Q4 2020 Lumentum Holdings Inc Earnings Call
Good day.
Welcome to the.
Fourth quarter fiscal year Twentytwenty earnings call.
Participants will be in listen only mode.
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Secondly conference specialist crossing startling zero on your telephone keypad.
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I would now like to turn the conference over to Jim Fanucchi Darrow Associates. Please go ahead.
Thank you operator, welcome to Lumentums fourth quarter and fiscal year 2020 earnings call. This is Jim Fanucchi from Darrow associates, assisting lumentum with its investor relations.
Turning the call today from the company's management team, we have Alan Lowe, President and Chief Executive Officer, Wajid Ali Chief Financial Officer, and Chris Coldren, Senior Vice President of strategy and corporate development.
Today's call will include forward looking statements, including statements regarding the markets in which we operate at our position in such markets. The impact of Cobot 19 at response of actions there to our business and continuing uncertainty in this regard.
Friends and expectations for our products and technology, our expected financial performance, including our guidance as well as statements regarding our business initiatives and the achievement of synergies following our acquisition of Oclaro.
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 FCC filings, including the Companys quarterly report on form 10-Q for the fiscal quarter ended March 28, 2020, and didn't Lumentums 10-K for fiscal year 2020 ended.
June 27th 2020, which the company expects to file within 60 days of the fiscal year end. The forward looking statements provided during this call are based on lumentums 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 results in projections discussed in this call. Our non-GAAP non-GAAP financials are not to be considered as a substitute for or superior to financials prepared in accordance with gap.
In terms press release with the fourth quarter and full year fiscal 2020 results is available on its website at triple W. Lumentum Dot com under the Investor section and includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP results now I will turn the call over to Alan for his call.
Yes.
Thank you Jim good morning, everyone.
The fourth quarter capped off another record fiscal year.
Earlier this month, we celebrated our fifth anniversary of being a stand alone public company and Wow, what a five years. Its then.
We have accomplished a lot.
Execution of our strategy has positioned us as a clear technology and market leader and enabled us to strong we grow revenue margins and earnings per share every year since we became a standalone public company.
This was accomplished despite the significant impact of product line exits and divestitures and more recently cobot 19 and geopolitical headwinds.
Fiscal year 15 through fiscal year 20 or earnings per share grew at a compound annual growth rate of 47%.
This includes additional shares related to M&A consideration and convertible debt.
Over this period, our gross margin expanded from 33% to nearly 47% <unk>.
Our operating margins expanded from 5% to nearly 27%.
Our balance sheet is healthy with ample cash to fund organic and inorganic growth.
This has all been accomplished by focusing on markets, what long term growth trends.
Repeatedly introducing highly innovative market leading products.
Continuously improving our operations.
Establishing clear leadership position in the new and rapidly expanding threed sensing market.
Executing highly accretive M&A.
And wisely marriage, and our capital structure and allocation.
Fiscal 20, with a record year for revenue margins and earnings.
A record results were driven by product mix, rich and differentiated high margin products and the attainment of significant acquisition synergies.
Illustrating the improvements we've made in our financial model is our fourth quarter gross margin performance, which was only 20 basis points below the record level attained in our second quarter. Despite the fourth quarter revenue being impacted by October 19th.
As creases I am with our accomplishments to date I'm as excited as ever about the opportunities ahead.
I believe the future is truly bright at momentum.
Long term market trends and industry dynamics are more favorable now than when we became a public company five years ago.
The world is accelerating its ship to increasingly digital virtual approaches to work Entertainment education health care, social interaction and commerce.
This is stressing the world's communication in cloud networks, and driving the need for higher volumes up higher performance optical devices.
In order to produce communicate it consumes increasingly digital content and participate in virtual and augmented experiences world needs more capable and secure devices that benefit from our threed sensing and laser technologies.
We are well positioned to capitalize on these trends.
We are armed with a product portfolio rich and differentiated new products that are indispensable to customers and end markets globally.
These include optical communication products, such as high court counts and by end Roadms and higher bandwidth to your components and DCIO modules.
These are all essential to enable in the world medication networks to scale the bandwidth needed for our increase in digital and virtual way up life and work.
Lasers devices for three D sensing and light, our which enable contact with entry and control systems.
Biometric security.
Computation, OCA, cocky automotive safety, and economists operation and augmented and virtual reality.
And our commercial lasers enable more precise and the tissue processing, a variety of materials, including the consumer electronics semiconductor products in a broad range of durable goods.
Based on our view of a long term opportunities ahead of US we're strongly investing in R&D to further accelerate our leadership positions and enter new markets that benefit from our capabilities.
Additionally, we're also investing strongly and increased manufacturing capacity and capabilities.
Notable manufacturing capacity increases include the following major three investments.
One.
Doubling of our indium phosphide wafer fab capacity over the next 18 months as we believe the performance capabilities provided by our indium phosphide laser chips and photonic integrated circuits will be central to every telecom and Datacom communication network, and perhaps overtime increasingly in threed sensing and lighter application.
