Q4 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to <unk> fiscal results conference call for the fourth quarter of fiscal year 2019. At this time all participants are in a listen only mode. Later, we will conduct a question answer session and instructions on how to participate will be given at that time. As a reminder, today's call is being recorded I would now like to turn the call over you know Scarlet Toomajanian Investor Relations.
Thank you operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabrinets financial and operating results for the fourth quarter and fiscal year 2019, which ended June 28 2019.
With me on the call today are Seamus Grady, Chief Executive Officer, and Ts and Chief Financial Officer.
This call is being webcast and a replay will be available on the investors section of our web site located at Investor Dot Fabrinet Dot com.
Please refer to our website for important information, including our earnings press release, and Investor presentation, which include our GAAP to non-GAAP reconciliation.
I would like to remind you that today's discussion will contain forward looking statements about the future financial performance of the company forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. These statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise them in light of new information or future events, except as required by law.
For a description of the risk factors that may affect our results. Please refer to our SEC filings in particular, the section captioned risk factors in our Form 10-Q filed on May seven 2019.
We will begin the call with remarks from Seamus and TS followed by time for questions I would now like to turn the call over to Fabrinets CEO Seamus Grady shipments.
Thank you Garo and good afternoon, everyone.
I am pleased with our record performance for revenue and earnings in the fourth quarter, especially given some of the unusual business dynamics, we experienced during the quarter.
Revenue in the fourth quarter was 405 million and non-GAAP net income was one dollar per share exceeding the high end of guidance.
These results also drove strong cash flows in the fourth quarter.
With operating cash flow of nearly $42 million and free cash flow of over 36 million.
For the full fiscal year revenue increased 15% to nearly 1.6 billion and non-GAAP net income increased 26% to $3.81 per share.
Total operating cash flow for the year was a record $147 million up $9 million from a year ago and free cash flow.
It was also a record at 129 million up a healthy 23% from a year ago.
As I'm sure you know the US department of Commerce export ban to walk away that began in the middle of the quarter came as a surprise to the industry.
We do manufacture products for some of our customers who ship to walk away.
While we estimate that this negatively impacted our fourth quarter revenue by approximately $9 million.
We were able to offset that by better than anticipated performance from other businesses.
Looking at our business by end markets.
Optical communications revenue was $300 million.
Up are up about $2 million from the third quarter and represented 74% of total revenue.
Within optical communications Telecom revenue was down 2 million from the third quarter to 215 million.
Our 72% of optical revenue.
Primarily due to the impact of the way band with other telecom products offsetting some of the wall way related pressure.
We had anticipated the datacom revenue would be up slightly from the third quarter and in fact, we saw a 5% sequential growth to $85 million or 28% of optical communications revenue.
Biotechnology Silicon Photonics based optical communications revenue grew 10% from third quarter to nearly 90 million the highest level in three years and represented 30% of optical communications revenue the highest level in more than a year.
Revenue from Qsfptwenty, eight and QSS P. 56, Transceivers was 46 million up to me than from the third quarter, primarily from increased revenue from QSS P 56 programs.
By days arrays.
100 gig programs continue to represents nearly half of optical communications revenue at 144 million.
Products rated at speeds of 400 gig and above were roughly flat with the third quarter at $23 million or 8% of optical communications revenue.
Looking at non optical communications revenue was a record $105 million up 4% from Q3 with gains coming primarily from the industrial end markets.
Revenue from industrial lasers was a record $53 million are up 9% sequentially, but we don't expect to sustain this level in Q1.
Automotive and sensor revenue were both stable at 23 million and four and a half million respectively.
Finally, other non optical communications revenue was also stable at 24 months.
Revenue from new business increased 8% from the third quarter to 165 million and represented a record 41% of total revenue for the quarter.
Last quarter, we discussed an agreement with Infinera, where we would be assuming manufacturing responsibilities for the products being manufactured at our Coriums Division in Berlin.
We have made significant progress in transferring the production of these products from Berlin to our facilities in Thailand and this process is now essentially complete.
While revenue from this program in the fourth quarter was immaterial, we expected to begin to ramp in Q1 and contribute even more meaningfully beyond that.
We continue to believe that infinera could become a 10% customer by the end of fiscal 2020.
Up from single digits in fiscal 2019.
Speaking of which we had 110% customer in fiscal 2019 and that was again lumentum.
