Q1 2021 Lumentum Holdings Inc Earnings Call
Good day, everyone and welcome to the <unk> first quarter fiscal year 2021 earnings call.
All participants will be at all what could only mode.
Please note today's event is recorded.
At this time I'd like to turn the conference call over to.
Okay, Oh Darrow associates Sir.
Please go ahead.
Thank you operator, welcome to Lumentums first quarter fiscal year 2021 earnings call. This is Jim Fanucchi from Darrow associates, assisting lumentum with its investor relations joining the call today from the Companys management team, we have Alan Lowe, President and Chief Executive Officer Watch It all Lee Chief Financial Officer.
And Chris Coldren, Senior Vice President strategy corporate development.
Today's call will include forward looking statements, including statements regarding the markets in which we operate and our position in such markets. The impact of COVID-19 and to respond to the actions there to our business and continuing uncertainty in this regard trends and expectations for our products and technology are markets market opportunity and customers.
And our expected financial performance, including our guidance as well as statements regarding our future revenues from walk away, our financial model and our long term margin targets. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risk factors described.
Our FCC filings, including the company's quarterly report on form 10-Q for the fiscal quarter ended September 26, 2020, which the company expects to file later today added Lumentums 10-K for fiscal year 2020 ended June 27 to 2020. The forward looking statements provided during this call are based on Lumentums re.
The beliefs and expectations as of today lamenting undertakes no obligation to update these statements except as required by applicable law. Please also note unless otherwise stated all results and projections discussed in this call. Our non-GAAP non-GAAP financials are not to be considered as a substitute for or superior.
Our two financials prepared in accordance with GAAP Lumentums press release with our first quarter 2021 result, and accompanying supplemental slides are available on its website at www Dot Lumentum dot com under the Investor section and includes additional details about our non-GAAP financial measures and a reconciliation.
The Asian between our historical GAAP and non-GAAP results now I will turn the call over to Alan for his comments.
Thank you Jim good morning, everyone I.
I would like to make a couple of broader points before providing my business commentary.
We will be discussing our strong financial results and we benefit from the digital transformation that cobot Nike is accelerating we recognize and don't want anyone to lose sight of the significant economic health and wellbeing challenges COVID-19 has tragically brought to millions of people around the globe I.
Our thoughts are with all of those affected I thought so also with the health care professionals and first responders, who sell quickly make a difference on the Frontlines every day I'm.
<unk> momentum plays an important role in the critical infrastructure that helps people say, we continue their work their education and their life. During these challenging times now onto my comments about our business and financial results. We started fiscal 21 on a strong note in the first quarter, we achieved record non-GAAP gross margin.
<unk> operating margin and earnings per share.
For the first time, we achieved gross margin in excess of 50% and operating margin above 30%.
This performance demonstrates the strength and resilience of our business and financial model. We expect this positive momentum to continue into the second quarter.
As pleased as I am with our results.
And the progress, we've made and driving towards our strategic goals I'm as excited as ever about the opportunities ahead.
As I, often say the future is truly bright at Lumentum.
Long term market trends and industry dynamics are very favorable.
The world is accelerating its shift to increasingly digital and virtual approaches to work Entertainment education health care, social interaction and commerce, which all drive increasing need for our differentiated products and technology.
We intend to invest strongly in R&D to address these positive long term trends and strengthen our market leadership positions.
First quarter revenue was in the upper half of our guidance range.
Our revenue mix was different than we had contemplated in our guidance due to changes throughout the quarter.
Our assumptions for three D sensing prove conservative and demand for our three D sensing products accelerated through the quarter.
Strength in three D sensing sales more than offset lower than anticipated telecom and commercial laser sales.
Telecom Datacom revenue grew 2% sequentially and 5% year on year, excluding revenue from low margin product lines, we have divested or discontinued telecom and Datacom revenue grew 4% sequentially and 14% year on year the largest contributor to this growth was telecom transmission.
We had strong sales of indium phosphide based coherent transmission modules and components, including E C O and DCIO modules and 600 gig and 800 gig modulators.
One of them sales increased from last quarter, but were still down year on year Howard.
However, our contentionless Nbn roadms grew more than 30% quarter on quarter to a new high highlighting the increasing shift to this technology in new customer systems.
During the first quarter, we saw some push outs in telecom customer orders.
Also saw reductions in customer forecast due to cope with 19 impacting the timing of new deployments. In addition to customer inventory management.
These contributed to lower telecom revenue than we assumed in our guidance.
On certain key new telecom product, however, demand exceeded our ability to supply and we are working hard to expand output.
During the first quarter, we made a lot of progress on new products further strengthening our telecom leadership position.
On the transmission side, we began sampling our four hundredg DCIO transmission modules on.
On the transport side, we continue to proliferate, our contentionless and buy in and high Port Count Rotem technologies with C.L. and extended C band versions to enable customers next generation systems globally.
Prior quarter trends continued in Datacom with chip sales growing 6% sequentially.
