not accretive in Q1 and will pose a headwind throughout the year. Overall, both acquisitions are still net accretive for the full year. Hopefully, that answers your question.

Yes. So, I’m still confused. I thought you had said in the text of the presentation that you were expecting a 30% operating margin. Is that incorrect?

Yes. That continues to be our target model. Yes.

Long term?

So, we haven’t changed our target model. Yes, our long term to model. That’s right.

So just going down to the IPG stuff and then I’ll leave the floor. Can you give us some sense of the scaling of that business? What kind of revenue base is it attached to it or what kind of cost structure is attached to it?

Yes. Hi Alex, thanks for the question. The revenue is really not material at this point. We expect to be able to grow it with our sales force but it’s still not going to move the needle much there. The real gem there is the team and the progress that they’ve made on DSP technology. And so, we’re going to continue to make those investments, and in fact, ramp up those investments to be able to get out the first DSP, but also work with the team on the roadmap for future DSPs. So, as with any kind of large-scale semiconductor development, it’s not for the faint of heart and there’s incremental R&D needed to be able to develop leading-edge DSPs. And so, we believe that we’re positioned well to be able to make those investments and have those returns come in fiscal ‘24 and beyond.

I see. So, that’s a fairly large investment in DSPs that you’re making. Okay. Thanks.

Thank you. Our next question comes from George Notter of Jefferies.

I wanted to ask about your comments on share normalization. When I look at the revenue guidance, it seems like there's a shortfall of around $55 million to over $60 million in sales as we enter the September quarter. Could you discuss the impact on share normalization and provide some insight on what’s happening there? Also, what are your expectations moving forward? Thank you.

Sure, George, thank you for the question. We're now in year six of smartphone ramps, and we've captured a significantly large share of that market. We've been discussing the normalization of our market share for quite some time, and we're reaching that point. As mentioned in our statements, we anticipate that Lumentum's smartphone revenue will decline by 40% to 50% year-over-year, and we are already observing this trend in the first quarter. While we expect 3D sensing for smartphones to see a modest increase in the first quarter, in previous years, this quarter typically saw dramatic growth. Therefore, we are beginning to witness normalization starting this first quarter.

And is this a permanent change in the business? And is there something just systematic to your products relative to your competitors that is creating that share normalization? Any more sort of root cause would be great.

Well, I think, root cause is that any large-scale consumer electronics company wants to have diversity of supply. And they’ve been working on that for years. And I think finally, after six years, they’ve gotten more diversity of supply. That said, we are still working diligently with that customer as well as other customers to be the design partner of choice. And we expect that there will be fluctuations in share, and we expect to have moments of time where we gain a lot of that share back, but we’ll have to see. I think what we’ve tried to do is provide the most likely outcome for not only Q1, but for the fiscal ‘23 and that’s why we were very specific in that lower revenue from smartphones of 40% to 50% in the year.

Our next question comes from Simon Leopold of Raymond James.

First one for Wajid. You gave us, I think, pretty good detail on what’s going on with the convertible debt treatment and your commitment to settle in cash. Could you explain how it affects the balance sheet? I think it’s my understanding that your debt also goes up higher. Just if you could walk us through that. And then, I’ve got a follow-up on the telecom trend.

The impact on the balance sheet will begin to show a decrease in the amortization of the debt discount related to the convertible debt. We will highlight this in our fiscal Q1. More importantly, from the balance sheet perspective, we have a maturity in fiscal '24, specifically in March 2024, for the first $450 million of convertible debt. You will see us working on our capital structure to ensure we can handle that principal maturity by March 2024. Fortunately, we have enough cash on the balance sheet to manage this comfortably. We expect to generate enough additional cash, along with our current cash, to cover this obligation. Our next convertible debt doesn't mature until 2026, and we have similar commitments and plans for that. This is why we have opted for the accounting treatment that we have.

And so, the debt would go from about $1.9 billion to about $2.4 billion. Is that the right calculation?

That’s correct. That’s about right. Yes.

