Lumentum Holdings Inc (LITE) 2021 Q2 法說會逐字稿

Good day, everyone, and welcome to the Lumentum Second Quarter Fiscal Year 2021 Earnings Call. (Operator Instructions) Please also note today's event is being recorded.

At this time, I'd like to turn the conference call over to Jim Fanucchi of Darrow Associates. Sir, please go ahead.

Thank you, operator. Welcome to Lumentum's Second Quarter Fiscal Year 2021 Earnings Call. This is Jim Fanucchi from Darrow Associates, assisting Lumentum with its Investor Relations.

Joining the call today from the company's management team, we have Alan Lowe, President and Chief Executive Officer; Wajid Ali, Chief Financial Officer; and Chris Coldren, Senior Vice President of Strategy and Corporate Development.

Today's call will include forward-looking statements, including statements regarding the markets in which we operate and our position in such markets; the impact of COVID-19 and responsive actions thereto on our business and continuing uncertainty in this regard; trends and expectations for our products and technology; our markets; market opportunity and customers; our proposed acquisition of Coherent and our expected financial performance, including our guidance as well as statements regarding our future revenues; our financial model; and our margin targets.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risk factors described in our SEC filings, including the company's quarterly report on Form 10-Q for the fiscal quarter ended December 26, 2020, which the company expects to file later today and in Lumentum's 10-K for fiscal year 2020 ended June 27, 2020.

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 second quarter fiscal 2021 results and accompanying supplemental slides are 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.

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

Thank you, Jim. Good morning, everyone.

Before getting into the details of our business results, I'd like to make some comments about the COVID-19 pandemic. There have been a lot of developments since our last earnings call. We have unfortunately seen the significant impact of the COVID-19 pandemic expand to millions of people around the globe. Our thoughts are with all of those affected and the health care professionals who selflessly make a difference on the front lines every day.

Fortunately, we have also seen the development and early distribution of effective vaccines. This gives me optimism that the dark days we are living through will pass, and there is a path to better days. We thank those who have developed and are now manufacturing these vaccines that are beginning to protect people. While I can't put us in the same category as these lifesavers, I am proud that Lumentum plays an important role in the critical infrastructure that helps people safely continue their work, education and life during these challenging times.

Now on to our business and financial results for the second quarter. Increased demand in Telecom and Lasers added to the positive momentum from the prior quarter, resulting in record revenue, non-GAAP gross margin, operating margin and earnings per share. For the first time ever, we achieved gross margins in excess of 53% and operating margins above 35%. As pleased as I am with these results and the progress we have made in driving towards our strategic and financial goals, I am as excited as ever about the opportunities ahead. As I often say, the future is truly bright at Lumentum.

We are well positioned to grow revenue and earnings into the future. We believe long-term market trends are very favorable. We also believe there our upcoming growth catalysts in each of our markets. The accelerating shift to digital and virtual approaches to all aspects of work in life is driving staggering amounts of data in the world's networks and cloud data centers. To meet the challenges created by this digital transformation, our industry is poised for major new technology transitions that we believe are well served by our products and capabilities. These include higher speed telecom and datacom transmission solutions in the range of 400 to 800 gig, photonic solutions for 5G front haul and backhaul, and newer advanced ROADMs and other telecom transport solutions.

The computer vision revolution that is driving our 3D sensing and LiDAR business is in its early days. Computational photography and augmented and virtual reality should drive the expansion of world-facing 3D sensing across many new smartphone designs and into consumer electronic devices and wearables. The increasing use of LiDAR and in-cabin 3D sensing in automobile and delivery vehicles significantly adds to our long-term market opportunities. We have made significant investments in R&D and developed a broad portfolio of new products and technologies that address both upcoming and long-term growth opportunities. This has been done in close coordination with our customers, and we have obtained many important design wins.

We are now starting to scale up production of many of these new products. We have exited underperforming product lines that would have been a drag on future growth. We continue to lower our fixed costs, thus increasing operating leverage and profitability as we grow. Our second quarter results underscore all of these points with strong incremental profitability and an increasing level of new products in the revenue mix.

Two weeks ago, we announced the Coherent acquisition, which will expand and diversify our revenue and market opportunities. A motivating factor for this transaction is the significant role we believe photonics will play across the value chains supporting many important long-term secular trends. For example, this includes the increasing role that lasers and photonics play in the manufacturing of the growing number of advanced semiconductors, displays and microelectronics that enable the digital transformation that I mentioned earlier. Another example is the increasing role of lasers and photonics in the manufacturing and supply chains of electric vehicles and energy storage solutions. This is an important and significant opportunity as the world transitions to these sustainable technologies to combat climate change.

