Earnings Call: Q3 2020

May 5, 2020

Good day, everyone, and welcome to the Lumentum Third Quarter Fiscal Year 2020 Financial Results Conference Call. As a reminder, today's call is being recorded for replay purposes through May 12, 2020. I would now like to turn the conference over to Mr. Jim Fanucchi, of Darrow Associates. Mr. Fanucchi, please go ahead. Thank you, operator. Welcome everyone to Lumentum's third quarter fiscal 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 we operate, including potential market sizes, market trends in our position in such markets, the impact of COVID-nineteen and responsive actions there too on our business, our partners and the global economy, trends and expectations for our products and technology, including product development and projected new product releases Purchasing trends and demands for our products, our expected financial performance, including our guidance expenses, risks and uncertainties, associated with potential disruption caused by COVID 19 as well as statements regarding our business initiatives and the achievements 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. Lumentum encourages you to review our most recent filings with the Securities And Exchange Commission, 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 to be filed with the SEC later today, and Lumentum's annual report on Form Ten K for fiscal year 2019 ended June 29, 2019. 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 2020 results is available on its website at www.wlumentum.com under the Investors section and includes additional details about our non GAAP financial measures and a reconciliation between our historical GAAP and non GAAP results. Lumentum's website also contains our latest SEC filings and supplementary slides relating to today's earnings release and the company encourages you to review these documents. Time today on our website. Now I will turn the call over to Alan for his comments. Thank you, Jim. Good morning, everyone. At the outset, I want to thank our employees. They have been incredible through this crisis despite each having their own personal challenges, living and working in these times. They are the ones that have put us in such a great position, both financially, as well as with our technology and product leadership. Our employees are absolutely the company's greatest asset and my top priority is protecting the health and well-being of our employees and their families. I'd also like to thank the rest of our stakeholders, including customers, suppliers and shareholders for their support and partnership. While everyone is surely facing difficult challenges, all have been constructively focused on overcoming these challenges together. After protecting our employees, my next highest priority is ensuring we do everything we can to help our customers. This is both in the supply of products as well as the execution on new products to ensure future success for our customers and therefore us. Third quarter demand was very strong. Our revenue was within the range of our prior guidance, but on the lower end, due to COVID 19 related challenges that rapidly accelerated late in third quarter as the virus quickly spread outside of China. COVID 19 is dramatically impacting our 4th quarter outlook. We estimate that COVID 19 will impact 4th quarter revenue by more than $90,000,000 as the midpoint of our guidance is more than 20% below what we were anticipating for the 4th quarter before the brunt of our challenges of our inability to supply communication and the balance from reduced consumer and industrial market demand. We estimate that the COVID 19 related revenue reduction lowers projected 4th quarter earnings by more than $0.50 per share. While we continue to react tactically, to address the rapidly evolving and fluid situation, COVID 19 does not change our strategic focus or diminish our long term opportunity. Our strategic focus since we became an independent public company has been product and technology leadership with close customer partnerships in markets that we expect will have strong growth and will be healthy or long term. In addition, we have focused keenly on disciplined management over our operations, investments and capital structure. We believe we are seeing the benefits of executing with this focus. We have attained sustainable technology leadership positions that make us indispensable to the markets we serve. Additionally, we have become financially strong with industry leading profitability and a very solid balance sheet. We believe COVID 19 will accelerate the shift to increasingly digital and virtual approaches to work, entertainment, education, healthcare, social interaction, and commerce around the world. This accelerating shift will stress the world's communications and cloud networks and should therefore drive the need for higher volumes of high performance optical devices. We believe this will favorably impact our communication business over the long term. We also believe this accelerating ship will favorably impact our laser and 3 d sensing lines of business or long run. As more secure devices and other hardware that are easier to interact with and more autonomous will be needed to consume, produce, and communicate digital and virtual content. Because of these trends, we believe our strategy is even more apt than before. Further, because we believe the markets we address are driven by accelerating long term growth trends and are critically dependent on the types of products and technology we supply, we are planning to continue to invest strongly in innovation and new customer programs. By doing this we expect to drive our growth and further our market leading positions. Our investments will continue to be guided the strong strategic and financial discipline that has gotten us to this point. I want to be clear that we are also laser focused on driving increased efficiency and cost savings in all of our operations to further bolster our financial strength. As we rely on a highly global supply chain before discussing product line details, I think it is valuable to provide you with some details on the status of our