Lumentum Holdings Inc

NASDAQ:LITE

Earnings Call Transcript 2020-Q3

[Operator]

Good day, everyone, and welcome to the Lumentum Third Quarter Fiscal Year 2020 Financial Results Conference Call. As a reminder, today’s call is being recorded for replay purposes through May 12, 2020.

I would now like to turn the conference over to Mr. Jim Fanucchi of Darrow Associates. Mr. Fanucchi, please go ahead.

[Jim Fanucchi, Darrow Associates]

Thank you, Operator. Welcome everyone to Lumentum’s third quarter fiscal 2020 earnings call. This is Jim Fanucchi from Darrow Associates, assisting Lumentum with its Investor Relations, and 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, including potential market sizes, market trends and our position in such markets, the impact of COVID-19 and responsive actions there too on our business, our partners, and the global economy, trends and expectations for our products and technology, including product development and projected new product releases, purchasing trends and demands for our products, our expected financial performance, including our guidance, expenses, risks and uncertainties associated with potential disruption, caused by the COVID-19 as well as statements regarding our business initiatives and the achievement of synergies following our acquisition of Oclaro. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.

Lumentum encourages you to review our most recent filings with the Securities and Exchange Commission, particularly the Risk Factors described in our SEC filings, including the company’s quarterly report on Form 10-Q for the fiscal quarter ended March 28, 2020 to be filed with the SEC later today and Lumentum’s annual report on Form 10-K for fiscal year 2019 ended June 29, 2019.

The forward-looking statements provided during this call are based on Lumentum’s reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update these statements, except as required by applicable law. Please also note, unless otherwise stated, all results and projections discussed in this call are non-GAAP. Non-GAAP financials are not to be considered as a substitute for or superior to financials prepared in accordance with GAAP.

Lumentum’s press release with the third quarter fiscal 2020 results is available on its website at www.lumentum.com under the Investors section and includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP results.

Lumentum’s website also contains our latest SEC filings and supplementary slides relating to today’s earnings release and the company encourages you to review these documents. In addition, a recording of this call will be available by 11:30 AM Pacific Time today on our website.

Now, I will turn the call over to Alan for his comments.

[Alan Lowe, President & Chief Executive Officer]

Thank you, Jim. Good morning, everyone. At the outset, I want to thank our employees. They have been incredible through this crisis despite, each having their own personal challenges, living and working in these times. They are the ones that have put us in such a great position, both financially, as well as with our technology and product leadership. Employees are absolutely the company's greatest asset and my top priority is protecting the health and well being of our employees and their families.

I'd also like to thank the rest of our stakeholders, including customers, suppliers and shareholders for their support in partnership. Well, everyone is surely facing difficult challenges all have been constructively focused on overcoming these challenges together.

After protecting our employees, my next highest priority is ensuring we do everything we can to help our customers. This is both in the supply of products as well as the execution on new products to ensure future success for our customers, and therefore us.

Third quarter demand was very strong. Our revenue was within the range of our prior guidance, but on the lower end due to COVID-19 related challenges that rapidly accelerated late in the third quarter, as the virus quickly spread outside of China. COVID-19 is dramatically impacting our fourth quarter outlook. We estimates that COVID-19 will impact the fourth quarter revenue by more than $90 million, as the midpoint of our guidance is more than 20% below what we were anticipating for the fourth quarter, before the brunt of our challenges from COVID-19 began.

Little more than half of this $90 million is a result of our inability to supply communication products, due to both component sourcing and production limitations and the balance from reduced consumer and industrial market demand. We estimate that the COVID-19 related revenue reduction lowers projected fourth quarter earnings by more than $0.50 per share. While we continue to react tactically to address the rapidly evolving and fluid situation, COVID-19 does not change our strategic focus or diminish our long-term opportunity.

Our strategic focus since we became an independent public company has been product and technology leadership with close customer partnerships in markets that we expect will have strong growth and will be healthy over the long-term. In addition, we have focused keenly on disciplined management over our operations, investments and capital structure. We believe we are seeing the benefits of executing with this focus. We have attained sustainable technology leadership positions that make us indispensable to the markets we serve.

Additionally, we have become financially strong with industry leading profitability and a very solid balance sheet. We believe COVID-19 will accelerate the shift to increasingly digital and virtual approaches to work, entertainment, education, health care, social interaction and commerce around the world. This accelerating shift will stress the world's communications and cloud networks, and should therefore drive the need for higher volumes of high performance optical devices. We believe this will favorably impact our communication business over the long-term.

We also believe this accelerating shift will favorably impact our laser and 3D sensing clients of business over the long-term. As more secure devices and other hardware that are easier to interact with more autonomous will be needed to consume, produce and communicate digital and virtual content. Because of these trends, we believe our strategy is even more apt than before. Further, because we believe the markets we address are driven by accelerating long-term growth trends and are critically dependent on the types of products and technology we supply, we are planning to continue to invest strongly in innovation and new customer programs.

By doing this, we expect to drive our growth and further our market leading positions. Our investments will continue to be guided by the strong strategic and financial discipline that has gotten us to this point. I want to be clear, that we are also laser focused on driving increased efficiency and cost savings in all of our operations to further bolster our financial strength. As we rely on a highly global supply chain, before discussing product line details, I think it is valuable to provide you with some details on the status of our operations around the world.

