Q3 2022 Lumentum Holdings Inc Earnings Call
Good day, everyone and welcome to the lamented holdings third quarter fiscal year 2022 earnings call. All participants will be in a listen only mode. Please also note today's event is being recorded for replay purposes. At this time I would like to turn the conference School I bet, you coffee Tau Vice President of Investor Relations.
Mr. Please.
Thank you operator welcome to the mentioned its fiscal third quarter 'twenty to 'twenty two earnings call.
This is Jonathan Chas momentum as vice President of Investor Relations.
Joining me today are Alan Lowe, President and Chief Executive Officer, Wajid Ali 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 Neo photonics.
Including market opportunity 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 technology, our markets are good 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 target.
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 rich doctors described in the quarterly report on Form 10-Q for the quarter ended January 1st 2022.
And those in the 10-Q for the quarter ended April 2nd 'twenty to 'twenty two to be filed by Lew mentioned with the SEC today.
Forward looking statements provided during this call are based on the mentioned reasonable beliefs and expectations as of today.
You mentioned 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.
As I mentioned in press release with the fiscal third quarter 'twenty to 'twenty two results and the accompanying supplemental slides are available on our website at www dot dimension 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'll turn the call over to Alan.
Thank you Kathy and good morning, everyone.
Strong demand and solid execution by our team around the world resulted in all third quarter financial metrics being at the high end of our guidance range.
We are in an excellent position to grow revenue in Q4 and in fiscal 'twenty three.
And we believe we will see continued revenue growth beyond 2023.
Long term tail winds are driving our markets and demand for our differentiated product is already strong and growing.
Relenting growth in data generation and consumption is driving the cloud and networking markets we address.
Our customers are just beginning multiyear infrastructure upgrades that require our leading edge photonics.
Use cases for our high performance lasers for <unk> sensing and Lidar are expanding beyond mobile handset and in Q3, we announced a new reference design and building automation.
New automotive customers are turning to our lasers for Lidar and we are engaged with more customers on extended reality applications.
Demand for our commercial lasers also continues to grow that's industrial and microelectronic factories, and semiconductor fabs expand and upgrade their capabilities and increasingly utilized the leading edge lasers, we supply.
Near term telecom customer demand is outpacing the supply of third party components, most notably semiconductors that we need to build many of our products.
Our supply chain team is making excellent progress to alleviate component shortages, which we expect will drive strong sequential growth in telecom revenues in the fourth quarter.
We expect this telecom growth combined with the increased output from our recently commissioned datacom capacity were more than offset normal <unk> sensing seasonality in Q4.
We expect Q4 revenue will increase sequentially and year on year.
Our Q4 revenue outlook would result in a new company high for our fourth quarter.
So components supply is increasing demand is growing even faster.
We expect more than a $100 million revenue impact as a result of the gap between demand and supply in Q4.
This is up significantly when compared with an approximate $65 million gap, we saw in the third quarter.
While we expect these supply shortages to continue to improve with the diligent work of our team and our suppliers given the accelerating demand environment, we will likely see customer demand outpacing third party material supply into calendar 2023.
The Neo Photonics acquisition remains on track for the previously announced timeline a closing in the second half of calendar 2022.
We are working diligently with antitrust authorities in China with their approval being the final key closing conditions for the transaction.
Integration planning with the Neal Photonics team gives me strong conviction that the combination will create value for our customers our suppliers and our shareholders through a more comprehensive portfolio of differentiated products for our cloud networking and automotive customers as well as meaningful cost synergies.
Now, let me provide some detail on our third quarter results.
As expected telecom and Datacom revenue was down quarter on quarter due to supply constraints, despite very strong demand.
New applications for our Teng tunable transmission products are accelerating.
These include Metro access and fiber deep applications for cable msos and networking customers.
As well as wireless front haul for mobile networking customers.
Wireless front haul application is just starting to be deployed and is expected to deliver meaningful revenue by the end of the calendar year.
We are increasing our manufacturing capacity for our Tianjin <unk> and soon to be released 25, G tunable products and our wafer fab and our back end Assembly and test factories to address the rapid adoption of this differentiated and enabling technology.
Pump laser sales are robust and grew more than 50% from the same quarter last year.
As we have mentioned previously elevated pump shipments frequently have been a leading indicator of future telecom demand.
In addition submarine cable suppliers are deploying subsea cables at record levels driven by the robust demand from Hyperscale data center operators.
This is another leading indicator of future telecom demand.
We expect these infrastructure investments will help propel lament them into double digit growth starting in fiscal 'twenty three for multiple years.
Emails serving high speed cloud data center applications reached a new record in revenue.
New email manufacturing capacity will allow us to ramp our datacom shipments even more to help us better fulfill strong customer demand for our differentiated products.
Accordingly, we expect fourth quarter emo revenue to increase significantly from the third quarter.
Looking ahead to the fourth quarter, we expect telecom and Datacom revenue to be up strongly quarter on quarter due to the improvements in IC component supply, but still significantly below the level of customer demand.
