Fabrinet Q2 2024 Earnings Call Transcript

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Provided by Quartr
February 5, 2024

Key Takeaways

  • Fabrinet delivered record Q2 revenue of $712.7 million, up 7% year-over-year, and non-GAAP EPS of $2.08, both exceeding guidance ranges.
  • Datacom revenue reached $288.1 million—surpassing telecom for the first time—and grew 19% sequentially, driven by AI optical interconnect products.
  • Telecom revenue decline narrowed sequentially as demand for extended-reach pluggable optics (400ZR) helped offset inventory absorption; management expects slight sequential growth in Q3.
  • Non-optical communications revenue fell 5% sequentially to $144.8 million due to ongoing automotive inventory digestion, which is expected to persist into Q3.
  • For Q3, Fabrinet forecasts revenue of $705 million–$725 million and non-GAAP EPS of $2.08–$2.15, reflecting continued datacom strength and modest telecom recovery offset by automotive headwinds.
AI Generated. May Contain Errors.
Earnings Conference Call
Fabrinet Q2 2024
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good afternoon. Welcome to FiberNet's Financial Results Conference Call for the Q2 of Fiscal Year 20 24. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions on how to participate will be provided at that time. As a reminder, today's call is being recorded.

Operator

I would now like to turn the call over to your host, Garo Tumajanian, Vice President of Investor Relations. You may begin.

Speaker 1

Thank you, operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabrinet's financial and operating results for the Q2 of fiscal year 2024, which ended December 29, 2023. With me on the call today are Seamus Grady, Chief Executive Officer and Chabas Ferra, Chief Financial Officer. This call is being webcast and a replay will be available on the Investors section of our website located at investor. Fabrinet.com.

Speaker 1

During this call, we will present both GAAP and non GAAP financial measures. Please refer to the Investors section of our website for important information, including our earnings press release and investor presentation, which include our GAAP to non GAAP reconciliation as well as additional details of our revenue breakdown. In addition, today's discussion will contain forward looking statements about the future financial performance of the company. Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. These statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise them in light of new information or future events except as required by law.

Speaker 1

For a description of the risk factors that may affect our results, please refer to our recent SEC filings, in particular, the section captioned Risk Factors in our Form 10 Q filed on November 7, 2023. We will begin the call with remarks from Seamus and Chhaba, followed by time for questions. I would now like to turn the call over to Fabrinet's CEO, Seamus Grady. Seamus?

Speaker 2

Thank you, Garo. Good afternoon and thank you for joining our call today. We had a very strong second quarter, which again new records for revenue and EPS and also exceeded our guidance ranges. Rapid Datacom growth continues to fuel our overall performance, driven by next generation AI interconnect. Telecom revenue remains impacted by inventory absorption in the ecosystem, but we are encouraged that the magnitude of these declines is getting smaller.

Speaker 2

Total revenue was $712,700,000 an increase of 7% from a year ago and 4% from the Q1. Our strong execution helps to improve operating margins from the Q1 and generate non GAAP net income of $2.08 per share, a new quarterly record. Looking at the Q2 in more detail, optical communications revenue grew both from a year ago and the Q1. Within optical communications, telecom revenue decreased sequentially as anticipated. However, within telecom, we saw increasing demand for extended reach pluggable optics, which helped soften the sequential decline.

Speaker 2

We expect that this trend will continue in Q3. When combined with what appears to be a diminishing impact from inventory absorption, we believe telecom revenue could be up slightly in the 3rd quarter. Datacom revenue growth was strong again in the 2nd quarter, driven by AI optical interconnect products. For the first time in our history, datacom revenue exceeded telecom revenue, largely driven by AI programs. We expect to maintain this higher datacom revenue mix even as sequential datacom growth moderates and as telecom revenue trends improve.

Speaker 2

Our non optical communications business saw a small sequential revenue decline in the second quarter. This was primarily due to continued inventory absorption from certain automotive programs. We expect this inventory digestion in the automotive market to persist into the Q3, which we currently anticipate a sequential improvement in the Q4. Industrial laser revenue remained stable in the 2nd quarter. Operationally, we performed very well in the 2nd quarter with operating margins improving to 10.7%, a 20 basis point improvement from the Q1.

