Q4 2021 Lumentum Holdings Inc Earnings Call
Good day, everyone and welcome to the momentum holdings fourth quarter and fiscal year 2021 earnings call all participants will be in a listen only mode.
Also note todays event is being recorded for replay purposes through August 25th 2021.
If you require assistance. Please press Star then zero.
At this time I'd like to turn the conference call over to Jim Fanucchi of Darrow Associates. Sir. Please go ahead.
Thank you operator, welcome to momentum as fourth quarter and fiscal year, 2020. 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's call will include forward looking statements, including statements regarding the impact of COVID-19, and the responsive actions on our business.
And continuing uncertainty in this regard trends and expectations for our products and technology, our markets market opportunity and customers and our expected financial performance, including our guidance as well as statements regarding our future revenue 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's quarterly report on Form 10-Q for the fiscal quarter ended April three 2021 and in the company's annual report on Form 10-K for the fiscal year ended July 3rd 2021.
Which the company expects to file within 60 days of its fiscal year and the forward looking statements provided during this call are based on momentum reasonable beliefs and expectations as of today.
<unk> undertakes no obligation to update these statements except as required by applicable law.
Please also note unless otherwise stated all results and projections discussed on 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.
<unk> press release, with our fourth quarter and fiscal year 2021 results and the accompanying supplemental slides are available on its website at www dot momentum dot com under the investors section. This includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP.
GAAP results now I will turn the call over to Alan for his comments. Thank you Jim Good morning, everyone.
The fourth quarter capped off a fiscal 'twenty one that by all financial measures was our best year ever with record revenue margins and earnings per share.
This was despite the tough macro environment and impact of Covid, 19, which caused our laser segment to be down more than 25% in fiscal 'twenty one.
Growing demand from new customer opportunities drove optical communications segment revenue up 7% and total revenue to a new record level in fiscal 'twenty one.
We are focused on end markets that are driven by durable multiyear trends.
We have been successful in developing differentiated new products and designing them into market, leading customers who their next generation solutions many of which are just starting to ramp.
Our demand mix is increasingly shifting towards these products, which we believe could be signaling the start of a new accelerated growth phase in our markets.
Supporting this belief were robust demand trends in the fourth quarter.
We had very strong bookings, resulting in a book to bill of one two.
Telecom transport component revenue in the fourth quarter was higher than it has been in several years.
I'll provide more details on this later, but increased shipments of telecom transport components is typically a leading indicator of higher future telecom demand.
Year on year revenue from emo chips per data centers was up more than 50%.
During the fourth quarter, we had record Datacom chip backlog as cloud data centers are transitioning to higher speeds, where we have differentiated market leading products.
And three D sensing fourth quarter revenue was up 39% year on year.
This was the highest fourth quarter three D sensing revenue we have ever had.
And demand has been strengthening in the first quarter as well.
The recovery in our commercial lasers business continued and resulted in a 17% sequential increase in revenue and a laser's book to Bill of 1.2.
We expect this favorable demand environment throughout fiscal 'twenty two.
Customers have communicated that they are seeing accelerated in market demand for their next generation solutions.
And this should not be a surprise as our markets are driven by powerful long term sense.
The accelerating transition to digital and virtual approaches and all aspects of working life is driving staggering amounts of data and the world's networks and cloud data centers.
Proliferation of five G wireless will remove bandwidth bottlenecks at the edge of the networks and will create the need for even more capacity in metro and core networks as well as in cloud data centers.
The computer and machine vision revolutions are in their early days and we expect three D sensing and lidar capabilities will expand to many more applications in multiple markets.
Laser based material processing is critical to the manufacturing of these devices.
Enabling the digital transformation and the transition to <unk> wireless electric vehicles and energy storage.
Now I'll turn it to additional product line details.
For fiscal year, 'twenty, one telecom and Datacom revenue was up 4%.
Excluding the low margin product lines, we exited over the past few years revenue from telecom and Datacom each were up by 10% or more in fiscal 'twenty one.
Well customer demand is very strong fourth quarter telecom and Datacom revenue was approximately flat quarter on quarter and year on year.
Revenue growth has been muted temporarily by supply constraints, which have increased recently as we have consumed much of our buffer stocks.
In telecom revenue growth and higher level of module products, including rodents is being constrained by the supply of critical semiconductor components.
We are intensely focused on minimizing the impact of these shortages on our customer deliveries.
At this time, however, semiconductor supply shortages are negatively impacting our first quarter revenue outlook by more than $30 million, but again, our team is working diligently to improve upon the situation.
As I mentioned earlier in our telecom transport component product lines, which are not impacted by semiconductor shortages, we had fourth quarter revenues higher than we have seen in several years.
For example, fourth quarter terrestrial pump laser revenue was at the highest quarterly level in the last three years and the second highest in more than a decade.
