Earnings Call Transcript - LITE Q2 2024

Operator, Operator

Good day, everyone, and welcome to the Lumentum Holdings' Second Quarter Fiscal Year 2024 Earnings Call. All participants will be in a listen-only mode. Please also note that today's event is being recorded for replay purposes. At this time, I would like to turn the call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead.

Kathy Ta, Vice President of Investor Relations

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 expectations and beliefs regarding recent acquisitions, financial and operating results, macroeconomic trends, and our expected financial performance, including our guidance. 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, particularly the risk factors described in the 10-K for the fiscal year ended July 1, 2023, and our 10-Q 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. With that, I'll turn the call over to Alan.

Alan Lowe, President and Chief Executive Officer

Thank you, Kathy, and good morning, everyone. Lumentum stands at the leading edge of photonics innovation, partnering with customers to enable the future of data centers and the networks that connect them. We equip our customers with the industry's most comprehensive photonics portfolio, enabling them to unlock unparalleled performance and efficiency. From pluggable high-speed transceivers to enabling our customers' AI-optimized architectures with industry-leading transmitters and photonics, we are at the forefront of data centers' needs. Together with our cloud customers, we are shaping the future of data transmission through pioneering technologies such as chip-scale photonics and advanced data transmission protocols, as well as highly efficient and automated manufacturing at scale. It has been just three months since we acquired Cloud Light, and we are thrilled with the team that has joined us and the many opportunities that lie ahead. In this brief period, we have had meaningful traction with customers on new data center opportunities which we expect will drive significant additional growth as we complete the development of the new products and receive customer qualifications. The market opportunity is accelerating, and we expect broader customer adoption of 800G technology as these qualifications finalize. Additionally, the initial ramp-up of 1.6 terabit products by early technology adopters is creating a lot of pull from customers, and we expect to have a first-to-market advantage given our vertical integration and test results from our labs. Cloud Light transceiver shipments were very strong in the December quarter, contributing $59.5 million during the approximately eight weeks after the acquisition. We expect our shipments will be even stronger in the March quarter. Given a mid-calendar-year product transition planned by our largest data center customer, we expect revenue from data center transceivers to temporarily dip in the June and September quarters, and then grow significantly through the end of the year and into calendar year '25, as this transition completes and other new customer programs start to ramp. Given the surging data demands of AI data centers and our strong traction on new transceiver opportunities, we are strategically expanding our leading-edge transceiver manufacturing capacity. As a key part of this expansion, we are investing in state-of-the-art production lines at our manufacturing facility in Thailand. Our Thai factory has proven photonics manufacturing capabilities and has received numerous customer accolades, giving us confidence in our ability to ramp rapidly. This capacity will come online this summer, and we expect to lead the first wave of 1.6 terabit transceivers from multiple customers at this site. In addition to this new capacity expansion in Thailand, we will be leveraging Lumentum's components in new Cloud Light transceiver designs. We believe the combination of our established history of customer partnership, proven manufacturing leadership, and unmatched breadth of differentiated photonic component capabilities puts us in an excellent position to accelerate top line revenue growth and margins in this rapidly growing cloud transceiver market. While cloud data centers are forecasting double-digit CapEx growth in calendar '24, we are navigating challenging market conditions in other parts of our business. Based on sluggish carrier CapEx spending and our latest customer discussions, we now expect customer inventory digestion to extend through the balance of fiscal '24. Nevertheless, we are highly confident in our market position and the ultimate recovery and growth of this business. As fiber transmission reaches its physical capacity, network providers increasingly recognize the value of technologies, like ours, that enable continued network scaling, reinforcing our long-term confidence in this business. Moving to our Industrial Tech segment, we are very excited about our traction on new products serving new applications, particularly for our ultrafast lasers. These are ramping up and are adding to our customer end market diversification in our Industrial Tech segment. That said, we do expect a period of lower demand over the coming quarters driven by typical seasonality in our consumer business and by macro softness in the industrial market, along with elevated customer inventory levels at one of our large laser customers. We expect the industrial laser inventory to be corrected over the next six months, around the same timeframe