Earnings Call: Q4 2020

Aug 11, 2020

Good day, and welcome to the Lumentum Fourth Quarter And Fiscal Year 2020 Earnings Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Jim Panuque of TherO Associates. Please go ahead. Thank you, operator. Welcome to Lumentum's 4th quarter fiscal year 2020 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 Coldrin, Senior Vice President of Strategy And Corporate Development. Today's call will include forward looking statements, including statements regarding the markets in which the impact of COVID-nineteen and responsive actions there too on our business and continuing uncertainty in this regard. Trends and expectations for our products and technology, our expected financial performance, including our guidance as well as statements regarding our business initiatives and the achievement of synergies following our acquisition of Oclaro. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations particularly the risk factors described in our SEC filings, including the company's quarterly report on Form 10 Q for the fiscal quarter ended March 28, 2020, and in Lumentum's 10 K for fiscal year 2020 ended June 27, 2020, which the company expects to file within 60 days of the fiscal year end, 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 projections discussed in this call are non GAAP. Non GAAP financials are not to be considered as a substitute for or superior to financials prepared in accordance with GAAP. Lumentum's press release with the 4th quarter and full year fiscal 2020 results is available on its website at wwwmomentum.com. Under the Investors section and includes additional details about our non GAAP financial measures and the reconciliation between our historical GAAP and non GAAP results. Now I will turn the call over to Alan for his comments. Thank you, Jim. Good morning, everyone. The fourth quarter capped off another record fiscal year. Earlier this month, we celebrated our 5th anniversary of being a stand alone public company, and wow, what a 5 years it's been, we have accomplished a lot. Execution of our strategy has positioned us as clear technology and market leader and enabled us to strongly grow revenue, margins, and earnings per share every year since we became a standalone public company. This was accomplished despite the significant impact of product line exits and divestitures and more recently, COVID-nineteen and geopolitical headwinds. From fiscal year 15 through fiscal year 2020, our earnings per share grew at a compound annual growth rate of 47%. This includes additional shares related to M and A consideration and convertible debt. Over this period, our gross margin expanded from 33% nearly 47% and our operating margins expanded from 5% to nearly 27%. Our balance sheet is healthy This has all been accomplished by focusing on continuously improving our operations, establishing a clear leadership position in sensing market, executing highly accretive M and A, and wisely managing our capital structure and allocation. Fiscal 2020 was a record year for revenue, margins, and earnings. A record results were driven by a product mix rich and differentiated high margin products and the attainment of significant acquisition synergies. Illustrating the improvements we've made in our financial model is our 4th quarter gross margin performance, which was only 20 basis points below the record level attained in our second quarter, despite the 4th quarter revenue being impacted by COVID 19. As pleased as I am with our accomplishments today, I am as excited as ever about the opportunities ahead. I believe the future is truly bright at momentum. Long term market trends and industry dynamics are more favorable now than when we became a public company 5 years ago. The world has accelerated its shift to increasingly digital and virtual approaches to work, entertainment, education, health care, social interaction, and commerce. This is stressing the world's communication and cloud networks and driving the need for higher volumes of higher performance optical devices. In order to produce, communicate and consume increasingly digital content, and participate in virtual and laser technologies. We are well positioned to capitalize on these trends. We are armed with a product portfolio rich and differentiated new products that are indispensable to customers and in markets globally. These include optical communication products such as high port count and M by n ROADMs and high bandwidth to inherent components and DCO modules. These are all essential to enabling the world's communication networks to scale to the bandwidth needed for our increasing digital and virtual way of life and work. Lasers devices for 3 d sensing and lidar, which enable contactless entry and control systems, biometric security, computational photography, automotive safety, and autonomous operation, and augmented and virtual reality. And our commercial lasers enabled more precise and efficient processing of the variety of materials, including the consumer electronics, semiconductor products and a broad range of durable goods. Based on our view of the long term opportunities ahead of us, We are strongly investing in R&D to further accelerate our leadership positions and enter new markets that benefit from our capabilities. Additionally, we are also investing strongly Notable manufacturing capacity increases include the following major 3 investments. 1, doubling of our indium phosphide wafer fab capacity over the next 18 months as we believe the performance and capabilities provided by our indium phosphide laser chips and photonic integrated circuits will be central to every telecom and datacom communication network, and perhaps over time, increasingly in 3 d sensing and lidar applications 2, expanding Gallium arsenide device production capacity for our 3 d sensing automotive, industrial laser, and telecom and datacom products as application for these products are expanding rapidly. And three, Expanding capacity for next generation high port count and M by n ROADMs as customers globally are designing their new networks based on these technologies. Now onto the 4th quarter comments and trends. 