Speaker 2

Looking to the Q3, we are optimistic that we can deliver another strong performance for revenue and profitability. Despite softer near term automotive trends, we believe Telecom is positioned to show sequential revenue improvement, led by growth in ZR. In addition, we expect further growth in datacom revenue, which continues to be driven primarily by strength in AI programs. At the same time, we expect to extend our track record of strong operational execution and profitability. In summary, we are excited to have delivered another record quarter for both revenue and earnings per share, and we are confident that we can deliver another strong performance in the 3rd Now I'd like to turn the call over to Chaba for additional financial details on our Q2 of fiscal 2024 and our guidance for the Q3.

Speaker 2

Chaba?

Speaker 3

Thank you, Seamus, and good afternoon, everyone. 2nd quarter revenue was above our guidance range a record $712,700,000 up 7% from a year ago and up 4% from the Q1. The strong top line performance led to non GAAP earnings per share of $2.08 which was also above our guidance range. This record EPS includes the impact of a foreign exchange revaluation loss, which reduced net income by $0.10 per share. Details regarding our revenue breakdown are included in the investor presentation on our website.

Speaker 3

So my comments today will focus mainly on the most noteworthy areas. Optical Communications revenue was $567,900,000 or 80% of total revenue. Datacom revenue was $288,100,000 exceeding telecom revenue for the first time. Datacom revenue increased 19% from the Q1, driven primarily by 800 gig AI programs. Although the rate of sequential growth has begun to moderate, datacom revenue still increased by over 150% from a year ago.

Speaker 3

We expect new high data rate datacom programs to continue making significant contributions to our top line as we look ahead. Telecom revenue was $279,800,000 or just under half of total optical communications revenue. Telecom revenue declined 4% sequentially as we continue to see softness due to excess inventory in the channel. Similar to the Q1, growing demand for 400 ZR programs helped to offset some of this impact. We are optimistic that in the Q3, we could see a small sequential increase in telecom revenues.

Speaker 3

By data rate, Products rated 400 gig and faster grew 118% from a year ago and 18% from the 1st quarter and represented 2 third of total optical communications revenue. Non optical communications revenue decreased 5% sequentially $144,800,000 and comprised 20% of total revenue. This decline was driven primarily by inventory absorption of certain automotive products as we indicated last quarter. We anticipate automotive revenue will continue to decline in the 3rd quarter, but expect to see a return to sequential growth in the 4th quarter. Industrial laser revenue was flat sequentially and we expect that trend to continue in the 3rd quarter.

Speaker 3

As I discussed the details of our P and L, expense and profitability metrics will be on a non GAAP basis, unless otherwise noted. Gross margin in the 2nd quarter was consistent with the 1st quarter at 12.6%. Operating expenses were $14,000,000 or 2 percent of revenue. This produced operating income of $76,000,000 representing an operating margin of 10.7%, an improvement of 20 basis points from the Q1. With a strong balance sheet, we benefited from $7,700,000 of interest income, which more than offset the $3,800,000 FX loss from foreign currency asset and liability evaluations at the end of the second quarter.

Speaker 3

Effective GAAP tax rate was 5.2% in the 2nd quarter, in line with the mid single digit level we anticipate for the fiscal year. Non GAAP net income was a new quarterly record of $76,100,000 or $2.08 per diluted share. On a GAAP basis, net income was $1.89 per diluted share. Looking at the balance sheet and cash flow statements. At the end of the second quarter, cash and short term investments were $740,600,000 up $69,800,000 from the end of the first quarter.

Speaker 3

The primary driver of this increase was healthy operating cash flow of $84,200,000 With CapEx of $9,800,000 free cash flow in the quarter $74,400,000 We were active in our share buyback program during the quarter, repurchasing approximately 38,000 shares at an average price of $166.61 per share for a total cash outlay of $6,400,000 In addition to investing in our growth, returning value to shareholders remains a key capital allocation priority. At the end of the second quarter, $93,600,000 remained in our share repurchase authorization. Now I will turn to our guidance for the Q3. We remain optimistic about our business momentum and ability to execute well. In the Q3, we expect further sequential revenue growth in Datacom, which continues to be driven by demand for optical communications products for AI applications.

