Q2 2021 Lumentum Holdings Inc Earnings Call
Good day, everyone and welcome to the momentum second quarter fiscal year, 'twenty 'twenty one earnings call.
All participants will be in a listen only mode.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Kim for Lucky of Darrow Associates. Sir. Please go ahead.
Thank you operator, welcome to lament on the second quarter of fiscal year 'twenty 'twenty. One earnings call. This is Jim Fanucchi from Darrow associates, assisting momentum with its investor relations.
Joining 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.
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 responsive actions there too on our business and continuing uncertainty in this regard trends and expectations for our products and technology are markets market opportunity Inc.
Customers are proposed acquisition of coherent and our expected financial performance, including our guidance as well as statements regarding our future revenues, our financial model and our margin targets. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.
Really the risk factors described in our SEC filings, including the company's quarterly report on form 10-Q for the fiscal quarter ended December 26, Twenty-twenty, which the company expects to file later today and in momentum as 10-K for fiscal year 'twenty 'twenty ended June 27th 2020.
The forward looking statements provided during this call are based on momentum reasonable 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 are non-GAAP non-GAAP financials are not.
To be considered as a substitute for or superior to financials prepared in accordance with GAAP momentum press release with the second quarter of fiscal 'twenty and 'twenty, one results and accompanying supplemental slides are available on its website at www dot momentum dot com under the investors section and includes additional details about our non.
<unk> financial measures and a reconciliation 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.
Before getting into the details of our business results I'd like to make some comments about the COVID-19 pandemic.
There have been a lot of developments since our last earnings call.
We have unfortunately seen the significant impact of the COVID-19 pandemic expand to millions of people around the globe.
Thoughts are with all of those affected and the health care professionals, who selflessly make a difference on the front lines every day.
Fortunately, we have also seen the development and early distribution of affective vaccines.
This gives me optimism that the dark days, we are living through will pass and there is a path to better days.
We thank those who have developed and are now manufacturing. These vaccines that are beginning to protect people.
Well I can't put us in the same category as these lifesavers I'm proud that momentum plays an important role in the critical infrastructure that helps people safely continue their work education and life during these challenging times.
Now onto our business and financial results for the second quarter.
Increased demand in telecom and lasers added to the positive momentum from the prior quarter, resulting in record revenue non-GAAP gross margin operating margin and earnings per share.
For the first time ever we achieved gross margins in excess of 53% and operating margins above 35 per cent.
As pleased as I am with these results and the progress we've made in driving towards our strategic and financial goals I'm as excited as ever about the opportunities ahead.
And they often say the future is truly bright.
Rental.
We are well positioned to grow revenue and earnings into the future.
We believe long term market trends are very favorable.
Also believe there are upcoming growth catalysts in each of our markets the accelerating shift to digital and virtual approaches to all aspects of work and life is scribing staggering amounts of data in the world's networks and cloud data centers.
To meet the challenges created by this digital transformation our industry is poised for a major new technology transitions that we believe are well served by our products and capabilities.
These include higher speed telecom and Datacom transmission solutions in the range of 400 to 800 gig book.
Tonic solutions for five G front haul and backhaul and newer advanced wrote them and other telecom transport solutions.
Peter Vision Revolution that is driving our three D sensing Lidar business is in its early days.
Computational photography, and augmented and virtual reality should drive the expansion of world facing three D sensing across many new smartphone designs and into consumer electronic devices and Wearables.
The increasing use of lidar and in cabin three D sensing and automobile and delivery vehicles significantly adds to our long term market opportunities.
We have made significant investments in R&D and developed a broad portfolio of new products and technologies that address both upcoming and long term growth opportunities.
This has been done in close coordination with our customers and we have obtained many important design wins.
We are now starting to scale up production many of these new products.
We have exited underperforming product lines would have been a drag on future growth.
We continue to lower our fixed cost, thus, increasing operating leverage and profitability as we grow.
Our second quarter results underscore all of these points with strong incremental profitability and an increasing level of new products in the revenue mix.
Two weeks ago, we announced a coherent acquisition, which will expand and diversify our revenue and market opportunities.
A motivating factor for this transaction is the significant role we believe photonics will play across the value chain supporting many important long term secular trends.
For example, this includes the increasing role that lasers and photonics play in the manufacturing of the growing number of advanced semiconductors displays and microelectronics and enable the digital transformation that I mentioned earlier.
Another example is the increasing role of lasers, and photonics and the manufacturing and supply chains are electric vehicles and energy storage solutions.
This is an important and significant opportunity as the world transitions to these sustainable technologies to combat climate change.
The coherent acquisition will expand our market opportunities and fertile new areas for photonics, including in bio instrumentation and aerospace and defense.
It will also strengthen our innovation engine to better serve the customers of today and tomorrow.
In addition to the topline growth opportunities I have outlined we believe there are significant efficiencies and optimizations to be gained in the combination with coherent.