operations around We quickly implemented company travel restrictions and canceled participation in external events like trade shows and conferences in February. In early March, many of our employees started working from home. We have not laid off or furloughed employees including those who are not For example, we have used our commercial supply chains to procure and donate personal protective equipment or PTE to healthcare providers. Our employees have been leveraging internal capabilities to produce and donate limited quantities we have also expanded our charitable donation programs. In nearly all of our locations around the world, local governments have mandated social distancing measures, including shelter in place orders. We are deemed an essential business by these local governments due to the key role we play in the global supply chains of critical communications and healthcare systems. As such, we have been encouraged and permitted to continue operations. Regarding our factories in Asia, which perform assembly and test operations, In China, because we had a large number of employees working through the lunar New Year holiday due to strong demand for our products, we were able to quickly ramp up production from our Shenzhen factory after the extended Lunar New Year holiday. However, our Shenzhen factory was impacted in the third quarter by challenges in obtaining components from 3rd party suppliers inside and outside of China. While component supply is improving, there continues to be some impact in the fourth quarter. In Thailand, we rapidly implemented employee protective measures in the third quarter. These measures had not limited output So far, the production in Thailand has been impacted by the same challenges that our Shenzhen Factory is experiencing with sourcing components. In Malaysia, we use a contract manufacturing partner for the majority of our telecom transmission revenue. Output was significantly impacted late in third quarter due to the Malaysian government's movement control order issued on March 16th. We had no production Over the coming weeks, we expect to return to production levels close to those prior to the government order. Our wafer pads in the US Japan and the UK are all operating with some at lower efficiencies than before due to implementing social distancing and other protocols to protect the health of our employees. Our U. S. Fab supplies chips for telecom transport and commercial lasers products, and our UK fab supplies chips for telecom transmission products. The lower efficiency in our Japan and UK fabs is limiting our ability to grow to meet strong and increasing customer demand. We are hiring and adding capital equipment to increase We use 3rd party fabs in Taiwan, the U. S. And the UK for 3 d sensing and have not seen any impact in our ability to meet customer demand for these products. Outside of these operations, our employees are in general working from home. Extensively using virtual meetings and digital collaboration tools. If the increase in network traffic we have created with our virtual meetings, where we have added more than 1,000,000 meeting minutes per week since early February is an indicator of bandwidth growth then the future is very bright for Lumentum. We continue to make progress on R&D programs, even with the vast majority of our engineers working from home. We do have a limited number of staff in our labs or operating equipment for those working from home. We are continuing the development of new wafer designs for next generation products in our fabs All of these essential workers are also following strict social distancing rules and employing other personal protected measures. Now, I'll turn to the product line details on our telecom and datacom product lines. Before COVID-nineteen, demand was very strong and accelerating, driven by global telecom infrastructure upgrades, the start of 5G deployments and significant cloud data center expansion. We were already supply constrained on most key product lines, Despite COVID-nineteen, demand was strong throughout the third quarter across telecom transmission, transport, and datacom chips. Bookings for these products expanded by more than 10% sequentially, driving book to bill to over 1.3 up from 1.1 in the prior quarter. The outbreak, however, exacerbated existing supply challenges. As a result, telecom and datacom revenues decreased 6% sequentially. In particular, The supply of telecom transmission products from China and Malaysia was significantly negatively impacted late in third quarter. Despite these supply challenges, we continue to grow our DCO module revenue and our next generation indium phosphide high bandwidth components for 600 gig and 800 gig systems. During the quarter, we closed the sale of our tie in lithium Niobate wafer fab and continue to ramp down our U. S.-based lithium Niobate production. We had approximately $10,000,000 of lithium Niobate revenue in the quarter, and we expect this to decline to near 0 over the next two quarters as we have highlighted previously. Telecom Transport was approximately flatquarteronquarter. These product lines are more reliant on Thailand and China for manufacturing operations, but growth was limited by the supply of key components from third parties in China and elsewhere within Asia. Datacom chip revenue continues to grow strongly, increasing more than 20% sequentially as data center and 5G demand was robust. Remaining transceiver revenue was approximately $5,000,000 and will decline to 0 in the next quarter or 2 as planned. During the third quarter, we introduced key new telecom datacom products, These new products leveraged our highly differentiated indium phosphide and gallium arsenide capabilities and included 50 G PAM4 VCSELs and DMLs to enable higher bandwidths. Uncooled 100 G PAM4 EMLs to reduce data center power consumption and a wide set of new pump laser products that increase efficiently and power while lowering costs. These address the full range of optical amplifier applications. Looking to the 4th quarter, As I indicated earlier, telecom and datacom demand remains robust and strong bookings continue. However, we