Fourth quarter submarine components revenue, which is primarily from high reliability pump lasers used in undersea cable applications was also at the highest quarterly level in several years.
These data points are particularly important as pump lasers are critical to lighting up new optical amplifiers, which historically has happened early in both greenfield deployments and network expansions.
Because of this elevated pump laser shipments have typically been a leading indicator of future deployments of other telecom products.
We expect this strong telecom demand to continue to increase in fiscal 'twenty two.
Demand for Datacom chips for cloud data centers is also very strong.
Our highly differentiated products are enabling cloud data centers to transition to 204 hundred gig speeds.
As I mentioned earlier during the fourth quarter, we had record high Datacom chip backlog and record high E. M. L revenue, which was up more than 50% year on year.
This backlog will be delivered over multiple quarters, because we are production capacity constrained on datacom chips.
Our previously highlighted Datacom production capacity expansion is tracking well and will result in significant increased output starting in the second half of fiscal 'twenty two.
Due to expected long term demand growth, we are making additional production capacity increases beyond those we previously discussed.
Looking to the first quarter Telecom Datacom demand is continuing to grow however.
However, we expect revenue to be down quarter on quarter as the semiconductor shortages I spoke about earlier, having a near term become increasingly impactful to our ability to meet our growing customer demand.
Fourth quarter, industrial and consumer revenue was down 25% sequentially, but up 34% year on year to the highest fourth quarter level, we have ever delivered.
We continued to increase our design ins and traction in the automotive space in the fourth quarter, especially with our high power five junction pixel technology for Lidar applications, but also with pixels for in cabin driver monitoring systems.
In the first quarter, we expect industrial and consumer revenue to be up sequentially as production continues to ramp from major customer new products.
Turning to commercial lasers in the fourth quarter, we had significant revenue increases in most major product lines.
The most notable increase was in our kilowatt fiber laser the growth in our laser service business was also meaningful as utilization of our lasers in the field continues to increase.
Our laser segment is now recovering ahead of our original expectations and will be a contributor to growth in fiscal 'twenty two.
We expect first quarter laser revenue to be up again quarter on quarter.
Throughout my remarks, I've highlighted that our markets are driven by strong long term trends and that we are well positioned with differentiated new products and key design wins with market leading customers.
We believe the continuing shift in our demand mix towards differentiated products that enable next generation customer solutions is a leading indicator for growth over the coming years.
Before handing it over to Wajid 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 during these challenging times.
Our employees are absolutely the company's greatest asset.
They are the ones responsible for our outstanding and record fiscal 'twenty one results.
And for putting this in such a great position for growth in the coming years.
I would also like to thank our customers suppliers and shareholders for their continued support and partnership.
The future is truly bright elemental.
With that I'll hand, it over to watch it.
Thank you Alan good morning, everyone as Alan highlighted fiscal 'twenty, one sets a new bar for us financially with record revenue margins and earnings per share.
On margins, we achieved our previously announced target model a year earlier than originally projected.
Based on our confidence in our long term financial performance, we started aggressively executing on the $700 million share buyback program, we announced last quarter.
<unk> $3.1 million shares or 4% of our outstanding shares for $241 million.
Before jumping into the results I'd like to highlight some changes we decided to make and how we calculate our non-GAAP tax provision.
In order to give a more meaningful perspective of our tax burden over a longer term period reduced quarter to quarter variability in our non-GAAP tax rate.
And in light of our growing profitability and utilization of our historical tax attributes beginning in our fiscal fourth quarter. We are changing our method of calculating our non-GAAP income tax provision.
For this quarter only to help with comparisons we are providing our non-GAAP tax provision using both the prior method and our new method.
On our Investor Relations website, we have provided additional data to help with historical comparisons to be clear. This change in methodology does not affect our non-GAAP operating profit annual cash tax payments or cash flows, but it should result in more consistent but.
Higher reported non-GAAP tax provisions going forward and it will have no effect on any of our GAAP results.
Based on our analysis, we expect our non-GAAP long term tax rate under the new method of calculation to be in the range of 13% to 16%.
Now turning to the fourth quarter's numbers.
Net revenue for the fourth quarter was $392.1 billion, which was in the upper half of our guidance range down 7% sequentially and up 7% year on year.
GAAP gross margin for the fourth quarter was 41, 5% GAAP operating margin was 11, 7% and GAAP diluted net income per share was 28 cents.
Fourth quarter non-GAAP gross margin was 47, 7%, which was down 220 basis points sequentially as expected, but up 50 basis points year on year with a better mix of products and lower relative manufacturing costs.
The sequential decline relates to the seasonal change in product mix and volumes, while the year on year growth was driven primarily by improved gross margins and the optical communications segment.
Fourth quarter non-GAAP operating margin was 24, 6%, which decreased 330 basis points sequentially and 20 basis points year on year.
The sequential decline.