We responded to the COVID-19 outbreak early and rapidly all oversights. We quickly implemented company travel restrictions and cancelled participation in external events like tradeshows and conferences in February. In early March, many of our employees started working from home. We have not laid off or furloughed employees, including those who are not able to perform their work function from home.

We're also helping the communities in which we operate sample. For example we have used our commercial supply chains to procure and donate Personal Protective Equipment or PPE to health care providers. Our employees have been leveraging internal capabilities to produce and donate limited quantities of PPE. And we've also expanded our charitable donation programs.

In nearly all of our locations around the world, local governments have mandated social distancing measures, including shelter-in-place orders. We are deemed an essential business by these local governments due to the key role we play in the global supply chains of critical communications and healthcare systems. As such, we have been encouraged and permitted to continue operations, regarding our factories in Asia which perform assembly and test operations.

In China, because we had a large number of employees working through the Lunar New Year holiday due to strong demand for products, we're able to quickly ramp up production from our Shenzhen factory after the extended Lunar New Year holiday. However, our Shenzhen factory was impacted in the third quarter by challenges and obtaining components from third-party suppliers inside and outside of China. Our component supply is improving there continues to be some impact in the fourth quarter.

In Thailand we rapidly implemented employee protective measures in the third quarter. These measures had not limited output so far, but production in Thailand has been impacted by the same challenges that are Shenzhen factory is experiencing with sourcing components.

In Malaysia, we use a contract manufacturing partner for the majority of our telecom transmission revenue, but was significantly impacted late in the third quarter, due to the Malaysian government movement control order issued on March 16. We had no production for several weeks after this, but had been slowly ramping production since then.

Over the coming weeks we expect to return to production levels close to those prior to the government order. Our wafer fab to the U.S., Japan, and the U.K., are all operating the some at lower efficiencies than before, due to implementing social distancing and other protocols to protect the health of our employees. Our Japan fab is the source of our data comp chips. Our U.S. fab supplies chips for telecom transport and commercial lasers products and our U.K. fab supplies chips for telecom transmission products.

The lower efficiency in our and U.K. fabs is limiting our ability to grow to meet strong, and increasing customer demand. We are hiring and adding capital equipment to increase our capacity, but this takes time. We use third-party fabs in Taiwan, the U.S. and the U.K. for 3D sensing and have not seen any impact in our ability to meet customer demand for these products.

Outside of these operations, our employees are in general working from home extensively using virtual meetings and digital collaboration tools. The increase in network traffic we have created with our virtual meetings, where we have added more than 1 million median minutes per week since early February, this is an indicator of bandwidth growth in and the future is very bright for Lumentum. We continue to make progress in R&D programs, even with the vast majority of our engineers working from home. We do have a limited number of staff in our labs, who are operating equipment for those working from home.

We’re continuing the development of new wafer designs for next generation products in our fabs. All of these essential workers are also following strict social distancing rules, and employing other personal protective measures.

Now, I'll turn to the product line details. On our telecom and datacom product lines. Before COVID-19, demand was very strong and accelerating, driven by global telecom infrastructure upgrades to start to 5G deployments and significant cloud data center expansion. We’re already supply constrained on most key product lines. Despite COVID-19, demand was strong throughout the third quarter across telecom transmission, transport and datacom chips looking through these products expanded by more than 10% sequentially, driving book-to-bill to over 1.3, up from 1.1 in the prior quarter.

The outbreak however exacerbated existing supply challenges. As a result, telecom and datacom revenue decreased 6% sequentially. In particular, the supply of telecom transmission products from China and Malaysia was significantly negatively impacted late in the third quarter. Despite these supply challenges, we continue to grow our VCO module revenue and our next generation indium phosphide high bandwidth components for 600 gig and 800 gig systems.

During the quarter, we close the sale of our titan lithium nitrate wafer fab and continue to ramp down our based lithium nitrate production. We had approximate $10 million of lithium nitrate revenue in the quarter, and we expect this to decline to near zero over the next two quarters, as we have highlighted previously.

Telecom transport was approximately flat quarter on quarter. These product lines are more reliant on Thailand than China for manufacturing operations, but growth was limited by the supply of key components from third parties in China and elsewhere, within Asia. Datacom chip revenue continues to grow strongly, increasing more than 20% sequentially as data center and 5G demand was robust. Remaining transceiver revenue was approximately $5 million and while the client is zero in the next quarter or two as planned.

During the third quarter, we introduced key new telecom datacom products. These new products leveraged our highly differentiated indium phosphide and gallium arsenide capabilities and included 50G Pam four pixels and DMLs to enable higher bandwidth, un-cored 100G Pam four EMLs to reduce data center power consumption and wide set of new pump laser products that increase efficiently and power, while lowering cost is addressed the full range of optical amplifier applications.

Looking to the fourth quarter. As I indicated earlier, telecom datacom demand remains robust and strong bookings continue. However, we expect telecom and datacom revenue growth to be limited by COVID-19 related supply constraints. Supply constraints and telecom transmission in Malaysia are improving, but we are not at 100% output yet. We won't be able to satisfy them more than $100 million of current backlog we have for these products, until the second half of the calendar year.

Telecom transport revenue is expected to be up sequentially, due to progress on relieving supply challenges and new product momentum in the market. Datacom chip revenue is expected to be up sequentially, once again, due to continued strong cloud in 5G market demand, but it's still gated by capacity in our wafer fab. We are optimistic about the long-term outlook for telecom and datacom product lines, due to expected long-term demand trends, our technology and product leadership positions and improving industry dynamics.

