Q2 2022 Lumentum Holdings Inc Earnings Call
Good day, everyone and welcome to the dimension Holdings second quarter fiscal year 2022 earnings call.
All participants will be in listen only mode. Please note today's event is being recorded for replay purposes.
At this time I would like to hand, the conference call over to Kathy Thompson, Vice President of Investor Relations. Mr. <unk>. Please go ahead.
Thank you operator, welcome to the mentioned fiscal second quarter 2022 earnings call.
This is Kathy Todd dimension as Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer.
Wajid Ali Chief.
Chief Financial Officer, and Chris Coldren, Senior Vice President and Chief strategy and corporate Development Officer. Today's call will include forward looking statements, including statements regarding our expectations regarding the pending acquisition of Neil photonics, including market opportunity is.
Expected synergies financial and operating results and expectations regarding accretion time to close strategies of the combined company.
And benefits to customers and the markets in which we operate as well as the impact of COVID-19 on our business and continuing uncertainty in this regard.
Trends and expectations for our products and technologies.
Markets market opportunity and customers 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. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our quarterly report on form.
10-Q for the quarter ended October 2nd 2021 and for that was in the 10-Q for the quarter ended January one 2022 to be filed by Lew mentioned with SEC today.
Forward looking statements provided during this call are based on momentum as 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.
<unk> press release with our fiscal second quarter 2022 results and accompanying supplemental slides are available on our 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 .
Results with that I will turn the call over to Alan.
Thank you Cathy and welcome to the team good morning, everyone.
This is certainly an exciting time with momentum.
Actual demand for increased bandwidth and communications speed between networks data centers and all connected devices plays to our strength as a technology and market leader in photonics.
Demand is exceptionally strong and growing for our products, our cloud and networking customers are entering a multi your hardware upgrade cycle and rely on our leading edge photonics as their fundamental enabling technology.
We are broadening the application of our <unk> sensing lasers beyond mobile handsets into automotive driver assistance designs and VR applications.
Demand for our commercial lasers has never been stronger as industrial factories, and semiconductor fabs expand and upgrade their capability.
Second quarter demand was very strong across all major product lines.
Our results were above the midpoint of our guidance on all metrics.
Industry wide supply shortages have worsened with the recent surge in COVID-19, and are negatively impacting our third quarter revenue guidance by more than $65 million.
These shortages come at a time when customer demand is accelerating for our differentiated communications products.
Our products are essential to multiyear expansions in next generation optical network capacity.
Just beginning to be deployed.
We continue to work to alleviate supply constraints and expect fourth quarter revenue to be up from that of the third quarter.
Furthermore, we expect supply shortages to improve by the second half of this calendar year.
Looking beyond these near term supply challenges I am highly optimistic about our outlook and believe market inflections beneficial to us in our addressable markets.
Drive double digit revenue growth in fiscal 'twenty, three and beyond.
Not including the pending acquisition of Neoplatonic.
On our last call, we announced the Neo Photonics acquisition. This is a very exciting transaction and we continue to receive positive feedback from our customers.
The combination gives us a more complete product and technology portfolio.
This enables our customers to address their next generation cloud and networking speeds and scalability requirements.
We are confident in this long term market opportunity and the value. This combination creates.
We're also excited about adding neoplatonic talented team of experts to momentum.
We have made excellent progress with our integration planning and are on track with the previously announced closed timeline.
Two key closing conditions are now satisfied.
On January 20, <unk>, we announced that we have received U S antitrust clearance and just two days ago Neoplatonic shareholders approved the transaction and a special meeting of stockholders.
We are working diligently with antitrust authorities in China.
Expectations of closing the transaction in the second half of calendar 2022 remain unchanged.
Now let me provide some details on our second quarter's results.
Telecom and Datacom revenue was up quarter on quarter with exceptional strength in nearly every telecom product line.
Demand in these markets is also accelerating.
Next generation customer systems are just hitting an inflection point as new multi year network deployments are just starting to ramp.
While we were supply constrained across many of our product lines revenue from high speed 400 gig and above coherent components and modules nearly doubled quarter on quarter.
Five G <unk> streaming and network access requirements increase the speed at the edge of the network must also increase in the core of the network upgrade to higher speeds as well.
Transceivers, serving edge applications were up more than 60% quarter on quarter and more than 130% year on year.
Pump laser sales grew more than 30% sequentially to a new all time high.
As we've said previously elevated pump shipments frequently have been a leading indicator of future telecom demand.
Another leading indicator of telecom demand as optical fiber deployments for networks Cigna.
Significant investments in fiber infrastructure are underway as operators expand capacity capability and access.
We expect these infrastructure investments will propel lamenting into double digit growth for multiple years.
In Datacom <unk>, serving high speed cloud data center applications also achieved new record revenue.
Book to Bill for Telecom products exceeded one for the quarter and we have more than two quarters of datacom backlog already booked.
