Earnings Call: Q1 2021

Nov 2, 2020

Good day, everyone, and welcome to the Lumentum First Quarter Fiscal Year 2021 Earnings Call. All participants will be in a listen only mode. Please note today's event is being recorded. At this time, I'd like to turn the conference call over to Jim Fanucchi of Darrow Associates. Sir, please go ahead. Thank you, operator. Welcome to Lumentum's quarter fiscal year 2021 earnings call. This is Jim Fanucchi from Darrow Associates Assisting Lumentum with its Investor Relations Joining the call today from the company's management team, we have Alan Lowe, President and Chief Executive Officer Wajid Ali, Chief Financial Officer and Chris Coldburn, Senior Vice President of Strategy And Corporate Development. Today's call will include forward looking statements, including statements regarding the markets in which we operate in our position in such markets, the impact of COVID-nineteen and responsive actions thereto on our business and continuing uncertainty in this regard. Trends and expectations for our products and technology, our markets, market opportunity and customers and our expected financial performance, including our guidance, as well as statements regarding our future risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risk factors described in our SEC filings, including the company's quarterly report on Form 10 Q for the fiscal quarter ended September 20 2020, which the company expects to file later today and in Lumentum's 10 K for fiscal year 2020 2020. The forward looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update these statements, except as required by applicable law. Please also note unless otherwise stated, All results and projections discussed in this call are non GAAP. Non GAAP financials are not to be considered as a substitute for or Superior II Financials prepared in accordance with GAAP. Lumentum's press release with the first quarter 2021 results and accompanying supplemental slides, are available on and a reconciliation between our historical GAAP and non GAAP results. Now I will turn the call over to Alan for his comments. Thank you, Jim, and good morning, everyone. I would like to make a couple of broader points before providing my business commentary. While we will be discussing our strong financial results, and we benefit from the digital transformation that COVID nineteen is accelerating. We recognize and don't want anyone to lose sight of the significant economic health and well-being challenges, COVID-nineteen has tragically brought to millions of people around the globe. Our thoughts are with all of those affected. I thought so also with the health care professionals and first responders who selflessly make a difference on the front lines every day. Am proud that momentum plays an important role in the critical infrastructure that helps people safely continue their work, their education, and their life during these challenging times. Now on to my comments about our business and financial results. We started fiscal 2021 on a strong note. In the first quarter, we achieved record non GAAP gross margin, operating margin, and earnings per share. For the first time, we achieved gross margin in excess of 50% and operating margin above 30%. This performance demonstrates the strength and resilience of our business and financial model, we expect this positive momentum to continue into the second quarter. As pleased as I am with our results and the progress we've made in driving towards our strategic goals, I'm as excited as ever about the opportunities ahead. As I often say, The world has accelerated its shift to increasingly digital and virtual approaches to work, entertainment, education, healthcare, social interaction and commerce, which all drive increasing needs for our differentiated products and technology. We intend to invest strongly in R&D to address these positive long term trends and strengthen our market leadership positions. 1st quarter revenue was in the upper half of our guidance range. Our revenue mix was different than we had contemplated in our guidance due to changes throughout the quarter. Our assumptions for 3d sensing proved conservative and demand for our 3d sensing products accelerated through the quarter. Strength in 3d sensing sales more than offset lower than anticipated telecom and commercial laser sales. Telecom datacom revenue grew 2% sequentially and 5% year on year. Excluding revenue from low margin product lines, we have divested or discontinued telecom and datacom revenue grew 4% sequentially and 14% year on year. The largest contributor to this growth was telecom transmission. We had strong sales of indium phosphide based coherent transmission modules in components, including ACO and DCO modules and 600 gig 800 gig modulators. Rhodium sales increased from last quarter, but were still down year on year. However, our contentionless M by N ROADMs grew more than 30% quarter on quarter to a new high, highlighting the increasing shift to this technology in new customer systems. During the first quarter, we saw some push outs in telecom customer orders. We also saw reductions in customer forecast due to to lower telecom revenue than we assumed in our guidance. Uncertain key new telecom products, however, demand exceeded our ability to supply and we are working hard to expand output. During the first quarter, we made a lot of progress on new products further strengthening our telecom leadership position. On the transmission side, we began sampling our 400 gig DCO transmission modules. On the transport side, we continue to proliferate our contentionless end by end and high court count modem technologies with CL and extended C band versions to enable customers next generation systems globally. Prior quarter trends continued in datacom with sales growing 6% sequentially. We have seen a shift in