Earnings Call: Q1 2020

Oct 31, 2019

Good day, everyone, and welcome to the Lumentum First Quarter Fiscal Year 2019 Financial Results Conference Call. As a reminder, today's call is being recorded for replay purposes through November 7 2019. I would now like to turn the conference over to Mr. Jim Fanucchi of Darrow Associates. Mr. Fanucchi, please go ahead. Thank you, Adam. Welcome everyone to Lumentum's 1st quarter fiscal 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 Coldrin, Senior Vice President of Strategy And Corporate Development. Today's call will include forward looking statements, including statements regarding the markets in which we operate, including potential market sizes, trends and expectations products and technology, including product development and projected new product releases, purchasing trends and demand for our products our expected financial performance, including our guidance expenses and position in the market, as well as statements regarding our acquisition of Oclaro. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations Lumentum encourages you to review our most recent filings with in our filings with the Securities And Exchange Commission, including the company's quarterly report on Form 10 Q for the fiscal quarter ended September 28, 2019, to filed with the Securities And Exchange Commission later today and Lumentum's 10 K for fiscal year 2019 ended on June 29th. The forward looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Momentum undertakes no obligation to update these statements except as required by applicable law. Please also note, unless otherwise stated all results and projections discussed on this call are non GAAP. Non GAAP financials should not be considered as a substitute for or superior to financials prepared in accordance with GAAP. Lumentum's press release with the first quarter fiscal 2020 results is available on its website at dotcom under the Investors section and includes additional details about our non GAAP financial measures and its reconciliation between our historical GAAP and non GAAP results. Lumentum's website also contains our latest SEC filings and supplementary slides relating to today's earnings release and the company encourages you to review these documents. In addition, a recording of today's call will be available by 11:30 am specific time today on our website. Now, I will turn the call over to Alan for his comments and first quarter market and product highlights. Alan? Thank you, Jim. Good morning everyone. Long term strategic and financial goals. A revenue mix richer in new and more innovative products increased scale and acquisition synergies all helped drive sequential and year on year improvements in gross margin and operating margin. In particular, improvements in telecom and datacom margins helped 1st quarter non GAAP gross margins expand significantly to more than 45 sustainable technology and market leadership positions across the markets we serve. These have been attained through successful investments in R&D over many years and and in some cases years ahead of our competitors. We continue to invest strongly in R&D to extend our leadership positions. Our increased scale resulting from organic growth, share gains, products. For example, reduce the number of combined product lines. This higher investment level helps us accelerate the time to market on key customer programs, including Now, for attributed significantly to were up 92% sequentially 26% relative to the prior year. Year on year growth was driven by winning strong share in a larger market as customers are incorporating 3 d sensing in a higher percentage of their product offerings compared to last year. During the first quarter, we saw multiple customers launch new products incorporating front and world facing 3 d sensing capabilities. These product introductions demonstrate the increasing appeal of 3 d sensing for biometric authentication computational photography and augmented and virtual reality. We have shipped more than a 500,000,003 d sensing lasers to date. This is an amazing accomplishment and our experience is a valuable advantage that is difficult for our competitors to replicate. Customers around the world know they can count on our proven and unrivaled reliability and volume capability. Our R and D teams are very busy working with customers on their future generations of 3 d sensing needs. We expect that significant growth samples of photonic devices for the automotive market including laser assemblies for high performance lidar applications. While significant revenue is several years away from many of these applications, we are very optimistic about both the market opportunity and our ability to win customers declining more than amp. Turning to our telecom and data product line, datacom product lines. Transceiver customers who purchase our high performance laser chips serve both the telecom and datacom markets. Because of this, starting with the first quarter, in our commentary on this call, our earnings slides and in our 10 Q, we are now combining our tele datacom product lines. In the first quarter, telecom and datacom revenue was down 8% sequentially was up 40% from low margin product lines we've previously discussed. The remainder of the sequential decline was primarily due to lower shipments of non ROADM products to Huawei and the expected decline in submarine revenue we highlighted on our prior call. Sales of ROADMs were flat sequentially as on the With that said, we remain constrained on many of our Revenue from telecom and datacom products that are being discontinued totaled $19,000,000 in the first quarter. We expect in our third fiscal quarter. Excluding these discontinued product lines, telecom transmission revenue was up nicely on output on coherent modules to meet customer demand. We have previously highlighted that strengthened telecom Transport is often a leading indicator of future strength and demand for transmission products. We are now seeing