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Lumentum Holdings Inc
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[00:00:03] Is everyone and welcome to the momentum, first quarter fiscal year 2021 earnings call.
[00:00:09] All participants will be in a listen only mode. Please note today's event is being recorded. At this time, I'd like to turn the conference call over to Jim Fanucchi of Darrow Associates. Sir. Please go ahead.
[00:00:26] Thank you, operator. Welcome to the momentum. First quarter fiscal year, 2001 earnings call. This is Jim Fanucchi from Dero Associates assisting the momentum 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 Coldren, 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 and our position in such markets. The impact of covid-19 and responsive actions there, too, on our business and continuing uncertainty in this regard. Transend expectations for our products and technology, our markets, market opportunity and customers, and our expected financial performance, including our guidance as well as statements regarding our future revenues from warbly our financial model and our long term margin targets. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risk factors described in our SEC filings, including the company's quarterly report on Form Tinku for the fiscal quarter ended September the 26th Twenty twenty, which the company expects to file later today and in momentums 10k for fiscal year twenty twenty ended June 27 twenty twenty. The forward looking statements provided during this call are based on momentums reasonable beliefs and expectations. As of today, momentum 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 gap doget. Financials are not to be considered as a substitute for or superior to financials prepared in accordance with Gap momentums press release with the first quarter 2021 results and accompanying supplemental slides are available on its website at www.youtube.com Dotcom under the Investor Section and includes additional details about our non-cash financial measures and a reconciliation between our historical gap and non-GAAP results. Now I will turn the call over to Alan for his comments.
[00:02:37] Thank you, Jim. Good morning, everyone. I would like to make a couple of broader points before providing my business commentary by we will be discussing our strong financial results and we benefit from the digital transformation that covid-19 is accelerating. We recognize and don't want anyone to lose sight of the significant economic health and well-being challenges covid-19 has tragically brought to millions of people around the globe. Our thoughts are with all of those affected. Our thoughts are also with the health care professionals and first responders who selflessly make a difference on the front lines every day. I am proud that momentum plays an important role in the critical infrastructure that helps people safely continue their work, their education and their life during these challenging times. Now on to my comments about our business and financial results. We started fiscal 21 on a strong note. In the first quarter, we achieved record non-GAAP gross margin, operating margin and earnings per share. For the first time, we achieved gross margin in excess of 50 percent and operating margin above 30 percent. This performance demonstrates the strength and resilience of our business and financial model. We expect this positive momentum to continue into the second quarter. As pleased as I am with our results and the progress we've made in driving towards our strategic goals. I'm as excited as ever about the opportunities ahead.
[00:04:06] As I often say, the future is truly bright, adamantium long term market trends and industry dynamics are very favorable. The world is accelerating its shift to increasingly digital and virtual approaches to work, entertainment, education, health care, social interaction and commerce, which all drive increasing need for our differentiated products and technology. We intend to invest strongly in R&D to address these positive long term trends and strengthen our market leadership positions. First quarter revenue was in the upper half of our guidance range. Our revenue mix was different than we had contemplated in our guidance to the changes throughout the quarter. Our assumptions for three cents improved conservative and demand for our 3D printing products accelerated through the quarter. Strength, 3D sensing sales more than offset, lower than anticipated telecom and commercial laser sales, telecom datacom revenue grew two percent sequentially and five percent year on year, excluding revenue from the low margin product lines we have divested or discontinued. Telecom and datacom revenue grew four percent sequentially and 14 percent year on year. The largest contributor to this growth was telecom transmission. We had strong sales of Indian phosphide based coherent transmission modules and components, including Eisho and DCO modules and 600 gig and 800 gig modulators modem sales increased from last quarter, but we're still down year on year. However, our contention was NBN modems were more than 30 percent quarter on quarter to a new high, highlighting the increasing shift to this technology and new customer systems.
[00:05:54] During the first quarter, we saw some pushouts in telecom customer orders. We also saw reductions in customer forecasts due to covid-19 impacting the timing of new deployments in addition to customer inventory management. He's contributed to lower telecom revenue than we assumed in our guidance. Uncertain key new telecom products, however, demand exceeded our ability to supply. And we are working hard to expand output. During the first quarter, we made a lot of progress on new products, further strengthening our telecom leadership position. On the transmission side, we began sampling our 400 Deseo transmission modules on the transports side. We continued to proliferate a continuous NBN and high court count road and technologies, the C, l and extended seabourne versions to enable customers next generation systems globally. Prior quarter trends continued in datacom, with chip sales by six percent sequentially. We have seen a shift in near term customer forecasts with lower projected biji demand offset by continued strength in demand for a market leading chips for data centers. We have adjusted our way for start plans accordingly. Our backlog for data conscious remains very robust and demand continues to outstrip our work with that capacity. As such, we are continuing to aggressively expand our wafer capacity based on long term demand trends and expectations.
