Q3 2021 Lumentum Holdings Inc Earnings Call
Good day, everyone and welcome to the momentum holdings third quarter fiscal year 2021 earnings call all.
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At this time I'd like to turn the conference over to Jim Fanucchi of Darrow Associates. Sir. Please go ahead.
Thank you operator, welcome to the momentum third quarter of fiscal year, 2020. One earnings call. This is Jim Fanucchi from Darrow associates, assisting with 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 Ann.
Chris Coldren, senior Vice President of strategy and corporate development.
Today's call will include forward looking statements, including statements regarding the markets in which we operate 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 and customer.
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, particularly the risk factors described in our SEC filings, including the company.
The quarterly report on form 10-Q for the fiscal quarter ended April three 2021, which the company expects to file later today. The forward looking statements provided during this call are based on momentum reasonable beliefs and expectations as of today momentum 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 third quarter of fiscal 2021 results and the accompanying supplemental.
The slides are available on its website at Triple W. Lou bathroom dot com under the investors section and includes additional details about our non-GAAP financial measures and the 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.
I'm on the per se, our thoughts and prayers are with everyone affected by the continuing COVID-19 pandemic.
Well vaccinations in case rates are declining in the United States and a few other countries in many places around the world. The situation is not good.
What is happening in India is absolutely heartbreaking again, our thoughts are with everyone affected.
Turning to our business, our third quarter results highlight a product portfolio increasingly rich in new and differentiated products aligned with favorable long term multi year market trends.
Revenue from key new product line that position us well for long term growth were each up by double digit percentages year on year.
These include indium phosphide based coherent components and modules next generation contention with M by an rote of ice.
High speed emails.
And three D sensing lasers.
Non-GAAP gross margin expanded by 440 basis points year on year, driven by continuous improvements in our operations and product mix.
The accelerating transition to digital and virtual approaches in all aspects of work and life is driving staggering amounts of data and the world's networks and cloud data centers.
The proliferation of five G wireless will remove bandwidth bottlenecks at the edge of the network and drive even more bandwidth in the core networks.
And cloud data centers.
The computer and machine vision revenue.
<unk> are in their early days and we expect three D sensing in light of our capabilities will expand many more applications in multiple markets.
These include augmented and virtual reality.
<unk> machine vision for industrial applications friction.
Frictionless, and contactless biometric security and access control and automotive and delivery vehicle applications.
Laser based material processing is critical to the manufacturing of the devices that enable the digital transformation and transition to <unk> wireless and electric vehicles and energy storage.
These multiyear trends combined with our product and technology leadership positions bode well for us over the long term.
Recent discussions with market, leading customers gives me optimism.
Customers have communicated that they are seeing growing end market demand for their next generation solutions, where we have a wide range of design wins with highly differentiated products.
Now it's about translating this growing end market demand the shipments and revenue.
On this point like others, we are seeing headwinds that may moderate near term market growth in telecom and <unk> related components for the remainder of this calendar year.
We believe the telecom and five G components market will reaccelerate midway through our fiscal year 'twenty two.
These views are driven by the combination of the tight supply of critical semiconductors that we and our customers depend on.
Customer inventory build in anticipation of strong end market demand.
And potential delays in deployment in certain geographies more impacted by COVID-19.
We expect the lasers market recovery to continue and our business to return to pre pandemic levels by the middle of fiscal 'twenty two.
And three D. Sensing, we believe the net impact of certain customer design decisions will reduce the overall global market for three D sensing lasers in fiscal 'twenty two.
The approximately 20 to 25 per cent.
We expect laser based sensing to expand to more applications customers and markets in fiscal 'twenty, two and 'twenty three setting the stage for reacceleration of market growth in fiscal 'twenty three.
As well our product Roadmaps include new designs for the future, where we integrate additional functionality to help customers further reduced size and their cost of incorporating <unk> sensing capabilities, while allowing us to capture more dollar content over time.
At this time, but in these market trends supply constraints and customer forecast together, we expect our revenue for the first half of fiscal 'twenty two to be down approximately 5% relative to the first half of fiscal 'twenty one.
These near term external market headwinds do not diminish my optimism around our long term multi year market outlook.
Product portfolio of design wins, and the positive changes in our business model and the industry over the past several years.
I believe the future continues to be very bright and momentum.
Turning to capital allocation, we are disappointed the coherent transaction didn't turn out as we had initially hoped.
We continue to believe strategic M&A will be a value creator for the momentum over the long run.
We will be thoughtful in our approach and timing.
That said, we believe very strongly in our organic opportunities for value creation.
From a capital allocation standpoint, after analyzing alternatives, we believe investing in our own stock is currently our best opportunity.
As such momentum the board of directors has authorized the share buyback program for up to $700 million over the next two years.
Now onto more details about our third quarter.
Within telecom and Datacom revenue from indium phosphide based coherent components of modules was up 28 per cent year on year after adjusting for the extra week of the recent third quarter.
