All right. Welcome, everyone. Thank you for joining us at the OFC event, and this is Lumentum's analyst and investor briefing. Thank you for joining us. We are also webcasting this event, so there's about 50 people on our webcast right now. I'll take questions after we're done with our prepared presentations from the audience here. It'll take us about 25 minutes or so to get through our slides, the prepared presentation, and then you can feel free to step up to the mic. I'll take questions from the room first, and then if we have time, I'll take questions from the virtual audience. I'm Kathryn Ta, by the way. I didn't introduce myself, but I'm the new head of investor relations here at Lumentum.
I'm very pleased to have Alan Lowe, President and Chief Executive Officer here. Also, Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer, will be also taking the stage later on in the presentation. We will be making some forward-looking statements, and I encourage you to read the safe harbor. The forward-looking statements are based on our expectations that are reasonable, given the data that we have today. They do reflect some risks and uncertainties, and please you look at the total, complete risk statements that are in our filings with the SEC. We have no obligation to update such statements, but we will be making the forward-looking statements. All right. With that, I would like to turn the stage over to Alan.
Great. Thank you, Kathryn, and welcome to the team. You know, it almost feels normal again, and it's great to have people in the audience and back at OFC and walking through the convention center and seeing customers face to face. It really does feel good. Welcome. Thank you for coming today and thank you for joining online. If there's three things that you can leave this meeting with, they're right here on this chart.
You know, I think everybody believes that bandwidth requirements continue to be unrelenting and growing at 30% compound annual growth rate and continue to do so fueled by all the things that we do today virtually as well as all of the deployments of 5G that are making the edge of the network need more and more bandwidth. That drives bandwidth through the network and through the data centers. I have a few charts to talk about the growth in these various areas, but we are truly believers, and I was on a panel yesterday talking about supply chains. We'll talk about that a little bit. I joked a little bit, but I do think this time is different.
Demand is very strong, fueled by fundamental drivers of bandwidth requirements. I do believe it. We're investing in anticipation of this continuing, and we're really making sure that our factories are lined up for satisfying our customer demand as we get through some of these supply chain challenges that we have. You know, as we entered the pandemic, we were in the early stages of about to just ramp new technology, whether that be the new ROADM architecture for our customers or the higher speed 400, 600, and 800 gig speeds of wavelength. That got delayed, and it is now really in the early stages that should have been probably a year and a half ago.
We are ramping up our capacity in anticipation of very strong demand in new ROADM architectures as well as higher speed transmission products at 400, 600, and 800 gigs. Additionally, in the data center, and I was sitting on the panel with one of the network architects from Meta yesterday. They're increasing their CapEx year-over-year by 50%. The drivers for demand inside the data center are phenomenal, as well as machine-to-machine interaction, as AI becomes more real. We're investing also to increase our capacity in our DataCom EML chips in response to this what seems very rapid growth of DataCom. The fundamental economics for hyperscalers to transition to these higher speeds is phenomenal.
When you can get 400 gig in a transceiver that was doing 100 gig and have that 4x bandwidth go through one fiber, the economics are very, very compelling. That shift is happening, and that's why we're adding capacity. Our EML capacity has grown rapidly year- on- year and will continue to do so. Chris is gonna talk about the new opportunities for our 3D sensing in automotive, industrial, and consumer markets. You know, we believe that the fundamental technology that we have today for our consumer lead customer has given us a great learning and a great ability to show to other industries the high capacity, high reliability, high quality aspects of our products and technology.
As we advance that technology and invest in other types of VCSEL arrays and other kinds of lasers, for example, for LiDAR, I get pretty excited about the opportunities ahead. I think we're on the early stages of that, and automotive is gonna take some time, but we are investing and have invested probably for the last three or four years. We're starting to get design wins that we announced last quarter. To take a look at what we see as the bandwidth requirements and growth in CapEx, 20%, and I think that's probably understated as you look at the different bars here on the chart.
You know, I already talked about internet traffic, but bottom line is growing 20% year-over-year is fundamentally driving our requirements to add and invest in our infrastructure and our ability to grow our output for our datacom chips, our telecom transmission chips, and that means investments in fabs that we started a couple of years ago that are now coming online. What this means is really that we're seeing accelerating demand and the need for these higher-speed transmission products and new ROADM architectures that really drive the capability of satisfying that end-user demand that is really driving the fundamental need for adding this capacity.
If you look at the telecom side, as I said earlier, the new network architectures are fundamentally more compelling to our customers. As I said before, you know, in 2020, those network architectures should have been started to be deployed. We started that really in late 2021. If we had more semiconductor chips, we would be on our way to really ramping our WSS units. If you look at the 400 gig and above port count, 75% compound annual growth rate.