[00:07:28] On the new product front, we are working closely with our lead customers on their needs for future energy and above datacom transceivers. To this end, we have recently demonstrated High-Performance 200 gig Pam, four e-mails for such applications looking to the second quarter. We expect telecom and datacom revenues to be up sequentially with the strongest growth coming from telecom transport driven by growth in next generation. Rhythm's industrial and consumer revenue grew strongly quarter on quarter and was significantly higher than in our guidance assumptions. Our unmatched experience in shipping hundreds of millions of records per year continues to put us in a leadership position in the market. Since we became an independent public company five years ago, we have shipped approximately one and a half billion dollars, three cents in revenue. You continue to believe we have a larger addressable opportunity over this product cycle. This is due to the significant increase in 3D printing content per consumer device. We are now shipping looking to the second quarter. We expect industrial and consumer revenue to be flat to modestly up quarter on quarter. We are optimistic about three cents in demand in the coming quarters and years in addition to increasing content. We believe there's potential for a strong consumer upgrade cycle driven by new features, including 5G, augmented and virtual reality and computational photography. Further, we believe there's a potential for market share shifts at our customers level, which could be beneficial to us on Android.
[00:09:07] We continue to make very good progress on new opportunities. However, we are taking a conservative approach to Android revenue in our near term projections to the covid-19 and geopolitical factors looking even further ahead. We have multi-year product and technology roadmaps aligned with our consumer electronics customers. These include unique technologies to increase the integration of other components. Enable under screen 3-D cameras produce higher density and larger arrays to enable higher performance 3-D imaging, as well as to create new lasers to increase our opportunity within other consumer mobile devices. We are also focused on planting seeds for growth in markets beyond consumer electronics. We have unmatched and invaluable experience in 3D printing lasers for consumer electronics applications and broad industry leading photonic capabilities used across other markets. We believe this gives us a competitive advantage as we pursue emerging long term opportunities outside of consumer electronics. In the past quarter, our victories have completed the important ABC automotive qualification to a module partner, and we expect initial deployments of these products to be an automobile in cabinet applications. We are also now sampling high powered big solar arrays into light, our four last mile vehicle applications. According to our customers, these last mile applications could be one of the largest wider opportunities in the next several years.
[00:10:47] In addition, we are also sampling or our main qualification with major tier one auto suppliers for broader automobile opportunities that will deploy and develop over time. We are making progress in security and access control markets. We are already shipping in volume for facial recognition on payment kiosks. We are engaged with providers of security and access control systems who are looking to, as we sensing, to enable touchless or contactless high security access control. These applications are also accelerating due to public health and safety concerns. Turning to commercial lasers, revenue decline, 37 percent, quarter on quarter, this is a larger decline than we had assumed in our guidance given our customer mix. This decline was related to manufacturing weakness outside of China. We expect second quarter lasers to be flat to modestly. We believe that it will be several quarters before we get back to the revenue levels we saw in fiscal twenty twenty on the new product front, our latest 12 kilowatt fiber laser engines are now shipping to our lead customer for their newest platform. Additionally, we are very proud that our peekaboo A3 was recently recognized by laser focused world with an innovators award for being one of the most innovative products impacting the photonics community this year. I want to provide some color on our business with wholely given the regulatory restrictions that were announced in August.
[00:12:20] Sales have always declined in the first quarter and were less than 10 percent of total company revenue. In the second quarter, our guidance contemplates sales to what we could decline further due to the regulatory restrictions. Beyond the second quarter for modeling purposes, we currently expect sales to walkway to be less than five percent of quarterly sales before handing it over to watch it, to give you the numbers. I want to thank and acknowledge all of our employees around the world. They are the ones who have put us in such a great position financially, as well as with our technology and product leadership. They have been incredible, especially so working through the pandemic. This is a site each having their own personal challenges, living and working in these times. In addition to our business goals, contributing to society and our local communities is very important to momentum and to our employees. We are committed to the highest standard of social, ethical and environmental conduct and responsibility. This includes promoting safe, diverse and inclusive workplaces free from discrimination and harassment. Again. Thank you to all of our employees, they are absolutely the company's greatest asset. I would also like to thank our customers, suppliers and shareholders for their continued support and partnership during these challenging times. With that, I'll hand it over to Wajid.
[00:13:47] Thank you, Alan. Good morning, everyone. Turning to the first quarter's numbers, net revenue for the first quarter was 452 point four million, which was up 23 percent sequentially and one percent year on year. Gross margin for the first quarter was forty five point five percent gap. Operating margin was twenty one point nine percent and gas diluted net income per share was 86 cents. First quarter non-cash gross margin was 52 percent, which was up 480 basis points sequentially and up 620 basis points year on year. The sequential and year on year growth was driven by an improvement in product mix and acquisition synergies, as Allen highlighted, this record gross margin performance demonstrates the improvements we have made in our financial model. First quarter non-GAAP operating margin at thirty three point seven percent, increased 890 basis points sequentially and 640 basis points year on year. Improvements were made by gross margin improvements as operating expenses were approximately flat, with the comparable periods non-cash operating expenses totaled eighty two point seven million or eighteen percent of revenue. Aschiana expense was thirty six point eight million. R&D expense was forty five point nine million. Operating expenses continue to be a little lower than normal run rates due to covid-19 reducing travel trade show and other expenses. First quarter nine net income was one hundred and thirty nine point two million. This includes 900000 of net interest and other income and fourteen point two million of tax expense.
