Earnings Call Transcript - LITE Q4 2020

Operator, Operator

Good day, and welcome to the Lumentum Fourth Quarter and Fiscal Year 2020 Earnings Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Jim Fanucchi, of Darrow Associates. Please go ahead. Thank you, operator. Welcome to Lumentum's fourth quarter and fiscal year 2020 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 expected financial performance, including our guidance; as well as statements regarding our business initiatives and the achievement of synergies following our acquisition of Oclaro. These statements are subject to risk 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 March 28, 2020, and in Lumentum's 10-K for fiscal year 2020 ended June 27, 2020, which the company expects to file within 60 days of the fiscal year-end. 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 fourth quarter and full year fiscal 2020 results is available on its website at www.lumentum.com, under the Investors section, and includes additional details about 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.

Alan Lowe, CEO

Thank you, Jim. Good morning, everyone. The fourth quarter capped off another record fiscal year. Earlier this month, we celebrated our fifth anniversary of being a stand-alone public company. And, wow, what a five years it's been. We have accomplished a lot. Execution of our strategy has positioned us as a clear technology and market leader and enabled us to strongly grow revenue, margins, and earnings per share every year since we became a stand-alone public company. This was accomplished despite the significant impact of product line exits and divestitures and more recently, COVID-19 and geopolitical headwinds. From fiscal year 2015 through fiscal year 2020, our earnings per share grew at a compound annual growth rate of 47%. This includes additional shares related to M&A consideration and convertible debt. Over this period, our gross margin expanded from 33% to nearly 47%, and our operating margins expanded from 5% to nearly 27%. Our balance sheet is healthy with ample cash to fund further organic and inorganic growth. This has all been accomplished by focusing on markets with long-term growth trends, repeatedly introducing highly innovative, market-leading products, continuously improving, establishing a clear leadership position in the new and rapidly expanding 3D sensing market, executing highly accretive M&A, and wisely managing our capital structure and allocation. Fiscal 2020 was a record year for revenue, margins, and earnings. A record results were driven by a product mix rich and differentiated high-margin products and the attainment of significant acquisition synergies. Illustrating the improvements we've made in our financial model is our fourth quarter gross margin performance, which was only 20 basis points below the record level attained in our second quarter despite the fourth quarter revenue being impacted by COVID-19. As pleased as I am with our accomplishments today, I am as excited as ever about the opportunities ahead. I believe the future is truly bright at Lumentum. Long-term market trends and industry dynamics are more favorable now than when we became a public company five years ago. The world is accelerating its shift to increasingly digital and virtual approaches to work, entertainment, education, health care, social interaction, and commerce. This is stressing the world's communication and cloud networks and driving the need for higher volumes of higher performance optical devices. In order to produce, communicate, and consume increasingly digital content and participate in virtual and augmented experiences, the world needs more capable and secure devices that benefit from our 3D sensing and laser technologies. We are well positioned to capitalize on these trends. We are armed with a product portfolio rich in differentiated new products that are indispensable to customers and end markets globally. These include optical communication products, such as high port count and MxN ROADMs and high bandwidth coherent components and DCO modules. These are all essential to enabling the world's communication networks to scale to the bandwidths needed for our increasing digital and virtual way of life and work. Based on our view of the long-term opportunities ahead of us, we are strongly investing in R&D to further accelerate our leadership positions and enter new markets that benefit from our capabilities. Additionally, notable manufacturing capacity increases include the following major three investments: one, doubling our indium phosphide wafer fab capacity over the next 18 months, as we believe the performance and capabilities provided by our indium phosphide laser chips and photonic-integrated circuits will be central to every telecom and datacom communication network, and perhaps over time, increasingly in 3D sensing and LIDAR applications; two, expanding gallium arsenide device production capacity for our 3D sensing, automotive, industrial laser, and telecom and datacom products as applications for these products are expanding rapidly; and three, expanding capacity for next-generation, high