Speaker 3

In the telecom market, after several quarters of declines, we believe that we could see modest sequential revenue growth in the 3rd quarter. We expect this increase to be driven by further stabilization of industry wide inventory issues coupled with continued growth of data center interconnect products. We foresee another quarter of softness in our automotive business due to inventory absorption in the channel, And we expect that Industrial Laser revenue will be flat. As a result, we anticipate total revenue will be in the range of 705 to $725,000,000 in the 3rd quarter. We expect to continue to execute well and anticipate net income of $2.08 to 2 $0.15 per share.

Speaker 3

In summary, we are excited to continue with our strong track record of

Operator

Our first question comes from the line of Paul Ackerman with BNP Paribas. Your line is open.

Speaker 4

Yes. Thank you, gentlemen. I know you don't typically guide beyond 1 quarter, but perhaps you could discuss the backlog visibility you have On 400 gig and 8 and above optics over the next few quarters as perhaps well as the breadth of high speed optical programs ramping? I ask because while a peer reviewers indicated a temporary pause in 400 gig and 800 gig deployments in March, backlog visibility Backlog visibility appears very good for 800 gig and multiple hyperscalers appear to be deploying 800 gig this year. So if you could Comment on that, the visibility you have, that'd be very helpful.

Speaker 2

Thanks, Darrin. Yes, we have pretty good visibility, especially on the newer programs. Typically, in normal steady state business, we would have rolling 13 weeks forecast. But for these newer programs, we have Visibility beyond that, as you rightly point out, we just guide 1 quarter at a time. So I won't get into too many specifics.

Speaker 2

But I will say we are optimistic about the breadth of the pipeline for 400 gig and above, 400 gig, 800 gig and higher. And we have a number of programs and a number of customers in the pipeline that we're pretty excited about. But Again, nothing to get into too much detail about. And we certainly don't want to be announcing any products on behalf of our customers, but we're pretty optimistic about the pipeline that we have for those higher speed, higher data rate products.

Speaker 4

Great. Thank you for that. Perhaps if I may have a follow-up. Could you provide any update on the timing of Building 10? And also if you could address your ability to service What appears to be very strong demand for high speed optics in datacom, certainly if capacity that's serving telecom were to tighten quickly as well?

Speaker 4

Thanks.

Speaker 2

Yes. Building 10, we opened Building 9 a little over a year ago, We're already ramping at a fast pace in Building 9. Typically, when we get to 70% utilization on our last building, we'll then pull the trigger on the next building. We're not at that point yet and nothing to announce certainly at this stage. It is getting closer.

Speaker 2

I think we are pleasantly surprised by the pace at which we've been adding capacity and ramping In Building 9, demand in particular for Optical interconnect for AI applications is very strong and has been probably the biggest driver of our capacity additions in Building 9. So again, nothing to announce, but it is something that's in, I would say, if not the top of our mind, that's close to the top of our mind and something we're very mindful of and paying very close attention to We'll be really making a decision on in the coming quarters, I would say. If I go back maybe a couple of years ago, A 1,000,000 square foot facility like Building 9 is to think that we'd be even contemplating a Building 10 A little over a year after we've been building 9 would have been hard to imagine, but here we are. Capacity, the second part of Capacity additions in general, yes, we've been adding capacity at a fairly blistering pace and keeping up with supply really. We haven't been we have been able to keep up with all the demand thankfully.

Speaker 2

Any constraints we've seen along the way are typically component related. But we have been we would have been able to ship more, I would say, over the last while were it not for a couple of component constraints along the way. With any of these new products, especially when they're ramping very quickly, component constraints can catch you out sometimes. But overall, we've been very happy with the pace of growth and with the strength of the pipeline.

Speaker 4

Very helpful. Thank you.

Speaker 2

You're welcome.

Operator

Thank you. Our next question comes from the line of Alex Henderson with Needham. Your line is open.

Speaker 5

Great. Thanks. First, just a clarification. Can you Depict whether you're expecting any currency translations in the March quarter. I know the bot has Peaked around the very end of the December quarter and it's come off some since then.

Speaker 5

So is that Are you assuming flat in that calculus?