We have seen a shift in near term customer forecasts with lower projected by GE demand offset by continued strength in demand for our market leading chips for datacenters.
We have adjusted our wafer start plans accordingly.
Our backlog for Datacom chips remains very robust and demand continues to outstrip, our wafer fab capacity.
As such we are continuing to aggressively expand a wafer pack capacity based on long term demand trends and expectations.
On the new product front, we are working closely with our lead customers on their needs for future 800, G and above Datacom transceivers.
To this end we have recently demonstrated high performance 200 gig pamfour emails for such applications looking to the second quarter, we expect telecom and Datacom revenue to be up sequentially with the strongest growth coming from telecom transport driven by growth in next generation Williams.
Industrial and consumer revenue grew strongly quarter on quarter and was significantly higher than in our guidance assumptions.
Our unmatched experience in shipping hundreds of millions of Vixel rates per year continues to put us in a leadership position in the market since.
Since we became an independent public company five years ago, we have shipped approximately one and a half a billion dollars of Threed sensing revenue.
We continue to believe we have a larger addressable opportunity over this product cycle.
This is due to the significant increase in Threed sensing content per consumer device. We are now shipping looking.
Looking to the second quarter, we expect industrial consumer revenue to be flat to modestly up quarter on quarter.
We are optimistic about three cents in demand in the coming quarters and years.
In addition to increasing content, we believe theres potential for a strong consumer upgrade cycle, driven by new features including Fiveg augmented and virtual reality and computational photography.
Further we believe there is potential for market share shifts at our customers' level, which could be beneficial to us.
On Android, we continue to make very good progress on new opportunities. However, we are taking a conservative approach to Android revenue in our near term projections due to cope with 19 and geopolitical factors looking.
Looking even further ahead, we have multiyear price.
<unk> and technology Roadmaps aligned with our consumer electronics customers.
These include unique technologies to increase the integration of other components.
Enable under screens greedy cameras.
It is higher density and larger raised to enable higher performance three D imaging as well as to create new lasers to increase our opportunity within other consumer mobile devices.
We are also focused on planting seeds for growth in markets beyond consumer electronics.
We have unmatched and invaluable experience in Threed sensing lasers for consumer electronic applications and broad industry, leading platonic capabilities used across other markets.
We believe this gives us a competitive advantage as we pursue emerging long term opportunities outside of consumer electronics in the past quarter Vixel raise have completed the important eight you see automotive qualification through a module partner and we expect initial deployments of these products to be in automobile.
In cabin applications. We are also now sampling highpower, but solar arrays into light art for last mile vehicle applications.
According to our customers' needs last mile applications could be one of the largest lighter opportunities in the next several years.
In addition, we're also sampling or are in qualification with major tier one auto suppliers for broader automobile opportunities that will deploy and develop over time.
We're making progress in the security and access control markets.
We are already shipping in volume for facial recognition on payment kiosks.
We are engaged with providers of security and access control systems, who are looking to add threed sensing to enable excellent support contactless high security access control.
These applications are also accelerating due to public health and safety concerns.
Turning to commercial lasers.
<unk> declined 37% quarter on quarter. This is a larger decline than what we had assumed in our guidance.
Given our customer mix. This decline was related to manufacturing weakness outside of China.
We expect second quarter laser revenue to be flat to up modestly.
We believe that it will be several quarters before we get back to the revenue levels. We saw in fiscal 2020.
On the new product front, our latest 12 kilowatt fiber laser engines are now shipping to our lead customer for their newest platform.
Additionally, we're very proud that our Picoway three was recently recognized by laser focus world with an innovators award for being one of the most innovative products impacting the protonix community this year.
I want to provide some color on our business with wall way given the regulatory restrictions that were announced in August.
Sales to walk away declined in the first quarter and were less than 10% of total company revenue.
In the second quarter, our guidance contemplates sales to why wait to decline further due to the regulatory restrictions.
Beyond the second quarter for modeling purposes, we currently expect sales to walk away to be less than 5% of quarterly sales.
Before handing it over to Wajid to review the numbers I want to thank and acknowledge all of our employees around the world.
They are 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, especially so working through the pandemic. This is a site each having their own personal challenge is living and working in these times.
In addition to our business goals contributing to society and our local communities is very important to lumentum and to our employees.
We are committed to the highest standard of social ethical and environmental conduct and responsibility. This.
This includes promoting safe diverse and inclusive workplaces free from discrimination and harassment.
Again.
Thank you to all of our employees.
They are absolutely the company's greatest asset.
I would also like to thank our customers suppliers and shareholders for their continued support and partnership during these challenging times.
With that I'll hand, it over to watch it.
Thank you Alan good morning, everyone turning to the first quarter's numbers net revenue for the first quarter was 452.4 million, which was up 23% sequentially and 1% year on year.
GAAP gross margin for the first quarter was 45.5% GAAP operating margin was 21.9% and GAAP diluted net income per share was 86 cents.
First quarter non-GAAP gross margin was 52%, which was up 480 basis points sequentially and up 620 basis points year on year.