The Coherent acquisition will expand our market opportunities in fertile new areas for photonics, including in bioinstrumentation and aerospace and defense. It will also strengthen our innovation engine to better serve the customers of today and tomorrow. In addition to the top line growth opportunities I have outlined, we believe there are significant efficiencies and optimizations to be gained in the combination with Coherent. With our proven track record of execution, we are confident the combination will ultimately deliver financial performance consistent with the targets we set forth in our first quarterly earnings call last November. I look forward to a timely completion of this transaction and the welcoming of the talented employees of Coherent to the Lumentum team. While the future is truly bright at Lumentum, I believe it will be even brighter with the addition of Coherent.

Now on to more details about our second quarter. Telecom and Datacom revenue grew 10% sequentially and 7% year-on-year. Excluding revenue from the low-margin product lines we have divested or discontinued, Telecom and Datacom revenue grew 17% year-on-year. The largest contributors to growth in the second quarter were ROADMs, high-speed 600 and 800 gig indium phosphide coherent components, DCO modules and submarine products. Late in December, one of our contract manufacturing partners in Malaysia temporarily suspended production to implement measures to protect employees from COVID-19. This impacted second quarter revenue by approximately $6 million. In Telecom, we continue to see our revenue mix shifting towards new products aligned with our customers' next-generation systems. In the second quarter, we further ramped 400G and higher speed transmission solutions, and we qualified several new ROADM designs with major customers in the West and in China.

To this last point, we began shipping a complex twin MxN ROADM blade with other integrated functionality to a major western customer for new web scale and other network deployments. As I mentioned earlier, the telecom and datacom industry is poised for a transition to next-generation networks. We anticipate strong growth in the coming years as network operators deploy 400, 600 and 800 gig systems with new integrated transmission solutions and ROADMs. We believe this upcoming telecom technology upgrade cycle has been delayed by COVID-19, which should start to accelerate as global vaccinations increase over time.

In our datacom chip business, as expected, 5G fronthaul weakness in China impacted second quarter growth. Cloud demand remains very robust. Last quarter, we adjusted our wafer start to better align with this new demand mix and expect to grow into the third quarter.

We have a large and growing multi-quarter backlog. Market dynamics are favorable with increasing volumes and transitions to higher speeds where we have very differentiated products. Revenue from high-speed PAM4 EMLs has nearly doubled from year ago levels. And we recently introduced a breakthrough 53 gigabaud PAM4 DML as customers seek even more cost-effective solutions to accelerate 400G growth and future 800G applications. Our wafer fab expansion plans are on track with meaningful capacity additions coming online later this calendar year.

Looking to the third quarter, we expect Telecom and Datacom revenue to be down sequentially due to seasonal factors and the anticipated timing of new end customer deployments. Industrial and consumer revenue declined modestly quarter-on-quarter. We believe we have a larger 3D sensing opportunity this fiscal year compared to the last, but it will be spread out more broadly in time. As such, we expect a lower seasonal decline in the third quarter compared with prior years.

Within industrial and consumer, the contribution from industrial is now approximately 5%, about half of where it has been over the past several years. This has been driven by a transition to selling chips versus modules. We are optimistic about growth in the 3D sensing market in the coming years. We believe the introduction of 5G is driving an accelerated smartphone upgrade cycle. New applications, such as computational photography and augmented and virtual reality, have the potential to drive world-facing 3D sensing capabilities more broadly, especially across the Android customer base. We are working closely with major Android customers on world-facing 3D sensing capabilities for their future products as they seek to differentiate their offerings. We believe our experience and leadership in current high-volume world-facing deployments positions us very well with these customers.

We believe new customer devices and wearables that may reach the market in the coming years will benefit from 3D sensing capabilities and will drive additional market growth. Adding to this, customers in the security and access control market are looking for 3D sensing to enable higher security and touchless, contactless solutions. This is of increasing importance in a post-COVID-19 world.

LiDAR and 3D sensing for automobiles and delivery vehicles add significantly to our long-term market opportunities. We believe our unmatched and invaluable photonics experience spanning 3D sensing, communications and industrial lasers gives us a competitive advantage as we pursue these new opportunities. We are closely engaged with a wide range of customers. These include autonomous and delivery vehicle manufacturers, major Tier 1 auto suppliers and LiDAR solution providers.

During our second quarter, we completed a number of design wins, some of which are targeting start of production during calendar year '22. In addition, we have many other customer engagements that are in various stages of qualification.