port count and MxN ROADMs as customers globally are designing their new networks based on these technologies. Now on to the fourth quarter comments and trends. Fourth quarter results exceeded our guidance range across all metrics. We executed well in our recovery from the COVID-19 related shutdowns and supply challenges and returned to pre-pandemic output exiting the quarter. Our manufacturing operations have implemented worker protective measures, including enhanced use of PPE and social distancing, and at many of our sites our workforce that can perform their job functions while working from home continues to do so. Telecom and Datacom demand is very strong, especially in our datacom chips, coherent components and modules, and high-end ROADMs, supply of these products limited fourth quarter revenue. Telecom transmission was the most impacted by COVID-19 supply challenges and as a result declined a few million dollars sequentially. Telecom transport grew sequentially due to strong pump laser sales and increased sales of wavelength management and ROADM products. Prior quarter trends continued in Datacom with strong chip demand driving revenue growth. Chip sales became more than 95% of our Datacom revenue, but growth is still limited by wafer fab capacity. Current Datacom chip backlog is nearly $150 million. Looking to the first quarter, we expect Telecom and Datacom revenue to be higher than at any time in more than a year. As I stated earlier, we are increasing production capacity in our fabs and our back-end assembly and test facilities. As additional capacity and new production staff have been coming online, we have been increasing our wafer starts to satisfy our very strong company backlog. As expected, industrial and consumer revenue declined due to customer seasonality and the timing of new customer programs. Revenue was higher than in our guidance assumption due to stronger-than-projected demand. We expect first quarter industrial and consumer revenue to be up strongly quarter-on-quarter as we are already supplying high volumes of our new products for future customer product launches. These new product shipments include our latest chips for user and world-facing applications. This seasonal ramp started later than last year. And as a result, we expect our second-quarter shipments to be higher than our first-quarter shipments, which is different than last year. While we continue to make very good progress on new Android opportunities, we are taking a conservative approach to Android revenue in our first-quarter projections due to COVID-19 and geopolitical factors. Commercial lasers revenue was down approximately 13% quarter-on-quarter. This is a smaller decline than we had assumed in our guidance. Strength in lasers supporting the semiconductor end market partially offset the anticipated softness in fiber lasers. Lasers book-to-bill was substantially below 1, and we expect lasers revenue to decline further over the next two quarters. Our first-quarter guidance assumes an approximate 25% sequential decline for lasers. These expected declines are related to the economy outside of China, which, given our customer mix, is mainly where our products ultimately end up. Additionally, the second half of the calendar year is seasonally softer for our solid-state lasers. Before handing it over to Wajid to review the numbers, I have a few more comments. Given the current geopolitical situation, I want to provide some color on our business with Huawei. Sales to Huawei declined 6% sequentially in the fourth quarter to the mid-$40 million range. We expect sales to Huawei to decline further in the first quarter. While most of the products we supply are indispensable to Huawei, and we don't have visibility to any sharp demand reduction, given the current geopolitical uncertainty, we are taking a cautious approach to Huawei in our outlook. Wajid will provide more details on this. Lumentum is a global company with sales and operations across a wide range of geographies. We are committed to the highest standard of social, ethical, and environmental conduct and responsibility. These include promoting safe, diverse, and inclusive workplaces, free from discrimination and harassment. In addition to our goals around product leadership, providing a great customer experience, and executing to our financial commitments, our goal around corporate social responsibility and making contribution to society and our local communities are important to Lumentum and its employees. I want to thank 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 over the past five years and more recently through the pandemic, despite each having their own personal challenges, living and working in these times. They have gone above and beyond in their jobs, while also helping the communities in which we operate. Our employees are absolutely the company's greatest asset. I'd also like to thank the rest of our stakeholders, including customers, suppliers, and shareholders for their support and partnership over the past five years. They've all played a role in getting us to this point. With that, I'll hand it over to Wajid.

