Earnings Call: Q4 2019

Aug 8, 2019

Good day, everyone, and welcome to the Lumentum Fourth Quarter And Fiscal Year 2019 Financial Results Conference Call. As a reminder, today's call is being recorded for replay purposes through August 15, 2019. I would now like to turn the conference over to Mr. Jim Fanucci of Darrow Associates. Mr. Fanucci, please go ahead. Thank you, operator. Welcome to Lumentum's 4th quarter fiscal year 2019 earnings call. This is Jim Fanucchi from Darrow Associates, assisting Lumentum with its Joining the call today from the company's management, we have Alan Lowe, President and Chief Executive Officer Quadad Ali, Chief Financial Officer and Chris Holgren, Senior Vice President of Business Development. This call will include forward looking statements, including statements regarding the markets in which we operate, including potential market sizes, trends and expectations for products and technology, including product development and projected new product releases, purchasing trends and demand for our products, our expected financial performance, expenses and position in the market as well as statements for in the recent 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 the SEC, particularly the risk factors described in our filings with the Securities And Exchange Commission including the company's quarterly report on Form Ten Q for the fiscal quarter ended March 30, 2019 filed with the SEC on May 7, 2019, and in Lumentum's 10 K for fiscal year 2019 that ended ex 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 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 4th quarter full year fiscal 2019 results is available on its website at www.momentum.com under the Investors section and includes additional details about our non GAAP financial measures and affiliation between our historical GAAP and non GAAP results. Lumentum's website also has its latest SEC filings and supplementary slides relating today's earnings release and the company encourages you to review these. A recording of today's call will be available by 11:30 am Pacific Time today on our website. Now, I will turn the call over to Alan for his comments and fourth quarter market and product highlights. Thank you, Jim. Good morning, everyone. Before my comments on our business, I will start with the sad news we communicated in our press release yesterday. We recently learned that our Board Chairman, Marty Apland passed away. Marty and his role as Chairman was a trusted and wise advisor, but he was much more than that. He was a friend, a truly amazing human being, who will be greatly missed. On behalf of Lumentum, we send the Kaplan family, our most heartfelt condolences and sympathy. I will now move on to my comments on the business end markets. The fourth quarter was ample to say the least, but it capped off at fiscal year during which we made significant progress towards our long term strategic financial ship positions in telecom and 3d sensing. We introduced many highly differentiated new products one new design wins with market leading customers in all of our markets. In our commercial lasers business, unique new products enabled us to grow revenue to new record levels in a down market The Oclaro acquisition has given us a 1st mover advantage in a transforming industry. First, we attained a leading leading position in telecom transmission based on fundamental indium phosphide photonic integrated circuit technology. We believe this technology will be critical to our customers' ability to scale to higher network bandwidth in the future, including 800 gigabits per second to a significantly more profitable model that is expanded our datacom market focus to include 5g Wireless and other high volume applications. And finally, we improved our business model by achieving and are now increasing our annual synergy target These additional savings will be attained seen a trend toward further industry consolidation. Several other M and A deals in our space have been announced to date. There are perhaps more to come as market participants recognize the need for scale. Fiscal 'nineteen revenue was at a new high exceeding $1,500,000,000 and was up 25% relative to the prior year. For the first time, I believe these results and accomplishments both underscore the significant progress we have made toward our strategic goals during fiscal 2019 and position us well for revenue growth and margin expansion in fiscal 2020 and beyond. I'm proud to lead the the photonics technologies they need to win. Before turning to more details on our results, I'd like to provide an update on our business with Huawei On May 20, we indicated we had stopped shipping to Huawei in response to addition to the entity list and to become compliant with US Department of Commerce requirements. Subsequently, we completed a detailed analysis of the products we supply to Huawei and determined that certain products were subject to export administration regulations. Processes to ensure compliance with government requirements on an ongoing basis. We intend to fully comply with US Department of Commerce requirements. Sales to Huawei were down 