We expect to bring additional emo manufacturing capacity online in March which will help us ramp our datacom shipments through this calendar year to fulfill strong customer demand of our differentiated products.
These points, along with our design wins and long term share and supply agreements with market, leading customers gives us confidence that we have a strong long term outlook in telecom and Datacom.
Accelerating telecom or Datacom market demand is coming at a time when the supply environment is very dynamic and challenging.
Supply had been improving heading into and throughout the bulk of the second quarter.
However, late in the quarter the latest pandemic surge once again negatively impacted supply.
This contributed to a $50 million gap between the supply of material and customer demand in the second quarter.
Looking forward to the third quarter, we expect shipments of products that rely on third party supply semiconductors will be the primary driver of supply constraints.
The demand from our customers has also recently accelerated and we expect this will increase the gap between supply and demand, resulting in more than a $65 million impact to our projected revenue in Q3.
Therefore, looking to our third quarter, we expect telecom and datacom revenue to be modestly down quarter on quarter.
We continue to work diligently with our suppliers and on alternative sources of supply to alleviate shortages.
Turning to industrial and consumer second quarter revenue was down from last quarter as expected due to <unk> sensing seasonality.
Being the trusted partner in the industry enabled our <unk> revenue in the first half of fiscal 'twenty two to be higher than that of the first half of fiscal 'twenty one.
An important element of momentum <unk> sensing and lidar product strategy is to deploy our platforms into new markets and applications.
I am very excited about the milestones we have recently achieved on this front.
Some of our recent public announcements highlight our progress.
We recently announced two new automotive customer wins. The first was a partnership with Eisai, who is making all solid state lidar modules for Adas applications, leveraging our differentiated high.
Our multi junction pixel arrays.
We also announced that we have begun mass production of a pixel solution with Stanley electric used for in cabin driver and occupant monitoring.
These announcements complement other design wins and opportunities in our funnel.
A broad range of customers are increasingly relying on our enabling technology for their critical lidar in in cabin monitoring systems, we have strong customer traction and augmented and virtual reality opportunities that we expect will come to market in the next few years.
We believe most AR VR applications will employ multiple lasers.
The use cases for these lasers include eye tracking and tracking or gesture recognition and world facing imaging applications.
Customers in this space value, our differentiated products as well as our unparalleled experience quality and reliability track record and scale in the industry as they are targeting high volume and high performance applications.
We expect third quarter, industrial and consumer revenue to be down sequentially, primarily due to normal consumer product seasonality.
Our commercial lasers business was up strongly again quarter on quarter as expected.
Strength in lasers for manufacturing of semiconductor and consumer electronics and life science applications complemented strength in our fiber lasers for macro material processing.
We expect third quarter laser revenue to be up again sequentially driven by growth in new products and the overall market.
We expect lasers quarterly revenue surpassed our previous record as the business grows over the coming year.
Before turning it over to Wajid to run through the numbers I'd like to thank our employees around the world all of their hard work, putting us in such a great position in the market.
And for the resilience and doing this during such challenging times.
With that budget.
Thank you Alan.
Net revenue for the second quarter was $446 $7 million, which exceeded the midpoint of our guidance range net revenue was roughly flat sequentially and down 7% year on year.
GAAP gross margin for the second quarter was 46, 5% GAAP operating margin was 19, 1% and GAAP diluted net income per share was <unk> 75.
Second quarter non-GAAP gross margin was 51%, which was down sequentially and year on year, primarily driven by the change in product mix.
First quarter non-GAAP operating margin was 31, 7%, which decreased sequentially and year on year driven by the gross margin decline second quarter non-GAAP operating income was $141 6 million and adjusted EBITDA was $162 4 million.
Yeah.
Second quarter, non-GAAP operating expenses totaled $86 4 million or 19, 3% of revenue.
G&A expense was $38 $6 million R&D expense was $47 8 million other income and expense was a net expense of $1 million on a non-GAAP basis.
Second quarter non-GAAP net income was $120 2 million and non-GAAP diluted net income per share was $1 60.
Our fully diluted share count for the second quarter was $75 3 million, our non-GAAP tax rate remains at 14, 5%.
Onto the balance sheet cash and short term investments increased $178 million sequentially to approximately $2 billion.
During the second quarter, we generated $206 5 million in cash from operations and purchased 330000 shares for approximately $30 million.
To date, we have purchased a total of $4 5 million shares for $363 million under our previously announced two year $700 million share buyback program that was authorized by our board of directors in May 2021.
Turning to segment details.
Quarter optical communications segment revenue at $397 $4 million decreased 2% sequentially due to the expected seasonality for industrial and consumer partially offset by strong sequential growth in telecom and Datacom.
Optical communications segment gross margin at 58% decreased sequentially and year on year, primarily due to the change in the product mix, our second quarter laser segment revenue at $49 $3 million increased 16% sequentially and $60.