We had strong rhodium revenue with record contention list and buy in sales.
These products are increasing in our revenue mix due to the incorporation in our customers' latest systems, which they are just starting to ramp.
The average selling price of these the dance rhythms are significantly higher than the lower port count devices.
This will help us accelerate revenue growth as new network deployments increase over the coming several years.
In China, we are already designed at the every major network equipment manufacturer or NIM with her and buy in or high Port Count wrote them.
On our last call, we highlighted production shipments of M by an rote of them to our largest western customer.
And in the third quarter, we started production shipments to our next largest net customer in the west.
We are designed in.
And final qualification stages with many other customers with our latest advanced wrote them.
Revenue from emo chips was up more than 40% year on year again adjusting for the extra week in the recent third quarter.
These products serve the cloud data center market, which is increasingly transitioning to 204 hundred gig speeds.
At these higher speeds our products are highly differentiated.
We expect this differentiation will drive market share gains with non vertically integrated.
And vertically integrated transceiver suppliers.
We expect our growth will accelerate as cloud operators continue their transitions to higher speeds.
Underscoring this during the third quarter, we received $90 million of borders or emails, primarily from web scale cloud operators and customers surveyed them seeking to secure our production output.
This backlog will be delivered over multiple quarters as we are capacity constrained on E M. Els.
Our previously highlighted production capacity expansion is tracking well and will come on line. Later this calendar year for significant increased output starting in the second half of fiscal 'twenty two.
Due to continued delays and by G front haul deployments in China are third quarter D. M. O revenue was significantly below year ago levels and fourth quarter D. M. L sales are expected to be down by more than $20 million year on year.
At this time, we expect <unk> front haul deployment could resume this summer.
This timing would drive increased demand for our products towards the middle of fiscal 'twenty, two once customers ramp up and burn through existing inventory.
Looking to the fourth quarter, we expect the telecom and Datacom revenue to be up.
On quarter.
Third quarter of industrial and consumer revenue was up year on year due to increased dollar content and higher volumes and declined quarter on quarter as expected due to seasonality.
In the fourth quarter, we expect industrial and consumer to be down sequentially due to normal three D sensing seasonality, but up by double digits percentage year on year.
Additionally, we have begun mass production of new laser chip designs for upcoming major customer new products.
We recently had an important android customer to launch a mobile phone with time of flight three D sensing camera capabilities enabled by our lasers.
This is a notable design win as this customer is a large and leading supplier of camera components.
And the teachers frequently proliferate to much higher volume Android manufacturers.
During the third quarter, we announced industry, leading advancements in pixel technology that position us well for future applications in the industrial and automotive markets.
For example, we announced the high power high efficiency of pixel of raise leveraging industry, leading five and six junction designs.
These multi junction of raise our particular interest to the automotive in light of our markets.
They have strong traction in the solutions for autonomous vehicles, including in major retailers, who are looking to deploy fleets of autonomous delivery vehicles.
As well, we continue to receive design ins and initial production orders from other auto Lidar and access control customers.
Turning to the commercial lasers in the third quarter, we had a significant increase in kilowatt fiber laser sales after four quarters of decline.
Historically during market downturns macro material processing was amongst the slowest segment to recover and we are now cautiously optimistic that we have seen the worst of the impact of COVID-19 in the segment.
We expect fourth quarter laser revenue to be up quarter on quarter.
Throughout my remarks, I've highlighted that our market share driven by strong long term trends that we have invested heavily in differentiated new products technologies and customer programs.
With our latest products, we have secured key design wins and are on track from war with market leading customers.
Our product mix is becoming richer in these new products as customers are starting to ramp shipments of their next generation solutions.
We are seeing some near term external factors that will moderate industry growth for the next few quarters, but these don't diminish our long term market outlook.
Before handing it over to watch him to review the numbers I want to once again, thank and acknowledge all of our employees around the world for their hard work and contributions.
Our employees are absolutely the company's greatest assets.
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 third quarter's numbers net revenue for the third quarter was $419 5 million, which was down 12% sequentially and up 4% year on year.
Out of an abundance of caution we deferred $14 8 million of revenue due to delays in five G front haul deployments in China.
However, despite the lower revenue and due to the strength of our financial model.
We achieved approximately 50% non-GAAP gross margin and strong non-GAAP operating margin and EPS, which both were within our guidance ranges GAAP gross margin for the third quarter was 44, 1% GAAP operating margin was 63, 6% and GAAP diluted net income per <unk>.
Share was $2 85 GAAP.
GAAP results include the impact of the $217 6 million, we received in connection with the termination of the coherent transaction.
Third quarter non-GAAP gross margin was 49, 9%, which was down 350 basis points sequentially as expected, but up 440 basis points year on year due to our improving model with a better mix of products and lower relative manufacturing costs the sequential decline.
Line relates to the seasonal change in product mix and volumes, while the year on year of growth was driven by improved gross margins and the optical communications segment.