as the seasonal uptick in our consumer business. This, combined with our wins at new customers in new markets, should lead to a recovery in our Industrial Tech segment during the second half of the calendar year. Moving on to fiscal second quarter results, second quarter revenue and EPS results were above the midpoints of our guidance ranges, with revenue of $366.8 million and EPS of $0.32. I'm very excited about the contribution that our Cloud Light acquisition had on the quarter and will have in the future, given the technology and capability of the combined companies to address the rapidly growing AI and ML photonics market. We have continued to drive acquisition synergies to drive down our fixed costs, and Wajid will provide more color on this shortly. The combination of these lower fixed costs and the rebound in revenue will result in an accelerated expansion in our margins during fiscal '25. Cloud & Networking revenue was up 25% sequentially driven by strong cloud data center demand and the contribution from the Cloud Light acquisition, but down 25% year-on-year given broad-based softness across most of our telecom networking product lines due to the continued inventory correction at our network equipment customers. The future is bright for our cloud technology roadmap. In the second half of calendar '24, we expect to qualify the industry's first power-efficient 800G transceivers that employ 4x200 gig lanes of traffic using silicon photonics technologies. As I mentioned earlier, we expect to ramp capacity this summer at our campus in Thailand and expect to lead the first wave of 1.6 terabit transceivers for multiple customers in this facility. These ultrahigh-speed transceivers provide additional bandwidth needed for AI workloads while also alleviating data bottlenecks with lower power consumption and latency as customers move to 200-gig-per-lane technology. We expect that 200-gig-per-lane optics, using not only silicon photonics technology, but also our vertically integrated EML lasers will be the workhorse of the next generation of hyperscale data centers once these new products are qualified at leading cloud and cloud infrastructure customers. We have been receiving positive customer feedback about our 100-gig VCSEL performance for short-distance data center applications and expect to start ramping production in the second half of calendar '24. We will qualify our VCSELs in Cloud Light's active optical cables and transceiver platforms in the coming quarters. We are also working closely with cloud infrastructure providers on novel components and modules that leverage our unique technology capability to enable new future AI hardware architectures for higher-bandwidth, lower power density, and low-latency optical interconnects essential for training in inference applications. With the rapid build-out of AI and ML data centers, connecting those data centers with high-speed power and cost-efficient interconnects is becoming even more important. To that end, we continue to see success in our 400-gig ZR module business where, in Q2, we grew over 30% sequentially. Additionally, we are receiving positive customer feedback on our 800G ZR modules and we are on track to be first to market with customer samples this year. These modules will enable even higher speed extended reach data center interconnects to keep pace with rapidly expanding data center infrastructure. Our coherent transmission products outside of the data center are receiving positive customer feedback and traction on our next generation 130 and 200 gigabaud data rate technologies that enable next generation coherent applications at 800G, 1.2T, and 1.6T. As we move through calendar '24, we believe we are at the forefront of 200 gigabaud optical technology with our first-to-market and first-to-volume products. Turning to Industrial Tech. Fiscal Q2 was down 9% sequentially as expected, driven by seasonality in our 3D sensing business and inventory consumption at one of our large industrial lasers customers. Industrial Tech was down 35% year over year, primarily due to increased competition for market share in a certain 3D sensing socket and overall macroeconomic softness. We expect revenue of 3D sensing for consumer applications to contribute approximately 5% or less of company revenue in Q3 and Q4 of fiscal '24. As the shift to industry 4.0 and 5.0 drives demand for greater automation and precision manufacturing, our laser products are well positioned to address evolving industrial needs. With precise control and pulse parameters in quality and stability, we are seeing growing opportunities for our ultrafast and solid state lasers across key micromachining applications in semiconductor, EV batteries, displays, PCBs, and solar cell manufacturing. Growth in new micromachining applications will help to partially offset the near-term headwinds I mentioned earlier. To summarize, high-speed data center demand is skyrocketing, and we are accelerating product development and production to capture this growth. Armed with longstanding customer partnerships, industry leading manufacturing, and an unmatched portfolio of advanced photonic components, we are positioned to gain market share in the surging cloud transceiver market, driving significant top line and margin growth for Lumentum. Before turning it over to Wajid, I would like to thank our employees and our customers around the world for their focus and dedication as they continue to collaborate and partner with Lumentum.