25% sequentially in fourth quarter as a result of these actions. Looking to the first quarter, we expect sales to dynamic nature of the current geopolitical situation as to the challenges of projecting future Huawei revenues. Now for details on the fourth quarter full fiscal year performance. Telecom revenue was up 65% in fiscal 'nineteen. Within telecom, transport revenue increased by nearly 50%. In the fourth quarter, telecom revenue declined 6% sequentially due to lower shipments to Huawei. Partially offsetting the Huawei decline was growth achieved record ROADM revenue. We were able to partially offset lost Huawei ROADM revenue in the quarter grew sales to modules was up 10% sequentially with sales of both ACO and DCO products growing. Looking to the first quarter, we expect telecom revenue will be flat to up sequentially. Telecom customer demand outside of Huawei is strong. However, this demand is for different mix of products, than Huawei purchases from us and for which our supply chain had been rules is currently the limitation. Additionally, impacting telecom is an expected temporary dip in our submarine business, which has historically been a lumpy project based business. Looking further out, based on expected continued strong growth in global network bandwidth and data center traffic, The needed optical infrastructure for 5G wireless, we believe the telecom market should be strong on a multiyear basis. We believe the strength we have seen in telecom transport over the past year is a leading indicator of future strength and demand for transmission products. We are well positioned export products and deep customer relationships. We benefit from global bandwidth expansion regardless of who builds or supplies the networks. Our next generation products including M by N and high port count twin ROADMs DCO modules, including ZR and longer reach and high baud rate indium phosphide components, including those for 800 gigabits per second are critical to our customers global customer base. Turning to datacom. Early in fourth quarter, we closed the previously announced divestiture of our Japan based datacom Sever Business. This was a key milestone in our strategic pivot to focus exclusively on photonic chip sales in the datacom market and the challenged datacom transceiver business. Since the announcement of this transaction, we have seen strong engage from customers for datacomphotonic chips, including in 5g wireless applications. This drove 4th quarter datacom chip sales up 11% sequentially to new record levels. In many cases, new customer interest is from leading competitors who previously would not purchase from us due to the competitive nature of the transceiver us competing in the transceiver business. As a reminder, we are discontinuing all remaining data transceivers and certain low margin telecom product lines. Revenue from revenue from these product lines totaled $31,000,000 in the 4th quarter, and should decline to 0 over the next few quarters. Turning to our industrial and consumer product lines, which includes 3 d sensing. 4th quarter revenue was up 13%. This growth was larger than our guidance In the case of 3 d sensing, in fourth quarter, we started ramping deliveries to customers to support customers' product cycles expected to start of end customer models and supply chain inventory levels appear to be more normalized when compared to last year. Taking into account, the accelerated 4th quarter shipments and expectations around global smartphone volumes and our market share we expect 3 d sensing revenue in the first half of fiscal twenty twenty to be slightly up from the first half of fiscal twenty nineteen. We continue to make good progress on 3d sensing customers worldwide, including in world facing applications. Favorable consumer and media reviews for initial world facing enabled smartphones has caused customers product maps to more broadly incorporate 3 d sensing 3 d depth sensing for photography and augmented and virtual reality applications. Based on customer activity, we expect major smartphone manufacturers to introduce products with new world facing capability in calendar 2020. This combined with increased customer demand for smart phones driven by future 5G availability should drive a significant increase in 3 d sensing market in calendar 20202021. We are very well ability and volume capability. We have shipped 100 of millions of devices with unmatched performance quality and reliability and expect to exceed a 500,000,000 cumulative devices shipped by the end of our first quarter. This experience is a valuable Turning to commercial lasers. As highlighted earlier, new products enabled us to grow fiscal 2019 lasers revenue to new record levels in a down market. This growth was driven by a nearly 100% increase in fiber laser sales relative to the prior year. In the fourth quarter, our commercial lasers segment revenue was down 13% quarter on quarter as expected. Our commercial lasers business market to grow into, while leveraging our core set of optical technologies and manufacturing capabilities. Further, it provides us a level of customer and end market diversification. Looking