Turning to commercial lasers. Revenue grew 24% quarter-on-quarter. The largest contributor to growth was micro materials processing, including 5G applications. We expect lasers growth to continue into the third quarter. While we believe that it will take several quarters before we get back to the revenue levels we saw in fiscal '20, we are cautiously optimistic that we have seen the worst of the impact from COVID-19.

Lasers gross margin also grew quarter-on-quarter to 47.5%. We believe we are a leader in the lasers industry on this metric despite having significantly lower scale than larger industry players. We believe this is because we have unique design and manufacturing experience and capabilities borne from our many years of leadership in the photonics market. We expect to leverage this experience and these capabilities when we are able to combine with Coherent.

Throughout my remarks, I've highlighted how we are well positioned for continued top and bottom line growth over the next several years. We have made significant investments in differentiated new technology and products for new customer programs, attained many key design wins and are on track for more. In each of our markets, there are significant catalysts for growth. We have a new generation of telecom and datacom solutions and customers who are poised to ramp them. We have the expansion of world-facing 3D sensing in mobile devices and wearables and emerging LiDAR applications further add to our market opportunity. The broader lasers market we address is recovering from the impact of COVID-19, and we will benefit from this and additional growth driven by differentiated new products. We have exited underperforming product lines that would have been a drag on future growth.

The Coherent acquisition brings a significant opportunity to create a larger, more diverse photonics technology company. One with leading capabilities well aligned with many important long-term trends and financial performance consistent with the targets we previously set for Lumentum.

Before handing it over to Wajid to review the numbers, I want to thank and acknowledge all of our employees around the world. They have been incredible, especially so working through the pandemic. Our employees are absolutely the company's greatest asset. I would also like to thank our customers, suppliers and shareholders for their support and partnership during these challenging times.

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

Thank you, Alan. Good morning, everyone.

Turning to the second quarter's numbers. Net revenue for the second quarter was $478.8 million, which was up 6% sequentially and 5% year-on-year. GAAP gross margin for the second quarter was 48%, GAAP operating margin was 24.1% and GAAP diluted net income per share was $1.06. Second quarter non-GAAP gross margin was 53.4%, which was up 140 basis points sequentially and up 600 basis points year-on-year. The sequential and year-on-year growth was driven by improved gross margins in both the Optical Communications and Lasers segments. As Alan highlighted, this record gross margin performance demonstrates the improvements we have made in our financial model.

Second quarter non-GAAP operating margin at 35.5% increased 180 basis points sequentially and 670 basis points year-on-year. These results were driven by gross margin improvements as operating expenses have increased due to increased investment in new capabilities. Second quarter non-GAAP operating expenses totaled $86 million or 18% of revenue. SG&A expense was $38.2 million. R&D expense was $47.8 million. Second quarter non-GAAP net income was $155.7 million. This includes $200,000 of net interest and other income and $14.4 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 more conservative in our investment portfolio. Non-GAAP diluted net income per share was $1.99 based on a fully diluted share count of 78.4 million.

On the balance sheet. We ended the quarter with $1.7 billion in cash and short-term investments, up $90 million quarter-on-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.

Turning to segment details. Second quarter Optical Communications segment revenue at $449.1 million increased 5% sequentially due to growth in telecom and datacom and 10% year-on-year due to higher telecom and datacom and industrial and consumer revenues. Optical Communications segment gross margin at 53.8% increased 130 basis points sequentially, primarily due to higher ROADM volumes and improvements in manufacturing efficiencies and 580 basis points year-on-year due to a more favorable revenue mix, improved telecom and datacom margins and synergies from the Oclaro acquisition.

Our Lasers segment revenue at $29.7 million increased 24% sequentially but remains 39% down year-on-year due to COVID-19 impacting demand. Second quarter Lasers gross margin increased to 47.5% due to an increase in manufacturing volumes and mix favorability.

Now on to our guidance for the third quarter of fiscal '21. Please note, the outlook we are providing is on a non-GAAP basis and is based on our assumptions as of today.

We expect net revenue for the third quarter of fiscal '21 to be in the range of $425 million to $440 million. This revenue projection includes telecom and datacom declining sequentially due to seasonality and the timing of end customer deployments Industrial and consumer declining due to seasonality and commercial lasers increasing quarter-on-quarter, driven by further market recovery from COVID-19.

Based on this, we project third quarter operating margin to be in the range of 27.5% to 29.5% and diluted net income per share to be in the range of $1.31 to $1.46. At the midpoint, these projections incorporate an approximate $6 million increase in operating expenses, primarily related to the annual reset in payroll tax and benefits rates, new hiring and the additional payroll expense associated with our 14-week quarter. These projections also assume an approximate share count of 80 million, an estimated other expense of $0.8 million and an estimated tax expense of $12 million.