an increase in demand for telecom emission products after a lengthy period of telecom transport strength. Sales of chips to transceiver customers 13% sequentially to 5G wireless network applications. Based on the continued strong growth expected based on the continued strong growth expected in global network and data center traffic and optical infrastructure needed to support 5g wireless networks, We believe the market for our telecom datacom products should be strong on a multiyear basis. We are well positioned with our industry leading products and deep customer relationships. We believe from global bandwidth expansion, regardless of who builds or supplies we benefit from global bandwidth expansion, regardless of who builds or supplies networks. Our next generation products are critical to our global customer base and include high performance DML, EML and Pixel products enabling high speed optical transceivers, including 400g and above and next generation wireless front haul and access solutions. M by N and form a DCO transmission modules and underlying highly integrated components. And finally, high baud rate indium phosphide components, including those for 800 gigabit transmission. Looking to the second quarter, we expect telecom and datacom revenue will be up sequentially, driven primarily by growth in telecom transmission and transceiver chip sales. Now on to lasers. 1st quarter laser demand softened more than projected due to elevated customer inventory levels, resulting revenue dipping to $33,800,000. Looking to the 2nd quarter, we expect lasers to rebound to the mid to low $40,000,000 level. Over the long run, because of our investments in unique new product and technologies, We believe we Our commercial lasers business is important to our long term strategy. It provides us with significant addressable market to grow into and provides us with a level toward our strategic and financial goals. Over the past several years, we have made significant investments in new products markets, design wins, and M And A. We believe these investments position us well for the future. At Lumentum, we are releasing the power of light to create a brighter future and it is a very exciting time for all of our stakeholders. I would especially like to thank our employees for their hard work that has put us in such a great position I will now hand it over to Ajay. Thank you, Alan. Good morning everyone. I'm pleased to be discussing our strong first quarter Net revenue for the first quarter was $449,900,000, which was up year on year. GAAP gross margin for the first quarter was 37.3%. GAAP operating margin was 13.3% and GAAP diluted net income per share was $0.61. Again, GAAP results include the impact of restructuring, write downs, amortization of intangibles, and other charges related to the acquisition and our actions to attain acquisition synergies. 1st quarter non GAAP gross margin was 45.8 percent, which was up 690 basis points sequentially and 5.50 basis points year on year. As Alan noted, the strong year on year gross margin improvement was helped by improvements in telecom and datacom margins, as well as acquisition synergies. Non GAAP operating margin for the first quarter was 27.3%, which was up 8.30 basis points sequentially and 3.40 basis points year on year, driven by higher gross margins. Non GAAP operating expenses totaled $83,300,000 or 18.5 percent of revenue. SG and A expense was $37,000,000, R and D expense was $46,300,000. Non GAAP net income was $111,400,000 for the 4th quarter and includes $2,600,000 of net interest expense and tax expense of 8.7 $77,600,000. To the prior quarter. Facility. At the EPS level on an annualized 1st quarter Optical Communications segment revenue at $416,100,000 increased 17% sequentially. Within our Optical Communications segment, telecom and datacom revenue at $248,100,000 was down 8% sequentially. Industrial and consumer revenue at $168,000,000 was up 92% sequentially due to higher 3 d sensing revenues. Optical Communications segment gross margin at 46.1 percent increased and 5.80 $1,000,000 decreased 29 percent sequentially. 1st quarter lasers gross margin was 42%, a decrease of 150 basis due to lower revenue. Now on to our guidance for the second quarter. The projections we are providing today are on a non GAAP based and are based on our assumptions as of today. We project net revenue for the second quarter will be in the range of 445,000,000 to $460,000,000. This revenue projection includes telecom and datacom increasing sequentially. Primarily driven by telecom transmission and chip sales to transceiver customers. Industrial and consumer declining significantly. Due to a greater than 20 as customer inventory levels are more normalized. 24% to 26% and diluted net income per share to be in the range of $1.20 to $1.35. These projections incorporate an approximate share count of 78,000,000. With that, I'll turn the call back to Jim to start the Q and A session. Jim? Thank you, Wajid. Before turning the call over to the operator to start the question and answer session, I would like to ask everyone to please keep to one question one follow-up. This should help us get to everyone before the end time of this call. Yes, sir. Comes from the line of Rod Hall with Goldman Sachs. So my I guess my opening question is with regards to the telecom demand, you had said that outside of the discontinued products, you've seen good demand growth. Could you elaborate on what type of demand there you've seen? I know you're talking about transmission, but Can you give us any more color regionally or project wise on that that might help us understand what's going on out there in the telecom world? Since CapEx generally has been pretty weak? Yes, Rod, thanks for the question. This is Alan. I think as you said, the telecom transmission demand is very strong. Data data center interconnects very strong. 