to the first quarter, we expect lasers revenue to soften further as we enter the seasonally weaker fall time period. However, based on customer requests for quote activity, we believe the commercial lasers market will return to growth in the new calendar year. Over the long run, because have good opportunity for growth driven by new product introductions in addition to market growth Throughout my remarks, I've highlighted the significant progress we have made toward our strategic and financial goals during fiscal 'nineteen and how we have positioned ourselves well for fiscal 2020 and beyond. This combined with the growth catalyst we see in each of our major product lines makes future future. With that said, I will now turn the call over to Wajid. Thank you, Alan. Good morning, everyone. Before jumping into our 4th quarter results and our guidance for the fiscal first quarter of 'twenty, I'd like to run down our full year fiscal 2019 results. Net revenue for fiscal 2019 was $1,570,000,000, up 25% compared with fiscal 2018. Fiscal 'nineteen Optical Communications segment revenue was up 29%, driven by strong market demand for telecom products and the Oclaro acquisition. Our laser segment revenue was up 4% compared to the prior year, driven by strong fiber laser sales. For the full year, GAAP share was $0.54. These GAAP results include and our actions in the manufacturing costs. Non GAAP operating margin expanded 80 basis points to 20.5% for the full year and non GAAP net income increased more than 23% relative to the prior year, resulting a non GAAP diluted net income per share of $4.25. We ended the year with cash and short term investments of 7 $9,000,000, an increase of $71,000,000 relative to the prior quarter. Now turning to the fourth quarter. 1,000,000 and lasers. GAAP gross margin for the 4th quarter was 21.5%. GAAP operating margin was negative 3.4% and GAAP diluted net loss per share was 0.34 dollars. Again, GAAP results include the impact restructuring, write downs, amortization of intangibles and other charges related to the acquisition and our actions to attain acquisition synergies. 4th quarter non GAAP gross margin was 38.9 percent, which was approximately flat sequentially on lower revenue levels. Non GAAP operating margin for $700,000 or 19.9 percent of revenue. R and D expense was $46,400,000, SG and A expense was $34,300,000. I think it is important to highlight here that synergies achieved to date through the fourth quarter helped drive a sequential 120 basis point expansion in operating margin despite a 7% sequential decline in revenue. Non GAAP net income was 70 800,000 4th quarter and includes $2,400,000 of net interest expense and tax expense of $3,500,000. Non GAAP diluted net income per Now, turning $156,800,000, comp revenue at $227,700,000 was down 6% sequentially due to lower Huawei sales. Data comp revenue at $41,500,000 was down 28% sequentially, driven by the transceiver product line divestiture. Industrial and consumer revenue at $87,600,000 was up 13% sequentially due to higher industrial diode and 3d revenues. Optical Communications segment gross margin at 38.3 percent increased 30 basis points sequentially on lower revenue due the divestiture of lower margin datacom product lines and higher industrial and consumer in the mix. Our laser segment revenue at $47,800,000 decreased 13% sequentially. 4th quarter lasers gross margin was 43.5 dollars, a decrease of 250 basis points due to lower revenue. From the close of the Oclaro transaction through the end of the 4th quarter, we have taken actions that when annualized, achieve more than $60,000,000 and synergies, which is the target we put forward when we announced the transaction. We achieved these synergy levels earlier than we estimated transaction by strong execution after the close of the transaction. We now estimate that synergies will be approximately $100,000,000 in total or Additional synergies will primarily benefit cost of goods sold as further operating expense synergies are likely to be We expect financial impacts will be announced at the time of the transaction. We believe these additional COGS synergies should drive average gross margins to the upper half of the 40 20. The projections we are providing today are on a non GAAP basis and are based on our assumptions as of today. We project net revenue for the first quarter to be in the range of $435,000,000 to $455,000,000 This revenue projection includes telecom being approximately flat to slightly up. Datacom declining as we continue to wind down transceiver sales. Commercial lasers decreasing approximately 20%, driven by the factors Alan mentioned earlier, and industrial and consumer increasing as we enter the seasonally strong time period for 3 d sensing. We project 1st quarter or operating margin to be in the range of 22.5% to 24.5%. And diluted net income per share to be These projections incorporate an approximate share count of 70 With that, I'll the Q and A session, I would like to ask everyone to keep to one question and one follow-up that should help us get to everyone before the end of our 1 hour time Operator? First question comes from the line of Alex Henderson of Needham. Great. First, a clarification. You said that 3 d sensing would be up slightly from the first half of 'nineteen, but I'm not sure whether you meant the first half of 'nineteen fiscal year or first half of 'nineteen calendar year. Could you clarify that, please? Yes, we were talking first half of fiscal year compared to the first half of this year. Great. That's what I thought. The next 6 months, we expect to be flat to slightly up from the 1st 6 months of fiscal 2019. Perfect. 