With our proven track record of execution, we are confident the combination will ultimately deliver financial performance consistent with the targets we set forth in our first quarterly earnings call last November.
I look forward to a timely completion of this transaction and the welcoming of the talented employees of coherent to build momentum team.
For the future is truly bright elemental I believe it will be even brighter with the addition of coherent.
Now on to more details about our second quarter.
Telecom and Datacom revenue grew 10% sequentially and 7% year on year.
Excluding revenue from the low margin product lines, we have divested or discontinued telecom and Datacom revenue grew 17% year on year.
The largest contributors to growth in the second quarter were wrote them high.
High speed 608 hundred gig indium phosphide coherent components desio modules and submarine products.
Late in December one of our contract manufacturing partners in Malaysia temporarily suspended production implement measures to protect employees from COVID-19.
This impacted second quarter revenue by approximately $6 million.
In telecom, we continue to see our revenue mix shifting toward new products aligned with our customers' next generation systems.
In the second quarter, we further ramped for energy and higher speed transmission solutions and we qualified several new wrote them designs with major customers in the west and in China.
To this last point, we began shipping a complex twin M by in rodent blade with other integrated functionality to a major western customer for new web scale and other network deployments.
As I mentioned earlier, the telecom and Datacom industry is poised for a transition to next generation networks, we anticipate strong growth in the coming years as network operators deploy 400, 608 hundred gig systems with new integrated transmission solutions and wrote ups, we believe.
This upcoming telecom technology upgrade cycle has been delayed by COVID-19, which should start to accelerate as global vaccinations increase overtime.
And our Datacom chip business as expected five D front haul weakness in China impacted second quarter growth.
Cloud demand remains very robust.
Last quarter, we adjust for wafer starts to better align with this new demand mix and expect to grow into the third quarter.
We have a large and growing multi quarter backlog.
Market dynamics are favorable with increasing volumes and transitions to higher speeds, where we have very differentiated products.
Revenue from high speed Pam for emails has nearly doubled from year ago levels.
And we recently introduced a breakthrough 53 gigabyte amcor demo as customers seek even more cost effective solutions to accelerate for Hunter G growth and future eight energy applications.
Our wafer fab expansion plans are on track with meaningful capacity additions coming online later this calendar year.
Looking to the third quarter, we expect telecom and Datacom revenue to be down sequentially due to seasonal factors and the anticipated timing of new end customer deployments.
Industrial and consumer revenue declined modestly quarter on quarter.
We believe we have a larger three D sensing opportunity this fiscal year compared to the last but it will be spread out more broadly in time.
As such we expect a lower seasonal decline in the third quarter compared with prior years.
Within industrial and consumer the contribution from industrial is now approximately 5% about half of where it has been over the past several years.
This has been driven by a transition to selling chips versus modules.
We are optimistic about growth in the three D sensing market in the coming years.
We believe the introduction of five G is driving an accelerated smartphone upgrade cycle.
New applications, such as computational photography, and augmented and virtual reality.
Potential to drive world facing three D sensing capabilities more broadly, especially across the Android customer base.
We are working closely with major Android customers on world facing <unk>.
Three D sensing capabilities for their future products as they seek to differentiate their offerings.
We believe our experience and leadership and current high volume world facing deployments positions us very well with these customers.
We believe new customer devices, and Wearables that may reach the market in the coming years will benefit from three D sensing capabilities and will drive additional market growth.
Adding to this customers in the security and access control market are looking for three D sensing to enable higher security and touchless contactless solutions.
The increasing importance in a post COVID-19 world.
Lidar and three D sensing for automobiles and delivery vehicles add significantly to our long term market opportunities.
We believe our unmatched and invaluable photonics experience spanning three D sensing communications and industrial lasers gives us a competitive advantage as we pursue these new opportunities.
We are closely engaged with a wide range of customers.
These include autonomous and delivery vehicle manufacturers.
Major tier one auto suppliers.
And lidar solution providers.
During our second quarter, we completed a number of design wins, some of which are targeting startup production during calendar year 'twenty two.
In addition, we have many other customer engagements that are in various stages of qualification.
Turning to commercial lasers revenue grew 24% quarter on quarter.
A larger contributor to growth was micro materials processing, including <unk> applications.
We expect laser growth to continue into the third quarter.
While we believe that it will take several quarters before we get back to the revenue levels. We saw in fiscal 'twenty. We are cautiously optimistic that we have seen the worst of the impact from COVID-19.
Laser's gross margin also grew quarter on quarter to 47 five per cent.
We believe we are a leader in the laser industry on this metric, despite having significantly lower scale and larger industry players.
We believe this is because we have unique design and manufacturing experience and capabilities learn from our many years of leadership in the photonics market.
We expect to leverage this experience and these capabilities when we are able to combine with coherent.
Throughout my remarks, I've highlighted how we were well positioned for continued top and bottom line growth over the next several years.