10 gig tunable is very strong as well. And I think it's pretty broad based globally. It's hard to tell where that product ends up, but I think, data center interconnect is a a key driver for a lot of that. But, I think metro build outs as we've deployed all those telecom transport nodes, the metro build outs are filling out those those transmission lines with, coherent ports that drives both coherent ACO modules as well as our components. Okay, great. Thanks, Alan. And then my follow-up is with regards to handsets, terminals. I just wanted to I know that you had commented that non ROADM shipments to Huawei were down. But I'm wondering if you could talk a little bit about the handset shipments there and what's how the dynamics are going. I know that they, you know, they lost air in Europe, but then they've been refocusing on China. And then just more broadly, what's going on with Android in terms of 3 d? Are you seeing others coming in to fill that void that exist now because of Huawei and Europe and so on with 3 d models of their own? Yes, our comment regarding a non ROADM revenue being down was specific to telecom and datacom. Our 3 d sensing with Huawei was was actually up, I believe, slightly. And we're seeing broad adoption and and very active design ins for next generation of Android handsets using 3 d sensing. So we're pretty optimistic with the outlook on Android as a whole. And you guys, the share loss that you were, I think, anticipating in December on 3 d, it doesn't seem like that's materializing in this guidance, but just double checking that? Yes, we're very comfortable with our share, both in the short term as well as in the long term, we've done a good job making sure that we, get our customers what they need when they need it with the reliability. They expect, number 1. And then number 2, a lot of new products are going to get introduced throughout next year and we're extremely well positioned with our customers design teams to make sure we're leading the way there. So I think, share is, share is a good thing for us right now. Okay, great. Thank you, Alan. And your next question comes from the line of Alex Henderson with Needham. Thank you very much. So I was hoping to talk a little bit about, you know, what your expectations are as we go into the new year in terms of pricing given you normally see 10% to 15% price reductions in, in the first quarter, but it seems like the constraints around ROADMs and pumps may result in that being less of a pressure point, this year than traditionally. Could you give us any color on that? Yes. I mean, I think there's been, at least from my perspective, some transition with respect to have these annual bidings in some cases that we are now, working so closely with our customers that you know, there's it's not abnormal to have a multi year agreement, with our customers that that have price reductions over time to make sure that we're working with them to ensure that they get what they need. So I think from a standpoint of expectations for the March quarter having a huge reduction in the area of 10% to 15% on telecom and data count. I don't think that's the new normal anymore. I do think that there's going to be continued reductions, but I'd say on the low end of the scale from from the normal would be my expectations. And then if I could follow-up. One more question on the the shift to transmission seems a little bit of a surprise to me. I would have thought seen more on the ROADM and pump side, driving the upside to the business. It sounds like your, former Oclaro, you know, TCO ACO products are doing quite well. Can you just give us a little bit more granularity around those 2? Is there harder for us to track? You mean on the ACOs and DCOs? Yes, please. Yes. ACOs, we just can't make enough. We have as we said in the past, Alex, Transport is a leading indicator of transmission strength and we're seeing that in spades, right now. In fact, we saw it last quarter. We weren't able to fill our ACO demand. And a little bit to our surprise, we weren't able to fill our Tunable 10 gigs demand. So, we're continuing to see a broad range of demand for ACO, And we think there's a long tail in ACO, as well as demand for our DCO products as we start to introduce those into the marketplace. Okay. So you're starting to see that the impact of rolling out a lot of ROADMs is driving acceleration in global demand for transport? Is that what I'm hearing? For transmission, yes, absolutely. Perfect. Thank you very much. Thanks Alex. And your next question comes from the line of Samik Chatterjee with JP Morgan. Good morning. Thanks for taking my question. So you mentioned kind of seeing strength in the telecom group and demand for products. I just wanted to clarify because you also mentioned ROADMs you think are kind of in supply and demand is in balance. So, relative to kind of your expectations, to ROADMs for the remainder of the year? Are you expecting that to largely remain kind of sequentially flat? Are you expecting that to continue to kind of ramp up And then you mentioned kind of differentiated products. So just wondering if you can give us a breakdown of what portion of your own portfolio do you think is differentiated towards that kind of drives higher growth versus maybe the remaining portion of that? Yes, sure. I think, as we said in the prepared remarks, supply demand on ROADMs has reached more of an equilibrium, as a whole. I would say that we're still constrained on the very high end and some, specialty products where we're, have a sole source position. We just haven't been keep up with the end by end demand. And in some cases, the very high port count twin demand. So I think that that we're adding some capacity there, that should allow us to continue to get our customers what they need. And those are the different the products we're talking about. So, we're gonna continue to invest. We have a whole pipeline of new ROADMs that are gonna come out in the next couple of years that I I think will extend our leader a position there. So I think we're in pretty good shape with our ROADMs. I think