Wajid Ali, Executive Vice President and Chief Financial Officer

Thank you, Alan. As Alan mentioned, we are confident about our market position and growth opportunities across our surge markets. We are focused on lowering our fixed cost base so that as revenue recovers, operating margin dollars will expand faster than revenue. To this end, we have made significant progress on manufacturing synergies by hitting key milestones on closing two new photonic factories in China this past December. The benefit will accrue to our financial position as we ramp production at our Thailand facility. Additionally, our Japan wafer fab consolidation plans are progressing well, and we expect to execute this plan by the first half of fiscal '25, allowing us to attain significant additional synergies in both manufacturing and operating expenses beginning in the fiscal third quarter of 2025. As well, we continue to see incremental synergy and efficiency opportunities within our operating expenses. Consequently, we are increasing our synergy attainment expectations to $100 million, up from the prior target of $80 million. To date, we have achieved approximately $60 million in annual run-rate savings and expect to achieve the remaining $40 million as we execute against our plan. We will provide you with further updates as we achieve critical milestones. As I have mentioned previously, we had pre-built inventory of NeoPhotonics products to enable these factory transitions. In Q2, we reduced Lumentum's overall inventory levels by approximately $20 million sequentially, excluding the increase in inventory related to Cloud Light. In addition, despite incorporating the operational expenses of our recent acquisition of Cloud Light in Q2, our tight financial discipline drove company-wide operating expenses down by $4 million on a year-over-year basis. We're confident that our combined efforts on manufacturing efficiency, inventory management, and cost control will pave the way for continued improvements in gross and operating margins as telecom revenue recovers and our cloud revenue continues to grow. Net revenue for the second quarter was $366.8 million, which was up 15.5% sequentially and down 27.5% year-on-year. As Alan mentioned, we recognized $59.5 million in revenue from a partial quarter of Cloud Light during the quarter. The majority of this revenue came from 800G transceiver shipments. GAAP gross margin for the second quarter was 17.4%. GAAP operating loss was 28.7% and GAAP diluted net loss per share was $1.47 with a significant portion of the GAAP net loss due to acquisition related charges and amortization. Second quarter non-GAAP gross margin was 32.6%, which was down sequentially and down year-on-year driven by product mix and factory underutilization. Second quarter non-GAAP operating margin was 3.5%, which was up sequentially and down year-on-year. Second quarter non-GAAP operating income was $13 million, and adjusted EBITDA was $39 million. Second quarter non-GAAP operating expenses totaled $106.7 million or 29.1% of revenue, up $6.6 million from Q1, due in part to the acquisition of Cloud Light and down $3.6 million from the year-ago quarter due to tight expense controls and continued synergy attainment. Q2 non-GAAP SG&A expense was $38.4 million. Non-GAAP R&D expense was $68.3 million. Interest and other income was $12.3 million on a non-GAAP basis due to interest earned on our cash and investments. Second quarter non-GAAP net income was $21.7 million and non-GAAP diluted net income per share was $0.32. Our cash position decreased by $720 million during the quarter, to $1.22 billion; this was primarily due to the $705 million in cash used for the purchase of Cloud Light. Additionally, we incurred approximately $8 million of normal course expenses associated with the transaction. Turning to segment details, second quarter cloud and networking segment revenue at $286.7 million increased 24.8% sequentially and was down 25.1% year-on-year. Cloud and networking segment non-GAAP reporting profit at 10.1% decreased sequentially and year-on-year. Our second quarter industrial tech segment revenue at $80.1 million was down 8.9% sequentially and down 34.9% year-on-year. Second quarter industrial tech non-GAAP reporting profit of 15.9% was down sequentially and year-on-year. Before I move to our guidance, I would like to add some context to an impact to our revenue related to export regulations. Late last year, we were notified by certain critical IC suppliers that their products do not comply with the latest export regulations. Consequently, in December, we stopped the majority of our product shipments to the largest networking equipment manufacturer in China. Our assumption is that these export regulations will continue indefinitely, resulting in an approximately $40 million to $50 million reduction in calendar year '24 revenue from our prior expectations. Longer-term, we believe geopolitical factors could pose a benefit to our revenue opportunity given our larger product footprint within other customers who are expected to be end-market share gainers over time. Now, let me move to our guidance for the third quarter of fiscal '24, which is on a non-GAAP basis, and is based on our assumptions as of today. We expect net revenue for the third quarter of fiscal '24 to be in the range of $350 million to $380 million. This Q3 revenue forecast includes the following assumptions: Cloud and networking is expected to grow driven by strong cloud demand and a full quarter of Cloud Light, despite more than a $10 million impact from the export regulations just mentioned, and Industrial Tech is expected to decline nearly $40 million sequentially at the midpoint due to 3D-sensing seasonality and share dynamics, as well as industrial laser customer inventory digestion that Alan mentioned earlier. Based on this, we project third quarter non-GAAP operating margin to be in the range of 2% to 5% and diluted net income per share to be in the range of $0.20 to $0.35. Our non-GAAP EPS guidance for the third quarter is based on a non-GAAP annual effective tax rate of 14.5%. These projections also assume an approximate share count of 67.8 million shares.

Kathy Ta, Vice President of Investor Relations

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

Operator, Operator

We will now start today's Q&A portion of the call. Our first question today comes from Simon Leopold from Raymond James. Your line is now open. Please go ahead.

Simon Leopold, Analyst

Thank you very much for taking the question. I will try to keep to that one. So, I just wonder if you could maybe talk a little bit about your customer mix, customer concentration in this quarter. I'm wondering if you did have a new 10% customer, and how you see that particular concentration changing or evolving, both sequentially and then longer-term? And then I've got a quick follow-up.