Wajid Ali, CFO

Thank you, Alan. Good morning, everyone. I, too, would like to thank our employees for their dedication and perseverance. I am absolutely amazed at their strong execution under such challenging circumstances. Before diving into the fourth quarter results, some high-level comments and our full-year fiscal '20 results. Net revenue for fiscal 2020 was $1.68 billion, up 7% compared with fiscal 2019, despite the significant top-line impact of COVID-19 in the second half of the year and several product line wind-downs and divestitures. Fiscal 2020 optical communications segment revenue was up 11%, driven by growth in 3D sensing, Datacom chips, and telecom transmission, and the contribution of the Oclaro acquisition. Our laser segment revenue was down 16% compared to the prior year, driven by the impact of COVID-19 strongly exacerbating an already slower lasers market compared with the prior year. For the full year, GAAP gross margin was 38.7%, GAAP operating margin was 12.2%, and GAAP diluted net income per share was $1.75. Full-year fiscal 2020 non-GAAP gross margin expanded 700 basis points to 46.5%, driven by improvements in product mix and acquisition synergies. Non-GAAP operating margin expanded 610 basis points to 26.6% for the full year, and non-GAAP net income increased by more than 38% relative to the prior year. Non-GAAP diluted net income per share expanded 27% to $5.42. Operating expenses for the full year were 20% of revenue, up from 19% in the prior year, reflecting the full year of incremental acquisition expenses and an increase in R&D investments in new technology and customer programs. We have been simultaneously attaining R&D-related acquisition synergies and cutting investments in underperforming product lines, while ramping investments in areas with stronger outlooks and returns. On the balance sheet, we ended the year with $1.55 billion in cash and short-term investments. We have $1.5 billion in aggregate principal convertible notes and no term debt. Of these convertible notes, $450 million is due in 2024 and $1.05 billion is due in 2026. The total cash interest expense associated with these notes is approximately $6 million per year. We are well-positioned financially with a strong margin model, high levels of cash with low interest expense, and long maturity financing. Now, turning to the fourth quarter's numbers. Net revenue for the fourth quarter was $368.1 million, which was down both 9% sequentially and year-on-year. GAAP gross margin for the fourth quarter was 36.9%, GAAP operating margin was 7.3%, and GAAP diluted net loss per share was $0.06. Fourth quarter non-GAAP gross margin was 47.2%, which was up 170 basis points sequentially and up 830 basis points year-on-year. The sequential growth was driven by higher synergies in the quarter and an improvement in product mix, including an increase in laser's gross margins. As Alan highlighted, this gross margin performance demonstrates the improvements we have made in our financial model. Non-GAAP operating margin for the fourth quarter was 24.8%, which was down 20 basis points sequentially, but up 580 basis points year-on-year. Improvements year-on-year were driven by gross margin improvements. Non-GAAP operating expenses totaled $82.5 million or 22.4% of revenue. SG&A expense was $36.6 million; R&D expense was $45.9 million. Operating expenses continue to be a little lower than normal run rates due to COVID-19 reducing travel, trade shows and other expenses. Fourth quarter non-GAAP net income was $91.7 million. This includes $2.3 million of net interest and other income and $2 million of tax expense. Other income is down sequentially as interest rates on our cash and short-term investments are lower overall, and we are being more conservative in our investment portfolio. Non-GAAP diluted net income per share was $1.18 based on a fully diluted share count of 77.5 million. Turning to segment details, fourth quarter Optical Communications segment revenue at $330.3 million decreased 8% sequentially due primarily to 3D sensing seasonality and COVID-19 related supply limitations. Year-on-year, Optical Communications segment revenue decreased 7% due to lower Telecom & Datacom revenue with the exit of Datacom modules and COVID-19 supply limitations, which more than offset higher 3D sensing revenue. Although the segment revenue declined, Optical Communications segment gross margin at 46.6% increased 160 basis points sequentially due to higher synergies in the quarter and a brighter product mix within Telecom & Datacom and increased 830 basis points year-on-year due to a more favorable mix of products, improved Telecom & Datacom margins and acquisition synergies. Our laser segment revenue at $37.8 million decreased 13% sequentially and 21% year-on-year, due to lower fiber laser sales, offsetting strong solid-state laser sales. Fourth quarter lasers gross margin increased 52.9%, due to a better product mix and lower manufacturing costs. Now on to our guidance for the first quarter of fiscal 2021. 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 first quarter of fiscal 2021 to be in the range of $430 million to $455 million; this revenue projection includes Telecom & Datacom growing sequentially due to strong demand and recovery from COVID-19 supply limitations, industrial and consumer increasing strongly quarter-on-quarter due to new customer programs, and consumer electronic seasonality, and commercial lasers decreasing by approximately 25% sequentially due to end market demand caused by the slowdown in industrial production globally. This guidance does not hinge upon material additional shipments to Huawei beyond those made to date. Based on this, we project first-quarter operating margin to be in the range of 28% to 30% and diluted net income per share to be in the range of $1.40 to $1.55. These projections incorporate an approximate share count of 79 million and estimated other income of $1.5 million and an estimated tax expense of $13 million. The estimated other income is lower than levels in the recent past due to lower interest rates in general and are taking more conservative positions in our short-term investments. The increase in our relative tax expenses due to increasing profit levels, especially in jurisdictions with higher tax rates. Before wrapping up, I'd like to make a few comments when thinking about the coming fiscal year. In fiscal 2020, we had approximately $62 million of revenue from low margin product lines that we expect will be immaterial in fiscal 2021. In addition, for fiscal 2020, we had $221 million of Huawei revenue, which declined through the year, ending in the mid-$40 million range in the fourth quarter. With that, I'll turn the call back to Jim to start the Q&A session.