We continue to work diligently with our suppliers and on alternative sources of supply to alleviate shortages.
Turning to industrial and consumer third quarter revenue was down from last quarter as expected due to three D sensing seasonality.
We are expanding our three D sensing and lidar platforms into new applications in the industrial market.
In the third quarter, we announced a reference design with ambarella for building automation and occupancy sensor systems.
The design uses momentum what illuminator module for high accuracy time of flight three D. Sensing together with Ambarella is AI system on a chip, enabling the application of small sensors with local processing for occupancy monitoring intelligence space management and smart retail.
In automotive we have expanded our development activities with new Lidar customers and we are very pleased to have entered into a customer's supported development agreement for long range Lidar with a market leader in the Adas space.
In addition, we have begun our production ramp of our multi junction VIX will raise price side.
The customer pipeline for our products serving in cabin driver monitoring systems is also growing.
In addition, we have early product traction with multiple customers, who are developing extended reality solutions, which we expect will come to market in 2023.
We expect fourth quarter, industrial and consumer revenue to be down sequentially with typical consumer product seasonality.
Our commercial laser revenue was up again quarter on quarter as expected achieving near record levels, primarily driven by fiber lasers, serving automotive and industrial applications.
Altra fast lasers for manufacturing of semiconductors, and consumer electronics also grew sequentially.
Looking ahead to the fourth quarter, we expect laser revenue to grow again quarter on quarter, driven by new products and the overall market.
We expect laser quarterly revenue to surpass our previous record as this business grows over the coming quarters.
Before turning it over to watch it to run through the numbers I'd like to acknowledge our employees' commitment to implement sustainable practices.
To meet our company wide goal of net zero carbon emissions by 2030, we have transitioned more sites to renewable energy.
Since January our site in Ottawa holds a renewable energy certificate and we installed solar panels in our site in Slovenia.
Our sites in the United Kingdom started procuring 100% renewable electricity in May.
And our San Jose headquarters has achieved a LEED silver certification another step forward in our goal of net zero emissions.
We are also very proud to have achieved the echo vedis gold rating Gorilla Mentum advanced performance and sustainability.
In addition to our progress in sustainability initiatives I would like to thank our employees around the world all of their hard work and resilience during such challenging times.
With that I'll turn it over to watch it.
Thank you Ireland net.
Net revenue for the third quarter was $395 $4 million, which exceeded the midpoint of our guidance range net revenue was down 11, 5% sequentially and down five 7% year on year.
GAAP gross margin for the third quarter was 42, 3% GAAP operating margin was 11, 8% and GAAP diluted net income per share was 35 cents.
Third quarter non-GAAP gross margin was 49, 5%, which was down sequentially and year on year, primarily driven by lower revenue and higher supplier costs.
Third quarter non-GAAP operating margin was 26, 5%, which decreased sequentially and year on year due to lower revenue.
However, non-GAAP operating margin was above the high end of our guidance range third quarter non-GAAP operating income was $104 $9 million and adjusted EBITDA was $125 $1 million.
Third quarter, non-GAAP operating expenses totaled $97 million or 22, 9% of revenue.
SG&A expense was $40 million R&D expense was $57 million other income and expense was a net expense of zero point $9 million on a non-GAAP basis.
Third quarter non-GAAP net income was $88 9 million and non-GAAP diluted net income per share was $1 19 and was at the top of our guidance range provided on our last call.
Our fully diluted share count for the third quarter was $74 5 million, our non-GAAP tax rate remains at 14, 5%.
On the balance sheet cash and short term investments increased $542 million sequentially to $2 $6 billion.
Merrily driven by our convertible note offering.
During the third quarter, we generated $76 $6 million in cash from operations and purchased three 3 million shares for $324 million, which includes 2 million shares repurchased concurrent with the issuance of our 2028 convertible notes.
As of the end of Q3, we have purchased a total of 7.8 million shares of which $5 8 million shares were purchased for $487 million under our $1 billion share buyback program.
In Q3, we also funded a $30 million loan to Neil photonics to support their revenue growth.
This loan is consistent with the terms of our merger agreement.
Turning to segment details.
Third quarter optical communications segment revenue at $344 $2 million decreased 13% sequentially due to the expected seasonality in industrial and consumer and continued material and component shortages in our telecom business optical.
Indications segment gross margin at 49% decrease sequentially and year on year, primarily due to lower revenue and product mix, our third quarter laser segment revenue at 51 $2 million increased 4% sequentially and 62%.
Year on year.
Third quarter lasers gross margin at 52, 9% was approximately flat sequentially, but up year on year due to higher volumes.
Now onto our guidance for the fourth quarter of fiscal 2022, which is on a non-GAAP basis and is based on our assumptions as of today.
We expect net revenue for the fourth quarter of fiscal 'twenty two to be in the range of 405 million to $430 million, our telecom and Datacom revenue is expected to grow by approximately $50 million sequentially in Q4.