With combined Lumentum and our power revenue, representing 24% of our total revenue in fiscal 2019.
Operationally, we remain focused on continued improvements in efficiency and expanding capacity, while enhancing the benefits our customers value most like our best in class on time delivery quality and service.
To complement our ongoing cost reduction objectives.
We recently introduced a new initiative that we call half half two X with the goal of doing what we do today with half the people half the space and twice the output.
This half half two x. efforts.
Has had a number of positive effects already.
Through this initiative, we have improved operational efficiency and reduced cycle times for a number of process through through increased automation and optimization and the elimination of non value added activities.
This initiative has enabled us to free up close to 120000 square feet of manufacturing space at our Pine Hurst facility in Bangkok.
These efficiency gains have effectively increased the available manufacturing footprint at pine Hurst by more than 20%.
Half half two ex is an ongoing process, whereby we expect to continue to reduce labor costs improved cycle times and create more manufacturing space within existing facilities.
As such it means that our previous metric of how much of our Chonburi facility was either occupied are spoken for is no longer a meaningful gauge of our available capacity.
It also means that we may be able to push the buildout of the second building at our Chonburi campus until fiscal 2020 . One instead of later in fiscal 2020.
As reflected in our guidance.
Our customers are working through the restart of certain shipments to walk away.
With this we expect the timing of changes in supply chains to temporarily impacts some of our optical communications business in the first quarter.
Combined with the near term slowdown in the industry laser market, we anticipate a sequential decline in total revenue of approximately 4% in Q1 from our record performance in Q4.
We believe that the impact of the supply chain resets will be temporary and we remain very optimistic over the longer term.
Looking ahead to fiscal 2020.
We expect to further capitalize on our leading position as the manufacturer of choice for our customers most complex products.
We're particularly pleased with our record financial performance for the fourth quarter, especially given the unanticipated dynamics impacting the small number of our customers.
Our revenue growth of 15% for the fiscal year reflects our ability to grow faster than the markets we serve.
Our ongoing half half two X. initiative is generating exciting results for us that enable us to better serve our customers while improving our efficiency.
As a result.
We believe we're very well positioned to continue to deliver positive long term trends as a leading contract manufacturer for the most complex products.
We look forward to expanding our penetration within our target industries.
Now, let me turn the call over to Ts to discuss the details of our fourth quarter performance and our outlook Ts.
Thank you Seamus.
And good afternoon, everyone.
I will provide you with more details on our performance by end market and our financial results for Q4 as well as our guidance for Q1 of fiscal year 2020.
Total revenue in the fourth quarter of fiscal year, 2019, with a record $405.1 million and at the upper end of our guidance range. After adjusting for 1.9 million contribution due to our adoption of E. Six of this year.
Going forward, we will be both guiding and reporting results on the SP six so thick.
non-GAAP net income was one dollar per share and was also above our guidance range, even after a one cents contribution from our adoption of NFC sequencing.
Have fallen and Chen tailwind $1.8 million continued with the five cents to EPS upside.
For the full year revenue was $1.584 billion.
An increase of 15% for fiscal year, 2018, and non-GAAP net income or Ti dollar 81 cents, an increase of 26% five years ago.
For the fourth quarter optical communication represented 74% of revenue when non optical communications, representing 26% of our revenue.
Now turning to the details of our key NL.
A reconciliation of our GAAP to non-GAAP measures is included in our earnings press release, and Investor presentation, which you can find on our website.
non-GAAP gross margin in the fourth quarter was 11.8% a 30 basis point decrease from the third quarter last year due to a shift in product mix, partly related to the ban on shipments to allowing for a couple of our customers.
non-GAAP operating expense was 11.8 million in the fourth quarter.
As a result, non-GAAP operating income was $36.7 million and non-GAAP operating margin was 9.1% compared to 9.5% in the third quarter, primarily due to lower gross margin.
Texas during the quarter were $1.2 million and our normalized effective tax rate was 4.4% below our anticipated effective tax rate of 6% to 7%.
non-GAAP net income was above our guidance range at 30 737.6 million in the fourth quarter, a $1 per diluted share as I indicated earlier.
On a GAAP basis, which includes share based compensation expenses and amortizations the debt issuing costs net income for the fourth quarter was $32 million or 88 cents per diluted share above the high end of guidance.
Turning to the balance sheet and cash flow statement.