4th quarter results exceeded our guidance range across all metrics. We executed well in our recovery from the COVID 19 related shutdowns and supply challenges in return to pre pandemic output exiting the quarter. Our manufacturing operations have implemented worker protective measures, including enhanced use of PPE and social distancing in many of our sites, our workforce that can perform their job while working from home continue to do so. Telecom and datacom demand is very strong, especially in our datacom chips, coherent components and modules and high end ROADMs. Apply of these products limited 4th quarter revenue. Telecom transmission was the most impacted by COVID 19 supply challenges, and as a result, declined a few $1,000,000 sequentially. Telecom transport grew sequentially due to strong pump laser sales and increased sales of WaverLink Management and ROADM products. Prior quarter trends continued in datacom with strong chip demand driving revenue growth. Chip sales became more than 95% of our datacom revenue, but growth is still limited by wafer fab capacity. Current datacom chip backlog is nearly $150,000,000. Looking to the first quarter, we expect telecom and datacom revenue to be higher than any time in more than a year. As I stated earlier, we are increasing production capacity in our fabs and our back end assembly and test facilities. As additional capacity and new production staff have been coming online, we have been increasing our wafer starts to satisfy our very strong company backlog. As expected, industrial and consumer revenue declined due to customer seasonality and the timing of new customer programs. Revenue was higher than in our guidance assumption due to stronger than projected demand. We expect first quarter industrial and consumer revenue to be up strongly on quarter as we are already supplying high volumes of our new products for future customer product launches. These new product shipments include our latest chips for user and world facing applications. This seasonal ramp started later than last year. And as a result, we expect our 2nd quarter shipments to be higher there are first quarter shipments, which is different than last year. While we continue to make very good progress on new Android opportunities, We are taking a conservative approach to Android revenue in our first quarter projections due to COVID-nineteen and geopolitical factors. Commercial Lasers revenue was down approximately 13% quarter on quarter. This is a smaller decline than we had assumed in our guidance. Strength in lasers supporting the Semiconductor end market partially offset the anticipated softness in fiber lasers. Lasers book to bill was substantially below 1. We expect Lasers' revenue to decline further over the next two quarters. Our first quarter guidance assumes an approximate 25 percent sequential decline for lasers. These expected declines are related to the economy outside of China which given our customer mix is mainly where our products ultimately end up. Additionally, the second half of the calendar year is seasonally softer for our solid state lasers. Before handing it over to Watchhead to review the numbers, I have a few more comments. Given the current geopolitical situation, I want to provide some color on our business Sales to Huawei declined 6% sequentially in the 4th quarter to the mid $40,000,000 range. We expect sales to Huawei to decline further in the first quarter, but most of the products we supply are indispensable to Huawei and we don't have visibility to any sharp demand reduction, given the current geopolitical uncertainty, we are taking a cautious approach to Huawei and our outlook. Wajid will provide more details on this. Lumentum is a global company with sales and operations across a wide range of geographies. We are committed These include promoting safe, diverse and inclusive workplaces, free from discrimination and harassment. In addition to our goals around product leadership, providing a great customer experience and executing to our financial commitments, Our goal around corporate social responsibility and making contribution to society and our local communities are important to Lumentum and its employees. I want to thank 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 over the past 5 years and more recently through the pandemic, despite each having their own personal challenges, living and working in these times. They have gone above and beyond in their jobs while also helping the communities in which we operate. Our employees are absolutely the company's greatest asset. I'd also like to thank the rest of our stakeholders, including customers, suppliers, and shareholders for their support and partnership over the past 5 years. They've all played a role in getting us to this point. With that, I'll hand it over to Watcha. Thank you, Alan. Good morning, everyone. I too would like to thank our employees for their dedication and perseverance. I am absolutely amazed at their strong execution under such challenging circumstances. Before diving into the 4th quarter results, some high level comments and our full year fiscal 2020 results. Net revenue for fiscal 2020 was $1,680,000,000, up 7% compared with fiscal 2019, despite the significant top line impact of COVID 19 in the second half of the year and several product line wind downs and divestitures. Fiscal 2020 Optical Communications segment revenue was up 11%, driven by growth in 3d sensing datacomchip and telecom transmission and the contribution of the Oclaro acquisition. Our lasers segment revenue was down 16% compared to the prior year driven by the impact of COVID 19 strongly exasperating an already slower lasers market compared with the prior year. For the full year, GAAP gross margin was 38.7%, GAAP operating margin was 12.2%, and GAAP diluted net income per margin expanded 700 basis points to 46.5 percent, driven by improvements in product mix and acquisition synergies. Non GAAP