As Alan indicated earlier due to the accelerating demand. This Q4 guidance also reflects over $100 million of impact to revenue driven by shortages of third party components.
However, we believe this demand is durable due to customers being at the initial stages of their network upgrades.
Based on this we project fourth quarter operating margin to be in the range of 26, 5% to 28% and diluted net income per share to be in the range of adult 25 to $1 40.
The midpoint of these guidance ranges reflect our expectation our record revenue operating margin and diluted net income per share for our fourth quarter.
Our non-GAAP EPS guidance for the fourth quarter is based on a non-GAAP annual effective tax rate of 14, 5%.
These projections assume an approximate share count of $72 5 million in 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 Wajid before we start the question and answer session I would like to ask everyone to keep to one question and one follow up this should help us get to as many participants as possible before the end of our allotted time.
Operator, let's begin the Q&A session.
Opex, if you would like to ask a question. Please press star followed by one on your telephone keypad if.
If you wish to withdraw your question. Please press star followed by Chi.
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When the first to ask a question. Please ensure that your line is on mute locally.
And now our first question comes from Simon Leopold from Raymond James. Please go ahead. Your line is open.
Thank you very much for taking my question first just a very quick clarification on the you you've highlighted the.
The effect of the shortage is 65 billion in the reported quarter and $100 million in the coming quarter are those cumulative numbers or specific to the quarter.
And then my question is you.
You had previously moved operations out of China, and reduced your exposure to China I'm sure you've got some sourcing from China, and so I'm looking for a little bit of insight in terms of.
Whether you have and if you can quantify your risk from the China Lockdowns and on this topic have you gained share.
From competitors, because you have less direct China exposure. Thank you.
Thanks, Thanks Simon.
So specific to the quarter or <unk> 65, and 100 million. It's it's basically basically as we entered the quarter what do we see as a shortfall based on customer demand and what we're able to supply. So I guess you'd say, it's specific to the quarter, meaning.
While we're growing telecom and Datacom revenue by $50 million from Q3 to Q4, the gap between our ability to supply and the customer demand has moved from 65 million at the beginning of Q3 to $100 million in Q4.
So I hope that answers your question I mean, as we look at today, we're not able to satisfy $100 million of customer demand some of that which rolled over from last quarter.
Of course.
Is that answer your questions.
Yeah. So it's basically 65 plus an additional 35. So it's building because you hadn't met the demand in March quarter, and you can't meet an incremental 35.
Yeah, you can look at it that way, but at the same time again.
At the same time, we're we're eating away at some of it given that we are growing our telecom and datacom revenue by approximately $50 million from Q3 to Q4. So what we're trying to say is while we're able to grow that business by 20% quarter on quarter. The demand is growing even faster than that.
To Q4.
Perfect that.
Your your China it yet okay.
Okay, that's where your China sourcing.
Impact in our business, we do have a factory in China still.
And it was shut down during the Lockdowns in the end of March for 13 days, so that did impact slightly our R. A T.
Q3 revenue and more importantly, it impacted our ability to supply into our other factories for Q4, and that's factored into our guidance in Q4 on a component standpoint.
We have been.
Working diligently over the last couple of years to sole source not eliminate sole sourcing and get a the ability to have dual sources and assurance of supply in situations like we're having today so.
As we look forward.
Minimal impact to our from the Lockdowns on supplier suppliers impacted by by shutdowns and as far as share gains are concerned it it's really hard to say because I think.
If we were able to satisfy the demand yeah, we'd be gaining a lot of share.
It's hard hard for me to tell without looking at what our competitors are announcing to know if we're gaining share.
I'd say, we probably are.
Thank you very much.
Thanks Simon.
Perfect. Thank you very much for your question.
Our next question comes from Sam Nick Joseph from Jpmorgan. Please go ahead.
Hi, Good morning, Thanks for taking my questions I guess for my first one.
See you decided to exclude the $5 million.
Or expense.
Buying broke a box in the corridor from your non-GAAP numbers, if I'm reading it correctly, which does suggest that you think it's a bit more temporary and you talked about sort of improving I see supply. So just wanted to see Oh.
If I'm interpreting it right are you thinking it's a bit more of a temporary sort of event for you where you are with.
From brokers at higher prices and what's maybe embedded in your.
Fourth quarter guide relative to real quick.
Or is that really more trading very quickly that's why you're treating it as temporary and then I have a follow up thank you.
Yeah, Oh, sorry, stomach, yeah. So I'll start off with a was that one yes. So on some very specific products. We are taking a look at some exception buys.
For components and in order to meet our customer demand.
That we're seeing out there are you know where were seeing normal price increases on components for kind of you know what I would call regular standard products.
We are including that in our in our non-GAAP numbers, because we're seeing that not being temporary to tend to use your words, but yes.
We are seeing some temporary spot buy opportunities that help us meet customer demand.
Specific products.
We are we are pulling that out to show Hey. This is this is what we think is temporarily impacting us we do think that will continue to impact us.
In Q4, I don't have a specific number.
