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spk17: The forward-looking statements provided during this call are based on Lamentum's reasonable beliefs and expectations as of today. Lamentum 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 first quarter 2021 results and accompanying supplemental slides are available on its website at www.lumentum.com under the investor section and includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP results. Now I will turn the call over to Alan for his comments.
spk02: Thank you, Jim. Good morning, everyone. I would like to make a couple of broader points before providing my business commentary. While 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 wellbeing challenges COVID-19 has tragically brought to millions of people around the globe. Our thoughts are with all of those affected. I thought so also with the healthcare professionals and first responders who selflessly make a difference on the front lines every day. I am proud that Lumentum 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% and operating margin above 30%. 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. As I often say, the future is truly bright at Lumentum. 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, healthcare, social interaction, and commerce, which all drive increasing need for our differentiated products and technologies. 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 due to changes throughout the quarter. Our assumptions for 3D sensing proved conservative, and demand for our 3D sensing products accelerated through the quarter. strength in 3D sensing sales more than offset lower than anticipated telecom and commercial laser sales. Telecom and datacom revenue grew 2% sequentially and 5% year on year. Excluding revenue from low margin product lines we have divested or discontinued. Telecom and datacom revenue grew 4% sequentially and 14% year on year. The largest contributor to this growth was telecom transmission. We had strong sales of indium phosphide-based coherent transmission modules and components, including ACO and DCO modules and 600 gig and 800 gig modulators. Rotem sales increased from last quarter, but we're still down year on year. However, our contentionless end-by-end rotems grew more than 30% quarter on quarter to a new high, highlighting the increasing shift to this technology in new customer systems. During the first quarter, we saw some push-outs 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. These contributed to lower telecom revenue than we assumed in our guidance. On certain 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 400G DCO transmission modules. On the transport side, we continued to proliferate our contentionless end-by-end and high-port count rodent technologies with C, L, and extended C-band versions to enable customers to next-generation systems globally. Prior quarter trends continued in Datacom, with chip sales growing 6% sequentially. We have seen a shift in near-term customer forecasts, with lower projected 5G demand offset by continued strength in demand for our market-leading chips for data centers. We have adjusted our way for start plans accordingly. Our backlog for Datacom chips remains very robust, and demand continues to outstrip our way for that capacity. As such, we are continuing to aggressively expand our wafer pad capacity based on long-term demand trends and expectations. On the new product front, we are working closely with our lead customers on their needs for future 800G and above Datacom transceivers. To this end, we have recently demonstrated high-performance 200GB PAM4 EMLs for such applications. Looking to the second quarter, we expect telecom and datacom revenue to be up sequentially, with the strongest growth coming from telecom transport, driven by growth in next-generation rodents. 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 pixel arrays per year continues to put us in a leadership position in the markets. Since we became an independent public company five years ago, we have shipped approximately $1.5 billion of 3D sensing revenue. We continue to believe we have a larger addressable opportunity over this product cycle. This is due to the significant increase in 3D sensing 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 3D sensing demand in the coming quarters and years. In addition to increasing content, we believe there is potential for a strong consumer upgrade cycle driven by new features including 5G, augmented and virtual reality, and computational photography. Further, we believe there is potential for market share shifts at our customers' level which could be beneficial to us. On Android, 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 due to 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 underscreen 3D cameras, produce higher density and larger arrays to enable higher performance 3D 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 sensing lasers for consumer electronic 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 VIXL arrays have completed the important AEC automotive qualification through a module partner, and we expect initial deployments of these products to be in automobile in-cabin applications. We are also now sampling high-power VIXO arrays into LiDAR for last-mile vehicle applications. According to our customers, these last-mile applications could be one of the largest LiDAR opportunities in the next several years. In addition, we are also sampling or are in qualification with major Tier 1 auto suppliers for broader automobile opportunities that will deploy and develop over time. We are making progress in the 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 add 3D 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 declined 37% quarter on quarter This is a larger decline than what 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 revenue to be flat to up modestly. We believe that it will be several quarters before we get back to the revenue levels we saw in fiscal 2020. 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 PicoBlade 3 was recently recognized by Laser Focus World with an Innovator's 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 Huawei, given the regulatory restrictions that were announced in August. Sales to Huawei declined in the first quarter and were less than 10% of full company revenue. In the second quarter, our guidance contemplates sales to Huawei to decline further due to the regulatory restrictions. Beyond the second quarter, for modeling purposes, we currently expect sales to Huawei to be less than 5% of quarterly sales. Before I hand it over to Wajid to review 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, both financially as well as with our technology and product leadership. They have been incredible, especially so working through the pandemic. This is despite 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 Lumentum 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.