Alan Lowe, President and Chief Executive Officer

Yes, thanks, Simon. Yes, we did have a new 10% customer primarily due to the Cloud Light addition to revenue from that customer. I would say that we expect that diversification around our transceiver business will grow rapidly towards the end of this calendar year and into '25 as new 800-gig and 1.6T products are qualified with other hyperscalers as well as AI infrastructure companies. So, we're very excited about that and the diversification of the customers around our transceiver business. I would say that one of the things we did talk about was the less dependency on our consumer business, and that's why we gave specifics around 5% or less of our revenue in the next few quarters. And I think that's a healthy place to be with our consumer business. Does that answer your question, Simon?

Simon Leopold, Analyst

Thanks. And then, it does. And you sort of teed up my follow-up nicely, in that, in the deck, the footnote mentions that Industrial Tech is expected to decline approximately $40 million sequentially. And I'm still sort of adjusting to this new segmentation. And I'm just wondering if that implies 3D is essentially dropping to zero. I know you said less than 5%, but zero is also less than 5% or whether there's a significant portion of that $40 million coming out of this inventory adjustment product cycle on your industrial lasers, so just looking for a little bit more help on how to split that $40 million. Thank you.

Alan Lowe, President and Chief Executive Officer

Yes, I would say that we're pretty confident in that 5-ish percent for consumer in Q3, so the balance would come from, we mentioned on the call, around the inventory reduction efforts by one of our largest laser customers. So, that's how you could kind of split up that $40 million.

Simon Leopold, Analyst

Thank you.

Kathy Ta, Vice President of Investor Relations

Thank you, Simon.

Operator, Operator

Our next question comes from Alex Henderson from Needham. Your line is now open.

Alex Henderson, Analyst

Great, thanks. I wanted to dig into the Cloud Light business a little bit and understand some of the dynamics there. But I also wanted to understand whether Cloud Light's technology in selling transceivers has changed the dynamics around your chip sales to other transceiver companies at all. First question, is the 800-gig products that you were talking about ramping on in VCSELs, is there a 1.6 terabit product coming down the pike for that, because we've just heard from Fabrinet that they're expecting some impact on their business because of a product transition.

Alan Lowe, President and Chief Executive Officer

Yes. Let me address your first question first, which is around the dynamics of our chip sales. And I would say certainly our chip customers had some concern around us being a competitor, but we assured them that we are their partners, and we really treat those two businesses very separately, with a wall between our chip development team and our transceiver team, so there's no cross-contamination or concerns. I think we've alleviated a lot of those concerns to the point where I am sold out on Datacom chips today, and through next quarter, and we're adding capacity to meet the demands of our EML business, and bringing up our CW laser business in a rapid way. On the VCSELs, we talked about the 100-gig VCSELs being released in the second half of this year, with very positive results just going through final qualifications. As far as 200-gig VCSELs, that's a little bit out for us, and I think for the industry. So, 1.6T would be more of a silicon photonics or EML-based transceiver. But I'll let Chris talk a little bit more about his thoughts on 200-gig VCSELs or 1.6T.

Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer

Yes, as you mentioned, Alan, we are focusing on initial products of 1.6 terabits that will be based on silicon photonics. The industry is developing 200-gig VCSELs on our roadmap, and other third-party suppliers are also working on 200-gig VCSELs, which will be integrated over time. Additionally, the Cloud Light transceiver platform includes both multimode and single-mode transceivers, which positions us well to take advantage of both opportunities.

Alex Henderson, Analyst

So just that I understand, then if there is a 1.6 terabit product coming in the June quarter, it would have to be 16 lanes of 100, because I mean there is clearly an implication that there's something of that sort coming down the pike in the June quarter, and by other peoples' commentary. Is that not true?

Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer

I can comment on what our plans are, which involve silicon photonics-based approaches. I think we also have alluded to on the call that 200-gig-per-lane technology is also on the horizon, let's say, and will come out over the next year. So, I think you can put those facts together.

Alex Henderson, Analyst

Okay, thanks.

Alan Lowe, President and Chief Executive Officer

Yes, but just to be clear, we have 1.6 terabit silicon photonics in our labs today. We have 200-gig EMLs that we have qualified internally that are ready to go, waiting for both internal qualification at the transceiver level, as well as our customer's transceiver qualifications using 200G EMLs that I think will come out later this year.

Operator, Operator

Our next question today comes from Samik Chatterjee from J.P. Morgan. Your line is now open.

Samik Chatterjee, Analyst

Hey, guys, thanks for taking my question. Maybe just not to sort of keep going on Datacom, but to just make sure I am not confused. You talked about the product transition that your primary customer there for Cloud Light is undergoing. Maybe you can flesh that out a bit in your own words what's the transition? And more curious to hear what's your visibility in terms of market share with the customer following that transition? Any thoughts or any color on whether you expect any changes in relation to market share? And then, I have a quick follow-up. Thank you.