Now, that doesn't mean that revenue is gonna grow 75% because as we go up the learning curve for some of these products, whether that be tunable lasers, modulators, or receivers or the fundamental module, whether that be a CFP 2 or a ZR or a ZR+, those port counts are real, and I fundamentally believe it, and that's why we're investing in our ability to meet this demand, and that's why we're so excited about our pending acquisition with NeoPhotonics as well. On the WSS front, you know, our customers are betting their next generation architecture on Lumentum.
In most of the cases on these very high port count or CDC type of applications, we're sole source with our customers, and that's why we've invested ahead of time to make sure that as they ramp their production and as they ramp their network deployments, we'll be there for them, because we wanna make sure they continue to work with us on R&D, and we invest in their future for them. It's a very, very exciting time for the telecom network deployments and our investments to satisfy their needs. I talked already about this a little bit on the hyperscalers. I mean, the economics are just super compelling.
We are very constrained on our ability to ramp, and I think year-on-year, we were up 45% on our EML output in the December quarter, and growing each quarter this year, and adding additional capacity that'll come on late this calendar year to enable us to continue to ramp to meet this kind of what seems to be insatiable demand within the data center and the hyperscale space. We continue to invest in R&D across the board in all of these different technologies to be ready for the next generation.
I was meeting with one of the engineering architects of one of the very large hyperscalers, and you know, she'd gotten some early test results for one of our more advanced datacom chips, and she was super excited that now, you know, they're changing their architecture for 1.6 and 3.2 terabits using our datacom transmission technology. Exciting time across the board, datacom, hyperscale, edge of the network, and we're investing to satisfy that. With that, I'll turn it over to Chris.
Great. Thanks, Alan. Turning to 3D sensing, industrial, automotive, consumer opportunities for us, these are exciting as well, provide a lot of avenues to growth. For those that are following along via webcast or have the slides on our website, we're on page eight, I believe. What we show here is a range of opportunities that we're pursuing in the consumer, industrial, automotive space with our 3D sensing lasers. In general, we play at the laser chip level today. That's because we provide a lot of differentiation at that level, and the industry structure is quite favorable.
While there's a lot of folks, you know, pursuing the applications that are listed across the top here, very few of them have wafer fabs, if you will, producing, you know, millions or hundreds of millions of chips per year. That gives us a considerable competitive advantage in the market. You know, I draw analogy to how we're playing this maybe in reverse chronological order. You know, we have played in the datacom transceiver market and moved down to the transceiver to the laser chip level, as Alan just talked about, given the favorable dynamics at that level, the ability to differentiate products. We're starting that way, in the case of the markets that are shown here.
That said, you know, when you're playing at the laser chip level, obviously, as you see here across the selling prices of the types of products we provide are in the, you know, dollar to dollars each, and then you get, you know, multiple lasers per customer unit generating several dollars or even tens of dollars in the case of LiDAR per customer unit. That generates today about a billion-dollar market that we're addressing, and over the next five years or so, we expect the market to more than double with a pretty heavy contribution, more than half of that growth coming from things like augmented and virtual reality and LiDAR.
In fact, in the case of a LiDAR, perhaps the market even accelerates after that five-year time point, given the timescales of LiDAR are such that probably the adoption rate is accelerating, you know, moving forward. Looking ahead, you know, we have the opportunity to increase both our dollar content, I guess you would call it at the chip level, we're looking at opportunities to integrate more optics and even in some cases, electronics through chip-scale integration, if you will. We also have the opportunity to maybe even move up to modules and subsystems, depending on the opportunity and the industry dynamics.
Probably the most obvious one that's shown here, in fact, we have listed as a module-level solution, is providing coherent LiDAR modules, if you will, into industrial, whether they be metrology type applications or other, 3D imaging, if you will, in industrial opportunities where precision and performance is really paramount. It's taking a page from what we do both in 3D sensing, but also what we do in our coherent telecom transmission business. We continue to look at, you know, where we play in the ecosystem and whether there's logic to moving or changing over time and/or when we would intersect. Playing at the chip level today is what we do, and it's very healthy. I think you can see there's several consumer-based opportunities here.
Really the, you know, inflection here, we expect over the next two years in the augmented and virtual reality brings a pretty exciting new opportunity here. While, you know, similar type of laser to what's used in the smartphone and tablet space, but perhaps more lasers per customer unit, given that you need eye tracking, gesture control or gesture tracking, world-facing. There's multiple applications within a, you know, glasses or headset environment, beyond what is needed in a handset, if you will.
you know, the other major driver of growth, as we mentioned, automobiles, as Alan highlighted and we talked about on our last call, we've got a range of customer design-ins and partnerships that are underway, that you know, range in dollar content in the tens of dollars, could be even higher. In particular, one of the things we're most bullish on is the all solid state LiDAR. We think it's one, solves a lot of reliability concerns, but also manufacturability to drive cost. In order to achieve that all solid-state functionality, for example, the partnership we highlighted with SI leverages our multi-junction addressable, so the elements of a VCSEL array are addressable. That's how beam steering is accomplished. Very high VCSEL content, if you will, in that solution.