As I highlighted in my initial remarks, the world's experience with COVID-19 is changing how we do things in all aspects of work in life. This change directly drives the need for our telecom and datacom products. The market is designing networks around our leading products to enable scaling to higher capacity. This is very favorable to us. Our indium phosphide coherent components and modules enable the higher speed and density needed for higher network bandwidth.

Our high port count and MxN ROADM technology enables networks to scale capacity, much more efficiently. And our higher speed, lower power consumption datacom chips are critically important to drive network capacity and efficiencies in 5G and next-generation data center networks.

Turning to industrial and consumer. Our industrial and consumer product lines were down 24% sequentially as expected, due to seasonal factors, but up 40% relative to the prior year. Year-on-year growth was driven by customers, incorporating 3D sensing in a higher percentage of their product offerings compared to last year, and increase consumer demand for 3D sensing enabled products.

We steeply ramp volume production of lasers for world-facing cameras or LiDAR for consumer applications in the third quarter. We expect to continue to ramp volumes upsets lasers throughout the calendar year. Looking to our fourth quarter, our guidance contemplates 3D sensing declining significantly by more than 40% due to expectations around consumer demand, the potential for smartphone supply chain challenges impacting demand for our products and potential risk around the timing of new customer programs.

We have a range of new products. We are ready to ramp in the second half of the calendar year, including additional world-facing designs that we expect will increase the penetration of world-facing 3D sensing or LiDAR enabled cameras. It is too early to quantify with confidence, any impact consumer volumes, or the timing of new programs due to COVID-19, but we are very closely monitoring the situation.

We believe the 3D sensing market will continue to grow over the long-term. Mobile device manufacturers continue to make progress on their plans to incorporate front facing and world-facing capabilities into a LiDAR range of models. We're engaged with a broad range of customers focused on the consumer, industrial and automotive end markets, looking to add 3D sensing or LiDAR capabilities to enable their applications.

Now onto lasers. Third quarter lasers revenue decreased $43.5 million driven primarily by decline in fiber laser sales. We expect over the next several quarters, that our fiber lasers business will soften further, as it is tied to growth in global manufacturing.

Our solid state laser revenue expanded nicely quarter on quarter and attains levels not seen in nearly two years. This was due to strength in certain semiconductor manufacturing in markets including 5G antenna fabrications. We expect these trends to continue into the fourth quarter with fiber laser declines being larger than solid state growth, resulting in laser revenue declining sequentially by approximately 20%.

Throughout my remarks, I've tried to give you much more detail than usual, about the status of our market demand, for products, our operations, and our ability to supply, given the dynamic challenges the world faces with COVID-19. Before COVID-19, we were challenged to satisfy a strong customer demand for many of our communications products. The COVID-19 pandemic has exacerbated the situation. Our ability to supply these products is getting better; catching up on the strong demand will take a few more quarters.

Finally, I tried to highlight that while we are all living through difficult times, our strategy is even more apt, and our market position and financial strength, even more important. I believe we are well positioned both to weather the short term and to succeed in the long term.

With that, I'll hand it over to Wajid.

[Wajid Ali, Chief Financial Officer]

Thank you, Alan. Good morning everyone. I too would like to thank our employees for their dedication and perseverance. I am absolutely amazed at their strong execution in such challenging circumstances. Before diving into the details, some high level comment. As Alan highlighted in his opening remarks, COVID-19 is impacting our results, and our outlook. We estimate, COVID-19 is impacting our fourth quarter revenue by more than 20% and our earnings by more than 35%, or approximately $0.50 per share.

Despite these impacts, we have made progress in improving our financial model. Year on year in the third quarter, we achieved, 650 and 720 basis points of improvement in non GAAP gross and operating margins respectively. And more than a 37% improvement in non GAAP EPS, despite revenue being down 7%. Our model improvement is also seen in the improving margins and our guidance for the fourth quarter even with a substantially lower topline and a less rich revenue mix, relative to the prior year.

We continue to make strong investments in new technology and customer programs. This may be obscured in the year on year comparisons, where R&D spending is down, as we have been simultaneously attaining R&D acquisition synergies and cutting investments in underperforming product lines, all while ramping investments in areas with stronger outlooks and returns.

On capital structure, as you are aware, in the second quarter, we issued $1.05 billion in convertible debt, paid off our acquisition related term loan and repurchased $200 million of our stock. This increased gross cash, which is now approximately 1.5 billion reduced our share count and increased our flexibility to further drive strategic initiatives, while reducing the cash cost of our capital. We achieve this capital structure in the second quarter, not anticipating the COVID-19 pandemic.

However, as we have often said afterwards, the best time to raise capital is when you don't need it. The past two months is proof to that outage. We are well-positioned financially, with a strong margin model, high levels of cash with low interest expense and long maturity financing.

Now turning to the third quarters numbers. Net revenue for the third quarter was $402.8 million, which was down 12% sequentially, and 7% year on year. Our prior guidance assumed COVID-19 would negatively impact revenue by $15 million to $20 million. However, as Alan discussed, we had a larger impact than we assumed due to the spread of the virus beyond China, late in the third quarter. We estimate this additional revenue impact was more than $10 million over our guidance, assumptions.

GAAP gross margin for the second quarter was 39.2%. GAAP operating margin was 10.6% and GAAP diluted net income per share was $0.56. Third quarter non-GAAP gross margin was 45.5%, which was down 190 basis points, sequentially, but up 650 basis points year-on-year.