We have made significant investments in differentiated new technology and products for new customer programs attained.
Attained many key design wins and are on track for more.
And each of our markets there are significant catalysts for growth.
We have a new generation of telecom and Datacom solutions and customers, who are poised to ramp them.
We have the expansion of world facing three D sensing and mobile devices, and Wearables and emerging lidar applications further add to our market opportunity.
The broader laser market, we address is recovering from the impact of COVID-19.
And we will benefit from this and additional growth driven by differentiated new products.
We have exited underperforming product lines that would have been a drag on future growth.
The coherent acquisition brings a significant opportunity to create a larger more diverse photonics technology company.
One with leading capabilities well aligned with many important long term trends and financial performance consistent with the targets. We previously set for momentum.
Before handing it over to watch Ed to review the numbers I want to thank and acknowledge all of our employees around the world.
They have been incredible, especially so working through the pandemic.
Our employees are absolutely the company's greatest assets.
I would also like to thank our customers suppliers and shareholders for their 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 second quarter's numbers net revenue for the second quarter was 478.8 million, which was up 6% sequentially and 5% year on year.
GAAP gross margin for the second quarter was 48% GAAP operating margin was $24 one per cent and GAAP diluted net income per share was $1 six.
Second quarter non-GAAP gross margin was 53, 4%, which was up 140 basis points sequentially and up 600 basis points year on year.
The sequential and year on year growth was driven by improved gross margins in both the optical communications and laser segments.
As Alan highlighted this record gross margin performance demonstrates the improvements we have made in our financial model.
Second quarter non-GAAP operating margin at 35, 5% increased 180 basis points sequentially and 670 basis points year on year.
These results were driven by gross margin improvements at the operating expenses have increased due to increased investment in new capabilities.
Second quarter non-GAAP operating expenses totaled 86 million or <unk> 18 per cent of revenue.
SG&A expense was $38 2 million R&D expense was $47 8 million.
Second quarter non-GAAP net income was $155 7 million. This includes 200000 net interest and other income and $14 4 million of tax expense.
Other income was 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 was $1 99 based on a fully diluted share count of $78 4 million.
On the balance sheet, we ended the quarter with $1 $7 billion in cash and short term investments up $90 million quarter on quarter.
We have $1 $5 billion in 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.
Turning to segment details.
Second quarter optical communications segment revenue at $449 1 million increased 5% sequentially due to growth in telecom and Datacom and 10% year on year due to higher telecom and Datacom and industrial and consumer revenues.
Optical communications segment gross margin at 53, 8%.
<unk> 130 basis points sequentially, primarily due to higher wrote them volumes and improvements in manufacturing efficiencies and 580 basis points year on year due to a more favorable revenue mix improved telecom and datacom margins and synergies.
The Oclaro acquisition.
Our laser segment revenue at $29 7 million increased 24% sequentially, but remains 39% down year on year due to COVID-19 impacting demand.
Second quarter lasers gross margin increased to 47 five per cent.
Due to an increase in manufacturing volumes and mix favorability.
Now onto our guidance for the third quarter of fiscal 'twenty one.
Please note the outlook, we're providing is on a non-GAAP basis and is based on our assumptions as of today.
We expect net revenue for the third quarter of fiscal 'twenty, one to be in the range of $425 million to $440 million.
This revenue projection includes telecom and datacom declining sequentially due to seasonality and the timing of end customer deployments.
Industrial and consumer declining due to seasonality and.
And commercial lasers, increasing quarter on quarter, driven by further market recovery from COVID-19.
Based on this we project third quarter operating margin to be in the range of 27.5 to $29 five per cent and diluted net income per share to be in the range of $1 31 to $1 46 at the midpoint. These projections incorporate an approximate $6 million increase in operating expenses.
Primarily related to the annual reset in payroll tax and benefits rates, new hiring and the additional payroll expense associated with our 14 week quarter D.
These projections also assume an approximate share count of 80 million in estimated other expense of <unk> 8 million and an estimated tax expense of $12 million.
During our first quarter earnings call last November we provided a new target model for the company.
While our second half fiscal 'twenty, one performance is still expected to be below the target model due to seasonality.
Given our first half performance, we believe we will meet or exceed our gross and operating margin targets for the full fiscal year.
With that said I should emphasize that we intend to grow our investments in R&D to lead the market and in innovation.
And to expand our long term market opportunities as Alan highlighted earlier.
With that I'll turn the call back to Jim to start the Q&A 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 this should help us get to everyone before the end of our allotted time, operator lets begin with the question and answer session.
And ladies and gentlemen, once again, if you would like to ask a question. Please press star and then one to withdraw your question you May Press Star and two if you are using a speaker phone. We do as you. Please pick up the handset before pressing the numbers to ensure the best sound quality.
But again that is star and then one.
Our first question today comes from Thomas O'malley from Barclays. Please go ahead with your question.