The sequential and year on year growth was driven by an improvement in product mix and acquisition synergies as Alan highlighted this record gross margin performance demonstrates the improvements we have made in our financial model.
First quarter non-GAAP operating margin at 33.7% increased 890 basis points sequentially and 640 basis points year on year improvements were made by gross margin improvements as operating expenses were approximately flat with the comparable periods.
Non-GAAP operating expenses totaled $82.7 million or 18% of revenue SGN a expense was 36.8 million R&D expense was 45.9 million.
Operating expenses continue to be a little lower than normal run rates due to COVID-19, reducing travel trade show and other expenses.
First quarter non-GAAP net income was 139.2 million. This includes 900000 of net interest and other income and 14.2 million after tax expense.
Other income is down sequentially as interest rates on our cash and short term investments are lower overall, and we are being conservative in our investment portfolio.
Non-GAAP diluted net income per share was $1.78 based on a fully diluted share count of 78.2 million now.
Now turning to the balance sheet, we ended the quarter with 1.61 billion in cash and short term investments up 57 million quarter on quarter strong growth in our accounts receivable during the first quarter should lead to an even stronger cash generation in the second quarter, we have 1.5.
Billing in an aggregate principal convertible notes and no term debt are 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.
[music].
We are well positioned financially with a strong margin model high levels of cash and low interest expense as well as long maturity financing.
Turning to segment details first quarter optical communications segment revenue at 428.5 million increased 29.7% sequentially due to three D sensing seasonality and growth in telecom and Datacom, you're on your optical communications segment revenue increased 3%.
Due to higher telecom and Datacom revenue, particularly in Datacom due to strong growth in our chip business optical communications segment gross margin at 52.5% increase to 590 basis points sequentially due to do up due to a better product mix with.
Higher chip related revenue and increased 640 basis points year on year due to a more favorable product mix improved telecom and datacom margins and acquisition synergies.
Our laser segment revenue at 23.9 million decreased 37% sequentially and 29% year on year first quarter Laser's gross margin decreased to 43.5% due to the significant reduction in manufacturing volumes.
Now onto our guidance for the second quarter of fiscal 21.
Please note the outlook, we are providing is on a non-GAAP basis and are based on our assumptions as of today. We expect net revenue for the second quarter of fiscal 21 to be in the range of 465 million to $485 million. This revenue projection includes telecom and data.
The com, increasing sequentially industrial and consumer being flat to up modestly quarter on quarter and commercial lasers also being flat to up modestly quarter on quarter based.
Based on this we project second quarter operating margin to be in the range of 32% to 34% and diluted net income per share to be in the range of idled or 72 at dollar 90 days.
These projections incorporate an increase in operating expenses, primarily due to an increase in R&D as we invest in new products and technology.
Approximate share count of 79 million and an estimated other income of 0.5 million as well as an estimated tax expense of $15 million.
Before wrapping up I'd like to make a few important comments about our financial model it might be helpful to refer to the earnings slide deck on our website for the following points as well when.
When we announced the acquisition of Oclaro, we've put forth a target financial model with a gross margin range of 40% to 45% and an operating margin range of 20% to 28%.
For the trailing 12 month from the end of the first quarter of fiscal 20 to the end of the first quarter of fiscal 21, we exceeded this target model. We believe we will continue to grow margins overtime due to further improvements in product mix efficiency and.
Operating leverage as such we are now increasing this annual target in our mid term financial model, our annual gross margin target moves up to 50% and our annual operating margin target increases to 30% we.
We don't expect to exceed these new targets for the current fiscal year due to three D sensing seasonality as well as regulatory restrictions on fails to walk away impacting the second half of the fiscal year.
With that I'll turn the call back to Jim to start the QNX session Jim.
Thank you Wajid before turning the call over to the operator to start the question and answer session I would like to ask everyone to keep to one question and one follow up this should help us get to everyone before the end of our allotted time operator, let's begin the question and answer session.
Ladies and gentlemen, we will now begin that question and answer session to ask a question you know the press Star then one if you are using a speaker phone. We do ask that you. Please pick up your handset before pressing the keys.
So it's all your questions you May press star and two.
Again that is star then one to ask a question.
Our first question today comes from Samik Chatterjee from JP Morgan. Please go ahead with your question.
Thank you Hey, good morning, Thanks for taking my question.
Alan I just wanted to start with the Telecom group I think good luck.
To be a key customers like while we have seen over the last.
Three months.
Wondering if you can go into a bit due until she talks about how sustainable telecom demand is given kind of the changes we see again, what's driving the dealers and the push outs that you talked about is it kind of more focus on a spoke to good geography or is it kind of broadly is.
And then I have a follow up thank you.
Sure I mean, if you looked at our guidance or in the script, we talked about telecom and Datacom actually increasing in in fiscal Q2, so were.
Pretty confident that we'll have growth in telecom this quarter I'd say, we were probably expecting higher growth.
But due to you know some deployments are not happening.
Per the original schedule I think mostly due to coded in.