[00:15:40] Other income is down sequentially as interest rates on our cash and short term investments are lower overall and we are being conservative in our investment portfolio. Non-cash, diluted net income per share was a dollar 78 based on a fully diluted share count of seventy eight point two million. Now, turning to the balance sheet, we ended the quarter with one point sixty one billion in cash and short term investments, up 57 million quarter on quarter. Strong growth in our accounts receivable during the first quarter should lead to an even stronger cash generation in the second quarter. We have one point five billion in aggregate principal convertible notes and no term debt. Of these convertible notes, 450 million is due in 2024 and one point zero five billion is due in 2026. The total cash interest expense associated with these notes is approximately six million dollars per year. We are well positioned financially with a strong margin model, high levels of cash and low interest expense, as well as long maturity financing. Turning to segment details, first quarter optical communications segment revenue at 428 point five million increased twenty nine point seven percent sequentially due to 3D sensing seasonality and growth in telecom and datacom. Year-on-year optical communications segment revenue increased three percent due to higher telecom and datacom revenue, particularly in datacom, due to strong growth in our chip business optical communications segment, gross margin at fifty two point five percent increase to 590 basis points sequentially due to due to a better product mix with higher chip related revenue and increased 640 basis points year on year due to a more favorable product mix.
[00:17:43] Improve telecom and datacom margins and acquisition synergies. Our leaders segment revenue at twenty three point nine million, decreased 37 percent sequentially and 29 percent year on year first quarter, Lazar's gross margin decreased to forty three point five percent due to the significant reduction in manufacturing volumes. Now on to our guidance for the second quarter of fiscal 21, please note the outlook we are providing is on a nine gas basis and are based on our assumptions. As of today, we expect net revenue for the second quarter of fiscal 2001 to be in the range of 465 million to 485 million. This revenue projection includes telecom and datacom increasing sequentially, industrial and consumer being flat to up modestly, quarter on quarter and commercial. Lazar's also being flat to up modestly quarter on quarter. Based on this, we project second quarter operating margin to be in the range of 32 to 34 percent and diluted net income per share to be in the range of a dollar seventy to a dollar ninety. These projections incorporate an increase in operating expenses, primarily due to an increase in R&D as we invest in new products and technology and approximate share count of 79 million and an estimated other income of zero point five million, as well as an estimated tax expense of 15 million.
[00:19:26] Before wrapping up, I'd like to make a few important comments about our financial model, it might be helpful to refer to the earnings slide deck on our website for the following points as well. When we announced the acquisition of Acquaro, we put forth a target financial model with a gross margin range of 40 to 45 percent and an operating margin range of 22 to 28 percent. For the trailing 12 months from the end of the first quarter of fiscal twenty to the end of the first quarter of fiscal 21, we exceeded this target model. We believe we will continue to grow margins over time due to further improvements in product mix efficiency and operating leverage. As such, we are now increasing this annual target in our mid-term financial model. Our annual gross margin target moves up to 50 percent and our annual operating margin target increases to 30 percent. We don't expect to exceed these new targets for the current fiscal year due to 3D sensing seasonality, as well as regulatory restrictions on sales to Westerway impacting the second half of the fiscal year. With that, I'll turn the call back to Jim to start the Q&A session. Jim?
[00:20:47] Thank you, Wajid. Before turning the call over to the operator to start the question and answer session, I would like to ask everyone to keep to one question and one follow up that should help us get to everyone before the end of our allotted time. Operator, let's begin the question and answer session.
[00:21:07] Ladies and gentlemen, we will now begin the question and answer session to ask a question, you may press star and then one. If you are using a speakerphone, we do as you please pick up your handset before pressing the keys. To withdraw your question, you may press star and to forget that a star and then one to ask a question. Our first question today comes from CIMIC strategy from JP Morgan. Please go ahead with your question.
[00:21:34] Thank you. Hey, good morning, thanks for taking my question. Alan, I just want to start with the telecom group. I think a lot of key customers like Worryin CNR over the last two to three months are wondering if you can go into a bit more details to share thoughts about how sustainable telecom demand is given the changes we're seeing and what's driving the delays and the Bouchard's that you talked about. Is it kind of more focused on a particular geography or is it kind of broad based? And then I have a follow up. Thank you.
[00:22:08] Sure, I mean, if you looked at our guidance in this script, we talked about telecom and datacom actually increasing in fiscal Q2, so we're pretty confident that we'll have growth in telecom this quarter.
[00:22:21] I'd say we were probably expecting higher growth, but due to, you know, some deployments not happening as per the original schedule, I think mostly due to covid and the ability to get out into the field and deploy these networks. We've seen some slowdown, but we're still expecting growth across the globe in fiscal second quarter.
[00:22:46] So anything on what's driving the delays, is it more likely to be on the geography's it looked like 50.