Good morning, guys. Thanks for taking my question and congrats on the nice margins here I just had a question on mixing the topline you started this year out talking about how this year December could be seasonally the peak for your largest customer in and diving into the results here. It looks like that might have even come down from the September quarter can you just describe what's going on there or is that something.
About pre build of units or is there a bit of a shift in some share any details there would be helpful.
Yeah.
Hey, Tom This is Chris certainly.
I think obviously when we go into a you know the first quarter. This was a different.
Situation, given what was going on in the world with Covid and.
And <unk>.
Shutdowns in Asia, and then ramp back up.
But certainly we feel we are and I'm not quite sure. If we can comment on any pre builds per se, but certainly we shipped a lot of product in the September quarter.
And the end customers products, where we're not available to customers until after that so certainly there was some.
Some loading up if you will and then secondly, obviously the elephant in the room is around what is our share and and we.
You need to believe that we maintain a very healthy share with with our.
Top customer, having said that certainly we anticipate competition coming along and and perhaps.
There is.
From increasing.
Share loss happening in the December quarter, but certainly we think nothing.
Nothing that impacts.
The overall.
Strong position, we have with that customer.
That's helpful and then on the follow up obviously on the gross margins as well the strong performance in December is indicative of some some strength in the telecom and Datacom core business can you talk about what drove that you you indicated some increased <unk> sales and then you also talked about.
You know a western customer coming on is that something that's going to increase that gross margin profile as well going forward and is this higher rate kind of sustainable as you go through the end of your obviously you commented on hitting that fiscal year target, but just anything on the margins going forward at this higher rate. Thank you.
Yes, Tom I'll give you my thoughts and then let wajid.
<unk> kind of correct me, but I would say that the if you look at the mix in the in the quarter, our chip business actually was down and our margins went up and so that is indicative of gross margin improvement in our lasers that we talked about but as well on our telecom.
Mainly due to significant growth on the topline from transport, which includes our wrote them and so we had a good wrote them a quote.
And I think it's about D.
Differentiated products and that's why we're going to continue to invest R&D dollars to give customers the value proposition, so they're willing to pay and give us those kinds of margins and that's really what happened from my perspective, why did you want to add to that.
Yeah, I mean, if you Thomas if you take a look at you know our comments at the beginning of the quarter. We had said that are you know, we're coming up with a new business model of 50% gross margins from 30% operating margins and at that point in time based on how we thought the full fiscal year was going to go we did not think we were going to achieve that.
At model and we have set that more as a mid term model and from our from our script. Today you can see that our expectation now is that we will either achieve or exceed that model for the full fiscal year. So certainly you know things have trended better for us whether that'd be the new products that Alan just spoke about.
Or whether it's our ability to continue to lower our fixed cost within our manufacturing facilities as well as quite frankly, the uptick we've seen in our lasers business also helping the overall operation. So like Alan said, despite the chip business coming down a little bit we've been able to maintain gross margins.
And give confidence for a full year as well.
And our next question comes from Alex from Needham from Needham <unk> Company. Please go ahead with your question.
Oh I didn't know I was Anita.
That's a new one.
Okay. Thanks, guys.
[laughter] yeah.
Great stuff.
I wanted to go back onto the three D sensing because it seems to be a you know a lot of anxiety around the competition there.
They're.
There is a for.
Thought process are coming from some people that are perhaps.
You might have overreached, a with respect to.
Your allocation and market share and pricing are with your primary customer in that price may be under more pressure or share losses, maybe a.
A little steeper as well.
One of your primary customers rains in the the outlook on that front can.
Can you comment on whether any of that has validity or whether that.
Ah is an overstatement or how are or should we be seeing.
Seeing a meaningful change in you know your your share allocation.
And in that context do.
Do you expect over calendar 'twenty, one to be maintaining them.
Gross trajectory in your three D sensing business.
Yeah Alex.
I think you know as far as share is concerned it's hard to tell where we are I would say that our focus.
Is to really make sure that we continue to be the design house for not just our leading customer but for all of our three D sensing customers and I would tell you that the team is focused on allowing our customers to get to market with differentiated products like the world facing debt, we are ramped and shipped a lot of those.
And that's in and doing quite well, so as far as share commitments and pricing I'm not going to comment too much on that other than to say, we do have long term agreements in place debt. We know what our share is going to be at a minimum and we believe we're getting significantly more than that.
Actually as we ramp new products because of our leadership position, our ability and proven track record of ramping new products.
Chris do you have anything to add on that.
No I think you've covered it well Alan I mean, I think certainly debt as we look ahead. The computer vision Revolution that this three D. Sensing plays into is in its very early days, so as we look out to calendar.
Calendar 'twenty, one or our fiscal 'twenty two.
There's there's plenty of growth catalysts in three D sensing.
Proper and then then obviously at least in our our vernacular we're wrapping lidar in our three D sensing business unit, we've got world facing.