operating margin expanded 610 ten basis points to 26.6 percent for the full year and non GAAP net income increased by more than 38% relative to the prior year. Non GAAP diluted net income per share expanded 27% to $5.42. Operating expenses for the full year were 20% of revenue, up from 19% in the prior year, reflecting the full year of incremental acquisition expenses and an increase We have been simultaneously attaining R and D related acquisition synergies and cutting investments in the underperforming product line, while ramping investments in areas with stronger outlooks and returns. We ended the year with $1,550,000,000 in cash and short term investments. We have $1,500,000,000 in aggregate principal convertible notes and no term debt. Of these convertible notes, $450,000,000 is due in $202,451,000,000 is due in 2026. The total cash interest expense associated with these notes is approximately $6,000,000 per year. We are well positioned financially with a strong margin model, high levels of cash with low interest expense and long maturity financing. Now turning to the 4th quarter's numbers. Net revenue for the 4th quarter was 368,100,000 which was down both 9% sequentially and year on year. GAAP gross margin for the fourth quarter was 36.9%, GAAP operating margin was 7 4th quarter non GAAP gross margin was 47.2 percent, which was up 170 basis points sequentially and up 830 basis points year on year. The sequential growth was driven by higher synergies in the quarter and an improvement in product mix including an increase in lasers gross margins. As Alan highlighted, this gross margin performance demonstrates the improvements we have made in was 24.8%, which was down 20 basis points sequentially, but up 580 basis points year on year. Improvements year on year were driven by gross margin improvements. Non GAAP operating expenses totaled 82,500,000 or 22.4 percent of revenue. SG and A expense was $36,600,000, R and D expense was $45,900,000. Operating expenses continue to be a little lower than normal run rates due to COVID 19 reducing travel, trade show, and other expenses. 4th quarter non GAAP net income was $91,700,000. This includes $2,300,000 of net interest and other income and $2,000,000 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 more conservative in our investment portfolio. Non GAAP diluted net income per share was $1.18 based on a fully diluted share count of 77,500,000. Turning to segment details. 4th quarter Optical Communications segment revenue at $330,300,000 decreased 8% sequentially due primarily to 3 d sensing seasonality and COVID 19 related supply limitations. Year on year, Optical Communications segment revenue decreased 7% due to lower telecom and datacom revenue, with the exit of datacom modules and COVID-nineteen supply limitations, which more than offset higher three d sensing revenue. Although the segment revenue declined, Optical Communications segment gross margin at 46.6 percent increased 160 basis points sequentially due to higher synergies in the quarter and a bread or product mix within telecom and datacom. And increased 8.30 basis points year on year due to a more favorable mix of products, improved telecom and datacom margins. And acquisition synergies. Our laser segment revenue at $37,800,000 decreased 13% sequentially and 21% year on year due to lower fiber laser sales, offsetting strong solid state laser sales. 4th quarter lasers gross margin increased 52.9 percent due to a better product mix and lower manufacturing costs. Now on to our guidance for the first quarter of fiscal 2021. Please note the outlook we are providing is on a 21 to be in the range of 430,000,000 to 455,000,000 This revenue projection includes telecom and datacom growing sequentially due to strong demand and recovery. From COVID-nineteen supply limitations. Industrial and consumer increasing strongly quarter on quarter due to new customer programs and consumer electronic seasonality and commercial lasers decreasing by approximately 25% sequentially due to end market demand caused by the slowdown in industrial production globally. This guidance does not hinge upon material additional shipments to Huawei, beyond those made to date. Based on this, we project 1st quarter operating margin to be in the range of 28 to 30% and diluted net income per share to be in the range of $1.40 to $1.55. These projections incorporate an approximate share count of $79,000,000 and estimated other income of $1,500,000 and an estimated tax rates in general and are taking more conservative positions in our short term investments. The increase in our relative tax expense is due to increasing profit levels especially in jurisdictions with higher tax rates. Before wrapping up, I'd like to make a few comments when thinking about the coming fiscal year In fiscal 2020, we had approximately $62,000,000 of revenue from low margin product lines that we expect will be immaterial in fiscal 2021. In addition, for fiscal 2020, we had $221,000,000 of Huawei revenue which declined through the With that, I'll turn Thank you, of our allotted time. Questions. At this time, we will pause momentarily to assemble our roster. The first question comes from Tom Bemali of Barclays. Please go ahead. Good morning guys and thanks for taking my question and congratulations on the really nice results. I just wanted to start broadly with your telecom and datacom markets. Clearly, in the quarter, you had some capacity constraints and you overcame those. Can you talk about what trends you're seeing there? ROADM demand seems to be really wrong and you mentioned some additional investment there. Can you talk about how big you think that market can be and why it's so important that you need to show some additional investment there? Yeah, thanks, Tom. Yeah, we saw strong demand from, as I said, the high end ROADMs across the board, across geographies, datacom chips, and a combination of both hyperscale, 400 gig transceiver type chips to deployment of 5G backhaul, and the like. So I think as we indicated in the script, we have $150,000,000 of