And the ability to get out into the field and deploy these networks.
Seen some slowdown, but we're still expecting growth.
Across the globe in our fiscal second quarter.
So anything on what's driving that he leaves the leverage beyond the geographies.
Playing fiveg.
Oh, well, we as I said in the in the script as well we did see some delays in the demand for our Datacom chips for Fiveg deployment, mostly in China.
But that is easily taken up by the Mad strong demand in Hyperscale cloud.
Cloud data centers and so we've had to shift our wafer starts in our datacom business too towards more the higher.
Higher speed inside the data center.
Applications, but I'd say that is one area that we saw some delay in the deployment or so.
Slower than expected in our Fiveg deployments in China.
Okay, and if I can follow up on Threed sensing.
The industry.
And consumer group, you are guiding to flat to modestly up but.
But I think relative to kind of the guidance you had last quarter Ray you sounded a bit more concerned about December being beak in revenue I'm, just wondering if anything's changed on that front or what are your assumptions in relation to new market shared when you're kind of guiding to that for the December quarter.
Yeah, as we said throughout fiscal Q1 demand came in stronger than expected and stronger than we had guided in our August call. We've had a very strong October and expect a flat to slightly up now that could change.
Depending on how successful or our lead customers launch is but so far everything looks positive I do think one one thing that maybe a little different. This year is that we expect some of the demand that would typically be consumed in the december quarter to to roll into the March quarter. So that's perhaps a dynamic that may.
Maybe wasn't contemplated earlier.
Our next question comes from Rod Hall from Goldman Sachs. Please go ahead with your question.
Yeah. Thanks for the question guys and nice job on the earnings your I wanted to start off with the just though order.
Trajectory orders trajectory here recently in the last few weeks now that the new let's call them. The lead customer phones have launched I Wonder. If you guys have seen any change in threed sensing worse your factories or if that's all been pretty confident last couple of weeks and I have a follow up.
Well I mean, we've seen strong demand and through through.
I'll get in September and that carried through October. So you know it is that more of a front end loaded quarter now that could carry throughout the balance of the quarter, but you know our guidance doesn't contemplate that so I'd say, we're in a good position as far as market share I think you'd have that.
Ask our competitors because he doesn't give the numbers and our customer doesn't tell us what share. We have we have a contractual obligation that they abide by it at a minimum and we're fairly confident that that's certainly being abided by.
Okay. Thanks for that and then I wanted to on Datacom just check the.
Capacity situation and ask if you could give us any idea.
More specifically when that fab capacity comes on.
How much more fab capacity are you, adding proportionately can you just kind of give us some idea of what's going on with capacity there.
Yeah, as we said in the August call, we're expecting to correct.
Correct, Chris you might have to correct me double the wafer capacity over the next 18 to 24 months. It does come in chunks and our cycle time for Datacom wafers is more than a quarter or so like I said in the script as we see a shift from.
Fiveg to data center.
That takes time to move over.
So in the short term you know, where we're going to be constrained on those data center chips.
I would say that you know could we go from where we are today to double that in revenue and volume I'd say that there's probably some offsetting.
Price reductions over time that would offset some of that but our expectations are that we will have.
Plenty of demand.
Two years from now to consume twice of what we're producing today.
Yeah, Hey, Allen with <unk>.
So keep in mind some of your newer so some of the newer chips have are bigger and so they consume more real estate on a wafer so.
It may not be that more than doubling to eat out there but.
Oh, sorry, it may not be doubling of units, but it would be doubling of wafers as the new newer 200 gig chips that I talked about are actually larger and there's fewer chips per wafer.
Okay, but you can't say when the next big chunk of capacity comes on.
Oh it it I would say probably you know middle of next year, we will see some step up of capacity that we're getting incremental capacity last quarter. We grew 6% you know we're going to continue to get some incremental improvement through yields and productivity.
But I'd say, probably middle of next calendar year would see a step up of installed capacity to be able to take advantage of in the second half of the year.
Our next question comes from Alex Henderson from Needham and company. Please go ahead with your question.
Great. Thank you can you hear me okay.
Yes, Alex Thanks.
I wanted to to go into the Rogan side of the business, obviously very good performance in the <unk> and buy EM.
I would assume that that's more western accounts and while we while we as I understand it tends to do well.
More of the lower the speed stuff, so given the strength of demand there isn't.
It does somewhat tied to the timing of chassis deployments in which case.
Slower chassis sales would slow down the demand growth there or at least temporarily. So I was wondering if you could talk a little bit about that aspect of it and to what extent you know you're you're adding capacity what rate of capacity adds you're looking at any timing around that would be very very helpful. I appreciate.
Thank you.
Sure I think as we look at the very high Port count and the M. by and as I had said in the past China was leading the way.
But the rest of the world was following in that in.
And I'd say that today, we're seeing that rest of the world start deploying in a meaningful way and so I expect that.
The non walkaway business for our high Port Count and then by end will grow.