Alan Lowe, President and Chief Executive Officer

Yes, I'll comment on product transition. Certainly, we have to be a little careful of customer sensitivity. But you can imagine that as 800G is launched, there are subsequent generations of 800G whether that be different form factor or transitioning from 100G to 200G per lane. So, there are a range of changes as you get further into technology maturity to reduce power consumption and power density challenges in your systems. I think with regard to market share, we are very excited and believe that we have lots of opportunity to gain share. And that’s why as we talked about in our prepared remarks, we are expanding capacity very significantly so that we can come out and really accelerate growth later this calendar year and into calendar '25.

Samik Chatterjee, Analyst

Okay, got it. Thanks for that. And maybe just for my follow-up. On the telecom segment, your primary competitor of your company is calling out a recovery in demand in China, which I am assuming you are not able to capitalize on because of the trade regulations. But just curious if this is a situation where you would sort of go rework the product and get through some of the supply chain reorganization to still try to address that market with a different customer? Or is this sort of an area where you really don't have an option to go around and capitalize on that demand recovery in the China market? Thank you.

Alan Lowe, President and Chief Executive Officer

Yes, Samik. There are deployments about to happen in China that we are part of through non-Huawei customers. And, in a meaningful way, a very large part of the share non-Huawei in China network equipment manufacturers and things like that, so that is one of the areas of strong string. We stopped shipping due to the need to follow regulations obviously. I think that will trickle down eventually to the point where share will shift from network equipment manufacturers that we have a higher share of wallet on that over the long term we believe will be a tailwind for us.

Samik Chatterjee, Analyst

Thank you. Thanks for taking my questions.

Kathy Ta, Vice President of Investor Relations

Thanks, Samik.

Operator, Operator

Our next question today comes from Christopher Rolland from SIG. Your line is now open.

Christopher Rolland, Analyst

Hey, guys. Thanks for the question. Mine is about Cloud Light. So, first of all, you talked about maybe the end of program and a dip in June and September. If you could kind of describe why that program just ends and why there isn't something fluid into the segment of AI or what have you? And then, you talked about a broadening into new customers. How many are you thinking and how large do you think they may be versus your primary customer? Thank you.

Wajid Ali, Executive Vice President and Chief Financial Officer

Yes, Chris. We do, as you're alluding to, have a degree of customer concentration in the Cloud Light business. So, the customer that's driven a lot of 800 gig growth over the past several quarters, there's a time to ramp down of the current generation of product and it takes time to ramp up the next generation of product. So, while there are other customers and other customers are growing, they're not sufficient to offset that product transition, if you will. And as Alan alluded to, we are, through the capacity expansions as well as new product activities, expanding the number of sockets that we have with multiple customers so that such product transitions, which do occur from time to time, will be more smoothed out as the revenue base grows and diversifies. In terms of the magnitude of other customer opportunities, certainly, as we talked about when we announced the acquisition of Cloud Light, this is a very large market, and so the opportunity to add multiples of current revenue in the coming years is certainly well ahead of us and very well positioned with both the Cloud Light capabilities and the momentum that Lumentum brings to the table. Customers to date are very encouraged by the possibilities and are working closely with us to bring that to a reality over the coming year. You can't develop a product, qualify it, and ramp it in a few quarters. That does take a little bit of time, and so that's why we're talking about having significant capacity additions and revenue growth later this calendar year.

Alan Lowe, President and Chief Executive Officer

Yes, and Chris, maybe I can add to that as well.

Christopher Rolland, Analyst

Yes.

Alan Lowe, President and Chief Executive Officer

Yes, just to add to that, I think given that we're a U.S. headquartered company and now investing heavily outside of China is a very attractive alternative U.S. partner to all of the cloud customers, as well as the cloud infrastructure companies. And that's what's really got our attraction with, I'd say, every one of the customers. And that's why we're investing strongly in Thailand and will continue to invest to meet the needs of the demands that our customers are asking for. Because when they say go, they want to make sure we have the capacity in place. And so, that's what gives us confidence and why we're investing so strongly.

Christopher Rolland, Analyst

Thank you, Alan. Maybe as a follow-up, just to understand some of these moving product dynamics, when will 100-gig VCSELs be meaningful for you in terms of revenue? And then it sounds like you don't have a roadmap for 200-gig VCSELs; you'll have a hard cut to SIFO or EMLs for 200-gig, and that will be going into Cloud Light products as well. Did I get that transition correct?

Alan Lowe, President and Chief Executive Officer

Today, our 100-gig VCSELs have received a lot of positive feedback. We will begin generating revenue in the second half of the calendar year, and they will significantly contribute in 2025, both for AOC applications and multimode SR transceivers. We also have 200-gig technology planned in our roadmap. The development work we've accomplished over the past year on 100-gig gives us great confidence that we'll be ready with 200-gig technology at the right time, likely by the end of 2025 and into 2026. Thus, 100-gig VCSELs have a strong growth trajectory through 2025, and we have a high level of confidence in our 200-gig roadmap. We will first release EMLs around the same time as 200-gig per lane, followed by 200-gig VCSELs.