Thank you for the insight. Alan, could you provide more details on the current trends in transmission? Additionally, I'd like your thoughts on the market opportunities in ZR now that NeoPhotonics is part of the business. I'm interested in your longer-term outlook for fiscal '23 rather than just the next quarter.

Sure, thanks, Simon. I believe ROADMs saw significant growth and were likely the product line most affected by integrated circuit supply issues. As that supply situation improves, we anticipate continued growth in ROADMs. On the transmission front, high-speed coherent components increased by 250% year-on-year, and we expect this trend to persist due to the launch of high-performance modulators, tunable lasers, and, with the NeoPhotonics acquisition, receivers and ultra-narrow linewidth external cavity tunable lasers. These are exciting developments in transmission. As we mentioned earlier, the demand for 10 gig and soon-to-come 25 gig products is ramping up significantly, and we are increasing our capacity to double that to meet the needs of the MSO and wireless markets as they adopt these for higher bandwidth and product tunability. In the ZR market, it is still early as we integrate more ZR and ZR+ products from NeoPhotonics into our portfolio, and we expect growth in this area in the coming years. Additionally, with the acquisition of IPG, we believe we now have a comprehensive range of digital signal processors that will enhance our competitiveness in this market. While we will still depend on third-party suppliers for DSPs for a while, we anticipate that our investment in DSP technology and the recent acquisition will position us strongly in the ZR, ZR+, and other market segments.

Our next question comes from Tom O’Malley of Barclays.

I just wanted to dive back into the normalization of 3D sensing share. You guys have been pretty vocal about calling this out before. And you’ve also mentioned that in this coming year, you’re going to be below that long-term guidance of kind of flattish, down 5 to up 5. But in your prepared remarks here, you’re saying that there’s really no difference in terms of ASP degradation than normal. And when you just take where you guys have been historically from a share perspective down to even 50%, 50% share. You don’t really even get close to that, that down 40 or 50. So, could you just talk about any new trends that might be going on that may be weakening in the coming year from a technology perspective, or if there are potentially sockets that you had originally thought you would get that you’re no longer in competition for or perhaps you’ve shipped in a little more than you would have thought originally? Just any color there just because that number is pretty extreme.

Hey Tom, thanks for the question. This is Chris. I guess, I would roll back and say, if you look back a year or so, new chips were introduced that are smaller and lower priced, if you recall. And over the past year, though, we largely offset that reduction via share gains. So over the past 12 months, I think we’ve had even higher than our historical outsized positions. So, I guess, I would argue that the share normalization effect is quite significant. And so, if you layer on top of that a normal price reduction year-over-year for like-for-like type of chips, we end up with the kind of declines that we mentioned in the prepared remarks. There’s nothing structural going on or changes that are impacting our outlook. It really goes back to the share normalization combined with price reductions that are in the normal range for chips that have been sold, same year-over-year 'mature' for a very rapid taste consumer electronics world.

Helpful. And then, just on the supply chain, it seems like moving into the September quarter, you’re getting some ICs coming through the door that are loosening things up. Could you just talk to the cadence that you expect to see that loosen up through the December quarter? You’re getting $25 million out of that $100 million right out of the gate, but do you see it further loosening into December, or do you anticipate to continue carrying some of that constraint all the way through the end of the calendar year? Thank you.

Yes. Tom, our supply chain team has done a great job and has been relentless with our suppliers and done a really great job. And I think one of the dynamics we have seen in the June quarter and even into the first half of the September quarter is less necessity for these broker spot buys. So the supply from the normal channel is getting better in many cases. Now, that doesn’t mean that we have all the ICs we need. We still are struggling for several of them, but I do expect that as the broker market becomes less relevant to us, we’ll start seeing a better supply of chips. That said, we need to be getting chips in the next 30 days in order to impact our ability to produce products in the December quarter, and that’s still constrained. And that’s why we talked about having the supply shortages into the first half of the calendar 2023. So, we do expect that December quarter will be better than the September quarter, but still highly constrained given the strong demand we’re seeing in our telecom products.