The sequential decline was driven by lower overall revenues, particularly in industrial and consumer. The year-on-year increase was primarily driven by improvements in Telecom & Datacom margins, as well as acquisition synergies.

Non-GAAP operating margin for the third quarter was 25%, which was down 380 basis points sequentially, but up by 720 basis points year-on-year. Sequential and year-on-year changes were driven by the same factors as the gross margin improvement. Non-GAAP operating expenses totaled $82.7 million or 20.5% of revenue. SG&A expense was $38.4 million. R&D expense was $44.3 million.

The sequential decline in operating expenses was driven by the combination of reduced tradeshow and travel expenses, and the realization of additional acquisition synergies, which were partially offset by higher fringe rates associated with the new calendar year. Third quarter non-GAAP net income was $98 million. This includes $3.6 million of net interest and other income and $6.3 million of diluted net income per share with $1.26, based on a fully diluted share count of $77.5 million.

Now turning to segment details. Third quarter Optical Communications segment revenue at $359.3 million decreased 12% sequentially due primarily to 3D sensing seasonality. and COVID-19 related supply limitations. Year-on-year Optical Communications segment revenue reduced 5% due to lower Telecom & Datacom revenue with the exit of Datacom modules and COVID-19 supply limitations, which more than offset higher 3D sensing revenue.

Optical Communication segment gross margin at 45%, decreased 300 basis points sequentially, due to the revenue reduction and a less favorable product mix, but increased 700 basis points year-on-year due to a more favorable mix of products, improved Telecom & Datacom margins and acquisition synergies.

Our Laser segment revenue at $43.5 million decreased 10% sequentially, and 21% year-on-year, primarily due to lower fiber lasers sales. Third quarter lasers gross margin increased to 49.7% due to a better product mix and lower manufacturing costs.

On the balance sheet. We ended the third quarter with $1.45 billion in cash and short-term investments, up from approximately $1.3 billion in the prior quarter. We have $1.5 billion in aggregate principle convertible notes, and no term debt. Of these convertible notes $450 million is due in 2024 and $1.05 billion is due in 2026. The total cash interest expense associated with these notes is approximately $6 million per year.

And now an update on synergies. Through the third quarter of fiscal 2020, we completed actions that will result in approximately $100 million of annual expense synergies. As a reminder, we are targeting a total of $110 million in annual run rates acquisition synergies with the remaining $10 million to be attained over the next few quarters.

Turning now to our guidance for the fourth quarter. The projections we are providing today are also on a non-GAAP basis, and are based on our assumptions as of today. Please note the guidance we are providing today, incorporates our current expectations for supply and demand reductions related to COVID-19. We are providing a wider than normal revenue range to incorporate uncertainty around the impact of COVID-19.

We project net revenue for the fourth quarter will be in the range of $325 million to $365 million. At the midpoint, this revenue projection includes telecom and datacom approximately flat with growth limited by continuing COVID-19 supply limitations. This includes declines from discontinued products, which are estimated to be $6 million to $8 million. Industrial and consumer decreasing by more than 40% due to expectations around consumer spending trends in a macro slowdown, and the timing of new programs.

And commercial lasers decreasing by approximately 20%, due to end market demand caused by the slowdown in industrial production, globally.

Based on this, we project fourth quarter operating margin to be in the range of 18% to 21% and diluted net income per share, to be in the range of $0.70 to $0.090. These projections incorporate an approximate share count of 78 million, and an estimated, other income of $1 million, which is lower than the $3.5 million in the prior quarter, due to lower interest rates in general, and are taking more conservative positions in our short term investments.

With that, I'll turn the call back to Jim to start the Q&A session. Jim?

[Jim Fanucchi, Darrow Associates]

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 the one question and one follow-up, this should help us get to everyone before the end of our allotted time.

Operator, let's begin the question-and-answer session.

[Operator]

Thank you. [Operator Instructions] Your first questions from Samik Chatterjee with JPMorgan. Your line is open.

[Samik Chatterjee, JPMorgan]

Hi, good morning. Thanks for taking my question. Appreciate all your comments about the supply chain constraints, you're seeing this way to get more visibility about the aspects of your business by using demand reductions which you mentioned a couple of times and how are you thinking about maybe the recovery of the $90 million of headwinds that you're calling out through the remaining quarters? And I have a follow-up. Thank you.

[Alan Lowe, President & Chief Executive Officer]

Sure. Thanks, Samik. Most of the dynamics of the supply chain are really around ability to get components sourced from both within China as well as for instance the Philippines and Malaysia. We believe that that situation is getting much better, but the first half of this quarter was impacted pretty dramatically.

And then secondly, our ability to ramp up our contract manufacturer in Malaysia and that's happening as well, but the first half of the quarter was dramatically below 100% production, and we believe that in the next couple of weeks, that'll be back to close to 100%.

I think from our perspective the demand for Datacom chips, telecom transport and transmission is accelerating and we believe that as we get back to 100% capacity, and we bring on more capital which we have placed on order to be able to catch up with this demand. But I think it’s going to be sustainable, will allow us to grow both Datacom, telecom transport and transmission in the first fiscal and second fiscal quarters.