2nd question, if I could, Huawei stuff obviously is top of mind. Have you asked the government for any exclusions relative to Huawei? And has the, 3 d sensing piece been included in the ban, so far or is that something that, might be, allowed, to ship in, at some point? Yes, I think as I said, we've really developed a new process to make sure we comply with the regulations The majority of our products are not subject to EAR across the board with respect to with respect to being allowed to ship. So I don't want to comment on specific products, but I would say that the vast majority of our products are not subject to EAR. Okay. And if I could ask just one more question, how long do you think the supply constraints on telecom will be evident? And is that a matter of just simply shifting the type of product that you're producing as a result of any shifts in production? Or is that something that you think will last well into the back half of the year and then maybe even into next year. Can you give us any timeline on that? Yes, I certainly expect us to be able to solve the supply constraint over the next several months. It is impacting this quarter and into a bit of Q2. But we're we've got a whole focus making sure that the gating material items and suppliers are being coached to help us. And I'm sure we'll make progress, but it is impacting, this quarter and the beginning of next quarter. Your next question comes from the line of Samik Chatterjee of JP Morgan. Hi, this is Joe Cardoso on for Samik. My first question comes is related to the $0.03 in guidance. You guys kind of see more bullish in terms of 3 d sensing, ramping into this, well, your fiscal first half. Can you just provide us an update on whether you're seeing that coming your largest customer or whether that's more optimism around adoption from the Android camp? Yes, we're not going to talk specifically about customers, but I'd say that, we've been working on new product design wins across the board, both with our largest customer as well as Android and I'd say that we're based on where we are today, we expect, a good a good first half of the fiscal year. That said, I'd say that we weren't expecting as much growth as we saw in the fourth quarter. And think that that is a bit of a result of earlier ramp of new products for the fall, but we still believe that the inventory levels in a better situation than they were a year ago. So that gave us confidence that the first half of fiscal year is in pretty good shape. Got it. And then relative to your gross long term target of being in the upper range of your gross margin target, Is that so clarification, is that largely coming from the synergies or is that kind of coming from the mix of business that you guys are seeing? Hi, it's Wajid here. It's a little bit of both. We're seeing favorable product mix, across our product lines and we're expecting that to continue, over the next number of quarters. But in addition to that, it the $40,000,000 of annualized synergies that we expect to flow through in the tail end of that five quarter period that will that will really help us and give us confidence in moving up the range of 40% to 45%. And just a clarification on the synergies. Where exactly are you guys seeing the upside to the synergy targets? Well, I think across the board, I think we've made some decisions more rapidly and executed more rapidly than we had originally advertised and that's why we were able to get the full $60,000,000 done already. I'd say looking forward, we still have some product rationalization to take place. As well as in my prepared remarks, I talked about some of the lower margin telecom products, exiting over the next several quarters and that along, that kind of drags along a bunch of fixed costs and fabs that are going to go away during that time period. So think it's a combination of, really focused on how do we streamline our manufacturing processes, how do we combine our ERP system, which is not done and will be done later this fiscal year. So it's a combination of those things that give us confidence that there's another $40,000,000 to go. Yes, just to add to that, I mean, we've got just like with the first $60,000,000, we had clearly defined actions with timeline and a bottoms up. It's the same with the next 40,000,000. We've got a bottoms up with clearly defined timelines and actions that we're following, which is why Alan mentioned earlier, we've got a lot of confidence around achieving it. Your next question comes from the line of John Marcetti of Stifel. Thanks very much. Just wanted to get back to your comments about an expected sort of mix shift here