Our next question comes from Meta Marshall of Morgan Stanley.

Thank you. I’d like to follow up on the previous question regarding the easing of supply. Is any of that due to redesigns being implemented, or is it primarily because the necessary products are becoming available? Additionally, I have a question about the industrial lasers segment. You mentioned growth opportunities in new markets, but I would like to know if you're noticing any macroeconomic influences on the core industrial lasers business. Thank you.

Sure, we have been working on some redesigns, which are helping, and the overall supply availability of semiconductors has improved, though it's still not where we need it to be. It's a mix of both factors. The major issue with some suppliers that caused us problems six months ago has been resolved, leading to fewer unexpected last-minute issues that were common in previous quarters. Regarding industrial lasers, we are developing a range of new lasers, including higher power fiber lasers and ultrafast lasers, which are enabling us to tap into new markets and reach new customers. We are expanding our customer base into new applications, such as solar cell processing and EV battery processing, both of which are fast-growing markets that we think will drive continued growth through fiscal 2023 and beyond. As for the macro environment, we are not currently facing any concerns regarding industrial production or laser consumption, so everything looks positive on that front.

Our next question comes from Christopher Rolland of Susquehanna.

This one is probably for Wajid. Maybe if you can talk about some of the moving parts on gross margin, OpEx into September. I know you have that combined op margin. But how that plays out? And then, I guess, the transaction closed at the beginning of August. So, do we still have another third to embed into the December quarter? Thanks.

Yes, Chris. So, moving into the first quarter from the fourth quarter, we’re seeing modest improvements across all of our product lines. Now, like Alan mentioned earlier, normally, we see a pretty big uptick moving into Q1 from Q4 with our 3D sensing business. We’re not seeing as much of that. It is quite modest, moving into Q1. Our gross margin profile, if you put aside NeoPhotonics for a moment, it’s pretty similar to how we’ve been operating in fiscal Q4 with our business running right at our target model. Now, once you layer in eight weeks of NeoPhotonics revenue, and as you know, the gross margins of that business are significantly lower than our target model, that is having an impact on the Company overall. The way to think about December, I think it’s quite fair to say, yes, we would add in another one-third of revenue because we closed on August 3rd. So July revenues were not part of our fiscal Q1 guidance. So that should certainly be there for fiscal Q2. So, that is the right way to think about it.

Okay, great. And then, you guys talked about some broader opportunities for 3D sensing and investing there. Maybe you can talk about these opportunities, whether you think they can make a meaningful dent on what was left by your largest customer there. And then, I think you also mentioned oxygen sensing as well. That sounds like a new market for me. I don’t know if you can expand on that as well.

Hey, Chris. This is Chris. Great questions. To start, in terms of opportunities outside of our main customer, which has driven most of our revenue over the years, the two major areas that consistently emerge are extended reality and automotive. We are involved in extended reality, utilizing eye tracking, gesture control, and scene capture, each of which requires a laser device. This presents a significant opportunity in the coming years. In the automotive sector, the dollar content is notably higher; we could potentially earn several dollars per vehicle solely from the laser component. This figure could increase further with solid-state LiDAR, which we believe will be the leading choice in many LiDAR applications. I would direct you to the analyst briefing we held earlier this year, with slides available on our Investor Relations website, where we discussed the dollar content opportunities in these sectors. At that briefing, we noted that over the next three years, we expect a compound annual growth rate in this business between minus 5% to plus 5%. Given the decline anticipated this year, we expect a U or V shaped recovery as new applications begin to ramp up and compensate for some of the lost revenue we foresee this year. We reported $2 million in automotive LiDAR revenue at the laser chip level last quarter, which is a significant portion of market share at this stage. Regarding the oxygen sensor, we are not involved in chemical sensors. What you may have heard is that LiDAR, as a form of imaging and industrial sensing, can be applied in other industrial applications, and we are investing in research and development to accelerate these opportunities. I believe that answers your questions.