Kathy Ta, Vice President of Investor Relations

Great. Thank you.

Operator, Operator

Our next question today is from Meta Marshall from Morgan Stanley. Your line is now open.

Meta Marshall, Analyst

Thanks. It's been touched on a couple of questions, but just wanted to kind of narrow down into kind of the process or timeline of bringing your lasers into the Cloud Light portfolio, just kind of what the timing of that vertical integration would be, and then maybe just as a second question, more on the 3D sensing side of the portfolio, there are new kind of devices out from your major customer, just anything in terms of kind of contextualizing how big that opportunity either is or could contribute to the things.

Alan Lowe, President and Chief Executive Officer

The timing of our lasers in Cloud Light's portfolio is already underway since we became one company, covering both 100-gig VCSELs and EMLs. It mainly depends on customers' hesitance to change existing products, so we’ll see progress as we secure new product qualifications and customers. I anticipate more significant developments in the second half of calendar 2024 and into 2025. Regarding 3D sensing new devices, they are quite secretive. We believe we are involved in some of their new devices, but the volumes are much smaller compared to handsets. Therefore, I don’t expect any significant contribution from those new devices in the short term.

Kathy Ta, Vice President of Investor Relations

Great. Thank you. Thanks, Meta.

Operator, Operator

Our next question today is from Karl Ackerman from BNP Paribas. Your line is now open.

Karl Ackerman, Analyst

Yes, good morning. I have a question for Alan and one for Wajid. Wajid, within telecom, 130 and 200 gigabaud and coherent optics with eventually your own coherent DSP, that appear to be growth drivers for you, but where do you think your customers are on digesting inventory? I know you indicated it may not recover until September quarter, but have you seen book-to-bill trough in that area of the business? Any color on that would be helpful as we think about the recovery in telecom.

Alan Lowe, President and Chief Executive Officer

Yes, so on the high gigabaud products, those are constrained by our ability to meet customer demand today. And you're right, I think the combination of 130 gigabaud and 200 gigabaud and our own DSP is a real winning solution to meet the needs of next generation ZR products, as well as the long-haul and metro products. So, today, our 200 gigabaud and 130 gigabaud are going into more metro and long haul applications, just as prior products and previous generations, as they cost reduce over time and get into a smaller form factor into ZR products. So, that is off into the races, and it feels like the old times with the number of emails I get from executives asking us to ramp up faster and work with our suppliers to get product to them when they need it. So, that's a very, very strong positive. As far as digestion is concerned, I'd say that we have a lot of single source or primary source products that during the pandemic were in short supply where customers ordered in anticipation. For example, our tunable laser from NeoPhotonics is the workhorse of the industry, and there's inventory at many of our customers of those products as the anticipation of ZR demand was very, very strong and it became less so over the horizon. So, inventory needs to be digested of tunable lasers, and when that goes away, we believe that will take another quarter and a half or so before those products will ramp back up. So, I think putting aside the short-term inventory glut, we're very well positioned on existing products, on new products, and the new product demand is strong. From that perspective, we're very confident in our position and the market share today and going forward.

Karl Ackerman, Analyst

Thank you for that, Alan. Maybe a follow-up, you indicated how you are expanding production capacity in Thailand for high-speed laser components. At the same time, there seems to be quite a strong willingness by your customers to accept that. So, are you seeing a willingness across the supply chain for your customers to co-invest in your capacity as they ready some of these very high-capable products, really for AI clusters and next-generation AI networks as they wait for that demand? Thank you.

Alan Lowe, President and Chief Executive Officer

I would say on existing capacity and short-term growth of capacity, that’s on our dime and our customers are encouraging us and will reward us over time with orders. They're investing their R&D and engineering resources to qualify our products in the short term. I would say we are getting co-investment on development projects to develop unique alternatives to transceivers. For the long term, I think we have a share of mind with some of the AI infrastructure companies around what does the next generation of Datacom or optical interconnect or GPUs look like. They are willing to help us make those investments that will turn into revenue a little bit further out. But they're clearly partnering with us because they see the breadth of technology and capabilities that we have. So, I'd say that's kind of the answer both from the short-term as well as longer-term. Does that answer your question, Karl?

Karl Ackerman, Analyst

Yes, it does. Thank you.

Alan Lowe, President and Chief Executive Officer

All right.

Kathy Ta, Vice President of Investor Relations

Thank you, Karl.

Operator, Operator

Our next question comes from Dave Kang from B. Riley. Your line is now open.

Dave Kang, Analyst

Thank you. Good morning. Just one more question on the Datacom segment. So, with that pause or dip in June and September, how should we think about Datacom revenue for those two respective quarters?