[00:22:55] Well, we as I said in the script as well, we did see some delays in the demand for our datacom chips for 5G deployment, mostly in China, but that is easily taken up by demand, strong demand in hyperscale cloud data centers. And so we've had to shift our wafer starts in our datacom business to towards more the higher speed inside the data center applications. But I'd say that is one area that we saw some delay in the deployments slower than expected in our 5G deployments in.
[00:23:34] Ok, and if I can follow on 3D syncing the industrial and consumer group guiding to flat to modestly up, but I think relative to kind of the guidance you had last quarter where you sounded a bit more concerned about December being the peak in revenues, I'm just wondering if anything's changed on that front or what are your assumptions in relation to new market share when you're to gaining that for the December quarter?
[00:24:01] Yeah, as we said, throughout fiscal Q1, demand came in stronger than expected and stronger than we had guided in our August haul. We've had a very strong October and, you know, expect flat to slightly up. Now, that could change depending on how successful our lead customers launches. But so far, everything looks positive. I do think one one thing that may be a little different this year is that we expect some of the demand that would typically be consumed in the December quarter to roll into the March quarter.
[00:24:37] So that's perhaps the dynamic that maybe wasn't contemplated earlier.
[00:24:44] Our next question comes from Rod Hall from Goldman Sachs, together with your question.
[00:24:49] Yeah, thanks for the question, guys. Nice job on the earnings here. I wanted to start off with the just order trajectory orders trajectory here recently in the last few weeks. Now that the new let's call him the lead customer phones have launched. I wonder if you guys have seen any change in 3D sensing or trajectories or. That's all been pretty constant the last couple of weeks. And I have a follow up.
[00:25:16] Well, I mean, we've seen strong demand and through to August and September and it carried through October, so, you know, it's more of a front end loaded quarter now that could carry throughout the balance of the quarter. But, you know, our guidance doesn't contemplate that. So I'd say we're in a good position as far as market share.
[00:25:38] I think you'd have to ask our competitor because he doesn't give the numbers and our customer doesn't tell us what share we have. We have a contractual obligation that they abide by at a minimum, and we're fairly confident that that's certainly being abided by.
[00:25:55] Ok, thanks for that. And then I wanted to on data datacom, just check the capacity situation and ask if you could give us any idea more specifically when that fab capacity comes on and how much more fab capacity. Are you adding proportionately? Can you just kind of give us some idea of what's going on with capacity there?
[00:26:17] Yes, he said me on this call. We're expecting to buy Chris, you might have to correct me double the wafer capacity over the next 18 to 24 months.
[00:26:29] It does come in in chunks and our cycle time for datacom wafers is more than a quarter. So like I said in the script, as we see a shift from five G to data center, that takes time to move over. So in the short term, you know, we're going to be constrained on those data center chips. I would say that, you know, could we go from where we are today to double that in revenue and volume? I'd say that there's probably some offsetting price reductions over time that would offset some of that. But our expectations are that we have plenty of demand two years from now to consume twice what we're producing to the.
[00:27:16] You can see island with Netflix. Keep in mind, some of the newer some of the newer chips have are bigger and so they consume more real estate on a waiver. So it may not be more out there, but it may not be doubling up units, but it would be doubling of wafers as the newer, newer 200 gig chips that I talked about are actually larger in issue of chips per.
[00:27:44] Ok, but you can't say when the next big chunk of capacity comes on.
[00:27:49] Oh, I would say probably, you know, middle of next year, we'll see some step up of perhaps, you know, we're getting incremental capacity. Last quarter we grew six percent. You know, we're going to continue to get some incremental improvement through yields and productivity. But I'd say probably middle of next calendar year would see a step up of installed capacity to be able to take advantage of the second half of the year.
[00:28:17] Our next question comes from Alex Henderson from Needham and Co. Please go ahead with your question.
[00:28:22] Great, thank you. Can you hear me OK?
[00:28:25] Yes, Alex, thanks.
[00:28:27] Perfect. I wanted to go into the rhythm side of the business, obviously very good performance in and Biem, I would assume that that's more Western accounts than Wiley. Wiley, as I understand, tends to do, you know, more of the lower speed stuff. So given the strength of demand there, isn't this somewhat tied to the timing of chassy deployments, in which case slower chassy sales would slow down the demand growth there, at least temporarily? So I was wondering if you could talk a little bit about that aspect of it and to what extent, you know, you're adding capacity, what rate of capacity, as you're looking at in timing around that would be very, very helpful. I appreciate it. Thank you.
[00:29:19] Sure, I think as we look at the very high court count and the and as I said in the past, China was leading the way, but the rest of the world was following him. And I say that today we're seeing that rest of the world start deploying in a meaningful way. And so I expect that the non way business for our high court counting and buy in will grow dramatically over the next 18 months. I'd say that we are adding capacity. That's the ads take six to nine months. So the decisions we made that are adding capacity today happened in the first calendar quarter. Those are coming online now. So we're expecting to continue to add capacity as the rest of the world puts these in their mainstream systems to get deployed in, you know, later this year and into calendar 21.