Patients.
Two expanding gallium arsenide device production capacity for Threed sensing automotive industrial laser and telecom and Datacom products as application for these products are expanding rapidly and three expanding capacity for next generation, Hi, Port count and everybody and wrote them that's.
Customers globally are designing their new networks based on these technologies.
Now onto the fourth quarter comments and trends.
Fourth quarter results exceeded our guidance range across all metrics.
We executed well in our recovery from the Cobot 19 related shut down and supply challenges and returned to pre pandemic output exiting the quarter.
Our manufacturing operations have implemented worker.
Tactive measures, including enhanced use a P P E and social distancing and in many of our sites our workforce that can perform their job functions, while working from home continue to do so.
Telecom and Datacom demand is very strong, especially in our datacom chips coherent components and modules and high end wrote them.
Supply of these products limited fourth quarter revenue.
Telecom transmission was the most impacted by coordinating supply challenges and as a result, the quite a few million dollars sequentially.
Telecom transport grew sequentially due to strong pump laser sales.
Increased sales of Weblinc management and wrote them products.
Prior quarter trends continued in Datacom with strong chip demand driving revenue growth.
Sales became more than 95% or datacom revenue, but growth still limited by wafer fab capacity.
Current Datacom chip backlog is nearly $150 billion.
Looking to the first quarter, we expect telecom and datacom revenue to be higher than anytime more than a year.
As I stated earlier, we are increasing production capacity enterprise and our backend assembly and test facilities.
As additional capacity and new production staff have been coming online we have been increasing our wafer starts to satisfy our very strong company backlog.
As expected industrial consumer revenue declined due to customer seasonality and the timing of new customer programs.
Revenue was higher than in our guidance assumption due to stronger than projected.
We expect first quarter industrial and consumer revenue to be up strongly quarter on quarter. As we are already supplying high volumes of our new products for future customer product launches.
These new product shipments include our latest chips per user and the world pacing applications.
The seasonal ramp started later than last year.
And as a result, we expect our second quarter shipments to be higher their first quarter shipments, which is different than last year.
Well, we continue to make very good progress on new Android opportunities, we're taking a conservative approach to Android revenue in our first quarter projections due to cope with 19 and geopolitical factors.
Commercial lasers revenue was down approximately 13% quarter on quarter.
This is a smaller decline than we had assumed in our guidance.
Strengthen lasers supporting the semiconductor end market, partially offset the anticipated softness in fiber lasers.
This is book to Bill was substantially below one.
We expect lasers revenue to decline further over the next two quarters.
First quarter guidance assumes an approximate 25% sequential decline for lasers.
He is expected to clients are related to the economy outside of China, which given our customer mix is mainly where our products ultimately end up.
Additionally, the second half of the calendar year is seasonally soccer, where our solid state lasers.
Before handing it over to watch Ed to review the numbers Ive a few more comments.
Given the current geopolitical situation I want to provide some color on our business with wallet.
Sales to walk away declined 6% sequentially in the fourth quarter, the mid 40 million dollar range.
We expect sales to our way to decline further in the first quarter.
Well most of the products, we supply or indispensable to walk away and we don't have visibility to any sharp demand reduction given the current geopolitical uncertainty, we're taking a cautious approach to walk away and our outlook.
What did will provide more details on that.
Lumentum as a global company with sales and operations across a wide range of geographies.
We are committed to the high standard of social ethical and environmental contact and responsibility.
These include promoting safe diverse and inclusive workplaces free from discrimination and harassment.
In addition to our goals around product leadership, providing a great customer experience and execute into our financial commitments our goal around corporate social responsibility and making contribution to society and our local communities are important to lumentum and its employees.
I want to thank our employees around the world, they're the ones, who have put us in such a great position, both financially as well as with our technology and product leadership.
They have been incredible over the past five years and more recently to the pandemic despite each having their own personal challenges living and working in these times.
They have gone above and beyond their jobs, while also helping the communities in which we operate.
Employees are absolutely the company's greatest asset.
I'd also like to thank the rest of our stakeholders, including customers suppliers and shareholders for their support and partnership over the past five years.
If all played a role and getting the status quo.
With that I'll hand, it over to watch it.
Thank you Alan good morning, everyone I too would like to thank our employees for their dedication and perseverance I am absolutely amazed at their strong execution under such challenging circumstances.
Before diving into the fourth quarter results some high level comments and our full year fiscal 20 results net revenue for fiscal 20 was 1.68 billion up 7% compared with fiscal 19. Despite the significant top line impact of Cobot 19, and the second half of the year and.
Several product line wind downs and divestitures fiscal 20 optical communications segment revenue was up 11% driven by growth in three D sensing datacom chips and telecom transmission and the contribution of the Oclaro acquisition, our laser segment revenue was down 16% compared to the prior year.
Driven by the impact of Kobin 19 strongly exasperating, an already slower lasers market compared with the prior year.
For the full year GAAP gross margin was 38.7% GAAP operating margin was 12.2% and GAAP diluted net income per share was $1.75.