Because we are continuing some purchases.
In the month of April in the month of May, but yes, we're we're continuing that.
In our fiscal Q4, and like Allen mentioned earlier, we're expecting.
This some of these supply shortages to continue to impact us throughout the calendar year, and where we see specific opportunities to go and meet customer demand you know and the opportunities there from a spot buy standpoint, we will continue to do that.
Okay.
For my follow up you guided to a 50 million increase quarter over quarter in telecom and Datacom revenue and Alan you talked about the email capacity increase.
Wanted to see if you can split that out a bit for the Oh, how much of the $50 million increase is coming from Datacom and is this sort of step one in terms of your mill capacity and use maybe we get the full benefit of this in the next quarter I. Just wanted to think if this is the new run rate in terms of revenue per human and <unk> or is there another one.
Sort of leg up in terms of capacity.
Yeah.
Yeah, well of the $50 million, maybe perhaps I should say in a percentage growth basis. The emails are growing faster than the telecom business.
And so if you look at it as a whole.
$50 million represents about 20% of that business in Q3 going into Q4.
So emails are growing faster than 20% in telecom growing slower than the 20% to get to that.
$50 million.
We do have additional email capacity coming online. This is pretty much the implementation of what we've been talking about over the last year and a half coming online really in full force in Q4, we do have more coming online that will impact really calendar 'twenty three.
So, we're we will get incremental improvements of capacity through efficiencies and productivity.
But this is pretty much the incremental capacity that we've added we've been talking about for the last 18 months.
Okay, great. Thank you thanks for taking my questions.
Thanks, so much.
Perfect. Thank you. So my first question.
Our next question comes from Alex Henderson from Needham. Please go ahead.
Great and just on that last question you said incremental capacity in Q4 did you mean fiscal Q4 calendar Q4 just to clarify.
For the emails Alex.
Yeah, you were talking about the email capacity coming on Additionally, in Q4, but it wasn't clear whether you meant physical or kill them.
But I I met physical so we saw some we saw some of the improvement coming in Q3 as a result of that capacity coming online.
And in Q4 this quarter, we have a full quarter of that capacity and that's why we're seeing a very large step up in our ability to to ramp emails in the June quarter.
But it is there additional capacity coming on in the back half of the calendar year.
I would say that the capacity is being installed in the back half of the calendar year that will impact our ability to grow email capacity in calendar 'twenty three.
But between now and really calendar 'twenty three it'll all come through yield improvements productivity improvements and things like that it'll be more incremental.
Incremental as opposed to the step function that we saw in Q, our fiscal Q3 and now in our fiscal Q4.
I think my.
My question that I wanted to address as opposed to telling on to that last one was you talked about double digit growth in 'twenty.
'twenty, three and beyond fiscal years, 'twenty three and beyond.
Can you give us some little bit more granularity on the assumptions embedded in that is you.
You talked about the three D sensing business as you know kind of flat.
Five down five kind of flattish in previous.
Previous conversations is that the assumption in the double digit growth in 'twenty, three and beyond are embedded in those in that guidance.
Hey, Alex This is Chris I mean, maybe take a crack at that.
You know I would first referenced folks listening too detailed this in her presentation at OFC, where we highlighted.
Our assumptions over the next three years.
As you highlighted the industrial and consumer minus five to plus five.
And but you know telecom and datacom being up into the double digits and same with lasers I would say nearer term in fiscal 'twenty three.
Reason for the minus five to plus five on the industrial and consumer as we do expect that there is the possibility of share normalization. We've had a very outsized share in in three D sensing that share normalization being offset by new applications in the automotive industrial.
Extended reality market side, if you will but nearer term.
That's an evolving market. So so we'll probably see more than the minus 5% in fiscal 'twenty, three industrial and consumer, but reciprocally, the telecom and Datacom lasers will probably be at the high end or above the estimated CAGR that we had highlighted in that Oh, let's see presentation.
So current situation in three D sensing more industrial and consumer as well incorporate it in our assumption of fiscal 'twenty three revenue growth.
And as a follow up question. There was no mention of wrote them so far in the call or at least not that I heard.
Can you talk a little bit about the situation in the road to market relative to how much it's being impacted by supply constraints, what the underlying demand fields like <unk> and <unk>.
Your ability to just sell them installed those products.
Our customer.
Customer systems.
Thanks.
Yeah, Yeah. Good good question Alex.
We're not forgetting wrote ups and Roadmaps are critically important to us and to our customers into their customers and I'd say that wrote them and wrote them line cards have been impacted significantly by the IC shortages and where we've seen extremely strong demand. So if you go back and look at our pump.
Year on year up 57%.
Wrote them as are the other direction and that's really because of constraints not because of demand. So the demand is extremely strong.
And as the IC shortages improve and we're seeing it in Q4 items will increase as a result of that so.
A lot of pent up demand for wrote them. So that's why as Wajid prepared remarks, we think it's durable because.
And a lot of cases, we're sole sourced in these advanced <unk> and customers.