near term customer forecasts with lower projected 5G demand offset by continued strength in demand for our market leading chips for data centers. We have adjusted our wafer start plans accordingly. Our backlog for datacom shifts remains very robust and demand continues to outstrip our wake with capacity. As such, we are continuing to aggressively expand our wafer fab capacity based on long term demand trends and expectations. On the new product front, we are working closely with our lead customers on their needs for future 800g and above datacom transceivers. To this end, we have recently demonstrated high performance 200 gig PAM4 EMLs for such applications. Looking to the second quarter, we expect telecom and datacom revenues to be up sequentially with the strongest growth coming from telecom transport driven by growth in next generation ROADMs. Industrial and consumer revenue grew strongly quarter on quarter and was significantly higher than in our guidance assumptions. Our unmatched experience in shipping 100 of 1,000,000 of VCSEL arrays per year continues to put us in a leadership position in the market. Since we became an independent public company 5 years ago, we have shipped approximately $1,500,000,000 of 3 d sensing revenue. Continue to believe we have a larger addressable opportunity over this product cycle. This is due to the significant increase in 3 d sensing content per consumer device we are now shipping. Looking to the 2nd quarter, we expect industrial and consumer revenue to be flat to modestly up quarter on quarter. We are optimistic about 3 d sensing demand in the coming quarters and years. In addition to increasing content, We believe there is potential for a strong consumer upgrade cycle driven by new features, including 5G, augmented in virtual reality and computational photography. Further, we believe there is potential for market share shifts at our customers level, which could be beneficial to us. On Android, we continue to make very good progress on new opportunities. However, we are taking a conservative approach to Android revenue in our near term projections to the COVID-nineteen and geopolitical factors. Looking even further ahead, we have multiyear product and technology roadmaps aligned with our consumer electronics customers. These include unique technologies to increase the integration of other components, enable under screen 3 d cameras produce higher density and larger arrays to enable higher performance 3 d imaging as well as to create new lasers to increase our opportunity within other consumer mobile devices. We are also focused on planting seeds for growth in markets beyond consumer electronic We have unmatched and invaluable experience in 3d sensing lasers for consumer electronics applications. And broad industry leading photonic capabilities used across other markets. We believe this gives us a competitive advantage as we pursue emerging long term opportunities outside of consumer electronics. In the past quarter, our VCSEL arrays completed the important AEC Automotive qualification through a module partner, and we expect initial deployments of these products to be in automobile in cabin applications. We are also now sampling high power VCSEL arrays into lidar for last mile vehicle applications. According to our customers, these last mile applications could be one of the largest LiDAR opportunities in the next several years. For broader automobile opportunities that we'll deploy and develop over time. We are making progress in the security and access control market We are already shipping in systems who are looking to add 3 d sensing to enable touchless or contactless, high security access control These applications are also accelerating due to public health and safety concerns. Turning to commercial lasers. Revenue declined 37 percent quarter on quarter. This is a larger decline than what we had assumed in our guidance. Given our customer mix, This decline was related to manufacturing weakness outside of China. We expect second quarter lasers revenue to be flat to up modestly We believe that it will be several quarters before we get back to the our latest 12 kilowatt fiber laser engines are now shipping to our lead customer for their newest platform. Additionally, we are very proud that our People Blade 3 was recently recognized by laser focused world with an innovators award for being one of the most innovative products impacting the Photonics community this year. I want to provide some color on our business with Wall given the regulatory restrictions that were announced in August. Sales to Huawei declined in the first quarter and were less than 10% of total company revenue. In the second quarter, our guidance contemplates sales to Huawei to decline further due to the regulatory restrictions. Beyond the second quarter for modeling purposes, we currently expect sales to Huawei to be less than 5% of quarterly sales. Before handing it over to Wajid to review the numbers, I want to thank and acknowledge all of our employees around the world. They are the ones who have put us in such a great position both financially as well as with our technology and product leadership. They have been incredible, especially so, working through the pandemic. This is a slide each having their own personal challenges, living and working in these times. In addition to our business goals, contributing to society and our local communities is very important to Lumentum and to our employees. We are committed to the highest standard of social, ethical, and environmental conduct and responsibility. This includes promoting safe, diverse, and inclusive workplaces pre from discrimination and harassment. Again, thank you to all of our employees. They are absolutely the company's greatest asset. I would also like to thank our customers, suppliers, and shareholders for their continued support and partnership during these challenging times. With that, I'll hand it over to Juanjad. Thank you, Alan. Good morning, everyone. Turning to the first quarter's numbers. Net revenue for the first quarter was $452,400,000, which was up 23% sequentially and 1% year on year. GAAP gross margin 0.9% and GAAP diluted net income per share was 0.86 dollars. 