[00:30:13] Can you give us any calibration on the size of those capacity ads and whether you're planning the next step for, say, the first half of next year?
[00:30:27] Well, I mean, I think if you look at what we said, the NBN grew 30 percent last quarter, you know, that was a big chunk coming online, but that's not going to come online this quarter.
[00:30:38] I'd say that we probably have more NBN coming on in the first half of next year as our non railway customers are really starting to have meaningful deployment. That's our expectation at this point.
[00:30:56] Our next question comes from Tom OMalley from Barclays. Please go ahead with your question.
[00:31:01] Good morning, guys, and congrats on the nice results. My my first question is on the really strong gross margins. Could you talk about what's driving the outcome? Communications. You mentioned product mix a couple of times, and I assume that from that larger customer rolling on, but you also up your long term range. So is there some real gains in the core telecom and datacom gross margins? And can you kind of break out, you know, what the contribution is for the better margins? Is it just the customers, but also some real gains in that core business as you move more towards chips?
[00:31:33] Time to watch it, I'll take that one and then Alan and Chris can follow up, see, I, with the strong gross margins, were obviously driven by a very strong product mix. We've also had an accumulation of synergies that we talked about for a number of quarters that have added up and have added to our overall financial model, our datacom chip business, increasing six percent quarter over quarter. That was all chip business as well. And the gross margins on those product lines are are quite healthy. To your question on the long term model, really the long term model assumes that our Lazar's business comes back up and and starts running at a normal run rate again. And, you know, one of the reasons we haven't said that will exceed the long term model for for this fiscal year is because we expect to have our largest business continue to be weak into the back half of the fiscal year and then expect it to improve as we move into fiscal year 2002. And so that's what's really giving us confidence in our overall company. Long term gross margin model, being able to achieve over 50 percent gross margins is really lasers coming back and having OPCON continuing to improve with all the capacity improvement that Alan talked about in datacom, chips in our 3D sensing business, especially the new products and 3D sensing, continuing to have an uptake, as you can appreciate, that's just starting to get going. And we expect that to be a real success helping us into the next few quarters.
[00:33:07] That's up on my follow up, was really on the datacom business, you mentioned there were some push ups and five guys in the front hall related product, but then you mentioned that there was some strength in the hyperscale business. Where are you seeing that strength? And is that something that you expected or is that something that you recently saw pick up?
[00:33:26] Hey, Tom, this is Chris, so yes, the five G is is from Paul related. And as you can imagine, he's five deployments, at least initially. If he concentrated in China and we've seen a slowdown from those customers, given the ecosystem around 5G in China is is, you know, affected by what's going on in the geopolitical regime and in regulation time on wall. But, you know, as we've talked about in prior quarters, we've had, you know, multiple quarters of of backlog and in our datacom business. So not a not a big surprise that there's very strong demand for our chips going into data centers. And I think that's a combination of both our type of customer that we supply into in in in datacom, i.e. the transceiver customers winning more business within the hyperscale cloud operators, as well as our relative competitive position as a speeds increase and more performance is needed as you go from 40 to 100, 100 to 200, 200 to 400, our footprint in those customers tends to increase.
[00:34:53] Our next question comes from John Marchetti from Stifel. Please go ahead with your question.
[00:34:59] Thanks very much. I wanted to touch on the railway outlook that you gave both for the December quarter as well as the second half of the year. I just wanted to get a little bit of an understanding from the, you know, the reduced outlook. How much of that is is really based on actual restrictions of what you are allowed to ship versus, you know, always maybe overall demand declining because of their lack of access to some other products that they can't get for the full full bore materials.
[00:35:33] I'd say it's a combination of both, right, and when you look at what we ship into one way, you know, there's still strong demand for all of our telecom and datacom products. There's some of those products we cannot continue to ship. And so I'd say the majority of the reduction from being greater than a 10 percent customer a few quarters ago to today, less than 10 percent and going down below five percent, most of that is due to regulatory restrictions.
[00:36:03] And, you know, a little bit is based on on demand. I'd say that like in the consumer products.
[00:36:10] Ok, and then what if I can follow up on some of your gross margin outlook comments, if we think about that laser business getting back into sort of the mid to upper 40s or maybe even a 50 billion dollar sort of quarterly run rate. How much upside off of this? You know, sort of forty three and a half that you did this quarter. Should we expect there to be.
[00:36:31] Well, I mean, in fiscal Q4, where we had a thirty seven dollars million quarter for Lazar's, we were above 50 percent gross margins. And so we have, you know, different margin mix within our latest business itself with some of the products in achieving better gross margins. But our new products, the lasers, are expected to be well above that. And so, you know, that gets into the 40 or 45 million dollar range. We should see a nice a nice bump back into the 50 percent gross margin line for Lazar's.
[00:37:07] And our next question comes from Simon Lippold from Raymond James. Please go with your question.
[00:37:13] Thanks for taking the questions. First, I wanted to just get a better understanding of the issues with way in that you talked about some level of sales below 10 percent in this quarter, which we understand, and then the outlook eventually getting below five percent. I certainly know that zero is also less than five percent. But why does the value not to the zero, could you help us understand what are the key aspects of the rules that allow you to do business with the way that we a positive number. Thanks.