At the end of the fourth quarter cash and investments were $444.7 million, an increase of $35.8 million from the third quarter.
Operating cash flow quarter was $41.9 million and with Capex of 5.5 million free cash flow was 36.4 million in the fourth quarter.
For the full year, we generated operating cash flow of $147.4 million and free cash flows of $128.7 million both of which are record.
Due to the timing of the open trading window, we did not have opportunities stickley repurchased any shares during the fourth quarter.
As such 62.2 million remaining in our share repurchase program.
And we will continue to evaluate market conditions to opportunistically repurchase shares when possible.
I will now like to turn to our guidance for the first quarters of fiscal year 2020, which is now based on etsy six or fee.
And Seamus described.
We expect revenue to be between 386 and $394 million.
From a margin perspective, we expect non-GAAP gross margin to moderate slightly from the fourth quarter due to the impacts of annual merit increases and we expect to see gross margin improved during the year toward our target range of tale to tell by 5%.
From an EPS perspective.
We anticipate non-GAAP net income per share in the first quarter to be in the range of 80 to 84 cents and get net income per share of 64 to 68 cents based on approximately 37.4 million fully diluted shares outstanding.
In conclusion, we are excited with our record performance in the quarter.
We remain very well positioned to deliver profitable growth over the longer term at leading manufacturers of the most complex high mix product.
Operator, we would now like to open the call for questions.
Thank you, Sir ladies and gentlemen at this time, if you would like to ask a question over the phone. Please press star and then one on your telephone keypad. If your questions have been answered Mr moves up to Q simply press the pound key.
And our first question will come from line of Samik Chatterjee with Jpmorgan. Your line is now open.
Hi, Thanks for taking the question if I could just start off on the guidance itself. You mentioned a couple of drivers why you have a sequential decline in the revenue going from fourth quarter to the first quarter, but if you can just kind of help us with the puts and takes between the fourth quarter in the first quarter, including how much are you expecting in terms of a headwind from the sanctions on who are we as well as kind of sounds more like you're giving up some share as you do the supply chain reset. So can you just supposed to think about quantifying those impacts.
Hi, This is seamus. Thank you for the question a couple of things.
There's a few things we outlined in our prepared remarks, let me out a little bit of color first of all on the the subject of the supply chain recess our customers.
Have been finding resolution to the way band and in some cases have been finding that by redirecting certain products to other of their customers, which means theyve had to maybe re purpose.
Existing products to suit other customers. So that that has presented a few supply I would call them supply chain challenges, albeit short term and temporary in nature. So thats the first point.
Secondly, you know as the in terms of the overall demand, let's say for why we I should point out in a way, it's not a direct customer of ours.
We don't see anything directly to walk away.
But it does seem just from the you know the industry.
Publications that we read probably the same as you've read.
That we're always total demand seems to be slower.
Due to due to slowness in China, but also due to maybe some of the stigma recall of hanging overweight in international markets like Europe . So we do think that overall way is done we don't have a good feel for what that might be present percentage terms again as we don't supply were directly but we do we do feel it is it is being a factor if you like in Q1.
And then thirdly industry lasers.
You know industrial lasers will need to be down we think for another quarter or two we believe that the worldwide market, especially for welding and cutting.
Is down by about 10% quarter on quarter, we think that's going to continue for a couple of quarters.
The final point I would make just in terms of maybe the the guidance.
Some of our customers relative to our guidance.
Some of our customers are guiding up on Threed sensing significantly which of course is a product that we don't manufacture we don't participate in Threed sensing.
As regards.
Are we losing share we don't believe so with the short answer I suppose as we don't believe that we've lost any market share. We believe this where we continue to be the number one.
Optoelectronic CMS company.
As you can see from our results, we just posted record performance for revenue and profits.
We once again generated significant cash and we continue to work with our customers on new opportunities and to court, new customers and new applications.
You know in F 2019.
We believe the CMS industry grew by about 7%.
The optical industry grew by about 3% and that includes three D sensing.
And we grew by about 15.5%. So we don't believe that we're losing money on a share.
Got it if I can just follow up quickly on the Infinera business that you mentioned, you're largely done with the.
Most of the footprint from Berlin to your pilot facility bookstore is was there any margin impact from that.
Movement in this quarter that said is and how should I think about the impact on cash flow as you make that transition was that entirely your fiscal 19 impact or is there some impact on fiscal 20 as you do that transition.