During our first quarter earnings call last November, we provided a new target model for the company. While our second half fiscal '21 performance is still expected to be below the target model due to seasonality, given our first half performance, we believe we will meet or exceed our gross and operating margin targets for the full fiscal year. With that said, I should emphasize that we intend to grow our investments in R&D to lead the market in an innovation and to expand our long-term market opportunities, as Alan highlighted earlier.

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

Thank you, Wajid. (Operator Instructions) Operator, let's begin with a question-and-answer session.

(Operator Instructions) Our first question today comes from Thomas O'Malley from Barclays.

Congrats on the nice margins here. I just had a question on mix in the top line. You started this year out talking about how this year, December could be seasonally the peak for your largest customer. And diving into the results here, it looks like that might have even come down from the September quarter. Could you just describe what's going on there? Is that something about prebuilding units? Or has there been a shift in some share? Any details there would be helpful.

Tom, this is Chris. Certainly. I think, obviously, when we go into the first quarter, this was a different situation given what was going on in the world with COVID and shutdowns in Asia and then ramp back up. But certainly, we feel we are -- or I'm not quite sure if we can comment on any prebuilds per se, but certainly, we shipped a lot of product in the September quarter. And the end customers' products were not available to customers until after that. So certainly, there was some loading up, if you will.

And then secondly, obviously, the elephant in the room is around what is our share, and we continue to believe that we maintain a very healthy share with our top customer. Having said that, that certainly, we anticipate competition coming along. And perhaps there is some increasing share loss happening in the December quarter. But certainly, we think nothing that impacts the overall strong position we have with that customer.

That's helpful. And then on the follow-up, obviously, on the gross margins as well. The strong performance in December is indicative of some strength in the telecom and datacom core business. Can you talk about what drove that? You indicated some increased ROADM sales, and then you also talked about a western customer coming on. Is that something that's going to increase that gross margin profile as well going forward? And is this higher rate kind of sustainable as you go through the end of the year? Obviously, you commented on hitting that fiscal year target. But just anything on the margins going forward at this higher rate.

Yes. Tom, I'll give you my thoughts and then let Wajid kind of correct me. But I'd say that if you look at the mix in the quarter, our chip business actually was down and our margins went up. And so that is indicative of gross margin improvement in our Lasers that we talked about, but as well on our Telecom, mainly due to significant growth on the top line from transport, which includes our ROADMs. And so we had a good ROADM quarter. And I think it's about differentiated products, and that's why we're going to continue to invest R&D dollars to give customers the value proposition so they're willing to pay and give us those kinds of margins, and that's really what happened from my perspective.

Wajid, do you want to add to that?

Yes. I mean, if you -- Thomas, if you take a look at our comments at the beginning of the quarter, we had said that we're coming up with a new business model of 50% gross margins and 30% operating margins. And at that point in time, based on how we thought the full fiscal year was going to go, we did not think we were going to achieve that model. And we have set that more as a midterm model.

And from our script today, you can see that our expectation now is that we will either achieve or exceed that model for the full fiscal year. So certainly, things have trended better for us, whether that be the new products that Alan just spoke about or whether it's our ability to continue to lower our fixed costs within our manufacturing facilities as well as, quite frankly, the uptick we've seen in our Lasers business also helping the overall operations.

So just like Alan said, despite the chip business coming down a little bit, we've been able to maintain gross margins and give confidence for a full year as well.

Our next question comes from Alex Needham (sic) [Henderson] from Needham & Company.

I wanted to go back on to the 3D sensing business. There seems to be a lot of anxiety around the competition there. There's a thought process coming from some people that perhaps you might have overreached with respect to your allocation and market share and pricing with your primary customer and that pricing may be under more pressure or share loss maybe a little steeper as one of your primary customers reins in the outlook on that front.

Can you comment on whether any of that has validity or whether that is an overstatement? Or how -- or should we be seeing a meaningful change in your share allocation? And in that context, do you expect over calendar '21 to be maintaining a growth trajectory in your 3D sensing business?

Yes, Alex. I think as far as the share is concerned, it's hard to tell where we are. I would say that our focus is to really make sure that we continue to be the design house for not just our leading customer, but for all of our 3D sensing customers. And I'd tell you that the team is focused on allowing our customers to get to market with differentiated products like the world-facing that we are ramped and shipped a lot of those units and doing quite well.

So as far as share commitments and pricing, I'm not going to comment too much on that other than to say we do have long-term agreements in place that we know what our share is going to be at a minimum, and we believe we're getting significantly more than that, especially as we ramp new products because of our leadership position and our ability and proven track record of ramping new products.

Chris, do you have anything to add on that?