Full year fiscal 2000, non-GAAP gross margin expanded 700 basis points, a 46.5% driven by improvements in product mix and acquisition synergies.
Non-GAAP operating margin expanded 610 basis points to 26.6% for the full year and non-GAAP net income increased by more than 38% relative to the prior year.
Non-GAAP diluted net income per share expanded 27% at $5.42.
Operating expenses for the full year, where 20% of revenue up from 19% in the prior year, reflecting the full year of incremental acquisition expenses and an increase in R&D investments in new technology and customer programs, we had been simultaneously attaining R&D related acquisition synergies at.
And cutting investments in underperforming product lines, while ramping investments in areas with stronger outlooks and returns.
On the balance sheet, we ended the year with 1.55 billion in cash and short term investments. We have 1.5 billion an aggregate principal convertible notes and no term debt.
These convertible notes 450 million is due in 2024 and 1.05 billion is due in 2026. The total cash interest expense associated with these notes is approximately $6 million per year.
We are well positioned financially with a strong margin model high levels of cash with low interest expense and long maturity financing.
Now turning to the fourth quarters numbers.
Net revenue for the fourth quarter was 368.1 million, which was down both 9% sequentially and year on year GAAP gross margin for the fourth quarter was 36.9% GAAP operating margin was 7.3% and GAAP diluted net loss per share was six cents.
Fourth quarter non-GAAP gross margin was 47.2%, which was up 170 basis points sequentially and up 830 basis points year on year.
The sequential growth was driven by higher synergies in the quarter and an improvement in product mix, including an increase in laser's gross margins.
Alan highlighted this gross margin performance demonstrates the improvements we have made in our financial model.
Non-GAAP operating margin for the fourth quarter was 24.8%, which was down 20 basis points sequentially, but up 580 basis points year on year improvements year on year were driven by gross margin improvements non-GAAP operating expenses totaled 82.5.
<unk> million or 22.4% of revenue SGN a expense was 36.6 million R&D expense was 45.9 million.
Operating expenses continue to be a little lower than normal run rates due to covert 19, reducing travel trade show and other expenses.
Fourth quarter non-GAAP net income was 91.7 million.
This includes 2.3 million of net interest and other income and 2 million of tax expense. Other income is down sequentially as interest rates on our cash and short term investments are lower overall, and we are being more conservative in our investment portfolio.
Non-GAAP diluted net income per share what's adults 18 based on a fully diluted share count of 77.5 million.
Turning to segment details.
Fourth quarter optical communications segment revenue at 330.3 million decreased 8% sequentially due primarily to threed sensing seasonality and covert 19 related supply limitations year on year optical communications segment revenue decreased 7% due to lower telecom.
And Datacom revenue would be exit of Datacom modules, and covert 19 supply limitations, which more than offset higher three D sensing revenue.
Although this segment revenue decline optical communications segment gross margin at 46.6% increased 160 basis points sequentially due to higher synergies in the quarter and a brighter product mix within telecom and Datacom and increased 830 basis points.
Year on year due to a more favorable mix of products improved telecom and datacom margins and acquisition synergies.
Our laser segment revenue at 37.8 million decreased 13% sequentially and 21% year on year due to lower fiber laser sales offsetting strong solid state laser sales fourth quarter laser's gross margin increased 52.9% due to a better product mix and lower.
Our manufacturing costs.
Now onto our guidance for the first quarter fiscal 21.
Please note the outlook, we are providing is on a non-GAAP basis and is based on our assumptions as of today.
We expect net revenue for the first quarter fiscal 21 to be in the range of 430 million.
455 million this revenue projection includes.
Telecom and Datacom growing sequentially due to strong demand and recovery from covert 19 supply limitations.
Industrial and consumer increasing strongly quarter on quarter due to new customer programs and consumer electronics seasonality.
And commercial lasers, decreasing by approximately 25% sequentially due to end market demand.
By the slowdown in industrial production globally.
This guidance does not hinge upon material additional shipments to walk away beyond those made to date.
Based on this we project first quarter operating margin to be in the range of 28, 30% and diluted net income per share to be in the range up $1.40 to $1.55.
These projections incorporate an approximate share count of 79 million and estimated other income of 1.5 million and an estimated tax expense of 13 million.
Yes, I made it other income is lower than levels and the recent past due to lower interest rates in general and are taking more conservative positions in our short term investments the increase in our relative tax expenses due to increasing profit levels, especially in jurisdictions with higher tax rates.
Before wrapping up I'd like to make a few comments when thinking about the coming fiscal year.
In fiscal 20, we had approximately 62 million of revenue from low margin product line that we expect will be in material in fiscal 2001. In addition for fiscal 20, we had 221 million of why way revenue, which declined through the year ending in the mid.
40 million dollar range in the fourth quarter.
With that I'll turn the call back to Jim to start the QNX session Jim.
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 the should help us get to everyone. Before the end of our allotted time, operator, let's begin with a question and answer session.
