Good day everyone, and welcome to the Lumentum First Quarter Fiscal Year 2021 Earnings Call. All participants will be in a listen-only mode. Please note, today’s event is being recorded. At this time, I would like to turn the conference call over to Jim Fanucchi, of Darrow Associates. Sir, please go ahead.

Thank you, operator. Welcome to Lumentum's first 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 and our expected financial performance, including our guidance, as well as statements regarding our future revenues from Huawei, our financial model and our long-term margin targets. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risk factors described in our SEC filings, including the company's quarterly report on Form 10-Q for the fiscal quarter ended September 26, 2020, which the company expects to file later today, and in Lumentum's 10-K for the 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 first quarter 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 the 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. 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’d 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. Our thoughts are 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 onto 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 needs for our differentiated products and technology. We intend to invest strongly in R&D to address these positive long-term trends and strengthen our market leadership positions. First quarter revenue was in the upper half of our guidance range. Our revenue mix was different than we had contemplated in our guidance due to the changes throughout the quarter. Our assumptions for 3D sensing improved 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. ROADM sales increased from last quarter, but we're still down year-on-year. However, our contentionless MxN ROADMs grew more than 30% quarter-on-quarter to a new height 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 a contentionless MxN and high port count ROADM technologies with C, L and extended C-band versions to enable customers in their 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 forecast that lower projected 5G demand offset by continued strength in demand for our market leading chips for data centers. We have adjusted our wafer start plans accordingly. Our backlog for datacom chips remains very robust and demand continues to outstrip our wafer fab capacity. As such, we are continuing to aggressively expand our wafer fab 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 200 gig 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 ROADMs. Industrial & 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 VCSEL arrays per year continues to put us in a leadership position in the market. Since we became an independent public company 5 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 for consumer devices we are now shipping. Looking to the second quarter, we expect Industrial & 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's potential for a strong consumer upgrade cycle driven by new features, including 5G, augmented and virtual reality and computational photography. Further, we believe there's potential for market share shifts at our customer's 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 multiyear product and technology roadmaps aligned with our consumer electronics customers. These include unique technologies to increase the integration of other components, enable under screen 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 electronics applications and broad industry leading photonic capabilities used across other markets. We believe this gives us a competitive advantage as we pursue emerging long-term opportunities outside of consumer electronics. In the past quarter, our VCSEL 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 VCSEL 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 laser qualification with major Tier 1 auto suppliers for broader automobile opportunities that we'll 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 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 Innovators award for being one of the most innovative products impacting the photonics community this year. I want to provide some color on our business with Huawei, given the regulatory restrictions that were announced in August. Sales to Huawei declined in the first quarter and were less than 10% of total 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 handing 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 a site each having their own personal challenges, living and working in these times. In addition to our business goals, contributing to society and our local communities is very important to 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.