The system-level solution, very cost-effective, very reliable, you know, often doesn't get a lot of attention, but we've got a great lasers business. You know, we've got industry-leading profitability in this business that's driven despite being a smaller player relative to some of the bigger guys that are out there. That said, we derive that great profitability via leveraging the scale of the rest of our business, and particularly in the telecom side of things, but also the experience and learnings in developing products that are going into higher volume applications, ones that you know you don't go in and service a telecom or a module, if you will, in the field, the way many industrial lasers our customers are used to.
The fact that we come out with very robust products that very reliable, you know, less service needed, it creates a lot of customer value proposition. There's a lot of new markets that are emerging for us, whether that be in next-generation semiconductor device fabrication, solar cell fabrication, display manufacturing. When you look at electric vehicles across the board, virtually the body, the motors, the batteries, the power electronics are all heavily reliant on laser-based manufacturing. Given all those opportunities, we're confident that we can grow faster than the market via introducing new products and picking up market share. We hit on a lot of these topics, but I think it's important to, you know, kind of step back to the 60,000 foot level.
There's multi-year secular trends across consumer, industrial communications where we play today. There's also new opportunities, whether they're in life sciences, aerospace and defense even that we don't even touch really today more peripherally, but are emerging to be very reliant on photonics, providing, you know, not only long-term tailwinds for the markets we play into, but also new markets to enter to drive additional growth. Turning to page 11 for those following along.
On our last earnings call, we highlighted and, you know, in the press release and in statements, but maybe a little less quantitatively, so we're breaking that out in more detail here, that we believe, you know, at least for the next several years, we can grow at nice double-digit CAGR, and we're providing that breakdown here to get to that math. What you can see here is in the telecom and datacom portion of our business, we feel that the market is set up for very strong growth. On top of that, we've done a lot of work to clean up, if you will, our product portfolio, exiting product lines that are based on technologies that would be cannibalized by this upturn in 400 gig and above speeds.
That was a negative hits to growth over the past couple years, but then should pay off in terms of allowing us to be over indexed, if you will, to the high-speed growing portions of the market. Next, turning to the industrial and consumer portion, as shown here, to be clear, this is really as we report out our numbers, this is 3D sensing and some industrial diode laser semiconductors, does not include our commercial lasers business, which we'll get into next. That industrial consumer, both our markets and revenue today heavily 3D sensing in the mix. What we're showing here is, you know, -5% to +5% growth rate.
The reason for that is not because there's not great opportunities, but we're trying to be very conservative in our outlook, given we have a very, you know, strong market position, and certainly we have the potential for share to normalize, over time. We have nothing to say that that's going to happen, hasn't happened over the past five years. But we want The Street to think about this as, you know, if things don't revert to some kind of equitable market share distribution between us and our competitors, then that's all upside. But if it does, hey, we're still have a very great growth outlook for the combined portfolio of products we provide.
Again, nothing to suggest there's a change from the past in 3D sensing, but for modeling purposes, just wanna take a conservative point of view and hence why we said greater than 10%, didn't put a bound on the upper side of it. Then in the laser space, we believe we can grow, you know, quite a bit above market growth rates, so in this case, 10%-15% CAGR. That's really driven by our increasing exposure to new applications.
You know, over the past number of years, our team has been very focused on building a great cost structure and manufacturing platform for our lasers to enable us to, you know, at the same time, take the brand-new product we've been developing, be very cost effective, be able to enter the markets that we haven't played in historically or new markets that are just emerging and be extremely competitive. The upshot, greater than 10% CAGR, if you kind of revenue weight all of those growth rates across our portfolio. Wanna reiterate our target financial model. 50% growth rate, 30% or sorry, 15% gross margin, 30% operating margin with the greater than 10% growth rate.
Highlight though, the LTM comp that's shown on this page, obviously down from fiscal 2021, but we highlight that in the past two quarters, we've had more than $90 million of, you know, negative revenue hit due to supply shortages. That revenue is not perishable, it will be in future quarters. There's more. Obviously, everything I've talked about to date has been organic growth rate. We've got the exciting NeoPhotonics transaction that we announced in early November. This gives us even more exposure to the 400 gig and above tailwinds that are in the market. As well, obviously, there's a lot of other benefits in combining, you know, the efficiencies in combining, customer relevance, et cetera. You know, we've got a playbook.