So I'll, let Ts, let me talk about the cash flow in a moment just on the overall impact on on revenue and margin. So in Q4, we had a small.
The improvement in the revenue because of the the current the Infinera business.
I think we call it an immaterial. So we had a small amount of revenue that we shipped in the quarter. It was probably a headwind in terms of margin for the quarter as we did a startup costs. We had a lot of activity going on that we haven't fully covered those costs, yes. So in Q4 I would say.
Slightly positive to revenue and slightly negative to our to our margin than in Q1, we're just beginning to ramp now in Q1. So we're obviously, we're buying a lot of inventory we've taken over a lot of inventory from the Germany facility.
But we're just beginning to ramp that this quarter and will have I would say more of an impact this quarter, but by no means we won't be up to full volume for another one or possibly two quarters and then as regards the cash flow impact as a t. as talk about that yes. The good afternoon summit.
On the cash flow side.
Any new customer.
When they get their forecasts, we buy inventory.
We put in resources, we pay our labor ahead of the collection and we give them the.
A nice payment tone in this case infinera is at such a long term partner and we extend the Oh I see that the credit and the database so I would say.
In the next two three quarters, we will see a dip in our cash flow and I expect by the end of the year fiscal year, the cash will be pretty much neutral right.
Or even at a level that helpful.
Yes. Thank you thanks.
Thank you Pat.
Thank you and our next question will come from John Marcheschi with Stifel. Your line is now.
Thanks very much.
I appreciate kind of the color just on the cash flows could you maybe talk about just the gross margin in fiscal Fourq you itself. It came in a little bit below what we were expecting obviously you had a a little bit of upside to revenue. Just curious if you can talk a little bit about that sequential decline in margins specifically in that fourth quarter.
Okay. So are we looking at the June quarter right from the March quarter, and as you probably know Chamberlain. Just described we have the scale. While we then okay. There while E band you come as a surprise losses efficiency a lot of a wait and see.
A time frame and at that point, you know as a manufacturing that you away and see you lot efficiency. So we lost some efficiency over there and also you heard about Korean panel as with any new product, we startup we incurred significant startup costs. So that the margin a little bit and we also have a one month out merit increase we still think it's a giggle our employee Ah American starting June the first so there is a one man impact there therefore them the margin from 12.1% in F Q3 much quarter to 11.8% in the in the in the June quarter, and that's basically these two or three effect to account for that in a margin erosion.
Okay. Okay, and then you mentioned obviously in your prepared remarks, as Panera business starts to scale that they could be 10% customer and I wanted to make sure that I heard you correctly, you think they can still be a 10% customer for the year, even with a little bit at the slower ramp to start in the first couple of quarters or are you, saying that once fully ramped they could they could essentially be a 10% customer I just want to make sure I think about how to load that potential revenue in as I'm modeling out the fiscal year.
Yes, we think well, we certainly think that will be at that race at the end of the year, but we think there's a good chance there will be a 10% customer for the full year actually.
Okay. Okay. Thank you and then just lastly on the on the on the laser color Seamus I mean, obviously with that market slowing down a little bit and so much yields still coming from your primary customer in that laser market I'm, just curious what with that.
Market now slowing a little bit how have conversations changed there or what's your outlook to bring on additional customers outside lumentum through a model and how you're thinking about that for for maybe fiscal 20 and beyond.
So we have we have a number of customers in the in the laser space, we have three or four of the kind of the big customers in that space Lumentum is by no means are only customer.
Again from what we can see you know the let's say.
Coating and precision welding market seem to be seem to be down about 10% quarter on quarter.
And most of our customers in that space have have guided down.
And a lot of them are talking about significant pressure from Chinese suppliers.
Who are moving into their space and really.
Producing very low cost products that our customers are finding it difficult to peace compete with.
So there is this kind of two parts of the onto their short term long term short term of course, it's of course is not good in the sense that.
10% slowdown in the market. We serve is and is not a good thing. However, you know from our perspective. It we think it might not be a bad thing in the longer term because we do feel this will act as a catalyst and encourage our customers to maybe move to outsource faster because really for them to compete with very low cost Chinese competitors.
They are really going to have to use outsourcing as a as a tool to allow them to compete so we do think.
The competition, our customers are facing from Chinese suppliers, albeit causing some short term headwinds we believe could act as a catalyst for outsourcing in the longer term does that make sense.
