Good day, ladies and gentlemen. Welcome to Fabrinet's financial results conference call for the third quarter of fiscal year 2020. I would now like to turn the call over to your host, Garo Toomajanian, Investor Relations.
Thank you, operator. Good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabrinet's financial and operating results 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 Csaba Sverha, Chief Financial Officer. This call is being webcast. A replay will be available on the investors 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 section captioned risk factors in our Form 10-Q filed on February fourth, 2020. We will begin the call with remarks from Seamus and Csaba, followed by time for questions. I would now like to turn the call over to Fabrinet CEO, Seamus Grady. Seamus?
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 the safety of our employees and their families, and we're 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 COVID-19 issues from CASIX, our factory in China, in late January. 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 first 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 to be taken in the factory and at home. We encouraged 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 million 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 million was down 4% from the second quarter, but up 3.5% from a year-ago. Within optical communications, telecom revenue was $224 million, down 10% from the second quarter, but up 3% from a year-ago, reflecting some inventory adjustments associated with certain next-generation programs.
Datacom revenue of $85 million rebounded nicely and was up 14% from the second 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 million and represented 21% of total revenue. Revenue from QSFP28 and QSFP56 transceivers also continued to grow and was up 7% from the second quarter and 17% from a year ago at $51 million or 12% of total revenue. By data rate, 100-gig programs grew 1% from the second quarter and 10% from a year ago to $161 million. Products raised at speeds of 400-gig and above declined 41% from the second quarter, but grew 25% from a year ago to $29 million.
Looking at our non-optical communications business, revenue of $103 million was essentially flat from the second quarter and up 2% from a year ago. Demand for industrial lasers was also flat sequentially with revenue of $46 million. 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 million, and other revenue was $22 million. Excluding the impact of this reclassification, revenue from automotive and other non-optical revenue would've been consistent with the second quarter. Sensor revenue was $3 million. As we look to and beyond the fourth 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 Fabrinet. 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 Industrial Laser and 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 of parts and materials we need to manufacture are likely to face variability. 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 third quarter and will likely continue to do so in the foreseeable future until the COVID-19 impact settles down. Because of this, we now expect our gross margin to be in the range of 11.5%-12%, or slightly below our target range of 12%-12.5% for the full year. 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 million in cash and investments and total debts of approximately $55 million. In addition, we continue to generate significant cash flow and anticipate maintaining that position in the upcoming quarters. In summary, we're in a very dynamic business environment, and our within guidance performance in the third quarter is a strong reflection of our resiliency and agility.
This ability to quickly respond to shifting markets has been a part of Fabrinet's core strategy since our inception, and its value 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 Csaba for additional financial details and our fourth quarter guidance. Csaba?
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 $411.2 million, within our guidance change and slightly below our record second quarter performance as anticipated. Recall that in our last call, our revenue guidance incorporated an $8 million-$10 million 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 on revenue from the pandemic was $12 million-$15 million, or $4 million-$5 million more than we originally anticipated.
Non-GAAP net income was $0.92 per share, which was at the lower end of our guidance change, even after the greater than expected effect on both revenue and expenses that Seamus discussed. Turning to the details of our P&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. Seamus described 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 third quarter. Non-GAAP operating expense was $12.2 million in the third quarter, flat with Q2. As a result, non-GAAP operating income was $33.7 million, and non-GAAP operating margin was 8.2%. Taxes in the third quarter were $1 million, 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 was $34.8 million in the third 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 $28.3 million, 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 third quarter, cash, restricted cash and investments were $465.2 million, up from $450.5 million at the end of the second quarter. Operating cash flow in the quarter was $51.8 million, and with CapEx of $12.1 million, free cash flow was $39.8 million in the third quarter.
On a year-to-date basis, operating cash flow was $104.4 million, and free cash flow was $77 million. 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 $20.7 million. At the end of the quarter, we had $41.5 million remaining in our share repurchase program. We 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 we serve, and that the current environment, in many respects, highlights the importance of products we manufacture.
That said, we are not immune from the broader factors that are impacting some of our customers. This is reflected in our revenue guidance, which calls 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 changes to reflect this. For the fourth quarter, we anticipate revenue to be in the range of $370 million-$400 million, including a $25 million-$35 million impact from COVID-19 related uncertainties. We are also reflecting in our guidance an approximately $15 million 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 third quarter, many of which will extend into upcoming quarters, we expect gross margin to be in the range of 11.5%-12%, slightly below our target range of 12%-12.5% for the full year of fiscal 2020. From an earnings perspective, we anticipate non-GAAP net income per share in the fourth quarter to be in the range of $0.80-$0.92, and GAAP net income per share of $0.64-$0.76, based on approximately 37.6 million 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 our business during this pandemic.