Operator, Operator

Thank you, Wajid. Before we 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 with a question-and-answer session.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Tom O'Malley of Barclays. Please go ahead.

Tom O'Malley, Analyst

Good morning, guys, and thanks for taking my question and congratulations on the really nice results. I just wanted to start broadly with your Telecom & Datacom markets, clearly in the quarter you had some capacity constraints and you overcame those. Can you talk about what trends you're seeing there? ROADM demand seems to be really strong, and you mentioned some additional investment there. Can you talk about how big you think that market can be and why it's so important that you need to show us some additional investment there?

Alan Lowe, CEO

Yes, thanks, Tom. We saw strong demand from, as I said, the high-end ROADMs across the board, across geographies, datacom chips, and a combination of both hyperscale 400 gig transceiver type chips to deployment of 5G backhaul and the like. So, I think you know, as we indicated in the script, we have $150 million of datacom chip backlog. And today we're shipping approximately $50 million and growing that, so you can see it's going to take us some time to catch up with the datacom chip business. On the telecom transmission business that was most impacted by COVID through the March to May timeframe, that's now back to being able to produce actually more than what we were producing before as we've added capacity. And we saw strong demand on our coherent ACOs, DCOs as well as our high-end coherent components that are going into 400, 600 and even 800 gig coherent transponder. So it's pretty broad range of strong demand across the board.

Tom O'Malley, Analyst

Great. And then my follow-up was on Huawei. You've seen some of your peers take Huawei out of guidance as well. Can you talk about what you mean by de-risking Huawei? It seems like you've taken orders to date and that's included in your guidance, and then you basically assumed no additional revenue. Just some clarity there would be helpful and understanding what the de-risk actually means? Thanks, guys.

Chris Coldren, SVP Strategy and Corporate Development

Hey Tom, this is Chris. Thanks for the question. Yeah, so our business with Huawei has been declining over the past year or a little more than a year with the U.S. action. However, underneath that decline in revenue, what has been happening at a product level is products that they can get from other non-U.S. suppliers, I think they have generally moved away from us. And what remains in our revenue are products that we’re the only guy or the other supplier is another U.S. based supplier. They continue to have business globally and therefore, we expect we will continue to have business with them on those indispensable products without any visibility into a cliff, if you will out there. Having said all that, obviously, we're trying to be very conservative and ensure that if there was something out there that that did happen during the quarter that we're not in a challenging position. The other key point on Huawei and those indispensable products is that we have lots of other customers for those products and we're capacity constrained on most of those products. Therefore, even if we were to see a limitation coming from Huawei from a demand standpoint, we should be able to redirect that to other customers. And in a sense, that's largely contemplated in our guidance, so I wouldn't in a sense take up our outlook, just because we removed it and there's, if there wasn't something going wrong for the remainder of the quarter, with Huawei, I wouldn't take up numbers because we could be shipping that to somebody else, and that's already in our guidance assumption.