Third quarter non-GAAP operating margin at 27, 9% decreased 760 basis points sequentially, but increased 290 basis points year on year.
The sequential decline was driven by the expected gross margin decline and the increase in operating expenses quarter on quarter. The year on your increase was driven by the gross margin improvement year on year.
Third quarter, non-GAAP operating expenses totaled $92 $1 million or 22% of revenue SG&A expense was $40 8 million R&D expense was $51.3 million the.
The sequential increase in operating expenses was primarily driven by the extra week of the 14 week quarter and the annual reset of benefits rates and payroll tax that occurs at the beginning of the calendar year.
Third quarter non-GAAP net income was $110 6 million. This includes half a million of net interest expense and $6 million of tax expense or the.
The income and expense was a net expense of zero point $5 million as interest income declined to levels lower than our expense due to lower interest rates on our cash and short term investments non-GAAP diluted net income per share was $1 40 based on a fully diluted share count of $79 2 million.
On the balance sheet, we ended the quarter with approximately $2 1 billion in cash and short term investments of 354 million quarter on quarter, including the 218 million coherent transaction termination fee paid to US we have $1 5 billion in aggregate principal.
The convertible notes and no term debt.
As Alan mentioned momentum as board of Directors has authorized a share buyback program of up to $700 million over the next two years over the past 12 months, our cash balance has increased by more than $600 million and we are confident in our future and long term outlook given the <unk>.
Relative valuations in the industry. We believe this is a good use of our growing cash.
Now turning to segment details.
Third quarter optical communications segment revenue of $387 9 million decreased 14% sequentially due to seasonally lower revenues in telecom and Datacom and industrial and consumer and the deferred five G related revenue I discussed earlier.
Optical communications segment revenue was up 8% year on year due to the extra week in the quarter and higher industrial and consumer revenues due to the increased dollar content and the adoption of three D sensing in the consumer electronic devices.
Optical communications segment gross margin at 51% decreased 370 basis points sequentially, primarily due to lower industrial and consumer in the revenue mix, but increased 510 basis points year on year due to a more favorable revenue mix with newer and more.
<unk> products and the benefits from operational improvements.
Our laser segment revenue at $31 6 million increased 6% sequentially due to the ongoing recovery from the impact of COVID-19, what is 27% down year on year as the recovery isn't complete.
Third quarter lasers gross margin was down 30 basis points sequentially at 47, 2% and down 250 basis points year on year due to significantly lower revenue levels.
Now onto our guidance for the fourth quarter of fiscal 'twenty, one which is on a non-GAAP basis and is based on our assumptions as of today.
We expect net revenue for the fourth quarter of fiscal 'twenty, one to be in the range of $360 million to $400 million. Despite industry headwinds. This revenue guidance is consistent with our historical seasonality when normalizing for the revenue, we deferred and the recent 14 week quarter I'd note.
Over the past four years, the mean seasonal revenue decline from the third to fourth fiscal quarter has been about 7%.
Our revenue projection assumes telecom and datacom, increasing quarter on quarter, industrial and consumer declining due to normal seasonality and commercial lasers, increasing quarter on quarter driven by further market recovery from COVID-19.
Based on this we project fourth quarter operating margin to be in the range of 22, 5% to <unk> 25 per cent and diluted net income per share to be in the range of 92.
Two of $1 14.
These projections also assume an approximate share count of 79 million in estimated other expense of $1 million and an estimated tax expense of $9 million.
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 the one question and one follow up this should help us get to everyone before the end of our a lot of time operator, let's begin the question and answer session.
We will now begin the question and answer session to ask the question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time of your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
Our first question comes from Cemig Chatterji of J P. Morgan. Please go ahead.
Hi, This is Joe Cardoso on for Sonic Chad the things for the question. My first one here just wanted to touch on the first half guide you provided from fiscal 'twenty to starting with telecom and Datacom you, calling from moderate growth for full of re accelerating in the second half of the year. Just wondering if you can parcel out the details there.
The where are you expecting to see the greatest strength, where you're expecting to see the greatest weakness how much of supply related and the.
Then in terms of the recovery into the second half can you kind of rank order the drivers of that that's kind of giving you confidence that we see that recovery in the second half. Thank you.
Oh sure I'd say first half.
Going through the different product areas.
As we said Q4, we see telecom growth telecom and Datacom growth in Q4, we expect telecom to continue to grow in the first half but moderately.
From the exit rate of Q4, Datacom is going to continue to be hampered from our perspective and expectations around the <unk> rollout in China.
And one of the reasons, we had that revenue deferral in the third quarter is the inventory.
In the in the various stages of the of deployment is moving very slowly. So we don't expect that to pick up and as we said the D. M. L year on your reduction in Q4 is about $20 million. So we expect that the continued to be a drag on our datacom business offsetting that is the increase.
Capacity, we're putting in place an E M L and so we shouldn't see more modest increases in the emails, but overall datacom will be down in the first half.