datacom chip backlog And today, we're shipping approximately $50,000,000 in growing that. So you can see it's going to take us some time to catch up with the datacom chip business. On the telecom transmission business that it was most impacted by COVID through the, through the, March through, May timeframe, that's now back to being able to produce actually more than what we were producing before as we've added capacity. And we saw strong demand on our coherent, ACOs, DCOs, as well as our high end, coherent components that are going into 400, 600, and even 800 gig, coherent transponder. So it's pretty broad range of strong demand across the board. Great. And then my follow-up was on Huawei. You've seen some of your peers take Huawei out of guidance as well. Can you talk about what you mean by de risking Huawei? It seems like you've taken orders to date and that's included in your guidance and then you've basically assumed no additional revenue. Just some clarity there would be helpful in understanding what the derisk actually means. Thanks guys. Hey, Tom, this is Chris. Thanks for the question. Yes. So our business with Huawei has been declining over the past year or a little more than a year with the U. S. Action. And, but underneath that decline in revenue, what has been happening at a product level is, product that, they can get from other non U. S. Suppliers. I think they have generally moved away from us. And what remains in our revenue are products that were the only guy or the other supplier is a another U. S.-based supplier. And, you know, they continue to have business globally and therefore, we expect we will continue to have business with them on those indispensable products without any visibility into a, you know, a cliff, if you will, out there. Having said all that, obviously, we're trying to be very conservative and ensure that if there was something out there that did happen during the quarter that were not in a challenging position. The other key point on Huawei and those indispensable products is that we have lots of other customers for those products. And we're capacity constrained on most of those products. Therefore, even, if we were to see a limitation coming from Huawei from a demand standpoint, we should be able to redirect that to other customers. And in a sense, that's largely contemplated in our guidance. So I wouldn't, in a sense, take up our outlook just because we've removed it and there's if there wasn't something going wrong for the remainder of the quarter, with, with, Huawei, I wouldn't take up numbers because we could be shipping that to somebody else and that's already in our guidance assumption. Next question comes from Rod Hall of Goldman Sachs. Please go ahead. Yeah, hi guys. Thanks for the question. I wanted to start off with 3 d. The indications here are pretty strong. Both now and as you look forward. I wonder if maybe Alan you could comment on your share position. What do you think that looks like in the fall? I mean, it feels like it's pretty good. And then the second thing that I wanted to ask about is CapEx with all the capacity expansion. Can you guys give us some idea of what the CapEx outlook is going to be maybe on into next year? Thanks. Yes, thanks Rod. I'll take the 3 d sensing question and then let Wajid answer the CapEx question. I think we're positioned quite well. I mean, I think we've been the lead supplier for multiple generations of products and have a pipeline of new products that will be introduced over the coming years, multiple years. So I think we are, we view ourselves as the leader by a clear leader, both from the standpoint of what we have shipped in the past as well as what we think we're new ship in the future. And we're doing quite well on the new products. So I think, as we look at the pie expanding, as more content per device and more devices and the rollout of 5G, I think we're positioned quite well, to continue to maintain a very good share of that business And it comes down to execution. And we've been able to show our customers that we can execute. We can provide them with high yielding product in their factories and 0 defects, in the product. So I think from that perspective, We're trying to give our customers every reason to want to continue to buy a high percentage of the share from us. And so I think that's where we are today on that. Wajid, do you want to take the CapEx question? Yes, sure. Okay. So on CapEx, Our general rule of thumb is is that we'd like to keep CapEx, at a rate that hovers around depreciation. Our fiscal 'twenty, we were a little bit lower than And moving into fiscal 'twenty one, we're actually expecting our capital spending to increase somewhere in the 20 to 25 percent range year over year. So you could probably see a CapEx of somewhere between $100,000,000 $110,000,000 for fiscal year 2021. Now as Alan pointed out in his prepared remarks, we're very laser focused on where we're putting that money. So we're putting that CapEx investments around products that have higher gross margins and we see a lot of backlog and a lot of customer demand. And we think that we are either the major supplier, or the the number 1 and only supplier, for those products. And so That's what's giving us a lot of confidence in the type of returns we'll see, on that capital investment. Okay, great. Thanks. Next question comes from Samik Chatterjee of JP Morgan. Please go ahead. Hi, good morning. Thanks for taking my question. I just wanted to start off and see if I can dig into the margin expansion here a bit, looking at 800 basis points of year on year margin expansion in optical communications. And assuming you could have achieved it without improving telecom margins where you've mentioned product mix a couple of times already. Just help me think about sustainability of those margins and particularly the opportunity to improve it further? And what role maybe some of these capacity constraints that have right now are playing in driving those better margins? And I have a follow-up. Thank you. Yes, sure. Okay. I'll start