expect telecom and datacom revenue growth to be limited by COVID 19 related supply constraints. Supply constraints in telecom transmission in Malaysia are improving, but we are not at 100% output yet. We won't be able to Telecom transport revenue is expected to be up sequentially due to progress on relieving supply challenges and new product momentum in the market. Datacom chip revenue is expected to be up sequentially once again due to continued strong cloud and 5G market demand, but is still gated by capacity in our wafer fab. We are optimistic about the long term outlook for our telecom and datacom product lines due to expected long term demand trends, our technology and product leadership position and improving industry dynamics. As I highlighted in my initial remarks, the world's experience with COVID 19 is changing how we do things in all aspects of work and life. This change directly drives the need for our telecom and datacom products. The market is designing networks around our leading products to enable scaling to Our indium phosphide coherent components and modules enable the higher speed and density needed for higher network bandwidth. Our high port count and M by N ROADM technology enables networks to scale capacity much more efficiently. And our higher speed, lower power consumption datacom chips are critically important to drive network capacity and efficiencies in 5g And Next Generation Data Center Networks. Turning to Industrial And Consumer, our Industrial consumer product lines were down 24% sequentially as expected due to seasonal factors, but up 40% relative to the prior year. Year on year growth was driven by customers incorporating 3e sensing in a higher percentage of their product offerings compared to last year, and increased consumer demand for 3 d sensing enabled products. We steeply ramp volume production of lasers for world facing cameras or lidar for consumer applications in the third quarter. We expect to continue to ramp volumes of such lasers throughout the calendar year. Looking to our fourth quarter, our guidance contemplates 3 d sensing declining significantly by more than 40% due to expectations around consumer demand, the potential for smartphone supply chain challenges impacting demand for our products and potential risk We are ready to ramp in the second half of the calendar year, including additional world facing designs that we expect will increase the penetration world facing 3 d sensing or lighter enabled cameras. It is too early to quantify with confidence any impact consumer volumes or the timing of new programs due to COVID-nineteen, but we are very closely monitoring the situation. We believe the 3 d sensing market will continue to grow over the long term. Mobile device manufacturers continue to make progress on their plans front facing and world facing capabilities into a wider range of models. We are engaged with a broad range of customers focused on the consumer, industrial, and automotive end markets looking to add 3 d sensing or lidar capabilities to enable their applications. Now on to lasers. 3rd quarter lasers revenue decreased to $43,500,000, driven primarily by decline in fiber laser sales. We expect over the next several quarters that our fiber lasers business will soften further as it is tied to growth in global manufacturing. Our solid state laser revenue expanded nicely quarter on quarter and attained levels not seen in nearly 2 years. This was due to strength in certain Semiconductor Manufacturing end markets, including 5G and 10F application. We expect these trends to continue into the fourth quarter with fiber laser declines being larger than solid state growth resulting in laser revenue declining sequentially by approximately 20%. Throughout my remarks, I've tried to give you much more details than usual about the status of our market demand, for our products, our operations and our ability to supply given the dynamic challenges the world faces with COVID-nineteen. Before COVID-nineteen, we were challenged to satisfy strong customer demand for many of our communications products. The COVID-nineteen pandemic has exacerbated this situation. So our ability to supply these products is getting better catching up on the strong that while we are all living through difficult times, our strategy is even more apt in our market position and financial strength even more important. I believe we are well positioned both to weather the short term and to succeed in the long term. 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 in such challenging circumstances. Before diving into the details, some high level comments. As Alan highlighted in his opening remarks, COVID 19 is impacting our results and our outlook. We estimate COVID-nineteen is impacting our 4th quarter revenue by more than 20% and our earnings by more than 35% or approximately $0.50 per share. Despite these impacts, we have made progress in improving our financial model. Year on year in third quarter, we achieved $650,000,000 720 basis points of improvement in non GAAP gross, and operating margins, respectively, and more than a 37% improvement in non GAAP EPS despite revenue being down 7%. Our model improvement is also seen in the improving margins in our guidance for the fourth quarter, even with a substantially lower top line and a less rich revenue mix relative to the prior year. We continue to make strong investments in new technology and customer programs. This may be obscured in the year on year comparisons where R and D spending is down as we have been simultaneously attaining R and D acquisition synergies and cutting investments in underperforming product lines. All while ramping investments in areas with stronger outlooks and returns. On capital structure, as you are aware, In the second quarter, we issued $1,050,000,000 in convertible debt, paid off our acquisition related term loan and repurchased $200,000,000 of our stock. Reduced our share count and increased our flexibility to further drive strategic initiatives, while reducing the cash cost of our capital. We achieved this capital structure in the second quarter, not anticipating the COVID-nineteen pandemic. However, as we have often said afterwards, the best time to raise capital is when you don't need it. 