Good day, ladies and gentlemen. Welcome to Fatenet's financial results conference call for the third quarter of fiscal year 2020. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session and instructions on how to participate will be provided at that time. As a reminder, today's call is being recorded.
I would now like to turn the call over to your host, Garo Tumanjanian, Investor Relations.
Thank you, for the third quarter of fiscal year 2020, which ended March 27, 2020. With me on the call today are Seamus Grady, Chief Executive Officer and Travis Ferra, Chief Financial Officer. This call is being webcast and a replay will section of our website located at investor. Fabrinet.com. Please refer to our website for important information, including our earnings press release and investor presentation, which includes 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 recent SEC filings, in particular, the session caption risk factors in our Form 10 Q filed on February 4, 2020. We will begin the call with remarks from Seamus and Chauha, followed by time for questions.
I would now like to turn the call over to Fevenet's CEO, Simus Grady. Jimus?
Thank you, Garo, and good afternoon, everyone. Before I discuss the details of our results, I would like to tell you about how we are handling COVID 19. We're very fortunate that COVID 19 has not impacted our ability to keep our factories running globally. Needless to say, we greatly appreciate the extraordinary efforts of our employees and their families, our suppliers, and of course, our customers for their continued dedication and hard work during this challenging time. We've taken great measures to ensure and we are pleased to report that we are operating at 100% capacity and that our employees are well.
Extreme flexibility, decisive response to the crisis, excellent leadership and teamwork together with excellent partnerships with our customers and suppliers helped us make immediate changes to our build schedules and operating protocols to meet the volatile demands resulting from the crisis. We came to know about The information received from our staff during the Chinese New Year was very disconcerting as the virus was reported to be similar to the SARS virus of 2003. We immediately implemented all of the measures taken in our China factory across all of our factories starting the 1st week of February We continued to enhance the measures as recommended by the CDC, the World Health Organization, local and federal governments of the regions where we operate as well as based on our own research on the subject. The measures include monitoring body temperatures of all people entering the factories, cutting down on visitors, banning visitors from regions heavily hit by the virus, mandatory social distancing, frequent washing of hands, wearing face masks, stopping large group meetings, providing disinfectant in all areas of the factories and special training of staff on the symptoms and precautions be taken in the factory and at home. We encourage staff to work from home where possible and mandated that all vulnerable staff work from home.
By mid February, we started disinfecting all material coming in to ensure it was virus free before it was issued to the manufacturing lines. Despite the challenges we faced, we demonstrated the flexibility inherent in our business model to produce financial results that were within our guidance range in our fiscal third quarter. With revenue of $411,000,000 and non GAAP net income of $0.92 per share. This nimbleness also enabled us to generate significant free cash flow. Looking at some of the details of the quarter, our high level business mix was relatively consistent with our recent history with 75% of revenue from optical communications and 25% from non optical communications.
Optical communications revenue of $309,000,000 was down 4% from the 2nd quarter, but up 3.5% from a year ago. Within Optical Communications, Telecom revenue was $224,000,000, down 10% from the 2nd quarter, but up 3% from a year ago. Reflecting some inventory adjustments associated with certain next generation programs. Datacom revenue of $85,000,000 rebounded nicely and was up 14% from the 2nd quarter and up 5% from a year ago. By technology, Silicon Photonics based optical communications revenue increased 5% both from the second quarter and from a year ago to $86,000,000 and represented 21% of total revenue.
Revenue from QSFP28 and QSFP56 transceivers also continued to grow and was up 7% from the 2nd quarter and 17% from a year ago at $51,000,000 or 12 percent of total revenue. By data rate, 100 gate programs grew 1% from the 2nd quarter, and 10% from a year ago to $161,000,000. Products rated at speeds of 400 gig and above declined 41% from the 2nd quarter but grew 25% from a year ago to $29,000,000. Looking at our non optical communications business, revenue of $103,000,000 was essentially flat from the second quarter and up 2% from a year ago. Demand for industrial laser was also flat sequentially with revenue of $46,000,000.
During the third quarter, we reclassified certain revenue from other non optical revenue to automotive to better represent the end market being served. As such, automotive revenue was $31,000,000 and other revenue was $22,000,000. Excluding the impact of this reclassification, revenue from automotive and other non optical revenue would have been consistent with the 2nd quarter. Sensor revenue was $3,000,000. As we look to and beyond the 4th quarter, it's clear that there is extraordinary uncertainty ahead.