Speaker 3

Well, hi, Alex. This is Trevor. Certainly, we had a revaluation impact in quarter, so we are off the peak. But as you know, we are continuing to hedge our currency exposure. So from operations perspective, we anticipate a flat FX environment going into Q3.

Speaker 3

However, obviously, in the March quarter, We do contemplate certain exchange rate revaluation impact. Again, BARD has reached the peak earlier. So we are contemplating some reval impact in the EPS, but not in the cost of goods sold environment, if that makes sense.

Speaker 5

Great. And the taxes, as I assume, are going to be pretty consistent With the first half level and the second half, is that a reasonable?

Speaker 3

Yes. That's a reasonable, I think, that we anticipate mid single digits.

Speaker 5

So I wanted to ask a couple of questions on operations. Can you give us any sense of what the non speed products did particularly in the telecom space, the ROADMs and OLS type products? And second, can you give us some sense of what's going on with systems business, which obviously has become an increasingly large piece of your business over time.

Speaker 2

So non speed rated Alex in the quarter, Maybe, Chad, if you can help me with the exact numbers and then I'll talk about what's in non speed rated

Speaker 3

business Flat, Alex, in Q2 versus Q1, it was $118,000,000 revenue from non speedrated. And I'll pass Back on to Seamus, but it does include more than Rodent. So I'll let Seamus to clarify on that.

Speaker 2

That's right, Chad. It was €118,000,000 so up €1,000,000 slightly up from the prior quarter. And for us, non speed rated includes ROADMs, it's about a third of the non speed rated business, also fiber arrays, another third. And then the balance is made up of other components, primarily optical amplifier. So there's a good mix of products in there.

Speaker 2

It's not just One particular category.

Speaker 5

Right. And systems?

Speaker 2

Systems, we don't break that out separately. We remain optimistic about our I would call it our pipeline of new business that we're working on in that space. There of course are several opportunities to win additional systems business over time both at our existing customers and new customers. And we have Probably upwards of a dozen programs that are in our sights right now. While the favorable economics are typically quite easy to demonstrate to the customer.

Speaker 2

The sales process for those can be very long, often requiring some external catalyst. So we're being patient, but we're very focused on that.

Speaker 5

Okay. One last question and then I'll see the floor. On the AI side, I assume that you're still Capacity constrained on production as opposed to any demand issues And that's probably going to stay that way all year. Can you give us any sense of what the rate of commitment to new production capacity coming on looks like for that AI product line and whether you expect to broaden your customer base in terms of other AI customers? Thanks.

Speaker 2

So the pace of capacity adds has been very strong And we have been able to more than keep up with the demand. Any constraints we've seen, Alex, have been at the component level. From time to time, there are certain components that are in very high demand. So any constraints we've seen have been more at the in terms of component supply than actually ability to manufacture. So we've been able to keep up with the demand from a manufacturing point of view, and we're continuing to add capacity.

Speaker 2

In terms of additional Customers and maybe additional products, there's really a couple of routes for us for additional business that's fueled by AI. And when we say AI interconnect, we don't mean things like DCI. We mean specific short reach, low latency, low power optical interconnect that's used specifically for these AI products. We have, I would say, 2 ways that we see are two causes for optimism in that space. One is our existing customer base.

Speaker 2

We're working hard to make sure we win, Obviously, it meets all the requirements for the current products, but also win the follow on products and the next generation products. So we're working very hard on that. And then in addition, There are a number of other customers who we're working with to bring on new products. They're probably a little bit further out, But we have more than one set of opportunities we're working on. We have a number of customers that we're working hard to win in the AI space.

Speaker 5

Just to be clear, you had said in the past that 10%, 15% to 25% Quarter to quarter capacity growth was attainable over the next year. I think is that still the reasonable way to think about capacity growth?

Speaker 2

I'm not sure that we talked about capacity growth in those terms. I mean, typically, we work with the customer to give us Again, on these new products have long visibility, so that we can put capacity in place. It's quite an involved process working with the customer, with the equipment suppliers. Some of these equipment is on very long lead times. So it's quite an involved process.

Speaker 2

We've been able to keep ahead of the capacity. So sorry, keep ahead of the demand. We have not been constrained by demand in any way. And we have also not been constrained by capacity. So I wouldn't feel comfortable sizing it exactly at 20% or 25%.