1st quarter non GAAP gross margin was 52%, which was up 480 basis points sequentially and up 6.20 basis points year on year. The sequential and year on year growth was driven by an improvement in product mix and acquisition synergies. As Alan highlighted, this record gross margin performance demonstrates the improvements we have made in our financial model. 1st quarter non GAAP operating margin at 33.7 percent increased 8.90 basis points sequentially 6.40 basis points year on year. Improvements were made by gross margin improvements as operating expenses were approximately flat with the comparable periods. Non GAAP operating expenses totaled $82,700,000 or 18 percent of revenue. SG and A expense was $36,800,000, R and D expense was $45,900,000. Operating expenses continued to be a little lower than normal run rates due to COVID-nineteen reducing travel, trade show and other expenses. 1st quarter non GAAP net income was 139 $2,000,000. This includes $900,000 of net interest and other income and $14,200,000 of tax expense. Other income is down sequentially as interest rates on our cash and short term investments are lower overall and we are being conservative in our investment portfolio. Non GAAP diluted net income per share was $1.78 based on a fully diluted share count of $78,200,000. Now turning to the balance sheet. We ended the quarter with $1,610,000,000 in cash up $57,000,000 quarter on quarter. Strong growth in our accounts receivable during the first quarter should lead to an even stronger cash generation in the 2nd quarter. Of these convertible notes, $450,000,000 is due in 20.24 $1,050,000,000 is due in 2026. The total cash interest expense associated with these notes is approximately $6,000,000 per year. With a strong margin Turning to segment details. 1st quarter Optical Communications segment revenue at $428,500,000 increased 29.7 Year on year Optical Communications segment revenue increased 3% due to higher telecom and datacom revenue, particularly in datacom, due to strong growth in 5.90 basis points sequentially due to a better product mix with higher chip related revenue and increased 640 basis points year on year due to a more favorable product mix, improved telecom and data margins and acquisition synergies. Our leisure segment revenue at $23,900,000 decreased 37% sequentially and 29% year on year. 1st quarter lasers gross margin decreased to 43.5% due to the significant reduction in manufacturing volumes. Now on to our guidance for the second quarter of fiscal 2021. Please note the outlook we are providing is on a non GAAP basis and are based on our assumptions as of today. We expect net revenue for the second quarter of fiscal 2021 to be in the range of $465,000,000 to $485,000,000. This revenue projection includes telecom and datacom increasing sequentially. Industrial and consumer being flat to up modestlyquarteronquarterandcommercial lasers also being flat to up modestly quarter on quarter. Based on this, we project 2nd quarter operating margin to be in the range $1.70 to $1.90. These projections incorporate an increase in operating expenses primarily due to an increase and an estimated other income Before wrapping up, I'd like to make a few important comments about our financial model. It might be helpful to refer to the earnings slide deck on our website for the following points as well. With a for the 21, we exceeded this target model. We believe we will continue to grow margins over time due to further improvements in product mix, efficiency and operating leverage. As such, we are now increasing and our annual operating margin due to 3 d fencing seasonality, as well as regulatory restrictions on sales to Huawei impacting the second half of the fiscal year. Thank you, Ajid. Before turning the call over to the operator to start the question and answer session, I would like to ask everyone to keep the one question and one follow-up. This should help us get to everyone before Our first question today comes from Samik Tategy from JP Morgan. Please go ahead with your question. Thank you. Hey, good morning. Thanks for Alan, I just wanted to start with the telecom group. I think a lot has changed related to your key customer like Huawei and Ciena over the last kind of 2 to 3 months. Wondering if you can go into a bit more detail also share your thoughts about how sustainable telecom demand is given kind of the changes we're seeing and what's driving the delays and the push outs that you talked about? Is it more focused on a particular geography or is it kind of broad based? And then I have a follow-up. Sure. I mean, if you looked at our guidance or in the script, we talked about telecom and datacom actually increasing in fiscal Q2. So pretty confident that we'll have growth in telecom this quarter. I'd say we were probably expecting higher growth but due to some deployments not happening, per the original schedule, I think mostly due to COVID, and the ability to get out into the fields and deploy these networks, we've seen some slowdown, but we're still expecting growth across the globe in our fiscal second quarter. So anything on what's driving the delays? Is it more likely on the geographies in replying 5g? Well, we, as I said in the script as well, we did see some delays in the demand for our datacom chips for 5G deployment mostly in China. But that is easily taken up by demand, strong demand in hyperscale, cloud data centers. And so we've had to shift our wafer starts in our datacom business towards