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 3rd quarter's numbers. Net revenue for the 3rd quarter was $402,800,000, which was down 12% sequentially, and 7% year on year. Our prior guidance assumed COVID 19 would negatively impact revenue by $15,000,000 to $20,000,000. However, as Alan discussed, we had a larger impact than we assumed due to the spread of the virus beyond China late in third quarter. We estimate this additional revenue impact was more than $10,000,000 over our guidance assumptions GAAP gross margin for the 2nd quarter was 39.2 percent, GAAP operating margin was 10.6% and GAAP diluted net income per share was 0 point 56 dollars. 3rd quarter non GAAP gross margin was 45.5 percent, which was down 190 basis points sequentially, but up 6.50 basis points year on year. The sequential decline was driven by lower overall revenues particularly in industrial and consumer. The year on year increase was primarily driven by improvements in telecom and datacom margins, as well as acquisition synergies. Non GAAP operating margin for the third quarter was 25%, which was down 380 basis points sequentially, but up by 7.20 basis points year on year. Sequential and year on year changes were driven by the same factors as the gross margin improvement. Non GAAP operating expenses totaled 82,700,000 or 20.5 percent of revenue. SG and A expense was $38,400,000, R and D expense was $44,300,000, The sequential decline in operating expenses was driven by the combination of reduced trade show and travel expenses and the realization of additional acquisition synergies, were partially offset by higher fringe rates associated with the new calendar year. 3rd quarter non GAAP net income was $98,000,000. This includes $3,600,000 of net interest and other income, and $6,300,000 of tax expense. Non GAAP diluted net income per share was 1.26 based on a fully diluted share count 3rd quarter Optical Communications segment revenue at $359,300,000 decreased 12% patient segment revenue reduced 5% due to lower telecom and datacom revenue with the exit of datacom modules and COVID-nineteen supply limitations, which more than offset higher 3 d sensing revenue. Optical Communications segment gross margin at 45 percent decreased 300 basis points sequentially due to the revenue reduction and a less favorable product mix, but increased 700 basis points year on year due to a more favorable mix of products, improved telecom and datacom margins and acquisition synergies. Our lasers segment revenue at $43,500,000 decreased 10% sequentially and 21% year on year, primarily due to lower fibrous laser sales. 3rd quarter lasers gross margin increased to 49.7% due to a better product mix and lower manufacturing costs. On the balance sheet, we ended the 3rd quarter with one point $45,000,000,000 in cash and short term investments, up from approximately $1,300,000,000 in the prior quarter. 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 20.24 $1,050,000,000 is due in 2026. The total cash interest expense associated with these And now an update on synergies. Through the third quarter of fiscal 2020, we completed actions that will result in approximately $100,000,000 of annual expense synergies. As a reminder, we are targeting a total of acquisition synergies with the remaining $10,000,000 to be attained over the next few quarters. Turning now to our guidance and are based on our assumptions and demand reductions related to COVID 19. We are providing a wider than normal revenue range to incorporate uncertainty around the impact of $325,000,000 to $365,000,000. At the midpoint this revenue projection includes telecom and datacom approximately flat with growth limited by continuing COVID-nineteen supply limitations. This includes declines from discontinued products, which are estimated to be $6,000,000 to Industrial and consumer decreasing by more than 40% due to expectations around consumer spending trends in a macro slowdown and the timing of new programs. And commercial lasers decreasing by approximately 20% due to end market demand caused by the slowdown in industrial production globally. Based on this, we project Fourth quarter operating margin to be in the range of 18 percent to 21 percent and diluted net income per share to be in the range of $0.70 to $0.90. These projections incorporate an approximate share count of $78,000,000 and an estimated which is lower than the in our short Thank you, Wajid. This should help us get to everyone before the end of our allotted time. Thank The first question is from Samik Chatterjee with JP Morgan. Your line is open. Hi, good morning. Thanks for taking my question. I appreciate all your comments about the supply chain constraints you're seeing. Just wanted to get more visibility about the aspects of your where you're seeing demand reductions, which you mentioned a couple of times and how are you thinking about maybe the recovery of the $90,000,000 of headwinds that you're calling out through the remaining quarters? And I have a follow-up. Thank you. Sure. Thanks, Sameet. Also, the the dynamics of the supply chain are really around ability to get components sourced from, both within China as well as for instance, the Philippines and Malaysia. We believe that that situation is getting much better but the first half of this quarter was impacted pretty dramatically. And then secondly, our ability to ramp up our contract manufacturer in Malaysia, and that's happening well. But the first half of the quarter was dramatically below 100% production. And we believe that in the next couple of weeks, that will be back to close to 100%. I think from our perspective, the demand for datacom chips, telecom transport and transmission is accelerating. And we believe that as we get back to 100% capacity and we bring on more capital, which we have placed on order to be able to catch up with this demand. But I think it's going to be sustainable, will allow us to, grow both datacom, telecom transport and transmission in the 1st fiscal and second fiscal quarters. Okay, got it. And as a