In light of this, I wanted to share some thoughts on how the COVID 19 crisis could impact our business going forward. On the one hand, with work from home protocols in place around the world, demand for internet bandwidth has grown substantially. Clearly, the next generation telecom and datacom products we manufacture for our customers, which make up about three quarters of our revenue are critical to expanding network capacity. This will continue to be a positive driver for FabricNET. On the other hand, We could continue to see regional downward demand adjustments if outbreaks return.
In addition, markets for other products we manufacture such as industry lasers automotive are likely to see reduced demand in a prolonged economic downturn. Our approach toward managing shifting customer demand remains unchanged. Our employee well-being remains our top priority and that means we will continue to follow intense safety protocols at all of our facilities. At the same time, the availability and we will continue to work closely with our customers and suppliers to identify solutions to satisfy our customers' demand. These supply chain constraints are the primary factor that has pressured our gross margin in the 3rd quarter and will likely continue to do so in the foreseeable future until the COVID-nineteen impact settles down.
Because of this, we now expect our gross margin to be in the range of 11.5% to 12% are slightly below our target range of 12% to 12.5% for the full year. And we could see this pressure continue into early fiscal 2021. Fortunately, our business model remains extremely resilient and agile. More than 90% of our costs are variable with components and materials making up the greatest portion of our costs. Because of this, we are able to quickly adjust manufacturing costs to manage changing demand dynamics.
As such, we believe we can maintain industry leading gross margin levels despite the demand churn and material availability challenges. From an operating expense perspective, we continue to be a very lean organization and do not foresee meaningful expansion of operating expenses in the near future. From a balance sheet perspective, we remain very well capitalized with over $465,000,000 in cash and investments and total debt of approximately $55,000,000. In addition, we continue to generate significant cash flow and anticipate maintaining position in the upcoming quarters. In summary, we're in a very dynamic business environment and are within guidance performance in the third quarter is a strong reflection of our resiliency and agility.
Visibility to quickly respond to shifting markets has been a part of Fabrinet's core strategy since our inception. And it slightly becomes most apparent when the environment gets challenging. As such, we believe we are uniquely positioned to continue to thrive during and post the COVID 19 crisis. Now I'd like to turn the call over to Chaba for additional financial details and our fourth quarter guidance. Saba?
Thank you, Seamus, and good afternoon, everyone. I will provide you with more details on our financial results for the third quarter and our guidance for the fourth quarter of fiscal year 2020. Total revenue in the third quarter of fiscal year 2020 was $411,200,000, within our guidance range and slight you below our record 2nd quarter performance as anticipated. Recall that in our last call, our revenue guidance incorporated an $8,000,000 to $10,000,000 impact from COVID 19. During the quarter, we have demonstrated our extreme flexibility to produce financial results that were within our guidance changes, even though the actual impact of our revenue from the pandemic was $12,000,000 to $15,000,000.
Or $4,000,000 to $5,000,000 more than the originally anticipated. Non GAAP net income was $0.92 per share, which was at the lower end of our guidance range, even after the greater than expected effect on both revenue and expenses that Shane was discussed. Now, turning to the details of our P and L. A reconciliation of GAAP to non GAAP measures is included in our earnings press release and investor presentation which you can find on our website. Shane will describe the number of extraordinary efforts we are going through during COVID 19 to remain operational while also keeping our employees safe.
Combined with the revenue impact, gross margin was below our target range at 11.2% in the quarter. Non GAAP operating expense was $12,200,000 in the 3rd quarter, just with Q2. As a result, non GAAP operating income was $33,700,000 and non GAAP operating margin was 8.2%. Taxes in the third quarter were $1,000,000, and our normalized effective tax rate was 2.4%. With revenue streams coming from more advantageous tax jurisdiction, we now expect our effective tax rate to be below 5% for the full year.
Non GAAP net income $34,800,000 in the 3rd quarter or $0.92 per diluted share, as I indicated earlier. On a GAAP basis, which includes share based compensation expenses and amortization of debt issuance costs. Net income for the third quarter was $28,300,000, or $0.75 per diluted share, also within our guidance range. Turning to the balance sheet and cash flow statement, At the end of the 3rd quarter, cash restricted cash and investments were $465,200,000, up from $450,500,000 at the end of the second quarter. Operating cash flow in the quarter was $51,800,000 and this CapEx of $12,100,000 free cash flow was $39,800,000 in the 3rd quarter, On a year to date basis, operating cash flow was $104,400,000 and free cash flow was 77,000,000.