in the short term ROADM demand is is still robust. I'd say that we're our our expectations are that that it's probably flat to down slightly in the December quarter, but, you know, that that's more than offset by, strong, strong demand in the telecom transmission, including ACOs and 10 gig tunables, as well as DCOs in 2020. Got it. And just on datacom, you're guiding to kind of sequential improvement there as well. I'm just wondering if sales are ramping up faster than you earlier expected because I think at least on our part, the expectation was that maybe 1 more quarter of kind of sequential declines before you start chip sales kind of overwhelming the declines on the modules. So can you just help me with that? Yes. Just for clarity, in the first quarter, we had $19,000,000 of what we call products which are our lithium niobate modulators and our datacom transceivers. We expect that to go to 0 over the couple of quarters. Again, with the bulk of that reduction coming in the March quarter, on datacom shifts, our expectations are that it continues to grow both in the December quarter through 2020 as we are no longer a competitor to our customers in the transceiver market. So we've seen a broad range of customers coming to us to take advantage of our leading edge EML, DMLs and VCSEL technology and products. So I think we're going to continue to see strength in the chip sales through 2020, especially as the 5G rollouts become more meaningful next year. Your next question comes from the line of Blayne Curtis with Barclays. Hey guys, this is Tom O'Malley on for Blayne Curtis. I just wanted to ask quickly on the margins. You guys have clearly undergone a transition here to more high quality business and you saw a substantial increase here in the December, the September quarter. Can you talk about how you see that going forward? Is this a sustainable level for margins and, longer term, is this kind of the right area to think about you guys from a margin profile? Yes, hi, it's Wajid. I'll take that question. So on the margins, you've probably seen that our margins have improved, quite well, both year on year and, and, sequentially as well. We talked at our last conference call about moving our gross margins levels up to the upper portion of 40% to 45%. And we felt that it was both our product differentiation as well as the synergy work, that we've had with the acquisition, flowing through an executing and improving our gross margins. So generally, we have better gross margins in the back half of the calendar year than in the first half. Of the calendar year, primarily because of 3 d sensing. But year on year, so, you know, Q2 over Q2 and Q3 over Q3, We do expect to continue to see improved margins primarily because of the synergy work that we continue to execute on. Great. And then my follow-up, for your largest customer in the quarter, do you guys give a percentage out or I know that you give it out in the filing, but could you give it to us? We actually don't give that out, in, the 10 Q. We only name them, but we don't actually give the percentages. Thanks. And your next question comes from the line of John Marchetti with Stifel. Alan, I wanted to go back to the comment that you made about, you know, sort of transport leading transmission sales. And I'm curious as you know, as we're looking out over the next several quarters or year or so, do you actually see transport starting to lag in transmission growing faster? And how do we think about that maybe in the overall mix of the business and doesn't have a margin impact? Well, that is a good question. I I don't have a crystal ball, but I'd say we're going to see continued growth in transmission through 2020. And as new networks get deployed or new network architectures get deployed with things like in by in or the very high port count twins, we're gonna see ROADM growth, return from what may be a a a flat period here today. So we're our expectations are as we continue to introduce new products in ROADMs that, those will be adopted by our network equipment manufacturer partners as well as the service providers So I think, well, there may be a flat period today. Our expectations are that ROADM growth continues through 2020. But at the same time, transmission now is building out, those those transmission lines that, the transport networks have have deployed. And then maybe just as a follow-up on the chip business, it seemed like it grew a little bit sooner than you were expecting here that that demand has come in a little bit more quickly. I'm curious if you can just talk a little bit about how much of that is maybe serving existing customers that you used to be sort of transceiver provider to or selling versus maybe some new customers that are coming in now and buying chips given that you don't compete with them anymore? Yes, I'd say it's a mix of both. I'd say we're getting, we're getting sales from customers frankly, we didn't even know existed. But I'd say it's a broad range of customer interaction, and a broadening of our base in the chip sales that is pretty exciting. And your next question comes from the line of Meta Marshall with Morgan Stanley. Great. Thanks guys. A couple of questions. Just what on the commercial laser business and kind of expecting that business to bounce back. Is that better industrial conditions that your main customer is seeing or just a little bit of context as to why that would improve in the next quarter. And then maybe the second question, unloading that the Huawei shipments at the low end were a little bit lower than expectations. Is that inventory, is that some in sourcing? Just any color there would be helpful. Thanks. Yes, I'll take the lasers quite question. I I I don't think that we're seeing the light at the end of the tunnel with respect to industrial, demand. I think we're seeing that last quarter there was a significant inventory correction, at at not just one customer, but at at several customers that have the laser shipment being, significantly