Rod Hall, Analyst

Yeah. Hi, guys. Thanks for the question. I wanted to start off with 3D. The indications here are pretty strong both now and as you look forward. I wonder if maybe, Alan, you could comment on your share position, what you think that looks like in the fall? I mean, it feels like it's pretty good. And then the second thing that I wanted to ask about is CapEx. With all the capacity expansion, can you guys give us some idea of what the CapEx outlook is going to be maybe going into next year? Thanks.

Alan Lowe, CEO

Thank you, Rod. I'll address the 3D sensing question and then let Wajid handle the CapEx question. We believe we are in a strong position. We have been the primary supplier for several generations of products and have a pipeline of new products set to be launched in the coming years. We consider ourselves the clear leader, both in terms of our historical shipments and our future projections. Our new products are performing well, and as we see the market growing with increased content per device, more devices, and the rollout of 5G, we are well-positioned to maintain a significant share of that market. Success hinges on our execution, and we have demonstrated to our customers our capability in delivering high-yielding products with zero defects. We are giving our customers every reason to continue purchasing a large percentage of their needs from us. With that, Wajid, do you want to address the CapEx question?

Wajid Ali, CFO

Sure. Okay. So on CapEx, our general rule of thumb is that we'd like to keep CapEx at a rate that hovers around depreciation. Our fiscal 2020, we were a little bit lower than that. And moving into fiscal 2021, we're actually expecting our capital spending to increase somewhere in the 20% to 25% range year-over-year. So you could probably see a CapEx of somewhere between $100 million and $110 million for fiscal year 2021. Now, as Alan pointed out in his prepared remarks, we're very laser-focused on where we're putting that money. So we're putting that CapEx investments around products that have higher gross margins, and we see a lot of backlog and a lot of customer demand. And we think that we are either the major supplier or the number one and only supplier for those products. And so that's what's giving us a lot of confidence in the type of returns we'll see on that capital investment.

Samik Chatterjee, Analyst

Hi. Good morning. Thanks for taking my question. I just wanted to start off and see if I can dig into the margin expansion here a bit. Looking at 800 basis points of year-on-year margin expansion in optical communications and assuming you couldn't have achieved it without improving telecom margins, where you've mentioned product mix a couple of times already. Just help me think about sustainability of those margins and particularly the opportunity to improve it further? And what role maybe some of these capacity constraints that you have right now are playing in driving those better margins? And I have a follow-up. Thank you.

Wajid Ali, CFO

Yes. Sure. Okay. I'll start off, and then Alan and Chris can also jump in if they think I've missed something. So you're absolutely right. We've seen just a great improvement in our gross margins year-on-year, specifically in that segment of the business. A lot of it has been driven by synergies that we've had happen every single quarter. And now what we're seeing, as we're entering fiscal 2021 is that all of the synergies are accumulating, so we're getting a much better impact of those. Our product mix is improving. You heard Alan say that we've got approximately $150 million worth of Datacom chip backlog. You can appreciate the type of pricing power that allows us to have, as well as just improving our overall product mix within our Optical Communications segment. We've removed $62 million worth of low-margin products that won't be there in fiscal year 2021, that's also having a very strong impact. And I think one of the things that we didn't mention on the call that I'd like to point out now is the new products that are coming out specifically within telecom transmission and telecom transport, the margin profile that we're expecting from those are also better than the older products. And that's one of the reasons we're investing in the type of capital that we are, a 20% to 25% increase in capital spending year-on-year is not a small sum of money, especially given the fact that we're focusing those capital investments in specific areas related to Datacom chips and telecom transmission. So, because of those tailwinds, we certainly see the sustainability of those gross margins. The one thing I also did mention is our world-facing products. We're seeing strong demand for that, moving from our fiscal Q4 into our Q1 and into our Q2. Alan mentioned in his prepared remarks that we're expecting to see stronger demand in the back half of this calendar year. That's all coming from world-facing products and that's expected to have a strengthening improvement on our gross margins as well. So we're feeling quite confident. You saw in fiscal 2020, every single quarter was above 45% gross margins, and we had not seen that in fiscal 2019. And so, we're looking forward to keeping that up in fiscal 2021 and improving from a very strong baseline that we've got. Okay?