We think we did a, you know, okay to pretty good job on the Oclaro transaction, and this has a lot of similarities, at least from the operational side of things, so we've got that playbook to pull from, and really are confident that this will create shareholder value in the coming years, in addition to the organic growth and target financial models that we showed earlier.
Based on that confidence, a couple of things that happened literally, you know, last week, our board authorized increasing our buyback program, share buyback program that is, to $1 billion, added a little extra time out to May of 2024. We've been pretty aggressive about buying back shares to date, so that's why we felt that increasing it and extending it was warranted, particularly given the confidence in our growth outlook. It's great to take out some shares today and reward those who stick with us on the growth that's expected to come. At the same time, we did a convertible note offering last week and concurrently with that purchased $200 million worth of stock. That's not included in the $1 billion so that's in addition to the $1 billion that we expanded our program to.
Finally, before wrapping up here, just wanna highlight and wanna make sure I got my notes here to make sure I hit all the exciting products. It's a long list. Here at OFC, a lot of things we're demonstrating, and you can go see showcased in our booth. I really recommend stopping by and talking to our team. We've got a high-performance 400 gig DCO module in a demo as well as in our booth, live traffic. These are high-performance products, 800 gig coherent modulators for next-gen telecom transmission. Also didn't highlight it as much in our presentation, but another exciting opportunity is DWDM and moving out to the edge. We've got a rapidly growing business providing 10 gig and 25 gig tunable transceivers.
These are high-performance telecom transceivers in the same form factor as Datacom modules plugging into cable MSO Remote PHY opportunities, 5G backhaul or sort of front haul applications, and really growing nicely. You also see next-generation ROADMs, much higher port counts to enable increased scalability. We've got a great new product just starting with what we call ROADM node on a blade. Over the years, we've taken the opportunity to integrate wavelength selective switches, optical amplifiers, channel monitoring, integrate all of that in a compact blade. Now we're integrating multiple of those, if you will, on a blade so that customers can reduce the number of slots taken in their systems by ROADMs and amplification, increase the number of 400, 600, and 800 gig ports they can plug into their chassis, reduces space for their system, increases value for their customers.
On the Datacom side of things, as Alan highlighted some exciting stuff, 200 gig per lane EMLs that enable 800 gig, 1.6 terabit, and beyond Datacom transceivers, 100 gig per lane DMLs. This enables the next generation of 400 gig transceivers that will be coming down the pipe that are lower cost for customers. We have a suite of high-power CW lasers, so providing light for silicon photonic transceivers for shorter distance, lower performance applications so that we also tap into that market in addition to the EML, DML portion that we provide. A suite of VCSELs, right. We've got a great VCSEL platform.
I've shipped billions of them into the consumer electronics space, leveraging that same platform to be able to provide VCSELs into the Datacom market and have exciting 25 gig, 50 gig VCSELs for shorter reach applications. A complete portfolio of products for data center, next-gen data center applications, as well as next-gen Datacom or telecom applications. I think we hit on a lot of these points. It's a really exciting time in the photonics industry. We're seeing tailwinds across all of our markets today. New markets are emerging for our photonics that electric vehicles, augmented virtual reality, autonomous vehicles and the like. We're armed with differentiated products, customer design wins with market-leading customers. With that, I think I managed the time well there. We'll open up the Q&A session.
Great. We'll take questions in the room first. If you wouldn't mind just stepping up to the microphone, please say your name and your firm, if you don't mind. Then we'll take the first question.
Simon Leopold with Raymond James. Two, if I might. One sort of mandatory that we have to get a check on the supply chain constraints. I believe last earnings call you talked about constraints primarily affecting ROADMs, but also affecting your Datacom transceiver and lasers. Could you give us an update on what's constrained and your outlook for recovery? The second thing I wanted to ask is if you could give us an update on essentially your relationship with Huawei as well as your opportunities as operators maybe try to move away from Huawei to other OEMs that might be your customers.
Okay. Yeah. Thanks, Simon. I'll answer the second one first. We still have a very good relationship with Huawei. Over the last couple of years, they've gone from a very large customer to a smaller customer because they've moved everything they could away from U.S.-based suppliers, and they buy what they can only get from a U.S.-based customer. We're sole source on a lot of products there. We have products where the alternative is a U.S. manufacturer. From that perspective, we're going to continue to sell products that we can sell to them that they can't get elsewhere. That's number one.
I think number two is, to your point, as network operators around the world make a shift from a Huawei-based network to a Western-based network, whether that be Ciena or Nokia or Infinera, that's actually a tailwind for us because we have much larger share of wallet of those other network equipment manufacturers. As we lose a dollar at Huawei, if you will, we probably gain two dollars at a Western network equipment manufacturer, as those networks shift. They're starting to shift, a lot of activity around it. I'd say that's really gonna come in a more meaningful way late this year and into calendar 2023. As far as the shortages are concerned, we are impacted mostly by semiconductors that go into our ROADMs, but we're also impacted by semiconductors that go into our transmission products.