more of the higher speed inside the data center applications. But I'd say that is one area that we saw some delay in the deployments, slower than expected in our 5G deployments in China. Okay. And if I can follow-up 3 d sensing, the industrial and consumer group, you're guiding to flat to modestly up But I think greater to kind of the guidance you had last quarter where you sounded a bit more confident about December being the peak in rev news. I'm just wondering if anything's changed on that front or what are your assumptions in relation to maybe market share when you're kind of guiding to that for the December quarter? Yes, as we said, throughout fiscal Q1, demand came in stronger than expected and stronger than what you had guided in our August call. We've had a very strong October, and, you know, expect, flat to slightly up. Now that could change. Depending on how successful our lead customer's launch is, but so far everything looks positive. I do think one thing that may be a little different this year is that we expect some of the demand that would typically be consumed in the December quarter to to roll into the March quarter. So that's perhaps a dynamic that maybe wasn't contemplated earlier. Our next question comes from Rod Hall from Goldman Sachs. Please go ahead with your question. Yes, thanks for the question guys and nice job on the earnings here. I wanted to start off with the, just the order trajectory, orders trajectory here recently the last few weeks now that the new, let's call them the lead customer phones have launched. I wonder if you guys have seen any change in 3d sensing order reserve. That's all been pretty constant the last couple of weeks. And I have a follow-up. Well, I mean, we've seen strong demand. And through through, August September and it carried through October. So, it's more of a front end loaded quarter. Now that could carry throughout the balance of the quarter, but our guidance doesn't contemplate that. So I'd say we're in a good position as far as market share, I think you'd have to ask our competitor because he doesn't give the numbers and our customer doesn't tell us what share we have, we have a contractual obligation that they abide by at a minimum, and we're fairly confident that's certainly being divided by it. Okay. Thanks for that, Alan. And then I wanted to, on datacom, just check capacity situation and ask if you could give us any idea, more specifically when that fab capacity comes on and How much more fast capacity are you adding proportionately? Can you just kind of give us some idea of what's going on with capacity there? Yes, as we said in the August call, we're expecting to, Chris, you might have to correct me, double the wafer capacity over the next 18 to 24 months. It does come in chunks. And our cycle time for datacom wafers is more than a quarter. So like I said in the script, as we see a shift from 5G to data center, that takes time to move over. So in the short term, we're going to be constrained on those data center chips. I would say that could we go from where we are today to double that in revenue and volume? I'd say that there's probably some offsetting price reductions over time that would offset some of that, but our expectations are that we'll have plenty of demand 2 years from now to consume twice of what we're producing today. So you can keep in mind some of the newer chips have are bigger and so they consume more real estate on a wafer. So it may not be more doubling of units, but it would be doubling of wafers as the newer 200 gig chips that I talked about are actually larger and there's fewer chips per wafer. Okay. But you can't say when the next big chunk of capacity comes on? Oh, I would say probably middle of next year, we will see some step up of capacity. We're getting incremental capacity last quarter, we grew 6%. We're going to continue to get some incremental improvement through yields and productivity, but I'd say probably middle of next calendar year would see a step up of installed capacity to be able to take advantage of the second half of the year. Our next question comes from Alex Henderson from Needham And Company. Please go ahead with your question. Great. Thank you. Can you hear me okay? Yes, Alex. Thanks. Perfect. I wanted to go into the ROADM side of the business. Obviously, very good performance in, N by M, I would assume that, that more Western accounts than Huawei. Huawei, as I understand, it tends to do more of the lower speed stuff. So given the strength of demand there, isn't, aren't those somewhat tied to the timing of chassis deployments, in which case, slower chassis sales would slow down the demand growth there, at least temporarily. So I was wondering if you could talk a little bit about that aspect of it and to what extent, you're adding capacity, what rate of capacity adds you're looking at any timing around that would be very, very helpful. I appreciate it. Thank you. Sure. I think as we look at that very high port count and the end by end as I've said in the past, China was leading the way, but the rest of the world was following and And I'd say that today, we're seeing that rest of the world, start deploying in a meaningful way. And so I expect that the non Huawei business for our high court count and N by N will grow, dramatically over the next 18 months. I'd say that we are adding capacity. The capacity adds take 6 to 9 months. So the decisions we made that are adding capacity today happened in the 1st calendar quarter those are coming online now. So we're expecting to continue to add capacity as the rest of the world puts these in their mainstream systems. That get deployed in later this year and into calendar 2021. Can you give us any calibration on the size of those capacity adds and whether you're planning the next set for, say, the first half of next year? Well, I mean, I