Capabilities has as you know.
Emerged in our top customer and and really driven by price.
Photography applications and that's been a killer app for smartphones for the past decade, and we have a lot of engagement and traction with Android customers, who need to have that capability in order to have that.
Top notch world class camera going into their future product cycles, then you have things outside of phones, and whether they'd be wearables or other devices that will ultimately incorporate three D sensing and as Alan highlighted in his prepared remarks.
You know the automotive ramp of Lidar is in its very early stages, we've got design wins things that should start.
Levels of production in calendar year 'twenty, two so I think there's a a long growth.
Our growth trajectory and our three D sensing business, whether that's calendar 'twenty one.
But out into calendar 'twenty, two and beyond.
So is that a yes, you expect a growth.
You know.
And three D sensing in calendar 'twenty one.
Absolutely.
The second question.
It's really on the Android side, obviously the high end.
Apple products have done much better than anybody would have expected.
Clearly the photography Apple in particular was a key piece of debt.
There was a discussion in the prior quarter that.
Android go manufacturers were worried about Covid and therefore, we're shifting more of their focus to the lower end of the margin are there other product line and therefore were slower to adopt.
World facing and some of the additional technologies are implied.
Has that shifted as a result of the significant success at the high end of the market that ample experience.
Yeah, Alex I think whether it's shifted or not I think we've been engaged with the all of the Android suppliers.
On world facing.
Products and I guess, the flurry of activity has increased some but until they they announced a product or until they have a plan of record that includes <unk>.
World facing three D sensing, it's not plant as part of the plan of record and so our anticipation is debt later this year, we'll start seeing that in a more meaningful way and that's why we're very confident that calendar year 'twenty two we'll see expansion beyond our lead customer into the Android World.
Okay.
And our next question comes from meta Marshall from Morgan Stanley. Please go ahead with your question.
Great. Thanks.
I wanted to ask a couple questions. One you know clearly that the telecom business is doing quite well.
But just with one of your major customers P&L kind of expecting a second half rebound in their business just the timing of when you might see some further uptick in the telecom business from resumption from major customers and then the second piece is you know clearly the D. C O business is doing.
Quite well as you noted in the transcript.
With the Acacia transaction closing is there any expected disruption to that partnership where you would expect that to continue for the D. C. L D.
Thanks.
Yeah, Hi, Yeah, I'm not going to comment specifically on.
A specific customer because I get in trouble for doing that but I will say as we said in our in our on our script that the new generation of products from 406 hundred 800 gig and our next generation wrote them. Those systems have been designed by our customers and they're waiting to be deployed and the only thing.
Back then from being deployed is is being able to get on planes and install these new things that take more effort than adding more of the old stuff and so as we at least my view on things is as we see vaccinations, becoming more prevalent across the globe, we think that things will pick up.
And we will start seeing in the second half for the year those deployments.
Becoming more meaningful and we're poised and adding capacity in anticipation of that so I think.
Our our our sentiment is that the second half for the calendar year, we'll see.
A big deployment of for 600, 800 gig and high end wrote them for those next generations of systems to handle this the digital transformation of our what's going on in the world. So.
But that that outlook is pretty strong as far as D. C. O's are concerned as I said in our conference and in the script we saw it.
Significant growth from our D C O product.
We're doing a lot of design work now on our 400 gig D. C O I don't think the acquisition of <unk>.
Acacia has any impact on that other than to say that our customers don't want to be.
Beholden to a competitor of theirs and so I'd say, we've probably seen more traction over the last six months than we've seen in the past for.
We're having an independent supplier of D C O modules in the market.
I think both from both fronts, where we're optimistic.
Great. Thanks.
And our next question comes from Amit <unk> from Jpmorgan. Please go ahead with your question.
Oh, great. Thanks for taking my question I, just wanted to start off firstly on the automotive lidar opportunity and see if you can talk about what are you seeing in relation to how the automotive lidar supply chain is developing I'm. Just curious because you mentioned, you're working with the Oems as well as some of the lidar solution provider.
Oh, how critical should we think low income IP and design capabilities are or is it an opportunity for us on the lidar solution providers to kind of.
Have their own design and work with contract manufacturers directly and I have a follow up thank you.
Yeah. Thanks, that's a great question, yeah, So I would say that the.
Value momentum brings to to lidar.
In the automotive space in General is obviously the leadership, we have in both three D sensing and telecom.
And at our industrial our commercial lasers business, we bring a wealth of capability and technology.
To bear and our strategy and goal is to be a partner of all the folks.
Building, a light or whether that be I think you know that the lidar solution providers. If you will to folks that are building modules or the folks that are actually putting lidar into their automobile applications and today you know what's exciting about this opportunity obviously is one.
For the long run it's it can be very significant with.
Base number of say 100 million or at least the order of 100 million vehicles that are produced every year.