Samik Chatterjee, Analyst

Okay. If I can just follow-up on just thinking about the restrictions here on Huawei and as they take hold, if Huawei does give up share in Europe to some of the other optical system players that you are a supplier to as well. How should I think about Lumentum's content per system with the likes of Ciena or Nokia relative to Huawei and what kind of impact that would have if market share shifts in the overall landscape?

Alan Lowe, CEO

Yes. If you compare our business with Huawei to their market share and then to western companies and our share of their spending, it’s clear that we have a better share of wallet outside of Huawei. This suggests that if and when carriers decide to transition away from Huawei, it could increase our available market if it shifts to other competitors. This is based on their market share and our share of their spending. However, it’s important to remember that changing from one network equipment manufacturer to another is not an immediate process; it takes several quarters. This transition requires time, but when or if it occurs, it should benefit Lumentum and our products.

Alex Henderson, Analyst

Thank you very much. I was hoping you could talk a little bit about the 3D sensing market in context of whether you think the various pressures that have developed will impact the amount of demand in the back half or whether the increase in world-facing is sufficient to offset any possible decline in handsets? And to what extent you're looking at some visibility on the Android market? Thanks.

Alan Lowe, CEO

Let me respond to that, Alex, and then Chris can add his thoughts. We don't predict the success of our customers' product launches, but the feedback we are receiving indicates strong interest in new products and the rollout of 5G. We see more content per device and an increase in new chips for devices that come with higher average selling prices due to larger chip sizes. Additionally, there are more units being produced, supported by a growing 5G market and an expected refresh cycle that should create demand. Overall, when you consider all these factors together, the market size is significantly larger compared to last year, and we believe we are maintaining a strong share of that business. Regarding the Android market, we are still actively engaged with all Android handset manufacturers. However, the integration of 3D sensing has thus far been limited to the higher-end devices, and we haven't penetrated the mid-range segment where the volume is much greater. Our outlook anticipates this trend to continue, and we will see how the Android market evolves in 2021. We aim to be a supportive partner for our clients, and when they incorporate our technology into more mainstream devices, we expect to see further market expansion. Chris, do you have anything to add to that?

Chris Coldren, SVP Strategy and Corporate Development

I think the only thing to add is Alex’s question really focused on the second half of the calendar year and I think everything Alan said lines up. There’s also that some of our major customer timelines may have shifted out which can move where our revenue is between September and December quarters and perhaps even some bleed from what normally would think of as the second half of the calendar year into the first part of the next calendar year. That's something that we’re speculating on, don’t have that firm yet, but something to just call out as people should think about as you said the moving headwinds, tailwinds in this industry and it's not just volume, it's also timing.

Meta Marshall, Analyst

Great. Thanks. Just clarifying question, kind of, on the remaining $40 million of revenue that is going into Huawei. Is most of that equipment or most of that supply going outside of the country, so into their engagements in other countries? And is any of what you're supplying still servicing within the country? And then maybe the second question, just on the $150 million of wafer backlog or orders that you noted, you noted that you were doubling your capacity, but should we consider that that's a number you could achieve over the next couple of years or just a timeline when you think you could achieve those orders? Thanks.

Alan Lowe, CEO

Thank you, Meta. It's not entirely clear where our products end up once we ship them to Huawei. However, anecdotally, we know there are significant deployments happening in China that are using our high-end ROADMs. I would speculate that most of our production shipments remain in China, although there are deployments outside of China as well. It is a fluid situation as carriers make decisions about partnering with Huawei. We're observing shifts in mix and customer preferences as those decisions evolve. As mentioned earlier, we anticipate our business with Huawei will decrease this quarter. I would be surprised if there are even 10% of customers in fiscal 2021, but we continue to collaborate with them on new product designs and technologies where we lead. We're keeping options open and will see how things develop. Regarding the Datacom chip backlog of $150 million, we are shifting about $50 million each quarter and are increasing that amount gradually. We plan to double our indium phosphide production capacity over the next 18 months, which could lead to shipping $100 million of Datacom chips six quarters from now. Currently, we have three quarters of backlog that we're working to resolve quickly. Orders continue to come in, so we are focused on improving yields, boosting productivity, and maximizing our existing assets while expanding our capabilities in our fabrication facility.