spk16: Thank you, Alan. Good morning, everyone. Turning to the first quarter's numbers, net revenue for the first quarter was $452.4 million, which was up 23% sequentially and 1% year-on-year. Gap gross margin for the first quarter was 45.5%. Gap operating margin was 21.9%. And gap diluted net income per share was $0.86. First quarter non-gap gross margin was 52%. 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 Alan highlighted, this record gross margin performance demonstrates the improvements we have made in our financial model. First quarter non-GAAP operating margin at 33.7% 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-GAAP operating expenses totaled 82.7 million or 18% of revenue. SG&A expense was 36.8 million R&D expense was $45.9 million. Operating expenses continued to be a little lower than normal run rates due to COVID-19 reducing travel, trade show, and other expenses. First quarter non-GAAP net income was $139.2 million. This includes $900,000 of net interest and other income and $14.2 million of tax expense. Other income is down sequentially. as interest rates on our cash and short-term investments are lower overall, and we are being conservative in our investment portfolio. Non-GAAP diluted net income per share was $1.78, based on a fully diluted share count of $78.2 million. Now turning to the balance sheet. We ended the quarter with $1.61 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 $1.5 billion in aggregate principal 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. 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 $428.5 million increased 29.7% sequentially due to 3D sensing seasonality and growth in telecom and datacom. Year on year, optical communication segment revenue increased 3% due to higher telecom and datacom revenue, particularly in datacom, due to strong growth in our chip business. Optical communication segment gross margin at 52.5% increased 590 basis points sequentially. 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, improved telecom and datacom margins, and acquisition synergies. Our lasers segment revenue at $23.9 million decreased 37% sequentially and 29% year-on-year. First quarter lasers gross margin decreased to 43.5% 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 non-GAAP basis and are based on our assumptions as of today. We expect net revenue for the second quarter of fiscal 21 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 lasers 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%. and diluted net income per share to be in the range of $1.70 to $1.90. These projections incorporate an increase in operating expenses, primarily due to an increase in R&D as we invest in new products and technology. An approximate share count of $79 million and an estimated other income of $0.5 million, as well as an estimated tax expense of $15 million. 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 Acquero, we put forth a target financial model with a gross margin range of 40% to 45% and an operating margin range of 22% to 28%. For the trailing 12 months, from the end of the first quarter of fiscal 20 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 midterm financial model. Our annual gross margin target moves up to 50%, and our annual operating margin target increases to 30%. 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 Huawei impacting the second half of the fiscal year. With that, I'll turn the call back to Jim to start the Q&A session.
spk17: Jim? 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. This should help us get to everyone before the end of our allotted time. Operator, let's begin the question and answer session.
spk04: Ladies and gentlemen, we will now begin that question and answer session. To ask a question, you may press star and then 1. If you are using a speakerphone, we do ask that you please pick up your handsets before pressing the keys. To withdraw your questions, you may press star and two. Again, that is star and then one to ask a question. Our first question today comes from Sameek Chatterjee from JP Morgan. Please go ahead with your question.
spk00: Thank you. Hey, good morning. Thanks for taking my question. Alan, I just wanted to start with the telecom group. I think a lot has changed related to your key customers like Huawei and Siena over the last kind of two to three months. I'm wondering if you can go into a bit more detail to share your thoughts about how sustainable telecom demand is given kind of the changes we're seeing and what's driving the delays and the push-outs 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.
spk02: Sure. I mean, if you looked at our guidance in the 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. I'd say we were probably expecting higher growth but due to some deployments not happening 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 our fiscal second quarter.
spk00: So anything on what's driving the delays? Is it more like a delay on the geographies in deploying 5G?
spk02: Well, 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 applications. cloud data centers and so we've had to shift our way for starts in our data comm 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 China okay and if I can follow up on 3d sensing the industrial
spk00: and consumer group, you're 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 confident 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 maybe market share when you're kind of guiding to that for the December quarter?
spk02: Yeah, as we said, throughout fiscal Q1, demand came in stronger than expected and stronger than we had guided in our August call. We've had a very strong October. and expect flat to slightly up. Now, that could change depending on how successful our lead customer's launch is. But so far, everything looks positive. I do think 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. So that's perhaps a dynamic that maybe wasn't contemplated earlier.