Was driven by the expected gross margin decline and increase in operating expenses quarter on quarter.
The year on year decline was driven by increased operating expenses.
Fourth quarter, non-GAAP operating expenses totaled $96 million or 23, 1% of revenue S.
SG&A expense was $41.5 million R&D expense was $49.1 million.
Fourth quarter non-GAAP operating income was $96.6 million and adjusted EBITDA was $117.5 million.
Other income and expense was a net expense of zero point $7 million on a non-GAAP basis.
Our fully diluted share count for the fourth quarter was 77.5 million shares.
Under our prior method of tax calculation fourth quarter non-GAAP net income was $89.5 million and non-GAAP diluted net income per share was $1.15.
Under our new method of tax calculation fourth quarter non-GAAP net income was $81.9 million and non-GAAP diluted net income per share was $1 six.
Our non-GAAP results include the additional cost of goods sold we are incurring related to procuring semiconductor components that are in short supply globally.
And the measures we are taking to prevent the spread of COVID-19 in our sites.
Turning to the full year results fiscal 'twenty, one net revenue was $1.74 billion, which was up 4% from fiscal 'twenty, excluding the low margin product lines, we exited over the past two years revenue was up 8% in fiscal 'twenty, one over fiscal 'twenty GAAP.
GAAP gross margin for fiscal 'twenty, one was 44, 9% GAAP operating margin was 32% and GAAP diluted net income per share was $5.07.
Full year fiscal 'twenty, one non-GAAP gross margin was 59%, which was up 440 basis points relative to fiscal 'twenty due to our improving model with a better mix of products and lower relative manufacturing costs.
Fiscal year 'twenty, one non-GAAP operating margin at 38% increased 420 basis points from that of fiscal 'twenty driven by the gross margin expansion offsetting increases in R&D spending year over year.
Fiscal 'twenty, one non-GAAP operating income was $536.1 million and adjusted EBITDA was $621 million.
For fiscal 'twenty, one our fully diluted share count was $78.4 million shares.
Under the prior method of tax calculation fiscal 'twenty, one non-GAAP net income was $495 million and non-GAAP diluted net income per share was $6.31.
Using our new method of tax calculation fiscal 'twenty, one non-GAAP net income was $458.2 million and non-GAAP diluted net income per share was $5.84.
On the balance sheet, we ended the quarter with approximately $1.95 billion in cash and short term investments. We continue to have $1.5 billion in aggregate principal convertible notes and no term debt.
Cash flow from operations in the fourth quarter was $124.2 million and for the full year was $738.7 million. The full year cash flow from operations includes a net of $207.5 million from the coherent termination.
Turning to segment details fourth quarter optical communications segment revenue at $355.2 million decreased 8% sequentially due to seasonally lower revenues in the industrial and consumer fiscal 'twenty, one optical communications segment revenue was up 7%.
Over fiscal 'twenty.
Optical communications segment gross margin at 47, 7% decreased 240 basis points sequentially due to lower industrial and consumer in the revenue mix and due to increased cost of procuring certain components impacted by worldwide shortages.
Fiscal 'twenty, one optical communications segment gross margin at 51, 2% was up 470 basis points relative to fiscal 'twenty due to a higher mix of higher margin product lines and improvements in operational efficiency and footprint.
Our fourth quarter laser segment revenue at $36.9 million.
Increased 17% sequentially due to the ongoing recovery from the impact of COVID-19 physical.
Fiscal 'twenty, one laser revenue was down 25% relative to fiscal 'twenty due to COVID-19 related slowdowns in end market demand.
Fourth quarter lasers gross margin was up 130 basis points sequentially at 48, 5%.
'twenty one laser segment gross margin was up 30 basis points relative to fiscal 'twenty.
Now onto our guidance for the first fiscal quarter of fiscal 'twenty, two which is on a non-GAAP basis and is based on our assumptions as of today.
We expect net revenue for the first quarter of fiscal 'twenty two to be in the range of $430 million to $445 million, our revenue projection assumes telecom and datacom decreasing quarter on quarter.
Industrial and consumer increasing due to normal seasonality in the consumer portion and commercial lasers, increasing quarter on quarter again, driven by further market recovery from COVID-19.
And as Alan noted earlier demand is very strong, but our revenue outlook includes the negative impact of more than $30 million due to semiconductor component supply shortages.
Based on this we project first quarter operating margin to be in the range of 35% to 32, 5%.
And diluted net income per share to be in the range of $1.47 to $1.61 or.
Our non-GAAP EPS guidance for first quarter is based on a non-GAAP annual effective tax rate of 14, 5% or $19.9 million at the midpoint. These projections assume an approximate share count of 76 million shares.
And in other income and expense that was a net expense of approximately $1 billion.
These projections also include the additional expenses, we are incurring related to procuring semiconductor components and COVID-19 protective measures.
With that I'll turn the call back to Jim to start the Q&A session Jim.