<unk> lasers is continuing to see a.
Recovery from the pandemic and as we said we expect that we will by the middle of our fiscal year be back to pre pandemic levels. So we'll see moderate growth in lasers, and then as we said also our expectation given the three D sensing market being a smaller by 20 to 25 per.
The scent, mainly due to design decisions that some of our customers of made around smaller chips and smaller chips lead to smaller average content per device and so that's probably the bigger drag on the first half expectations.
As far as second half and why we're confident that we'll see a rebound I think you know if you look across our product portfolio.
Our design wins are phenomenal our team has done a fabulous job on our high Port Count and contention list <unk>. Those are designed in and we talked about new designs in the west of them and so from our perspective, we are very much poised for a rebound now of that might happen before.
Before the end of the calendar year, but our expectations are that that just is modest and then in the second half of the fiscal year that picks up also in the second half of the year, our capacity will be coming online for our emails and that is going quite well when he talked about that two of three quarters ago. That's in motion and we expect that our emails due to our highly <unk>.
<unk> products.
And the orders that we talked about in Q3, we expect the capture major market share on our email business on the 204 hundred gig products and then again continued growth in lasers.
And then the the three of sensing is again a market issue that I think we'll all see on that one.
Yeah.
The next question comes from Rod Hall with Goldman Sachs. Please go ahead.
Yeah, Hi, guys. Thanks for the question I guess my first question is back to the <unk> sensing.
I think it had been pretty well telegraphed. The chip size is going to go down but I had also been assuming that you guys would have higher share as a result of the redesign. So I just wonder if Alan could you comment on your share position in each one and how you see that going and then I've got a follow up.
Sure Rod Thanks for the question.
No. We're we're highly confident of our ability to satisfy our customer and for the last three and a half years. We've been the partner of choice. We continue to execute deliver almost of 1 billion units of three D sensing and so I think from our perspective, where the design lead where we're doing very.
Very well, we are our market share, we've been saying for three and a half years that our customer need security of supply and that we would see a shift and we had we saw that last year. So I don't want to make expectations that we're going to go back to the kinds of shared that we had over the last three years because that was.
Uncomfortable for a customer and for us quite frankly, so I think having two suppliers.
In our leading customer is a good thing and one that that you know gives us a comparison of of how well we perform compared to our competitor and I think we're continuing to perform very well from a quality delivery cost perspective, and so our expectations are that we're going to continue to have a solid share, especially at the front end product launches.
Okay, Great and then for my follow up I, just wanted to check on I know the there's additional rhodium capacity planned for the summer just wanted to check that still on track that you guys are going to expand that capacity I guess now.
Well, maybe you could comment on what do you think that means for rhodium.
Revenue trajectory post about it are we still are you still expecting to be sure of it sounds like probably not given what's going on in the market, but I'd just be curious on the supply versus demand.
Balances as you bring that capacity on line and whether it's still on track.
Yeah, we have added wrote them capacity, mostly on the high end part of the M buy in as well as the very high Port Count modems.
And so you know as.
As our western customers have added are in buy into their mainstream product portfolio. We are not going to be short from a capacity standpoint, so that that because you know what are the sole source, we cannot let them down and from that perspective, we're adding capacity in anticipation of them continuing to grow.
Of that business in the first half of our fiscal year, but really ramping it dramatically.
In the in the second half so that's on track I'd say the other thing that's the that's causing some angst is the semiconductor shortages and so I I have been king expediter of of semiconductors more than I'd like to be.
But that is also putting some pressure on our ability to meet our customer demand on the island.
The next question comes from Alex Henderson with Needham. Please go ahead.
Okay.
Thank you very much.
You made a couple of comments around three D sensing that I just wanted to get some clarification on.
Clearly there has been some share shift going on there is a reduction of your share of an increase in your competitor share.
Your comment are the.
Do you expect to have solid share is very definitive in terms of whether you think that rate of change of shares.
Can you talk about.
Whether you think you've gotten to a point where shares stabilized or do you expect.
You need to have share.
Erosion, how should we think about share trajectory as opposed to just simply solid solid it's not very descriptive.
Alright, Alex you know.
I think our track record.
Swear itself.
As new products have been announced we are the dependable supplier of that our customer accounts on <unk>.
Yeah.
You wanted to have a different word for solid that's how I'd describe it and so my perspective is that.
The the share equilibrium that has been reached in the last quarter is probably where we're going to end up and I think.
Over the long term no every quarter, it's going to be different based on new products and the.
The models, the get built and where we are versus our competitor, but I think overall.
You know all of our numbers speak for itself and I think if you talk to our competitor do the comparison and see where we are I mean, we're pretty transparent with our <unk> since the numbers are in our press release and in our earnings.
So the the conclusion as to your share of stabilized relative to where it has been in the most recent couple of quarters is that the fair statement of what you just said.