[00:37:48] Yeah, we're not going to get into the details of the restrictions and our products and which ones to buy, which ones are in to the restrictions, and not other than just to say, you know, the business with layaway is becoming less material for our future business.
[00:38:07] And down below five percent, whether that's zero or four and a half percent, is still TBD at this point. And we try not to guide more than one quarter at a time, but we wanted to get some color around our expectations that it's going to continue to go down and become even less meaningful to our overall business in the second half of the fiscal year.
[00:38:28] And then just understanding you don't want to guide beyond a quarter. I think it would be helpful to everyone if we could at least get some qualitative aspects around the March quarter seasonality in that you've got a couple of odd things going on this year where you're 3D sensing it's time shifted from September to December, creating a tougher comparison. And then you've got the whiteway issues we just talked about. So maybe less China business, which usually affects seasonality. Could you help us understand a little bit about how your seasonality may be different in calendar 21 versus prior years?
[00:39:10] Well, I'd say and Chris can jump in as well and say that, you know, our China business is impacted by the restrictions at Wall Way. And I think if you just take a look at where they have been, where they were in the September quarter, where we're expecting them to be in the March and June quarter, I think you can take five to eight percent of our revenue out as a result of that. And so, you know, that's that's a broad range. And, you know, things things are going to change. Things are going to change probably tomorrow. Who knows? But that's our current expectation as far as 3D sensing is concerned. You know, we've taken a very conservative approach on on Android. So I'd say that our expectations are input is very small in the first half of next year, although we're working with many of the customers to make sure that if or when they decide to put 3G sensing into their mainstream phones will be there for them. And I'd say that for our customer, you know, they don't they don't really tell us our our expectations are that there is some strength in 3-D sensing in the March quarter, more than normally given the later launch of the product line.
[00:40:25] To answer your questions on.
[00:40:33] Our next question comes from Adam Marshall from Morgan Stanley. Please go with your question.
[00:40:38] All right, thanks. Just wanted to get a sense of, you know, maybe coming back to Wall Way as that business kind of winds down a little bit or is restricted a little bit, just are you seeing any broadening out of demand from other kind of China optical vendors? And then maybe second, just you know, you talked a lot about the auto opportunity just in terms of, you know, general timelines. We should be thinking of four maybe in cabin and out of cabin. Thanks.
[00:41:09] Sure, I'll take the wall, we want to let Chris answer that, the auto one. I'd say that there's activity around traditional carriers that have been relying on way, but that takes time, meaning there's nervous carriers that don't want to rely on layaway.
[00:41:30] And I think that's natural. I'd say that, again, that's probably a multiple quarter thing before that that billing cycle and the responses turn into deployments. So I think it's happening. I don't think there's a slowdown in bandwidth demand. And so networks are going to need to continue to be built and bandwidth is going to need to continue to grow. So I think that, you know, if you look at our share of wallet of other customers, it's actually a long term positive trend for us. It's just a matter of the air pocket between now and those new deployments happening. I'd say that's two to three or four quarters.
[00:42:13] This may be just following up right there on that real quickly, I mean, just in terms of understanding kind of overall global share, but just in terms of selling it to ZTE or more China specific rather than just kind of the shares, what's taking place there?
[00:42:30] Well, we've seen strength in our nonwar way, China customers over the last several quarters and really, you know, consuming high end rodenas, consuming high end coherent transmission components and modules. So I don't know if that's a result of the wily restrictions or results of our products being no state of the art and leading edge, and that we're going to continue to see growth from those customers, you know, over the short and mid-term time horizon. Our next question comes from Chris, there was a question about all of you.
[00:43:15] Yeah, yeah. So we're playing into automobiles in multiple ways, both in cabin as well as outside cabin for for, you know, driver assistance systems or in the case of autonomous vehicles, you know, sensor system to, you know, enable the car see in order to go, i.e., light our systems. And and as Alan highlighted on the call, you know, in the past quarter, we we've qualified in a model level product that enables in cabin applications. Europe is is really leading the way for cabin driver monitoring systems. They have, you know, regulations that that require it to to be installed in vehicles, I believe, starting out in calendar 22 in cabins, probably the smaller of the opportunities relative to the outside cabin opportunity in in are all of these are long term markets. They don't really start taking off out into the 23, 24, 25 timeframe. Even then, the penetration is relatively low. But over time, we believe these become, you know, multi 100 million dollar opportunities for parliament and even at the laser level. And we are definitely supplying at the laser level have opportunities to move up to to the module level where the dollar content might be a bit higher. But what's really critical is, is because these markets take a long time to get designed in and qualified and eventually ramp up. We need to plant those seeds today, get designed in with what module integrators and ultimately Tier one auto manufacturers. And that's really what we wanted to highlight today, is that design and activity and had traction is happening.
[00:45:21] The next question comes from George Naughton from Jefferies. Please go ahead with your question.