in the telco world as you continue to move at least over the short term away from some of the Huawei mix. Should we think of ROADM sales maybe moderating some of that growth as we're looking at certainly the first half of this fiscal year, but maybe on a full year basis as well? Well, I think our expectation given where we are today is that ROADMs regardless of our guide and our expectations with Huawei, continue to grow. So we're expecting ROADM growth in the first quarter and continued growth as we introduce new products and new design wins across our customer base globally. So I think our expectation and we still are adding capacity, especially for the new leading edge in by in products as well as the very high port count, which has broad adoption across our customer base. So we're expecting another good year for ROADM. And then maybe just to follow-up to Alan on the comments that you made around submarine, not being a little bit lumpy for you, at least in the first half of this school year. Is that a change in customer behavior there? Is it a sign that you're starting to see customers either move away from new builds into upgrades or vice versa. Just curious what you're seeing in that submarine market as it's been relatively strong for the industry here for quite some bit. Yes, I think it's a combination of a couple of things. One of which is, it is lumpy. It's project based. We, if you recall, we made most of our submarine products at our contract manufacturer in China. We ramped up production in order to make the transition to our own Thailand, the and that is coming up in Thailand. So, I'd say the combination of 2 things. 1, it's project based and lumpy, had a really strong quarter in fiscal Q4 on submarine. And I think part of that is a result of, us winding down production one location, and moving it to bring up in a new location, that takes some time. So I think there probably was some inventory taken in Q4 that is going to be consumed over the next several months and quarters, and then bringing up the new facility, on summary and take time. And so we're on track with the bring up. But I'd say that this quarter is just going to be a low quarter for summary due to those factors. Your next question comes from the line of Meta Marshall of Morgan Stanley. Hi, this is Eric on for Meta. Thanks for taking our question. Maybe just first on the lasers business, what is the timeline for adoption of the product side of the model and now that there's a bit more capacity, could you see revenue in second half of fiscal 'twenty? Yes. I mean, we are winding down the completion of the development of specific products for other customers and have shipped samples. So I wouldn't expect any meaningful revenue in the first half, but expect it to contribute in the second half of the fiscal year. That's helpful. Thanks. And then on the datacom chip sales, could you maybe give us a sense on just the size that you would hope to achieve in that business over the next 12 months? I think it's a day, quite frankly, we are constrained by our ability to produce wafers and more chips. We have demand that is not being satisfied and we're making investments to handle that demand. I think with what's going on fundamentally in data centers and hyperscale build outs in 5G, the demand for unit volume is growing rapidly and we expect to really be able to over the longer term double that business. And I don't see any reason that we can't do that. Thank you. And then just finally on Huawei, if a waiver were to be granted for kind of those outstanding products that aren't shipping. Is that something that you would start building products immediately or is there a bit of a lag in timeline to start resuming shipments? Yes, there would be a probably a bit of a lag only in that, if we're unable to ship a product today, we're not going to be building product continually. We do have some inventory. So we I'll respond, but we do typically have manufacturing times that can be a quarter in length. Therefore there could be some delay. Your next question comes from the line of Tejas Venkatesh of UBS. What sort of ASP declines do you expect in VCSEL for fiscal 2020 versus 2019? Yes, we're not going to get into specifics on that. I think what I will answer is that we expect, with the world facing coming on board in a meaningful way in calendar 'twenty, And with a new, set of chips that we believe will be introduced in calendar 2020, we will have an ASP reset or our content per device will increase in calendar 20. We believe in a meaningful way. I think our expectations and what we tried to say in the prepared remarks was that unit growth would be higher than ASP reduction, therefore driving, you know, growth in our first half of fiscal 'twenty. But I think calendar 'twenty is going to be a very solid year for us in 3 d sensing, because more content per phone and new devices that will go into handset or mobile device. Thank you. And as a follow-up, I wanted to revisit ROADMs What was ROADM revenue in 4Q? I believe you had $130,000,000 per quarter of capacity. So it sounds like you're still adding capacity. So just an update on that would