Chris mentioned the Remote PHY and cable MSO operators and driving 10 gig and 25 gig transceivers. We're impacted there, but to a less extent. We're able to get some of those things resolved. There's a lot fewer semiconductors to work on on a small transceiver like that as opposed to a ROADM or a ROADM line card where there's many, many semiconductors. The surprises that we get on a weekly basis of, "Oh, you're not gonna get the stuff we told you you're gonna get," I would say are lessening. So we're more predictable with respect to what we can load our lines with.
At the same time, we're also increasing capacity for our ability to manufacture ROADMs because if the supply chain is disrupted, and we lose manufacturing capacity, and then all of a sudden we get a whole bunch of chips, in the past, we haven't been able to run those through. We're adding ROADM capacity so that when we are able to get those semiconductors, we can flex up in our capacity to meet their demands. I'd say our datacom is really constrained by our ability to grow our wafer fab capacity in Japan. We did year-on-year 45% in the December quarter on our EMLs. That's gonna continue to grow in the March, June, and throughout the calendar year. That's really controlled by us.
We're not really reliant on others other than equipment coming online, and those lead times have actually gotten longer as well.
Okay. Thanks for the question, Simon. I just wanted to mention that the slides that we just showed are available on our website, that also will help our virtual audience sort of follow along with the Q&A. Next question.
Great. Tom O'Malley with Barclays. Thanks for hosting the event, guys. You showed an interesting slide showing points of opportunities in three different things across the board, you know, whether it be LiDAR, consumer applications, et cetera. You showed a slide about industrial consumer for your three-year horizon, and that's a flat guide. Could you talk about how much in that flat guide is embedded for non-smartphone 3D sensing applications? What are you assuming to get to that flattish growth from the non-smartphone stuff?
Yeah, I'm reluctant to get into, you know, much more detail, but I would say that we're assuming that, you know, within that range, you know, from -5 to +5, it's probably that gives you a scale of what is new, if you will, driving in the mix, if you will. We will have more customer and application diversity in five years from now than today.
Cool. Just a second one, this may impact you a little less than some other people at the show, but you're hearing more and more about co-packaged optics, and, you know, the timing of that is kind of up in the air right now. One, can you just comment on when you actually see that transition taking place or if you do? Two, how would it impact the mid-term versus today?
Yeah. We view co-packaged optics in general as a significant opportunity. You know, what, where. You know, there's really two places co-packaged optics can go. The first is, you know, at some level, replacing datacom transceivers as they are used today. At the same time, you continue to need semiconductor lasers to go through silicon photonic devices. They tend to be at the lower end or lower performance spectrum. That's why, as I highlighted, the products we talked about, we're showing here high- power continuous wave lasers that are used for those co-packaged optics opportunities.
You know, the really exciting piece of co-packaged optics, at least in my point of view, is that today, you know, there's still the market for very short reach interconnects on board, you know, connecting CPUs or GPUs to memory, for example, through copper interconnects. We see copper's demise at some point, and that being replaced by short reach optical interconnects. The volumes there are astronomical, and every one of those links needs laser light going through it, and that's an area where we're developing very high- performance multi-wavelength modules to be able to serve that market and creates an upside to any of the numbers that we've shown here today.
Thanks, Tom. We'll take the next question.
Hi there, George Notter from Jefferies. I guess I wanted to ask about the supply chain environment. You know, if you walk around the trade show floor and talk to folks, it sort of seems like, you know, there's certainly appetite to build inventory, you know, at customers. It's, you know, I think that's true if you're a carrier or you're a system supplier. You know, it seems like there's incremental inventory that people are attempting to build. Like, what insights do you have into, you know, your customers building inventory? Are the orders that they place upon you know, non-cancellable? Like, how do you sort of describe the environment and the risks to Lumentum?
Yeah, this was a good question yesterday for the panel because we had one of our customers and one of our suppliers on the panel as well. You know, from my perspective, telling customers they can't cancel orders or push orders out is not really a partner. We really work with our customers to understand, transparently, are these products being deployed, where are they being deployed, and is this real demand? I think from our perspective, you know, we're so far short of satisfying real demand or stockpiling of demand that at least in the next six months, that's gonna be the case for sure. I'd say that, you know, the earnings release yesterday was pretty telling.
I mean, their order rate was phenomenal. You know, whether that gets deployed over the next two quarters or the next year is really a function of our ability to get the semiconductors that they need to be able to satisfy their customers. You know, certainly in the short term, there is no stockpiling. I think there's probably a desire. I would love to have a week of semiconductor chips so that I could, you know, deal with an airplane not taking off on time. Today, there is no flux in the supply chain. If a plane gets delayed, I don't get parts to the line, and I lose capacity. You know, I think that's gonna be the case. I mean, Chris talked about the $90 million that we've missed in the last two quarters.