From a capital allocation perspective, we remain committed to returning value to shareholders and have been focused on opportunistically repurchasing shares in the open market as permitted. During the quarter, we repurchased 355,000 shares at an average price of $58.37, for a total cash outlay of $20,700,000. At the end of the quarter, we had $41,500,000 remaining in our share repurchase program. Will continue to evaluate market conditions to opportunistically repurchase additional shares when possible. I would now like to turn to our guidance for the fourth quarter of fiscal year 2020.
We believe that long term growth trends are intact for the markets serve and that the current environment in many respects highlights the importance of products we manufacture. That said, We are not immune from a broader factors that are impacting some of our customers, and this is reflected in our revenue guidance caused for a sequential decline of 6% at the midpoint. At the same time, the market uncertainty is greater than we have seen in some time. As such, we are expanding our guidance ranges to reflect this. For the fourth quarter, we anticipate revenue to be in the range of $370,000,000 to $400,000,000, including a $25,000,000 to $35,000,000 impact from COVID-nineteen related uncertainties We are also reflecting in our guidance an approximately $15,000,000 impact as a result of an inventory correction from one of our customers.
As you'd anticipate from the factors that impacted our gross margin in the 3rd quarter, many of which will extend into upcoming quarters, we expect gross margin to be in the range of 11.5% to 12%. Slightly below our target range of 12.5 percent for the full year of fiscal 2020. From an earnings perspective, we anticipate non GAAP net income per share in the 4th quarter to be in the range of $0.80 to $0.92 and GAAP net income per share of $0.64 to 0 0.7 1,000,000 fully diluted shares outstanding. In conclusion, we are pleased to see our resilient business model work successfully at a volatile time. While we see the potential for even greater uncertainty ahead, our flexibility and agility leaves us well positioned to protect We believe we can exit the crisis in an even stronger position and continue to be optimistic about our prospects to deliver shareholder value over the longer term.
Operator, we are now ready
Our first question comes from John Marchetti with Stifel.
I was wondering if you could talk a little bit as we're looking out here into your fourth quarter guide about how you see some of the different segments playing out here, Telecom clearly seemed to slow here a bit. You saw some uptick in datacom in the March quarter. And then you talked a little bit about the weakness in lasers that may be likely. Just curious if you can give us some qualitative comments on what you're seeing out there. Across those three markets and what's kind of embedded in that guide for 4Q?
Yes. Thanks, John. I would say, datacom, as you said, we see a thing to be pretty resilient, pretty strong. I think the pretty insatiable demand for bandwidth around the world is evident even more so now the 3 Fairburnet folks on the call here. We're all dialing in from different parts of the world and I think everyone is probably dialing in from somewhere So the demand for datacom products just continues to be very strong.
Telecom overall, we think the demand is solid. We did have an inventory and we have an inventory correction this quarter, but we think as inventory correction aside, the underlying demand is actually quite resilient. Industrial and automotive, I suppose, are the 2 I'm sorry, lasers and automotive. Obviously, everyone knows automotive notice bank cars right now. So the demand for the automotive products we make is we expect to continue to be quite soft for a while.
And industrial lasers similar, I think it's probably flat, I would say, for industrial lasers and really subject to what happens post COVID, if the world economy starts to take off again, We have some very good customers and some very good products we make for those customers. But like I said, datacom, quite strong telecom, the underlying business is quite strong notwithstanding the inventory correction we saw with one of our customers. And then automotive continues to be will continue to be a challenge for a couple of quarters. And industrial lasers, we think will be slightly flat. The good news is I suppose the optical communications products, the ones we see being quite strong make up 75 percent of our revenue.
So we're going to continue to see strength in the segment that makes up the vast bulk of our revenue.
And then, Jim, if I can just follow-up on that inventory collection. You mentioned that the $15,000,000 hit to the fourth quarter guide, what was it in the actual third quarter? And did it relate to issues with older inventory that wasn't able to be eaten up. Did it have anything to do with some of the new systems level stuff that's been transferred over. Just curious if you can give us some additional color there.
Thank you.