Dramatically over the next 18 months I'd say that we are adding capacity the capacity adds take six to nine months. So the decisions. We made a that are adding capacity. They happened in the first calendar quarter. Those are coming online now so we're expecting to continue to add capacity as the rest of the world.
It puts season their mainstream systems that get deployed in a you know later this year and into calendar 21.
Can you give us any calibration on the size of those capacity adds a and whether you're planning. The next set of or say the first half of next year.
Well I mean, I think if you look at what we said then by end grew 30% last quarter. It's you know that was a big chunk coming online.
Not going to come online this quarter I'd say that we probably have more in buy in coming on in the first half of next year as our non.
Non walk away customers are really starting to have meaningful deployment, that's our expectation at this point in time.
Our next question comes from Tom O'malley from Barclays. Please go ahead with your question.
Good morning, guys and congrats on the nice results. My my first questions on the really strong gross margins could you talk about what's driving the Opcone Communications, you mentioned product mix a couple of times I assume I'm not sure about larger customer rolling on but you also have to your long term range. So is there some real gains in the core telecom and Datacom gross margins and.
Can you kind of break out what the contribution is for the better margins is it just.
The big customer or is there also some real gains in that in that core business as you move more towards chips.
Yeah, Tom It's Wajid I'll take that one and then Alan and Chris can follow ups. So yes. It does the strong gross margins were obviously driven by a very strong product mix. We've also had an accumulation of synergies that we talked about for a number of quarters that have added up and have added to our overall financial.
Model, our Datacom chip business, increasing 6% quarter over quarter that was all chip business as well and the gross margins on on those product lines are are quite healthy to your question on the long term model really the long term model assumes that our lasers business comes back up and start.
It's running at a normal run rate again, and you know one of the reasons we haven't.
That will exceed the long term model for for this fiscal year is because we expect to have our lasers business continued to be weak.
Into the back half of the fiscal year, and then expected to improve as we move into fiscal year 22, and so that's what's really giving us confidence in our overall company long term gross margin model being able to achieve over a 50% gross margins is really laser is coming back and having opcom continuing to improve it.
All the capacity improvements that Alan talked about in Datacom chips, and our three D sensing business, especially the new products on three D. Sensing a continuing to have a an uptake as you can appreciate that's just starting to get going and we expect that to be a real success, helping us into the next few quarters.
Great. That's helpful. And then my follow up was really on the Datacom business. You mentioned there were some push outs in five g. I assume that's front haul related product, but then you mentioned that there was some strength in the Hyperscale business.
Where are you seeing that strength and is that something that you expected or is that something that you recently saw a pickup.
Hey, Tom This is Chris so yes, the Fiveg is front haul related 10 as you can imagine.
[noise] Fiveg deployments at least initially the concentrated in China and Weve seen a slowdown.
From those customers I.
Given the ecosystem around Fiveg in China is it you know.
Acted by what's going on in the geopolitical risk.
Regime in regulations on on Wally but.
But you know as we've talked about in prior quarters, we've had multiple.
Multiple quarters of backlog in our Datacom business, so not a not a big surprise that there's very strong demand for our chips going in into data centers and I think that's a combination of.
Both our type of customer that we supply into in in in Datacom I.E., the transceiver customers, winning more business within the Hyperscale cloud operators as well as our relative competitive position as a speed increase and more.
Performance is needed as you go from 40 to 100 100 to 200 200 to 400.
Our footprint in those customers tends to increase.
Our next question comes from John Marchetti from Stifel. Please go ahead with your question.
Thanks, very much I wanted to touch on the Y way outlook that you gave both for the December quarter as well as the second half of the year.
I just wanted to get a little bit of an understanding from the you know the reduced outlook how much of that is really based on actual restrictions of what you are allowed to ship versus you know why ways, maybe overall demand declining because of their lack of access to some other products that they can't get for the field.
We'll pull a bold materials.
Yeah, I'd say, it's a combination of both right and when you look at what we ship into law way.
There's still strong demand for all of our telecom and Datacom products. There's some of those products. We cannot continue to ship and so I'd say the majority of the reduction from being greater than a 10% customer a few quarters ago to today less than 10% and going down below 5% most of that due to regulatory restrictions.
And you know a little bit is based on on demand I'd say that like in the consumer products.
Okay, and then what do you think if I can follow up on some of your gross margin outlook comments, if we think about that laser business getting back into sort of the mid to upper fortys or maybe even a $50 million sort of quarterly run rate how much upside off of this sort of <unk> 43, and a half that you did this quarter or should we expect there to be.
Well I mean in fiscal Q4, where we had a 37 million dollar order for lasers, we were above 50% gross margins and so we have you know different margin mix within our lasers business itself with some of the products in achieving better gross margins, but our our new products and lasers.
Are expected to be well above that and so as that gets into the 40 or $45 million range, we should see a nice a nice bump back.
Back into the 50% gross margin line for lasers.
And our next question comes from Simon Leopold from Raymond James. Please go ahead with your question.
Thanks for taking the questions first I wanted to just get a better understanding of.