Our next question comes from Samik Chatterjee of JP Morgan.

I guess, for the first one, if I can increase the long-term model, and you did reiterate the long-term model today. Just wanted to see if you can give us a sense of sort of the timing that you’re thinking in terms of when you get back to the long-term model. The NeoPhotonics synergies that you’ve called out $50 million over two years but that doesn’t get you all the way to the long-term model. So, how should we be thinking, is it a sort of a three-year plus target to get back to the long-term model? Any help there would be great. And I have a follow-up. Thank you.

Thank you for the question. Regarding our long-term model, if we compare this year to last year, we achieved gross margins above 51% and operating margins over 30% last year. This year, we expect our core business, excluding NeoPhotonics, to continue to operate within the 50-30 model. This is despite our largest customer being projected as a 10% to 15% customer for fiscal year 2023, all from a chip-based business with higher margins due to our market service approach. Our lasers, telecom, and datacom businesses are expected to improve in fiscal year 2023, which will help with operating leverage against fixed manufacturing costs. This growth is anticipated to carry on into fiscal year 2024 and fiscal year 2025, similar to how it is benefiting us in fiscal year 2023. As for the Neo synergies of $50 million, we estimate it will take about two years to fully realize these through our P&L as we commence our integration work, with updates provided each quarter. Additionally, the recent IPG purchase will enable significant benefits as we begin to ship our own DSP into our ZR and ZR+ products. While I won’t delve into specific cost benefits and vertical integration advantages, it’s clear that this will enhance our gross margins. These three factors instill confidence in our return to the long-term model. It may take around 24 months to see complete realization, but that’s the timeline we are considering. It's important to note the change in our largest customer’s contribution.

That’s helpful. And my follow-up, you talked about the vertical integration opportunity with IPGs, the acquisition of the IPG business or the DSP there. How should we think about sort of milestones in terms of what’s your expectation in getting the first DSP out? How should we think about sort of the opportunity on vertical integration and maybe more in the longer term become a merchant supplier of DSPs? How are you thinking about that?

This is Chris. I want to address a couple of points. Firstly, regarding our focus on internal supply vertical integration, we see coherent technologies expanding beyond the previously mentioned use cases for ZR and ZR+. We're exploring opportunities within data centers and edge networks, which is why we consider this a significant long-term investment. It may be a bit early to establish specific timelines or milestones since the acquisition just closed yesterday. However, as we move into the '24 and '25 timeframe, we anticipate having products not only developed but also integrated into our modules and starting to ramp for customers. There are many milestones to achieve beyond just developing the chip; we need to incorporate it into our modules and implement it with customers. This is an exciting development. Additionally, it enhances the integrated circuit capabilities we acquired from NeoPhotonics, which were mainly focused on drivers. Ultimately, with the combination of silicon photonics, indium phosphide photonic integrated circuits, high-speed drivers, and digital coherent ASICs, we are managing the entire spectrum of cost, vertical integration, supply chain, and future transmission modules.

Our next question comes from Rod Hall of Goldman Sachs.

Hey, guys. This is Anmol on for Rod. I think most of the questions are answered. But, I wanted to revisit and pick your thoughts about where are we in terms of ROADM and more broadly the telecom cycle? And what innings do you think we are in, in terms of carrier investments? Thank you.

Yes. Good question. As we said in the script, there are a lot of leading indicators of our telecom business, one of which is our pump lasers and submarine components that are really the first thing that needs to go into a network in order to start the deployment and then come ROADMs. And we’re seeing, as we said, the advanced ROADMs, high port count MxN being 70% of our revenue, ROADM revenue that is, in Q4 as another leading indicator for telecom growth. And then, you get the transmission products coming on. We believe that we are in the early phases of these new network deployments, and there’s quite a runway. That’s why we’re confident not only in the growth rates we’re expecting in fiscal ‘23, but our expectation is to have continued double-digit growth rates into the years beyond 2023. So, I’d say early stages, product development and product portfolio is better than it’s ever been and our confidence in future growth is very, very high.