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 to open the call for questions.
Thank you. Our first question comes from John Marchetti with Stifel. Your line is now open.
Thanks very much. Seamus, 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. 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.
Thanks, John. I would say Datacom, as you say, we see it being continually pretty resilient, pretty strong. I think the pretty insatiable demand for bandwidth around the world is evident even more so now. The three Fabrinet 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. The demand for Datacom products just continues to be very strong. Telecom, overall, we think the demand is solid. We did have an inventory correction, and we have an inventory correction this quarter. We think, inventory correction aside, the underlying demand is actually quite resilient. Industrial and Automotive, I suppose, I'm sorry, lasers and Automotive. Obviously, everyone knows Automotive. Nobody's buying cars right now.
The demand for the Automotive products we make we expect to continue to be quite soft for a while. 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. Like I said, I would say Datacom, quite strong. Telecom, the underlying business is quite strong, notwithstanding the inventory correction we saw with one of our customers. Automotive will continue to be a challenge for a couple of quarters. Industrial Lasers, we think, will be slightly flat. The good news is, I suppose the optical communications products, the ones that we see being quite strong, make up 75% of our revenue.
We're going to continue to see strength. In the segment that makes up the vast bulk of our revenue.
Seamus, if I can just follow up on that inventory correction. You mentioned the $15 million hit to the fourth quarter guide. What was it in the actual third quarter? Did it relate to some 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.
Yeah, I think we're not going to break out the exact number, let's say, of the inventory correction in Q3. There's a combination of a number of factors there. Obviously, the COVID-19 impact we've sized, and that was really a function of piece part availability. We did have some churn in the quarter, where 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 it factored in when we issued our guidance earlier in the quarter. We were aware of it. It's really to do with, I suppose, a customer who has surplus, we call it good inventory, finished goods inventory that they're looking to burn off.
Of course, when they're burning off surplus inventory, it means they don't need to buy as much of the new stuff that we make for them. Overall, we don't see it as indicative of any longer-term trend. It happens from time to time. We have to take the rough with the smooth, John, with the customers. 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. As we know, when inventory gets built up over a few quarters, it takes more than one quarter to correct it. 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.
Yeah. First off, congrats on the nice results, gentlemen.
Well, thank you, Troy.
Thanks, Troy.
Hey, Seamus maybe for you or Csaba, either way. I guess could you talk about customer concentration, 10%? I guess I would 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 Acacia business.
Okay, a lot of questions there. Customer concentration, as we had indicated, I suppose, as the year was going along, we've indicated we expect to have more than one 10% customer. I think we're still on track to have more than one 10% customer. The Infinera business, the Coriant business, 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 that were built with other contract manufacturers that are being moved to us. 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. We see that unfolding probably over the next, I would say, six to nine 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. We were on a kind of a measured mile. We had to get the transfer done very quickly. You asked about Acacia. The Acacia business, again, we're a key supplier to Acacia. Obviously, we're very happy with that relationship. As regards sizing it as a 10% customer, you'd have to tune in for the Q4 call, I'm afraid.
Yeah.
I would say we're very happy, I would say, obviously, with a lot of our customers, but how each of them are tracking, we're very happy with that and we feel we're on track, I would say, to hopefully 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 one 10% customer at that point.
Great. Okay, perfect. Hey, then Seamus, I dropped off for a bit, so I'm sorry if this was addressed, the 400-gig business, did you say it was down 41% sequentially? Could you just touch on that?
It was, and again, I suppose that's to a large extent the comments around the 400-gig reduction and the comments around the inventory correction are similar root cause I would say there. Again, we don't see any particular overall trend. Again, sometimes with newer programs, the demand can be quite choppy, where you get a spike in demand for next generation product that can taper off and then come back again a couple of quarters later. Again, we don't see it as, again, indicative of any overall trend. Yeah, that was a 40, I think we said a 41%, if I'm correct, reduction in 400-gig.
All right. Last one for me. I'll cede the floor. You mentioned Datacom being strong. Just curious, is it across all product segments in Datacom, or QSFP, you know, QSFP28, QSFP56 stronger than others?
Yeah, it's across multiple product lines. I think 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 is down again because people are working from home, and so their ad revenue is down. That may soften the demand. So far, we've seen it hold up pretty strong. Again, we're not really 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. Certainly the sense we see is that the demand remains quite strong. Our silicon photonics business was up 5% from the second quarter and up 21%, sorry, almost 21% of the revenue.