be great. Yes. Hey, Tejas. We're not disclosing revenue by product line. I think you can imagine a triple digit number and we grew quarter over quarter. Did not grow as much as we had originally anticipated prior to mid May. But, as we redirect manufacturing capacity, we expect to grow more strongly in road Your next question comes from the line of Troy Jensen of Piper. Hey, thanks and congrats on really nice results here. Thanks, Greg. Hey, Alan, maybe for you, I'd love to get your thoughts on the case, just Cisco deal. I mean, clearly, Cisco was a big ACO customer for you and Oclaro with the intention, I'm sure to get to the DCOs. And just thoughts on what this means longer term with that customer? And then also, were you guys one of the bidders in the Acacia transaction? Well, we're certainly not going to comment on the second part of your question. Well, our perspective on the deal is it's a good deal for everyone involved. I mean, Cisco has been a longtime partner customer of ours in a solid, really strategic customer of ours. Acacia has been a supplier to us, a customer to us and a competitor to us. I think the transaction, has a couple of dynamics, one of which is the customers are going to want a second source and we've seen activity increase with respect to DCOs. Since the announcement, from, from, from Lumentum. And I think that Cisco is going to continue to be both a transport and transmission customer of ours into the future. So, all of that said, I think it's a very positive outcome for the industry and positive outcome for Lumentum because I expect fully to be viewing to be a supplier to Cisco and to Acacia. And we believe that the dynamic will a catalyst for growth for us on DCOs and ZRs in the future. Okay. And maybe just a question on OpEx. You don't understand like more synergies, but I mean, just specifically looking at the September numbers here, is OpEx on an absolute dollar basis going to be declining sequentially, or do you get to this range or is it just going to be a bigger spike in gross margins? Yes. Hi, it's Wajid here. We'll probably see OpEx stay within the range of fiscal Q4 plus or minus a couple of $1,000,000. You'll really see the synergies start flowing through, like we said on our prepared remarks, within the gross margins, but more in the latter part of obviously will be higher because we've got a stronger mix of 3 d sensing. But outside of that, the synergies that we talk about that are in addition to the $60,000,000 we already achieved, will be primarily in our caustic goods sold line. So OpEx will stay relatively flat plus or minus based on the investment levels we make and the timing of those investment levels. Your next question comes from the line of Rod Hall of Goldman Sachs. Yeah, hi guys. Thanks for the question. I wanted to ask about the ROADM demand situation. So I know that you had said previously that in the September quarter, you expected to serve a bunch of backlog that you had in terms of orders. And so I'm assuming that that's being done. And I wondered beyond the September quarter if now that the backlog is cleared or maybe you can clarify whether it will be of what the demand situation looks like. I think Alan you had alluded to some growth there, but I just wanted to clarify what that ROADM demand looks like. On an organic basis as we get into the December quarter and beyond? Yes. So, demand for ROADMs across all of our customer base is very strong. We are not satisfying the overall demand in the September quarter. And we'll see how it goes in the December quarter as we add more capacity. But I'd say that the capacity is not interchangeable in every case and that like our MxM is a unique capacity that's not shared with other product lines. And then the mix between modules or blade changes dynamically through the quarters. So that's why it gives us confidence that the September quarter ROADM will grow. I would have every expectation that the December quarter ROADMs will grow as well, assuming we have the right capacity for the mix that through. And we are seeing a shift to a continual higher court count when 1 by 2 by 35 and by end as well as blades associated with this newer technology. So we're going to continue to grow our ROADM capacity and our ROADM revenue. So Alan, just to clarify that, are you thinking there's a good chance that in December and beyond the ROADM supply will still be short of demand? Or do you think that by the time you get into December, supply should at least equal demand? Assuming you've been able to reconfigure production the way that you need to? Well, I think again, it's going to be based on mix we get. And as we continue to be working with our customers across the globe on new designs, the high capacity and contentionless and directionless ROADMs. We believe that those will continue to be constrained for some period of time until we bring on additional new capacity. So we're trying to tighten the capacity to get some flexibility, but we continue to see more demand than our customers are forecast in the longer term. And it takes a while to the capacity. We are bringing on more capacity, but again, we're having