off and then Alan and Chris can also jump in if they think I've missed something. So you're absolutely right. We've seen just, a great improvement in our gross margins year on year specifically in that segment of the business. A lot of it has been driven by synergies that we've had happen every single quarter. And now what we're seeing as we're entering fiscal 2021 is that all of those synergies are accumulating. So we're getting a much better impact, of those. Our product mix is improving. You heard Alan say that we've got approximately $150,000,000 worth of datacom chip backlog. You can appreciate the type of pricing power that allows us to have, as well as just improving our overall product mix, within our Optical Communications segment. We've removed $62,000,000 worth of low margin products that won't be there. And fiscal year 2021, that's also having a very strong impact. And I think one of the things that we didn't mention on the call that I'd like to point out now is the new products that are coming out specifically within telecom transmission and telecom transport, the margin profile that we're expecting from those are also better than the older products. And that's one of the reasons, we're investing in the type of capital that we are a 20 percent to 25 percent increase in capital spending year on year is not a small sum of money, especially given the fact that we're We're focusing those capital investments in specific areas related to datacom chips and telecom transmission. So So because of those tailwinds, we certainly see the sustainability of those gross margins. The one thing I also mentioned is our world facing products. We're seeing strong demand for that, moving from our fiscal Q4 into our Q1. And, into our Q2, Alan mentioned in his prepared remarks that we're expecting to see stronger demand in the back half of this calendar year, that's all coming from mold facing products, and that's expected to have a strengthening improvement on our gross margins as well. So where we're feeling quite confident. You saw in fiscal 2020, we had every single quarter was above 45% gross margins And we had not seen that in fiscal 2019. And so, so we're looking forward to keeping that up in fiscal 2021 and improving from a very strong baseline that we've got. Okay. Got it. If I can just follow-up on just thinking about the restrictions here on Huawei and as they take hold, if Huawei does give up share in Europe to some of the other optical system peers that you supply to as well. How should I think about Lumentum's content per system with the likes of C and R, Nokia? Relative to Huawei and what kind of impact that would have if market share shifts in the overall landscape? Yeah, I think if you look at our business with Huawei compared to their market share, and then look at the Western Companies and our share of their wallet. Clearly, we have a better share of wallet outside of Huawei. Which means that over time, if and when, carriers decide to move away from Huawei, that will be actually a increase in our available market. Should it go to other competitors of theirs just given the share of the market they have and our share of their wallet. So I think from that perspective, But keep in mind, the shift from one network equipment manufacturer to another doesn't happen in 1 quarter. It happens over several quarters. So that does take time, but when that shift or if that shift does happen, I think it's a good thing for momentum in our products. Great. Thank you. The next question comes from Alex Henderson of Needham And Company. Please go ahead. Thank you very much. I was hoping you could talk a little bit about the 3 d sensing market in context of whether you think the various pressures that have developed will impact the amount of demand in the back half or whether the increase in world facing is sufficient to offset any possible decline in handsets, And to what extent you're looking at, some visibility on the Android market? Yes, let me take a shot at it, Alex, and then let Chris chime in. I'd say that, you know, we are not a predictor of how to successful product launches that our customers will be. But that said, I think that, the signals we're getting from our customers are quite strong with respect to, new products and the rollout of 5G. So again, more content per device, more new chips across the board on new devices, which come with higher average selling prices as the chips are somewhat bigger. And then more units that these devices are going into, with a growing market for 5G and a refresh cycle that is expected, at least in my mind, expected to generate additional demand. So you pile all those things together, the pie is getting very large relative to where it was last year, and we think we're maintaining a very, very good share of that business. As for the Android market, we're still engaged with every single one of the Android, handset players. That said, their incorporation of 3 d sensing has been only at the very high end and still yet to get into the mid range where the volumes are larger. And so our outlook contemplates that continuing. And then we'll see what happens in calendar 2021 with the Android market. I think our efforts are to continue to be the partner for everyone and make sure that we're there to support them. And if and when they put those on to more of the mainstream devices, then we'll see that market expand even further. Chris, do you have anything to add on that? I think the only thing to add is Alex's question really focused on the second half of the calendar year. And I think everything Alan said, lines up there's also that some of our major customer timelines may have shifted out, which you know, can can move where our our, you know, revenue is between September December quarters and perhaps even some some bleed from what normally you would think of as the second half of the calendar year into into the 1st part of the next calendar year. I that's something that I'm we're speculating on. Don't have that firm yet, but something to just call out as people should think