6% year on year second quarter lasers gross margin at 53, 1% was up sequentially and year on year due to higher volumes.
Now onto our guidance for the third 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 third quarter of fiscal 'twenty to be in the range of $375 million to $405 million. This guidance reflects over $65 million of impact to revenue driven by shortages of semiconductors and other <unk>.
Materials. However, we do believe that this demand is durable and that as the supply chain improves we will return to strong growth base.
Based on this we project third quarter operating margin to be in the range of 24% to 26% and diluted net income per share to be in the range of $1 one to $1 19.
Our non-GAAP EPS guidance for the third quarter is based on a non-GAAP annual effective tax rate of 14, 5%. These projections assume an approximate share count of 75 million and interest and other income and expense that is a net expense of approximately.
$1 million.
With that I'll turn the call back to Kathy to start the Q&A session Kathy.
Thank you <unk> before we start the question and answer session I would like to ask everyone to keep to one question and one follow up this should help us get to as many participants as possible before the end of our allotted time.
Operator, let's begin the question and answer session.
Thank you Mr. As a reminder, if you'd like to ask a question today. Please press star followed by one on your telephone keypad and stuff on it by two to come to your question. Our first question is coming from Sonic chest achieved from J P. Morgan.
Your line is now open if you'd like to proceed with your question.
Thank you and thanks for taking my question. So on the first one if I can just start with the supply chain and when do you see if I can get a clarification on your comments about for Q. It did sound like in terms of your guidance for Q4 revenues to be up quarter over quarter, where you're not embedding in as much supply.
Improvement, it's more of a fiscal 'twenty, three where you see.
The supply chain, improving so maybe if you can clarify that because what I'm trying to get to is how much of that fourth quarter guidance is contingent on supply improving and you being able to capitalize on some of this constrained led pent up demand that you are talking about in fiscal third quarter.
And I have a follow up thank you.
Yeah, Okay. Thanks, Thanks, Mike.
Well I'll start with demand being very very strong as we said in the script.
And.
The impact that we're seeing in Q3 was really result of what we saw happen late in the in Q2 and into January where some of our suppliers were impacted by increase in Covid, we've seen that.
A bit and so we're starting to see a better supply of ships today that turned into deliveries really late this quarter and into Q4, so that gives us confidence even with the seasonality of <unk> sensing.
In Q4 lasers will be up data com will be up we believe the supply will be up that will give us confidence that Q4 will be up even in the typical low point of three D. Sensing in the June quarter. So that's kind of the.
Where we are with the short term outlook I think long term for <unk>.
'twenty three and beyond our confidence is really based upon the demand of the <unk>.
Inflection point of demand, where new networks that we've been talking about this for over a year new networks are starting to be deployed at higher speeds up to 100 gig and new architectures for <unk> and Thats just at the very early stages, and we believe that through fiscal 'twenty three we will see.
Better supply of componentry in semiconductors that will allow us to get that double digit.
Annualized growth.
Even even with <unk> sensing seasonality throughout the year. So I think it's just a great time for us.
Getting through this short term supply challenge is challenging for us, but we will get through it in our products and technology and our people are just doing a great job getting us through it.
Got it got it.
For the follow up I know you had mentioned the double digit growth in revenue in fiscal 'twenty, three and seeing that sort of being.
Supported over a multiyear period as well.
Can't help but ask three something obviously is a big portion of your revenue today, So what would be the assumption in terms of growth over a multiyear period in <unk> sensing embedded in that.
Sort of guidance.
Well I mean, we've gone five years in a row thinking we're going to be losing share and we're certainly modeling.
Share loss into our projections that said, if we continue to execute and out execute our competitors, that's an upside to our expectations. So I think that's number one on the mobile handsets I do think as we mentioned in the script that we are getting into automotive and we are getting into our VR, which is more of a longer term investment that we have.
Making over the last several years and so I think that really starts kicking in in a more meaningful way in fiscal 'twenty four and beyond.
But we are starting to see the early signs of revenue coming from those applications. So I think from our perspective, the telecom and Datacom growth is at the early stages and that will really fuel us.
Through the double digits in 'twenty, three 'twenty four and beyond.
But that said I do think there are other drivers tailwind that will it'll help us on commercial lasers with new products and industrial production.
Well as <unk> growth that I talked about.
Thank you for to stomach for his question. Our next question is coming from Thomas <unk> from Barclays. Your line is now open if you'd like to proceed.
Good morning, guys. Thanks for taking my question I had one on.
Your largest customer is clearly you've heard other reports. This this earnings period. The results are quite strong there in December and also into March.
Apply issues seem to not be impacting them as much as in other areas can you just talk about why youre seeing.
Kind of the greater than seasonal decline in the December quarter, I understand that you had kind of signaled that that would be down, but it seems down more robustly any reasons for that.
Well, Tom this is primarily due to the timing of.