Yeah, just just having perhaps at the for laser chip level tens of dollars of content are at the module level hundreds of dollars for content for automobile adds up to a pretty big market and what we see today in terms of the supply chain is is is very is very because theres a lot of.
New players are in this and.
It's very transformational for for the automotive industry, new technology that not not necessarily.
The traditional auto manufacturers auto suppliers.
Be clear cut leaders and so what I would say is our partnerships spanned from traditional auto manufacturers to autonomous vehicle manufacturers to folks that are building a lidar modules then supplying into those same supply chains and in the nearer term perhaps.
<unk> the delivery vehicle autonomous vehicle is where we're seeing.
I'm not sure that the most traction, but probably where you'll see the initial.
Sales go into because they're able to move a little faster.
And in ramp a little more quickly, whereas the debt the consumer or passenger vehicles. If you will that you are I would drive or hopefully not driving sit in led to drive itself are a little longer term.
But.
Probably the larger opportunity and those get rolling you know probably a couple of years. After the start of the autonomous vehicle land and a delivery vehicle applications.
Got it that's really helpful. Chris if I can just follow up on.
The Datacom side I think you talked about Tom talked about the five chi from call. It a demand moderating in China.
How should we think about your capacity plans I think you had outlined doubling capacity on the Datacom chipset side.
Still kind of on track to do that given some of the moderation in demand and then what are the broader implications here for the Telecom group and should we expect to see some softness in telecom.
Broadly gosh seeping through the weakness you're seeing in China and G. Rollouts.
Yeah I think this is Alan.
What we said in the last call was that we've seen a slowdown or a pause in the deployment of five G and I think leading up to that period of time, there was a euphoria of five G rollout and so I think that we're kind of going through.
Some inventory burn of.
Datacom chips and five G that or are being deployed now in radio base stations are being deployed in China, just to a lesser degree than we had expected.
You know at the end of last year that said I think that debt there will be a significant amount of radio base stations as a ship in China are very significant and we will start seeing the five G picked up as debt inventory drops off that said that the hyperscale demand is very strong and where you have very differentiate.
Products in both our emails and what I've talked about on the D. M. L 53, gigabyte and so we see a lot of traction as hyperscale or moving to that higher speed Datacom transceiver utilizing our state of the art emails and now D. M L and so I think we're optimistic.
For the debt the demand as that capacity comes online and so from I think it was two quarters ago. We said, we're going to double the wafer capacity and we're on track to do that later this year and we think it'll be consumed as well because we do have it.
We do have a growing backlog of multi quarters and so we do have a demand that we need to satisfy and as we bring on debt capacity, our datacom business for Ram Chris you want to take that the telecom part of that.
Yeah, I mean, I don't think we don't think the same factors that are driving that are set for <unk>.
Softness in China, five G are necessarily driving a slowdown.
In Telecom in fact, I think as Alan said that the five D was very aggressive upfront as China set national goals around a base station deployments et cetera.
I think that the telecom guys are just trying to keep up with that debt.
Very strong pace and you know that the telecom market I think.
And earlier had asked about it being very strong day I'd I'd counter with its its mixed today that we've had over the past year.
Year, some areas of strength certainly in some of the D. A C O N and our 100 gig solutions, but wrote them said.
Slow over the past year, and we saw that pick up this past quarter I'm getting back to sort of like a two year ago levels.
He will and so you know that the telecom market, we believe as Alan highlighted in the prepared remarks is really prepared to take off for accelerate once the.
Yeah.
World is able to travel and get out and install these D SNP networks.
And.
Five key challenges that are happening in China. We believe are just just temporary in nature that debt.
Theres still a lot more to go in China.
And there'll be a lot of telecom deployed in China outside of China to support for <unk>, that's going on globally.
And our next question comes from Rod Hall from Goldman Sachs. Please go ahead with your question.
Yeah, Hey, good morning, guys. Thanks for the question I wanted to start off with the $6 million says manufacturing push and just double check that well for one thing it sounded like Alan that was in telecom, but also is that in your guidance. So that you expect to get to 6 million back in the guidance and I have a follow up.
Yeah. It was a telecom and you know whether it's some of that demand went to other suppliers are not is not clear I'd say that from you know certainly on the ACO where are we.
Which as you know.
Part of that debt just moved into the Q3 guidance and so yeah.
Yeah. Whatever we think is is is not gone to other competitors is contemplated in our guidance.
Okay. So its something less than the 6 million Alan yeah to be clear I guess, yes, okay.
And then the second thing I wanted to ask about was I just wanted to come back for the coherent deal.
One other things that it looks to us like there's definitely manufacturing overlap at least in some places I'm curious if the synergies you guys had talked about contemplate consolidation and manufacturing or is it still too early to is thought through all that in detail.
That's still a possibility down the road.
Yeah, we have a synergy target that we talked about two weeks ago, and we said that two thirds of that will come from Cogs.
We have we have to get through the integration planning process to really critically.