Thank you Wajid before where you start the question and answer session I would like to ask everyone to keep to one question and one follow up this should help us get to everyone before the end of our allotted time operator, let's begin the question and answer session.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys.
But any time your question has been addressed and you would like to withdraw. Your question. Please press Star then two again, please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Tom O'malley.
With Barclays.
Please go ahead.
Hey, guys. Thanks for taking my question and good morning.
It sounds like in the telecom business trends are really strong on the pump laser side can you talk about what youre seeing in terms of transport deployments into the back half of this year and then with with what you just reported in June it kind of implies some weaker transmission can you talk about is that COVID-19 related or is that some slowing demand in the transmission side.
Yeah, Hi, Tom This is Alan.
You know as we said in the script the.
Trans transport component growth, usually is a leading indicator for future other growth and that's what we're seeing play out what we think is going to play out in the first half of fiscal 'twenty two.
And so we are seeing broad demand of road <unk> wrote them line cards.
That usually go along with these transport components that really build out the initial either greenfield or expansion of existing networks and so I think outlook for transport is extremely strong I need to get some semiconductor chips into to really be able to satisfy customer demand when they want it as far as transmission is concerned.
We are seeing strength in transmission outlook.
In coherent components on our tunable lasers on our our tunable on our modulators high bandwidth modulators as well as surprisingly enough on 10 gig tunable and so across the board Acos are continuing to go strong well down from peak levels, but theres a lot of.
A lot of chassis out in the market and the networks that are waiting for Acos and so I think we're in pretty good position there and as we start to get qualified on our 400 gig desio modules I think we're going to see a pickup in our transmission business throughout the year.
That's helpful. And then my follow up is on the commercial laser business.
If you look at your peers. There has been just cultural for weakness kind of across the board you, obviously have a different customer concentration in some of your peers can you talk about your success. There is that more related to the geography or are you really seeing a bounce off the bottom that's related to some some weakness over the past year can you just walk through the puts and takes of what's driving that strength versus others who are.
Even some weakness.
Sure I think twofold, you're right our customer base is different.
We have limited exposure into China, especially with our kilowatt fiber laser customer.
And from that perspective, we're seeing a good bounce back and overall demand on our kilowatt fiber lasers that typically go outside of China and markets. We are seeing certainly as everyone has seen a pickup in semiconductor demand and that's why we commented on our service our laser service business.
Up which is usually a good indicator of usage of our lasers in the field and then we.
We are seeing also our micro machining business pick up that typically.
Goes with semiconductor.
Upswings, both be it on the <unk>.
Dealing with semiconductors or the components that they go on in Pcbs and things like that so I do I do think it's a different a different customer base and a different end market that we address compared to some of our peers.
The next question comes from Rod Hall with Goldman Sachs. Please go ahead.
Yeah. Good morning, guys. Thanks for the question I guess I wanted to kick off with three D. Sensing share I know last quarter, you guys had talked about.
You talked pretty cautiously about share right now the numbers look pretty good. So I'm just curious how share is tracking for you now and audits. The back end of the year relative to what you were thinking last quarter and then I have a follow up.
Yes.
Yes.
Rod Thanks for the question our commentary last quarter was around the market size and our expectation for average selling prices due to the smaller chips in the next generation of our <unk>.
Leading customer products and so I'd say you know given the Q4 revenue our biggest Q4 ever in three D sensing.
We bode pretty well with respect to share.
I do think that.
The product is and that has not even been announced yet so it's really in the early stages with respect to how share is going to play out over the long term, but I would say that we're positioned very very competitively and as we've proven to our lead customer we are there for them with high quality.
Meeting their production output.
And their expectations, so I feel really good about our chair.
Okay, great illness. That's good. Thank you and then my follow up with on the 30 million. I know you. You commented wrote them with supply constrained Datacom is capacity constrained I'm just curious like how that 30 million kind of breaks down across the business is it mostly wrote them that that you know could you give us any color on.
What's in the $30 million, but what particular lines are affected there.
Yes in the $30 million, we did not include our our internal capacity constraints like to your point on Datacom. This is our product that our customers want that we can't deliver because we can't get the semiconductors and that is mainly around our transport products broadens wrote them line cards a little.
On our transmission products, but most of the the 30 million really comes from our telecom transport area.
Right and you guys you got plenty of capacity on three D. If that were to flex up upward in terms of demand right Allen.
Yeah, absolutely I mean, we are we have <unk>.
Factual obligations to have inventory there in case.
There is an uptick in end demand or share shifts and so we're ready for our customer and they know it and.
We're going to continue to be there for them. So you're right. We have plenty of three D sensing capacity and in our foundry model.
We really have worked well with our supply chain to make sure that.
They are ready if and when upticks do occur.
The next question comes from Alex Henderson with Needham. Please go ahead.