think if you look at what we said, the end by end grew 30% last quarter, It's that was a big chunk coming online. But that's not going to come online this quarter. I'd say that we'll probably have more in my end coming on in the first half of next year, as our non Huawei customers are really starting to have meaningful deployment That's not our expectation at this point in time. Our next question comes from Tom O'Malley from Barclays. Please go ahead with your question. Good morning guys and congrats on the nice results. My first question is on the really strong gross margins. Could you talk about what's driving the communications. You mentioned products mix a couple of times and I assume that's from that larger customer rolling on, but you also upped your long term range So is there some real gains in the core telecom and datacom gross margins? And can you kind of break out what the contribution is for the better margins? Is it just the big customer or is there also some real gains in that core business as you move more towards chips? Tom, it's Wajid. I'll take that 1 and then Alan and Chris can follow-up. So yes, so the strong gross margins were obviously driven by a very strong product mix. We've also had an accumulation of synergies that we talked about, for a number of quarters that have have added up and have added to our overall financial model. Our datacom chip business increasing 6% quarter over quarter that was all chip business as well. And the gross margins on those product lines are quite healthy. To your question on the long term model, Really, the long term model assumes that our lasers business comes back up and starts running at a normal run rate again. And one of the reasons we haven't says that we'll exceed the long term model, for this fiscal year is because we expect to have, our leisure business continue to be weak into the back half of the fiscal year and then expected to improve as we move into fiscal year 'twenty two. And so that's what's really giving us confidence in our overall company, long term gross margin model, being able to achieve over 50% gross margins is really lasers coming back and having APCOM continuing to improve with all the capacity improvements that Alan talked about in datacom chips in our 3 d sensing business especially the new products on 3 d sensing, continuing to have an uptake, as you can appreciate, that's just starting to get going And we expect that to be a real success helping us into the next few quarters. Great. That's helpful. And then my follow-up was really on the datacom business You mentioned there were some push outs in 5G. I assume that's front haul related product, but then you mentioned that there was some strength in the hyperscale business. Where are you seeing that strength? And is that something that you expected? Or is that something that you recently saw pickup? Hey, Tom. This is Chris. So, yes, the 5G is front haul related. And as you can imagine, 5G deployments at least initially have been concentrated in China, and we've seen a slowdown from those customers, given the ecosystem around 5G in China is affected by what's going on in the geopolitical regime and regulations on Huawei. But as we've talked about in prior quarters, we've had multiple quarters of backlog in our datacom business. So not a big surprise that there's very strong demand for our chips going into data centers. And I think that's a combination of both our type of customer that we supply into in datacom by either transceiver customers winning more business within the hyperscale cloud operators, as well as our relative competitive position as speeds increase and, more performance is needed as you go from 40 to 100 to 100 to 200 to 200 to 400 our footprint in those customers tends to increase. Our next question comes from John Marchetti from Stifel. Please go ahead with your question. I wanted to touch on the Huawei outlook that you gave both for the December quarter as well as the second half of the year. I just wanted to a little bit of an understanding from the reduced outlook. How much of that is really based on actual restrictions of what you are allowed to ship versus Huawei's, maybe overall demand declining because of their lack of access to some other products that they can't get for the full, full materials. Yes, I'd say it's a combination of both, right? And when you look at, what we ship into Huawei there's still strong demand for all of our telecom and datacom products. There's some of those products we cannot continue to ship So I'd say the majority of the reduction from being greater than a 10% customer a few quarters ago to today less than 10% going down below 5%. Most of that's due to regulatory restrictions. And a little bit is based on I'd say that, like in the consumer products. Okay. And then, Wajid, if I can follow-up on some of your gross margin outlook comments, If we think about that laser business getting back into sort of the mid to upper 40s or maybe even a $50,000,000 sort of quarterly run rate, How much upside off of this sort of 43.5% that you did this quarter? Should we expect there to be? Well, I mean, in fiscal Q4 where we had a $37,000,000 quarter for lasers, we were above 50% gross margins. And so we have, different margin mix within our lasers business itself with some of the products achieving better gross margins, but our new products and lasers are expected to be well above that. And so as that gets into the $40,000,000 or $45,000,000 range, we should see a nice bump back into the 50% gross margin line for lasers. And our next question comes from Simon Leopold from Raymond James. Please go ahead with your question. Thanks for taking the questions. First, I wanted to just get a better understanding of the issues with Huawei in that, you talked about some level of sales below 10% in this quarter, which we