We will now begin the question and answer session to ask a question in the press Star then one on your telephone keypad.
If you're using east speakerphone, please pick up your handset people pressing the keys.
Any time your question, it's been a dress and you would like to withdraw your question. Please press Star then too.
This time of we'll pause momentarily to assemble our roster.
First question comes from Tom O'malley of Barclays. Please go ahead.
Good morning, guys and thanks for taking my question and congratulations on a really nice results I just wanted to start broadly with your telecom and Datacom market is clearly a in the quarter you had some capacity constraints and you overcame those can you talk about what trends you're seeing there rotem demand seems to be really strong and you and you mentioned some additional investment there can you talk about how big you said.
That market can be and why it's so important that you need to show some additional investment there.
Yeah. Thanks, Tom Yeah, we saw strong demand from as I said that the high end road comes across the board across geographies Datacom ships.
And it's a combination of both Hyperscale 400 gig transceiver type chips to a deployment of fiveg. He backhaul and alike. So I think you know as we indicated in the script, we have $150 million data.
<unk> chip backlog and today, we're shipping approximately 50 million in growing that so you can see it's going to take us some time to catch up with the with Datacom chip business on the telecom transmission business that it was most impacted by kogut through the through the March to they timeframe.
That's now back to being able to produce actually more than what we were producing before as we've added capacity and we saw strong demand on our coherent agios DC goes as well as our high end coherent components that are going into 400, 600, and even 800 gig.
A coherent transponder so it's pretty broad range of a strong demand across the board.
Great and then my follow up with all involved what you've seen some of your peers take quality out of guidance as well can you talk about what you mean by de risking while it seems like you've taken orders to date and not included in your guidance and then you basically assumes no additional revenue just some clarity there would be helpful and understanding what the de risk actually beach. Thanks.
Yes.
Hey, Tom This is Chris Thanks for the question, Yes. So you know our business with Wally has been declining over the past year or little more kind of year Powell with U.S. action.
And but underneath that decline in revenue, but that's been happening at a product level is.
Products that are they can you get from other non U.S. suppliers I think they have generally moved away from us.
And what remains in our revenue or you know products that.
Where are the only guy or the other supplier is say another U.S. paced supplier.
And they continue to have business globally, and therefore, we expect we will continue to had business with them on those indispensable products without any visibility into a you'll a cliff a if you will out there having said all that obviously we're trying.
To be very conservative and and ensure that if there was something out there that that did happen during.
The quarter that or not.
In a challenging position.
The other key point on on walk away and those indispensable products is that we have lots of other customers for those projects and where.
Capacity.
Constrained on most of those products therefore, even if we were too.
See a limitation coming coming from a walk away from a demand standpoint, we should be able to redirect that other customers and in a sense. That's that's largely contemplated in our guidance. So I Wouldnt you know.
In a sense take up our outlook just because we've removed. It then there's you know if there wasn't something went wrong for the remainder of the quarter, a with with a walk away I wouldn't take up numbers because you know we could be shifting that's to somebody else and that's already in our guidance assumption.
Next question comes from Rod Hall of Goldman Sachs. Please go ahead.
Hi, guys. Thanks for the question I wanted to start off with three D. The the indications you are pretty strong.
Both now and as you look forward I Wonder if maybe Alan you could comment on your share condition. What you think that looks like in the fall I mean, it feels like it's pretty good.
And then the second thing that I wanted to ask about as Capex with all the capacity expansion can you guys give it some idea what the capex outlook.
He was going to be maybe on into next year. Thanks.
Yes, Thanks, Ryan I'll take the three D. Sensing question and then let legit answer the Capex question I think we're positioned quite well I mean, I think we'd been the lead supplier for multiple generations of products and [noise].
Have a pipeline of new products that will be introduced over the coming years multiple years. So I think we are we view ourselves as the leader but.
Clear leader both from the standpoint of what we have shipped in the past as well as what we think we're going to ship in the future.
And we're doing quite well on the new products. So I think as as we look at the pie expanding as as more content per device and more devices and the rollout of Fiveg, I think where physician quite well to continue to maintain a very good.
Sure of that business and it comes down to you know execution and we've been able to show our customers that we can execute you can provide them with high yielding product in their factories and zero defect.
And the product so I think from that perspective.
We're trying to give our customers.
Every every reason to want to continue to buy a high percentage share from us and so I think that's that's where we are today on that.
Why did you want to take the Capex Yep sure. Okay. So on on Capex are our general rule of thumb is that we'd like to keep capex I'm at a rate that hovers around depreciation our fiscal 20, we were a little bit lower than not and moving into fiscal 21, we're actually expecting our capital spending.
The increase somewhere in the 20 to 25 cents range year over year. So you could probably see the topics of somewhere between 100 and 110 million.
For fiscal year 21, now as Alan pointed out in his prepared remarks, we're very laser focused on where we're putting that money. So we're putting that capex investments around products that have higher gross margins and we see a lot of backlog and a lot of customer demand and we think that we are either the major supplier.