No, I think you covered it well, Alan. I mean, I think certainly, that as we look ahead, the computer vision revolution that this 3D sensing plays into is in its very early days. So as we look out to calendar '21 or our fiscal '22, there's plenty of growth catalysts in 3D sensing proper. And then obviously, at least in our vernacular, we're wrappering LiDAR in our 3D sensing business unit.

We've got world-facing capabilities have emerged in our top customer and really driven by photography applications, and that's been a killer app for smartphones for the past decade. And we have a lot of engagement and traction with Android customers who need to have that capability in order to have that top-notch world-class camera going into their future product cycles. Then you have things outside of phones and whether they be wearables or other devices that will ultimately incorporate 3D sensing.

And as Alan highlighted in his prepared remarks, that the automotive ramp of LiDAR is in very early stages. We've got design wins, things that should start levels of production in our calendar year '22.

So I think there's a long growth trajectory in our 3D sensing business, whether that's calendar '21, but out into calendar '22 and beyond.

So is that a yes, you expect growth in 3D sensing in calendar '21?

Absolutely.

The second question I had is really on the Android side. Obviously, the high-end Apple products have been much better than anybody had expected. And clearly, the photography app, in particular, was a key piece of that.

There was a discussion in the prior quarter that the Android manufacturers were worried about COVID and therefore, were shifting more of the focus to the lower end of the margin or of their product line and therefore, were slower to adopt world-facing and some of the additional technologies implied. Has that shifted as a result of the significant success at the high end of the market that Apple experienced?

Yes. Alex, I think whether it's shifted or not, I think we've been engaged with all of the Android suppliers on world-facing products. And I guess the flurry of activity has increased some. But until they announce a product or until they have a plan of record that includes world-facing 3D sensing, it's not part of the plan of record. And so our anticipation is that later this year, we'll start seeing that in a more meaningful way. And that's why we're very confident that calendar year '22, we'll see expansion beyond our lead customer and into the Android world.

And our next question comes from Meta Marshall from Morgan Stanley.

Great. I wanted to ask a couple of questions. One, clearly, the telecom business is doing quite well. But just with one of your major customers, Ciena, kind of expecting the second half rebound in their business. Just the timing of when you might see some further uptick in the telecom business from resumption from major customers?

And then the second piece is, clearly, the DCO business is doing quite well, as you noted in the transcript. With the Acacia transaction closing, is there any expected disruption to that partnership or you would expect that to continue for the DCO business?

Yes, I'm not going to comment specifically on a specific customer because I'd get in trouble for doing that. But I will say, as we said in our script, that the new generation of products, from 400, 600, 800 gig and our next-generation ROADM, those systems have been designed by our customers, and they're waiting to be deployed. And the only thing holding back them from being deployed is being able to get on planes and install these new things that take more effort than adding more of the old stuff.

And so as we -- at least my view on things is, as we see vaccinations becoming more prevalent across the globe, we think that things will pick up and we'll start seeing in the second half of the year those deployments are becoming more meaningful, and we're poised in adding capacity in anticipation of that.

So I think our sentiment is that the second half of the calendar year will see a big deployment of 400, 600, 800 gig and high-end ROADMs for those next generations of systems to handle this digital transformation of what's going on in the world. So that outlook is pretty strong.

As far as DCOs are concerned, as I said in our conference -- in the script, we saw significant growth from our DCO product. We're doing a lot of design work now on our 400-gig DCO. I don't think the acquisition of Acacia has any impact on that other than to say that our customers don't want to be beholden to a competitor of theirs. And so I'd say we've probably seen more traction over the last 6 months than we've seen in the past for having an independent supplier of DCO modules in the market. So I think both -- from both fronts, we're optimistic.

And our next question comes from Samik Chatterjee from JPMorgan.

Great. I just wanted to start off firstly, on the automotive or the LiDAR opportunity and see if you can talk about what are you seeing in relation to how the automotive LiDAR supply chain is developing? I'm just curious because you mentioned you're working with OEMs as well as some of the LiDAR solution providers.

How critical should we think Lumentum's IP and design capabilities are? Or is there an opportunity for some of the LiDAR solution providers to kind of have their own designs and work with contract manufacturers directly? And I have a follow-up.

Yes. Thanks, Samik. That's a great question. Yes. So I would say that the value momentum brings to LiDAR in the automotive space in general is obviously the leadership we have in both 3D sensing and telecom and in our industrial or commercial lasers business, we bring a wealth of capability and technology to bear. And our strategy and goal is to be a partner of all the folks building LiDAR, whether that be, I think, the LiDAR solution providers, if you will, the folks that are building modules or the folks that are actually putting LiDAR into their automobile applications.