spk04: Our next question comes from Rod Hall from Goldman Sachs. Please go ahead with your question.
spk03: Yeah, thanks for the question, guys, and nice job on the earnings here. I wanted to start off with just the order trajectory, orders trajectory here recently in the last few weeks. Now that the new, let's call them the lead customer phones have launched, I wonder if you guys have seen any change in 3D sensing order trajectories or if that's all been pretty constant the last couple weeks, and I have a follow-up.
spk02: well i mean we've seen strong demand and through um through uh august and september and it carried through october so um you know it's uh more of a front-end loaded quarter uh now that could carry throughout the balance of the quarter but you know our guidance doesn't contemplate that so i i'd say we're in a good position as far as market share 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.
spk03: Okay, thanks for that, Alan. And then I wanted to, on Datacom, just check the capacity situation and and ask if you could give us any idea um 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 yeah as we said in the august call um we're expecting to and i might correct chris you might have to correct me uh double the wafer capacity over the next 18 to 24 months
spk02: um it does come in in chunks um and our cycle time for datacom wafers is you know more than a quarter so like i said in in the script as we see a shift from 5g to data center that takes time to move over So in the short term, we're going to be constrained on those data center chips. I would say that 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'll have plenty of demand two years from now to consume twice of what we're producing today. Keep in mind, some of the newer chips are bigger, and so they consume more real estate on a wafer. So it may not be doubling of units, but it would be doubling of wafers as the newer 200-gig chips that I talked about are actually larger, and there's fewer chips per wafer. okay but you can't say when the next big chunk of capacity comes on oh it i would say probably you know middle of next year we will see some step up of capacity 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 um 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 in the second half of the year.
spk04: Our next question goes from Alex Henderson from Needham & Company. Please go ahead with your question.
spk08: Great. Thank you. Can you hear me okay?
spk04: Yes, Alex.
spk02: Thanks.
spk08: Perfect. I wanted to go into the Rotem side of the business. Obviously, very good performance in the end-by-end environment. I would assume that that's more Western accounts than Huawei. Huawei, as I understand, tends to do more of the lower speed stuff. So given the strength of demand there, aren't those somewhat tied to the timing of chassis deployments, in which case slower chassis 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're adding capacity, what rate of capacity ads you're looking at, any timing around. That would be very, very helpful. I appreciate it. Thank you.
spk02: Sure. I think as we look at that very high port count and the end-by-ends, as I've said in the past, China was leading the way, but the rest of the world was following. And I'd say that today we're seeing that rest of the world start deploying in a meaningful way. And so I expect that the non-Huawei business for our high port count and end-by-end will grow dramatically over the next 18 months. I'd say that we are adding capacity. Capacity adds 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 that get deployed later this year and into calendar 21.
spk08: Can you give us any calibration on the size of those capacity ads and whether you're planning the next set for, say, the first half of next year?
spk02: Well, I mean, I think if you look at what we said, the end-by-end grew 30% last quarter. That was a big chunk coming online. That's not going to come online this quarter. I'd say that we'll probably have more end-by-end coming on in the first half of next year as our non-Huawei customers are really starting to have meaningful deployments. That's our expectation at this point in time.
spk04: Our next question comes from Tom O'Malley from Barclays. Please go ahead with your question.
spk10: Good morning, guys, and congrats on the nice results. My first question is on the really strong gross margins. Could you talk about what's driving the opcom communications? You mentioned products mix a couple times, and I assume that's from that larger customer rolling on, but you also upped 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 what the contribution is for the better margins? Is it just
spk16: the the big customer or is there also some real uh gains in that in that core business as you move more towards chips uh tom it's it's watch it i'll take that one and then alan and chris can follow up so yeah so the strong gross margins were obviously driven by a very strong product mix uh we've also had an accumulation of synergies that we talked about um for a number of quarters that have have added up and have added to our overall financial model Our Datacom chip business increasing 6% quarter over quarter, that was all chip business as well. And the gross margins on those product lines are quite healthy. To your question on the long-term model, really the long-term model assumes that our lasers business comes back up and starts running at a normal run rate again. And one of the reasons we haven't said that we'll exceed the long-term model for this fiscal year is because we expect to have our leisure business continue to be weak into the back half of the fiscal year and then expected to improve as we move into fiscal year 22. 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% gross margins is really lasers coming back and having OpCom continuing to improve with all the capacity improvements that Alan talked about, and Datacom chips in our 3D sensing business, especially the new products on 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 three quarters.