Or the number one and only supplier for those products. Some so that's what's giving us a lot of confidence and the type of returns, we'll see on that topic, one buttoned up.
Okay, great. Thanks.
Next question comes from Samik Chatterjee of JP Morgan. Please go ahead.
Hi, Good morning, Thanks for taking my question I, just wanted to start off and Steve.
I can dig into the margin expansion he had a big dog looking at 800 basis points of margin.
Margin expansion and to be communications and assuming you couldn't have achieved good without improving telecom margins you mentioned, Florida makes a couple of times already just help me think about sustainability of those margins and particularly the opportunity improved for the and what role maybe told these capacity constraints that you have right no are playing in.
Having those better margins.
Thank you.
Yes, sure, Okay, I'll start off and Alan and Chris can also jumped then if they think I've missed something so you're absolutely right. We've seen just.
Great improvement in our gross margins year on year specifically.
In that segment of of the business a lot of it has been driven by synergies that Weve had happened every single quarter and now what we're seeing as we're entering fiscal 21 is that all of those synergies are accumulating so we're getting a much better impact of those our product mixes improving your hurt Allen's say that we've got a proxy.
The only $150 million worth of Datacom ship backlog you can appreciate the type of pricing power that allows us to have as well as just improving our overall product mix within our optical communications segment, a we've removed $62 million worth of low margin products.
So it won't be there in fiscal year 21, that's also having a very strong impact and I think one of the things that we didnt mentioned on the call that I'd like to point out now is the the new products that are coming out specifically within telecom transmission and telecom transport the margin profile that we're expecting from those are also better.
Then the older products and that's one of the reasons.
We're investing in the type of capital that we are 20% to 25% increase in capital spending year on year is it's not a small sum of money, especially given the fact that we're refocusing of those capital investments in specific areas related to Datacom chips, and and telecom transmission. So so because of those tailwind.
We certainly see a the sustainability of those gross margins I'm. The one thing I also did mentioned as our world spacing our products, we're seeing strong demand for that moving from our fiscal Q4 indoor Q1, and a into our Q2 Alan mentioned in his prepared remarks that we're expecting to see stronger demand.
And the back half of this calendar year, that's all coming from old facing products and that's expected to having a strengthening improvement on our gross margins as well. So we're feeling quite confident you saw in fiscal 20. We had every single quarter was about 45% gross margins and we had not seem not in fiscal <unk>.
And then so so we're looking forward to keeping that up in fiscal 21 and improving from a very strong baseline that we've got.
Okay.
But if I can just follow up one just thinking about the restrictions here on <unk> <unk> the quarter if love it does.
Give up share in Europe.
Because to some people that you are supplied to as well how should I think about lumentums kind of Dan for system, but the likes of CNO Nokia native to lobby and what kind of impact that would have if market share shifts in the.
Landscape.
Yeah, I think if you look at our business with law way compared to their market share and then look at the western companies and our share of their wallet clearly we have a better share of wallet outside of walk away, which means that overtime if and when.
Carriers decide to move away from walk away that will be actually a increase in our available market.
Should it go to other other competitors of there's just given the share of the market they have and our share of their their wallet. So I think from that perspective, and but keep in mind the shift from one.
Network equipment manufacturer to another doesn't happen in one quarter. It happens over several quarters and so that does take time, but when that shift or if that shift does happen I think it's a good thing for them, it's a matter of crops.
Thank you.
The next question comes from our hundreds of Needham and company. Please go ahead.
Thank you very much Oh, I was hoping you could talk a little bit about the three D sensing market in context of whether you think or the various pressures that have developed a little impact the amount of demand in the back half or whether the increase in world.
Facing is sufficient to offset a any possible decline in handsets and to what extent you're looking at some visibility on the Android market. Thanks.
Yeah, Let me take a shot as it Alex and then let Chris China, then I'd say that you know we are not a predictor of how successful product launches that our customers will be but that said I think that the singles, we're getting from our customers are quite strong.
With respect to new products and the rollout of Fiveg. So again more content per device more new chips across the board on new devices, which come with higher average selling prices as the chips are somewhat bigger and then more units that these devices are going into.
With a growing market for Fiveg and a refresh cycle that is expected at least in my mind expected to generate additional demand. So you pile all those things together the pie is getting very large relative to where it was last year and we think we're maintaining that very very good share of that business as for the Android.
Market, we're still engaged with every single one of the Android.
Handset players that said there.
Incorporation of Threed sensing has been only at the very high end and still yet to get into the mid range, where the volumes or are substantially larger and so our outlook contemplates that continuing and then we'll see what happens in calendar 21 with what the Android market. I think you know our efforts are to continue to be the partner.
Everyone and make sure that were there to support them and if and when they put those onto more to the mainstream devices are then we'll see that market extend even further Chris you have anything to add on that.
I think the only thing dad is Alex's question really focused on the second half of that calendar year, and and Tom I think everything Allen said line top. There's there's also you know that that some of our major customer timelines may had shifted out which which you know can can move where are our.