The issues with wild way in that you talked about some.
Some level of sales below 10% in in this quarter, which we understand and then be outlook a bench, we getting below 5% I certainly know that euro is also less than 5%, but why does the value not go to zero could you help us understand what are the aspects of the rules that allow you to do business with Wawa.
That is still a positive number thanks.
Yeah, we're not going to get into the details of [noise].
The restrictions in our products, and which ones abide which ones.
Our falling to the restrictions and not.
Other than just to say you know the business with with Wild way is becoming less material for our future business and down below 5% wasn't that zero or 4.5%, there's still a TBD at this point, we try not to guide more than one quarter at a time, but we wanted to give some color around our expectations that it's going to come.
You need to go down and become even less meaningful to our overall business in the second half of the fiscal year.
And then just understanding you don't want to guide beyond the quarter I think it would be helpful to everyone. If we could at least get some qualitative aspects around the March quarter seasonality in that you've got a couple of things going on this year, where you're you're three D sensing its time.
Lifted from September to December, creating a tougher comparison and then you've got the Y way issues. We just talked about so maybe less China business.
Which usually effect seasonality could you help us understand a little bit about how your seasonality maybe different in calendar 2001 versus prior years.
Okay.
Well, I'd say and Chris can jump in as well I'd say that.
Our China business is impacted by the restrictions at Wawa and I think if you just take a look at where they have been where they were in the September quarter, where we're expecting them to be in the March and June quarter. I think you can take 5% to 8% of our revenue outlook as a result of that and so.
You know that that's that's a broad range in that you know.
Things that things are going to change things going to change probably tomorrow, who knows but that's our current expectation as far as three D. Sensing is concerned and we've taken a very conservative approach on on Android. So I'd say that our expectations are Android is very small in the first half of next year otherwise.
And with many of the customers to make sure that if or when they decide to put three D sensing into their mainstream phones will be there for them.
And I'd say that for our lead customer you know they don't they don't really tell us or our expectations are that there is some strengths in threed sensing in the March quarter more than normally given the later launch of the product line.
Did that answer your question.
Our next question comes from meta Marshall from Morgan Stanley. Please go with your question.
Great. Thanks, just wanted to get a sense of you know maybe coming back to qualify as that business kind of winds down a little bit or is restricted a little bit just are you seeing any broadening out of demand from other kind of China optical vendors and then maybe second just you.
Talked a lot about.
The auto opportunity just in terms of you know general timelines, we should be thinking out for maybe in cabin and how the cabin. Thanks.
Sure I'll take the walk away one I'll, let Chris answer the the auto one.
I'd say that there's activity around traditional carriers that had been relying on walk away.
But that takes time, meaning.
The there's nervous carriers that don't want to rely on law way and I think that's natural and I'd say that.
Again, that's probably a multi quarter thing before that that bidding cycle and the responses turn into deployments and so I think is happening I don't think there's a slowdown in bandwidth demand and so networks are going to need to continue to be built and bandwidth is going to need to continue to grow so I think.
That you know if you look at our share of wallet of other customers is actually a long term positive trend for us. It's just a matter of the air pocket between now and those new deployments happening I'd say, that's two to three or four quarters.
Chris maybe just following up right there on that real quickly I think that does in terms of understanding kind of overall global share, but just in terms of selling that does he he or fiberhome more China specific that or is that just kinda saracens taking place there.
Well, we've seen strength in our non Wally China customers over the last several quarters and really.
No consuming high end Roadms consuming high end coherent transmission components and modules.
So I don't know if that's a it's a result of a while we restrictions or results of our products being no state of the art and leading edge and I'd say that we're going to continue to see growth from those customers you know over the the short and mid term time horizon.
Our next question comes from and you know operate with Chris There was a question about auto and have been [laughter].
Yeah. Its so we're playing into automobiles multiple ways both in cabin as well as outside cabin for Port you know driver assistance systems or in the case of autonomous vehicles, you know sensor system to enable.
Able to car seat and nowhere to go.
I eat light, our systems and and as Alan highlighted on the call you know in the past quarter. We we've qualified in a normal.
You have normal level product that Naples in cabin applications Europe is really leading the way for in cabin driver monitoring.
Systems. They have regulations that require it's too to be installed in vehicle side believe starting out in calendar 22 in cabins, probably the smaller of the opportunities relative to the outside cabin opportunity.
In in light are all of these are long term markets. They don't really start taking off out into the 23 24 25 timeframe. Even then the penetration is relatively low but over time, we believe these become.
Multi hundred million dollar opportunities for for Lumentum, even at you know the laser level.
And we are definitely.
Definitely supplying it to laser level have opportunities to move up to.
To to the module level, where the dollar content might be a bit higher but what's really critical is because these markets take a long time to get designed in and qualified and eventually ramp up we need to plant those seeds today get designed in with split module.
Understand ultimately tier one auto manufacturers and that's really what we wanted to highlight today is that design in activity and traction is happening.
Our next question comes from George Notter from Jefferies. Please go ahead with your question.