understand. And then the outlook eventually getting below 5%. I certainly know that euro is also less than 5%, but Why does the value not go to 0? Could you help us understand what are the aspects of the rules that allow you to do business with Huawei that is still a positive number? Thanks. Yes, we're not going to get into the details of, the restrictions in our and which ones are buying, which ones are falling to the restrictions and not, other than just to say, the business with Huawei is becoming less material for our future business and down below 5% whether that's 0 or 1.5 sense is still a TBD at this point. And did you try not to guide more than 1 quarter at a time, but we wanted to get some color around our expectations that it's going to continue to go down and become even less meaningful to our overall business in the second half of the fiscal year. And then just understanding you don't want to guide beyond the quarter. I think it would be helpful to everyone if we could at least get some qualitative aspects around the March order seasonality. In that, you've got a couple of odd things going on this year where your 3 d sensing it's time shifted from September to December, creating a tougher comparison. And then you've got the Huawei issues. We just talked about, so maybe less China business, which usually affects seasonality. Could you help us understand a little bit about how your seasonality may be different in calendar 2021 versus prior years? Well, I'd say, and Chris can jump in as well. I'd say that, our China business is impacted by the restrictions at Huawei. And I think if you just take a look at where they have been, where they were in the September quarter, where we're expecting them to be in the March June quarter, I think you can take 5% to 8% of our revenue out as a result of that. And so, you know, that's that's a broad range and that, you know, things things are going to change, things are going to change probably tomorrow, who knows, but that's our current expectation. As far as 3 d sensing is concerned, we've taken a very conservative approach on on Android. So I'd say that our expectations are Android is very small in the first half of next year, although we're working with many of the customers to make sure that for when they decide to put, 3 d sensing into their mainstream phones, we'll be there for them. And I'd say that for our lead customer, they don't really tell us, our expectations are that there is some strength in 3 d sensing in the March quarter more than normally given the later launch of the product line. Did that answer your question, Simon? Back to Huawei. As that business kind of winds down a little bit or is restricted a little bit. Just are you seeing any broadening out of demand from other kind of China community, just in terms of general timelines we should be thinking of for maybe in cabin and account? Thanks. Sure. I'll take the Huawei 1 and I'll let Chris answer the auto 1. I'd say that there's activity around, traditional carriers that have been relying on Huawei that's natural I'd say that, again, that's probably a multi quarter thing before that that bidding cycle and the responses turn into deployment. And so, I think it's happening. I don't think there's a slowdown in bandwidth demand. And so networks are going to need to continue to be built and bandwidth is going to need continue to grow. So I think that if you look at our share of wallet of, other customers, it's actually a long term positive trend for us. It's just a matter of the air pocket between now and those new deployments, happening. I'd say that's 2 to 3 or 4 quarters. Chris. Maybe just following up right there on that real quickly. I mean, just in terms of understanding kind of overall global share, but just in terms of selling into ZTE or Fiber Home, more China specific vendors and just kind of the share shifts taking place there. Well, we've seen strength in our non Huawei China customers over the last several quarters and and really, consuming high end ROADMs, consuming high end coherent transmission components and modules. So I don't know if that's a result of, the Huawei restrictions or a result of our products being no state of the art and leading edge. And I'd say that we're going to continue to see growth from those customers, over the short and midterm time horizon. Our next question comes from Chris, there was a question about auto view. Yes. So we're playing into automobiles, multiple ways, both in cabin as well as outside cabin for driver system systems or in the case of autonomous vehicles, sensor systems to enable the car seat in order to go. I. E. LiDAR systems. And as Alan highlighted on the call, in the past quarter, we call 5 in a nodule level product that enables in cabin applications. Europe is really leading the way for in cabin driver monitoring systems. They have regulations that require it to be installed in vehicles, I believe, starting out in calendar 'twenty two, in cabins, probably the smaller of the opportunities relative to the outside cabin opportunity in LiDAR. All of these are long term markets. They don't really start taking off out into the 'twenty three, 'twenty four, 'twenty five time frame, even then the penetration is relatively low, but over time, we believe these become opportunities for Lumentum, even at the laser level, and we are definitely supplying at the laser level have opportunities to move up to the module level where the dollar content might be a bit higher But what's really critical is because these markets take a long time to get designed in and qualified in, eventually ramp up, We need to plant those seeds today, get designed in, with module integrators and ultimately Tier 1 auto manufacturers. That's really what we wanted to highlight today is that design in activity and traction is happening. Our next question comes