The announced new products I mean, if you look back in calendar 'twenty. If you recall the introduction of the new handsets was much much later and that drove a higher December quarter, then in September quarter, well. This this year the products were announced early that ramp up happen earlier and Thats why we in the script.
About.
First half of our fiscal 'twenty, two compared to first half of our fiscal 'twenty one.
So fiscal 'twenty, two was actually up from fiscal 'twenty one.
And if you look at in the aggregate of that six month period, which is really the launch period, we actually did quite well with growing our revenue even though the chip size in the ASP of those chips was down.
I think that's why we're confident in our continued share.
At our leading customer so I think that's really the difference between the two years and it's really about when the products were launched and when they when they started ramping us up to put devices on the shelves.
That's helpful. Alan I'll just add.
In reality, we are.
I would just say that the seasonality that we are.
We're assuming is not atypical from years prior to last year and as Alan highlighted there is last year was the anomaly from a seasonality standpoint.
Helpful. And then my follow up just on the other side of the coin with some of the shortages that are happening in the telecom and Datacom business could you just walk through where specifically you're seeing those headwinds get worse.
I think a nice way to kind of laid out as maybe transport versus transmission in the telecom business and on the Datacom side as well just to get a better feel for where those increasing headwinds are kind of taking hold thank you.
Sure sure.
I would say if I look back in Q2, the primary shortage was really.
Telecom transport.
And we were as I talked about in doing that.
Earlier remarks.
The telecom transmission business was quite strong and we were able to really ramp coherent components and Teng tunable is quite rapidly.
Now also being impacted in Q3, and so I would say still the majority of the shortages are on telecom transport, but we are seeing componentry semiconductors that are impacting our ability to continue to grant to ramp those coherent components and Teng tunable.
Because demand is so strong as expected and those higher speeds and coherent as well as higher speeds at the edge of the network why which is why our 10 gig tunable lasers. So strong so.
That's kind of the telecom story.
From mostly transport in Q2, the mix of transport and transmission in Q3 on Datacom.
We grew our email business year over year by 45%, we're bringing on more capacity the emo.
Revenue will grow in the March quarter, and then grow more significantly in the June quarter.
And that's really because we have such differentiated products in that transition for 400 gig.
In the Hyperscale is really really starting to acting in a meaningful way and Thats why we have multiple quarters of backlog. There is customers are wanting to get in line to get that capacity as we bring it online. So that's kind of the story and Datacom I'd say.
The Dms business is still.
A headwind for us as <unk> in China.
It is now starting to consume that inventory, we talked about over the last several quarters.
But there is still a little bit more work there to do before we start having really more meaningful revenue and BMO. So our focus is how fast can we ramp our email capacity that's coming online quite successfully.
Okay.
Okay.
Thank you just hoping for his question. Our next question is coming from Alex Henderson from Needham Alex. Your line is now open. Please proceed.
Thank you very much so I wanted to go back into the <unk> for a second.
The numbers in the.
Back half first half of the fiscal year are actually better than what you had originally expected.
And I was wondering if you could talk about what you think happened relative to your share position given the strength of your technology.
And what the mix might it looks like so that we can get some sense of how you outperformed relative to.
To the original guide of down 2025% I think is what you talked about in that business and similarly, as we look forward to the next round should we anticipate a further reduction in die size or dynamic that caused that die size change.
And hence pressure on the overall demand revenue for the category does that reverse as we go into or stabilize as we go into.
The next fiscal year.
Yes, Thanks, Alex for the question, Yes, we did do better than than we had said probably a year ago.
The die size did go down and Asps did go down I think our focus with our lead customers just to make sure we are their launch partner.
And we execute out of the gate and or their design partner of choice and I think thats, what we saw play out in the first half of our fiscal.
Fiscal year, where we were really.
The launch partner and we've got a good share of that business and Thats, what offset those ASP reductions that we saw due to the chip size and so I think it's just a matter of the team doing a great job of executing there.
Your second question around further reduction in die size I would say no I mean, the shrinkage of the die today that we saw in the launch in the second in the first half of our fiscal year.
Really the most dense bichsel array that we think we can do and.
Still give the capabilities that they're looking for that said, we're working on a lot of different chips for a lot of different applications and so one might even expect that there might be more content.
And the next launch of products.
Don't know because they don't tell us everything, but we are working on a lot of different chips that have a lot of different capabilities.
From from how we look at it and so I don't believe theres going to be further die size or shrinkage of.
A component tree from a three D sensing and handsets I think theres going to be expansion into other products.
More meaningful way.
If I can follow up the second question would be on the chip supplier.
Coming on stream in the end of March can you scale that for us.
Is that a 30% type increase in production.
Typing.
Volume increase.
We could get out of that.
New product.
Your line.
Capacity.
Yes, I think if you recall back 18 months or so ago. We said, we were going to be doubling the emo wafer capacity.
Didn't necessarily mean, we'd be doubling the revenue is pricing does come down overtime. So last quarter in Q2, we were up 45% year on year.