Speaker 2

But what I would say is We remain confident we can keep capacity added ahead of demand.

Speaker 5

Great. Thanks.

Speaker 2

Thanks, Alex.

Operator

Please standby for our next question. Our next question comes from the line of Samik Chatterjee with JPMorgan. Your line is open.

Speaker 6

Hi, thanks for taking my questions. I have a couple. Maybe for the first one, you and you Great to hear Datacom business. You had a sequential revenue growth of about $46,000,000 this quarter. When you're talking about the guidance for fiscal 3Q, it just appears to be the case that you're talking about a more moderate sequential growth going from 2Q to 3Q, just looking at the overall guidance as well, it appears to be a bit more moderate than what you've seen in the past couple of quarters.

Speaker 6

So just curious if that's the case and what are the drivers there potentially? Is it the component constraint that you talked about? Or is it The customer more timing around the customer purchases or is it market share, any drivers that you can call out That's driving more moderation there. Thank you.

Speaker 2

Sure. Thanks, Samik. Yes, a couple of parts to the question and also a couple of parts to the answer. You're correct. The Datacom growth, we're certainly calling out some moderation in our guidance, but still Very healthy growth.

Speaker 2

Just to point out, our overall growth, if you look, we have a track record, of course, of exceeding our guidance, We always work hard to make sure we do that. Our guidance right now for Q3 at the midpoint of the guidance, If we were to accomplish that at the midpoint of the guidance, we'd see us up 7.5% year on year in what has traditionally been a seasonally soft quarter. At the high end of the guidance, we will be up 9% year on year. If we were to exceed the high end of the guidance, double digits growth year on year is not out of the question in Q3. The quarter on quarter, the guidance we've given for Q3 contemplates a number of factors, one of which is The transfer out of the 100 gig Intel business will really begin in Q3.

Speaker 2

The impact will really be in Q3 and in Q4. So that's one factor that's if you like factored into our guidance. Secondly, growth in Datacom will moderate somewhat as our initial AI programs pass the initial part of the growth curve. So as we get to the point where we're beginning to lap ourselves with 4 consecutive quarters of growth, that growth will begin to moderate, albeit We're working hard to win the follow on programs and the follow on products and the new products and other customers. But that initial phase of growth will begin to moderate.

Speaker 2

That said, we do believe we're still fairly early in the overall AI cycle and that will continue to contribute to our performance for a long time. And we do expect Datacom to remain our biggest revenue contributor. It's a little too early to call out specific future programs, new programs, And we don't have anything to announce today, but we're we believe we're very well positioned to win additional AI programs. But to specific question you asked in relation to the guidance, really a couple of factors, primarily the 100 gig business. 100 gig has started to really taper off as well.

Speaker 2

We think that the industry is transitioning to 400 gig probably quicker. 100 gig is beginning to taper off and we're going to be transferring that program out in Q3. And secondly, as I said, The growth in Datacom will temporarily moderate as our initial AI programs begin to be lapped at this point, if that makes sense.

Speaker 6

Yes. Thank you for the color. And for my follow-up, on the telecom business For fiscal 3Q, the takeaway that I had from your prepared remarks for sequential growth into 3Q was the Growth driver are the ZR pluggables. If I can just maybe not ask for a guide, but sort of ask you for a bit more of a forward look. Is there enough pipeline that you see for growth in CR pluggables to sort of drive you back to more sequential growth on a bit more sustainable basis beyond the March What are we sort of seeing very limited or very moderate inventory related sort of headwinds at this point where the growth in ZR plug ins can be a bit more of a sustainable tailwind to drive you back to sequential growth there?

Speaker 6

Thank you.

Speaker 2

Yes, I think You hit the nail on the head. The growth in telecom is primarily driven by, let's broadly call it ZR and DCI generally. That doesn't mean that traditional telecom is going away far from it. The traditional telecom is really going through this inventory digestion. There is a longer term trend.