Right.
Revenue is between September and December.
Quarters, and perhaps even some some bleed from what normally you would think of is the second half the calendar year into into the first part of the next calendar year I, Yeah, that's something that I mean, we're speculating on don't have that Oh from yet that's something that just just.
Call out a as as people should think about.
As you said to the you know.
Moving headwinds Tailwinds in this industry and and you know it's not just volumes. It's also timing.
So if I could follow up just to punctuate the point does it it sounds like you're saying they didn't see why three Q4 Q the back half of calendar year that you would expect threed sensing will be up year over year given those.
Positive commentary is that reasonable to expect.
I I think the opportunity is certainly there and we think that the the total pie is this year.
For second half over second half substantially larger.
Obviously, we guide one quarter time and as we've seen in the past. This this business Oh looks can move around pretty quickly, but that's certainly our expectation get and as Alan highlighted the increase dollar content per per handset is substantially larger and therefore.
The overall opportunity.
Should be significantly up year over year.
Thank you Chris.
Next question from Alex from.
They have Marshall of Morgan Stanley. Please go ahead.
Great. Thanks.
And just to.
Clarifying question kind of on the remaining 40 million of revenue that it's going into hallway. You know is most of that equipment or most of that supply going outside of the country. So kind of into their engagements and other countries and you know if any of what you're supplying still.
Ah surfacing within the country and then maybe the second question just on the 150 million of of wafer backlog or orders that you noted you noted that you were kind of doubling their capacity, but should we consider that that's a number you could achieve over the next couple of years or just kind of timeline. When do you think you could.
It does orders thanks.
Yes. Thanks.
So I'd say that its not perfectly clear where our products are ending up as we shipped them to all way I'd say that anecdotally, we know there's large deployments happening today in China that are using for instance, our high end Roadms and so I would speculate that the majority of our.
Production shipments are staying within China, Although I know there are a deployments going with our product outside of China. So I'd say, it's a dynamic mixes as carriers decide to go with while we are not the with far away.
And we're seeing mix shifts in customer shifts as those decisions get made so I'd say that as we said in the in the in the script our business with law way is expected to continue to go down this quarter I wouldn't be surprised if they're even a 10% customer in fiscal 21, but you know we're still working.
With them on new product designs and.
Technology and products that are we are the leader on and continue to partner with them on so I think we're keeping the door open and we'll see what happens as for the Datacom chip backlog of $150 million again, who shifting approximately 50 million a quarter, we're growing that incrementally every.
Quarter, and kind of the increments come in chunks and so as we said we're going to double indium phosphide production capacity over the next 18 months, one could imagine that six quarters from now we could be shipping a $100 million of datacom or chips at that point in time, So I'd say it today.
It is run rate, we have three quarters of backlog, we're trying to catch that up assesses weekend orders are continuing to come in so it's a it's a fight that we're working to try to overcome and increase yields increased productivity and get more out of the assets. We have while at the same time, increasing our capabilities in our fab.
Hey, Allen I'd like that to add to the to the point about domestic sales in China. You know, we're also significantly increasing our our business with other customers in China, who are also buying.
Hi end wrote on sand and other of our very differentiated products. So our access to to the Chinese market domestically that is is is it still strong and in some ways increasing.
In that as metro deployments or the equivalent of Metro deployments grow in China based on high end wrote them.
We are supplying to all of the major network equipment manufacturers in China.
Thanks, Good point thanks, Chris.
Thanks, Matt <unk>. The next question comes from John Marchetti of Stifel. Please.
Thanks, very much I actually Chris I, just wanted to follow up on that last point that you made but somebody other suppliers in China judging from the comment you guys had made it sounds like you're still out obviously expecting to ship to walk away. This year, although obviously, it's declining year over year, but is there a chance I guess that you think your China business overall is either you know on par.
What we saw in in fiscal 20, or maybe even a little bit higher <unk>. Some of these other suppliers that maybe you didn't do as much with historically a start to pick up some of that slack with within your China market.
Yeah, and then I think that that that certainly in the aggregate when you add up all of all of Chinese customers I think the one one.
Because demand is is is strong and increasing in China and our relevance to customers outside Wawa is also a increasing significantly the only slight modulation I'd point, which is just a subtlety that that of those products. We discontinued which include Datacom transceivers and lithium niobate modulators set of customers.
In China were relatively large percentage of of that business, but if you were to normalize for that and then absolutely.
Thanks, and then why and if I can just ask a quick follow up question on the model I'm just curious as we look out into 21.
You should expect the higher tax rate that you're assuming and the first quarter to kind of be the new normal as we look out for the full year or that has to do a little bit more with some of the the three D sensing volumes and some things what they were expecting to to pick up here in the in the first half of the fiscal year. Thank you.
Yeah, John I don't know good question, we should probably model somewhere between 10 and 11% for our tax rate for fiscal year 21, I, it's being driven by a combination of higher expected profits.
That are going to be coming out of our datacom chip business as well as like you mentioned just generally higher profits on many of our product lines and so a 10% to 11% as probably the right model for fiscal 21.