[00:45:27] Hi, guys, thanks very much. I wanted to ask the three dissenting question, is there you know, obviously the parts that you're shipping into your lead customer are all new this cycle, or maybe most of what you're shipping into that customer is brand new. Is there is there some desire to build an inventory safety stock, you know, by your large customer as they shift over to those new parts? And I think, Alan, you were referencing something about March, you know, consumption sell in versus sell out. Can you just talk about how you see inventory at that customer? Thanks.
[00:46:06] You know, George, we really don't have a lot of visibility into what is the inventory of modules and consumer devices beyond when we ship a voxel chip to the module integrator. So sorry, I'm not to be able to provide a ton of color on on what that looks like. I will say, though, that that through the quarter we saw upticks in the demand, which would tell me that something changed, whether it's a share shift or. Haitians responded in customer demand.
[00:46:44] And so that's you know, that's the only kind of color I can give you on inventory or what's going on at our customers level.
[00:46:53] That's OK, that's helpful. And then one last one linearity, I noticed that the day sales outstanding calculation was was pretty low relative to what you guys typically reported in recent quarters. Was the quarter front end loaded linnear. How would you characterize it? Thanks a lot.
[00:47:17] Watch it here on news, I think.
[00:47:20] I'm sorry, but at the UN button, our Cordoba's was pretty similar to previous quarters in terms of overall linearity, you can see shifts and customers in terms of their own linearity, and that can have an impact on our DSOs, just depending on what the payment terms are with with each one of them. And then sometimes, you know, they'll come along and either pay within the first couple of weeks of the new quarter or the last couple of weeks of at the end of the quarter, depending on how their batch processing works. And we're expecting our cash flow to be significantly better. And in fiscal Q2 versus fiscal Q1, just given the type of profitability we've achieved during the quarter. So all be good from a cash flow standpoint.
[00:48:13] In our next question comes from Anada through from Leupp Capital. Please go ahead with your question.
[00:48:19] Hey, good morning, guys. Congrats on the results and thanks for taking the question. Just two quick ones for me, if I could, as sort of the comments about two to four quarters their pocket to make of some of the warming that does that kind of specific or is that is that a worldwide remark? And then I have a quick follow up.
[00:48:41] Yeah, I mean, I don't have a crystal ball, but I'd say that, you know, there is activity today outside of China where traditionally Chinese while based carriers are looking for other suppliers. And that's that's what my comment was around.
[00:48:59] It was outside of China. It's probably two to three quarters before that kind of activity turns into revenue for us and revenue for our network equipment manufacturing customers.
[00:49:13] That's that's really helpful. And just a quick follow up on gross margins, you got to give you context around what is in this quarter. To what extent and sort of with regard to the new long term model, does capacity utilization play a role? Obviously, Max does. And then are there any other factors besides the capacity utilization that includes the margins, meaningful long term, the gross margin?
[00:49:39] Yeah, I'll start with that one, so it's not just capacity utilization, but the additional capacity is going to help us quite a bit from from a gross margin standpoint. And and Alan talked about the fact that we're seeing improving yields and productivity to get more supply to meet demand for our datacom products. And obviously that's helping as well. You know, the one thing we noted earlier that I'll note again is really our laser is acting as a headwind to our overall corporate model. Our Ofcom segment has has very strong tailwinds in it, whether it's our telecom transport business or telecom transmission business or telecom datacom business, as well as 3D sensing with with our new products and new opportunities we've got there. So as EPS lasers come back up from an overall revenue standpoint and capacity utilization within our own fabs for laser products improves, we should see the nice bump up. I pointed out earlier that I'm thirty seven dollars million of Glaeser's revenue in fiscal Q4. We had above 50 percent gross margins. And so really that's because of capacity utilization, helping us improve our overall Lazar's gross margin profile, which obviously helps to consolidate the company. So so it does play a pretty big part of it.
[00:51:05] Our next question comes from Chris Rolland from Susquehanna. Please go ahead with your question.
[00:51:11] Thanks for the question and I'll also echo my congrats on the quarter as well. My first question was kind of higher level. I was wondering if I could get your thoughts on the Marvell and EnVie proposed acquisition and kind of what that means for your outlook for vertical integration in optical. And, you know, whether this changes your strategy in terms of, you know, what it might be appropriate to tie up with another company or whether you think you can go it alone, alone for now and and forever, perhaps. But, yeah, just just your high level thoughts there and how you you might execute going forward.
[00:52:01] Yeah. Hey, Chris, this is Chris. So, you know, I think the the the fact that inci was was picked up by another semiconductor company as opposed to, say, a network equipment manufacturer really means that at least our view is that they will that will remain a merchant ICEE supplier, less clear whether they will be as focused on on providing, you know, modules for the where we may compete with by on the future. That still remains to be seen. So I think overall, from our standpoint, this doesn't necessarily change the landscape very much in that one. You know, fabulous semi company becomes another fabulous semi company. And and, you know, if we were purchasing products for them, that you buying it from a from Marvell as opposed to buying from inside is probably not not a not a big change for us as opposed to, for example, other deals that have been out in the industry, Acacia being acquired by Cisco over the longer run. I mean, I think we're very, very confident in our our ability to to compete and prosper in the telecom market with with our industry leading in Indian phosphide components. That's really where where we see our differentiation. And, you know, what we choose to do from from that forward on whether that be organic development or and enable that, you know, if or when something happens there.