And today, what's exciting about this opportunity, obviously, is over the long run, it can be very significant with base number of, say, 100 million or at least the order of 100 million vehicles that are produced every year. Just having, perhaps at the laser chip level, tens of dollars of content or at the module level, hundreds of dollars of content per automobile adds up to a pretty big market. And what we see today in terms of the supply chain is varied because there's a lot of new players in this. Ad it's very transformational for the automotive industry, new technology that's not necessarily the traditional auto manufacturers, auto suppliers, be clear-cut leaders in.

So what I would say is our partnerships span from traditional auto manufacturers to autonomous vehicle manufacturers to folks that are building LiDAR modules, then supplying into those same supply chains. And in the nearer term, perhaps the delivery vehicle, autonomous vehicle is where we're seeing not really the most traction, but probably where you'll see the initial sales go into because they're able to move a little faster and ramp a little more quickly. Whereas the consumer or passenger vehicles, if you will, that you or I would drive or hopefully not drive -- sit in, let it drive itself, are a little longer term, but probably the larger opportunity, and those get rolling probably a couple of years after the start of the autonomous vehicle and delivery vehicle applications.

Got it. That's very helpful. Chris, if I can just follow up on the datacom side. I think you talked about -- you talked about the 5G front haul demand moderating in China. How should we think about your capacity plans? I think you had outlined doubling capacity on the datacom chipset side? Are we still kind of on track to do that given some of the moderation in demand? And then what are the broader implications here for the telecom group? And should we expect to see some softness in telecom as kind of broadly seeping through the weakness you're seeing in China in 5G rollouts?

Yes. I think -- this is Alan, Samik. I think what we said in the last call was that we've seen a slowdown or a pause in the deployment of 5G. And I think leading up to that period of time, there was a euphoria of 5G rollout. And so I think that we're kind of going through some inventory burn of datacom chips in 5G that are being deployed now, and radio base stations are being deployed in China, just to a lesser degree than we had expected at the end of last year. That said, I think that there will be a significant amount of radio base stations shipped in China, very significant, and we'll start seeing the 5G pick up as that inventory drops off.

That said, the hyperscale demand is very strong. And we have very differentiated products in both our EMLs and what I talked about on our DMLs, 53 gigabaud. And so we see a lot of traction as hyperscalers are moving to that higher speed datacom transceiver, utilizing our state-of-the-art EMLs and now DMLs. And so I think we're optimistic for the demand as that capacity comes online.

And so I think it was 2 quarters ago, we said we're going to double the wafer capacity, and we're on track to do that later this year. And we think it will be consumed as well because we do have, as we said, we do have a growing backlog of multi quarters. And so we do have demand that we need to satisfy. And as we bring on that capacity, our datacom business will ramp.

Chris, do you want to take the telecom part of that?

Yes. I mean, I don't think -- we don't think the same factors that are driving the softness in China 5G are necessarily driving a slowdown in telecom. In fact, I think, as Alan said, the 5G was very aggressive upfront as China had set national goals around base station deployments, et cetera. I think the telecom guys are just trying to keep up with that very strong pace. And the telecom market, I think a question earlier had asked about it being very strong today. I'd counter with it's mixed today that we've had over the past year, some areas of strength, certainly, in some of the ACO and 100-gig solutions. But ROADMs have been slow over the past year, and we saw a pickup this past quarter getting back to sort of like a 2-year ago levels, if you will.

And so the telecom market, we believe, as Alan had highlighted in the prepared remarks, is really prepared to take off or accelerate once the world is able to travel and get out and install these new networks. And the 5G challenges that are happening in China, we believe, are just temporary in nature, that there's still a lot more 5G to go in China, and there will be a lot of telecom deployed in China, outside of China to support the 5G that's going in globally.

Our next question comes from Rod Hall from Goldman Sachs.

I wanted to start off with this $6 million of manufacturing push and just double check that -- well, for one thing, it sounded like Alan, that was in telecom, but also, is that in your guidance, so that do you expect to get the $6 million back in the guidance? And I have a follow-up.

Yes. It was telecom. And whether some of that demand went to other suppliers or not is not clear. I'd say that certainly on the ACO, where -- which is a part of that, that just moved into the Q3 guidance. And so yes, whatever we think is not gone to other competitors is contemplated in our guidance.

Okay. So it's something less than the $6 million balance, to be clear, I guess?

Yes.

Okay. And then the second thing I wanted to ask about was I just want to come back to the Coherent deal. One of the things that it looks to us -- like there's definitely manufacturing overlap, at least in some places. I'm curious if the synergies you guys have talked about contemplate consolidation of manufacturing? Or is it still too early to thought through all that in detail and that's still a possibility down the road.