Thank you, Alan. Good morning, everyone. Let’s review the first quarter's results. We reported net revenue of $452.4 million for the first quarter, reflecting a 23% increase sequentially and a 1% rise year-on-year. The GAAP gross margin was 45.5%, with a GAAP operating margin of 21.9% and a GAAP diluted net income per share of $0.86. Our non-GAAP gross margin for the first quarter was 52%, up 480 basis points sequentially and 620 basis points compared to the previous year. This growth can be attributed to a better product mix and synergies from acquisitions. As Alan pointed out, this record gross margin performance highlights the enhancements we've made to our financial model. The first quarter’s non-GAAP operating margin reached 33.7%, a sequential increase of 890 basis points and a 640 basis point improvement year-on-year, driven by the rise in gross margin while operating expenses remained nearly unchanged compared to prior periods. The total non-GAAP operating expenses were $82.7 million, representing 18% of revenue. SG&A expenses accounted for $36.8 million, while R&D expenses were $45.9 million. Operating expenses remain slightly below typical levels due to reduced travel and other costs resulting from COVID-19. For the first quarter, non-GAAP net income stood at $139.2 million, which includes $900,000 in net interest and other income and $14.2 million in tax expenses. The sequential decline in other income is due to lower interest rates on our cash and short-term investments, alongside a cautious approach to our investment portfolio. The non-GAAP diluted net income per share was $1.78, based on a fully diluted share count of 78.2 million. Now, looking at our balance sheet, we ended the quarter with $1.61 billion in cash and short-term investments, an increase of $57 million from the previous quarter. Strong growth in our accounts receivable during the first quarter should contribute to significant cash generation in the second quarter. We have $1.5 billion in convertible notes with no term debt, including $450 million due in 2024 and $1.05 billion due in 2026. The annual cash interest expense related to these notes is approximately $6 million. Financially, we are well-positioned with a solid margin model, substantial cash reserves, minimal interest expenses, and long-term financing. Now, let’s dive into the segment performance. The Optical Communication segment generated $428.5 million in revenue for the first quarter, a sequential jump of 29.7% driven by 3D sensing seasonality along with growth in telecom and datacom sectors. Compared to the same quarter last year, optical communication revenue grew by 3% supported by higher earnings from telecom and datacom, particularly from strong growth in our chip business. The gross margin for the Optical Communication segment was 52.5%, up 590 basis points sequentially due to an improved product mix with increased chip-related revenue, and 640 basis points overall year-on-year due to enhanced product mix, better margins in telecom and datacom, and acquisition synergies. In contrast, our laser segment brought in $23.9 million but saw a sequential decline of 37% and a 29% drop year-on-year. The gross margin for the laser segment fell to 43.5% due to significantly reduced manufacturing volumes. Moving on to our guidance for the second quarter of fiscal 2021. Please note that our outlook is provided on a non-GAAP basis based on our current assumptions. We anticipate net revenue for the second quarter to fall within the range of $465 million to $485 million. This estimate reflects expected incremental growth in telecom and datacom, stability in the Industrial & Consumer sector, and slight increases in commercial lasers. Consequently, we predict the second quarter operating margin to be between 32% and 34% and diluted net income per share to range from $1.72 to $1.90. These estimates include an expected rise in operating expenses, mainly driven by increased R&D investments for new products and technologies. We expect around 79 million shares and an estimated other income of $0.5 million, with tax expenses projected at $15 million. Before concluding, I want to share some important updates on our financial model. We believe it is beneficial to refer to the earnings slide deck on our website for further details. When we announced the acquisition of Oclaro, we set a target financial model with a gross margin range of 40% to 45% and an operating margin range of 22% to 28%. Over the last 12 months from the end of the first quarter of fiscal 2020 to the end of the first quarter of fiscal 2021, we have surpassed these targets. We are confident that we will continue to expand margins over time through further enhancements in product mix, efficiency, and operating leverage. Therefore, we are raising our annual targets for the mid-term financial model: the annual gross margin target will increase to 50%, and the annual operating margin target will rise to 30%. However, we do not expect to surpass these new targets in the current fiscal year due to 3D sensing seasonality and regulatory restrictions on sales to Huawei, which will impact the second half of the fiscal year. I will now turn the call back to Jim to commence the Q&A session.

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.

Our first question today comes from Samik Chatterjee from JPMorgan. Please go ahead with your question.

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, your key customers like Huawei and Ciena over the last 2, 3 months. Wondering if you can go into a bit more detail or share 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’ve a follow-up. Thank you.

Sure. I mean, if you looked at our guidance or in the script that 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.

So anything on what's driving the delays? Is it more likely a delay on the geographies in deploying 5G?

Well, we did see some delays in the demand for our datacom chips for 5G deployment, mostly in China. But that is easily taken up by demand, strong demand in hyperscale cloud data centers. And so we've had to shift our wafer starts in our datacom business towards more of 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 & 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 has changed on that front or what are your assumptions in relation to maybe market share when you are kind of guiding to that for the December quarter?

Yes. 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 customers' launches. But so far, everything was positive. I do think one thing that maybe 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.

Our next question comes from Rod Hall from Goldman Sachs. Please go ahead with your question.

Thank you for the question and great job on the earnings. I'd like to start by discussing the recent order trajectory in the last few weeks since the new lead customer phones have launched. Have you noticed any changes in 3D sensing or order patterns, or have things remained consistent over the past couple of weeks? I also have a follow-up.

Well, I mean, we've seen strong demand through August and September and it carried through October. So it's more of a front-end loaded quarter. Now that could carry throughout the balance of the quarter, but our guidance doesn't contemplate that. So I'd say we're in a good position. As far as market share, I think you'd have to ask our competitor, because they don'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.

Thank you, Alan. I wanted to check the current situation regarding datacom capacity. Could you provide us with more specific information about when that fab capacity will come online and how much additional capacity you are adding? Please give us some insight into the capacity developments.