about, as you said, the moving headwinds, tailwinds in this industry and, and, you know, it's not just volumes, it's also timing. So if I could follow-up, just to punctuate the point, does it, it sounds like you're saying that in CY 3Q, 4Q, the back half of calendar year that you would expect 3 d sensing will be up year over year given those positive commentary. Is that reasonable to expect? I think the opportunity is is certainly there. And we think that the total pie is this year, for second half over second half substantially larger. Obviously, we guide 1 quarter at a time. And as we've seen in the past, this business outlook can move around pretty quickly, but that's certainly our vacation given, as Alan highlighted, the increased dollar content, per, per, handset is substantially larger and therefore, the overall opportunity, should be significantly up year over year. Thank you, Chris. The next question is from Nathan Marshall of Morgan Stanley. Please go ahead. Great. Thanks. And just a clarifying question, kind of on the remaining $40,000,000 of revenue that is going into Huawei, is most of that equipment or most of that supply going outside of the country. So kind of into their engagements in other countries? And is any of what you're supplying still servicing within the country? And then maybe the second question, just on the $150,000,000 of wafer backlog or orders that you noted, you noted that you were kind of doubling your capacity, but should we consider that that's a number you could achieve over the next couple of years or just kind of time line when you think you could achieve those orders? Thanks. Yes, thanks Meta. So I'd say that it's not perfectly clear where our products are ending up as we ship them to Huawei. I'd say that anecdotally, we know there's large appointments happening today in China that are using, for instance, our high end ROADMs. And so I would speculate that the majority of our production shipments are staying within China, although I know there are deployments going with our product outside of China. So I'd say it's a dynamic mix as carriers decide to go with Huawei or not to go with Huawei. And we're seeing mix shifts and customer shifts as those decisions get made. So I'd say that as we said in the script, our business with Huawei is expected to continue to go down this quarter. I would be surprised if there are even a 10% customer fiscal 2021, but we're still working with them on new product designs and technology and products that are we are the leader on and, continue to partner with them on. So I think we're keeping the door open and we'll see what happens. As for the datacom chip backlog of $150,000,000, again, we're shipping approximately 50,000,000 quarter. We're growing that incrementally every quarter and kind of the increments come in chunks. And so as we said, we're going to double indium phosphide production capacity over the next 18 months. One could imagine that six quarters from now, we could be shipping $100,000,000 of datacom chips at that point in time. So I'd say at today's run rate, we have 3 quarters of backlog. We're trying to catch that up as fast as we can. Orders are continuing to come in. So it's a it's a fight that we're working to try to overcome and increase yields increase productivity and get more out of the assets we have while at the same time increasing our capabilities in our fab. Alan, I'd like to add to the point about, domestic sales in China. You know, we're also, you know, significantly increasing our our business with other customers in China who are also buying high end ROADMs and other of our very differentiated products. So our access to the Chinese market, domestically, that is is still strong and in some ways increasing in that as metro deployments or the equivalent of metro deployments grow in China based on high end ROADMs. We are applying to all of the major network equipment manufacturers in China. Thanks. The next question comes from John Marchetti of Stifel. Thanks very much. Actually, Chris, I just wanted to follow-up on that last point that you made with some of the other suppliers in China. Judging from the comments you guys have made, it sounds like you're still obviously expecting to shift to Huawei this year, although obviously it's declining year over year. But is there a chance, I guess, that you think your China business overall is either on par with what we saw in fiscal 2020 or maybe even a little bit higher some of these other suppliers that maybe you didn't do as much with historically, start to pick up some of that slack within the China market. Yes. I mean, I think that that's certainly in the aggregate when you add up all of, Chinese customers. I think the one because demand is strong and increasing in China and our relevance of customers outside Huawei is also increasing significantly. The only slight modulation, I'd point, which is just a subtlety that that of those products we've discontinued, which include datacom transceivers and lithium niobate modulators that the customers in China were relatively large percentage of, of that business. But if you were to normalize for that, then then absolutely. Thanks. And then Mahesh, if I can just ask a quick follow-up question on the model, I'm just curious as we look out into 'twenty one, if we should expect the higher rate that you're assuming in, the first quarter to kind of be the new normal as we look out for the full year or that has to do a little bit more with some of the 3 d sensing volumes and some things that we're expecting to pick up here in the first half of the fiscal year. Thank you. Yes, John. Good question. We should probably model somewhere between 10% 11% for our tax rate for fiscal year 2021. It's been driven by a combination of higher expected profits that are going to be coming out of our datacom chip business. As well as like you mentioned, just generally higher profits on, many of our product lines. And so 10% to 11% is probably the right model for fiscal 2021. Thanks very much. The next question comes from Simon Leopold