So going back on to the three D sensing for a second clearly.
Supply conditions.
Broadly are causing everybody to be.
Anxious about supply and so it seems like the three D sensing.
Production, probably is anticipating potential risks to supply.
The products get launched so are we pulling forward some of that.
Demand into the June quarter that might have been something that was produced later in the year or does it change your outlook for the overall.
FY 'twenty two outlook.
To have pulled that much volume into the to the June quarter.
Hey, Alex this is Chris.
I would say, it's a <unk>.
Little early to tell exactly what's going on overall, but are we don't believe this is necessarily a significant.
Pull forward you got to remember last year. There was a delay if you will in the customers' product cycles due to COVID-19, and so kind of as we look back in years before.
And more normal.
Seasonal trends and then considering the additional dollar content and.
And volume relative to say two years ago, three years ago things look relatively normal.
But again with that caveat that its very early to tell what's going on.
In this product cycle.
So have you changed your thoughts on the full year FY 'twenty to kind of.
Growth potential.
Yeah, I would say, we have not changed our view necessarily on the market.
Look.
But I think as Alan indicated earlier that market outlook has a lot of variables like what overall market pricing and what what volumes and mix are going to be in and those we only only have guesstimates to one quarter's worth of the product cycle. So far so our previous views on that the aggregate opportunity.
Are not changed materially at this point.
The next question comes from meta Marshall with Morgan Stanley. Please go ahead.
Great. Thanks.
Maybe wanted to ask a question.
Last quarter, you had noted not expecting kind of a pick.
Pick up and transport until kind of early 'twenty two.
To get a sense of you know is this.
Some of those projects that you thought would hit until calendar 'twenty two hitting today.
Or just.
Any commentary about how its tracking to kind of previous expectations and then the second just seen.
China has clearly had a buildup of some inventory that you were expecting to clear later on in the year just any update there. Thanks.
Yes, Hi, Matt.
Yeah, I would say that we have seen a bit of a demand change from expectations of three months ago in that.
Demand for transport and I think it's real demand and I don't think it's a bunch of double ordering but it's hard to say.
And I can usually gauge that by how many Ceos call me.
And ask for deliveries and I can tell you. It's it's brisk so.
I would say that.
That the transport demand is real it's picked up more than we had expected and if we were able to get the semiconductor chips that we need I think we would.
Be able to really really ramp up.
Our transport revenue, but we're continuing to work on that so don't get me wrong I think the challenge. We had is we built up some inventory that for flex demand and more demand came in than we had expected.
Therefore were unable to satisfy all of that demand I would say that the.
The longer term demand trends from our perspective are very solid as we talked about the transport components in submarine cables going and throughout the world really our leading indicators for future demand and our product positioning for our M buy in.
Now, it's starting to proliferate significantly outside of China is very very strong.
Your question about.
Excuse me your question about China inventory is that specific to five G. In our Datacom chips.
Or more general.
And well I think you had mentioned last quarter that you thought there might be some inventory within China that should be clearing kind of in the calendar Q4 period. So just trying to see if any of the pickup you're seeing in China is kind of ahead of expectations.
Yeah, I'd say for the inventory, we were specifically talking about our five G Datacom chip.
Inventory that in fact, we had revenue deferral.
In prior quarters.
We have seen activity around five G, but that inventory is slow moving so far.
We expect that to start picking up over the next several months and to your point hopefully that'll be.
Flushed through the system.
By the end of the calendar year, and then start meaningful BMO.
Laser chips shipments into calendar 'twenty two.
The next question comes from stomach <unk> with J P. Morgan. Please go ahead.
Hey, good morning, Thanks for taking my questions I guess.
I can just start with the supply constraints.
From the tone of your.
Your conversation does sound like things are getting a bit worse.
So just wanted to get a sense I know, it's a bit early for fiscal <unk> and onwards, but should we be thinking about more material.
Wins in the 30 million or maybe some headwinds on margins as you go out and procure inventory and as a second part to that seasonally we've seen telecom and Datacom move up from one <unk> to Q does kind of the supply chain constraints constraints limit Europe delivered do that are in dispute. Thank.
Thank you.
Yeah, I would say, it's a little early to say because I am having discussions with the executives at the semiconductor companies that are continuing to work to try to support us.
And we're hopeful we can make further progress with them and we booked out long long lead times orders for these critical semiconductor chips that will not we will consume because there's long tails long long life, and our <unk> and <unk>.
And so I think from that perspective, it's hard to say, what's going to happen in Q2, because in fact later today I've got a call with the CEO of a semiconductor chip company. That's one of our big bottlenecks and I'm hopeful to get good news, but that news would only impact Q2, I would say that on the margin front.
Unlike others. We've included the cost of expediting semiconductors or paying brokers higher charges. We've included those costs in our non-GAAP numbers and so you saw that.
Impact in Q4.