I think so I mean from from my perspective, I'm extremely paranoid I, that's all the time and that keeps us on our toes and make sure that were attentive and responsive to our customers' needs and we don't want to give them any any reason or excuse to move any more share than they already have and I think they're comfortable with it.
I'm comfortable with it and I think from that perspective, we're we're just continuing to work on next generation and net next generation per customer to make sure. We're there for them.
The next question comes from Simon Leopold with Raymond James. Please go ahead.
Thank you for taking the question.
I've got two I wanted to ask the sort of more complex, one first and second T V.
So on the three D sensing market decline that you've talked about there's obviously two key dimensions, one volume and the other is a S. P. I. Appreciate you can't be specific on the values, but could you could you help us get a better understanding of how we should think about what's going on.
With the Asp's with the smaller chip other than the fact that they're less.
Okay.
Yeah.
Yes Simon.
Say that.
Yeah, just like any semiconductor of the cost of that device scales with both.
Both chip size as low as yield and so.
Our our customers' expectation is that the S. P scales with chip size.
And we're working on yield and I think we've done a great job and our team's done a great job in getting to yields that I think our competitor and a customer never thought we could get to so I think from that perspective, you can imagine that that the discussions with our customers around the the.
Of the chip is ex percent smaller than price.
And therefore, it should be ex percent smaller than in the Asps and I think that that holds true for the most part given any different complexity of the processing or testing or any in the yield variation, but from our perspective.
<unk>.
The wafer size is a good indicator of cost and therefore, it becomes a good indicator of PAH.
Price and from our perspective, we price for a given the margin in the market dynamic and were very confident even at lower asps that our margins will continue to maintain where they have been.
But that that in place the gross profit dollars are lower than.
Yeah, I mean, absolutely I think kind of percentage basis.
The margins are going to be stable with the top line coming down because of market shrinkage.
Shrinkage.
The dollar is at the bottom will be will be lower.
Okay and then the easy question I had hopefully it's just trying to unpack the the datacom.
Products, a little bit it sounds to me that the the D. M. L chips from the five G exposure, China's pretty decent size, probably bigger than I was guessing and maybe <unk>, maybe a little bit smaller. So can you give us a little more color on how to think about the.
The the.
<unk> is coming from different products within Datacom. So helps us thinking about this trending thank you.
Sure.
I'd say that.
You know, our our EMS business grew 40% year on year. So the the growth in datacom as coming from emails and and we sell the MLS too.
The five G front haul we sell the <unk> two transceiver suppliers that sell into the Hyperscale.
Hyperscale data centers, although that is certainly starting to soften as well as those hyperscale or I'm moving from 100 gig Transceivers to 204 hundred gig Transceivers and so we're going to see a rapid shift not only from the reduction in pipe <unk> deployment, but also the shift from 100 G. In the data center to too.
Hundred and 400 G and so are our focus and pressure is really on how do we add capacity or shift capacity from D. M. L to email and it's not straightforward as you might think because there is difference in complexity with respect to the.
The processing of an email compared to a demo.
I think you can assume that pre <unk> slow down it was probably around 50, 50 ish and I think you can model that.
In the in the Datacom business.
But if you look at Q4 business I'd say, it's dramatically email heavy.
And that will continue to grow through the first half of the fiscal year.
The next question comes from meta Marshall with Morgan Stanley. Please go ahead.
Great. Thanks.
A couple of questions from me.
One of them.
Well the deal.
On the.
Share repurchase that's kind of what.
Is the kind of your appetite for M&A, particularly given the.
Silver Lake had been a potential partner when you were looking at the.
Yes.
It would seem as if I opt in.
Yeah.
Looking at the B, maybe less active in the near term.
And then on the.
Second question.
Just as you look at your telco forecasts of kind of going forward.
Have you incorporated.
Potentially be.
Incremental flow down.
What we're seeing right now.
Yeah.
Yeah, that's it looks like three questions met up with.
Let me take the M&A I'll have what you had talked about the share repurchase.
We still believe that M&A is strategic for us.
And we will create inorganic value for our shareholders and we're still.
I'm focused on doing that I think we have a track record of successful M&A.
And that's what we're looking for I think you know we are disappointed that the coherent went the way. It went although I think it also is an opportunity for us to step back and say what is the next acquisition and at this point in time a.
Management and the board believes that the value of organic value creation is the best place to put our cash I'd say you know what Jay can talk about the cash generation we've had.
And the decision on the share repurchase then I'll come back to the to the Telecom question go ahead.
Yeah, No I think we've struck a perfect balance in terms of our capital allocation strategy. As you know we've we've historically invested heavily in capex to support our growth as well as and selective M&A transactions.
And the beauty of the 700 million dollar or share buyback that our board has authorized is that it's it's just a little bit larger than the amount of cash we've generated.
Over the last 12 months and it still leaves us with a lot of firepower.
To go ahead, and do M&A transactions as we choose to so I think it gives us optionality and it allows us to maintain our flexibility.