Yes. I think, the we're not going to break out the exact number, and it's the inventory correction in Q3, there's a combination of a number of factors there. Obviously, the COVID impact we've sized and that was really a function of piece part availability. We did have some churn in the quarter over, we had lack of demand for certain products and that was replaced by increases in demand for other products. And then the inventory correction that you mentioned, the inventory correction, we did have a have it factored in when we issued our guidance earlier in the quarter.
So we weren't aware of this. And it's really to do with, I suppose, a customer who has surface, we call it good inventory, finished goods inventory that they're looking to burn off. Of course, when they're burning off, surface inventory, it means they don't need to buy as much of the new stuff that we make for them. So overall, we don't see it as as indicative of any longer term trend. We think it's it happens from time to time.
We have to take the roof with this move, John, with the customer. Sometimes their demand goes through the roof and they can't get enough. And then sometimes they have too much and they have to correct. And as we know, when inventory gets built up over a few quarters, it takes more than 1 quarter to correct it. So it's really just a function of an inventory correction with one particular customer, as opposed to any kind of big industry trend or anything like that.
Thank you.
You're welcome John.
Thank you. Our next question comes from Troy Jensen with Piper. Your line is now open.
Yes. First off, congrats on the nice results, gentlemen.
Well, thank you, Troy.
Hey, Seamus, maybe for you or Saba, either way. I guess, could you talk about customer concentration, 10%, like I said, love to get an update on Infinera, how the Coriant business is stacked up. And then maybe Cisco, the new project you guys talked about, and then the business.
So, okay, a lot of questions there. So customer concentration, as we had indicated, I suppose, as the year was going along, we've indicated we expect to have more than 1 10% customer. I think we're still on track to have more than 1 10% customer. The Infinera business, the Coriant business, that has been The transfer has gone very well. We've ramped those products and are continuing to ramp actually other products that have maybe come our way from that were built with other contract manufacturers that are being moved to us.
So I would say that has gone very well. The Cisco transfer we're really in the planning stages at this stage. There's nothing meaningful in terms of the revenue in Q3. And we're really in the planning stages. And we see that unfolding probably over the next, I would say 6 to 9 months, we see that transfer unfolding.
It will take a little bit longer than the transfer we did with Berlin because that was a different situation. The operation in Berlin was closing down. So we were on a kind of a measured mile. We had to get the transfer done very quickly. You asked about Acacia.
You have the Acacia business. Again, we're a key supplier to Acacia. Obviously, say, we're very happy with that relationship. But as regards, sizing it as a 10% customer, you'll have to tune in for the Q4, call it, I'm afraid.
Yes.
I would say we're very happy, I would say, with obviously with all of our customers, but how each of them are tracking, we're very happy with that. And we we feel we're on track, I would say, to hopefully, even when we report out on our Q4 results, we'd be hopefully reporting on a little bit less concentration and let's say more than 1 10% customer at that point.
Right. Okay. Perfect. Hey, and then, CMS, I dropped off for a bit. So, I'm sorry if this was addressed, but the 400 G business, did you say it was down 41% sequentially?
And could you just on that?
It was. And again, I suppose that's to a large extent, the comments around the 400 G reduction and the comments around the inventory correction are similar root cause, I would say there. Again, we don't see any particular overall trends. So again, sometimes with newer programs, the demand can be quite choppy, where you get a spike in demand for kind of next generation products that can taper off and then come back again a couple of quarters So again, we don't see it as, again, indicative of any overall trend, but yes, so that was a 40, I think we said a 40 1%, if I'm correct, reduction in 4G.
All right. Last one for me and I'll see floor, but can you just you mentioned datacom being strong. Just curious, is it across all product segments in datacom or QSFP 20 56 stronger than others?
Yes, it's across, I mean, it's across multiple product lines. I think the demand for the demand for bandwidth is going to drive a lot of demand. At the same time, we are hearing comments out of some of the big hyperscale guys that their ad revenue was down again because people are working from home and so that their ad revenue is down. So that may soften the demand. But so far, we've seen it hold up pretty strong.
Again, we're not really the if you like the best people to tell you what the big macro trends are, we just really go by the forecast we get from our customers. Historically, the sensible you can see is that, the demand remains quite strong. Our Silicon Photonics business was up 5% from the second quarter and up 21% sorry, was 21% of the revenue. And then QSFP2856 grew 7% from the 2nd quarter 17% from a year ago and up to about 12% And again, 100 gig continues to be very strong. So, the 400 gig comment really when you're building the newer, the next generation products, the demand is, if you like zoom out and look over a long period of time, it looks very good, but there does tend to be some inter quarter choppiness from time to time.