Alan Lowe, President and Chief Executive Officer

It's a good question.

Wajid Ali, Executive Vice President and Chief Financial Officer

I think.

Alan Lowe, President and Chief Executive Officer

Go ahead.

Wajid Ali, Executive Vice President and Chief Financial Officer

Go ahead.

Alan Lowe, President and Chief Executive Officer

I'd say we're still working on what that dip looks like, and clearly our customer is looking to help us smooth that dip. So, I would think from a modeling standpoint it could be down 30% through that transition period. But again, that's a matter of still working through. And then, can we pull in the new products into the September quarter that would make that June quarter the low? And I think that's probably the case, as we have made tremendous progress on the new products and the demand for those new products is strong. So, I'd say you can model kind of a dip in the June quarter with a slight pickup in the September quarter, but that's a little bit dynamic.

Dave Kang, Analyst

Got it. And then, my second question is on the telecom. Just wondering, you talked about tunable lasers. Just wondering how big that business is and also can you provide any update on the ROADM segment?

Wajid Ali, Executive Vice President and Chief Financial Officer

Yes, Dave, we don't break those products out specifically, but I think maybe a key point, as Alan highlighted on the call, or in a previous question, is both of those products are ones where there are more inventory out there, given the position we have and the criticality we are to our customers and the supply challenges around semiconductors or ICs a year ago or so that's an area where inventory was built quite heavily. So, for example, our ZR modules ourselves are ramping up, but tunable lasers aren't yet. There will be a time lag of a quarter or two before they start to recover given the amount of inventory that's out there. So, unfortunately, the situation is that some of the major product lines we have driven a lot of our historical revenues are the ones that where there are high levels of inventory that are remaining to burn off in the coming couple of quarters.

Dave Kang, Analyst

Thank you.

Kathy Ta, Vice President of Investor Relations

Thank you, Dave.

Operator, Operator

Our next question today comes from Ruben Roy from Stifel. Your line is now open.

Ruben Roy, Analyst

Thank you. I hope my first question is quick, because you guys have been talking about this quite a bit. But Chris, I think this is for you in answer to previous questions around this little bit of pause in the June-September quarters on the transceiver technology. I just wanted to make sure I understood. That's a design change, 100% related to kind of your product and not because of other network elements. Is that the right way to think about it?

Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer

I would say, well, maybe slightly different, which is to say that the customer wants to purchase different products, then we have to make a new product. And so, there is a period of ramping down the old before we ramp up the new, and that's what presented the dip.

Ruben Roy, Analyst

Okay.

Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer

Customers are trying to improve system or network performance, if you will, through a different sort of product design.

Ruben Roy, Analyst

Okay, thank you for that. And then, on the industrial side, you have, outside of pretty fencing, you've got the inventory consumption at a large customer, and obviously macro weakness ongoing. I'm wondering if you could kind of sort out the macro side of it, how has design activity been? Alan, I know you have gotten some new products out there with some of the fast industrial lasers. Are you seeing any sort of pickup in design activity or discussions around either additive manufacturing or otherwise, I'm just curious how you're thinking about over the next 12 to 18 months?

Alan Lowe, President and Chief Executive Officer

Yes, good question. I would say, as we said in the script, a lot of new applications, I would say the one that we are ramping today is primarily around solar processing and manufacturing, and our laser gives them a differentiated efficiency of the solar cells. So, as you can imagine, 1% efficiency or even a fraction of a percent efficiency for solar cells is a big deal. For whatever reason, our unique capability in our ultrafast lasers had a lot of attraction in that space. Similarly, we are seeing a lot of design activity around other applications, and we have talked about those on the call around EV batteries, PCBs, and displays that are coming to fruition, and will turn into business really in the second half of calendar '24 and into '25. So, yes, a lot of activity and a lot of success with respect to our femtosecond and picosecond lasers.

Ruben Roy, Analyst

Thank you.

Kathy Ta, Vice President of Investor Relations

Thanks, Ruben.

Operator, Operator

Our next question today comes from Vivek Arya from Bank of America. Your line is now open.

Vivek Arya, Analyst

Thank you for taking my question. And I just wanted to nail down what we have heard so far about June and September. So, it seems like June is at least $30 million below March levels, all else being equal. And then, September it recovers, but maybe doesn't get back to March levels, but I wanted to confirm that. And if June and September are both below March levels, then what happens to gross margins? Are they also below March levels? I just wanted to make sure that we just connect all the dots that we have heard so far on the call.

Alan Lowe, President and Chief Executive Officer

Wajid, I think you are on mute.