This quarter, we will probably be up another 10%.
From from the December quarter, and then we will get the full quarter.
The benefit in the June quarter. So we could expect high teens to 20 ish percent growth sequentially in the June quarter that said, we're still not going to be caught up with demand and thats why <unk>.
Six or nine months ago, we actually added more capacity that will be coming online.
Late in the calendar year and into calendar 'twenty three so our confidence is.
<unk> is strong that our differentiated products, especially on the high speed <unk> is going to drive our demand for those chips and the capacity that we're bringing online will be utilized so that's kind of how we envision the growth in the email business and then at BMO comes back that will be an extra added tailwind for us.
And thank you Alex for his question. Our next question is coming from Rod Hall from Goldman Sachs, which alone is not open if you'd like to proceed.
Yeah, great. Thanks for giving me a question I got.
I guess, one on the sort of phasing of demand there are other suppliers into the Apple ecosystem talking about significant reductions in June and I Wonder.
Do you guys look at that consumer electronics sector, maybe more broadly as you look into the summer do you do you expect any kind of demand normalization, particularly in three D. Sensing like that or is it just too early to have visibility on that and then I have a follow up.
Hey, Rod this is Chris.
I think it's a little early to comment.
We're out of time.
That said.
Not seeing anything unusual in our outlook at this point in time.
As I said earlier on a prior question.
The seasonality in the March quarter as is not atypical from what we've seen in years past other than last year, given the later launch and products.
The June quarter seems to at least at this point look to set up in a similar light similar historical seasonality in.
In the prepared remarks, we commented that the first half we used the first half this year versus first half last year comp. So we kind of think thats, where it averaged out the timing delays of the difference in the timing between the two years and now we're in a much more normal regime, but again very early to tell.
Okay, great. Thanks, Chris and then my follow up is just on the.
VR products I Wonder could you give us any kind of a thought on what the content for you might look like in those is it similar to a smartphone or is it likely to be quite a bit more kind of hard to gauge how many scanning systems there might be and so on so I was just wondering if you could give us any any color on what kind of content you might see in that kind of.
Our product.
Yes, Rod I think from the question I am not thinking of ZR I think your meeting.
Reality VR.
And.
Alexandra <unk>.
Yes, okay.
So the point is we have multiple lasers going into into.
Virtual reality augmented reality headset right, they're going to be eye tracking gesture control world facing all of those require.
Different three D sensing or sensors or lidar sensors, if you will each containing lasers now the lasers probably will have.
The Zip code of.
The individual price that we supply into the.
The consumer space today, but since there's more of them. So we believe there is actually an overall content gain opportunity in that case.
Did that answer your question.
You're asking about <unk> or were you asking about.
ZR.
But as we lose rod sorry about that.
Go ahead, Harry I'll skip to the next question.
Certainly no problem. Our next question is from Simon Leopold from Raymond James Your line is now open. Please proceed.
Thanks for taking the question.
Still a little bit confused on what occurred in the supply chain.
And Alan I definitely heard your prepared remarks, but I guess, you talked about 50 million constraints in the quarter, which we had assumed were primarily in the telecom and Datacom segment, but you ended up putting up.
$267 million versus $2 16.
So.
If I can just confirm that.
The constraints are in that segment and not in industrial and consumer or lasers.
Just to make sure and then in terms of the specific components.
I didn't know whether you were exposed to sort of commodity type low tech components or whether we're talking about things like FPGA. So if you could clarify that and then I've got a quick follow up thank you.
Sure Simon.
Yes, so the.
The impact of you remember the earnings call from last quarter, We said, we expected it to be about $40 million impact.
The supply constraint impact and we Werent talking about Datacom in the Datacom. We view is in our control we have the wafer fab, we produce and add capacity. So this specifically is talking about the telecom segment.
<unk> portion of the telecom or Datacom, and so that impact actually grew through the quarter both from a.
A matter of stronger demand that we talked about but also late in the quarter of constraints that came out from from semiconductors, and I say that it's a broad range of semiconductors from very simple cookie cutter components to things as complicated as FPGA is I would say that that as we look forward.
Word we're starting to see some of that.
Get better from the standpoint of products that we expect to get delivered.
Late in this quarter to help us with the Q4 supply and so that's why the combination of extra strong demand and an easing of the supply constraints of those component trees.
It gives us confidence that Q4 will be up even in the seasonally slower.
<unk> market I would say that if you look at our consumption of semiconductors theyre not the bleeding edge five and seven nanometer node products. There the older technology nodes and so not a lot of foundries are adding a lot of capacity in that area.
But they are adding some but it just takes time, so that's coming online and I think that's what gives us confidence in our ability to start really.
Tackling some of this very very strong demand as we look into fiscal year 'twenty three and beyond.
Thanks, and then just the follow up is how are you thinking about wage inflation and the effects on your operating expenses and I'm sure. The employees are going to thank me for that one.