to anticipate that mix today, I'd say we don't have any excess capacity in any of our product lines on ROADMs. So we're feverishly trying to get more out of the existing capacity drive yields, drive productivity and drive output, without having to add a bunch of capacity. Okay. And then on the second kind of major question we had was on lasers gross margins. Those were down quarter over quarter. And I know you guys are targeting 50%. Could you just comment on that margin trajectory and what you're thinking now in terms of how that progresses toward that 50% goal? Yes, I mean, I think the drop we saw in the June quarter was really volume based and revenue based and there are some fixed that don't get absorbed with lower volume. I think, as we expect in calendar 2020, the volume will pick back up And as we introduce new products from new fiber lasers to new ultrafast lasers, we expect that, we will go closer to the higher, higher 40% margins and could get to 50% margin in calendar assuming the mix is right and that the economy allows us to really grow that business. That said, I'd say, that lasers, competitors of ours are hitting some pretty heavy headwinds. And so, I think We bought the trend, as we said, by growing our lasers business in a pretty tough environment, but we expect that calendar 2020 will be a different story. It even amplify that over the past year, a lot of the growth in lasers, by fiber lasers, which historically, for us, were below our lasers average margin given there over the past year become a substantial portion of it of the the lasers mix and gross margins have increased, up until now with revenue coming down. It's compressing margins. I think the point I'm trying to emphasize is that the non high related portion has had a pretty brutal year, but it's a higher margin than average. So as Alan alluded to, calendar 'twenty, we believe the non fiber laser portion we'll begin to rebound, and that will have a very positive influence on the mix and therefore the margin. Your next question comes from the line of Simon Leopold of Raymond James. Thank you for taking my question. This is Mauricio in for Simon. A quick housekeeping item. Can you please give us the number of 10% customers this quarter and the percent contributions, please? We had 3 10% customers. I don't think we're set that in our press release today. Yes, we'll have the 10% customers detailed that in our K later this month. Okay. Thank you. And then I wanted to go back to the Huawei question. Back in May, do you guys reduce your June guidance by close to $33,000,000 at the midpoint following the U. S. Addition of Huawei to this entity list. Today's results highlight a close to $22,000,000 beat to that guidance, again, at the midpoint And then I was wondering if you could give us some color on what portion of this bid could be attributed to, your ability achieve more products into Huawei than you previously anticipated? Well, I think I'll start and let Alan finish. The 30 something $1,000,000 come down, when we, when we guided, I think if you, you know, book, what we ended up with was Huawei being down 25% or amounts to approximately 20 $1,000,000. And so, the net net of that is obviously not as much as we were And therefore, I think as we highlighted in our prepared remarks, was really the industrial and consumer business that, probably was the most significant driver of upside, though we were able to redirect some of that telecom business. That we weren't able to serve Huawei to other customers. The challenge was just all of this happened very late in the quarter. So with our manufacturing lead time difficult to redirect and get much impact within the quarter when it was really only about a month, month and a half to go. I think that covers it, Chris. I'm sorry. Go ahead. Okay. I know that you're going, disclosing at this point, what kind of products you're able to ship currently able to ship into Huawei. But it's, given your prepared remarks, is it fair to assume that the majority of products outside of telecom Oh. Great. Let's go on to the next question. Your next question comes from the Thanks for taking my question. So, do you mind if you, give us a little bit color, how much capacity, how much more capacity need to meet the current ROADM demand or in order to, lower or shorter the lead time for the ROADM Thanks. Yes, I think if you look at what we did in fiscal 'nineteen, we more than doubled the output of ROADMs. We continue to add, but don't expect to double again this fiscal year. So our CapEx plans for our fiscal 2020 are lower than they were for fiscal 2019. But off of substantially higher installed capacity base. So the decisions that we made 6 months ago are coming online now most of which are for the very high end ROADMs and high port count ROADMs. And we're going to continue to invest, to bring that And I think as Chris mentioned, we are over $100,000,000 in ROADMs we grew last quarter. We expect to grow this quarter. I fully expect to grow in the December quarter. And most of that growth will be coming from the very high end ROADMs and ROADM blades. So I'm not going to give a number. I think one of