Yes. We have a synergy target that we talked about 2 weeks ago, and we said that 2/3 of that will come from COGS. We have to get through the integration planning process to really critically pinpoint the plans to get those synergies. I mean, some of them will come from supply chain. Some will come from manufacturing overlap, to your point. But the details of that still need to be worked out as we get closer to that integration planning phase of the deal.

I think my excitement around the Coherent deal is around getting the combined larger company to that model that we talked about earlier. But it's also about putting 2 incredibly talented teams together to accelerate the innovation engine because photonics is really playing a key role in a lot of the long-term megatrends. And I think the combination of the 2 companies really puts us at the forefront of that.

And our next question comes from John Marchetti from Stifel.

I just wanted to follow-up, Chris, on some of your comments around the ROADM business, particularly with the outlook in China as we're looking out here over the second half of the fiscal year. You mentioned some of the strength with the new western vendors and some of the new ROADM business there. Curious how that business is now trending in China? And how we should think about that as a contributor on the telecom side looking out in the second half of the fiscal year?

Yes. So I think as we've talked about in prior calls, that China has historically not been a deployer, if you will, of ROADMs in their domestic networks. And we continue to believe that they will transition to that, and that is driving strength in our outlook with a broad swath of our customers in China. So we do expect that to contribute to growth.

But to be clear, we also expect our western customers to grow quite strongly in ROADMs. I mean, ROADMs are sort of the essential element along with optical amplifiers that go in brandnew network deployments, and we expect new telecom networks to go in globally. So China and in the west. Whether that's starting in the second half of this year, but -- or for this calendar year. But certainly, it's a multiyear upgrade process in both geographies, the west and the east.

And then I guess just as a quick clean up for that. Can you guys talk at all about maybe where Huawei was in the quarter? And if there's any change to your outlook on them relative to what you gave last quarter as a kind of outlook for the second half of the year?

Yes, no problem, John. So last quarter or at least on last quarter's earnings call back in November, given there was a change during the quarter in August with the regulations, we provided a bit more commentary around our business on -- our business with Huawei. And we indicated that, well, sales would decline quarter-on-quarter. It will be less than 10% of total sales. That's what's happened and consistent with our commentary. We continue to believe that our sales to Huawei in fiscal '21 will be down from our sales in '20, given the dynamics around that situation.

And our next question comes from Simon Leopold from Raymond James.

First thing I wanted to see if maybe you could help us understand is how your mix is between world-facing and front-facing in the 3D sensing? Specifically, you've talked in the past about having better share in world-facing. If you could elaborate on that and whether or not you're starting to see Android trickle into the mix on the world-facing? And then I've got a follow-up.

Yes. Thanks, Simon. I think as with any new product launch, our expectations is that we have a -- and maintain a large share of that, given our proven track record to our customers. And so I'd say that, to your point, our world-facing share in the December quarter was quite large relative to share of front-facing. But that's all speculation, and I think it's best to ask our friends next week.

As far as Android, it's still very small and -- but optimistic about the future. And I'd say that because the level of activity around world facing, and to Chris' earlier point around computational photography, has got a lot of traction. And given that our leadership position on world-facing production volumes, quality, reliability, we feel that we're in a good position with all of the major Android suppliers. And we expect, as I said earlier, to see some design wins and records of putting world-facing into those devices later this year.

And then just as a follow-up, I wonder if maybe you could offer us a time line of when you would think the LiDAR opportunities could become material. And I'm really not looking for something by quarter, I'm thinking by year. But maybe help us think about the trajectory of how you envision that opportunity materializing?

Yes, Simon, this is Chris. So kind of as we said earlier, that calendar '22 is really when I think we'll see the first start of production. I mean, certainly, we are shipping poles or very moderate volumes into niche applications for LiDAR. But until we get out into calendar '22 is when we start to see more meaningful revenue.

And with that said, this is a market that -- not quite like the consumer electronics market where there's a whole heck of a lot of revenue can be generated in a year because of the model -- the turnover in customer models. The auto industry, we expect it to be a multiyear to evolve kind of on the S curve, if you will. But I think as we look into calendar '22, the opportunity starts to become more meaningful, but it will take several years to get to the kind of levels that I talked about with the high penetration of that 100 million vehicle units per year.

And our next question comes from George Notter from Jefferies.

I guess I wanted to follow up on the Huawei discussion. If we go back a number of quarters ago as the whole Huawei situation was flaring up, we talked about a safety valve of sorts in this business. And the idea was that you could ramp other western vendors in terms of your sales. And I think also, you talked about how your dollar content was higher in some of those other vendors' products relative to Huawei.