Yeah, Hi, Simon I think just like it's Wajid here I think just like most other companies.
Also experiencing I'd call it normalized wage inflation in.
And the company.
I think with the demand that Alan talked about especially what we're seeing on.
Some of our higher margin product lines.
Whether it's <unk> or laser business growing.
Both sequentially into Q3 and.
Unexpected actually into Q4 as well, we will be able to offset some of those inflationary opex gains from.
Better margin products shipping.
Thank you Simon for his question. We now have our next question from George Notter from Jefferies.
Your lines will be open now if you would like to proceed with your question.
Yes.
Hi, guys. Thanks, very much I guess I would I'd be interested in asking about the neo Photonics acquisition you guys are another three months down the road in terms of.
Getting towards the close of that transaction any more perspectives on your synergy opportunities where they come from.
Rising an update there would be great. Thanks.
Yes, thanks for the question George.
I couldnt be more excited about where we are with the neo photonics.
Acquisition and the more I get to know the team there the more excited I am about bringing them on board.
I'd say from a synergy standpoint, we are diving into the integration planning in a meaningful way and there's nothing that has changed our outlook as we talked about in November .
$50 million of synergies of which 60% of that should come from cost of goods sold so we're still going through that.
Tactical how do we get that but there's nothing that we've seen so far that changes that set of numbers.
We certainly can give you an update next time, we get together because I think we will have will be much further down the road or the <unk>.
Detailed synergy plan and integration planning, but again, it's an exciting opportunity and customers just absolutely love the combination together.
Great. Thank you.
Thank you George and our next question is from meta Marshall from Morgan Stanley .
Your line is now open. Please proceed.
Great. Thanks.
Alan.
You talked encouragingly about kind of <unk> or the Adas opportunity.
That opportunity kicking in over the next couple of years, just wanted an update on how youre thinking about kind of the Android universe and any potential pick up that could happen. There I have a follow up question.
Let me answer that one first.
Yes.
Sure Thanks for that.
We continue to work with all of the Android.
Handset manufacturers and we are shipping, but just not a very not very much to them today.
I think it's a matter of if they adopt and if they adopt and mainstream products. It will become a meaningful part of our business, we're not counting on that in our guidance and we're not counting on that.
With respect to our double digit expectations of growth through fiscal 'twenty three and beyond.
If that does come through then that will be upside to that that expectations I'd say RBR in Adas.
It's a long haul, especially on the Adas side.
Aside because of that.
That's a multi year design cycle.
And we have we have some wins and where we're starting to launch, but I think that's really more of a.
Fiscal 'twenty four.
Contribution from our perspective.
Your second question got it.
Yeah.
The other part of rods question.
Dr.
And just I mean, I know that Thats, primarily kind of from your neo photonics opportunity, but just how youre viewing.
That opportunity developing.
Yes, Matt this is Chris.
It's a huge opportunity.
One of one of the part of the calculus, and then Youll photonics.
Acquisition that.
Data center, Interconnects and and.
Connecting cloud data centers is a huge opportunity in the transition to 400 gig in <unk>.
Transaction to kind of a more universal solution that that all.
All the major cloud operators are using create say a very large opportunity both at the transceiver level as welling selling components into folks building transceivers. So we think between the combination we will have all basis coverage to do very well in that opportunity.
Alright. Thanks.
Thank you Mitchell. Our next question is from Christopher Rolland from NRG Christopher Your line now if you would like to proceed with your question.
Thanks, guys for the question.
Alan that was some great color on FPGA is.
I was wondering if you could detail, perhaps some more sub components.
That.
Our constraining you guys as analysts.
The more data the better and to track this kind of stuff.
<unk> a lot of help for our analysis.
And also if you could talk about that $65 million progression over call. It the next three to four quarters.
What's your best guess on those constraints.
Yes.
Okay.
Yes, so FPGA as are we.
One of the components.
Are causing this grief.
Why.
Through the past couple of months, we've been surprised by the commitments.
Deliveries that were we were counting on.
And that's less than most more recently as I think.
And then because.
Less of an impact but.
It's it's not just FPGA analog devices.
Other kinds of devices that.
As I said before a cookie cutter stuff.
<unk>.
Whatever reason, we get we get surprised and that's why we're working very closely with our suppliers and with our customers who oftentimes have more influence over the suppliers that we do.
So.
It is broad.
But again, it's probably a handful or two handfuls of suppliers that are creating most of the greif for us that we're working on with the with but also working to as we've talked about in the past to get second sources to alleviate some of those constraints.
I'd say the $65 million progression over time, I think it's a function of supply that we think is getting better but also a function of a demand that is very very strong and so.
If you look at Q4, and our expectations for growth in Q4 will that number of $65. I don't think so I think we're going to grow in Q4 and have pent.
Pent up demand that is what you had talked about in the script is durable.
Really durable because of the product differentiation and in most cases, we're sole sourced.