down, actually more than we had expected. So, I'd say that it was just an inventory correction and, now we're starting ship more in line with our customers, shipments out to their customers. And so I think that's that's the only thing we're seeing on lasers. Yes. I'll take the Huawei question. So, I think the best way to look at, our sales to Huawei is In general, where we're sole source and have a very unique product or capacity has been constrained for a long time. Those sales generally are continuing on, flattish, not growing. Whereas we've seen some decline in products where there may be other suppliers and perhaps they may have built some inventory over time. But we'd also highlight that they were a significant datacom customer or transceiver and with the the exit, of that business or, or ramp down of that business, that is also causing, Huawei revenue decline. And your next question comes from the line of Tejas Venkatesh with UBS. Can you talk broadly to China demand beyond Huawei? What you're seeing from a tender activity perspective and maybe how other customers are reacting? Yeah. I think there's a tremendous amount of activity in China. On the tender side, I I do think, anecdotally, there's a lot of deployments going on as well. So we're seeing a broad base of demand from not just Huawei, but from from other customers, both in telecom and datacom. Product. So I I think it's it's broad based and it's, I think a strong period of of deployment of networks, today in China. Thank you. And as a follow-up, where are you call, we had said that we were, targeting a new synergy level of approximately $100,000,000 as we had already achieved the original target of $50,000,000. We continue to make progress towards that $100,000,000 synergy target. If you remember, we had said that it take 4 or 5 quarters to get there. And we thought that many of the synergies would come in, during the tail end, of that time period that we had outlined. And it was part of the reason why we felt confident that our average gross margins on an annual basis would move to the upper half before due to 45%. Some of which we're already seeing the benefit of in this quarter, as well as in our guide for next quarter. And so we're continuing to back to that. We're quite confident that we'll be able to, to achieve those targets in the time period that we've outlined. And your next question comes from the line of Simon Leopold with Raymond James. Great. Thank you very much for taking the question. 2, 2, I'd like to ask. One is just if maybe we could double click a little bit more on the telco datacom trends as we go from December into March. I think one of the things I suspect may be helping December, and I want to clarify is maybe some purchases related to the end of life that maybe that that is part of the factor boosting December and leading to a more than seasonal decline in March, if you could help with that aspect? And then I've got a follow on. Thanks. Yes, let me try to answer that and Chris can correct me. I would say that, you know, again, $19,000,000 of of discontinued sales, in the September quarter that's it's going to go down in the December quarter and then go down even further in the March quarter. I'd say that we're seeing strength primarily in the telecom transmission side of that as well as the datacom chips. And so we went from one record last quarter in data chips. We're expecting new records this quarter, and I would expect that in the March quarter, we're going to see continued growth on on datacom chips. And we did not satisfy the demand on our telecom transmission business in September quarter and we're adding capacity. We're still not meeting the demand today of our customers. And so I think we're going to continue to see that in the March quarter? Yes, I think the way to think about it is, the datacom transceivers are burning off somewhat linearly, but we have the quarter. I think also looking to the March quarter, I know Alex asked the question about, ASPs and ASP declines, but it also add there is another driver of seasonality in the March quarter, generally folks are are manufacturing in Asia and and, many in China at our our customer level. And therefore, their output in that quarter can can decline. So I think even in a a more moderated ASP environment, we are still to see seasonality, in the telecom datacom world in the March quarters, driven by holidays, in the in the March quarter in Asia. Great. And then as my follow-up, I wanted to see if you could talk a little bit more about your expectations for the 3 d sensing market in calendar 'twenty, specifically comments on 5G as a driver for mobile devices. As well as world facing elements in mobile devices in calendar 2020? Thank you. Yes. Simon, maybe a little easier for me to in our fiscal year, so I think in fiscal 2021. But certainly, we think that there's going to be a reasonably inflection point in the market as we go from fiscal 2020 to 2021, which is a combination of everything you said, right? We've got world facing, coming in in a much more substantive manner. So that's expand the dollar content, addressable by, by, in a phone, as well as maybe a driver of customers, print from having node 3 d sensing to 3 d sensing to have that computational photography capability, On top of that, certainly, the expectation that 5G could start a broader spending cycle, as certainly, I know many of us sitting in the room here have a December 2017 phone and and hear that, something great's coming in, in 2020. So I think there'll be some pent up demand that'll, that'll drive, a cycle there. And then as well the sort of the maturation of the technology and the software and manufacturing ecosystems to enable customers that may not be as vertically integrated or as advanced in the 3 d sensing technology in house, find the technology more accessible. And so I think we start getting out into our fiscal 2021 where the market for 3 d sensing can start having a be at the end of it. Thank