Critically rely on our technology and products for these next generation networks. So Williams or are very very strong I wish I had more ics because I'd be able to ship a whole lot more in Q4 and beyond.
So if the rodents accelerates at some future periods is that then resulting in a reduction in the growth in pumps, because you're sucking the pump volume into your Amsterdam seem to be <unk>.
Thanks, and I'm done.
Yeah.
Yes.
I think he you know that kind of goes back to history, Yes, we we we internally supply into our Tau erode them. So there could be some reduction in pump revenue, but we've added a lot of capacity over the past several years and in pumps. So I'm I'm not sure that will be that significant of an impact.
Terrific.
And we're continuing to add pump capacity as we speak so as as we defer more of those pumps to our internal consumption.
It probably ties pretty well with our added capacity that we're adding over the next few quarters.
Very helpful. Thank you very much.
Thanks, Alex.
Thank you Alex for your question.
Our next question comes from George Notter from Jefferies. Please go ahead.
Hi, guys. Thanks, very much maybe just extending the conversation on <unk> I think you guys were working to qualify alternate suppliers on componentry into your protein products can you tell us where you are in that qualification process and when that might help alleviate some of your supply constraints.
Yeah, well I mean across the board we've been looking at them.
Alternative sources.
That are plug compatible and those certainly are gone.
A lot smoother than ones that.
Require a board re spin and so those who those board resend have.
It's been challenging as you can imagine.
But we're confident that that they're going to continue to progress and alleviate some of these concerns and some of them.
Some of our component shortages, but I'd.
I'd say that that for more of the common parts, we've made more progress than on some of the complex parts that require both a PCB spend as well as for more changes and that's just just taking more time, but we expect that that didn't really come to closure over the next few months. So that we will see some.
Some ability to get these complex our Ics and in early calendar early fiscal 'twenty three.
Got it and then maybe the other one I had was on <unk>.
I think if I go back over the last few quarters, you guys were working off some inventory in our in China.
I'd love to get an update there thanks, a lot guys.
Yeah. Thanks, George Good question, we have seen some of the D. M. LS that we if you recall over a year ago or so we.
We reversed some revenue deferred some revenue that has been.
Slowly starting to.
Be recognized as those <unk> are.
Being consumed by our customers and their customers.
There's still some inventory to go but I'd say, it's encouraging that there's movement. So I guess you can translate that into <unk> base stations being deployed again in China, not nearly to the pace that they were two years ago, but certainly a signal that they are being deployed which I think is a good sign.
<unk> for the future.
Great. Thank you.
Yeah.
Thanks George.
Vivek. Thank you for your question George.
Next question comes from meta Marshall from Morgan Stanley . Please go ahead.
Great. Thanks, a couple of questions for me just one.
Kind of noted our progress on the wireless front haul opportunity and just wanted to get a sense for how large you think that opportunity could be as it ramps kind of next year and then second you know.
Just as you look to size kind of the the hundred million difference between kind of.
Of supply and demand just how are you guys thinking about you know how much.
As forward ordering versus kind of how much is type equipment that they would've actually wanted in that corner.
Well I'll answer the second question first and then ask Chris to tackle the front haul and the N G and 25 G tunable stuff.
I'd say that we have we have long lead term meantime purchase orders from customers, who request outside of the existing quarter, we don't count that in the $100 million. This is for orders that customers have said they want it.
In either this quarter or prior quarters, and so from that perspective, I think the demand is real now if we got all of the Ics that we could ever imagine tomorrow, what our customers want them, all immediately probably not because they're reliant on other.
Supplies and other suppliers to satisfy those network build out so I think it's real I think it's durable and I think it'll bleed off over time as far as the worldwide semiconductor situation gets better, but we don't see that being.
Alleviated until calendar 2023.
Chris you want to pick the wireless front haul question.
Sure and I I'd also like to.
<unk> gone to the 100 million piece I think there's a.
Something important to highlight right that it's not $100 million, you know a little bit across every product line.
You know product lines that are not constrained or up tens of percent year over year, whereas as Alan highlighted earlier on the question on rodents wrote I'm, sorry, the other direction, but as they're integral to the network and systems, we expect they should be running at comparable.
Rates as the other product lines that are not constrained at the present time, and Lo and behold $100 million kind of reflects.
That when we if you were to sort of hypothetically add that back to two existing or guidance then all of a sudden I O Aldo.
All the product lines are up in a similar.
Tens of percent year over year kind of basis, turning back to the wireless front haul.
We participate in in two ways, specifically in wireless front haul today, one is as we've talked about in prior calls is flying.
D M L lasers or.
10 gig going to 25 gig lasers in our.
What we would call datacom, even though it's a telecom application, but very analogous to the kind of lasers, we supply into hyperscale data centers on that business has been progressed as we talked about earlier, but it has run at <unk>.
Several tens of millions of dollars per quarter, and we believe that over time, it can get back to that sort of several tens of millions of dollars per quarter opportunity the.