And if not dual sourced, but mostly sole source, especially on the high end <unk>, where these constraints are hitting us quite quite frequently so.
I would say that.
We're going to continue to grow in Q4 and into the second half of the calendar year.
And then demand becomes the other function of.
Does that number get bigger or not I.
I think it's probably going to get bigger.
Yes.
Alan maybe something useful data.
Go ahead go ahead, because I was going to say something maybe.
Yes, it useful to add is it.
The product lines that are being hit by the shortages are pretty big product lines for us.
If you were to go sort of look at it everything else the product lines that aren't getting hit by semiconductor shortages.
They are up almost 100% year on year.
So now you're kind of come back and say Wow.
That probably underscores.
Think about a network you need a little bit of everything to be able to build a network. So it really highlights the underlying demand environment is really really strong so as as we get more supply you can imagine what that is going to do to those product lines that are now impacted being able to grow at those kinds of rates.
That's why we're very confident about.
As supply improves how strong the outlook looks in 'twenty three and beyond.
Okay. Thanks for that question.
Rack 80, plus.
Weeks of lead times for FPGA, so that it does.
That does all work.
For my second question.
Four.
The industrial laser business obviously.
Coherent didn't happen for you guys, but we kind of see why we're so interested in that market and it seems really quite resilient here.
What about ramping.
Kind of organic investment into that area and there are there some other areas, where you can ramp organic investment.
Outsized at this point.
Given the constraints in your traditional communications businesses.
Yes.
Yes, I mean, the industrial lasers business is very interesting to us.
I think we were willing to buy coherent at the right price and they've got.
The wrong price and so I wish them well.
As I said in the script, our expectations are that our industrial lasers business hit new record revenue levels in the coming quarters.
Really due to both market, but also new product introductions that we're introducing new higher power fiber lasers were introducing new ultrafast lasers for.
Different kinds of material processing and new markets that we haven't participated in the past and so we are ramping up our investments in the industrial lasers, but we're also looking at new markets to consume photonics and that could be in lasers markets for EV battery welding or other kind of exacerbations where are we.
Haven't played in the past, but also.
Different types of industrial markets were.
This shift is happening too.
All of them to use photonics, where they hadn't in the past and so.
Our perspective is we've got a lot of great technology.
That's really useful in other markets and Thats, where were going to be able to expand our.
Addressable market through.
Investing in these types of market investigations, and we have a very very big program and looking at that.
Thank you Christopher and his question on next question is coming from Richard Shannon from Craig Hallum. Richard Your line is now open. Please proceed.
Great. Thanks, guys I wanted to follow up on the <unk> sensing topic here, maybe a slight change in the past questions here kind of looking out into fiscal.
Fiscal 'twenty three and later you talked about some opportunities in automotive both inside and outside the car and a little bit on Android.
I guess from your the answer that I heard I wasn't necessarily.
Wouldn't have concluded that you see a lot of one.
Dollar contribution or added to the current base here. So I guess, maybe I'll turn it around and ask the question of do you see the ability to grow your <unk> sensing business much in fiscal 'twenty three with these new markets or is it going to take years beyond that before that happens.
Yeah.
I'd say the contribution in fiscal 'twenty three will be small.
But there are seeds that we're planting today and we've made some announcements today.
That will pay off in the long run.
I would say that.
Our expectations are that the AR VR becomes meaningful in 'twenty four.
And.
To aid us in cabin become more meaningful in 2025.
And so those seeds that we're planting today and through this calendar year are going to pay off in a meaningful way and contribute to diversifying our customer base and <unk> sensing, but also we're working on other types of applications within existing customers that will allow us to grow three D sensing.
In fiscal 'twenty three.
And beyond and so I'd say, we're focused on making sure. We continue to be the partner of choice and what are the NPI partner of choice development partner of choice for our lead customer, but also the Android base and so if and when they choose to put <unk> into their devices will be there for them and so I'm very optimistic about three D sensing.
Okay.
Well, thanks, I, certainly echo your enthusiasm or it's just a matter of timing and we look forward to hearing about that and my second question is on your comments your prepared remarks around.
Double digit growth potential I think you said that both in fiscal 'twenty, three and 'twenty four I'm wondering if you could delineate a couple of things within that comment first of all on telecom versus datacom relative growth opportunities there and then within telecom I would presume.
Correct me, if I'm wrong that the ratings are a big part of that maybe you can kind of delineate within telecom and maybe kind of.
Give us kind of if you can kind of peel back the layer on kind of the network dynamics that are driving this growth that'd be helpful. Thanks.
Yes.
Yeah.
Sure.
I think it's just bandwidth demand I'd say is probably pent up.
As we talked about over the last since the pandemic.
Most of the capacity adds were happening with.
100 gig 200 gig that transition is happening now so higher speeds 400 gig and above new generations of <unk> are being deployed today pump lasers at new record high submarine pumps and repeaters at very high levels today.