But like I said, overall, we think datacom remains quite strong.
All right. Well, understood and good luck gentlemen.
Thank you. Thank you, Troy.
Thank you. Our next question comes from Alex Henderson with Needham. Your line is now open.
Get all the parts that you needed and you didn't have production issues with the revenue guidance and the back the most recent printed quarter have been higher. Or in other words, is the demand outstripping capacity and ability to procure?
Yes. I would say overall, yes, if you look, and I'll maybe, Travis give a bit more detail in a moment. But if you look at our quarter just ended, we reported 411, which actually already contemplated the inventory correction from the customer that we talked about. We also had contemplated about $8,000,000 to $10,000,000 of COVID impact ended up being a little bit higher. So if you take we contemplated CHF 8,000,000 to CHF 10,000,000 of COVID impact, the actual impact was CHF 12 to 15 If you add those to $411,000,000 plus, let's say, an additional $5,000,000 from COVID, you get to $416,000,000.
So we would have been at about 4 16 And within that, there was a lot of churn. So a lot of churn, churn meaning certain SKUs were no longer required and other other SKUs we have to go get the parts for. And then for the if you just do the math and pick the midpoint of 385 there, the COVID impact of 25 to 35. Again, if you pick the midpoint of that, you have party and then the inventory correction, we size at about 15. So we would be at about again taking the midpoint of the guidance plus the midpoint of the COVID impact and the inventory correction, you'll get about 4:30.
So, yeah, we demand is resilient. We believe it's really a question of our ability to get the parts, but we have a lot of confidence our team and then our customers and then our suppliers to turn cartwheels and do what's necessary to get the parts to make sure we calculate the customer's demand.
Right. So I just wanted to make sure that that was all supply chain and not demand related. And I think you were pretty clear on that. The second question is the inventory correction. Is that exclusively on the telco side of the business?
Yes. Once we clear that inventory demand would be in fact that, $25,000,000 to $35,000,000 higher. And therefore, that looking out sequentially, into the back half of the calendar year, that's kind of the baseline is what you report plus that inventory correction. Because I mean, to be blunt about it, virtually every other company that's printed so far, whether it's MACOM, whether it's in 5, whether it's Acacia this afternoon after the close, whether it's NeoPhotonics have seen much stronger numbers and you're guiding towards?
Yes, I think that's a fair assessment, Alex. You'd be in the ballpark with the assumption you made there. It's an inventory correction, again, where our customer has built up, maybe a little bit more inventory than they'd like. But it's the right thing for them to do. They should burn off what they have before they order new, which is just that we have this 1 quarter and we do think it's a 1 quarter.
We don't believe it's it's going to drive on. We do expect it to get back to normal levels in the September quarter and beyond.
One more question, if I could. Clearly, the economic situation in Thailand has changed quite dramatically. I think you've gone from probably the strongest currency in that region to probably one of the weakest ones over the last 3 months. Can you talk a little bit about how you expect that to play out through your numbers, shouldn't that be a pretty nice offset to, some of the costs as we get into the back half of the year? Sounds like it probably will cause you to have margins to improve beyond, the guide for this year.
Is that kind of the way to think it.
Yes. Hi, Alex. This is Chabh. I'll take this question. So let me answer with the 3 aspects that we are seeing in the tieback devaluation.
So obviously, one of the things is the market has given the valuation of tiebacks, which have started to see starting from February. The other aspect of that is our hedging policy that, cases, we are usually entering in a quarter with 100% hedged for the current quarter, 50% hedged for the next quarter and 25% hedge situation for the following quarter. And also, the 3rd factor is our hedge accounting we have implemented this quarter. So all these three factors are, if you look at our Q3 numbers, we pretty much eliminated the exchange rate from Thailand this quarter by the sheer nature of hedging in place. So therefore, in the March quarter, we have seen any significant impact from the currency devaluation.
And also as we are looking into our Q4, as we have had pretty much 50% hedged situation by the time we started off this quarter, we will not see a significant tailwinds from Taibas this quarter. Obviously, we are buying forward the contracts every week. So we anticipate to see meaningful impact on our fiscal Q1 2021.