And it's in our guidance to continue to pay those higher prices and expedite fees to two similar to semiconductor companies in our Q1 guide and I expect them to also be in our Q2 performance as well.
Okay got it. Thank you thanks for taking my question.
Sure. Thanks.
The next question comes from George Notter with Jefferies. Please go ahead.
Hi, guys. Thanks, very much I guess I wanted to dig into the sort of Huawei discussion going back.
Year year, and a half ago.
If I look back I think the narrative from you guys was really around.
There's the Huawei business ramped down given the U S government controls.
You would see opportunities to win more more sockets more market share in other traditional system suppliers as they take share from Huawei around the world and I guess I'm kind of wondering like if you can revisit that narrative and you know what are you seeing in the marketplace in terms of share.
Your traditional customers.
Huawei Thanks.
Yes, George Thanks, This is Chris and I'll I'll take first stab at it and let Alan come in.
And add to it.
But certainly on the Huawei fronts right. We continue to have business with Huawei. It has significantly declined year over year and you know that's really driven by the fact that.
Where they have opportunities to buy some of what we were supplying from now.
Non U S suppliers.
They are they are tending to buy from non U S suppliers when they can do that.
Fortunately for us.
Many of those situations or product lines that prior to to the U S. SEC actions against Huawei, We decided to get out of for example, lithium niobate modulators and Datacom modules.
Countering that is is some of our more bleeding edge technology for example in rodents.
There may not be a non U S supplier and there may not be another supplier in the world with with our capabilities and so we've seen those product lines grow with him and Huawei and sort of you know.
Sort of pushed back a little bit on the headwind the net headwind we have with them that said there.
There certainly is activity around the world where we're.
Service providers are looking to use western suppliers more extensively.
That has resulted perhaps in some near term AR increased sales for for our Western network equipment manufacturers, but to be clear, that's a long term opportunity for our customers and therefore us.
Given you can't switch network vendors overnight.
Multiple quarters, if not multiple year process to do that and.
And as we've highlighted in the past our share of wallet with our western customers significantly higher than with Huawei.
And therefore as that transition continues to unfold over the next few years, we should be a net beneficiary.
Of that given that share of wallet.
Great. Thank you very much.
The next question comes from Simon Leopold with Raymond James.
Please go ahead.
Thanks for taking the question I wanted to see if you could update us regarding the comments you made on the prior earnings call on the <unk> sensing market. When you indicated you expected the market would be down 20% to 25% in your fiscal 'twenty two.
I I discerned, maybe a little bit more optimism on today's call with the additional commentary around the automotive opportunities.
Just update us on how you're thinking there and then I've got a follow up.
Sure Simon this is Alan thanks for the question.
I would say that again our commentary around.
Our fiscal 'twenty two three D sensing market was really around the average selling price of a chip.
Chips going into next generation devices going down as a result of smaller.
Die sizes and so.
Two things one of which is again record Q4 results positioned very well that's that's not part of our perspective on market because share is still not clear.
But we're feeling pretty good about that I would say.
Till a device gets announced and the traction that the end user and customer are really comes through it's going to be hard to say what is going to happen to overall unit demand and so our commentary was around hey, if unit demand is flat. We believe the market is going to be down 20% to 25% now does it look like.
That's playing out.
And maybe you.
You might you might sense of softening with respect to.
With those numbers, but it is going to be down assuming units are flat now are is our lead customer gaining share I think so and therefore may be.
There could be higher unit volume that would offset some of that average our average sales price per chip.
In our fiscal 'twenty two.
I appreciate that and then in terms of the supply chain issues in the telecom component, specifically telecom not telecom plus datacom.
I'm sort of discerning this implies a sequential decline probably in the mid to high teens percent and I'm wondering how you're thinking about once the supply chain gets better not necessary when but when it does.
Do you expect to see a really a catch up spend so essentially it sits in backlog and we get a better than seasonal recovery at that point. Thank you.
Chris do you have the expectation with respect to trends trends.
Telecom.
Q1.
Year on mute Chris.
Yeah, we expect telecom to certainly declined sequentially as we highlighted in the guidance I'm I I'm.
I'm not I'm not certain it's up.
The magnitude that youre, saying, Simon, but certainly the supply constraints are.
Seriously handicapping growth in that space.
Yeah, and then as far as your other question about is that demand.
There when we're able to satisfy I'd say, yes, mostly because a lot of that demand is very high and <unk>, where we are.
The leader and in most cases, if not all cases sole source and so.
That's why we're working extremely hard to get the semiconductors, we need because our customers bet on us and we certainly don't want to let them down. So I'd say that demand is is there when we are able to satisfy so it will it will get pushed out if we're not able to satisfy it and don't think we will be able to satisfy all of it in Q1 for sure but.
Whether we are able to satisfy that in Q2 is another another question that will answer on the next call.
The next question comes from Ananda Baruah with loop capital.