from George Notter from Jefferies. Please go ahead with your question. Hi guys. Thanks very much. I wanted to ask a 3 d sensing question. Is there obviously, the parts that you're shipping into your lead customer are all new, this cycle or maybe most what you're shipping into that customer is brand new. Is there some desire to build an inventory, safety stock by your large customer as they shift over to those new parts? And, I think Alan you were referencing something about March consumption selling versus sell out. Can you just talk about how you see inventory at that customer? Yes, George, we really don't have a lot of visibility into what, is the inventory of modules and consumer devices beyond when we ship, a VCSEL chip to the module integrator. So sorry, I'm not going to be able to provide it kind of color on what that looks like. I will say though that through the quarter, we saw up ticks in the demand, which would tell me that something changed, whether it's a share shift or for stronger, but in customer demand, and so that's the only kind of color I can give you on inventory or what's going on at our customer's level. Got it. Okay. That's helpful. And then, one last one. Linearity, I noticed that the day sales outstanding calculation was pretty low relative to what you guys have typically reported in recent quarters. Was the quarter front end loaded linear? How would you characterize it? Thanks a lot. Wajid, you're on mute, I think. It's about to hit the unmute button. Our quarter was pretty similar to previous quarters in terms of overall linearity. You can see ships and customers in terms of their own linearity and that can have an impact on our DSOs, just depending on what the payment terms are with with each one of them and then sometimes they'll come along and either pay within the 1st couple of weeks of the new quarter or the last couple of weeks of the, at the end of the quarter, depending on how their batch processing works. Are we expecting our cash flow to be significantly better in fiscal Q2 versus fiscal Q1, just given the type of profitability we've achieved during the quarter. So So from what we did from a cash flow standpoint. And our next question comes from Anata Barula from Loop Capital. Please go ahead with your question. Hey, good morning guys. Congrats on the results and thanks for taking the question. Just two quick ones for me, if I could. Al, the sort of the comments about 2 to 4 quarters, their pocket, to make up some of the Huawei revenue. Was that China specific or is that a worldwide remark? And then I have a quick follow-up. Yes. I mean, I don't have a crystal ball, but I'd say that, you know, there is activity today outside of China where it's a traditionally Chinese Huawei based carriers are looking for other suppliers. And that's what my comment was around. It was outside of China, it's probably 2 to 3 quarters before that kind of activity turns into revenue for us and revenue for our network group within manufacturing customers. Got it. That's really helpful. And just quick follow-up on gross margins. You guys gave me context around what drove in this quarter So to what extent is sort of in regards to the new long term model? Does capacity utilization play a role obviously mix does? And then are there any other factors aside from capacity utilization that will influence the margins meaningfully long term, the gross margin? Yes. No, I'll start with that one. So it's not just capacity utilization, but the addition of capacity is going to help us quite a bit from a gross margin standpoint. And Alan talked about the fact that we're seeing improving yields and productivity to get more supply to meet demand for our datacom chip products. And obviously that's helping as well. The one thing we noted earlier that I'll note again is really our lasers acting as a headwind to our overall corporate model. Our Ofcom segment has very strong, tailwinds in it. Whether it's our telecom transport business or telecom transmission business, our telecom datacom business, as well as 3 d sensing with our new products and new opportunities we've got there. So as we see lasers come by up from overall revenue standpoint and capacity utilization within our own fabs for laser products improves. We should see the nice bump up I pointed out earlier that on $37,000,000 of lasers revenue, in fiscal Q4, we had above 50% gross margins, And so really that's because of capacity utilization, helping us improve our overall lasers closed margin profile, which obviously helps the consolidated company. So it does play a pretty big part of it. Our next question comes from Chris Rolland from Susquehanna. Please go ahead with your question. Thanks for the question. And I'll also echo my congrats on the quarter as well. My first question is kind of higher level. I was wondering if I could get your thoughts on the Marvell and Inphi proposed acquisition, and kind of what that means for your outlook for vertical integration in optical, and whether this changes your strategy in terms of, when it might be appropriate to tie up with another company or whether you think you can go it alone for now and forever, perhaps. But yes, just your high level thoughts there and how you might execute going forward? I think the fact that inphi was picked up by another semiconductor company as opposed to, say, a network equipment manufacturer, really means that, at least our view is that they will will remain a merchant IC supplier, less clear whether they will be as focused on providing modules where we may compete with Inphi on the future, that still remains to be seen. So I think overall, from our standpoint, this doesn't necessarily change the landscape very much in that one fabless semi company becomes another fabless semi company. And if we were purchasing products for them, buying it from Marvell as