Right. And just one last question on the tax line I was a little confused. You said you gave the full year tax commentary being below 5%. But are you also looking for the 4th
So our March quarter has been about 2.4%. It has to do with our revenue from different tax jurisdictions. So we anticipate is to go up back in normal situation for Q4, but the overall tax shape for the year, we anticipate to still stay below 5%.
So it ought to be in the 5% to 6% range in the June driven?
It's going to be below the 5% range, I would say.
Just the June quarter is below 5% that?
That's correct.
Our next question comes from Samik Chatterjee with JP Morgan. Your line is now open.
Hi guys, this is Joe Cardoso on for Samik Chatterjee. My first question, I was just curious to see what you guys were expectation and or visibility was relative to recoveries across the different markets that you play in?
Hi, Joe. I think as we talked about earlier, I think, the markets remain pretty strong. The markets we serve are remain pretty resilient. We think datacom is remaining resilient. We think telecom is resilient, albeit with one inventory correction that we've called out from that, we see it being pretty resilient.
Industrial lasers, we think is still pretty strong, but it's just probably a little bit flat based on the macro situation. And then all the modes of who knows I suppose when that will recover, but it's a small part of our overall revenue But I think Automotive is going to continue to be impacted for a while in terms of global economies open up again. So I would say the majority of the markets we serve, we feel very good about. We feel the demand is strong. We have we're in the right we're serving the right industries and we think we have just the best customers in those industries.
So we're pretty touch wood, we're pretty confident, Joe.
Got it. And then just relative to the headwinds you're baking in, for COVID and the inventory corrections, you gave us the top line number. What are you guys expecting in terms
of an EPS headwind there?
We've guided the EPS and let's have a we've guided the EPS. We've quantified the revenue impact, let's say, for COVID and ambulatory corrections. We're not going to break out, let's say, the EPS impact for COVID or anything like that. It's a pretty dynamic It would become a kind of a meaningless number to be honest with you because we have a lot of challenges that we just have to deal with in terms of changing demand, the churn we talked about and also the components of my situation and the expenses we incur to continue to maintain to keep all of our employees safe, which is our first priority. So there are several elements to it, if you like.
There's mix, there's component supply constraints we have to deal with. And then there's the expenses of keeping all our employees safe, but we haven't broken out and we don't plan to break out the EPS impact of COVID. Chauva, anything you want to add to that?
No, I think you summarized it. Sorry, Vasim. So go, obviously, when we have put together our guidance, it's obviously incorporating the impact not on the top line, but on the EPS as well. So that's our guidance traffic reflecting the revenue range, which is obviously have a consequence on the EPS as well, which is included in our guidance. Got it guys.
No problem.
Thank you. And then just one last more one last question from me. Just on share repurchases, you guys spent roughly $20,000,000 this quarter. Just wondering if that was more of a function of the macro backdrop and the company being more opportunistic? Or is the company considering that as a future potential avenue to drive more shareholder value going forward?
I would say it's both. So as part of our capital allocation strategy, Joe, I would say it's both. Obviously, this past quarter, we were opportunistic when we saw the share price, if we felt it was a good time. Again, we're subject to open window constraints and all that stuff, but we felt it was a good time to repurchase some shares. And we're we're committed to, making sure we return value to the shareholders as obviously share repurchase is a key part of that strategy.
Whether or not we'll continue to do that, we don't we don't pre announce. We announce after the fact that we have at this stage, we have about 40,000,000 to 2,000,000. Is that correct? Remaining in our share repurchase authorization as we enter this quarter.
Yes, we have 41.5 minutes.
Okay.
Thanks guys.
Our next question comes from Tim Savageaux with Northland Capital Markets. Your line is now open.
Pardon me. Hi, good afternoon.
Hi, Tim.
Hi, Tim. So, if we look at the inventory correction you mentioned is having been kind of factored in Tiara outlook for March. A couple of questions on that. 1, should I assume that we kind of see that in the decline in 4 gigging above revenue in the quarter to some degree. And 2, with regard to the outlook for June, Is it a matter of that perhaps taking longer than you might have initially expected or kind of growing into a bit of a larger headwind throughout the quarter?
Or how would you, I guess, compare your outlook on that now versus when you started or guided the last quarter?
Yes, I think you're you've hit the nail on the head. Tim, I think the last quarter yes, you're right in the 400 gig and above number that largely explains, that situation. And then for this quarter, I wouldn't think it's longer than we anticipate. It's very unusual when one of our customers has to do an inventory corrections in as you'd appreciate inventory builds up over a long period of time. And correcting excess inventory or surplus inventory, it takes a little bit of time.