And just a follow-up on that. So, how flexible would you think you are in terms of tweaking the operational scale to preserve margins? I mean, should you see a normalization in demand since the space can be lumpy? That’s it from my end. Thanks.

Yes. Well, we haven’t seen lumpiness in years. And I think that’s really a result of the competitive dynamic being very, very different. And that is when one of our customers designed a new network or a new architecture for a network of their customers and they bet on MxN, they buy it from us. The dynamic is very, very different. So, we haven’t seen that lumpiness for quite some time. I think as we free up supply of semiconductors, we’ll see a smooth ramp-up, and that’s why we talked about the second half of the fiscal year being stronger than the first half. As those ICs come free, we believe that our ROADM business will really thrive in the second half and continue to grow strongly as a result of new products and being in the early stages of deployments of these networks. Chris, do you have anything else to add on that?

Yes. I think the only thing I’d add is also our mix of customers in the networking space has evolved over time as well that this year we have a lot of sales with the cloud customers, cable MSO, wireless operators directly. And so, our leverage to specific carriers or network equipment manufacturers supplying to those carriers has been a bit more diversified as well. So, I think that adds to, as Alan said, there’s a different competitive dynamic. So, you’re not constantly worried about losing share on a very short-term basis to your competition, which can cause downward in your business, but also there’s a lot more smoothing or averaging out over end network operators that we’re now exposed to that should provide a lot more stability than the last 10 years, if you will.

Our next question comes from Ananda Baruah of Loop Capital.

Yes. Thanks, guys. Good morning. Lastly, exciting stuff going on. Just a quick one, if I could. Could you give us a sense of how we should understand the ramping of conversations over time with the hyperscalers with regards to the photonics opportunity? And at what point do you believe these conversations can result in, I guess, an increased revenue scale in NeoPhotonics and that’s it for me. Thanks a lot.

Yes. I think it’s a lot broader than just cloud or cloud operators, but I would say, until August 3rd, we were separate businesses and operating completely separately. At this point, we’re very focused on getting in with the customers as well as obviously integrating the business and really helping them understand the value proposition of the combined company. We truly believe, whether it’s the NeoPhotonics acquisition or the acquisition we announced yesterday, we’re talking about smaller, in many ways, subscale businesses that being part of a larger entity, there are a lot more opportunities. And the kind of customers that you mentioned are very much worried about security of supply and the scale of their suppliers. We think that’s something that we can help both of the acquisitions that have closed solve. Thanks for the question, Ananda.

And, Chris, do you think it’s going to be ‘24 event, is that unreasonable?

I think it does take a little bit of time. So, I mean, I think there’ll be benefits starting from day one, but really where it starts to accelerate, given the time of design-in and getting design wins and how customers allocate share commitments to us and to competitors, yes, I think it will accelerate through ‘24.

Our next question comes from Tim Savageaux of Northland Capital Markets.

Great. Made it in there. Question is also kind of around long-term modeling. Obviously, you’ve got a lot of moving parts this year. But at least heading into the year, organically, you’re looking at talking about double-digit growth rates over, I guess, multiple years. It looks like, given what’s happening in 3D, you wouldn’t have gotten there this year organically. But, as we look further out, especially with an eye towards Chris’ comments about a potential V-shaped recovery in 3D, is that still a reasonable expectation for the combined company in terms of double-digit growth over the medium- to long-term? Thanks.