you very much. And your next question comes from the line of George Notter with Jefferies. Hi guys. Thanks very much. I guess, obviously, the thing that really stood out here in the quarter was the gross margin upside. And, Certainly, I would imagine the mix of 3 d sensing was a big piece of that, but, obviously, other elements too, you mentioned the synergy piece from Oclaro certainly the discontinuation of certain transceiver products, but can you walk through exactly where the upside prize on gross margins came from. It would be interesting if you could kind of piecemeal that out for us to some degree. That would be great. Thanks. Yeah, I'll start it off and then I'll pass to Chris for Alan if they want to continue. I don't really think that there was much of a surprise. We expected that synergies would start flowing through in the first quarter, from some of the activities that we had, we executed. The our operations team executed better than we had expected on those synergies. So that's certainly, a benefit for us. In the normal part of our business outside of the acquisition, we did see some material cost benefits that were better than expected and that helped us as well. The continuation of some of the, the product mix items that Alan talked about with us shipping more datacom chips. And obviously the 3 d sensing products that you mentioned earlier, both of them had upside for us, from from a gross margin standpoint. And so I think it was all within the realm of of what we thought would happen, but we certainly executed, better than we expected. And so that did lead to some upside. And moving forward, we mentioned earlier that we continue to expect to see gross margin improvements year over year. If you take a look at our Q2 guide, It's not like it was just a one time event year over year. If you take a look at the midpoint of our operating margin guidance, that points to higher gross margins versus last year. And even into fiscal Q3 and Q4, as we take a look at some of the synergies that are about to flow through, in terms of us getting to the $100,000,000 target we've laid out there, we continue to expect to see gross margin improvements year over year. So We're executing to our plan and I think it's that execution that's leading to what is viewed as an upside surprise. Got it. And then just as a sorry, just as a quick follow-up, I wanted to ask about, ROADMs also. I think, Chris, you had something to say there. I would also highlight that the 3 d sensing as a percentage of the overall revenue was was not necessarily changed a whole lot year over year. So, I think we had, you know, did well at holding margins of 3 d sensing, but it was really everything outside of 3 d sensing that, particularly in the telecom datacom space between synergies, as well as the percentage of revenue from newer and more differentiated products year over year, was greatly improved. And so there really is kind of the worst products going down significantly and the good products going up. Significantly in the mix within telecom datacom is a big factor. Sorry, you were talking about? Yes, I just you mentioned again, the supplydemand equilibrium in general there, obviously that's a real change from the experience you guys have seen over the recent years. Any concerns about an inventory correction, potential with customers there? I always have concerns about inventory corrections, but, I don't think in this case, because we still are strained on the very high end, product lines and that's going to become a bigger percentage of our ROADMs at significantly higher ASPs than the low end. I'm not so concerned about the long term outlook for our ROADM business or if there's a buildup of inventory. I do think in talking with our customers, there are new new metro tenders going on, throughout the world. And I think that there's going to be new greenfield transport networks, deployed in in the coming years. So I'm not I'm not concerned, whether or not the December quarter is a down quarter rodems or not. I think long term, there's demand for ROADMs, especially our highly different Jerome. So, I think it's a good market to be in. And your next question comes from the line of Michael Genovezi with MKM Partners. Thanks very much. I'm looking ahead to the March quarter for 3 d, considering the guidance for December, which I think is down more than seasonally normal. And it seems like the unit picture is pretty good. There's not a lot of inventory out there. Your share position is pretty good. So wondering how we should model 3 d for the March quarter, if it could be not down as much as we would normally think March would be down? I think Mike, it's a little early to be talking about March and on 3 d sensing how dynamic the the the 3 sensing market certainly is, you know, we're we're we share your optimism around round units and, and and how our customers are doing. But with that said, You know, we've we've got a long way to go to get through our December quarter and and see where, customer demand lands and, based on history, we know it's difficult to predict, 3 d sensing that far out. But I'll give you just just one data point. We're working on more programs now than we've ever worked on on 3d sensing, across a broad range of customers. So I think that's usually a pretty good indicator that, customers are counting on us and are going to deploy 3d sensing both in front and world facing. In calendar 2020 2021. So I think long term, it's a good situation. Okay. Thanks for that. And then my follow-up, I'm not sure if someone's already asked this. I don't think you want to answer it, but I'm going to ask, it seems important since this is the first quarter you're combining telecom and datacom. To just if you could give a more precise breakout for what it was in 1Q, the mix of telecom datacom? Well, as we've combined them, I don't think we're going to, give that level of detail. I guess, maybe qualitatively, the easiest thing to say is that, that certainly ADICOM