The other way we play is as Alan alluded to 10 gig and 25 gig tunable lasers as W. D. M approaches start to penetrate wireless front haul as well as in the cable msos fiber deep architectures.
Electively those we expect very early stages, but are starting to ramp up to be multi hundred million dollar a year market opportunity. So very exciting leg leg to our story in that over the past N number of years our telecom.
<unk> mission has been reserved if you will to metro long haul coherent applications.
And we haven't participated more in.
Access or edge applications, where the volumes are quite high and now with the adoption of fiber deep and WDM architectures and five G front haul a very large market opens up that's very unique to.
Our kind of tunable laser technology.
Great. Thanks, I appreciate the answers guys.
Okay.
Thank you for your questions.
Our next question comes from time of money. Please go ahead. Your line is open.
Good morning, guys. Thanks for taking my question. My first one is just on the current reported quarter. If you. If you look at telecom and Datacom, it's down about 9% sequentially. You gave some bread crumbs on the pump lasers being better wrote them as having some component constraints, but could you just give us a little more color on the split between Datacom and telecom.
As you look from the December to March quarter, and how you get to that minus nine overall. Thank you.
Well I don't think we want to get into specifics on an exact revenue levels, but I think what you can assume.
As Alan highlighted as we've been in Datacom capacity constrained and <unk> got a little bit of extra capacity in the March quarter. So you can assume datacom was relatively flattish quarter over quarter and that that any of the decline was driven by <unk>.
COVID-19 surge driven you know supply constraints.
Somewhat unique in this case due to the surge in December and January timeframe hitting the telecom.
Almost entirely.
Helpful. And then my other ones just on the Datacom side, so youre, giving email starts year over year now and it looks like.
Those are growing quite nicely could you just help level set how big emails are a part of that Datacom business. Now you just talked about how do your mills were you know running tens of millions of dollars of peak, but they are lower than that and you kind of help with the split out there just so we have some feel for how big that business is getting thank you.
I think the best way to say that it's in the range of 70 570, 75% of our total datacom business at present.
Emails that is.
I appreciate it thank you guys.
Thank you so much for your question.
Our next question comes from Rod Hall from Goldman Sachs.
Please go ahead your line is open.
Yeah, Hi, guys. Thanks for the question I wanted to go back to the comment that.
You'd said industrial and consumer will be down more than 5% in fiscal 'twenty three I kind of wanted to dive into that a little bit and understand at least from a qualitative point of view do you think that is mainly due to the end market and kind of normalization of the end market is it share.
Related is it content related maybe could you dig into that a little bit and then I have a follow up.
Yeah, Rod I think this is our expectations with regard to share.
Normalization or equalization, you know for the past five and a half for over five years, we've had a very very large share of our.
Our leading edge customer and we expect that at some point in time.
Sure will will normalize and that's why we're so that expectations that it.
It could be down more than 5% from fiscal 'twenty two to 'twenty three.
Not anything to do with the market or device numbers are growth that are in customer. This is really more as we look at share specifically.
And I'll, let you guys did anything wrong with it and we're not really expecting much age.
Oh, sorry about that.
Well I'll start and Mike.
Alan I wanted to follow that up and just say.
Are you.
You're not expecting much of a change on content then it sounds like I mean, just normal kind of maybe declines in pricing, but otherwise not much of a concentration.
You know I think it could in the coming years, we're working on many different lasers of different types of and until they go into a product it's hard to say.
How much what models they go into and things like that.
Not counting on a we're not counting on it in that guidance any any android business and that could be an upside, but I'd say.
You know we've been counted we've been working with Android for for years and it. It had it had its day when we were shipping meaningful revenue to Huawei on their handsets, but.
But I'd say as far as content at our leading customer.
There may be some increased content, but some of that will be offset by as you say a price reductions over overtime.
Okay, and then Mike My follow up was just on these new applications XR and automotive I wondered if I.
I thought on automotive your commentary suggested maybe external sensing coming a little closer where you've got a little more visibility, but I don't know if I misinterpreted your comments, there, but I wonder could you could you just talk a little bit about XR. When you know roughly timing on that is it early early part of the calendar year and then automotive is that right or are you.
Getting a little bit more visibility on application for external sensing.
Hey, Rod this is Chris I would say that you know what we're highlighting is is a lot of.
Our design win activity if you will.
Both in the automotive and the extended reality applications, so very strong customer traction Dizzy.
Design wins are racking up with with multiple customers and and more.
More importantly meaningful customers in those spaces from a timing standpoint, I think as we've been clear you know automotive is a very long term market. So it'll it'll start small and Andy for enough increment upwards steadily.
Extend to reality has probably more opportunity.
Nearer term, but we still think I think we said this in the prepared remarks that.
You know, we we expect our customer products to be launched probably calendar 'twenty three time frame would be our expectation, but they don't customers don't share with us their exact timing.
Around product launches and and.
What theyre going to be per se as you can imagine these customers are very secretive in the space about what theyre doing.
But I would say as you know we know that.