[Samik Chatterjee, JPMorgan]

Okay. Got it. And as a follow up, we’ve seen some of your peers report acceleration and the deployment fees of 5G infrastructure in China. Can you give us a sense if revenues, I think, Huwei revenues you said last quarter was $60 million, if that, what was the number this quarter that you just reported and what's embedded in your guide and are you seeing, kind of a similar acceleration as your peers are reporting.

[Wajid Ali, Chief Financial Officer]

Yes. So, we are seeing -- certainly we have very strong Datacom chip demand that is driven in part by 5G deployments. And this quarter had an incredibly strong bookings presumably driven by a lot of 5G. Can you remind me the second part of your question.

[Samik Chatterjee, JPMorgan]

Look, I think last quarter you said Huwei revenues were $60 million. So I was just asking if that in what did you see in terms of trends in the reported quarter and what's embedded in your guide?

[Wajid Ali, Chief Financial Officer]

That revenue has declined a bit. We don't provide revenue by customer on a quarterly basis, but you can imagine that is down 20% sequentially.

[Samik Chatterjee, JPMorgan]

Okay. Thank you.

[Operator]

The next question is from Rod Hall with Goldman Sachs. Your line is open.

[Rod Hall, Goldman Sachs]

Yeah, thanks guys. Thanks for taking my question. I just thought I'd go back to the $90 million impact on the guidance, and sort of walk through the add-up on that. So I would estimate and I like to get clarification on whether this is right or not, but that the 3D sensing impact was about $40 million of that. Then it lasers is down 20%, that's just over 4. So then is it all -- like the rest of it is telecom and Datacom revenue you think you would have had but you don't, or could you just walk back through that and clarify how that breaks down by the different business units. And then I have a follow up.

[Alan Lowe, President & Chief Executive Officer]

Yeah, I think. Yeah, thanks Rod. I think in general, from a demand standpoint, you're pretty close. I think 3D sensing we said was going to be down 40% or more. I think the balance of approximately $45 million to $50 million is our ability to supply. And majority of that comes from our inability to ramp our production in Malaysia in the first half of the fiscal -- yeah, first half of the quarter, as well as its secured components and so we have orders, we have demand. Our customers are having daily phone calls with us as to how we prioritize them, how we get them their product, let's say, north of $50 million is our inability to supply. And we believe that had, had we not had the pandemic, our capacity would be aligned with that demand and we would have been able to produce it, so that's where the math comes from.

[Rod Hall, Goldman Sachs]

Okay. Yeah, that makes sense. I wanted to go back to this comment on that you made in a slide on the potential delay in customer programs. And I know you say it's too early to know, when do you think you will know on 3D sensing whether programs are delayed? And can you give us any idea on how we should think about seasonality now or you just don't know yourself. I mean, it seasonality likely to shift more into Q4 at this stage you think or it's just too hard to tell, but mainly I'm interested in when you'll find out?

[Alan Lowe, President & Chief Executive Officer]

Yeah. Ron, it is really hard to tell. And I think we find out when they tell us. And so I think from that perspective, we are ready. We have the product, a whole new set of chips, ready to go and waiting for not just one customer, but multiple customers to tell us when they're ready to ramp those products. And there's a very clear gate that they tell us. And it's a loud scream that we can hear around the world when they say go. So there's no timeline as to when they do that. It's really more of a, make sure we're ready to go and when they say go, where you have to jump high.

[Rod Hall, Goldman Sachs]

Yeah. And then just clarifying the Huawei point. You sit down 20% quarter-on-quarter or down 20% off that $60 million level I guess that's for March right. And then I don't know if you said in the guide what Huawei impacted, but it'd be nice to get that as well. And then that's it for me?

[Alan Lowe, President & Chief Executive Officer]

Yeah. So, I would anticipate at roughly the same level.

[Rod Hall, Goldman Sachs]

So, minus 20% on the 60.

[Alan Lowe, President & Chief Executive Officer]

Correct.

[Rod Hall, Goldman Sachs]

Okay.

[Alan Lowe, President & Chief Executive Officer]

And just to be clear that's a supply constraint number, given the constraints we're having on ability to provide telecom transport for that matter, as well as transmission. So, they -- certainly the demand is higher than that.

[Rod Hall, Goldman Sachs]

Right, okay. Appreciate it. Thanks guys.

[Alan Lowe, President & Chief Executive Officer]

Thanks.

Operator: The next question is from Alex Henderson with Needham. Your line is open.

[Alex Henderson, Needham]

Great. Thank you very much. So, I was hoping you could talk a little bit about the competitive circumstances around the 3D environment. Obviously, it's difficult to time when production will ramp up for that. But have you seen any change in dynamics, I think when we talk back in March you talked about, picking up some share because of competitors inability to supply. Is that still the case. Or have you seen any change in that dynamic at this point, and do you anticipate the products in the back half to be the more advanced products on a broader set of platforms. Therefore, continued high share in the back half?

[Alan Lowe, President & Chief Executive Officer]

Yeah. Thanks, Alex. I'd say that it's hard to say exactly what's going on with our competitor. I think our focus is making sure we have the mind share with our customer as they roll out new products. And so I'd say that the product we talked about in the scripts the world-facing LiDAR application, we have an extremely high share of that, we expect to continue to keep that as well as any new chips, as they use us as more their development arm, and priority, moving forward. And I think you're right, I think the technology advancements on these new chips, makes it not as easy to catch up as fast. And so after three years I think that our competitors are getting it. But now we're moving to the next one.