follow-up, we've seen some of your peers report, acceleration in the deployment pace for 5G infrastructure in China. Can you give us a sense if revenues, I think Huawei revenues you said last quarter was $60,000,000 if that was the number this quarter that you just reported and what's embedded in your guide and you are you seeing kind of a similar expiration as your peers are reporting? Yes. So we are seeing certainly, we have very strong datacom chip demand that is in driven in part by, 5gdeployments. And this quarter had an incredibly strong bookings, presumably driven by a lot of 5G. Can you remind me the second part of your question? What I think last quarter you said Huawei revenues were $60,000,000. So I was just asking if that's in what did you see in terms of trends in the reported quarter and what's embedded in your guide? That revenue has declined a bit We don't provide revenue by customer on a quarterly basis, but you can imagine that is down in the 20 down 20% sequentially. The next question is from Rod Hall with Goldman Sachs. Your line is open. Yes, thanks guys. Thanks for taking my question. I just thought I'd go back to the $90,000,000 impact on the guidance and sort of walk through to add up on that. I so I would estimate and I'd like to get clarification on whether this is right or not, but that the 3 d sensing impact was about $40,000,000 to that. And then at lasers, it's down 20%. That's just over 4%. So then is it all like the rest of it is telecom and datacom revenue you think you would have had, but you don't, or could you just walk back through that and clarify how that breaks down by the different business units? And then I have a follow-up. Yes, I think, yes, thanks Rod. I think in general, from a demand standpoint, you're pretty close. I think, 3 d sensing we said was going to be down 40% or more I think the balance of approximately $45,000,000 to $50,000,000 is our ability to supply. And that majority of that comes from our inability to ramp our, production in Malaysia in the first half of the fiscal, yeah, first half of the quarter. As well as to secure the components. And so we have orders. We have demand. Our customers are having daily phone calls with us is to how we prioritize them, how we get them their product. So I'd say north of $50,000,000 is our inability to supply And we believe it had had we not had the pandemic, our capacity would be aligned with that demand and we would have been able to produce it. So that's where the math comes from. Okay. Yeah, that makes sense. I wanted to go back to this comment on, that you made in the slides on the potential delay in customer programs. And I know you say it's too early to know. When do you think you will know on 3 d sensing, whether programs are delayed? And can you give us any idea on how we should think about seasonality now? Or you just don't know sales? I mean, it's seasonality likely to shift more into Q4 at this stage, you think, or just too hard to tell, but mainly I'm interested in when you'll find out. Yeah, Ron, it is really hard to tell. And I think we find out when they tell us. And so I think from that perspective, we are ready. We We have the product, a whole new set of chips ready to go and waiting for not just one customer, but multiple customers to tell us when they're ready to ramp those products. And there's a very clear gate that they tell us. And it's a loud screen that we can hear around the world when say, they say go. So it's there's no timeline as to when they do that. It's really more of a make sure we're ready to go. And and when they say go, we jump high. Yes. And then just clarifying the Huawei point. You said down 20% quarter on quarter or down 20% off that $60,000,000 level. I guess that's for March, right? And then I don't know if you said in the guide what Huawei's impact is, but it'd be nice to get that as well. And then that's it for me. I would anticipate it roughly the same level. That's a minus 20% on the 60 Correct. Okay. Just to be clear, that's a supply constraint number, given the constraints we're having on ability to provide telecom transport for that matter as well as transmission. So they certainly, the demand is higher than that. The next question is from Alex Henderson with Needham. Your line is open. Great. Thank you very much. So I was hoping you could talk a little bit about the competitive circumstances around the 3 d environment. Obviously, it's difficult to time when production will ramp up for that. But have you seen any change in in dynamics. I think when we talked back in March, you had talked about picking up some share, because of a competitor's inability to supply. Is that still the case? Or have you seen any change in that dynamic at this point? And do you anticipate, the products in the back half to be products on a broader set of platforms, therefore, continued high share in the back half. Yeah. Thanks, Alex. I'd say that it's hard to say exactly what's going on with our competitor. I think our focus is making sure we have the mind share with our customer as they roll out new products. And so I'd say that the the product we talked about in the script, the world facing LiDAR application, we have an extremely high share of that. We expect to continue to keep that as well as any new chips as they use us as more, their development arm and priority. Moving forward. And I think you're right. I think the technology advancements on these new chips makes it not as easy to catch up as fast. And so after 3 years, I think that our competitors are getting it. But now we're moving to the next one. And then just one more question on the operating lines. Clearly, there are some cost benefits to not doing as much travel on the like. And some of that is probably going to be impacting the June quarter. Given what you're saying about your operating margins, can you talk about what's going on with the OpEx on a more sustainable basis. Are you also trimming back some costs there? Any guidance on whether there's additional synergies on the R and D would be helpful particularly? Thanks. So on the travel, the way to think about kind of travel reductions quarter to quarter, moving