So all of these things are really good leading indicators for what's to come. So <unk> are a big part portion of our growth expectations for 'twenty three 'twenty four.
But as well the <unk>.
Mission speed, so our componentry coherent components that we talked about in the script growing dramatically.
The 10 gig at the edge of the network.
Over 100% year on year, we're adding capacity to probably double that again next year and adding higher speeds to the edge of the network. So there's just a lot of demand for bandwidth that our telecom products and technology and differentiation is really enabling our customers to address.
So I'd say, that's on the telecom side Datacom up 45% year on year on an <unk>, we're going to continue to grow that we're adding more capacity late this year and into next year. So that's going to have a meaningful contributor to our expectations on double digit growth.
And don't forget commercial commercial lasers business, we're going to continue to grow that business and get into new markets and so I think the combination of those things putting aside even.
<unk> and what happens there our confidence is very very high that as these short term supply constraints alleviated.
We'll be on a very very strong growth trajectory.
Okay.
And thank you to Richard next question is from Tim <unk> from Northland Capital markets. Tim. Your line is now open. Please proceed with your question.
Alright, how about that.
Couple of questions here in terms of telecom Datacom sort of breakdowns first off would it be fair to say the sequential growth in.
Fiscal Q2 is pretty evenly split.
Between telecom transmission and.
Datacom chips.
Given your comments about strength in 400 gig components.
So that's one and then as a follow up.
Talked about some pretty impressive growth rates at 400 gig.
Assume that's both telecom and Datacom can you try and size that.
Business relative to the whole of your telecom and Datacom business that 400 gig plus business. Thanks.
Okay.
Hey, Tim so.
Inc. First between.
The December quarter Telecom Datacom.
A lot of the growth was in telecom I think as we've highlighted.
We're capacity constrained in Datacom.
<unk>.
Not at all an issue in telecom or Datacom, but in the case of Datacom certainly it is our own internal manufacturing capacity. So the growth Youre seeing came from from telecom.
The split between between.
It's a little tricky because pump lasers, and <unk> and Paas its are those higher low speed.
All 400 gig and above we certainly believe what we're providing today goes into next generation networks. There that are growing so it was actually.
A relatively small portion of our.
Our business that is at the 100 gig 200 gig at this point in the combined telecom Datacom and.
Portion of the most interesting part is perhaps 10 gig tunable piece by.
By far the largest.
Less than 400 gig.
Speed portion of the business and that's growing because as we highlighted in the script.
As you put 400 gig 600 800 gig in the core of the network you're going to be upgrading the edge of the network to 10 gig and 10 gig tunable possible transceivers are really booming or more than doubled year over year, and we think they're on a on a multiyear growth trajectory as well as they push out into.
To those edge applications broadband access applications that youre very familiar with.
Yeah.
And thank you to Tim we have time for just one more question Ananda Baruah from loop capital. Your line is now open if you'd like to proceed with your question.
Hey, guys. Good morning, I appreciate you squeezing me in here squeezing us in here.
Just a couple.
I believe you had mentioned a little bit ago potential for Edison <unk> sensing for content increases.
Upcoming upcoming models and I was wondering if you'd have any any sense of.
When that May get set.
And is there some potential that you could update us on that 90 days from now May I have a quick follow up thanks.
Yes, I mean, typically if something were to go into a new device that were to be released in the fall.
No for sure.
By our next earnings call kosher.
And so sometime between now and in May we would need to start production.
Production of that and again as I said, we're working on multiple different chip designs and so until it becomes a plan of record for one of our customers. It's hard to say, but I do think that there is.
There is potential for content increase in the back half of this year.
That's super helpful. And then just quick related follow up.
Is that content increase which will occur.
Would it make sense that.
A dollar.
Basically the blended ASP.
It would be stronger as well.
Yes.
Yes, I believe so if I understand your question right I think more revenue per.
That would.
With another chip in it.
It would also drive that.
ASP increases.
Yes that was the question I really appreciate it thanks, so much guys.
Sure. Thanks for the question.
And thank you to Ananda we have run out of time for any further questions. So I'll hand back to Illinois from dimension for any closing remarks.
Great. Thank you Harry I want to thank our customers and suppliers for their partnership in these challenging times I would also like to leave you with a few thoughts as we wrap up this call.
We have work to do to manage through the current near term supply shortages I'm very excited about the accelerating customer demand in telecom and Datacom and lasers.
Additionally, the opportunities we have in automotive augmented and virtual reality and industrial applications, which increasingly leveraged <unk> sensing and lidar capabilities that momentum are beginning to emerge and grow.
Our market, leading and proven product and technologies position us well for all of these opportunities ahead.
With that I would like to thank everyone for attending today and we look forward to talking with you again during upcoming Investor events, which you will find posted on our website.
Thank you and have a great day.
Thank you to everyone who has joined US today. This concludes the call and you may now disconnect your lines.
Okay.
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