Moving forward as well so we're looking forward to putting some cash to work.
In order to be able to buy back some shares, especially at current levels.
And then on your third question on telecom forecast and the incremental impact of things.
Things like what what's going on in India.
Hard to say I think.
Our perspective is that.
We've seen a continued slow ramp up of telecom even through this time, our expectations are that that continues.
And if it doesn't go to India, and I think in talking to our customers the they're still deploying in India today, and so if things get much worse, which is hard to believe are hard to imagine the.
That could be impacted but so far today it's.
It's still deploying but not at the rate it would otherwise if there had not been.
Such of such an influx of of cases.
The next question comes from John My of Kate Marchetti from Stifel.
Thanks, very much maybe just following up for a minute Alan on the on the telecom comment.
With some of the new wins that you have for the M by and with some of the western vendors.
On your sort of first half of fiscal year outlook do you expect those sorts of deployments to continue to ramp and I guess has your expectation for that ramp slowed relative to maybe where you were a quarter or so ago.
Okay.
I'd say no I'd say we're.
Pretty much tracking to what where we expected I mean I think.
We had expected that there would be muted growth is the result of our challenges of deploying during the pandemic.
But we're very very happy with the progress of the design cycle of our products and next generation systems for not just Chinese the nims, but also the western them. So we talked about in the script. So I think from our perspective, we're poised for and buy in indium phosphide coherent components and modules and so.
Or if the the the deployments accelerate we'll be ready.
And then maybe just as a follow up on the <unk> deferral side.
Is it your sense of that inventory levels got way ahead of themselves because of some of the risks associated with all the <unk>.
Prior administrations.
Efforts to the hamper some of that growth there or is this the result of the delays in some of those tenders and I'm just curious where do you think maybe those inventory levels are right now and if.
If it's a couple of quarters to move that out or if we still have to wait and see what some of these new expected tenders actually deliver thanks.
Yeah, I mean, I think if you go back in time.
Last year, there was expectation that there'd be a million base stations in China or some number like that it was approximately 60% of those deployed same kind of outlook was for calendar 'twenty, one and I think it's similar kind of.
Appointment of if you will.
The 600 of 680 million base stations look like they're going to be deployed but not of lot of been deployed in the in the first half and so.
Our belief is that that that starts picking up in the summertime, but won't have meaningful meaningful impact on our business until the middle part of of the fiscal year and so that's where we think the inventory.
Throughout whether that's at the the.
Radio base station supplier or at their transceiver customer supplier or or or in our whip I mean, there's that much inventory, where I think that it.
It needs to ramp up of needs to start deploying before we see any meaningful the pointed in the I'd say, it's solely due to the U S. China.
Geopolitical issues and their ability to get the.
Chips for the base stations and so that redesign is happening.
And in our expectations is the battle that'll start picking up in the second half of the calendar year.
The next question comes from Ananda Baruah with loop capital. Please go ahead.
Hey, Thanks, guys for taking the question.
He came from me if I could as well really a clarification of the first line you guys talked about on three D. Sensing here of both being of market down compelling it and then the price and mix and then the pricing component how much of the guidance as the market down versus the the pricing on the smaller the.
Fine.
And then also are you seeing pricing pressure.
He called the pricing pressure and then I have a quick follow up thanks.
Yeah.
Hi, This is Chris good morning.
Think oh, well the market down is the combination of abnormal price erosion and.
The smaller chip size, which reduces the the dollar content. If you will we've made no no.
To be clear.
And I think Alan mentioned this in the prepared remarks, we're not opining on anything around volumes or or or mix within.
You know the market. If you will this is this is purely sort of normalizing for those factors.
Just about a lower dollar content than normal price erosion I would say the pricing environment is normal there.
There's not.
Unusual pressure right we've provided.
Price downs for our customers.
Every year since since.
We got into this business and then we've seen price increases as chip sizes of gone up and up.
And the prices come down with normal price erosion or in this case when theres a redesign of the chip of smaller you.
That said.
We also have a product roadmap well aligned with our customers that.
Includes designs it integrate additional functionality enable lower cost higher performance you know maybe integrate other optical capabilities reduces packaging costs package sizes et cetera that will help us capture more dollar content over time as those products are launched.
But going back to the question about the market in fiscal 'twenty two there's other customers coming on line.
Other markets and other applications, but.
They won't come on line fast enough to offset the impact that we're seeing.
At some of the major customers, but the dollar content and normal price erosion so but.
As they come on line through fiscal 'twenty, two and into fiscal 'twenty. Three then we believe the market will reaccelerate.
That's all of them. They do think sorry, maybe just one other thing to add on the market outlook, that's different than where we were on the last earnings call, which was our expectations to have a major Android customer of incorporate three D sensing and recently they've made the decision not to do it in this generation of products and so.
That also puts pressure on expectations around the market win.
The major Android customer decided not to incorporate <unk> sensing and so that puts some pressure on our outlook for the market.