Certain number of Ben Chip this year end and or sorry in calendar 'twenty, one and expectations of growth into 'twenty, two and more meaningful growth in <unk> and 'twenty three.
Okay, great. Thanks, a lot guys I appreciate it.
Yeah.
Thanks, Rob.
Okay.
Perfect. Thank you so much for your question. Our next question comes from Christopher Rolland from Susquehanna. Please go ahead.
Hey, guys. Thanks for the question my.
My question is around Comms I guess, there's a couple of parts to the equation here, you know supply and demand for.
For that 100 million supply shortfall I was wondering if you could kind of break that up between wrote them T C and D C and.
And Conversely, you know from the demand picture.
Each of those three are you seeing kind of the biggest surprise in demand versus versus your expectation.
Yeah, I would say the shortfall is.
The primarily telecom. So if you say, it's all one telecom or 95% of it is in telecom.
The split between <unk> and <unk>.
Transmission products is pretty pretty close I'd say, you know wrote them that had been impacted most in the past and as we in the March quarter was impacted significantly.
And where we're seeing some relief in the June quarter. So.
I think as.
As we get.
The semiconductors, and we are working diligently and I wanted to say, thank you to the supply chain team, they've just done a fantastic job but.
But I'd say wrote them or the biggest hit them.
As an individual product line, but then it goes into amplifiers blades and transmission products as well.
Oh, great. Thank you and then on the three D sensing side just to follow up there and get my head around it.
If I'm doing the numbers right we're.
We're down almost 30% year on year for the June quarter I know this is a small.
Base in June , but as we look out into next year could we be down you know how would you put the odds at being down significantly more than 5% year on year could could there be a situation in which you know were down 20% or something like that or in your best view or are we just looking.
Fall kind of much more modestly here.
I I would say first that we didn't give a specific three D. Sensing number for for the June quarter Guide I would say that you know.
I guess it was a year ago or so we said that the overall market due to two <unk>.
Chip size reductions would be down 20, 25% something like that and what we've seen is in fact exactly that and hence that's why you're seeing the year over year.
Decline.
And in three D. Sensing for example, and in the June quarter.
What what the market or what or more specifically, what our revenue is going to be in our next fiscal year, we're not providing guidance are much more beyond what we've said, but certainly.
The color, we're providing is that that minus five to plus five.
You know percent three year CAGR, you could imagine it being a little more V or U shape. If you were to look at it on an individual 'twenty three 'twenty four 'twenty five basis.
As as Alan alluded to share normalization.
You know if it happens it happening you know it.
At least from a model standpoint assume you know next year and and then.
New applications come in and offset that in 'twenty, four and 'twenty five timeframe. So I don't want to get into specifics of how much of a decline, but certainly more than the 5%, but on a three year basis.
Being somewhere.
<unk>, just slightly up slightly down in aggregate.
Alright, Thank you Chris.
Thanks, Chris.
Thank you so much for your question.
Next question comes from Michael Genovese from Rosenblatt Securities. Please go ahead.
<unk>.
Thanks, a lot.
A lot of good questions have been asked so I'll just ask a quick one question.
I mean, you've got the $50 million sequential.
Kris in telecom and Datacom revenues this quarter and just looking at your.
Operating margin and EPS guidance, it seems like that actually is coming out of pretty decent.
Gross margin. So can you just talk about how you did that in this environment.
Ah you're avoiding expedite seems on this incremental amount and I talk about how your had solid gross margins even in the supply chain. Please.
Yes, hi, so I'll start off so I think you've seen before.
Number of quarters, we've been.
Talking about our overall company margin model and you know for two years in a row on a fiscal year basis, we've been fairly consistent in achieving or exceeding our model both from a gross margin standpoint and from a.
And from an operating margin standpoint, and actually maybe take a look at the midpoint of our fiscal Q4, we will actually improve gross margins are you know.
Year over year, and you know one of the biggest drivers for US is really operating leverage and so you know when our lasers business is growing.
As it has year over year and.
And sequentially, that's covering a lot of manufacturing overhead for us and that's helping us drop more to the bottom line. In addition to that you know where were seeing a lot of growth.
Both of our transmission in our telecom business.
The margins for those products R. R.
Are quite good relative to you know historically, what we've seen our teng tunable products are doing quite well and transmission and we're seeing the benefit of that followed.
All to the bottom line.
Our operating expenses have stayed fairly consistent as we've continued to invest in R&D and so that's been that's been helping us too.
Yeah, where we're expecting some expedite fees to happen you know when we have one component left and the only way to get the product to the end customers to do a spot buy.
We'll continue to do that and you know we think it'll.
It'll it'll help our overall customer satisfaction in our main goal is to meet or exceed our customer expectations and that's that's how we're running the company and that's how we're driving our financial model as well so.
Yeah, I mean, it's it's really just the leverage we're seeing on our on our telecom and our laser business as well as our datacomm business improving.
Quarter over quarter.
We popped up some email numbers.
Chris said earlier, and that's really helping us as well so so it's really those things.