Thanks very much.
The next question comes from Simon Leopold Raymond James. Please go ahead.
Thank you very much for taking the question first on the the strength and meet the chip sales just wondering if you could help us discern a drivers to what extent is this related to fiveg initiatives front haul backhaul made hall, or perhaps China versus activity in datacenter.
As an hyperscale do you have visibility that helps us understand what's driving this.
Hey, Simon this is Chris yes, so I would say, it's all the above that you mentioned, but I would but it also highlight that within data centers. It's not just volumes, though volumes are are certainly very important. It's also that data centers and moving from 100 gig the 200 gig to 400 gig.
And it and in doing so our buying increasingly sophisticated.
And differentiated chips from us. So that also helps drive revenue growth, where where we may be having content or or ASP increase, but certainly both fiveg and data center, our heavy contributors to to the revenue and the growth.
One more than the other or equal how do we kind of think about that I'm trying to get a sense I don't ability.
Yeah, I don't want to get into.
The details I would say they both are material, it's not 90, 10 headsets, a little more equitable than that.
Great and then as my follow up I wanted to maybe get a little better sense of the materiality of the world facing element in the three d. growth and I. Certainly can appreciate you don't want to give us breakdown by by piece part, but I guess, what we're trying to get a better sense of is sort of the organic.
Front facing contribution versus world facing this world facing have better margins is that the growth driver or are both elements are growing and front facing is additive but not.
At the expense of a front facing any anything you could help us understand that we'd appreciate it.
Sure Simon a this is Alan I.
I think it isn't as we look at it you know the user facing or front facing has to chipset at and there are various sizes and what what you can think of is on the world's facing there's one chip and it's about an average size so when a our expectation.
As for a handset that has both front facing in world facing compared to one that has just been facing we'll see a 50% increase in the content per handset that said again, the the new chips or a somewhat larger and therefore carry a higher is piece so.
When you look at old a front facing compared to new front facing there is an incremental is t. increase or revenue per handset increase and I'm not going to get into how much that is always the margin differences between the various products as our customers are listening and that would not be a wise choice to.
To to two to do but that said, we continue to drive our cost in our supply chain. So that we continue to maintain the margins that we've had over the past three years, while at the same time, having the average selling price on existing products come down overtime. So that's that's our model and we're going to continue to.
Drive costs and continue to have margins that we expect on Threed sensing.
The next question comes from George Notter of Jefferies. Please go ahead.
[noise] hi, guys. Thanks, very much I guess I wanted to ask about the supply chain impacts.
You mentioned coming into the quarter you expected more isn't a 90 million dollar impact in June I think that was a combo of supply side and end market impacts due to Ah Jacoby, but can you talk about what you actually saw and then in the quarter and then just to confirm for September you know you guys are part of her full speed full strength in terms of field.
The supply side for men patchy perspective.
Yeah. So in the guidance that we provided that $90 million was a combination as you say of supply and demand demand on the side of lasers, and threed sensing and supply across the board, but mainly on transmission. So we did see some stress.
The news as we said in the script on a three D sensing and lasers relative to that 90 million. So that's helped with the outperformance to guidance.
And then through the quarter, we saw some of the supply limitations free up for instance, our contract manufacturer in Malaysia.
Now is back to full speed, we've added capacity they've added people. So we're running at full speed there I will say that not all the problems are done I mean, we typically have.
Chip shortages or other kind a component shortages from time to time in the normal course, that's kind of where we are today.
And there might be a little bit of impact as demand has been very strong for some of the communication products that are also going into health care products and so those are the discussions I'm, having with senior executives at some of our IC component suppliers, but it's more like the normal chasing a parts and not the.
Factories shut down kind of thing so I think from that perspective, you can you can think of it as we went into July and August we're back to full speed ahead, and normal course of business.
The next question comes from Tim Savageaux of Brooklyn Capital markets. Please go.
Hey, Good morning America, Congrats from a result, especially once again.
Gross margin execution.
My question is strategic in nature.
Mentioned ample cash you know for her.
Fairly decent share price there so I guess at a high level I Wonder if you could.
It's kind of review.
The companys kind of strategic priorities given you know what are the success.
The Oclaro deal has been well the communication side as you look across.
Industries and areas of focus for Lumentum and then.
I'll ask my follow up right now since its potentially related but only potentially.
Which is to say it is you look at the emerging market for 400 ZR modules.
I Wonder if you could.
Frame that opportunity for us from a lumentum perspective relative to the module businesses that you exited.
In Datacom inside the data center versus the module businesses.
That you remain did.
And that it performed well for you on a coherent side USIO DCIO is people are estimating a billion dollar ZR marker over the next three years, I Wonder where lumentum stands relative to that opportunity.
Oh, great Tim Oh, I'll take the strategic question and as Oh, Chris to cover the ZR market and our perspective on that.
I think you know obviously as we said of the in that in the script, we have ample cash for continued organic investment as well as inorganic and you know we have a process that we are looking at on a regular basis that looks at you know potential targets and all the industries we.