of Raymond James. Please go ahead. Thank you very much for taking the question. First, on the strength in the chip sales, just wondering if you could help us discern, drivers. To what extent is this related to 5 g initiatives, front haul, backhaul, midhaul, perhaps China versus activity in data centers and hyperscale. Do you have visibility that helps us understand what's driving this? Hey, Simon. This is Chris. Yeah. So I would say, it's all the above that you mentioned, but I would, but it would also highlight that within data centers, it's not just volumes, though volumes are certainly very important. It's also that data centers are moving from 100 gig to 200 gig to 400 gig. And in doing so, are buying increasingly sophisticated and differentiated chips from us. So that also helps drive revenue growth where we may be having content or ASP increase. But certainly, both 5G and data center are heavy contributors to the revenue and the growth. 1 more than the other or equal? How do we kind of think about that? I'm trying to get a sense of sustainability. Yes, I don't want to get into deep details. I would say they both are material. It's not in 9010. It's a little more equitable than that. Great. And then as my follow-up, I wanted to maybe get a little better sense of the materiality of the world facing element in the 3 d growth. And and I certainly can appreciate you don't wanna give us breakdown by by piece part, but I guess what we're trying to get a better sense of is sort of the organic front facing contribution versus world facing, just world facing, have better margins? Is that the growth driver or are both elements growing and front facing is additive, but not at the expense of front facing. Anything you could help us understand that, we'd appreciate it. Sure, Simon. This is Alan. I think as we look at it, the user facing or front facing has 2 chips in it. And there are various sizes and what you can think of is on the world facing, there's one chip and it's about an average size. So when a our expectation is for a handset that has both front facing and world facing compared to one that has just front facing, we will see a 50% increase in the content per handset. That said, again, the new chips are, somewhat larger and therefore carry a higher ASP. So when you look at old, front facing compared to new front facing, there is an incremental increase or revenue per handset increase. And I'm not going to get into how much that is or the margin differences between the various products as our customers are listening and that would not be a wise choice to do. But that said, we continue to drive our costs and our supply chain so that we continue to maintain, the margins that we've had over the past 3 years, while at the same time having the average selling price on existing products The next question comes from George Notter of Jefferies. Please go ahead. Hi guys. Thanks very much. I guess I wanted to ask about the supply chain impacts. You mentioned coming into the quarter, you expected more than a $90,000,000 impact in June. I think that was a combo of supply side and end market impacts. Due to COVID. But can you talk about what you actually saw? And then in the quarter, and then just to confirm for September, you guys are full speed, full strength in terms of the supply side from manufacturing perspective? Yes. So in the guidance that we provided that $90,000,000 was a combination, as you say, of supply and demand, demand on the side of lasers and 3 d sensing, supply across the board, but mainly on transmission. So we did see some strengthening, as we said, in the script on 3 d sensing and lasers relative to that $90,000,000. So that's helped with the outperformance to guidance. And then through the quarter, we saw some of the supply limitations free up. For instance, our contract manufacturer in Malaysia now is back to full speed. We've added capacity. They've added people. So we're running at full speed there. I will say that not all the problems are done. I mean, we typically have chip shortages or other kind of component shortages from time to time in the normal course. That's kind of where we are today. And there might be a little bit of impact as demand has been very strong for some of the communication products that are also going into health care products. And so those are discussions I'm having with senior executives at some of our IC component suppliers but it's more like the normal, chasing of parts and not the, the factory shut down kind of thing. So I think from that perspective, you can think of as we went into, July August, we're back to full speed ahead in normal course of business. The next question comes from Tim Savageaux of Roplin Capital Markets. Please go Hey, good morning and congrats on the results, especially once again. Gross margin execution My question is strategic in nature. Alan, you mentioned ample cash. You also have a fairly decent share price there. So I guess at a high level, I wonder if you could kind of review the company's kind of strategic priorities given what a success The Aclaro deal has been on the communication side as you look across, industries in areas of focus for Lumentum. And then I'll ask my follow-up right now since it's potentially related, but only potentially. Which is to say, as you look at the emerging market for 400 ZR modules, I wonder if you could frame that opportunity for us from a Lumentum perspective relative to the module businesses that you exited? In datacom inside the data center versus the module businesses that you remained in and that it performed well for you on the coherent side. ACODCO is people are estimating a $1,000,000,000 ZR market over the next 3 years. I wonder where Lumentum stands relative to that opportunity. Great, Tim. I'll take the strategic question and ask Chris to cover the ZR market and our perspective on that. I think, obviously, as we said in the script, we have ample cash for continued organic investment as well as inorganic. And, we have a process that we are looking at on a regular basis that looks