Thanks very much.
Thank you John .
Thank you and our next question will come from the line of Troy Jensen with Piper Jaffray. Your line is now open.
Hey, congrats on the nights a results gentlemen.
Thank you Troy Thank you.
Hey, So Seamus for you I guess I'd like to talk a little bit about silicon Photonics, and you had a record quarter here, but two of your top three customers emerging here. So.
Just thoughts on that combination and what it means to.
Fabrinet longer term and then ultimately you can use silicon photonics still provide some of the same growth that you've had historically with those two firms margin.
Well first the first of all it's very early we don't really know what the impact will be as of yet again historically when our customers have come together, it's tended to be good for us historically this one it's far too early to say.
You know, we still think that silicon photonics has a lot of legs left and we do feel we're certainly in the Dms space. We are the leading contract manufacturer you know manufacturing silicon photonics based products.
And we do feel where they were the supplier of choice for those type of products are very complex products very difficult to manufacture with with high reliability and high yield.
We've been doing it for quite a while so we do feel we have an advantage over our competition you know the long term impact of let's say Cisco and Acacia.
I'm, we're not we're not sure yet at this stage, it's very early to say, but we don't right now we don't see we don't see anything negative. We we we think it's a good combination.
So there are good match.
And we're kind of excited to see where where Cisco tends to intends to take the product in the future.
So within Silicon Photonics is it still a three firms that make up the bulk of that business.
Yes, it would be yes.
Well, there is resulting in a habit.
There's also a number of I would say smaller smaller players who have some really.
I would say really exciting technology, albeit that they are quite small in terms of their overall size is quite small, but they do have some exciting technology.
Okay, Perfect and then last question I'll cede the floor.
Just thoughts on your Qsfptwenty eight a unit versus 56 units and we see growth in both segments or is it just because the 56 going under the growth for the business going forward.
Based on the data in front of me I think talent across.
Brought base, so I see both are growing.
And Q4, we did $47 million.
Higher than in Q3.
And moving forward, we see an immediate need to slow down.
Because some of the consolidation going on with the cloud growth in EG and so on so yes, but you know we're still pretty optimistic about the form factor Qsfptwenty eight.
All right. Thanks, guys. Good luck.
Thank you Troy.
Thank you and our next question will come from the line Michel Waller with Needham. Your line is now open.
Hi, Thanks for taking the question.
Yes.
Alicia Oh, sorry, just a quick one on M&A looks like it increased.
Okay. Thanks for the question Michelle at Q4 about 1.2 million higher than the previous quarter, because we go to a restructuring and tied to beef up our sales and marketing function a very important for the future. So we hire he VP sales and marketing as previously announced.
And now he is trying to build his team. So moving forward I will expect operating expense is about around that level or 11 point.
Three to 11.5 million per quarter moving forward.
Okay. That's helpful. Thanks.
One quick one on the Uh huh.
I have two x.
Program, you were talking about increasing the.
The manufacturing official.
So it seems like that's going to push out the the build out that you guys are going to.
Potentially had been a fiscal 20.
Or I mean area I'm just wondering if you can give some detail around that but I think you said was it 20% in Korea.
Yeah sure so our main campus in Pine Hurst.
You know most of our existing customers when they have new business that it that they want to bring our way.
They really want to bring that business up in pine Hurst. They don't want to have their business split between pine Hearthstone and Chonburi. So chonburi, we target more for new customers, new business or bringing in.
Therefore in order for us to be able to grow with our existing customers, we need to be more efficient we need to create space and over the last year or so we've created about 120000 square feet of of manufacturing space in Pine Hurst.
So thats, it's about a 20% increase in the manufacturing space that we have in pine Hurst.
Which is just as you know it's a really good result, but it means we are able to bring in new business. For example, like the Infinera business you know the majority of the Infinera business the product manufacturing will be on pine or some of the repair and upgrades.
Business sets as to kind of a space space hog that will be in chonburi with the vast majority that business will be in pine Hurst.
So this is an initiative we've had going for some time, we've never really talked about publicly before but its really part of the of the DNA of the company internally about really really doing more with less the the name we put on it as half half two X half the space half the people to actually help us, but it's a way of really doing more with less creating.
Creating space to be more efficient so that we can basically grow the company and bring in new business and that doesn't mean that we can I mean 120000 square feet. It's a lot of space. It means we think we will be able to push out the buildout of the next building in Chonburi to fiscal <unk>.