And in this case, it's kind of a couple quarters that the customer is taking to burn off that surface inventory. It's actually a good thing it makes them healthier and stronger as they do that. But we do believe from our discussions with the customer, it's a 2 quarter situation. So last quarter, you can you can see the impact there last quarter. And then this quarter, we've sized it at about $15,000,000.
And then we expect to be back to normal levels of business with that customer in the September quarter. So I don't we don't see we don't envision it dragging on longer than the June quarter.
Understood. And getting back to your estimated kind of pandemic impact or What have you? I guess, I just want to come back to it and I might imagine, when you talked about continued demand strength in datacom, should we take from that that you expect datacom revenues to rise or are you kind of portioning the supply chain impact that you're calling out across segments relative to kind of where they would have been. On the one hand, and then I assume there's actual economic or virus related demand destruction in places like auto
and maybe other, where you might
have normally or just as a result of the demand impact guided down. So I guess I'm trying to kind of parse out between supply and supply constraint driven impact and what you consider to be will demand impact in that $25,000,000 to $35,000,000 range?
I would say that the vast bulk of the COVID impact we've called out is supply related as opposed to demand destruction. The only real demand disruption we've seen is in automotive, which is a small part of our revenue. Aside from that, we haven't really seen any demand destruction. It's mostly to do with, let's say, supply constraints. And in some cases, the supply constraints are a function of this demand churn that I talked about where we think we're going to be building products a, B, and C for a particular customer.
And we end up having to park A, B, and C and build products, DE and F. And so we have to scramble to get the parts and get the components for those. So it's but I would say the underlying demand is quite strong and the majority if I had to kind of parse it out the majority of the COVID impacts we've called out this quarter is primarily, I would say, supply component supply related. That's our biggest challenge. The 2 biggest things, I suppose, that maybe keep me awake at night, are we going to be able to get all the parts to make sure we satisfy what the customers need And, how do we make sure we keep all we continue to keep all of our employees safe?
They're the 2 biggest challenges for us the next trial, I would say, until COVID is behind us. And the impact on component shortages, it's unusual. It's not like, let's say, previously, if you go back the couple years ago, we had like the MLCC shortages or from time to time you get DRAM shortages or whatever it might be. This is completely different. This is a function of primarily a function of where you have lockdowns in place in particular countries.
And suppliers have to operate at 50% or or implement social distancing in the factory that you can only bring in half of the workforce. So it just takes time for those supplier to be able to respond to that and maybe bring on additional shifts and run over the weekend to increase their output. So And it's spread across many, I would say, many commodities. It's not specific 21 commodity. So yeah, the challenges are great this quarter, but that's why we're here.
We're here to solve those problems.
Got it. If I could squeeze in when last follow-up. And I wonder if that the overall kind of logistical issues play any role in kind of make increasing challenges for onboarding Cisco and whether you continue to expect that, they could represent, I won't say another, but up to above the 10% customer in your fiscal 2021?
I think I mean, generally, we don't talk about kind of specific customers, but just on the Cisco transfer I would say, hopefully not, Tim, because it's an existing set of products that are already being manufactured by another supplier. So the supply chain is positioned. It's not like a completely new product that we have to go off and set up the supply chain. It's an established a family of products with an established supply chain. So we're quite optimistic I would say about the on boarding of that business.
And but it will take it will take an additional I think we'll take about 6 to 9 months the end of the calendar year, I'd say it's probably timing wise is a good best. Whether that results in Cisco becoming a 10% customer or not, we'd have to wait and see. But, yes, we're quite happy with if you like how we're diversifying our mix. Obviously, Lumentum is our number one customer and I would say will continue to be for some time. But the others in contention, if you like, that we've talked about before.
Obviously, Infinera is 1. Cisco is 1 Acacia is a significant customer for us. So we are quite happy we're diversifying our mix of customers.
I'm not showing any further questions at this time. I would now like to turn the call back over to Seamus Grady for closing remarks.
Thank you, operator. Thank you all for joining our call today. We're pleased to have met our guidance in the third quarter during a very dynamic business environment. Our success is a direct reflection of our core strategy to operate a very agile and flexible business that lets us respond very quickly to shifting environments. And we look forward to speaking with you again in the future.
Until then, goodbye and stay safe. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.