Speaker 2

If you look at our mix and the shift in our mix to for the first time having more datacom than telecom, it's really driven by the explosive growth we've seen in AI, but also The cloudification, the trend towards cloudification of telecom that's underway, which lets telecoms Telcos leverage elastic cloud computing to scale their network capacity based on demand to meet the workload needs. So that's a trend that's ongoing. But the growth we're seeing, it is coming back to a little bit of growth, which is encouraging to see, but it's primarily driven by ZR and DCI. And we have a good pipeline of ZR, a 400 ZR currently, but also some other follow on products that we're working on with our customers. So we're quite optimistic about that.

Speaker 2

Again, ZR and DCI generally seems to be quite strong.

Speaker 5

Thank you. Thanks a lot.

Operator

Thank you.

Speaker 7

Thanks,

Operator

Our next question comes from the line of Mike Genovesi with Rosenblatt Securities. Your line is open.

Speaker 8

Great. Thanks a lot. Seamus, do you have a sense of your market share in 800 gs cables for NVLink applications?

Speaker 2

We do, but it's not something we would be prepared to discuss publicly. We have a very good sense of it.

Speaker 8

I mean, is it but because I mean, is it 100% or less than 100%?

Speaker 2

Well, for let's say for let me put it this way, For our main customers for their own design products, we're the only manufacturer. There are other Intra connect solutions that they use, but for their product that they've designed themselves, we're the only people who manufacture that. So I mean, I guess you could say we have 100% market

Speaker 8

Yes. I guess I'm just thinking for the very shortest application of just sort of GPU to GPU. I don't know if there's other cables out there. Are you aware of any others?

Speaker 6

Other what?

Speaker 8

Other competing products out there besides your own? Like do they exist or are you the only one making the very, very short ones?

Speaker 2

No, there are 2 other approved. Again, it's our customer who decides What's in what's approved for that, let's call it the sockets. There are 2 other approved manufacturers, but those two companies have their own designs. Okay.

Speaker 8

Okay, perfect. And then, well, I guess, is there an opportunity here with Are there GPU makers to make the same kind of product for I guess 1 or 2 or 3 other companies out there that also make GPUs. Is that an opportunity that you're pursuing?

Speaker 2

Yes, it is. And we think we're well positioned. We have a very strong track record of producing transceivers generally, but these very high speeds, low power, low latency, short reach transceivers, we have a very good reputation. We're very good at this. And we think we're the leader.

Speaker 2

We're the leader in terms of service, delivery, quality, and So we believe our costs are below. So we think we're very well positioned to capture more business in that space from other As other companies push into that space and start to capture market share, they will all need optical interconnect. We think we're in a good position to help them.

Speaker 8

Yes. Great. And then last question for me, I guess is when we think about sort of what comes next As you go from the GPUs to the top of rack switches and then out to other parts of the data center and you need longer cables and sort of discrete 800 gs transceivers. My question is, do you see yourself participating in that market With direct relationships with the end customer or should we think about you participating in that market through your more traditional datacom transceiver customers, who will clearly need help to ramp up to the volumes they need to get to. How should we think about that?

Speaker 8

These longer reach datacom transceivers evolving for you?

Speaker 2

Yes. So we think probably both, both directly with the large consumers of these devices, but also with the optical interconnect company. So we think we can support both. We don't have our own products nor will we have we're not an ODM. We have no plans to have our own products.

Speaker 2

So that's one of the things that's a little bit different about Fabrinet is we're not an ODM and we won't be an ODM. But if one of the hyperscalers hypothetically, if they have their own design or if they have a design that they own that they want us to manufacture, we'd be happy to do that. But conversely, the traditional transceiver companies, we're happy to support them as well. We support both. And I think that's something that's quite unique about us is we're able to support both and we don't have any kind of conflicts because we don't have our own products that allows us to support both.

Speaker 8

So it sounds like we should probably think about datacom being larger than telecom for we don't have any expectations of telecom becoming larger than comment any particular point here. Do we it seems like Datacom will sort of stay larger. Is that correct?

Speaker 2

I think so. Yes. We seem to have crossed over to the point where datacom is larger than telecom for us. And again, it's driven by really a couple of things, the growth in AI, The cloudification of telecom generally, but also this inventory digestion. But the inventory digestion, of course, is temporary that demand will come back.

Speaker 2

So for all those reasons, we think that datacom will continue to be larger for us at least than telecom.