QSFP28 and QSFP 56 grew at 7% from the second quarter and 17% from a year ago and up to about 12%. Again, 100-gig continues to be very strong. The 400-gig commentary, when you're building the newer, the next generation products, the demand is, if you zoom out and look over a long period of time, it's very good. There does tend to be some inter-quarter choppiness from time to time.
Okay.
Like I say, overall, we think Datacom remains quite strong.
All right. Well, understood, and good luck, Seamus.
Thank you. Thank you, Troy.
Thanks. Thank you. Our next question comes from Alex Henderson with Needham. Your line is now open.
Thanks. If you were able to get all the parts that you needed and you didn't have production issues, would the revenue guidance and the fact the most recent printed quarter have been higher? In other words, is the demand outstripping capacity and ability to procure?
Yes. I would say overall, yes. I'll let maybe Csaba give a bit more detail in a moment, 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 million-$10 million of COVID impact, which ended up being a little bit higher. If you take, we contemplated $8 million-$10 million of COVID impact. The actual impact was $12 million-$15 million. If you add those to $411 +, let's say, an additional $5 million from COVID, you get to $416. We would have been at about $416. Within that, there was a lot of churn. A lot of churn, meaning certain SKUs were no longer required and other SKUs we have to go get the parts for.
Then for the SKU, if you just do the math and pick the midpoint of 385 there, the COVID impact of 25-35, again, if you pick the midpoint of that, you have 30, the inventory correction we've sized at about 15. We would be at about, again, taking the midpoint of the guidance, plus the midpoint of the COVID impact and the inventory correction, you'd be at about 430. Yeah, demand is resilient, we believe. It's really a question of our ability to get the parts. We have a lot of confidence in our team and in our customers and in our suppliers to turn cartwheels and do what's necessary to get the parts to make sure we satisfy the customer's demand.
Right. 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 in the telco side of the business?
Yes.
Once we clear that inventory out, should we assume then that the normalized rate of demand would be, in fact, that $25 million - $35 million 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? To be blunt about it, virtually every other company that's printed so far, whether it's MACOM, whether it's Inphi, whether it's Acacia this afternoon after the close, whether it's NeoPhotonics, have seen much stronger numbers than you're guiding towards.
Yeah, 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, but it's just that we have this one quarter, and we do think it's a one quarter. We don't believe it's going to drag on. We do expect it to get back to normal levels in the September quarter and beyond.
All right. 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 three 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 your margins to improve beyond the guide for this year. Is that kind of the way to think about it?
Hi, Alex. This is Csaba. I'll take this question. Let me answer with the three aspects that we are seeing in the Thai baht devaluation. Obviously, one of the things is the market has driven devaluation of Thai bahts, which we have started to see starting from February. The other aspect of that is our hedging policy that as we have communicated, we are usually entering in a quarter with 100% hedged for the current quarter, 50% hedged for the next quarter, and 25% hedged situation for the following quarter. Also, the third factor is our hedge accounting that we have implemented this quarter. All these three factors are, if you look at our Q2 numbers, we pretty much eliminated the exchange rate impact from Thailand this quarter by the sheer nature of hedging in place.
Therefore, in the March quarter, we haven't seen any significant impact from the currency devaluation. 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 significant tailwinds from Thailand this quarter. Obviously, we are buying forwards the contracts every week. We anticipate to see meaningful impacts from our fiscal Q1 2021.
Right. Just one last question on the tax line. I was a little confused. You gave the full year tax commentary being below 5%, but are you also looking for the fourth quarter to be below 5%? I think it was obviously well below that in the March quarter.
Our March quarter has been about 2.4%. It has to do with our revenue from the different tax jurisdictions. We anticipate this to go up back in normal situation for Q4. The overall tax rate for the year, we anticipate to still stay below 5%.
It ought to be in the 5% - 6% range in the June quarter then?
It's going to be below the 5% range, I would say.
Just the June quarter is below 5%?
That's correct.
Okay, I got it. Thanks.
Thank you.
Thanks, Alex.
Our next question comes from Samik Chatterjee with JPMorgan. 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' 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 remain pretty resilient. We think Datacom is remaining resilient. We think Telecom is resilient, albeit with one inventory correction that we've called out. Aside 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. Automotive, who knows, I suppose, when that will recover, but it's a small part of our overall revenue. I think Automotive is going to continue to be impacted for a while until global economies open up again. I would say the majority of the markets we serve, we feel very good about. We feel the demand is strong.
We're serving the right industries, and we think we have just the best customers in those industries. We're pretty, touch wood, we're pretty confident, Joe.