Yes. As we mentioned in the August call, we expect to double the wafer capacity over the next 18 to 24 months. This will occur in phases, and our cycle time for datacom wafers is longer than a quarter. As noted in my previous remarks, the transition from 5G to data center takes time. Therefore, in the short term, we will face limitations with data center chips. I believe we can achieve significant growth in revenue and volume over the next two years, but there may be some price reductions that could offset this growth. Nonetheless, we anticipate strong demand in two years to consume twice the production levels we have today.

Okay. But you can't say when the next big chunk of capacity comes on?

I would say probably in the middle of next year, we will see an increase in our capacity. We gained some incremental capacity last quarter, growing by 6%. We expect to continue making incremental improvements through better yields and productivity. So, I believe by the middle of next calendar year, we'll see a significant increase in installed capacity that will allow us to take advantage of demand in the second half of the year.

Our next question comes from Alex Henderson from Needham and Company. Please go ahead with your question.

Great. Thank you. Can you hear me okay?

Yes, Alex. Thanks.

I wanted to discuss the ROADM segment of the business. We've seen strong performance in MxN, and I would assume this comes primarily from Western accounts rather than Huawei, which typically focuses on lower-speed offerings. Given the strong demand, isn't it possible that this is linked to the timing of chassis deployments? If chassis sales slow down, could that temporarily impact demand growth? I would appreciate it if you could elaborate on this aspect, including how much capacity you are adding and the pace of these additions, as well as any timing details. Thank you.

Sure. I think as we look at that very high port count in the MxN as I 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 core count and MxN will grow dramatically over the next 18 months. I'd say that we're adding capacity. Capacity adds take 6 to 9 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 in later this year and into calendar '21.

Can you give us any calibration on the size of those capacity adds and whether you're planning the next set for say, the first half of next year?

Well, I mean, I think if you look at what we said, the MxN grew 30% last quarter. That was a big chunk coming online, but that's not going to come online this quarter. I'd say that we probably have more MxN coming on in the first half of next year as our non-Huawei customers are really starting to have meaningful deployment. That's our expectation at this point.

Our next question comes from Tom O'Malley from Barclays. Please go ahead with your question.

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 product mix a couple of 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 the big customer or is it also some real gains in that core business as you move more towards chips?

Tom, it's Wajid. I'll take that one. And then Alan and Chris can follow-up. So, yes, the strong gross margins were obviously driven by a very strong product mix. We've also had an accumulation of synergies that we talked about for a number of quarters that have added up and have added to our overall financial model. Our datacom chip business increasing 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 will exceed the long-term model for this fiscal year is because we expect to have our lasers 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 a 50% gross margins, is really lasers coming back and having Opcom continuing to improve with all the capacity improvement that Alan talked about in datacom chips and our 3D sensing business, especially the new products in 3D sensing continuing to have an uptake as you can appreciate, that's just starting to get going. And we expect that to be a real success helping us into the next few quarters.

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 were 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?

Hey, Tom. This is Chris. So yes, the 5G is front haul related. And as you can imagine 5G deployments, at least initially it's 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 a 100, 100 to 200, 200 to 400, our footprint in those customers tends to increase.

Our next question comes from John Marchetti from Stifel. Please go ahead with your question.

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 shift 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 supply chain?

Yes. 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 of our telecom and datacom products. There's some of those products we cannot continue to ship. And so I'd say the majority of the reduction from being greater than a 10% customer, a few quarters ago to today less than 10% and going down below 5%, most of that's due to regulatory restrictions. A little bit is based on demand, I'd say that like in the consumer products.

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?

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 different margin mix within our lasers business itself with some of the products achieving better gross margins, but our new products in lasers are expected to be well above that. And so as that gets into the $40 million or $45 million range, we should see a nice bump back into the 50% gross margin line for lasers.

And our next question comes from Simon Leopold from Raymond James. Please go ahead with your question.

Thanks for taking the questions. First, I wanted to just get a better understanding of the issues with Huawei. In that 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 do business with Huawei that is still a positive number? Thanks.

Yes. We are not going to get into the details of the restrictions in our products and which ones to buy, which ones are falling to the restrictions or 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 CBD at this point. We try not to guide more than one quarter at a time, but we wanted to get some color around our expectations that it's going to continue to go down and become even less meaningful to our overall business in the second half of the fiscal year.

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 your 3D sensing is 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?

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 in 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 in it. 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, 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?

Our next question comes from Meta Marshall from Morgan Stanley. Please go ahead with your question.