In fiscal 'twenty two.
That was actually my follow up so I appreciate that do you think the that Dan.
Do you see other opportunities sort of in the Android space aside from that.
That one vendor that still could be included in what we hear your thought process of 90 days ago.
Yeah, I mean, I think we continue to be very excited about the Android adoption, it's obviously been slower than we'd expected and I'm sure everybody's minnick expected, but this year is I think been rough four of for Android the suppliers overall, given the given it seems like COVID-19 has really impacted.
The dam compared to.
Our largest customers I think Alan you know well.
The strong interest across the board for for kind of the Lidar based approach or time of flight based approaches for world facing per photography, AR VR applications.
And Alan highlighted in the script day, a what we think is a very positive data point that we.
<unk> had a customer.
Launch.
A.
Great smartphone with world facing capabilities really focused on photography. This is a customer who also sells.
<unk>, if you will image sensors and others to to the Android universe in mass and therefore.
Their technologies or their designs frequently proliferate to much larger Android manufacturers and that's really been one of the technical barriers to the Android World is that this is this is harder technology and then some of the more low cost.
Android manufacturers need help with the technology. So it's great to see a a leading technology, maybe not a leading volume a manufacturer of phones adopt it so that that technology will proliferate a bit further.
The next question comes from George Notter with Jefferies. Please go ahead.
Hi, guys. Thanks, very much I guess I wanted to.
Kind of keep going on the three D sensing discussion here.
Any changes in the performance characteristics that you're seeing out of the marketplace either through.
The world facing our front facing.
Driving the a S. P. In chip size changes or is this more of a sort of natural evolution of the market.
Yeah, George I think it's more of the a capability that we've been able to provide to our customer and jointly the.
These are chips that we've talked about with our customer two and three years ago, and so as our capability and technology improves.
We can combined develop a product that has more functionality at a smaller size and as I think Chris talked about our ability to then go from that stage of the game to adding more functionality on the chip that now our customer needs to go to third parties and add different types of components.
As we roll out those types of functionalities that are embedded in the chip at a lower cost we will capture more dollar content. So I would say this is no different than just the evolution of of driving.
The lower cost solutions at higher functionality and features.
And one thing to add to that I think that that maybe got lost is.
All of the chips from any of the smaller theres still a lot of lasers in fact the.
Uh huh.
Many lasers, if not more of than than in the past. So that presents a lot of technical challenges to accomplish that but as Alan said, that's why it's taken of several years and working with the customers to achieve that level of density on the chip. The reason I highlight that it also provides the level of differentiation of barrier to entry for other folks from the market. So it's not like the chip.
It's getting smaller and dumber, it's getting smaller and more complex.
If you will.
Okay. Thanks.
The next question comes from Michael Genovese with West Park Capital. Please go ahead.
Thanks very much.
So there's a lot of handwringing on this call about the of the market share, but I feel like you answered it.
Or in the prepared remarks, and I want to make sure I understand correctly, because you're saying that the market is going to be down 20% to 25%.
In the second half of the county or in your revenue cycle, when you'd be down 5%. So it doesn't that rig.
Suggests some share of switch swinging back to you as this new chip is this new smaller chip is rolled out of the math just tell us that you're getting total share.
Well keep in mind <unk> sensing as a portion of our business and so as we look at our different other businesses lasers is gonna grow telecom is gonna grow of Datacom is going to be under pressure and so are our commentary was around the market and in the market being down 20% to 25% in the in the fiscal year.
The fiscal first half of the fiscal year, our belief due to the chip size and the and the lack of adoption by a major Android customer that the market itself will be down 20% to 25% now how that translates into our revenue is hard to say, but it's going to have a negative impact on our revenue assuming we maintain the share of.
We have today and I think.
That's what you can model into your first half model in.
It turns out that we gain a bunch of share then great, but our expectations and our guidance don't don't count on that.
Got it.
Okay, Great and then.
Just wanted to ask from your perspective, I mean, the the the indium phosphide.
News is good news.
As we track that market Theres, a lot of interest in plug of bowls, and 400, ZR and ZR plus.
And so what's your perspective on that market, because we mentioned need to play there is is it going to.
Inhibit or drive the growth rate of indium phosphide going forward just any general commentary there would be appreciated. Thank you.
Yeah. Thanks, Mike Yeah, I mean, certainly we're very excited about our opportunities for indium phosphide platform.
Very differentiated capabilities, we are already supplying.
The high performance indium phosphide components into the 800 gig applications. As an example, we are also very focused on 400 gig.
<unk> modules, you know theres, a whole range of performance requirements.
You know all the way from your Metro long haul then down to D. C. I and the are tight the modules are working on all of them. Some of them are in production. The others are in the sampling phase and we're kind of prioritizing our investments based on our ability to differentiate our products and find the opera.
<unk> and customer feedback.
Right opportunity for us given the unique indium phosphide platform Leann.