Got it. 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. We've guided the EPS. We've quantified the revenue impact, let's say, for COVID and inventory corrections. We're not going to break out, let's say, the EPS impact for COVID or anything like that. It's pretty dynamic. It would become a kind of a meaningless number, Joe, 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 component supply situation. The expenses we incur to continue to maintain to keep all of our employees safe, which is our first priority. There are several elements to it, if you like. There's mix, there's component supply constraints we have to deal with. There's the expenses of keeping all our employees safe.
We haven't broken out and we don't plan to break out, let's say, the EPS impact of COVID. Csaba, anything you want to add to that?
I think you summarized it very well, Seamus. Joe, 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. That's our guidance, reflecting the revenue range, which obviously has a consequence on the EPS as well, which is included in our guidance.
Got it, guys. No problem. Thank you. Just one last question from me. Just on share repurchases, you guys spent roughly $20 million 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. 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. We felt it was a good time. Again, we're subject to open window constraints and all that stuff. We felt it was a good time to repurchase some shares. We're committed to making sure we return value to the shareholders, and obviously share repurchase is a key part of that strategy. Whether or not we'll continue to do that, obviously we don't pre-announce. We announce after the fact. At this stage, we have about $42 million, Csaba, is that correct, remaining in our share repurchase authorization as we enter this quarter.
Yeah. We have $41.5 million.
Okay. Thanks, guys.
Thank you, Joe.
Thank you, Joe.
Thank you. Our next question comes from Tim Savageaux with Northland Capital Markets. Your line is now open.
Pardon me. Hi, good afternoon.
Hi, Tim.
Couple of questions. If we look at the inventory correction you mentioned as having been kind of factored into your outlook for March, a couple of questions on that. One, should I assume that we kind of see that in the decline in 400-gig and above revenue in the quarter to some degree? Two, 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? How would you, I guess, compare your outlook on that now versus when you started or guided the last quarter?
Yeah, I think you've hit the nail on the head, Tim. I think the last quarter, yeah, you're right in the 400-gig and above number that largely explains that situation. 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 correction, Tim. As you'll appreciate, inventory builds up over a long period of time. Correcting excess inventory or surplus inventory, it takes a little bit of time. In this case, it's a kind of a couple of quarters that the customer's taking to burn off that surplus inventory. It's actually a good thing. It makes them healthier and stronger as they do that. We do believe from our discussions with the customer, it's a two-quarter situation.
Last quarter, you can see the impact there last quarter. This quarter we've sized it at about $15 million. We expect to be back to normal levels of business with that customer in the September quarter. We don't envision it dragging on longer than the June quarter.
Understood. 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 you expect Datacom revenues to rise? Are you kind of portioning the supply chain impact that you're calling out across segments relative to kind of where they would've 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. I guess I'm trying to kind of parse out between supply constraint driven impact and what you consider to be actual demand impact in that $25 million - $35 million range.
I would say the vast bulk of the COVID impact we've called out is supply related as opposed to demand destruction. The only real demand destruction 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 D, E, and F. We have to scramble to get the parts and get the components for those.
I would say the underlying demand is quite strong. 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 two 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? How do we make sure we continue to keep all of our employees safe? They're the two biggest challenges for us for the next while, I would say, until COVID is behind us. The impact on component shortages, it's unusual.
It's not like, let's say previously, if you go back a couple of years ago, we had the MLCC shortages, or from time to time you get DRAM shortages or whatever it might be. This is completely different. This is primarily a function of where you have lockdowns in place in particular countries, Suppliers have to operate at 50% or implement social distancing in their factory that they can only bring in half of the workforce. It just takes time for those suppliers to be able to respond to that and maybe bring on additional shifts and run over the weekends to increase their output. It's spread across many, I would say, many commodities. It's not specific to any one commodity. 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 one last follow-up.
Sure.
I wonder if the overall kind of logistical issues play any role in kind of the increasing challenges for onboarding Cisco and whether you continue to expect that they could represent, I won't say another, but up to above a 10% customer in your fiscal 2021?
I think, 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. 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 family of products with an established supply chain. We're quite optimistic, I would say, about the onboarding of that business. It will take an additional, I think it will take about six to nine months. The end of the calendar year, I'd say, is probably, timing-wise, is a good bet. Whether that results in Cisco becoming a 10% customer or not, we'd have to wait and see. Yeah, we're quite happy with, if you like, how we're diversifying our customer mix.
Obviously, Lumentum is our number one customer, and I would say will continue to be for some time. The others in contention, if you like, that we've talked about before, obviously, Infinera is one, Cisco is one, Acacia is a significant customer for us. We are quite happy with how we're diversifying our mix of customers.
Okay. Thank you.
Thank you, Tim.
Thank you. 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. 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.