Wajid Ali, Executive Vice President and Chief Financial Officer

Thank you, Vivek. That sounds about right. We typically provide guidance one quarter at a time due to the number of customers contributing significantly to our revenue and the volatility we may experience. Based on the information we have shared, that calculation seems accurate. Regarding our gross and operating margins, we expect some synergies to materialize in our June and September quarters, as previously mentioned. We achieved $60 million by the end of the December quarter, and we anticipate additional synergies to assist us in March and more in June. Consequently, gross margins are expected to remain flat at least through the June quarter, with some improvement anticipated in September. Some new initiatives that Alan mentioned will require additional R&D investment for our large hyperscale customers, so we won't scale back on those. Operating expenses will also fluctuate between June and September. I believe that's the best way to understand the situation. Just to clarify, the 30% decline refers to Datacom, not the overall company in the June quarter, correct?

Vivek Arya, Analyst

Right. At $30 million, right?

Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer

Yes, $30 million, it's about $30 million-ish.

Vivek Arya, Analyst

My follow-up, how do you think about your balance sheet right now? Net leverage is kind of higher than peers. And so, how do you think about the balance sheet right now? Do you think you need to do anything extraordinary to shore it up? And in general, how should we think about just cash flow generation this year? So, just any comment on the balance sheet would be helpful.

Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer

Yes. We exited the December quarter with a little over $1.2 billion in cash. Our expectation is that we'll continue to generate cash flow from operations, both in the March quarter and in the June quarter as well. We are making some incremental investments in capital in our Thailand facility that Alan talked about. And so, that'll modulate between March and June just depending on when the CapEx comes in and when we pay for it. We have a convertible debt due in March, in the middle of March. Our expectation is that we'll be able to pay that off on the cash that we have on the balance sheet, and that still leaves us with a comfortable level of cash exiting that payoff. So, we're quite comfortable with the level of debt we have, both on a gross and a net basis, just kind of given those dynamics.

Vivek Arya, Analyst

Thank you.

Kathy Ta, Vice President of Investor Relations

Thank you, Vivek. So, Drew, I think we have time just for one more question.

Operator, Operator

Okay. Our next question comes from Ananda Baruah from Loop Capital. Your line is now open.

Ananda Baruah, Analyst

Good morning, guys. Thanks for taking the question. Just sort of going back to the transceiver comp, Alan, Chris, what's a good way to think about overall Gen AI exposure right now? I guess, how big would you size your kind of Gen AI related business in the December quarter? And I guess, what's a good way to think about, and you can include ZR in there if you think did that belong? Sounds like, Alan, you in your prior remarks, you think it to some degree, you think it belonged. And then, what's a good way to think about sort of, I guess kind of like the growth rate of those of how you size that Gen AI-related business over the next 12 to 24 months? There are a lot of moving parts with new customers and programs and stuff like that coming on, but any context, both of those questions would be pretty useful for us. Appreciate it.

Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer

Sure. I would say as we highlighted on the call, the Cloud Light revenue around $60 million will be going up significantly here in the March quarter with a full quarter of it. I think the vast majority of that, given that it's primarily 800 gig is going into AI platforms. If you were to look beyond that, then obviously we've got our Datacom chip business, which is several tens of millions of dollars a quarter as well adding into that. I would be cautious to start throwing in some of the telecom revenue at this point. Certainly, data going in and out of the data centers is relevant, but I think that's more of a longer-term story as more data centers are built with purpose and spread out further for power consumption reasons, which will start to really drive the telecom space. Now, going back to the revenue pieces that I highlighted between the Cloud Light transceivers and our Datacom chips, I expect, I mean obviously, we've talked about kind of a dip here over the coming quarters. But if we were to look at that over several year periods to smooth those out, I think the industry is expecting that AI is growing at a 50% CAGR or something like that over the next three-plus years. We have an opportunity to grow at least as fast as that, if not faster, given our more modest overall market share but having all of the essential ingredients to be able to be a share gainer.

Ananda Baruah, Analyst

That's helpful, Chris. I appreciate it. I'll leave it there. Thanks a lot.

Kathy Ta, Vice President of Investor Relations

Thank you so much, Ananda. And now I think we're going to turn the call back over to Alan for some closing remarks.

Alan Lowe, President and Chief Executive Officer

Great. Thank you, Kathy. I would like to leave everybody with a few thoughts as we wrap up the call. We are confident in our agility and leadership position to navigate the current market environment. Lumentum stands at the forefront of the data center revolution from pioneering chip scale photonics to automated manufacturing and to new and growing partnerships with hyperscale cloud customers and infrastructure providers. Our Cloud Light acquisition has already proven to be a success with a fantastic team and valuable insight propelling our high-speed transceiver production to meet surging demand. With that, I would like to thank you for attending today's call, and we look forward to meeting you again at investor conferences, upcoming meetings, and at the OFC Show in San Diego. Thank you.

Operator, Operator

That concludes today's 2024 Lumentum earnings conference call. You may now disconnect your line.