from fiscal Q3 to Q4, we should probably think about it in the $2,000,000 to $3,000,000 range, moving from 1 quarter to the next. Our expectation is that there will be some how that starts up again as June rolls around. There certainly is a niche from our sales team as well as our operations team to get back into normal, especially with the number of capital deployments that Alan talked about in his script that we've got going on specifically at our UK facility, as well as Caswell. So we do need to how our teams start moving around like that, but I think you should think about it from a $2,000,000 to $3,000,000 quarter standpoint. As far as kind of reducing R and D, at an overall level just because of, you know, what we're looking at as a as a COVID-nineteen issue, that's not occurring. We're continuing to invest. You can take a look at our careers website on lumentum.com. We're actively hiring, across multiple functions, specifically in R&D. Our direct labor hires in the UK over the next year will probably increase a couple of 100 folks just to ramp up with our transmission products. And so right now, we're just trying to figure out how do we get everybody trained and everybody going. So we're certainly the mode of leaning in as far as, additional targeted hires to support, our R and D programs. And I would like to and they are targeted hires. So it's not across the board, but we're certainly leaning in from that standpoint because Our objective is to stay ahead of the competition as we've done in most of our markets, if not all. And so that's the mindset of the management team. But yes, you'll see some benefits in OpEx just because of travel delays and things of that nature. The next question is from Tom O'Malley with Barclays. Your line is open. Hey guys, thanks for taking my question. I just wanted to talk a little longer term on the operating model as well. Clearly, you guys have described some manufacturing that you think is picking back up in the next couple of weeks in Malaysia. Can you talk about at the midpoint of your guidance, when are you assuming that Malaysia is back to 100% And then within your own factories, how long does the operating margin pressure kind of exist? Is this something that likely lingers into the following quarters or are you able to get these things corrected in the next couple of weeks? Well, I think we've gotten the go ahead to bring back all the employees in Malaysia. So that's happening now. We expect that that'll take another week and then we have the cycle time of the coming through. So I'd say within the next 2 to 3 weeks, we should be close to 100%. But keep in mind that there are social distancing limitations that won't get us all the way back with the current headcount. So we're hiring, we're adding capital, but I think that by the end of May, we should be back close to where we were in February. I'd say that the other areas of focus are as Wajid talked about our UK fab and our Japan fab. There's just so much to that we need to be able to get more wafers out and improve the yields and drive the cost and things like that. And that's really what we're focused on. So I would say that I don't have a crystal ball as to when this whole pandemic will end, but I'd say that we probably as we enter into, July August, we should be back to near normal from what I can tell. Great. Thanks. And then the second one is just about largest customers. Your queue just came out. It looks like there's 2 customers that represented about 37% of revenue. Could you tell us how big your largest customer was? And it looks as though it's down pretty heavily into June. I'm just looking at the supply chain it's down as well. But can you talk about just the share there? You obviously talked about a world facing sensor, but your existing sensors particularly in the front facing is share maintaining or is that just a broader unit depression? Yes. So our go ahead now. Go ahead, Chris. I was going to say our largest customer is running north of $90,000,000 a quarter. Don't want to get any more precise than that. And I'll hand it to Alan to talk about share. No, I think we're comfortable with our share on that customer. And I think that, as I said before, our focus is on making sure that we enable the next generation of products. And that we go back to the kind of share we had, 3 years ago and over the last couple of years, So that's kind of our focus and we expect to do quite well as the next generation of products come up. The next question is from Meta Marshall with Morgan Stanley. Your line is open. Great. Thanks. I just wanted to dive into kind of the China based revenue. Just with the tenders being granted or a number of the tenders kind of being granted over the past couple of weeks. Can you just give a sense of how that should flow through to your revenue or demand or pipeline or how many of your kind of past orders do you estimate have been kind of getting ready for some of those tenders And then maybe just on the datacom chip side, should we consider that that's all kind of coming from one customer or is there a growing set of customers for those chipsets? Thanks. I'll answer the second one first because that's easy. If you look at the datacom customer base a year and a half ago when the acquisition completed, it was very concentrated on one lead customer. I'd say that now It's extremely diverse. We're seeing as we exited the module business, customers came to us because we were no longer a threat compete with them. And so we've seen a broadening of our customer, base and we've seen a growing set of customers coming to us especially on well, existing products, but with our technology development on the products I talked about in the script, And also on our VCSELs, we've seen really a rapid acceleration of customer based growth there. As far as China, there is a lot of activity today. I am on calls and escalations with many of our Chinese customers to be able to supply what they need. And that ranges from Datacom chips to high end ROADMs, high port count ROADMs and by end ROADMs as well as transmission products. And so I'd say that that demand is real product is