Participate in as well as other part industries, where our technology might mix with something else that could give us a new market to to attack.
You know, obviously nothing to announce here, but I'd say that ER to your point I think the team has done a very very good job with taking a the oclaro acquisition and really transforming our business into a very high margin.
A very efficient.
Machine and I think no doubt that one is 90% behind us we have a few more things to do there, but I'd say the most most of it's behind us and I think we're ready for more again, nothing to announce but but where we're looking at everything and yes, we have ample cash and I won't comment on the stock price but.
I think there's certainly opportunities there.
Chris you want to pick the yard question.
Yeah, absolutely so but can you know the T R.
As a product it is say sort of a manifestation of trends that we've been focused on for for several years, it's really.
Capsule that moving away from discrete components and driving a highly integrated solution based on photonic integrated circuits to offer high density, which require small size low power consumption et cetera for for certain applications shorter distance high density.
Cetera, that's one of the major reasons, why we decided to get out of the discrete modulator business as an example, and deal with an underpinning of the Oclaro acquisition getting getting a leadership position in those photonic integrated circuits, which we believe our indium phosphide platform offers you know the bad.
Performance a possible out there for for such such shot types of solutions that customers are looking for.
It's it's definitely a market we are are chasing and developing products for in sort of commenting on the market sizes. I think you know we got to be a little careful with words of saying a billion dollars over a few years I mean, yeah I'm a billion cumulative he got also recognize that these are lower relatively.
On a coherent module or lower ASP product in and DC I, which is really the portion of the market. The ZR is focused on has no good volume and increasing volume, but it's not the entire market. So while we are focused on 400 gig ZR were also focused on bringing.
During the same kind of capabilities I eat low power consumption small size, but very high performance too.
Metro applications and other applications using our indium phosphide isotonic rate at a certain capabilities.
The next question comes from Christopher Rolland of Susquehanna. Please go ahead.
Thanks, guys for the question.
If you guys could I might've missed it but if you could give an overall company book to Bill I think it was 1.3 exiting March so.
I would like to see how that die that changed also if you could talk about lead times for your products, you know where have they been traditionally particularly telco.
On the telecom side of things, where they've been traditionally and where have they stretch to a and then ultimately where do you think we can go with that thank you.
Sure just book to Bill was over one for the quarter, even with a significant.
Reduction in bookings for lasers that led us to this you know guide of down 25% lasers in Q1.
So I'd say nothing abnormal on book to Bill you know strong demand across the board with the exception of lasers.
Lead times really vary depending on you know if were the sole supplier or have a $150 million worth of backlog for Datacom. That's that's a that's a three quarter or leave time for new products, unless we prioritize and ship things around so it depends I.
That's the extreme.
And and you know roadms vary from the low end wrote them, which is probably more like two two months to the high end Roadms, which are you know.
Probably longer than a quarter now, we're adding capacity as I said to try to shorten that because I don't think any of our customers have a crystal ball to know what they need four quarters for four months from now.
That all four quarters from now so we're trying to provide some additional flexibility, but at the same time being smart with investments on capital. So we're we're not where we want to be and that's why we're adding capacity and capital.
Great and then a and then I guess, one for Wajid, HM where does the Opex go once we normalize here once we all let's say get our shocks next year and travel comes back where do we ultimately shake out on a run rate. Thank you quarterly.
The run rate. Thank you watch it.
Yeah, Chris for we're thinking that Opex will increase a little bit a in fiscal year 21 versus fiscal year 20, specifically a in R&D or from a modeling standpoint thinking about it in that 20% to 21% of revenue is is probably a appropriate.
But most of the increase will will come in R&D.
Yes.
And last question today will come from Ryan cuts of Rosenblatt Securities. Please go ahead.
Hi, that's getting the question what are the could drill down a little bit on the the 400 gig sarcoma datacenter sounds like that's a big driver backlog and.
It seems strong statements from the any Ams about optical costs are holding back the cycle. How do you see that playing out with the Hyperscale operators and you know or you are you at risk of losing share by you know not a by having such a long lead times appreciate that thanks.
Yeah. Thanks, Ryan. So 400 gig is is it is absolutely critical to two datacenter operators to be able to get that data center essentially compute capacity up if you will and Ah and where and strong leadership position there.
In that lasers needed for 400 gig are very challenging to make.
Certainly get your point about risk of risk of share loss. There that's something that we're certainly managing and and ensuring that we're doing the right thing to prioritize customers that we think are the sort of right horse to right. If you will to to ensure that we have.
The lions share of that opportunity and why we're expanding capacity adds as aggressively as we are to address those those opportunities.
Helpful. Thanks, so much appreciated.
This concludes our question and answer session I would like to turn the conference back over to Jim Fanucchi for any closing remarks.
Thank you so much and that does conclude our call for today, we would like to thank everyone for attending and we do look forward to talking with you again in another few months when we report our first quarter fiscal 21 results. Thank you and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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