Please go ahead.
Hi, good morning, guys.
Congrats on the strong execution and thanks for taking the question questions. Two if I could I guess the first one is on <unk> sensing.
I think going back to three D. Sensing is there any opportunity.
Get more favorable pricing to fiscal 'twenty two than than what you were originally thinking 90 days ago.
Any context, there would be great and then I have a quick follow up thanks.
Yes, I mean, we're not going to talk specifically about our price discussions with our customers.
I would say that.
We do we do sign up for multiyear agreements and.
Those those tend to be.
The intense negotiations that you know, we're very happy with where we ended up I'll put it that way.
That's really helpful and just going back to <unk>.
The telecom in China, five east specifically.
Could you could you just give us like the context as to where they are and the re qualification process or whatever the right way to think about it.
Given the displacement that happened with Huawei.
Sort of last August and September and that they were yesterday the carriers, we're going to.
Calling it a re qualification process, but whatever the right terminology is.
Where they are today.
And are you seeing a pickup off of sort of what's been the last sort of 910 months Kate.
Cadence for Europe for you that and that's it from my fault.
Christina sorry, this is Chris on <unk> chips in China.
What I would say is is it's I would.
An element of re qualification where are our customers.
Needed to obtain alternate sources of semiconductor chips.
For for their base station designs, but you know I think the way that a lot of folks are tracking it does around tender activities and tender awards for base stations and.
This summer where there has been some tender activity tenders awarded to network equipment manufacturers by the China Mobile China Telecom.
The worlds to deploy additional base stations.
Uh huh.
I would say the activity there was moderate there wasn't day, a huge uplift if you will than expected volumes.
But on the other hand, good to see that that those tenders were released and awarded and we expect as Alan highlighted earlier is that once the overall supply chain is worked down the inventory of product that.
We've already provided which should happen over the next few quarters that as we get into the middle of our fiscal.
Fiscal year or into the new calendar year that we would then see a resumption in growth for us for those products.
And maybe if I could just add as well.
The good news is there is a lot of activity in China, not with just our large customer, but with others on transport deployments, So metro and long haul deployments are continuing and I believe that's usually are indicators that there is a commitment to build out the fiber networks because once you do that then.
The bottleneck at the edge of the network really gets alleviated and you need to make sure you have the metro and core networks built out and we're seeing a lot of activity in that area.
The next question comes from Christopher Rolland of Susquehanna. Please go ahead.
Thanks for the questions guys.
The first one is the.
The shortages that you guys see out there is this changing your desire for.
External versus internal capacity, both both front end and back end.
Yeah, No I don't think so I mean these are unique semiconductor chips in most cases that we are not going to be.
Manufacturing.
Ourselves in any situation that I can see so we're reliant on our semiconductor test.
Suppliers and their foundry partners to increase the wafer output and allocate some chips to us.
Bigger scheme of things our consumption of semiconductor chips is relatively small.
So we don't need.
Millions of these chips, we need thousands of the chips are tens of thousands of the chips and then from that perspective, it would make no sense for us to get into.
The the FPGA business for example.
We're going to continue to rely on them and partner with them to get what we need.
For sure and I know, we've talked a lot about transport, but maybe.
Maybe you can double click on that kind of next level of demand that we're seeing there.
You did talk about I think this pre build of China inventory.
Any status on that what are the transport applications ultimately.
Going going to be used for here and geographically what does this mix look like is it are there moving parts other than China here.
Oh, Yeah, I think that it's a global demand pick up that we've seen on transport. Both wrote them wrote and line cards and what we did talk about is our transport components and submarine components and.
We are growing that output.
As a result of the demand and there are no semiconductor component.
<unk> with respect to our our transport component.
Output and so we've seen strength of that and our pump lasers in China as well as outside of China as well as submarine cable deployments that use a lot of our components under the at the bottom of the Ocean are high reliability, So I'd say that.
It's a broad increase in demand even in the last three months since our last earnings call for those components as well as the road of mine cards, both inside of China.
As well as the rest of the world.
Chris do you have anything else to add on that.
Okay.
No Alan I think the key point is that it's it's it's it is global in nature, and if anything I mean, China is growing on the telecom transport and transmission side, but it's really the western world that is picking up so significantly at present.
10, and this is as I think if you go back on on prior calls we've highlighted that that China kind of let a little bit on some next generation architectures.
And we fully expected the west to come on strong.
And that's only been delayed by by COVID-19.
And while unfortunately, COVID-19 continues to be a problem I think you know world is moving on at least in telecom deployments and figuring out how to.
Get going and deploy that bandwidth because at the end of the day with internet bandwidth growing 30% per year.
You can't skip a lot of years of expanded deployments or else you run into a big problem very quickly and as Alan highlighted five G opening up the edge of the network you need to put in that core capacity and that's what's happening.