Yes. So, I’ll start off and then certainly, Alan and Chris can jump in as well. So, from a long-term model standpoint, yes. So, this year, if you take a look at our standalone business, we’re probably growing by 7% to 8% because we probably had more of a step function drop in 3D sensing demand than we were expecting coming into the year, although we’ve been messaging it for quite some time. As we saw Q1 revenues come in or forecast coming from our customer, we realized very quickly that it is dipping much faster than we expected. So, that is impacting us. But if you take a look at our telecom and datacom business and our lasers business, even without the acquisition of NeoPhotonics, it’s expected to grow over 25% in fiscal ‘23 versus fiscal ‘22. So certainly, NeoPhotonics, we’re also expecting to have the type of tailwinds that will allow that business on a standalone business basis to grow into fiscal year ‘24 as well. And as Chris mentioned, with the combined sales team, we should be able to do better than that as a combined company. So with the rest of the business going into fiscal ‘24 at a double-digit growth rate and then some of the investments that we’re expecting in 3D sensing to start paying off, we’re certainly comfortable with the outlook on the business that we’ve provided in the past as it relates to long-term growth.

Our next question comes from Richard Shannon of Craig-Hallum.

I’m just going to ask one on 3D sensing and specifically the non-phone part of it. It sounds like you’re getting some great activity there, Chris. And given that you talked about a three-year time frame with the OFC presentation earlier this year, I’ll ask a question in that context, which is given the fairly big step down in your big customer here and the dynamics with other non-phone customers. Is it reasonable to think about your non-phone 3D sensing or I don’t know, call it imaging or something like that, being at least as big as the phone market for you within that three-year period of time?

I believe that in terms of the market, whether it’s in year three or year four, we are looking at that time frame given the time needed to ramp up these applications. As we consider the next three to five years, we expect the non-smartphone business to reach a size equal to or larger than the smartphone business, considering the potential in those areas. The key question is when that crossover will occur. That’s why we estimate a range of minus 5% to plus 5%, as it’s very sensitive to that final year. However, in years three or four, I certainly see that happening.

Our final question of the day comes from Michael Genovese of Rosenblatt.

Okay, great. Thanks a lot. First question, just to clarify on the sort of organic non-3DS guide, you threw lasers in there, expecting over 25% growth. But is that just because it’s included with telecom and datacom, or is lasers itself growing that quickly?

Yes, lasers are growing very rapidly, with a year-over-year increase of 59%. We anticipate this growth will continue. What we meant to convey is that aside from share normalization, the rest of the business, including telecom, datacom, and lasers, is performing well. We expect lasers to achieve record revenue levels in Q1 and to keep growing throughout the calendar and fiscal year. That's why we included them together.

Okay, great. And then finally, can you flesh out a little bit more on the DSP strategy? From what I’m hearing here, it sounds like definitely, you plan to make ZR, ZR+ modules with an internal DSP. Do you then expect to have your own DSP and other kinds of transmission modules as well, or should we think it would just be limited to or focused only on ZR?

No, I think you can consider ZR as the first step. Since we announced the deal 25 hours ago, we are still trying to determine if we need to adjust the existing roadmap or add resources. So, I would say it's still early days. However, we are not entering the DSP business for just one DSP. We are making this investment and acquisition for the long term. I believe it will position us well, especially when we combine the NeoPhotonics product and technology, IPG products and technology, and what Lumentum has. Together, it really positions us strongly for vertical integration in coherent components and modules.

Great. Thank you, Michael. Charlie, I think that’s all the questions that we have. So, I’d like to pass the call back over to Alan for some concluding remarks.

Thank you, Kathy, and thank you, Charlie. I’d like to leave you with a few thoughts as we wrap up this call. We have significantly improved our access to third-party ICs and have increased our manufacturing capacity to support the ongoing demand strength. Our fourth quarter results and first quarter guidance certainly reflect the strength across our telecom, datacom and commercial lasers business. I’m also very excited about our acquisition of NeoPhotonics and the purchase of the telecom transmission product lines from IPG and the breadth of the products and capabilities that we can now offer to our customers. Together, we have a broad portfolio of best-in-class products and technologies. We are committed to strongly invest in innovation and manufacturing capabilities to deliver on customer needs today and in the future. With that, I would like to thank everyone for attending, and we look forward to talking with you again during upcoming investor events, which you will find posted on our website. Thank you.

Ladies and gentlemen, this concludes today’s call. Thank you so much for joining. You may now disconnect your lines.