spk10: Great. That's helpful. And then my follow-up was really on the Datacom business. You mentioned there were some push-outs in 5G. I assume that's front-haul-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?
spk12: Hey, Tom. This is Chris. So, yes, the 5G is front-haul-related, and as you can imagine, 5G deployments, at least initially, have been concentrated in China, and we've seen a slowdown from those customers, given the ecosystem around 5G in China is affected by what's going on in the geopolitical regime and regulations on Huawei. But as we've talked about in prior quarters, we've had multiple quarters of backlog in our Datacom business. So 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 Datacom, i.e. the transceiver customers winning more business within the hyperscale cloud operators, as well as our relative competitive position as 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.
spk04: Our next question comes from John Marchetti from Stiefel. Please go ahead with your question.
spk06: Thanks very much. I wanted to touch on the Huawei 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 reduced outlook. How much of that is really based on actual restrictions of what you are allowed to ship and versus Huawei's maybe overall demand declining because of their lack of access to some other products that they can't get for the full materials?
spk02: Yeah, I'd say it's a combination of both, right? And when you look at what we ship into Huawei, There's still strong demand for all 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% customer a few quarters ago to today less than 10% and going down below 5%, most of that's due to regulatory restrictions. And a little bit is based on demand, I'd say, like in the consumer products.
spk06: Okay. And then, Wajid, 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 million sort of quarterly run rate, how much upside off of this sort of 43.5 that you did this quarter should we expect there to be?
spk16: Well, I mean, in fiscal Q4 where we had a $37 million quarter for lasers, we were above 50% gross margins. And so we have, you know, different margin mix within our lasers business itself with some of the products, you know, achieving better gross margins. But our new products and lasers are expected to be well above that. And so, you know, as that gets into the $40 or $45 million range, we should see a nice bump. back into the 50% close margin line for lasers.
spk04: And our next question comes from Simon Leopold from Raymond James. Please go ahead with your question.
spk07: Thanks for taking the question. First, I wanted to just get a better understanding of The issues with Huawei in that you talked about some level of sales below 10% in this quarter, which we understand, and then the outlook eventually getting below 5%. I certainly know that zero is also less than 5%, but why does the value not go to zero? Could you help us understand what are the aspects of the rules that allow you to do business with Huawei that is still a positive number? Thanks.
spk02: Yeah, we're not going to get into the details of the restrictions in our products and which ones fall into the restrictions and not, other than just to say the business with Huawei is becoming less material for our future business and down below 5%, whether that's zero or 4.5% is still a TBD at this point. We're trying 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.
spk07: 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 Your 3D sensing, it's time shifted from September to December, creating a tougher comparison. And then you've got the Huawei 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?
spk02: Well, I'd say, and Chris can jump in as well, I'd say that... our China business is impacted by the restrictions at Huawei. 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 5% to 8% of our revenue out as a result of that. And so that's a broad range. 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, we've taken a very conservative approach on Android. So I'd say that our expectations are Android 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 3D sensing into their mainstream phones, we'll be there for them. And I'd say that for our lead customer, You know, they don't really tell us. Our expectations are that there is some strength in 3D sensing in the March quarter more than normally given the later launch of the product line. Does that answer your question, Simon?
spk04: Our next question comes from Maida Marshall from Morgan Stanley. Please go ahead with your question.
spk01: Great. Thanks. I just wanted to get a sense of maybe coming back to Huawei. As that business kind of winds down a little bit or is restricted a little bit, are you seeing any broadening out of demand from other kind of China optical vendors? And then maybe second, you talked a lot about the auto opportunity just in terms of general timelines we should be thinking of for maybe in-cabin and out-of-cabin things.
spk02: sure i'll take the huawei one i'll let chris answer the the uh auto one um i'd say that there's activity around um traditional carriers that have been relying on huawei um but that takes time meaning there's nervous carriers that don't want to rely on huawei and i think that's natural i'd say that again that's probably a multi-quarter thing before that that bidding cycle and the responses turn into deployments. And 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 wallets, 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. Chris?
spk01: Maybe 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 into ZTE or Fiber Home, more China-specific vendors and just kind of the share shifts taking place there.
spk02: Well, we've seen strength in our non-Huawei China customers over the last several quarters and really – consuming high-end rotums, consuming high-end coherent transmission components and modules. So I don't know if that's a result of the Huawei restrictions or a result of our products being state-of-the-art and leading edge. And I'd say that we're going to continue to see growth from those customers over the short and mid-term time horizons. Our next question comes from, hang on, Chris, there was a question about automobiles.