I think that's gonna actually grow in the short term because the order rate, to your point, is actually extremely strong across the board. As we add capacity, you know, we'll hopefully take care of that by getting the semiconductors we need for our customers.
Thanks, George.
Hey, guys. Thanks. Yeah, thanks for doing this, by the way. This is great. Yeah, Ananda Baruah with Brean Capital. Two quick ones. First, Chris, the growth rates that you gave, does that include NeoPhotonics?
It does not include NeoPhotonics.
Got it.
That would be upside to the numbers.
Got it. Any perspective on how the numbers might change if segment fair versus NeoPhotonics?
Well, I think certainly, we're very bullish on the opportunity that they have to grow, if you will. When that business becomes part of us, it's certainly gonna grow at the standalone opportunity and probably even faster given you know, our ability to you know, strengthen their balance sheet, if you will, by being part of us and giving customers confidence that we'll continue to expand manufacturing capacity. I think by over-indexing to 400 gig and above, and what's beyond that, is gonna continue to drive strong growth rates. I think if you saw on the charts, the highest growth rate among the segments was telecom and datacom, and among telecom and datacom, 400 gig and above telecom is the highest growing portion of the business.
not gonna give numbers at this point, but stay tuned for that when the transaction closes, but it certainly should accelerate growth rates on an even bigger base.
Yeah, maybe if I could just add, I mean, one of the parts of the deal was that we offered NeoPhotonics a $50 million loan so that they could invest to meet the kind of demand we talked about. You know, that's also a signal to their customers that we're behind them, whether it closes next month or several months from now, and gives them the ability to ramp up their capacity to levels that, you know, the hyperscalers of the world need today.
The loan was brilliant, by the way. It really was. Seriously. Second question is, Chris, when you were talking about 3D sensing and the up pot to down pot, I thought I heard a comment about, you know, if we return to the equitable market share. Did I hear that accurately? And could you give us the context around that, if that's what you just said?
Yeah. I think the key point here is, you know, we for a number of years have now maintained an outsized market share position with, you know, very large customers who are, you know, trying to, not that they want to take it down to a non-leadership position in the market, but at least they have seen value in having multiple suppliers. Our for- modeling purposes, again, our assumption is, okay, that share will normalize to some more, as you said, more equitable position. If, you know, the last five years predict the future, that's probably a conservative assumption. You know, certainly as we talk to investors and analysts, everybody, you're very nervous about, you know, that situation.
We feel, and we're certainly not seeing the value of it in, you know, our trading performance, if you will. I think if folks can look at that and think of that as, you know, assume the share normalization and, you know, if we over-execute and overachieve again, then that's only upside. We don't need that to drive the kind of growth rates we're talking about.
Can you just remind us quickly, when do those contracts get set? Because I think there's volume agreements in the contracts today. What, what's the cadence of those contracts getting set?
Yeah, you know, they're typically multi-year. As new products get launched, that's typically where we get more share because we're typically the R&D partner of choice and the, you know, the one that has shown that we can go up the ramp better than anybody else. You know, typically then as you add a new product, you have that negotiation discussion, but it's typically multiple years.
Thanks.
Thank you, Ananda. I'll take the next question over here.
Rod Hall with Goldman Sachs. I just wanted to go back to the industrial consumer growth rate. Obviously, it'll be difficult to do this fiscal year given the comps and so on. I'm wondering how we should be thinking about the phasing of that growth if we assume flat over the, you know, the period that you guys are tapering. Is that kind of first question or got a little bit of analysis on that?
Yeah. I mean, it's a little bit difficult to say what the next year is going to be. That's why we kind of took the three-year CAGR approach to say, at some point, that's long enough in the future to say that this assumption of share normalization materializes. That said, you know, as we look to the next year, you know, great products. We performed very well this year. There's new dollar content opportunities coming. So, you know, we continue to see upside, but for modeling purposes, we wanna keep people thinking about that upside as upside.
That kind of leads on to the next question, which is, how big do you think the AR opportunity is as you look out into the next fiscal year? We know not this year, but next year. Is it material or is it kind of rounding error?
Maybe say it differently. I think as you look out in 2025, it's a $ multi-hundred million market. Now as you look nearer term, it's going to be obviously determined by which customer launches which product when, and there's some pretty heavy hitters. So it's not a thousand customers that are launching products in the next one to two years. So the timing is really gonna be dictated by those customers ramping. But I think as we look at least the next two years over that, you know, five-year time horizon.
Sure.