[00:53:50] Thank you for that. And then just a couple housekeeping, I don't know if you offer any other details around things like a book to bill or changes in lead times or perhaps capacity utilization.
[00:54:08] Yeah, we typically don't do that unless there's something to highlight, like our to come chip backlog is, you know, very large and capacity constrained and will be such for some period of time, similarly. And ah, with that in our Indian side, we're prepared with this strong demand and 600, 800 gig modulators that's that's capacity constrained.
[00:54:32] And so but beyond that, we typically don't give a book to bills or backlog because some of it doesn't really mean much in that a lot of our customers are on BMI agreements and some of our customers are, you know, placing long lead time over long lead time purchase orders one year in advance. And so it kind of fluctuates what's going on with book to bill and backlog. But I'd say that, you know, where our guidance contemplates, you know, normal run of the mill type of demand that is strengthening across the board.
[00:55:13] In our next question comes from Tim Salvio from North Korean capital markets. Please go ahead with your question.
[00:55:21] Hi, good morning and congrats on the results. I wanted to focus in on telecom datacom from his perspective in particular, it looks to be where you expect the growth here this quarter and maybe even more notable, given the anticipated declines, further declines at Huawei. So, you know, when you look at what you're effectively going to kind of the Midpines percentage sequential increase, I think you've already called out. ROADM as the primary driver of that growth, but I just want to confirm that and maybe get your comments to expand. You know, I met his question earlier seeing increased traction among other Chinese OEMs. But I wonder if he commented on more broadly about customer diversification globally and what might be driving that strength. So some pretty strong optical results out of Nokia, for example, last week. So I guess the overall question is about growth drivers for that sequential guide and what you're seeing from them, kind of an OEM diversification standpoint globally.
[00:56:38] Yeah, so we said that a lot of the growth is coming from from our relatives as we're, you know, adding capacity and trying to meet the strong demand of our high end roads, we're also seeing strength in the higher speed, coherent components like our 600 to 800 gig modulators and teenagers. Those are probably the two big areas, datacom chips with the shift between 5G and hyperscale. That's probably not an area where we'll see huge growth because of, you know, repairs to it.
[00:57:15] And so I said most of it's coming from those two areas and modems and it will pass Christian, meaning that on that.
[00:57:25] No, I mean, I think that the key point, really, Tim, is, is if you go back, you know, pre pandemic, we've we've been preparing, if you will, for the next generation systems, whether they be four, six, eight under a gag, whereas the 100, 200 gig systems are kind of grown long in the tooth where where transport products are going into those systems have have softened. That's why Rodent's came down late last year. And then obviously the pandemic, you know, caused disruption in our ability supply. We're we're catching up with that. And and really, the growth is being driven from a product standpoint across high end or and the newest coherent components from our OEM diversification standpoint, there's not a lot of new OEMs per say out there. So we're we're pretty well covered. I think what what we're we're seeing, though, is those new products that are growing typically start in, you know, one ish customers where your lead customer, when you're developing design in and then proliferate across a broader customer sets. And I think as we highlighted in the script, something like the NBN roadmap is something that initially started in China and is now proliferated across a broader set of customers. We anticipate the same thing happening with the 600 800 gig, high speed coherent components as well as our our DCO modules. Providing a broader customer set for those individual products doesn't necessarily mean we're adding new customers, per say.
[00:59:16] But ladies and gentlemen.
[00:59:18] We only had one 10 percent customer last quarter, so the customers investigation is happening and I think we'll continue to see that.
[00:59:27] So, Jamie, go ahead.
[00:59:31] And ladies and gentlemen, we do have time for one additional question. This question comes from Tom Diffely from D.A. Davidson. Please go ahead with your question.
[00:59:39] Yes, good morning. Just one final question on really sensitive. What is your view of the relative value pricing or margin differences between the standard and the world facing componentry? So.
[00:59:58] Not not really much difference at say that, you know, this is a this is a product cycle where refresher of all of the chips kind of resets expectation on pricing. And and we've been able to come up the yield and productivity curves quite strongly on both the front facing and world peace and chips. So I wouldn't say that there's a meaningful difference in margin or revenue per wafer area percent.
[01:00:32] Great. That's it for me. Thank you.
[01:00:34] Thanks, Tom.
[01:00:38] And ladies and gentlemen, with that, we'll end today's question and answer session. I'd like to turn the conference call back over to Kim Snoopy's for any closing remarks.
[01:00:50] Thank you, operator. This does conclude our call for today. We would like to thank everyone for attending and we look forward to talking with you again when we report the second quarter fiscal 21 results. Have a good day.
[01:01:04] And ladies and gentlemen, that will conclude today's conference, we do thank you for attending. You may now disconnect your lines.