Hi, guys. Thanks, very much I wanted to ask a three D. Sensing question is there you know obviously the parts that you're shipping into your lead customer our all new this cycle.
Or maybe most of what you're shipping into that customer is brand new.
Is there is there some desire to build an inventory safety stock you know by your large customer as they shift over to those new parts and.
I think Alan you were referencing something about March concern.
Consumption sell in versus sell out can you just talk about how you see inventory at that customer. Thanks.
Yeah, George what we really don't have a lot of visibility into what.
Is the inventory of modules and consumer devices beyond when we ship Vixel chip to the module integrator I'm, so sorry, I'm not going to be able to provide that kind of.
Color on on what that looks like.
I will say, though that that through the quarter, we saw upticks in the demand, which would tell me that something changed whether it's a share shift or.
Patients were stronger customer demand and.
So that's you know that's the only kind of color I can give you on it.
Inventory or what's going on it at our customers' level.
Got it Okay. That's helpful. And then one last one a linear already I noticed that the days sales outstanding calculation was was pretty low relative to what you guys have typically reported in recent quarters was the quarter front end loaded.
Linear how would you characterize it thanks a lot.
[noise] Wajid, you're on mute I think.
I'm, sorry, [laughter], it's about to hit the I mean, our our quarter was was a pretty similar to previous quarters. In terms of overall linearity are you can see shifts and customers in terms of their own linearity enacting I have an impact on our dsos are just depending on what the pain.
And terms are with well with each one of them and then sometimes you know they'll they'll come along and either pay within the first couple of weeks, so the new quarter and or the.
Last couple of weeks of Oh, we ended the quarter, depending on how their batch processing works Oh, we're expecting our cash flow to be a significantly better and in fiscal Q2 versus.
Versus fiscal Q1, just given the type of profitability, we've achieved high during the quarter. So switching will be good from a cash flow standpoint.
And our next question comes from Nada throughout from Loop capital. Please go ahead with your question.
Hey, good morning, guys. Congrats on the results and thanks for taking the question.
Yeah, just two quick ones for me if I could.
Alan the sort of the comments about two to four quarters their pocket.
I make some of the lottery revenue was that did that China's specific or is that is that a worldwide remark and then I have a quick follow up.
Yeah, I mean, I I don't have a crystal ball, but I'd say that you know there is activity today outside of China, where to traditionally Chinese walkaway based carriers are looking for others suppliers and that's that's what my comment was around was outside of China is.
Probably two to three quarters before that kind of activity turns into revenue for us in revenue or.
Network equipment manufacturing customers.
Got it that's that's really helpful and just quick follow up on on gross margins you guys give you context around what drove them. This quarter, so to what extent sort of with regard to the new long term model does capacity utilization play a role obviously next dies and then are there any other fab.
After the size and capacity utilization.
Influence the margin meaningfully long term big Rice wiser.
Yeah, no I'll start with that one so it's.
Not just capacity utilization, but the addition of capacity is going to help us quite a bit from from a gross margin standpoint, and Ah and Allen talked about the fact that we're seeing improving yields and productivity.
More supply to meet demand for our Datacom chip products and and obviously, that's helping as well you know the one thing. We noted earlier that I'll note again is really our laser is acting as a headwind to our overall corporate model. Our Opcom segment has has very strong tailwinds in it.
Whether it's our telecom transport business, our telecom transmission business, our telecom datacom business as well as three D sensing, but with our new products and new opportunities. We've got there. So as we see lasers come back up from an overall revenue standpoint, and capacity utilization within our own fabs for laser.
Products improves I, we should see the nice bump up I pointed out earlier that I'm $37 million of lasers revenue in fiscal Q4, we had above 50% gross margins and so really that's because of capacity utilization are helping us improve our overall laser's gross margin profile, which obviously helps us.
All the different companies so.
It does play a pretty big part of it.
Our next question comes from Chris Rolland from Susquehanna. Please go ahead with your question.
Thanks for the question and I'll also echo my congrats on the quarter as well.
My first question was kind of higher level I was wondering if I could get your thoughts on the.
The Marvell and Inphi proposed acquisition and kind of what that means for your outlook for vertical integration in optical.
And you know whether this changes your strategy.
In terms of when it might be appropriate to tie up with another company or whether you think you can go it alone alone for now and <unk> and forever, perhaps but yeah. Just just your high level thoughts there and how you you might execute going forward.
Yeah, Hi, Chris This is Chris so.
You know I think the the fact that in five was picked up by another semiconductor company as opposed to a say a network equipment manufacturer really means that at least our view is that they will fill will remain a merchant or IC supplier.
Less clear, whether they will be as focused on on providing modules, where they literally may compete within five on the future that still remains to be seen so I think overall from from our standpoint. This doesn't necessarily change the landscape very much in.
That one you know Fabulous semi company becomes another tablet semi company and and you know it if we were purchasing products for them on that.
Jim buying it from from Marvell as opposed to buying from Inphi is probably not not not a big change for us as opposed to.