We expect that one or two major customers will launch reasonably significant programs to public consumer, if you will. Probably in the next 12 months, it's relatively modest, just as we sit here today. If you ask me 12-24 months, I think we start getting meaningful revenue from that.
Okay. Then I have just one more with, for Alan, which is, this may be a non-sequitur, but we started to think about defense exposure for a lot of different companies. Lumentum has got a long history in, you know, defense supply. We've got one with JDSU. So, I'm just wondering, is there opportunity there? You know, I know a lot of your products don't really lend themselves, but some of you are technology minded. I'm curious what you think there.
Yeah. I mean, Chris talked about some new opportunities for optics in new markets. I mean, we've probably for the last nine months, have a dedicated team looking at what other markets that we don't participate in could utilize our technology and, you know, EVs and battery, things like that. Also, defense is also something that we're looking at. We may do that completely organically, but we also may look at, you know, inorganic small acquisitions to be able to accelerate our entrance into those kinds of markets.
That'd be mostly sensing more than or other.
Certainly, sensing is one of them, but you know, there's a lot of focus on things like directed energy, right? As somebody that makes a lot of semiconductor laser diodes in the United States, that turns out to be an interesting opportunity for us as well. There's a range of things in that market.
Yeah. Okay, thank you.
Thanks, Rod Hall. Next question.
Hi. I'm Fahad Najam from Loop Capital. I wanna go back to your long-term outlook for the telecom and datacom market. How much of that outlook is based on exposure with China? And are you seeing similar trends out of China as you're seeing from the rest, guys here in the U.S.? Any kind of color you can add to the geographic outlook?
Well, I can talk about China in the short term. I'm having more meetings with our friends in China over the last three months than I've had over the prior two years. The demand for our products is very strong today. I like Chris' comment about, you know, how does that factor into our overall double-digit outlook for the next couple of years. We have not seen the slowdown other than the 5G. We talked about that about a year ago, that 5G deployments had slowed down our DML shipments into China. That inventory was built up. It's starting to get depleted, and we're starting to see that in the second half of this calendar year, that we should be shipping again meaningful DMLs as 5G really gets going again.
I'd say that, you know, from my perspective, Huawei's not the only game in China. ZTE and FiberHome are becoming more meaningful. They're also trying to get outside of China. You know, that's still probably early days. You know, I think we're partnering with all of those customers to, you know, get the technology that they need for the networks that they need. Today, the demand is very strong there.
Yeah. I just would add that, you know, the percentage of China in the mix is probably going to decline over time in that. We're sort of under-indexed, if you will. The reason for that is both,w e highlighted the point of gaining $2 when we sell to a Western customer, w e lose a dollar from a Huawei as an example. That also, you know, in a similar vein that the kinds of products we supply are a fairly narrow range of products, meaning ones that they can't get from non-U.S. suppliers, and some of them are lower ASPs, some of them are higher ASPs. So, the average dollar content is lower from those customers. Therefore, what's driving a lot of the growth is the Western world, if you will.
As Alan's highlighting, China's ramping and growing next gen technologies just like the West. The same networking trends and bandwidth challenges are in China. They maybe didn't come down as hard over the past couple of years with both the COVID impact to deployments, and they maybe started ramping a little earlier some of the next gen technologies. In terms of the growth rates that were projected there's not a high dependence on China doing anything unusual. In fact, it's kind of de-levering a bit from China as the Western customers become a much more significant portion of our revenue.
Can you remind me what China is as a percentage of program?
Yeah, that's actually a tricky answer because, you know, what we put in our filings is ship to type. Obviously, a lot of Western customers have us ship to China where they manufacture. I think you should think of China maybe being more when you take a step back and say, what percentage of the global growth in GDP are they? That's kind of in the range of where our China exposure should land in the 30% of the aggregate revenue, if you will.
I apologize. I have one more follow-up on the comment about equitable market share in the consumer 3D sensing market. Are you assuming still a two-player market in the 3D sensing consumer market, or is it a three-player market?
I'm not sure that necessarily matters a huge amount. What we're just assuming is that we can maintain a very good market position, very good market share if it wasn't for the recent past, looking backwards, you know, having to move down from that to a still very strong market share position. You know, this is an industry where, particularly at the chip level, you know, large barrier to entry in terms of being able to manufacture with that quality, reliability, and performance at the volumes that we're talking about. We've seen a very worthy competitor, you know, take years to be in a position to ship. We're not anticipating this being a four, five, six horse race.
If there's a third that emerges and picks up a little bit of business, I don't think it really changes ultimately what our long-term market share is going to be in the space.
Appreciate the answer. Thank you.
Thanks, Fahad. We have a number of questions that have come in from our virtual audience, the first of which is Alex Henderson of Needham, and I think this is for you, Alan. He's commenting that indeed, the industry is fundamentally different from prior conditions. Another way that you didn't mention is that it is much more consolidated. How has industry consolidation changed the customer and competitor behavior, and what does it mean for us?