opposed to buying from inside probably not a big change for us as opposed to, for example, other deals that have been out in the industry, a case should be acquired by Cisco. Over the longer run, I mean, I think we're very, very confident in our ability to compete and prosper in the telecom markets with with our industry leading indium phosphide components, that's really where we see our differentiation. And what we choose to do from that forward on whether that be organic development or M and A, we'll let you know if or when something happens there. Thank you for that. And then just a couple housekeeping. I don't know if you offer any other details around things like to bill or changes in lead times or perhaps capacity utilization? Yes, we typically don't do that unless there's something to highlight like our datacom chip backlog is very large and where capacity constrained and will be such for some period of time, similarly on our wafer fab in our Indian Pass right with that with the strong demand and 600 and 800 gig modulators, that's capacity constrained. And so, but beyond that, typically don't give book to bills or backlog because some of it doesn't really mean much in that a lot of our customers are on BMI agreements and some of our customers are placing long lead time, either long lead time purchase orders 1 year in advance. And so it kind of fluctuates what's going on with book to bill and backlog. But I'd say that, we're our guidance contemplates normal run of the middle type of demand that is strengthening across the board? And our next question comes from Tim Savageaux from Northland Capital Markets. Please go ahead with your question. Hi, good morning and congrats on the results. I wanted to focus in on telecom datacom from a guidance perspective in particular. And look, that looks to be where you expect the growth here this quarter, maybe even more notable given the anticipated declines, further declines, at Huawei. When you look at what you're effectively guiding to kind of a mid teens percentage, sequential increase, I think you've already called out ROADM as the primary driver of that growth, but I want to confirm that and maybe get your comments to expand beyond Meta's question earlier, seeing increased traction among other Chinese OEMs, but I wanted to comment more broadly about customer diversification globally and what might be driving strength. Saw some pretty strong optical results out of Nokia, for example, last week. So I guess the overall question is about growth drivers for that sequential guide in what you're seeing from kind of an OEM diversification standpoint globally? Yes. So we said that a lot of the growth is coming from our loadings as we're, adding capacity and trying to meet strong demand of our high end ROADMs. We're also seeing strength in the higher speed coherent components like our 60800 modulators and tintable lasers. I'd say those are probably the 2 big areas datacom chips with the shift between 5G and hyperscale. That's probably not an area where we're going to see huge growth because of, the whip is the width. And so I'd say most of it's coming from, those two areas in ROADMs and indium phosphide. Chris, do you have anything to add on that? No, I mean, I think that the key point really, Tim, is if you go back pre pandemic, we've been preparing, if you will, for the next generation systems, whether they be 4, 6, 800 gig, whereas the 100, 200 gig systems have kind of grown long in the tooth where transport product going into those systems have softened. That's why ROADMs came down late last year. And then obviously, the pandemic caused disruption in our ability to supply. We're catching up with that. And And really, the growth is being driven from a product standpoint across high end ROADMs and the newest coherent components from an OEM diversification standpoint, there's not a lot of new OEMs per se out there. So we're pretty well covered. I think what we're seeing though is those new products that are growing typically start in 1 ish customers where your lead customer, when you develop and design in, and then proliferate across a broader customer sets. And I think as we highlighted in the script, something like the end by end ROADM is something that initially started China and is now proliferated across a broader set of customers. We anticipate the same thing happening with the 600 gig, high speed coherent components, as well as our DCO modules, providing a broader customer set for those individual new products doesn't necessarily mean we're adding new customers per se. We've only had 1 10% customer last quarter. So the customer diversification is happening, and I think we'll continue to see that. Go ahead. And ladies and gentlemen, we do have time for one additional question. This question comes from Tom Diffely from D. A. Davidson. Please go ahead with your question. Yes, good morning. Just one final question on 3 d sensing. What is your view of the relative revenue or seeing are margin differences between the standard and the world facing components that you sell? Not really much difference. I'd say that this is a, this is a product cycle where a refresh of all of the chips, kind of resets expectation on pricing and we've been able to come up the yield and productivity curves quite strongly on both the facing and world facing chips. So I wouldn't say there's a meaningful difference in margin or revenue per wafer area percent. And ladies and gentlemen, with that, we'll end today's question and answer session. I'd like to turn the conference call back over to Jim Sanuki for any closing remarks. And we look forward to talking with you again when we report the second quarter fiscal 2021 results. Have a good day. Ladies and gentlemen, with that, we'll conclude today's conference. We do thank you for attending. You may now disconnect your lines.