spk12: Yeah, so we're playing into automobiles in multiple ways, both in cabin as well as outside cabin for, you know, driver assistance systems or in the case of autonomous vehicles, you know, sensor systems to, you know, enable the car to see and know where to go, i.e. LIDAR systems. And as Alan highlighted on the call, in the past quarter, we've qualified in a module-level product that enables in-cabin applications. Europe is really leading the way for in-cabin driver monitoring applications. systems. They have regulations that require it 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 LIDAR. 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 multi-hundred million dollar opportunities for Lumentum, even at the laser level. And we are definitely supplying at the laser level, have opportunities to move up to the module level where the dollar content might be a bit higher. But what's really critical is because these markets take a long time to get designed in and qualified and um eventually ramp up we need to plant those seeds today get designed in um with with module integrators and ultimately tier one auto manufacturers and that's really what we wanted to highlight today is that design inactivity and and traction is happening my next question comes from george notter from jeffries please go ahead with your question
spk05: Hi, guys. Thanks very much. I wanted to ask a 3D sensing question. 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 uh safety stock you know by your large customer as they shift over to those new parts and um i think alan you were referencing something about march uh you know consumption selling versus sellout can you just talk about how you see inventory at that customer thanks yeah george we really don't have a lot of visibility
spk02: to what is the inventory of modules and consumer devices beyond when we ship a VIXL chip to the module integrator. So sorry, I'm not going to be able to provide a kind of color on what that looks like. I will say, though, that through the quarter, we saw upticks in the demand, which would tell me that something changed, whether it's a share shift or patients were stronger to end customer demand. Um, and so that's, you know, that's the only kind of color I can give you on inventory or, or, um, what's going on at, at, at our customer's level.
spk05: Yeah. Okay. That's helpful. And then, um, one last one, uh, linearity, I noticed that the, uh, day sales outstanding calculation was, uh, It was pretty low relative to what you guys have typically reported in recent quarters. Was the quarter front-end loaded, linear? How would you characterize it? Thanks a lot.
spk02: Well, I did hear on mute, I think. I'm sorry.
spk16: I was about to hit the unmute button. Our quarter was pretty similar to previous quarters in terms of overall linearity. You can see shifts in 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 each one of them and then sometimes they'll come along and either pay within the first couple of weeks of the new quarter or the last couple of weeks of the end of the quarter, depending on how their batch processing works. We're expecting our cash flow to be significantly better in fiscal Q2 versus fiscal Q1, just given the type of profitability we've achieved during the quarter. So it should all be good from a cash flow standpoint.
spk04: And our next question comes from Anada Baruha from Loop Capital. Please go ahead with your question.
spk11: Hey, good morning, guys. Congrats on the results, and thanks for taking the question. Yeah, just two quick ones for me, if I could. Al, sort of the comments about two to four quarters, their pocket to make up some of the Huawei revenue, was that China-specific, or is that a worldwide remark? And then I have a quick follow-up.
spk02: 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, Huawei-based carriers are looking for other suppliers. And that was what my comment was around. 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.
spk11: Got it. That's really helpful. And just quick follow-up on gross margins. You guys gave me a context around what drove them this quarter. To what extent, sort of with regards to the new long-term model, does capacity utilization play a role? Obviously, mixed does. And are there any other factors besides capacity utilization that will influence the margins meaningfully long-term, the gross margin?
spk16: Yeah, no, I'll start with that one. So not just capacity utilization, but the addition of capacity is going to help us quite a bit from a gross margin standpoint. And Alan talked about the fact that we're seeing improving yields and productivity to get out more supply to meet demand for our Datacom chip 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 OpCom segment has has very strong tailwinds in it, whether it's our telecom transport business, our telecom transmission business, our telecom datacom business, as well as 3D sensing with our new products and new opportunities we've got there. So as we see 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 on $37 million of lasers revenue in Crystal Q4, we had above 50% gross margins. And so really that's because of capacity utilization helping us improve our overall lasers gross margin profile, which obviously helps the consolidated company. So it does play a pretty big part of it.
spk04: Our next question comes from Chris Rowland from Susquehanna. Please go ahead with your question.
spk15: Thanks for the question, and I'll also echo my congrats on the quarter as well. My first question is kind of higher level. I was wondering if I could get your thoughts on the Marvell and InFi proposed acquisition. and kind of what that means for your outlook for vertical integration in optical and whether this changes your strategy in terms of when it might be appropriate to tie up with another company or whether you think you can go it alone for now and forever perhaps. But, yeah, just your high-level thoughts there and how you might execute going forward.