The next question comes from Michael Genovese with West Park capital.
Please go ahead.
Okay. Thanks, I don't think so my first question I wanted to understand the margins a little bit better.
It seems like in the quarter you reported the.
Gross margins were a little bit weak, which I assume has to deal with the supply chains and the rotem constraints, but then the outlook. It seems like the constraints were getting worse, but the operating margin guidance is very very strong. So just can you just help me reconcile margins for these two quarters and what's going on.
Yeah, Hi, Michael with watches I'll take a crack at it and then Chris and Alan can jump in as well yeah. So margins in fiscal Q4, you're quite correct. They were impacted negatively by some of the increased costs that we had both because of some of the site measures we've been taking for COVID-19.
And also because of some of the expedite fees that Alan talked about that we're incurring and some of the brokerage fees that were incurring having to do with getting in some semiconductor products.
Moving into Q1 again, our operating margins of 35% to 32, 5%.
Quite pleased with those are those margins, where we're expecting to continue to have the.
At the same type of costs that we had in Q4 into Q1 as well and we've reflected that in the operating margins that we've communicated from a guidance standpoint, what's really benefiting us is a really good product mix our laser businesses is increasing.
Quarter over quarter, and that's helping us quite a bit as well and even looking forward.
You heard from the prepared remarks, Alan commented on the.
The backlog that we've got core melt chips is is at a record and so when you have that type of favorable product mix, that's going to pull down to our operating margins as well. So those improvements in product mix are combating some of the headwinds we're seeing from our supply chain cost standpoint.
Great. Okay. Thanks for that and then my second question is.
First setting a transport.
Trade working okay, but we're expecting it to get alright transmission, we're expecting transmission to get better at some point given what we're seeing in transport. My question is is it 400 ZR relative relevant to that conversation is that is that an important market is as transmission demand.
<unk> at some point in the future and is it something that you guys need to play more in Grace.
Hum.
At least in the near term I mean, the ZR market is certainly an important market.
It's only a small portion of the overall 400 gig and above our market and as Alan highlighted earlier R. R.
Currently and what we expect will be ramping up earlier is is more of a coherent components. So our high speed for.
For example high speed modulators at 608 hundred gig.
Narrow line width tunable lasers that then made up with those those modulators those are in production and ramping.
Present, as well as other components that go into our folks that are building 400, 608 hundred gig modules are our line cards and again as we mentioned earlier, our 400 gig desio modules.
Are either D. C O ZR plus however, you want to think about that.
Sort of format or standard they adhere to the R is certainly something where we're targeting on our roadmap, but it's it's not the be all end all for us because it's a pretty small portion of the market relative to you know.
What how big the pie is going to be in the fastest growing portions of it. It's just a new portion is probably why there's a lot of focus on it but it's certainly not the largest opportunity ahead of us in our top focus.
And we have time for one more question and our allotted time.
That comes from Fahad.
With M. Tam partners. Please go ahead.
Thank you for taking my question I know it will come out in the 10-K, but can you tell us.
Hum.
10% customers in the year.
Yeah.
Sure.
Hi, Todd this is Chris.
Yeah as you said it will come out in the 10-K, so I don't want to get too too quantitative if you will.
But maybe perhaps the easiest way to answer that question to say, we had three three folks in our 10% customer list over the past several years from time to time, not all three of them on that.
List in any particular year and St. St folks are in the mix there should not be anything surprising in the debt.
Greater than 10% customer as we've highlighted our top western customers are growing significantly by double digit.
Percentages year over year, and our largest customer in China Huawei is declining by double.
Double digit percentage year over year, where they're all exactly land in that 10% customer list will have to wait and see in the K.
Okay. So can you. So I was trying to get an answer around Huawei and how material Huawei is.
Revenue.
And to your outlook can you provide some insight to that.
Yeah.
As I said I like Huawei is hanging around and you know it is our.
Around a 10% customer that's why we want to wait and comment on the specific number on when the K comes out.
They have been much larger than our declining.
Year over year, and we expect to continue to decline.
Overtime as well given given.
Both.
Our reduction and being in a limited set of Skus. If you will primarily high end wrote them with them as well as.
Western service.
Service providers moving away from from Huawei, and moving to our Western network equipment manufacturers, where we have larger footprint. So.
So we don't see it as a reduction in our overall global market share.
Despite a reduction within Wally.
Yes, just to add to that Chris I think the other thing we've seen is a pickup in demand from other network equipment manufacturers in China.
Perhaps or gaining share.
In domestic China deployments, and so I think overall.
We're in pretty good position with the China market.
This concludes our question and answer session I would like to turn the conference back over to Jim Fanucchi for any closing remarks.
Great. Thank you drill this does conclude our call for today, we would like to thank everyone for attending and we look forward to talking with you. All again when we report the first quarter of fiscal 'twenty. Two results in early November. Thank you and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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