Thanks.
Great. Thanks for all that color would you.
Thanks, Michael.
Thank you very much. Our next question comes from Ananda Baruah from loop capital. Please go ahead.
Thanks, guys for taking the questions and congrats on the strong results.
Two quick ones, if I could I guess the first is.
With demand continuing to accelerate.
How any any context, you can share with us about how they impact second half of the calendar year seasonality and then just a clarification.
Do you guys is it accelerating at a faster pace today than you thought it might have been 90 days ago 90 days ago, you guys are quite positive as well and I have a quick follow up thanks.
Yeah.
Thanks for the question I.
I would say, it's accelerating as we expected given you know we've been signaling the transition to 400, 600, 800 G coming and the new network architectures focused on are leading.
Leading edge wrote them technology. So I'd say it is the demand is coming into play as expected the supply on the other hand, it is tougher and so I'd say, we're not we're not lacking demand that's there and I don't think we're gonna be lacking demand for several quarters.
It's a matter of what what does the semiconductor situation look like in the second half of the calendar year and that will really dictate.
What the telecom.
The revenue looks like in our fiscal Q1 and fiscal Q2. So we're working diligently to continue to try to improve that but.
But the situation is not totally solved yet and so that's a that's a that's a challenge for for Q1 and Q2 and we're only going to guide one quarter at a time because the visibility is a little bit tough beyond.
Beyond the short term horizon on what's going to happen with semiconductors.
That's super helpful. And then why do you just a quick follow up on the on the previous operating margin question is that to say that that we should expect a good leverage going forward I E.
And you'd mentioned, you're putting up good leverage in the June quarter.
And you had been in recent quarters. So she did that'd be something we should expect as well.
For everything.
Okay.
Yeah, No I, certainly where we're expecting to have a you know continued.
Continued leverage as we move into fiscal year 'twenty three.
The one the one point of caution as we are seeing.
Kris component costs.
That are that are that are impacting us and you know.
Continues to happen in.
In fiscal year 'twenty, two with the supply shortages that Alan talked about.
Or we're going to continue with our target model, but we're not going to.
Communicate any changes to it in addition to that you know just as a reminder, our you know our expectation on your photonics is is that that closes in the second half of our calendar year and as that comes on board.
We're going to have a lot of work to do from some of the synergy commitments that we've made.
To all of you and that's going to have some transitional impact on our overall gross margin model as well. So I just wanted to make sure that that.
I'll keep that in front of us.
Oh, hey, thanks for that that are that kind of kick appreciate it.
Thanks Ananda.
I'd like to squeeze in one more question if we could.
Perfect. Thank Ananda our final question comes from Dave Kang from B Riley. Please go ahead.
Alright, thank you.
Morning.
Two questions. The first one is regarding China, what's the situation with our Shenzhen factory, how much revenue does it generate any is it running 100% or partially and my follow up is regarding the supply chain impact. It was 65 million now this quarter it'll be 100 million when do you think.
It'll inflect.
Okay.
Yeah.
Okay. So China Shenzhen is back running full force and it's hard to say how much revenue it.
It generates because it makes components that go into other factories.
And it it primarily produces.
Subassemblies and components for our telecom transmission business. So.
A large percentage of our telecom transmission business go screw that factory.
And as I said earlier, we were shut down for 13 days in March.
That impacted.
Our revenue in the in the Q3 numbers as well as the components that flowed into other factories in Q4, and that's factored into our guidance.
The windows the supply chain.
The question on the second question on supply chain when does it inflect.
Yeah. So it's been going up when do you think it'll start to come down.
Oh yeah.
It's hard to say if you could tell me when the semiconductor shortages and I can tell you that the answer to that but I would say.
We believe that the demand for our telecom products and our leading edge.
I wrote them and high speed transmission products is extremely robust and that's going to continue to be robust and that's why it gives us confidence in the double digit growth.
In fiscal 'twenty, three over 'twenty, two and beyond so I'd say.
Demand is going to continue to be strong we're gonna have component challenges into calendar 'twenty three.
And when when does that go away is it's a little bit of a.
Her hard a hard question to answer, but I'd say the demand is again not our problem in the short term and I don't think it's a problem to a calendar through fiscal 'twenty three.
Thank you Dave.
Now I'd like to just pass the call back over to Alan for some closing remarks.
Great. Thank you Kathy 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.
I'm very excited about the accelerating customer demand in telecom datacom and lasers and the work our team continues to do to improve our supply of third party Ics and to increase our manufacturing capacity to support this ongoing demand strength.
Additionally, the opportunities we have in automotive extended reality and industrial applications, which increasingly leveraged <unk> sensing and lidar capabilities momentum are emerging and will drive diversification and growth.
Our market, leading products and technologies positions us well for these opportunities ahead.
With that I would like to thank everyone for attending and we look forward to talking with you again during our upcoming investor events, which you will find posted on our website.
Thank you for attending.
Thank you. This concludes today's call you may now.
Now disconnect your lines.
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