Yeah, I mean, thanks for the question, Alex. Yeah, the industry has consolidated, and I think if you look back five years ago, every three or six or 12 months, there was an auction, and we would have to bid on product, and then we'd get our share and you'd live with it. Now it's a very different situation in that when a customer launches a new architecture or technology, we sit down with them and talk about what cost they need and what cost we have and how we come together on the specifications that allow us to meet their cost targets, but at the same time, achieve our profitability.
We sign up for multi-year agreements where we know they're going to buy a bunch of product from us in a very high share, and they can count on our price reductions over time. It's very different from that perspective. You know, I think that's why I believe that, you know, whether all the orders that we get from customers are real orders, it almost doesn't matter because a lot of the products that we provide today, we are the supplier for it, and we have contractual obligations to satisfy what we can to our customers at prices that are predetermined. I do think that's a very good point, Alex, and one that the dynamic of the industry is extremely different than it was several years ago.
I just want to add to that. I think, you know, having been somebody that spent a lot of time talking with customers a number of years ago in this reverse auction environment, it was always very frustrating that it was difficult to get everybody on the page that probably better for them and for us to be in a situation where we're much more focused on what can we do together to create more innovative and disruptive solutions, if you will, as opposed to both chasing a price spiral downwards. Now, the reality is prices do have to go down over time. That's just the nature of technology products, the ability to deliver bandwidth more cost effectively over time. Now the ability to, you know, continue to make, you know, technological leaps to be able to solve bandwidth problems.
In that process, their customers gain more value, we gain more value with the overall solution. It's a much healthier for us and for our customer environment.
I have another question from Samik Chatterjee at JPMorgan. He was asking, what is the thinking behind the recent note offering, raising $750 million, but only using $200 million to repurchase stock? Why the need for additional cash on the balance sheet, and what is the purpose of the additional cash?
I think it's general corporate purposes. No, I'm kidding. You know, well, we did also increase the buyback by $300 million. I think our perspective is, you know, we have been aggressive at buying the stock. Our outlook for the future is very bullish and continuing to buy back our stock at these levels seem to make a lot of good sense to us. We are also, as I talked about before, investing in capital for the needed expansion in our fabs, which are not cheap, as well as the back-end equipment and facilities that we are investing in today. I think, you know, let us get through the NeoPhotonics acquisition, but I think we will start that integration and, you know, there may be something that comes after that.
Nothing to announce today, certainly having the ability to act fast on any kind of future acquisitions was something we were considering, but I'll stick with the general corporate purposes.
I think even add, Greg, we you know we look at our capital structure and how the company is financed continuously. You know, when you don't wanna be reactive, if you will, in that kind of thinking. You wanna be very proactive. We've looked out over several years, expect a lot of growth in the company, have some you know uses of cash between buyback, between a new acquisition that's pending. We have some notes that mature in 2024 as well.
When we looked at the overall economic environment, rising interest rates and all of that, should we wait a year and, you know, do something or go now and made the decision that it's probably better now than later, or at least the risk is higher if you look into the future. That's why we took the opportunity when we kind of saw the clouds part in the market, and we were able to get great terms and do a good deal.
Great. Another question from Tim Savageaux of Northland Capital Markets. He said, given the supply issues that you discussed, is it fair to assume growth in telecom and datacom at or above the high end of the range in the near term, say the next year? Or is that recovery just baked into this again?
I mean, certainly for datacom, because it's under our control, we will be growing faster than the market as we gain share and as the shift goes from 100 gig to 400 gig and above in the data center. I think that's the datacom story. On the telecom story, you know, as we said in the last earnings call, we believe that the June quarter will be better than the March quarter, and a lot of that's coming from continued growth in telecom as we expect that the semiconductor chips will free up. If you remember, one of the things we said was that in the March quarter, we were really impacted by COVID and the impact it had in December.
We didn't get the chips we needed in December and January to ship through the March quarter. We haven't had that kind of major event disruption this quarter so far. That leads us to think that the June quarter will continue to improve in telecom as well.
Great. We have one last question from the online audience. This is probably for Chris. Any update on NeoPhotonics in terms of China?
Nothing to add relative to prior commentary. We're going through the process, constructive dialogue with the officials in SAMR. You know, we highlighted when we announced the transaction, we would expect it to close in the second half of calendar 2022, and that continues to be our expectation. I think as we all know, that process always takes longer than the U.S. antitrust in general, and everything's going as expected.
Fantastic. Okay, we're at the top of the hour, and I'm sure we'll be around in the room if people in the room wanna stay back and ask a few more questions. With that, I'll end the broadcast. Thank you for attending our in-person discussion.
Thank you, everybody.