spk12: Yeah. Hey, Chris. This is Chris. you know i think the the the fact that uh infy was was picked up by another semiconductor company uh as opposed to uh say a network equipment manufacturer um really means that uh at least our view is that they will they will remain a merchant uh ic supplier less clear whether they will be as focused on providing modules where we may compete with InFi in 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, that, Buying it from Marvell as opposed to buying from InFi is probably 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 markets with with our industry leading indian phosphide components um that's really where where we see our differentiation and um you know what we choose to do from from that forward on whether that be organic development or m a we'll let you know uh if or when something happens there
spk15: Thank you for that. And then just a couple housekeeping. I don't know if you offer any other details around things like book to bill or changes in lead times or perhaps capacity utilizations.
spk02: Yeah, we typically don't do that unless there's something to highlight, like our Datacom chip backlog is, you know, very large and we're capacity constrained and will be such for some period of time. Similarly, in our Waclifab, in our in-game phosphide Waclifab, with the strong demand and 600 and 800 gig modulators, that's capacity constrained. And so, But beyond that, we typically don't give 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 placing 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, our guidance contemplates, you know, normal run-of-the-mill type of demand is strengthening across the board.
spk04: And our next question comes from Tim Savageau from Northland Capital Markets. Please go ahead with your question.
spk14: Hi, good morning, and congrats on the results. I wanted to focus in on telecom, datacom from a guidance perspective in particular. That looks to be where you expect the growth here this quarter, maybe even more notable given the anticipated declines, further declines at Huawei. So, you know, when you look at what you're effectively guiding to, kind of a mid-teens percentage, Sequential increase, I think you've already called out Rotem as the primary driver of that growth, but I just want to confirm that and maybe get your comments to expand beyond Mehta's question earlier. Seeing increased traction among other Chinese OEMs, but I wanted to comment more broadly about customer diversification globally and what might be driving that strength. Saw 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 kind of an OEM diversification standpoint globally.
spk02: Yeah, so we said that a lot of the growth is coming from our Rotoms as we're adding capacity and trying to meet the strong demand of our high-end Rotoms. We're also seeing strength in the higher speed coherent components like our 600 and 800 gig modulators and tunable lasers. I'd say those are probably the two big areas. Datacom chips with the shift between 5G and hyperscale, that's probably not an area where we're going to see huge growth because of, you know, the width is huge. And so I'd say most of it's coming from those two areas and rotums and the phosphide.
spk12: Chris, do you have anything to add on that? No, I mean, I think that the key point really, Tim, is if you go back pre-pandemic, we've been preparing, if you will, for the next generation systems, whether they be 4, 6, 800 gig, whereas the 100, 200 gig systems have kind of grown long in the tooth where transport products going into those systems have softened. That's why Rotums came down late last year. And then obviously the pandemic caused disruption in our ability to supply. We're catching up with that. And really the growth is being driven from a product standpoint across Europe. high-end rotums and the newest coherent components. From an OEM diversification standpoint, there's not a lot of new OEMs per se out there, so we're pretty well covered. I think what 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 develop and design in uh and then proliferate across a broader customer set and i think as we highlighted in the script something like the end by end rotum 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 the 600, 800 gig high-speed coherent components, as well as our DCO modules providing a broader customer set for those individual new products doesn't necessarily mean we're adding new customers per se.
spk02: We only had one 10% customer last quarter. So the customer diversification is happening. And I think we'll continue to see that. Sorry, Jamie, go ahead.
spk04: And ladies and gentlemen, we do have time for one additional question. This question comes from Tom Diefle from DA Davidson. Please go ahead with your question.
spk13: Yes, good morning. Maybe just one final question on 3D sensing. What is your view of the relative revenue or pricing or margin differences between the standard and the world-facing components that you sell?
spk02: not really much difference. I'd say that this is a product cycle where a refresh of of all of the chips kind of resets expectation on pricing, and we've been able to come up the yield and productivity curves quite strongly on both the front-facing and world-facing chips. So I wouldn't say that there's a meaningful difference in margin or revenue per wafer area per se.
spk13: Great. That's it for me. Thank you.
spk04: Thanks, Tom. 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 Jim Finucchi for any closing remarks.
spk17: 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.
spk04: And ladies and gentlemen, with that, we'll conclude today's conference. We do thank you for attending. You may now disconnect your lines.
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