continued to decline and was consistent with the commentary that we provided on our last in terms of the magnitude of the expected declines in datacom, driven by the exit of datacom modules. Was the 19,000,000 all in datacom or some of that was in telecom? Yes, some of that was in telecom on the lithium nitate modulator. So we talked about on prior So it's a mix of datacom modules and lithium Niobate. But I'd say the the other data point that we gave was that datacom chips were up 13% to record levels. So that's our future in datacom and we're pretty bullish on the outlook of datacom chips. All right. Thanks a lot guys. Thanks Mike. And your next question comes from the line of Tom Deepley with D. A. Davidson. Yes, good morning. Another 3 d sensing question. So it sounds like the competitive environment hasn't really changed that much. I'm just curious though when you go in and you win a new slot, are you winning mainly because of your kind of proven volume capabilities or other specific technology advantages as well? Yes, I'd say, there's really 3 factors that go into winning winning the business. 1 is what you indicated, not just capacity, but the proven reliability of shipping a half a billion units with no fuel barriers is pretty phenomenal and not easily, replicated by our competitors. I'd say number 2 is our R and D team and their ability to meet our customers' expectations and requirements and timing, as we're working on products today that will be released in 2020202012022. And so I think our pipeline of new products is phenomenal. And then third is is the technology that we're able to provide to our customers as they continue push the applications to do more with 3 d sensing, we're enabling them to do that through the advancements in technology that we bring to market. And that differentiates us even further from our competitors as they've been trying to catch up in 2017 products, we're working on 202012022 products. Okay, that's helpful. And then, kind of as a follow-up here, what's your current view of the lidar market? When does that become a real meaningful opportunity? I think in terms of being meaningful, we're still looking out, at least several years. I think as we highlighted in our prepared remarks, you know, we are shipping prototypes and samples to customers and in a in a wide range of customers at a wide range of levels, meaning we have, partnerships with folks where we may be supplying laser chips or low level packaged lasers all the way up to selling a, a, a much more sophisticated, you know, essentially a coherence of lidar module where we leverage a lot of the photonic integrated circuit capabilities we have as well as leverage our our ROADM switching technology for for beam scanning, And so, you know, the way to think about the lidar market is it probably doesn't start contributing significant revenue until we're out in the, you know, the fiscal 2022, 2023 timeframe. But on the other hand, it's a market where the seeds are planted now, and and you get designed in because the auto manufacturers have very long product development cycles that may sort of freeze or, their their their product requirements and their supply base, you know, in the now time frame, but revenue appears several years later. And your next question comes from the line of Tim Savageaux with Northland Capital. Hi. Good morning. And, congrats on the, the great results. It looks like, optical comm gross margins might have been 500 basis points plus sequentially. Yeah. But that's an observation. Not a question. First question, is, on the optical comms side. I mean, you look to be guiding December up you know, kind of solid double digits here and this in the face of some exits in product lines and, and flattish ROADM revenue, which, you know, suggests a very strong increase on the transmission side. And I guess my question there is, what are you seeing out of Huawei in particular or China in general? In that guide. Do you expect that to continue to be flattish and what does that imply about demand, I guess, across the rest of the world? So you're talking about telecom datacom, right, because in our optical is his, 3 16. Oh, sorry. Yeah. Telecom Datacom. Yeah. So we're expecting transmission to be very strong. As we add more capacity that's that's trying to keep up with the growth and demand for our coherent components, coherent mod rules, as well as, as I said before, 10 gig tunables. We are seeing, you know, I I would say that September quarter was at a very low point for our submarine shipments. We're seeing that pick up a little bit more. And that's a result of our transition out of, our Centimeters in China and then to our own factory, our customer inventory to make sure they had it during that transition. That that is well on track. And so we're going to be back to shipping some marine product to same rate as they're shipping to their customers. And so I think it's transmission, it's, submarine and, passive products, but I think the out as well as datacom chips, we're going to continue to see datacom chip growth offsetting some of this end of life product we talked about. Yes, I mean, I think as, you know, trying to not dig down into Datacom detail, but, we do expect that that portion of the telecom and datacom will turn the quarter in terms of growth this quarter meaning that the chip sales will overwhelm, transceiver decline. So that headwinds that we had in prior quarter will now start to turn to a tailwind on the datacom side. And I think, on the telecom transmission side, another point to add is, we've had it, we have a lot of design wins, on our, on our coherent modules. And so, customers continue to sell and market those systems. So we've had customers that may be been pretty successful in some new customer opportunities that are also driving the tailwind we're seeing in transmission. So it could be, you know, not just market growth, but some, some unique situation where we have some customers that have won some good