Pinpoint the plans to get those synergies I mean, some of them will come from supply chain. Some will come from manufacturing overlap to your point, but the details of that still needs to be worked out as we get closer to that integration planning phase of the deal.
I think my excitement around the coherent deal is around getting the the combined larger company to the model that we talked about earlier, but it's also about putting two incredibly talented teams together to accelerate the innovation engine because photonics is really playing a key.
And a lot of the long term megatrends and I think the car.
Combination of the two companies really puts us at the forefront of that.
Great. Okay. Thanks, Alan I appreciate it.
Thanks, Ron.
And our next question comes from John Marchetti from Stifel. Please go ahead with your question.
Thanks, very much I just wanted to follow up Chris on some of your comments around the Rotem business, particularly with the outlook in China as we're looking out here over the second half of the fiscal year.
You mentioned some of the strength with the new western vendors and some other new wrote a business there curious.
How that business is now trending in China, and how we should think about that as a contributor on the telecom side looking out in the second half for the fiscal year.
Yeah. So I think as we've talked about in prior calls debt that China has historically not been a deploy your if you will of wrote them from their domestic networks and we continue to believe that they will transition to that and that is driving strength in our outlook with with a broad.
Swath of our customers in China, So, we do expect that to contribute to growth but to be clear.
We also expect our western customers to grow quite strongly in wrote them wrote them as our.
Sort of the you know debt essentially.
Shall element along with optical amplifiers that go in brand New network deployments.
And we expect new telecom networks to go in globally, So China and in the West you know whether that's starting in the second half for this year, but.
For this calendar year, but certainly.
It is a multi year.
Upgrade process in both geographies, the west and the east.
Thanks.
I guess, just as a quick clean up for that can you guys talk at all about maybe where Huawei was in the quarter and if there's any change to your outlook on them relative to what you gave last quarter as our kind of outlook for the second half of the year.
Yeah, no problem, John So last quarter.
Or at least on last quarter's earnings call back in November given given there was a change during the quarter and in August with the regulations, we have provided a bit more commentary around our business on our business with Huawei and we indicated that a well.
Well sales would decline quarter on quarter be less than 10% of total sales. That's that's what happened in consistent with our commentary.
We continue to believe that our sales to Huawei in fiscal 'twenty, one will be down from our sales in 'twenty, given given the dynamics around that situation.
And our next question comes from Simon Leopold from Raymond James. Please go ahead with your question.
Thanks for taking the question first.
First thing I wanted to see if maybe you could help us understand is how your mix is between world facing and in front facing in the three D sensing.
Specifically, you you've talked in the past about.
Hum, having better share in world facing if you could elaborate on that and whether or not you're starting to see Android trickle into the mix on the world facing and then I've got a follow up.
Yeah.
Thanks Simon.
As with any new product launch our expectations or do we have a and maintain a large share of that given.
Our proven track record to our customers and so I'd say that to your point our world facing share in the December quarter was quite large relative.
Relative to share.
Share of prep.
Current pace, but that's all speculation and I think it's best to ask our friends are next week as.
As far as Android, it's still very small.
And but but optimistic about the future and I think I'd say that because the level of activity around world facing.
And to Chris's earlier point around computational photography is is got a lot of traction and given.
Given that our leadership position on world facing a production volume quality reliability.
We feel that we're in a good good position with all of the major Android suppliers and we expect as I said earlier to see some.
Design wins in records of putting world facing into those devices later this year.
Thanks, and then just as a follow up wondering if maybe you could offer us a timeline.
When you would think the lidar opportunities could become material in and I'm really not looking for something by quarter I'm thinking by year, but but maybe help us think about the trajectory of how you envision that opportunity materializing. Thank you.
Yes, Simon this is Chris so.
Kind of as we said earlier that the calendar 'twenty. Two is really went up I think we'll see.
First.
Startup production I mean, certainly we are we are shipping.
Samples or or very moderate volumes into niche applications for for lidar, but until we get out into calendar 'twenty. Two is when we start to see a more meaningful revenue and with that said.
This is a market that are not quite like the consumer electronics market, where where theres a whole heck of a lot of revenue.
Can be generated in a year because of the model the turnover and customer models. The auto industry, we expect it to be a multi year.
To evolve I'm kind of on the S curve, if you will.
But I think as we look into calendar 'twenty two.
The opportunity starts to become more meaningful but it will take several years to get up to the kind of levels that I talked about with D. A.
High penetration of that 200 million vehicle units per year.
And our next question comes from George Notter from Jefferies. Please go ahead with your question.
Hi, guys. Thanks, very much I guess I wanted to follow up on the Huawei discussion if we go back.
For a quarters ago. It was the whole Huawei situation was flaring up we talked about.
A safety valve of sorts.
In this business and the idea was that.
You could ramp other western vendors.
In terms of your sales and I think also you talked about how your dollar content with higher in some of those other vendors.