So I guess a few quarters on now, I'm wondering if you're seeing that shift to other OEMs in your business? And any flavor you could give us for that would be super helpful.

Sure, George. Yes, as we said in the prepared remarks, we've started production qualification of a western company with the MxN blade with other functionality that we expect to ramp up meaningfully.

If you go back in time, Huawei was an early adopter of that leading-edge technology that's now going more broadly across the western customers of ours. And as we look forward, when people can deploy these new networks in 400, 600, 800 gig and MxN ROADMs, I think we're optimistic that, that demand will ramp up and be able to really see meaningful growth in our ROADMs and high-speed transmission products.

And our next question comes from Ananda Baruah from Loop Capital.

Appreciate the questions. Just 2, if I could. The first is on 3D sensing. Alan, you mentioned sort of minimum -- maybe this is Wajid, but it was mentioned minimums in the longer-term share -- in the longer-term agreements. Does that also include minimums for pricing?

And then also along with that, I think it was mentioned in the prepared remarks, seasonality spread more throughout this year, through calendar '20 for that 3D sensing growth. So just a clarification there. And then I have a quick follow-up on telecom.

Sure. I mean, customer agreements, we don't get into a lot of details. But certainly, in order to be committed to share, they're going to be wanting to be committed to price. And so from that perspective, you would imagine that most of our contracts, if not all of our contracts, have committed share and committed price for some duration.

The comment around the seasonality spread was around -- historically, we saw between the December quarter and March quarter, a more dramatic dropoff, and then again, in the June quarter, even more. And we're saying that in the March quarter, we're not seeing that much of a dramatic dropoff as compared to prior years.

Looking forward into June, June is usually where the dropoff is more significant and as new models get ready for the shelves in the September quarter. So that was really the intent. Our fiscal year '21, we believe that our opportunity and our revenue for 3D sensing is going to be bigger than fiscal '20. And it's going to be more broadly spread out. And so that's what's contemplated in our guidance for the March quarter.

That's super helpful. And then just quickly on telecom. Really, 5G dynamics in China when the stuff of Huawei really kicked in, in the new way in the fall. I think the conversation was around over a number of months that the shift from Huawei to other folks in China would sort of level out the dollar opportunity there. Can you just give us an update on -- do you think that still is the case inside of China eventually? And when do you think that could begin to occur?

Yes. We have a lot of traction with other Chinese customers of ours outside of Huawei. I think it's going to take a considerable time given the size differences between Huawei in China and the rest of China suppliers in China.

Now our expectation is that those other companies continue to grow, and our traction with them is very strong. So I don't know if it's quarters or years, but I think from that perspective, we do have higher share of wallet, I would say, outside of Huawei with other Chinese customers as well as western customers. And so if or when share moves from a Huawei network to another supplier network, we believe that's a tailwind for us.

And our next question comes from Ryan Koontz from Rosenblatt Securities.

I wanted to circle back on your comment on a robust outlook for hyperscale. And I wonder how you kind of contemplate impact of ZR there? And as that starts to ramp late in the year and impact to '22, if you could comment on your perceived market position?

Ryan, this is Chris. So I guess when we made our comments around robust hyperscale demand, I think, at least the context in the prepared remarks was around within the data center. So the chips that we supply to folks building transceivers, whether that's 100 gig all the way up to now increasing at 400 gig. And for us, demand is really strong, given our differentiated products, particularly as you go to 200 gig, 400 gig and beyond.

When it comes to ZR, at least in our way of classifying products, that would be a telecom product outside the data center. And certainly, that's something that we're pursuing, developing. It plays in the sweet spot given our photonic integrated circuit capabilities based on the indium phosphide platform that we -- really was accelerated with our acquisition of Oclaro. So that's definitely a product that we have high hopes for as well as other indium phosphide-based products, whether that's higher performance versions of ZR modules and the ZR plus or DCO modules, all based on our indium phosphide photonic integrated circuit.

Chris, do you feel like you are engaged in some of the kind of early design cycles there? Or is that something you'll pick up, say, as a kind of a round 2?

I would say, certainly, we're -- we have a long-term relationship with all the relevant customers. And so we are engaged with them in ensuring that we have the right product, the right specs and that we have a seat at the table as they allocate commercial business. So absolutely.

And ladies and gentlemen, that is all the time that we have for today. I would now like to turn the conference call back over to Jim Fanucchi for closing comments.

Thank you. That does conclude our call. We would like to thank everyone for attending, and we look forward to talking with you again when we report our third quarter fiscal '21 results. Have a good day.

And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.