business, that are using our products where maybe the prior versions that their our customers' customers were using, we're not using our products and that enables us to get a strong growth. Yeah. And I want to kind of follow-up on that point precisely, which is we're hearing a lot about a pretty sharp increase in qualification activity around your CFP2 DCO module really post Cisco occasion to some degree. And I wonder if you I I don't know how long that would take to translate into revenue. I wonder if you could discuss, you know, when you talk about coherent module demand, to what extent that might be playing a factor in this stronger demand outlook and and what sort of opportunity that represents, for you guys throughout the balance of fiscal 20 on the CFP2 DCO front. Yes, I'd say that we're, you know, we're certainly seeing a broad base of interest in our CFP2 DCO, you know, over last few months as a result of what you said. I'd say we will see a pickup in DCO revenue in the December quarter. And then a real meaningful ramp up throughout calendar, 2020 as we, you know, get qualified at our customers and ship more meaningful volume. So we're putting capacity today to in anticipation of that type of growth throughout 2020. And I think what we're some of the strength we're seeing today is still ACO based and that gives us confidence that ACO has perhaps longer legs than than than many think, if you will, and that their, customers are winning new business with ACO based systems, that I think will extend how long the ACO business will remain strong for us. And maybe just to add one thing, in order to make a DCO, you have to be able to make an ACO and and the components go into an in the with products. And so I think from that perspective, our customers can count on us and, and, and they are counting on to be able to ramp up And your next question comes from the line of Ken Zeng with Rosenblatt Securities. Thanks for taking my question. So I think we're facing a lot of the capacity constraint of, the modem pump laser and also your laser fab in Japan. So what kind of a plan, the CapEx you're looking at for next year in order to increase the supply? Thanks. Yeah. I mean, as we said, today, we're not facing, well, we're facing supply constraints on the high end ROADMs, pumps seems to be okay as we've completely transitioned out of RCM in China, we had to add extra capacity last year to make that transition, smooth and seamless to our customers. So I don't think we have a whole lot of CapEx needs for, pump growth and we can produce a whole lot more pumps today than we could produce a year ago. And then we are spending money in, in our ab in Japan to grow that, output, as we've seen strong demand. But I would, I wouldn't say it's anything abnormal to our historic CapEx in say that our our calendar 20, CapEx plans are probably lower than our calendar 'nineteen CapEx plans given we had to spend a bunch of money to make that transition from Centimeters in China to our own factory in in Thailand. And so I think a lot of that heavy lifting is done. Okay. Thanks. And in past due normally gave the guidance for the free sensing business, the revenue. So what kind of the, you know, do you still provide that guidance or it's it's not, I don't think we ever provided guidance, from, you know, sort of numerically on 3 d sensing per se. But what we did highlight in our prepared remarks was that sequentially, we expected a greater than 20% decline in our 3 d sensing. But I think that's reasonably explicit given we break out our consumer industrial business And I think it's common knowledge that the industrial piece is substantially less than the consumer piece. And your final question comes from the line of Richard Shannon with Craig Hallum great. Thanks for taking my questions. If fitting me in here, I guess I'll follow-up on a couple of topics you've had some questions for. For the December quarter, you talked about some strength in the telecom part of your business and just want to make sure I caught correctly that it's largely from ACOs and 10 gig tunables. Is that did I catch that correctly? Yeah, those are 2 main drivers, but I would say that we're all are also seeing a coherent components demand increase as we are supplying those components that are in our ACOs and DCOs to customers who building their own DCOs or line cards for higher speed, coherent transmission. Okay. And the strength of the call here, it makes sense. And you just already discussed the ACL here. The 10 gig tunables is interesting here. Maybe if you could discuss where that demand is coming from breadth regional usage and maybe a little bit understanding of why you're why you think you're seeing strength and will it sustain? Yes. So I think that there's a couple areas. First is, it's certainly, you know, in a telecom network as you, as you upgrade core of the network to higher speed, you know, 100 gig and above the edge of the network. I'll gets upgraded. And so using DWDM technology at 10 gig using our tunable. And when we say tunable, 10 gig, it's, you know, these are in very compact SFP plus form factors. So they're finding a lot of applicability at the edge of the network, as well as we're seeing and emerging opportunity as we look to, both the cable MSO and wireless markets where, they are also finding use for for 10 gig and eventually, at the same 10 gig platform in a sense being turned up to 25 gig. Okay, great. That's all the questions for me. Thank you. Okay. And I'll now hand it back over to Alan Lowe. Great. Thank you, Adam. Just to close, we want to update you that we discuss our business at investor events. These events are listed on our website in the Investor Relations section and are regularly updated. This concludes our call for today. We would like to thank everyone for attending and we look forward to talking with you again in another few months. Thank you. And this concludes today's conference call. Thank you for your participation. You may now disconnect.