at potential targets in all the industries we've participate in, as well as other industries where our technology might mix with something else that could give us a new market to attack. Obviously nothing to announce here, But I'd say that, to your point, I think the team has done a very, very good job of taking the Oclaro acquisition and really transforming our business into a very high margin, very efficient machine. And I think that one is 90% behind us. We have a few more things to do there, but I'd say the most most of it behind us and I think we're ready for more. Again, nothing to announce, but, but we're looking at everything And yes, we have ample cash and I won't comment on the stock price, but I think there's certainly opportunities there. Chris, you want to take the ZR question? Yes, absolutely. So, Tim, the ZR, as a product is say, sort of a manifestation of trends that we have been focused on for several years, it's really you know, encapsulate moving away from discrete components and driving a highly integrated solution based on photonic integrated circuits to offer high density, which requires small size, low power consumption, etcetera, for for certain applications, shorter distance, high density, etcetera. That's one of the major reasons why we've decided to get out of the discrete modulator business as an example and was an underpinning of the Oclaro acquisition, getting, getting a leadership position in the photonic integrated circuits, which we believe our indium phosphide platform offers the best performance possible out there for such, such types of solutions that customers are looking for. It's definitely a market we are chasing and developing products for and sort of commenting on the market sizes. I think, you know, we're going to be a little careful with words of saying $1,000,000,000 over a few years. I mean, yeah, I mean, a 1,000,000,000 cumulative, you gotta also recognize that these are lower, you know, relatively on a coherent module, lower ASP product. In DCI, which is really the portion of the market that the ZR is focused on has good volume and increasing volume, but not the entire market. So while we are focused on 400 Gig ZR, we're also focused on bringing the same kind of capabilities, I. E. Low power consumption small size, but very high performance to metro applications and other applications using our indium phosphide photonic rated circuit capabilities? The next question comes from Christopher Rolland of Susquehanna. Please go ahead. Thanks guys for the question. If you guys could, I might have missed it, but if you could give an overall company book to bill. I think it was 1.3 exiting March. So we'd like to see how that that, that changed Also, if you could talk about lead times for your products, where have they been traditionally, particularly telco? On the telco side of things, where have they been traditionally and where have they stretched to? And then ultimately, do you think we can go with that? Thank you. Sure. Just, book to bill was over 1 for the quarter even with a significant reduction in bookings for lasers that led us to this guide of down 25% in lasers in Q1. So I'd say nothing abnormal on book to bill, strong demand across the board with the exception of lasers. Lead times really vary depending on if we're the sole supplier, or have $150,000,000 worth of backlog for Datacom. That's a 3 quarter lead time for new products unless we prioritize and shift things around. So it depends. I'd say that's the extreme, And, ROADMs vary from the low end ROADM, which is probably more like 2 months to the high end ROADMs, which are probably longer than a quarter. Now we're adding capacity, as I said, to try to shorten that because I don't think any of our have a crystal ball to know what they need 4 quarters or 4 months from now, better than 4 quarters from now. So we're trying to provide some additional flexibility but at the same time being smart with our investments on capital. So we're not where we want to be and that's why we're adding capacity and capital. Great. And then, and then I guess one for Wajid, where does OpEx go once we normalize here. Once we all, let's say, get our shots next year and travel comes back, where do we ultimately shake out on rate. Thank you, quarterly run rate. Thank you. Yes, Chris, we're thinking that OpEx will increased a little bit in fiscal year 'twenty one versus fiscal year 'twenty, specifically in R and D, from a modeling stand point thinking about it in the 20 percent to 21 percent of revenue is, is probably appropriate But most of the increase will come in R&D. And the last question today will come from Ryan Coontz of Rosenblatt Securities. Please go ahead. Hi, thanks for taking the question. I wonder if you could drill down a little bit on the 4 100 gig cycle and data center. Sounds like that's a big driver of backlog and some strong statements from the NEMs about how optical costs are holding back the cycle. How do you see that playing out hyperscale operators? And are you at risk of losing share by not by having such a long lead times? Appreciate that. Thanks. Yes. Thanks, Ryan. So 400 gig is absolutely critical to data center operators to be able to get the data center, actually, compute capacity, up, if you will. And and, you know, we're in a strong leadership position there, in that the lasers needed for 400 gig are are very challenging to make. We certainly get your point about, risk of share loss there. That's something that we're certainly managing and and ensuring that we're doing the right thing to prioritize, customers that we think are the sort of right horse to ride, if you will, to to ensure that we have, the lion's share of that opportunity and why we're expanding capacity as aggressively as we are to address those opportunities. This concludes our question and answer session. Thank you so much. And that does conclude our call for today. We would like to thank everyone for attending, and we do look forward talking with you again in another The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.