being deployed. It's not being stockpiled from what we can tell, because I think that the second half of the calendar year, there's going to be a major deployment in China. And so getting ready for that. The next question is from John Marchetti with Stifel. Your line is open. Thanks very much. Alan, I just wanted to follow-up on your last comment there where you're talking about some major deployments scheduled for the second half of the year. What was some of the renewed noise around additional China sanctions and some things like that way. Do you envision if something were to come down that you'd the halt like you did in May of last year? Or do you think that with what you learned there that you'd be able to continue to supply into China it tensions between the U. S. And some of those OEMs continues to escalate. Well, I mean, I think it's hard to speculate on what ruling or if a ruling comes down, we will certainly abide by any laws and restrictions. But it really comes down to what is that. I think as we look today, The de minimis rule limits very little of what we could have shipped. And so from that perspective, depending on what changes happen. If that limit changes to a lower number, I think we're probably okay. If it changes to 0, then that's a different matter. So It's hard to speculate, but of course, we're going to abide by the laws and make sure that we figure out how to support our customers, but at the same time also do the right thing. And then maybe just as a follow-up to some of this, if you had been able to secure supply and ship as normal, do you think that the book to bill in the telecom and datacom segment would still have been above 1. Just trying to get a sense of what that underlying sort of demand trend looks like, if you had been able to meet that demand in the quarter. Well, clearly if we've been able to ship more, the book to bill would have been lower because the billings would have been higher. So I don't think there's a lot of artificial bookings or double bookings. But we'll see we'll see when we add capacity. I think we've got a long haul to get back to more equilibrium between our ability to supply what the customers need and what they're deploying in the field. So, I think in our telecom datacom business, there are fundamental underlying reasons for growth in that business. I said in the script, we're creating video minutes on how we do business. And I think that is part of the new normal. So bandwidth requirements are continuing to grow and I don't see an end in sight for that. The next question is from George Notter with Jefferies. Your line is open. Hi guys. Thanks very much. I guess I wanted to ask about, any views you guys might have on the long term structure of the market competitively as we think about this COVID-nineteen experience and you think about maybe some of the smaller competitors space. Do you see this whole experience driving consolidation? Does it impact their ability to drive innovation like market share changes like how do you think the bigger picture changes longer term on share? Thanks. Yes. I mean, it's hard to speculate, how it splits its way out. I think as what Jin highlighted, having a strong financial business model with a very strong balance sheet allows us to lean in and invest and that's what we're doing. We are hiring R&D. We're investing. We intend to come out of this even with even better product differentiation than we went in. So I think it's going to be very hard for the small guys to keep up But we'll see. I think there'll be opportunities, but I'd say that also over the last 3 years, there's been a lot of consolidation. And so that the market landscape is in a pretty healthy position today. So we'll see what happens, but our focus is satisfying our customers, investing in new products and technology and differentiation so that when we come out of the other end, we were even better positioned. Next question is from Simon Leopold with Raymond James. Your line is open. Great. Thanks for taking the question. A couple of things I wanted to ask. 1 was Alan, in talking about the $90,000,000, you talked about over $50,000,000 being supply chain related. So that implies less than $40,000,000 being demand related Could you maybe unpack that a bit between 3d and industrial or commercial lasers, the commercial lasers? And help us understand what you think about for the prospect for recovery, particularly given that some of the end markets like auto manufacturing seem like they're they're struggling, to turn up factories, etcetera. Just your outlook on the demand aspect of the COVID-nineteen guidance. Sure, sure. I think just to note, we said more than $90,000,000. So we expect that between the supply and demand, we probably could have done more than $90,000,000 in Q4. So yeah, you're right. It's probably north of $50,000,000 of supply and our ability to ramp up mainly the Malaysian operation. So that's really impacting our Q4. But the prospects for recovery, I'd say you're right. I mean, on the lasers business, we think it's several until the global manufacturing infrastructure comes back to normal. So I think we're at a new lower level for lasers, probably through the calendar year. That, again, I don't have a crystal ball And then 3 d sensing, it's really hard to tell. I mean, our focus is making sure we're there for our customer when they need us. Especially on the new products. But it's hard to know what the levels of unemployment are people going to go out and buy high end phones? Or when they'll do that. I think fundamentally people will come back and continue to buy consumers tend to be resilient. So, it's really more difficult to project that one. But I'd say on telecom datacom, I'm not, I'm not losing a lot of sleep on worrying about whether or not there's demand there. Okay. And just as a follow-up, I wanted to get your thoughts on Lumentum's prospects and what you think your role would be in the emerging market for ZR modules? Hey, Sonam. This is Chris. Yes. So, certainly, we One of our motivations when we acquired Oclaro was to get the industry leading indium phosphide component and module capabilities and we