For example, other deals that have been out in the industry Acacia being.
Acquired by by Cisco over the longer run I mean, I think were very very.
Confident in our our ability to to compete and prosper in the telecom Mark.
Markets with with our industry, leading Indian Pos fight components that's.
That's really where where we see our differentiation and you know what we choose to do from from that Ford on whether that be organic development or M&A, we'll let you know if or when something happens there.
Thank you for that and then just a couple housekeeping I don't know if you offer any other details around things like a book to bill or changes in the lead times or perhaps.
Perhaps a capacity utilization.
Yeah, we typically don't do that in unless there's something to highlight like our datacom chip backlog is very large and we're capacity constrained and we'll be such for some period of time. Similarly on our wafer fab in our indium phosphide weapon fab with this strong demand and success.
And 800 gig.
Modulators, that's that's capacity constrained and so on.
But beyond that we typically don't give book to bills or backlog because some of it doesn't really matter.
Mean, much in that a lot of our customers are on B.M.I. agreements in some of our customers are placing long lead time item long lead time purchase orders one year in advance and so it kind of fluctuates, what's going on with book to Bill and backlog, but I'd say that you know were.
Our guidance contemplates normal run of the mill type of demand that is strengthening a across the board.
And our next question comes from Tim Savageaux from Northland Capital markets. Please go ahead with your question.
Hi, good morning, and congrats on the results I wonder instead of <unk>.
Focusing on telecom Datacom from a guidance perspective in particular.
That looks to be where you expect the growth here this quarter or maybe even.
More notable given the anticipated declines further declines.
While way so you know.
When you look at what you're effectively guiding to kind of.
Mid teens percentage.
Sequentially increase I think you've already called out.
Wrote them as the primary driver of that growth, but I just wanted to from that.
And.
And maybe get your comments to expand your own or met his question earlier.
Senior increased traction among other Chinese Oems, when and where it's becoming more broadly about customer diversification globally, and what might be driving that strength. So some pretty strong optical results out of Nokia for example, last.
Last week, so I guess the overall question is about growth drivers for that sequential guide.
And what you're seeing from a kind of an OEM diversification standpoint globally.
Yeah. So we said that a lot of the growth is coming from from a road businesses were you know, adding capacity and trying to meet the strong demand of our high end roadms.
We're also seeing strength in the higher speed coherent components like our 600 800 gig modulators.
And tunable lasers.
I'd say those are probably the two big areas Datacom chips with the shift between five gene and Hyperscale, that's probably not an area, where we're going to see huge growth because of the wip is with and so I'd say most of it's coming from.
Those two areas and wrote themselves and their cost like Chris you have anything to add on that.
No I mean, I think that the <unk>. The key point really 10 minutes is if you go back pre pandemic, we've we've been.
Preparing if you will for the next generation systems, whether they be 468 hundred gig, whereas the hundred 200 gig system. So that's kind of grown long in the tooth, where where transport products going into those systems have have softened that's why roadms came down.
Late last year, and then obviously the pandemic.
Hi, Bob caused disruption in our ability to supply, where where we're catching up with that and can't really the growth is being driven from a product standpoint across a high end roads and the newest a coherent.
Components from an OEM diversification standpoint.
There's not a lot of new Oems per se out there. So were were pretty well covered I think what what we're seeing though is those new products that are growing typically start in one ish customers, where your lead customer when you're developing designing.
And then proliferate across a broader customer sets and I think as we highlighted in the script that something like the end by end wrote them. This is something that initially started in China and is now proliferate it across a broader set of customers. We anticipate the same thing happening with the.
600, 800 gig high speed coherent components as well as our DCIO modules are providing a broader customer set up for those individual products doesn't necessarily anymore, we're adding new customers per se.
And ladies and gentlemen.
We will only had 110% customer last quarter. So the customer diversification is happening and I think we'll continue to see that.
Sorry, Jamie go ahead.
And ladies and gentlemen, we do have time for one additional question. This question comes from Tom Diffely from da Davidson. Please go ahead with your question.
Oh, yes. Good morning, maybe just one final question on three D. Sensing what is your view of the relative revenue or pricing or margin differences between the standard and these will stay soon component say so.
Not not really much difference I would say that you know this is a a this is a product cycle, where a refresher of all of the chips kind of resets expectation on on pricing and and we've been able to come up the yield and productivity curve is quite strong.
We on both the front facing and World Basin chips.
So I wouldn't say, there's a meaningful difference in margin or revenue per wafer area per se.
Great. That's it for me thank you.
Thanks, Tom.
And ladies and gentlemen, with that we'll end today's question and answer session I'd.
I'd like to turn the conference call back over to Jim Fanucchi for any closing remarks.
Thank you operator this does conclude our call for today, we would like to thank everyone for attending and we look forward to talking with you again, when we report the second quarter fiscal 21 results have a good day.
And ladies and gentlemen, with that we'll conclude today's conference. We do thank you for attending.
You may now disconnect your lines.