Great. Thanks. Just wanted to get a sense of, maybe coming back to Huawei, as that business kind of winds down a little bit or was restricted a little bit, just are you seeing any broadening out of demand from other kind of China optical vendors? And then maybe second, just you 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. Thanks.

Sure. I'll take the question about Huawei, and Chris can address the auto question. There's ongoing activity with traditional carriers that have been dependent on Huawei. However, it takes time, and as a result, some carriers are hesitant to continue relying on Huawei, which is understandable. This situation is likely to play out over multiple quarters before we start seeing the bidding cycle and the resulting deployments. Demand for bandwidth remains strong, and networks will need to continue expanding as bandwidth requirements grow. If we look at our share of wallet with other customers, the long-term trend is actually positive for us. We are currently in a transitional phase before these new deployments occur, which I anticipate will take two to four quarters.

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 FiberHome, more China specific vendors and just kind of the share shifts taking place there.

We have observed growth among our non-Huawei customers in China over the past few quarters, particularly in the high-end ROADMs and coherent transmission components and modules. It's unclear whether this trend is a result of Huawei restrictions or if it reflects the advanced quality of our products. Nonetheless, we expect to see continued growth from these customers in the short to mid-term.

Our next question comes from …

Hang on operator. Chris, there was a question about automobile qualification.

Yes. So we're playing into automobiles multiple ways, both in cabin as well as outside cabin for driver assistance systems or in the case of autonomous vehicles, sensor systems to enable the Car C in order to go, i.e., LiDAR systems. And as Alan highlighted on the call, in the past quarter we qualified in a module level product that enables in cabin applications. Europe is really leading the way for in cabin driver monitoring 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 $100 million 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 eventually ramp up, we need to plant those seeds today, get designed in with module integrators and ultimately Tier 1 auto manufacturers. And that's really what we wanted to highlight today is that design in activity and traction is happening.

Our next question comes from George Notter from Jefferies. Please go ahead with your question.

Hi, everyone. Thank you very much. I wanted to ask about 3D sensing. Is it true that most of the components you are delivering to your primary customer are new this cycle? Is there an intention from your large customer to build an inventory safety stock as they transition to these new components? Also, Alan, you mentioned something about consumption in March, particularly regarding sell in versus sell out. Can you share your insights on the inventory situation with that customer? Thank you.

Yes, George, we really don't have a lot of visibility into what is the inventory of modules and consumer devices beyond when we ship a VCSEL chip to the module integrator. So, sorry, I'm not 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 something was stronger to in customer demand. And so that's the only kind of color I can give you on inventory or what's going on at our customers level.

Got it. Okay. That's helpful. And then one last one. Linearity, I noticed that the day sales outstanding calculation 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.

Wajid, you’re on mute, I think.

I'm sorry, I forgot to hit the unmute button. Our quarter was quite similar to previous quarters in terms of overall linearity. You can observe shifts in customers regarding their own linearity, which can impact our days sales outstanding based on the payment terms with each of them. Sometimes, they'll pay within the first couple of weeks of the new quarter or in the last few weeks of the previous quarter, depending on their batch processing. We're anticipating our cash flow to improve significantly in fiscal Q2 compared to fiscal Q1, given the level of profitability we've achieved during the quarter. Everything should be good from a cash flow perspective.

And our next question comes from Ananda Baruah from Loop Capital. Please go ahead with your question.

Hey, good morning, guys. Congrats on the results and thanks for taking the question. Just two quick ones for me, if I could. Alan, sort of the comments about two to four quarters, the air pocket to make up some of the Huawei revenue. Is that China specific, or is that a worldwide remark? And then I have a quick follow-up.

Yes, I mean, I don't have a crystal ball, but I'd say that there is activity today outside of China where traditionally Chinese Huawei-based carriers are looking for other suppliers. And that's 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.

Got it. That's really helpful. And just a quick follow-up on gross margins. You guys gave context around what drove them this quarter. To what extent and sort of with regards to the new long-term model, does capacity utilization play a role? Obviously, mix does. And then are there any other factors besides the capacity utilization that will influence the margins meaningfully long-term, the gross margin?

Yes, I'll start with that one. So it's not just capacity utilization, but the additional capacity is going to help us quite a bit from a gross margin standpoint. And then Alan talked about the fact that we're seeing improving yields and productivity to get more supply to meet demand for our datacom chip products. And obviously, that's helping as well. 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 very strong tailwinds in it, whether it’s our telecom transport business or telecom transmission business or telecom datacom business, as well as 3D sensing with 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 where laser products improves, we should see the nice bump up. I pointed out earlier that $37 million of laser's revenue in fiscal Q4. We had above 50% gross margins. And so really that's because of capacity utilization helping us improve our overall laser's gross margin profile, which obviously helps to consolidate the company. So it does play a pretty big part of it.