[Alex Henderson, Needham]

And then just one more question on the operating lines. Clearly, there are some cost benefits to not doing as much traveling the like. And some of that is probably going to be impacting the June quarter, given what you're saying about your operating margins. Can you talk about what's going on with the optics, on a more sustainable basis. Are you also trimming back some costs there any guidance on whether there's additional synergies on the R&D would be helpful particularly? Thanks.

[Wajid Ali, Chief Financial Officer]

Hi, Alex, I'll take that. It's Wajid. So on the travel the way to think about kind of travel reductions quarter-to-quarter, moving from fiscal Q3 to Q4, we should probably think about it in the $2 million to $3 million range, moving from one quarter to the next. Our expectation is that there will be some travel that starts up again as June rolls around. There certainly is an edge from our sales team as well as our operations team to get back into normal, especially with the number of capital deployments that Allen talks about in his script that we've got going on specifically at our U.K. facility, as well as Caswell. So we do need to have our team start moving around like that. But I think you should think about it from a $2 million to $3 million, a quarter standpoint. As far as kind of reducing R&D at an overall level just because of what we're looking at as a COVID-19 issue, that's not occurring. We're continuing to invest. You can take a look at our careers website on lumentum.com we're actively hiring across multiple functions, specifically in R&D. Our direct labor hires in the U.K., over the next year will probably increase, a couple hundred, folks, just to ramp up with our transmission products. And so right now we're just trying to figure out how to get everybody trained and everybody going, so we're certainly in the mode of leaning in as far as additional targeted hires to support our R&D programs.

And I would like to mention they are targeted higher, so it's not across the board, but we're certainly leaning in from that standpoint because our objective is to stay ahead of the competition as we've done in most of our markets, if not all. And so that's the mindset of the management team. And yes, you'll see, some benefits, and effects just because of travel delays and things of that nature.

[Operator]

The next question is from Tom O’Malley with Barclays. Your line is open.

[Tom O’Malley, Barclays]

Hey, guys thanks for taking my question. I just wanted to talk a little longer term on the operating model as well. Clearly, you guys have described some manufacturing that you think is picking back up in the next couple of weeks in Malaysia. Can you talk about the midpoint of your guidance, when are you assuming that Malaysia is back to 100%. And then within your own factories, how long does the operating margin pressure kind of exist, is this something that likely lingers into the following quarters or are you able to get these things corrected in the next couple of weeks?

[Alan Lowe, President & Chief Executive Officer]

I think we've gotten the go ahead to bring back all the employees in Malaysia. So that's happening now. We expect that that will take another week and then we had the cycle time of the product coming through. So I’d say within the next two to three weeks we should be close to 100%, but keep in mind that there are social distancing limitations that won't get us all the way back with the current headcount. So we're hiring. We're adding capital and but I think that by the end of May we should be back close to where we were in February.

I'd say that the other areas of focus are as Wajid talked about our U.K. fab and our Japan fab, there's just so much demand that we need to be able to get more wafers out and improve the yields and drive the cost and things like that. And that's really what we're focused on. So I didn’t say that I don't have a crystal ball as to when this whole pandemic will end. But I'd say that we probably as we enter into July and August we should be back to near normal from what I can tell.

[Tom O’Malley, Barclays]

Great. Thanks. And then the second one is just about largest customers, your key just came out, it looks like there's two customers that represented about 37% of revenue. Can you tell us how big your largest customer was and it looks as though it's down pretty heavily into June. I'm just looking at the supply chain is down as well, but can you talk about just the share there. You obviously talked about a world facing sensor, but your existing sensors, particularly in the front facing is share maintaining or is that just a broader unit depression?

[Chris Coldren]

Yes. So our - go ahead.

[Alan Lowe, President & Chief Executive Officer]

Go ahead. No, go ahead. Go ahead, Chris.

[Chris Coldren]

I was going to say our largest customer is running north of $90 million per quarter. Don't want to get any more precise than that can take hold handed down and talk about share.

[Alan Lowe, President & Chief Executive Officer]

I think we're comfortable with our share on that customer and think that, as I said before, our focus is on making sure that we enable the next generation of products, and that we go back to the kind of share we had three years ago and over the last couple of years. So that's, that's kind of our focus. And we expect it to do quite well as the next generation products.

[Operator]

The next question is from Meta Marshall with Morgan Stanley. Your line is open.

[Meta Marshall, Morgan Stanley]

Great. Thanks. I just wanted to dive into kind of data comm based revenue, just with the tenders is being granted, or a number of the tenders kind of being granted over the past couple of weeks. Can you just give us a sense of, how that should flow through to your revenue or demand or pipeline, or how many of your kind of past orders do you estimate have been kind of getting ready for some of those tenders. And then maybe just on the data content side. Should we consider that that's all kind of coming from one customer or is there growing set of customers for those chips sets? Thanks.

[Alan Lowe, President & Chief Executive Officer]

I'll answer the second one first, because that's easy. If you look at the data comm customer base, a year and a half ago, when the acquisition completed it was very concentrated on one lead customer. I'd say that now that's extremely diverse. We're seeing as we exited the module business, customers came to us, because we were no longer a threat to compete with them until we've seen a broadening of our customer days, and we've seen a growing set of customers coming to us, especially on well existing products, but with our technology development on the products I talked about in the script. And also on VCSELs, we've seen really a rapid acceleration of customer base growth there.