The next question comes from Christopher Roland with Susquehanna. Please go ahead.
Hi, guys. Thanks for the question I guess my first one is pretty broad.
I guess looking out into the next year kind of.
What's the best Crystal Ball you guys have.
Do you expect to grow revenue year over year, and then secondly, you talked about the Reacceleration maybe in the back half.
Maybe talk about what this looks like how it kind of manifest itself.
Through your various segments as well thank you.
Yeah of course for them, maybe I could comment and Christopher Wajid can chime in you know our focus is to give you what we know when we know it.
Our outlook for the first half of the fiscal year of changed and so that's why we made the exception and gave you guidance for the first half. So that you knew as soon as it is as we knew and I think that that's why we gave first half guidance, where we're not going to talk about the year I think.
It's too hard to predict you know, let alone what's going to happen two quarters out as opposed to four of five quarters out so.
I think what we can comment on is our progress on new products and new design wins with customers and that's going extremely well and so as the market.
Next up or as deployments pick up will be there for our customers and we'll be really.
Focused on.
Making sure we give them what they need that said we are investing in capacity for those key products wrote them, we talked about we're investing in our in our wafer fabs both in Datacom as well as our indium phosphide capabilities for coherent component. So we are investing in anticipation of that picking up and we'll be ready for our customers.
The next question comes from the hard Michelle with N. K M partners. Please go ahead.
Thank you for taking my question I have a clarification first the.
The deferred revenue from <unk>.
A few million dollars is that accounted into your guidance or is that completely out of your.
It's one of our book yield.
Yes.
So the impact of the $15 million was on fiscal Q3, and you know any type of recovery, we see of the.
Whether it's from before whether it's in the first half of fiscal 'twenty. Two has already been incorporated in our guidance that we provided.
Okay.
One of my question that the Ellen.
It's not surprising that ESP or coming down our checks are indicating that the will come down as well.
You'll need customers most of them combined.
Injector and flooding of the many of the module.
But if our checks I'd also like in the next generation of this customer.
But it's been the leader.
The glass.
Model.
There I think you know you're.
Your technologies significantly far better.
The minister.
The than some of your peers.
So to that extent you expect the acceleration in fiscal 2022 is that based on an assumption of one youll share gains or is that based on an assumption that the.
Primarily more proliferation of <unk>.
<unk> sensing across more skus with this customer and also generally speaking more broader adoption by the end point.
Can parse that.
I'll comment about Reacceleration of fiscal 2022.
Sure well I think from Reacceleration in fiscal 2022, what we have what we had intended to say or what we had expected.
To really message was.
A lot of design wins happening now for different industries, whether that the automotive security biometric.
<unk> and access control and things like that are happening now that should accelerate through fiscal 'twenty three.
We're still hopeful that Android comes on line on line in fiscal 'twenty three.
But I think our outlook is really more around.
Added customers added markets.
And as far as next generation of devices for our lead customers.
We're working on many many different things.
And until they get close to deciding what's the plan of record we're working on many many different things without knowing what is actually going to be the plan of record for fiscal 'twenty. Three. So we're just we're just making sure we're of the design source for them and we will be there whether that's the.
The continuation of existing designs or new designs when they choose to put them in.
We have time for one more question or a lot of time. The next question comes from Tom Diffley from D. A Davidson. Please go ahead of the yeah.
Yes, good morning, and thanks for squeezing me in here.
Question on just the the nice margin expansion on the year over year basis, you know based on the cost reduction and some of the new products that you're rolling out has the most of the benefit now of unrealized or is there a runway for growth.
No of extending the expansion going forward on the margin basis.
Yeah, Hi, there I'll start off it's wajid here, so on our gross margins you're right to point out a lot of the year over year improvement that we've had across our optical communications products.
Products are lasers margins have come down year over year are primarily because you know all of our volume levels have been lower but as Alan noted in his remarks and even in the Q&A session. We're expecting our lasers business to continue to improve of.
And not only in Q4, but throughout the fiscal 'twenty two that should have a corresponding positive impact on the gross margins as it relates to lasers are now within the optical communications, we're continuing to expect our margins to hold Oh quite well.
Primarily because of some of the product mix benefits will start seeing as uml capacity comes on board.
Talking about our 50% gross margin model a couple of quarters ago, as we put it out there and as you can see you know even with our fiscal Q3 actual results year to date as well as what we're forecasting for Q4. Our current expectation is that fiscal 'twenty, one will end up where the gross margins are north of 50% and we're.
Targeting a 50% margin model for fiscal year 'twenty two as.
As well despite.
Some of the puts and takes that we've talked about during the call. So I think that that continues to be our target and our product and our our customer deployments that we're seeing a support that.
Great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Jim Fanucchi for any closing remarks.
Thank you. This concludes our call for today, we would like to thank everyone for attending and we do look forward to talking with you again, when we report the fourth quarter of fiscal 'twenty. One results have a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.