Speaker 8

Perfect. Thanks very much.

Speaker 7

Thanks Mike.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Your line is open.

Speaker 7

Thanks and good afternoon. Hi, Tim. I don't know if you hi, Shane. I don't know if you touched on this, but Can you I mean, it seems that's going over to Jabil or associated with their acquisition of the Intel transceiver assets. But can you quantify the impact of that?

Speaker 7

I mean, I know it's come down a lot, but it seems like it can still be significant, I don't know, dollars 10,000,000 $20,000,000 Can we take a swing at that?

Speaker 2

No. We wouldn't be prepared to take a swing at that. I think if Over the next couple of quarters, you'll see that 100 gig business decline. And really that as that 100 gig business transfers out, but we it's factored into our guidance. So we but I wouldn't be prepared to put a number on it right now, Tim.

Speaker 7

Fair enough. At a higher level on the AI fronts, and you touched on this before, you had described The stage of this market with varying numbers of the word vary to describe how early it was. Seems like we might have lost one here. So, I just want to get your kind of update on now that you've ramped pretty substantially, Where do you think we are in terms of that market growth? And are we we're clearly less early than we were, but has your view changed the last 6 months as to where we are from an AI Datacom growth stage or market perspective?

Speaker 2

I think it depends on what your time horizon is. If your time horizon and the prism that you're looking through is A quarter or 2, then yes, you're probably right. We're probably beyond that initial phase. But if your time horizon is much longer, right, I think we're in the very early stages of this. You can add or subtract as many varies as you like.

Speaker 2

But I still think we're in the very, very early stages of And we're just beginning to see what this explosive growth in AI and the infrastructure that's required to power this network will do and what it will need in terms of optical interconnect. I think it's because optical is the only way that you can get the speed and the bandwidth that you need to get the signals to move around. You just can't do it with traditional interconnect. So I think there's a kind of a paradigm shift to optical interconnect becoming kind of almost mainstream and you have to have optical for this. There's no other way to do it.

Speaker 2

So I still think we're in the very early stages. I'm still as optimistic as I was 6 or 8 months ago. My view hasn't changed on that. I think It's amazing to see what these products can do and what they drive in terms of technology. And we're just excited to be a part of it and to be able to continue to produce, again, not just the current products that are powering the data centers, but also to be working on the next generation products.

Speaker 7

Got it. And last one for me, and thanks for that. In terms of ZR, is any more color on that? Are you backed Through previous peak levels in ZR, are we now looking at getting over 10% of revenues? Or could you try and Size that for us or give us any color where we are now versus what we've seen in the past?

Speaker 3

Tim, let me take this famous. Tim, we haven't gotten back to the levels, high levels that we have been. Obviously, you have to Be mindful about the inventory digestion in the industry. So but we are excited to see that it returned to growth sequentially and the outlook is very promising for us. So I think there is still a lot of runaway left on ZR to become significant growth drivers.

Speaker 3

So I guess the narratives in our prepared remarks was about full good excitement because of the return to growth and the early signs of recovery of the industry. So It's still far from where it could be and where it has been in the past.

Speaker 7

Okay. Thanks very

Speaker 2

much. Thanks, Tim.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Dave Kang with B. Riley. Your line is open.

Speaker 9

Thank you. Good afternoon. My first question is on the Telecom size. So it sounds like Seamus you're splitting that up them up between DCI versus a traditional telecom. Just wondering if you can kind of what the mix is between DCI versus a traditional telecom?

Speaker 2

We haven't actually broken out the mix that way. I guess the point I was making, Dave, was that the growth that we're seeing in telecom is primarily coming from DCI and 400ZR in our forecast. Traditional telecom is still somewhat flat and digesting inventory. But because the industry categorizes DCI into telecom, we are seeing some growth in telecom from DCI and FormdCR, We don't actually break them out separately.

Speaker 9

Fair enough. But then is it fair to assume that traditional segment is still larger than DCI? I mean, If you look at like Ciena's and Infinera's of the world, traditional is certainly bigger than DCI?

Speaker 2

Yes. Okay.

Speaker 9

And then just on the go ahead.