As far as China, there is a lot of activity today. I am on calls and escalations on, with many of our Chinese customers to be able to supply what they need. And that ranges from Datacom chips to high-end ROADMs, high-powered routers and end-by-end ROADMs as well as transmission products.

And so I'd say that, that demand is real. Product is being deployed. It's not being stockpiled from what we can tell. Because I think that the second half of the calendar year, there's going to be a major deployment in China and so getting ready for that.

[Meta Marshall, Morgan Stanley]

Thanks.

Operator: The next question is from John Marchetti with Stifel. Your line is open.

[John Marchetti, Stifel]

Thanks very much. I just wanted to follow-up on your last comment, there where you're talking about some major deployments scheduled for the second half of the year.

Some of the renewed around additional China sanctions and some things like that way. Do you envision if something would have come down that, you'd have to halt like you did in May of last year, or do you think that was what you have learned there, that you'd be able to continue to supply into China, if tensions between the U.S. and some of those OEMs continues to escalate?

: Well, I mean, I think it's hard to speculate on, what ruling, or if a ruling comes down, we will certainly abide by any laws and restrictions. But it really comes down to what is that. I think as we look today the deminimis rule. I mean, it's very little of what we could have shipped.

And so from that perspective, depending on what changes happen. If that limit changes, to a lower number, I think we're probably okay. If it changes to zero, then that's a different matter. So, it's hard to speculate, but of course we're going to abide by the laws. And make sure that we figure out to support our customers. But at the same time also, do the right thing.

[John Marchetti, Stifel]

And then maybe just as a follow-up to some of this, if you had been able to secure supply and ship as normal. Do you think that the book-to-bill in the telecom and datacomm segment would still have been above? One, just trying to get a sense of what that underlying sort of demand trend looks like, if he had been able to meet that demand in the quarter.

[Alan Lowe, President & Chief Executive Officer]

Well, clearly, if we've been able to ship more, the book-to-bill would have been lower because the billings would have been higher. So, I don't think there's a lot of artificial booking or double bookings. But we'll see. We'll see when we add capacity. I think we've got a long haul to get back to more equilibrium between our ability to supply what customers need.

So, I think, in our telecom and datacom business, there are fundamental underlying reasons for growth in that business. And I said in the script. We're creating video, minutes, on how we do business. And I think that is part of the new normal. So bandwidth requirements are continuing to grow. And I don't see any insight for that.

[Operator]

The next question is from George Notter from Jefferies. Your line is open.

[George Notter, Jefferies]

Hi guys. Thanks very much. I guess, I wanted to ask about any views you guys might have on the long-term structure of the market competitively as we think about this COVID-19 experience and you think about maybe some of the smaller competitors in the space, do you see this whole experience driving consolidation? Does it impact their ability to drive innovation like the market share changes? Like how do you think the bigger picture changes longer term on share? Thanks.

[Alan Lowe, President & Chief Executive Officer]

Yeah. I mean, its hard to speculate how it sorts its way out, I think, as Wajid highlighted, having a strong financial business model with a very strong balance sheet allows us to lean in and invest and that's what we're doing. We are hiring R&D. We're investing. We intend to come out of this even better product differentiation than we went in. I think so it's going to be very hard for the small guys to keep up. But we'll see. I think, you know, there'll be opportunities. But I'd say, but also over the last three years there's been a lot of consolidation and so the market landscape is in a pretty healthy position today, so we'll see what happens. But, you know, our focus is satisfying our customers, investing in new products and technology and differentiation, so that when we come out the other end, we are even better positioned.

[George Notter, Jefferies]

Thanks.

[Alan Lowe, President & Chief Executive Officer]

Thanks, George.

[Operator]

The next question is from Simon Leopold with Raymond James. Your line is open.

[Simon Leopold, Raymond James]

Great. Thanks for taking the question. A couple things, I want to ask one was, Alan, in talking about the $90 million you talked about over $50 million being supply chain related. So that implies less than $40 million being demand related. Could you maybe unpack that a bit between 3D and industrial or commercial lasers, the commercial lasers, and help us understand what you think about for the prospect for recovery particularly given that some of the end markets like auto manufacturing seem like they're struggling to turn up factories et cetera. Just your outlook on the demand aspect of the COVID-19 guidance?

[Alan Lowe, President & Chief Executive Officer]

Sure, sure. I think just to note, we’ve said more than $90 million, so we expect that, between the supply and demand, we’ve probably could have done, more than $90 mil in Q4. So yeah, you’re right. it's probably north of $50 million of supply and our ability to ramp-up mainly the Malaysian operation, so that's really impacting our Q4, but the prospects for recovery, I'd say, you're right, I mean on the lasers business we think it's several quarters, until the global manufacturing infrastructure comes back to normal. So, I think we're at a new lower level for lasers, probably, through the calendar year. That, again, I don't have a crystal ball and then 3D sensing, it's really hard to tell, I mean, our focus is making sure, we're there for our customer when they need us, especially on the new products. But, you know, it's hard to hard to know what, you know, I think fundamentally, people will come back and continue to buy consumers tend to be resilient. So it's really more, more difficult to project that one. But I'd say on telecom and datacom. I'm not trying not loosing a lot of sleep, I'm worried about whether or not there's demand there.

[Simon Leopold, Raymond James]

Okay. And just as a follow-up, I wanted to get your thoughts on moments prospects and what you think your role would be in the emerging market for ZR modules.