You know products relative to Huawei, So I guess, a few quarters on now I'm wondering if you're seeing that shift to other Oems in your business and any flavor you can give us for that would be super helpful. Thanks.
Sure George Yeah, as we said in the prepared remarks.
We've started production qualification of a western company with M by and blade with other functionality that we expect to ramp up meaningfully.
If you go back in time.
Huawei was an early adopter of that leading edge technology that is now going more broadly across the western customers of ours and you know.
As we look forward to win when people can deploy these new networks and for six to 800 gig in and buy and wrote them I think we're optimistic that that that demand.
We'll ramp up.
And be able to really see meaningful growth in <unk> and high speed transmission products.
Great. Thank you.
Thanks George.
And our next question comes from Ananda.
For off from loop capital. Please go ahead with your question.
Hey, Thanks, guys appreciate the questions.
Hey, just two if I could the first is on zone three D sensing.
Alan are you mentioned sort of a minimum and maybe this is why jade, but it was mentioned.
Minimums in the longer term share in the luggage from agreements does that also include minimums for pricing.
And then also along with that I think it was nation from Pedro March seasonality spread more throughout this year through calendar 'twenty for it for that three D sensing growth.
A clarification there and then I have a quick follow up on telecom. Thanks, guys.
Sure I mean customer agreements, we don't get into a lot of details, but certainly in order to be committed to share they're going to be wanting to be committed to price and so from that perspective, you would imagine that most of our contracts if not all of our contracts have committed share in a committed price for some duration.
The comment around the seasonality spread was around.
Historically, we saw between the December quarter and March quarter, more dramatic drop off and then again in the June quarter, even more and we're saying that in the March quarter, we're not seeing that much of a dramatic drop off as compared to prior years, you know looking forward into June.
June is usually where the drop off.
<unk> is more significant and as new models get ready for for the shelves in the September quarter. So that was really the intent our fiscal year 'twenty. One we believe that our opportunity in our revenue for three D. Sensing is going to be bigger than fiscal 'twenty.
And it's going to be more broadly spread out and so that's what's contemplated in our guidance for the March quarter.
That's super helpful. And then just quickly on telecom really five D dynamics in China.
You know when the stuffs Huawei really kicked in in the new way in the fall I think the conversation was around.
Over and over a number of months the shifts from Huawei to other folks in China, what sort of level out the dollar opportunity. There can you just give us an update on <unk> do you think that still is the case inside of China, eventually and what do you think that could begin to occur.
Yeah, you know we have we have a lot of traction with other Chinese.
So customers of ours outside of Huawei I.
I think it's gonna take considerable time, given the size differences between Huawei and China and the rest of China suppliers in China now our expectations is that those other companies continue to grow and our traction with them is very strong so I.
I don't know, if it's quarters or years, but I think from that perspective, we do have higher share of wallet I would say outside of Huawei with other Chinese customers as well as western customers. So yeah for win share moves from a Huawei network to another.
Player network.
We believe that's a tailwind for us.
And our next question comes from Ryan Koontz from Rosenblatt Securities. Please go ahead with your question.
Hi, Thanks for the question I wanted to circle back on your comments on a robust outlook for Hyperscale.
I Wonder how you for contemplate the impact of ZR there and.
As that starts to ramp late in the year and the impact 'twenty. Two if you could comment on your proceed market position. Thanks.
Hey, Ryan this is Chris So I guess, when we made our comments around robust hyperscale demand I think at least for context in the prepared remarks was around within the data center. So the chips that we supply to folks building transceivers.
Whether that's 100 gig all the way up to now are increasing at 400 gig and for US demand is really strong given our differentiated products, particularly as you go to 200 gig 400 gig and beyond.
When it comes debt comes to Z or at least in our way of classifying products that would be a telecom product outside the data center and certainly that's something that we are we are pursuing developing it plays in the sweet spot given our photonic.
Photonic integrated circuit capabilities based on the indium phosphide platform.
That we are.
Really what was accelerated with our acquisition of a claro. So that's definitely a product debt you know.
We have we have high hopes for as well as other indium phosphide based products, whether that's a higher performance versions of CR ZR modules from the ZR plus or D. C O modules.
All based on our indium phosphide photonic integrated circuits.
Thanks, Chris I mean do you feel like you are engaged in some of the kind of early design cycles, there or is that something you'll pick up.
C as a kind of a round two.
I would say certainly we are we have a long term relationship with all the relevant to customers and so we are engaged with them.
In.
Ensuring that we have the right product the right stacks and and that are you know we have a seat at the table as they allocate commercial business so absolutely.
Understood. Thanks, a ton.
Thank you.
And ladies and gentlemen that is all the time that we have for today I would now like to turn the conference call back over to Jim Fanucchi for closing comments.
Thank you that does conclude our call we would like to thank everyone for attending and we look forward to talking with you again, when we report our third quarter of fiscal 'twenty. One results have a good day.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.