Speaker 3

Bear in mind, Dave, that our traditional business includes system business. So DCI being larger than our traditional telecom business would take a lot of growth. Got it.

Speaker 9

Yes. And then just sticking with the traditional side. So you're guiding telecom to be up sequentially, but just wondering, I'm assuming that's mostly driven by DCI or ZR. How should we think about traditional? Is it going to be kind of flat or still down?

Speaker 3

Traditional would be still slightly down, Dave, so the growth we are seeing, a moderate modest improvement quarter on quarter is driven by DCI and ZR.

Speaker 9

Got it. And my second question is on DZS. You talked about them as new customer last year. Just wondering what the latest is. Have they become sort of a meaningful customer or still ramping?

Speaker 9

Any color would be appreciated.

Speaker 2

We've transferred, let's say, everything that was in the initial list of products that was slated to transfer. We've transferred everything now. So they're the business from DZS is baked into our forecast and its interactions for last quarter. So That's already ramped. There's other business we're working on.

Speaker 2

We're working hard on to win and grow with DZS, but that initial phase of business is already ramped at this point.

Speaker 9

Got it. Thank you.

Speaker 2

Thank you, Dave.

Operator

Thank you. Please standby for our next question. We have a follow-up question from the line of Alex Henderson with Needham. Your line is open.

Speaker 5

There we go. So doing the mechanics of the math that you've given on The non optical and the telco and comparing the remainder to the guidance, it implies kind of Low single digit datacom growth. So a couple of questions. 1, is the fallout of the Intel business in the datacom piece? Is that where that would be located?

Speaker 5

Yes. And second, Within that context, is this a function of supply of components that is causing A fair amount of flatness sequentially that you just can't get the components necessary to ramp that business sequentially On the AI side, because it implies fairly modest AI growth, certainly not in line with the growth At your major customer on a quarter to quarter basis?

Speaker 2

So obviously, the first part of your question, the Intel business is in Datacom. So any of that business that we'll be transferring out in Q3 that will hit our Datacom number. Our growth in datacom, there's a lot of moving parts there and I wouldn't attribute it all to one customer or anything like that. There's a lot of moving parts there. The other thing that we don't have visibility to necessarily is the inventory position that our customer has.

Speaker 2

We ship to their demand, what they hold in inventory versus what's getting installed straight out of the oven. We don't really have visibility to that. So there's probably a little bit of inventory normalization going on there as well. But overall, the demand remains strong, But that's the piece we don't have visibility to is the inventory.

Speaker 5

So if I were to look at the Datacom business, it's Including AI, it's been pretty stable around $40,000,000 a quarter, I believe. And so I could take some stuff out of that for the Intel piece, but it still implies a meaningful deceleration in the AI. Is that Something that you see is fairly temporary and that the overall growth rate is still on track to Fairly high grades of growth for the calendar 2024 year?

Speaker 2

Well, we're expecting Datacom to be up sequentially in the quarter. I'm not sure I follow your logic.

Speaker 5

If I take The company's guidance and subtract out the comment about slightly up on telco, flat On auto or it's down on auto and flat on industrial lasers, Subtracting that out gives you the datacom piece. So the datacom piece is kind of Low single digit growth, I believe, if I do the math right. And sequentially, and certainly there's a Piece falling out, but that's a lot slower growth than that you had been posting. And I guess I'm trying to get to the elephant in the room, which is Why that's the case? And to what extent that that's a temporary lull before continuing a steep ramp in future periods?

Speaker 2

Yes. As I said, it's a combination of the Intel business transferring. And also those initial AI programs, They're passing into stable production now. They're through the initial part of the growth curve. So that's why we called out that the growth is starting to moderate in Q3 for that very reason.

Speaker 2

I'm not sure what it's Alex. I can't really get into the specifics of an individual customer. But again, it's a combination of both of those, continued growth in AI, but then offset by business transferring out on 100 gig transceiver business.

Speaker 5

Okay. Thanks.

Operator

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Seamus for closing remarks.

Speaker 2

Thank you for joining our call today. We are pleased to have exceeded our guidance again in the quarter. With another quarter of record revenue and EPS behind us, are optimistic that we are well positioned to continue our strong execution track record in the Q3. We look forward to speaking with you again. Goodbye.

Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.

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