2021.
Thanks.
Okay.
Thanks.
Thank you and our next question will come from the line of Tim Savageaux with Northland Capital. Your line is now open.
Hi, good afternoon, and good Brexit Silicon photonics for a moment and then.
Up to a higher level question.
For Silicon Photonics, I Wonder if you can characterize the growth.
In the June quarter, as being driven more by telecom Datacom.
And then do you expect silicon photonics to continue to grow into the September quarter.
Hey, good afternoon, Tim this yes.
By looking at the data or June versus March quarter. So they could see the calcitonin grew about 10% 80 to 90.
I will see both segments telecom and Datacom on the cynical about though is a growing.
I would say maybe the data Congo study fovista.
Well that most that when is that going is that helpful.
And then moving it is one if you want I think shame on though they didn't mention that we might see a temporary dip. Okay. Because you know some of the telecom thought that yeah go to some rationalization a again I think the most active funds on June quarter, the second quarter might be a slight down little bit so from the from the June quarter level.
Got it and that kind of feeds into my next question, which is if you look at the overall.
Sequential guide I guess down about 15 million <unk> mid range based on.
You're on your earlier comments.
It seems like the bulk of that maybe two thirds I don't know is on the.
Non communication side.
Given the commentary about 10% sequential declines I don't know if that's what you meant.
For the overall in the optical business or could you characterize your guidance in terms of non optical versus opt to go and then.
You know within optical what you expect telecom versus Datacom.
No no money, we don't break down the guidance into the account finite did you buy I think Shimon mentioned that yeah commercially the right now the whole indefinitely down, yes, and yes. So we expect that Q1 would be dolphin. The a in a June quarter that'll come with a laser which is a non optical communications side and on the optical communications side you know we.
We see essentially a did not come we'll be dollar game ER telecom at best maybe flat yeah. So so calling it think of the bottom of the hour guidance here, but we don't let me go down into critical lever silicon photonic level Q. If you have any level did you.
I appreciate the color I really do and if I could follow up with one last one just to understand that supply chain recently reset narratives.
You know part of the strength of your.
Footprint here is that you are located in Thailand in them.
You know extensively kind of not subject to a lot of what.
Might play competitors, who are more China focused or China based.
And in that context, I guess I'm, having a little problem understanding.
What you're referring to with regard to.
The disruption.
Coming from from Oems, I guess sensibly component guys shipping too.
The CN is of the world versus the ones of the world.
How do I connect that back to Fabrinet.
So it's really it's really a function Tim of you know if our customers.
Let's say stop shipping a certain product to walk away, but they have another customer for that product, but it's a slightly different variants are slightly different flavor of of the same product. So that have to do a I wouldn't call. It a redesign is more of an engineering change that might require us to take away 10 components and adds 10 other components. So we'd have to go out and source those components. So it's really more I think one of the phrase is our one of our customers use is re purposing.
But the re purpose existing products some and in some cases those products maybe already in production or about to start production. So.
Like I say will require I wouldn't call. It a full fledged redesign, but more of an engineering change that once it goes through it will create a component shortage that we have to go and fifth does that make sense.
It does thanks sometime soon.
Thank you Jim.
Thank you and our next question will come from the line of fight hard.
With Cowen Your line is now open.
Hey, guys. Thank you for taking my question actually it can kind of asked the question I was going to us, but I'll ask it differently.
In terms of your.
One died.
Help us understand in terms of the.
Relative.
Cyber is is it the industrial business Thats the primary driver for the weakness or is it the optical communication that within optical is it I mean.
Oh, Dan I don't what the telecom people without quantifying you just help us prioritize what we said is the biggest driver for the relative weakness and then.
Related to the second question that came out.
If you look at the broad picture.
Oh, you watch China regulation security as one would expect you'll be a net beneficiary of this a trade war.
One would think that you will probably benefit from this state escalation. So it's kind of positioned if youre highlighting the supply disruption lobby as a as a headwind but is that a benefit are you seeing from the U.S. trying accretable nations coming towards you.
I thought Oh, yes, yes, we are but I think it's maybe slower to come than we would like there's a number of a number of our customers are talking to us about.