Wajid Ali, CFO

Hey, Alan, I’d like to add to the point about domestic sales in China, we’re also significantly increasing our business with other customers in China who are also buying high-end ROADMs and other of our very differentiated products. So our access to the Chinese market domestically that is still strong, in some ways increasing in that as metro deployments or the equivalent of metro deployments grow in China based on high-end ROADMs, we are supplying to all of the major network equipment manufacturers in China.

John Marchetti, Analyst

Thanks very much. Actually, Chris, I just wanted to follow-up on that last point that you made. Some of the other suppliers in China, judging from the comments you guys have made, it sounds like you're still obviously expecting to shift to Huawei this year, although obviously, it's declining year-over-year. But is there a chance, I guess, that you think your China business overall is either on par with what we saw in fiscal 2020 or maybe even a little bit higher, if some of these other suppliers that maybe you didn't do as much with historically start to pick up some of that slack within the China market?

Chris Coldren, SVP Strategy and Corporate Development

Yes. I mean, I think that's certainly in the aggregate when you add up all of Chinese customers. I think the one – because the demand is strong and increasing in China and are relevance to customers outside Huawei is also increasing significantly. The only slight modulation I'd point, which is just a subtlety is that of those products we've discontinued, which include datacom transceivers and lithium niobate modulators, a set of customers in China were relatively large percentage of that business, but if you were to normalize for that, then absolutely.

Wajid Ali, CFO

Yes, John. Yes. No, good question. We should probably model somewhere between 10% and 11% for our tax rate for fiscal year 2021. It's being driven by a combination of higher expected profits that are going to be coming out of our datacom chip business as well as, like you mentioned, just generally higher profits on many of our product lines. And so, 10% to 11% is probably the right model for fiscal 2021.

Simon Leopold, Analyst

Thank you very much for taking the question. First, on the strength in the chip sales, just wondering if you could help us discern drivers. To what extent is this related to 5G initiatives, front-haul, back-haul, mid-haul, perhaps China versus activity in data centers and hyperscale? Do you have visibility that helps us understand what's driving this?

Chris Coldren, SVP Strategy and Corporate Development

Hi, Simon, this is Chris. Yes. So I would say it's all of the above that you mentioned, but I would also highlight that within data centers, it's not just volumes, the volumes are certainly very important. It's also that data centers are moving from 100-gig to 200-gig to 400-gig. And in doing so or buying increasingly sophisticated and differentiated chips from us. So that also helps drive revenue growth, where we may be having a content or ASP increase. But certainly, both 5G and data center are heavy contributors to the revenue and the growth.

Alan Lowe, CEO

Yes. Thanks, Ryan. The 400-gig is essential for data center operators to enhance their compute capacity. We hold a strong leadership position because creating the lasers required for 400-gig is quite complex. We understand your concerns regarding the risk of losing market share, and we are actively managing this by prioritizing the right customers to secure a significant portion of those opportunities. This is why we are aggressively expanding our capacity to meet the demand.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Tom O'Malley of Barclays. Please go ahead.

Ryan Koontz, Analyst

Thank you for taking my question. I would like to ask if you could provide more detail on the 400-gig cycle in the data center. It seems to be a significant factor driving backlog, and I've heard strong comments from the NEMs about optical costs potentially hindering the cycle. How do you anticipate this will affect the hyperscale operators? Additionally, is there a risk of losing market share due to the long lead times? I appreciate your insights. Thank you.

Operator, Operator

Thank you so much. And that does conclude our call for today. We would like to thank everyone for attending, and we do look forward to talking with you again in another few months when we report our first quarter fiscal 2021 results. Thank you, and have a great day.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.