continue to invest strongly in that capability and are developing those products as well as a whole wide range of DCO modules that whether it be 100 gig, 200 gig, 400 gig, and eventually above. And underlying supporting components for those customers who either build modules or line cards themselves. We expect that the market for 400 gig and at the module level, we'll start ramping up probably later this calendar year, so that could be much more meaningful in the following years, but it's an exciting market for us and we think we're very well you. The next question is from Tim Savageaux with Northland Capital Management. Line is open. Hey, good morning. Question over on the the telecom datacom side, I think you'd referenced a continuation of strong booking trends into the June quarter fiscal Q4. I wonder if we can get any more color on that whether you've seen an acceleration and expect given the supply constraints of book to bill and kind of similar or backlog build of similar levels and as you see those orders materialize, are you able to discern drivers, namely capacity additions driven by network traffic growth, kind of in the in the U. S. And EMEA versus what appears to be pretty strong, 5G driven growth in China. Yes. So we saw a continuation, excuse me, of the strong bookings in telecom datacom. It didn't change our ability to supply. That's for sure. But, I do think the fundamental drivers are North America bandwidth, hyperscale kinds of deployments as well as connecting all of the people working from home. And the use of, virtual collaboration tools and things like that. I'd say that 5G in China is is back and rolling. And so building out both the front haul and back haul, part of that network as well as the regional net Metro networks with ROADMs and transmission products is happening. So I think from that perspective, I don't don't see a slowdown. And I see more of a pent up lack of deployments over the last, the first calendar quarter in China that's now starting to ramp up in a meaningful way? And just to follow-up quickly, you mentioned a $100,000,000 backlog in transmission. I don't know if you expect that to grow at all or whether that was current or exiting fiscal Q3. And the expectation is that That's likely to ship in the calendar second half? Yes. So Sorry, I wasn't clear. The $100,000,000 backlog and transmission is backlog we have today that will not be satisfied by the end June. Got it. Thanks. So we're going to satisfy a lot in the backlog we have today, but this won't be satisfied. So if you look back on our historic transmission business, it's usually $100,000,000 to $120,000,000 a quarter and growing and with some of the discontinued products that's kind of ebbs and flows, but so we have strong backlog. We're continuing to get bookings and so we're going to end the fiscal year with a very strong backlog is my projection. The next question is from Christopher Rolland with Susquehanna International. Your line is open. Hey guys, thanks for the question. And on a prior question that you discussed. You talked about sets of LiDAR World facing product ready to go. Guess my question is, has this passed the full qualification process at your customer? And then secondly, just regarding a date, I know it's difficult and I know you guys are waiting, but isn't there some kind of drop dead date in which you need to implement and plan for capacity to ultimately satiate that order. Thank you. Well, I mean, we said we were ramping production of the world facing LiDAR products, in in Q3, you don't ramp unless you qualify. And so product announcements have been made with this product in it. So, it's being sold out to consumers. So, I think that the we're off and running on that one and we'll continue to ramp. As far as the drop dead date is concerned, we are ready in inventory at the right positions. There's not a our customer and our main customer and our sales team and product team, it is very well aligned on when we need to go, based on their schedule. So I'm not so worried about a drop dead date from that perspective. We'll be ready. And I think we're in a great position relative to our competitors. Our final question is from Richard Shannon with Craig Hallum. Your line is open. Well, thanks guys for taking my question. I just have one to finish up here again on 3 d sensing. You talked a lot of the answers on that topic. I think in the name margin big customer. Maybe Alan, if you could talk about the impact on your, can your Android customers impact from COVID here in terms of time frame and as well as even implementation of the either front facing or more specifically world facing? Thanks. Hey, Richard, this is Chris. So Android business in the quarter was a bit rough. As you can imagine, smartphone production in China was was down quite a bit. So we saw the Android revenues slow considerably quarter on quarter. With that said, our design in activity and product positioning with Android customers is is good and continuing to improve as we have a broad range of products for front and world facing that satisfy the Android customer needs. And that's one of the advantages of the scale that we have in the business is our in a sense, R and D capacity to be able to customize and develop products for, all of the customers in the Android space in addition to our largest customer. So we anticipate the Android from a design in standpoint to continue to progress to, broader set of models and higher volume products. I think as Alan highlighted, it's a little difficult to handicap the overall smart phone volumes in the world over the coming year given some macro challenges, which could impact consumer demand. But we feel pretty good about, both the broadening of 3 d sensing in the Android space and our position in supplying those products. That concludes the question and your session. And I will turn the call to Mr. Fanucchi for any closing remarks. Great. Thank you so much. This concludes our call for today. We would like to thank everyone for attending and we look forward to talking with you again in another few months. Have a good day. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.