Our next question comes from Chris Rolland from Susquehanna. Please go ahead with your question.

Thanks for the question and I'll also echo my congrats on the quarter as well. My first question was kind of higher level. I was wondering if I could get your thoughts on the Marvell and Inphi 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 what 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, yes, just your high level thoughts there and how you might execute going forward.

Yes, Chris. I believe that the acquisition of Inphi by another semiconductor company, rather than a network equipment manufacturer, suggests that they are likely to remain a merchant IC supplier. It is less certain how focused they will be on offering modules, where we may compete with Inphi in the future. Overall, from our perspective, this doesn’t significantly alter the landscape, as one fabless semiconductor company is simply replaced by another. If we were to purchase products, buying from Marvell instead of Inphi probably won’t have much impact for us, unlike other deals in the industry, such as Acacia being acquired by Cisco. Looking ahead, we remain very confident in our ability to compete and thrive in the telecom market with our leading indium phosphide components, which is where we see our distinct advantage. We will communicate any developments regarding our strategic decisions, whether they involve organic growth or mergers and acquisitions, if and when they occur.

Thank you for that. And then just a couple housekeeping, I don't know if you offer any other details around things like a book-to-bill or changes in lead times or perhaps capacity utilization.

Yes, we generally don’t share that information unless there’s something noteworthy to mention, such as our datacom chip backlog being quite substantial and we facing capacity constraints for an extended period. Similarly, our indium phosphide wafer fab is experiencing strong demand for 600 and 800 gig modulators, which is also capacity constrained. However, aside from that, we usually refrain from discussing book-to-bills or backlog figures since they may not provide much insight; many of our customers have BMI agreements and some place long lead time orders a year in advance. This leads to fluctuations in what’s happening with book-to-bill and backlog. Nevertheless, our guidance reflects a typical demand that is improving across the board.

And our next question comes from Tim Savageaux from Northland Capital Markets. Please go ahead with your question.

Hi. Good morning and congrats on the results. I wanted to maybe focus on telecom and datacom from a guidance perspective, in particular. It looks to be where you expect the growth here this quarter and maybe even more notable, given the anticipated declines, further declines at Huawei. So when you look at what you're effectively guiding to kind of the mid-teens percentage, sequential increase. I think you've already called out ROADM as the primary driver of that growth, but I just want to confirm that and maybe get your comments to expand beyond Meta's question earlier, seeing increased traction among other Chinese OEMs. But I wanted you to comment on more broadly about customer diversification globally and what might be driving that strength. Saw some pretty strong optical results out of Nokia, for example. So I guess the overall question is about growth drivers for that sequential guide and what you're seeing from them, kind of an OEM diversification standpoint globally.

Yes, so we said that a lot of the growth is coming from our ROADMs as we’re adding capacity and trying to meet the strong demand of our high end ROADMs. We're also seeing strength in the higher speed coherent components like our 600 and 800 gig modulators and tunable lasers. I would 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 the lift is. And so I said most of it's coming from those two areas in ROADMs and indium phosphide. 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 400, 600, 800 gig, whereas the 100, 200 gig systems are kind of grown long in the tooth, where transport products going into those systems have softened. That's why ROADMs 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 high end ROADMs and the newest coherent components. From a OEM diversification standpoint, there's not a lot of new OEMs per say 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, one-ish customers where your lead customer, when you're developing design in and then proliferate across a broader customer sets. And I think, as we highlighted in the script, something like the MxN ROADM is something that initially started in China and is now proliferated across a broader set of customers. We anticipate the same thing happening with the 600, 800 gig high speed coherent components as well as our DCO modules, providing a broader customer set for those individual products doesn't necessarily mean we're adding new customers, per say.

And ladies and gentlemen …

We only had one 10% customer last quarter. So the customer diversification is happening, and I think we'll continue to see that. Sorry, Jimmy, go ahead.

And ladies and gentlemen, we do have time for one additional question. This question comes from Tom Diffely from D.A. Davidson. Please go ahead with your question.

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 saw?

Not really much difference. I would say that this is a product cycle where a refresher 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.

Great. That's it for me. Thank you.

Thanks, Tom.

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.

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