You know switching their supply chain out of China, and moving it to Thailand. Those conversations are still going on Thats, maybe store to move than we would like but I do think you're right. It shows you know the the charter situation, we should be a beneficiary of that because we manufacture everything all of the products. We manufacture manufacturing tightened so yes that should be a again, a kind of a medium term.
Tailwind for US you would appreciate.
Unfortunately, due to the two things that say component shortages.
And at reengineering supply chains, they don't move at the same speed when a component shortage happens effects is immediately.
When a.
When a customer decides to read to move their supply chain, let's say from China to Thailand.
You know it can take I would say best case six months, probably more like nine months, maybe even up to a year.
And the pacing item is usually not the speed at which we can move the product.
The pacing item is usually the qualification cycle with their customers.
So like I said, there are a number of conversations going on but nothing of any north to really talk about at this point, but your point is a very good one yes, certainly the tariffs are a tailwind for us.
In relation to the Y. way situation, it's really more of a temporary I would call it.
It's a supply chain challenge that's a it's a high quality problem because again our customers are finding other.
Customers for their products separate from Wawa.
But it does present, a short term challenge in terms of just finding the right components mix to be able to get those products shipped and shipped out to our customers customers, but it is very much it I would call. It a temporary supply chain challenge, it's not like the components.
The supply chain.
Challenges, we had over the last couple of years that were kind of industry wide and pervasive and went on for several quarters. That's not what this is this isn't this is purely a I would say of a quarter a temporary supply chain challenged as we feel this will be it will be very short lived.
Thank you and regarding the Q1 guidance if you could highlight what's the primary driver of the industrial revenue business will be up.
Optical type things, but.
I would say, it's both I mean, the industry lasers again, you know that that business does seem to be down about 10%.
And it's a number of our customers have indicated that.
The optical communications you know, we do believe again, even though many of our customers are back in business with Wawa. That's again, why we as a big customer of many of our customers and even though they are back in business with wild way.
You know a few a few things to remember why we remains on DNC list on dose not all not all products have been turned back on and on and as you know.
It does seem that that.
Even with while we are being switched back on why waste demand is lower in China and and in Europe as well. So we think maybe while we it's not back on at the same level.
So therefore that the our guidance.
It is it's both I would say up to communications and industrial lasers.
Appreciate that thank you very much no problem. Thank you for that.
Thank you and we do have a question coming from the line of Dave Kang with B. Riley FBR. Your line is now open.
Yes. Thank you good afternoon.
So seamus thank you bill.
I believe you said that hallway impact was about $9 million for the quarter or so.
Should we expect.
Debt to be like 18 million for the full quarter.
Yes, I don't think so because I think the 9 million yeah. The 9 million was let's call it half of half of the quarter. So I guess, that's where you get to the 18 million from right.
I do think our customers have.
Let's say made up some of that I'm not sure that met up all of that but it certainly made up some of that so I don't think it's as straightforward as just to two times nine is probably a bit less than that of an impact got it and then second question is.
You have said multiple times that is a hallway situation to situation to be temporary but my understanding is that your customers that have reported already.
They talk about year versus non yard so they were able to ship non year products the ones. They couldn't ship, obviously our E R products. So.
That may not be a temporary situation just wanted to get your.
Understanding on this situation.
Oh, Yeah, absolutely I mean, there's obviously, while we are still on DNC list and its up to our customers to get the necessary approvals to allow them to shift away.
And that's that's the approach we take we take a very careful approach we don't ship anything until we're certain that our customer has the necessary approvals in place.
Overall, though I think with with whether the products are on the I guess the point I was making further the products are on the the the list or Nash overall weight demand does seem to be down and they've talked themselves about being down I think I read today 30 billion over the next two years because of the situation.
And again I think there is a little bit of maybe stigma even outside of the U.S. Some European countries are under pressure to not again im not an expert on it but from what I understand I guess same as you would read a lot of these countries are under under certain amount of political pressure maybe not too.
Purchased from Wally.
Got it thank you.
Thank you Dave.
Thank you and I'm showing no further questions in the queue. So now it is my pleasure hand, the conference back over to Sheamus Grady for any closing comments or remarks.
Thank you. Thank you for joining our call today, we're excited to have delivered strong Q4 results, which capped the best fiscal year in our history, we remain optimistic that our leadership as a trusted manufacturing partner positions us for continued success in fiscal 2020 and beyond.
I will look forward to speaking with you again soon thank you and goodbye.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect everybody have a wonderful day.