[Chris Coldren]

Hey, Simon, this is Chris. Yeah, so, certainly, one of our motivations, when we acquired Oclaro was to get industry leading indium phosphide component and module capabilities and we continue to invest strongly in that capability and are developing those products as well as a whole wide range of DCO modules, 100 gig, 200 gig, 400 gig and eventually above and underlying supporting components for those customers who either build modules or line cards themselves.

We expect that -- the market for 400 gig and, at the module level we’ll start ramping up, probably later this calendar year. So that could be much more meaningful in the following years, but it's an exciting market for us and we think we're very well positioned with our R&D across by technology.

[Operator]

The next question is from Tim Savageaux with Northland Capital Management. Your line is open.

[Tim Savageaux, Northland Capital Management]

Hey, good morning. Question over on the telecom, datacom side. I think you'd reference to continuation of strong booking trends into the June quarter fiscal Q4. I wonder if we can get any more color on that whether you've seen an acceleration and expect given the supply constraints of book-to-bill and kind of similar or backlog build. On the similar levels, and as you see those orders materialize, are you able to discern drivers, namely, capacity additions driven by network traffic growth in the US and EMEA versus, what appears to be pretty strong, 5G driven growth in China.

[Alan Lowe, President & Chief Executive Officer]

Yeah. So, we saw a continuation of the strong bookings on telecom, datacom. It didn't change our ability to supply, that's for sure, but I do think the fundamental drivers are North America bandwidth, hyperscale kinds of deployments, as well as connecting all of the people working from home and the use of virtual collaboration tools and things like that. I'd say that the 5G in China is back and rolling.

And so, building out both the fronthaul and backhaul part of that network as well as the regional Metro networks with roads and transmission products is happening. So I think from that perspective, I don't see a slowdown. And I see more of a pent up,

lack of deployments over the last -- the first calendar quarter in China that's now starting to ramp up in a meaningful way.

[Tim Savageaux, Northland Capital Management]

And just to follow up quickly, you mentioned $100 million backlog in transmission. I don't know if you expect that to grow at all or whether that was current or exiting fiscal Q3, and the expectation is that that’s likely to ship in mid-calendar second half?

[Alan Lowe, President & Chief Executive Officer]

Yeah. So, sorry, I wasn't clear that the $100 million backlog and transmission is backlog we have today, that will not be satisfied by the end of June.

[Tim Savageaux, Northland Capital Management]

Got it.

[Alan Lowe, President & Chief Executive Officer]

So we're going to satisfy a lot in the backlog we have today. But this won't be satisfied. So, you know, if you look back on our historic transmission business, it's usually $100 million to $120 million a quarter and growing and, you know, with some of the discontinued products have, you know, kind of, ebbs and flows but so, you know, we have a strong backlog. We're continuing to get bookings and so we're going to end the fiscal year with a very strong backlog it's my projection.

[Operator]

The next question is from Christopher Rolland with Susquehanna International. Your line is open.

[Christopher Rolland, Susquehanna International]

Hey, guys. Thanks for the question. In a - on a prior question that you discussed, you talked about sets of LiDAR world facing product ready to go, I guess, my question is, has this passed the full qualification process at your customer?

And then secondly just regarding a date, I know, it's difficult I know you guys are waiting but isn't there some kind of drop dead date, in which you need to implement and plan for capacity to ultimately initiate that order? Thank you.

[Alan Lowe, President & Chief Executive Officer]

Well, I mean, we said we were ramping production of the world facing LiDAR products in Q3. We don't ramp unless you qualify them. So product announcements have been made with this product in it. So it's being sold out to consumers. So, I think that the -- we're up and running on that one and we'll continue to ramp towards it drop dead date is concerned. You know, we're ready and inventory in the right positions. There's not our customer and our main customer and our sales team and product team is very well aligned on when we need to go, based on their schedule. So I'm not so worried about a drop dead date from that perspective. I will be ready. And I think we're in great position relative to our competitors.

[Operator]

Our final question is from Richard Shannon with Craig-Hallum. Your line is open.

[Richard Shannon, Craig-Hallum]

Well, thanks guys for taking my question. I just have one to finish up here again on 3D sensing talks. A lot of the answers on that topic I think in the name large that your big customer, really Alan, if you could talk about the impact on your - kind of your android customers impacting COVID here in terms of timeframe, as well as even implementation of either front facing or more specific world facing? Thanks.

[Chris Coldren]

Hey, Richard, this is Chris. So Android business in the quarter was a bit rough, as you can imagine smartphone production in China was down quite a bit. So we saw the Android revenues slow considerably quarter-on-quarter. With that chatter designing activity and product positioning with android customers is good and continuing to improve as we have a broad range of products for front and world facing that satisfy the android customer needs. And that's one of the advantages of the scale that we have in the businesses are, in a sense, R&D capacity to be able to customize and develop products for all of the customers in the Android space, in addition to our largest customer. So we anticipate the Android from a designing standpoint, to continue to progress to a broader set of models and higher volume products. I think as Alan highlighted, it's little difficult to handicap the overall smartphone volumes in the world over the coming years given some macro challenges which could impact consumer demand, but we feel pretty good about both the broadening of 3D sensing in the Android space and our position in supplying those products.

[Operator]

That concludes the question answer session. And I will turn the call to Mr. Fanucchi for any closing remarks.

[Jim Fanucchi, Darrow Associates]

Great. Thank you so much. This concludes our call for today. We would like to thank everyone for attending and we look forward to talking with you again in another few months. Have a good day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.