other analysts said that they believe we had $130,000,000 of installed capacity. I don't see any reason why we shouldn't be able to get to that. Level of ROADMs in calendar 2020. So I hope that answers your question. Sure. Thanks And also, one more question. In addition to 5G and the modem, what else your seeing the strength in the telecom market or which could provide a potential upside for your revenue in the next few quarters? What other products? We're seeing growth in the telecom space. Could slide the upside. As we said in the prepared remarks, we saw a 10% growth in our our coherent modules, so our ACOs and DCOs. So we're expecting, continued growth. We're constrained on ACOs today significantly constrained on ACOs as we've seen demand pick up, more than anticipated and and we are at the very early stages of DCO shipments that we expect that will continue to grow through the fiscal year and be a meaningful part of our, telecom revenue over the next several quarters. Thanks. That's all my questions. Thanks. Your next question comes from the line of Tim Savageaux of Northland Capital. Good morning, everyone. Or should I refer to you as party A this morning? Just throw in my $0.02 there. A couple of questions. With regard to the commentary around gross margins, I want to get a little more detailed on that. You talked about being toward the upper end of a 40% to 45% target range. Could you go over the timing on that again and whether that's driven by kind of organic improvements in telecom margins better mix with less datacom, more three d or what have you? And I have a follow-up. Yes. Hi. It's Wajid. I'll start it off and then Alan and Chris can jump in as well. So obviously product mix plays a a role kind of quarter to quarter. And so what we're talking about is looking 5 quarters out for a given product mix what do we think our growth margins are going to look like? So there's a couple of positive trends that are happening organically that are supporting our margin target of 40% to 45%. Alan talked about the growth in datacom chip sales, we talked earlier about having more content with 3 d sensing. And in addition to all that, we're expecting to have $40,000,000 worth of annualized synergies, which we mentioned earlier on the call, we've got clearly defined actions, with timelines on. And so that's going to happen probably at the tail end of the 5 quarter target that we've given, but it's really those three things that are driving our expectations on gross margins up, looking forward. Even in the lasers business, as Alan mentioned earlier, we're expecting to see higher levels of menu and so that should help us from an organic gross margin perspective as well. So it's all of those things combined. Alan? Yes, I would just add to that, I mentioned that we have $31,000,000 of products, telecom, transceivers and low margin telecom products, over the next several quarters are going to go to 0. That will help the average coach margin go up, but $10,000,000 a quarter at payment mostly in COGS is going to be 2% to 2.5%, in itself given no mix change. So I think we're pretty confident in our ability to make that happen. So I think it's a combination of all the above. Great. And to follow-up on 3 d sensing, it actually kind of levers off that datacom comment really depending on how fast you assume that drops off in your September quarter guide, what I see is actually pretty solid double digit growth being implied on a year on year basis in 3 d sensing and very strong sequential growth, obviously. And so to get to your kind of up slightly calendar guide, you need to have a pretty substantial decline in calendar Q4. And maybe that comes as a result of an earlier build cycle and maybe borrowing some of that here in the June quarter. But from an overall trajectory standpoint, am I thinking about that kind of the right way? I think, Tim, yes, though, I think when we start talking about December That's a little still a little further out. We've got plenty of time to manufacture. Well, you did guide to it. Well, I think our point being is, it depends on the timing of what we do this quarter. And as be highlighted also what happens in the overall smartphone market. But I think based on the comments, that we put in the script. I think you're headed in the right direction. Great. Thanks. Your next question comes from the line of Richard Shannon of Craig Hallum. Hi guys. Thanks for taking my questions. I guess a 3 d sensing question for me. Alan, maybe if you can talk about the competitive environment here in terms of what you're seeing for capacity and also capability of coming online here and also to the degree to which there are opportunities out there in 3 d sensing that may ask you or maybe looking for lower specs that Lumentum may not be than competing for? Oh, we're interested in everything, Richard. I'd say that we've had 2 years of extremely high market share. And we last a year ago, we thought that that was going to go down and it didn't. I think right now, think it's going to go down, but we'll see. I think our competitors are going to figure it out eventually, but as I said in prepared remarks. By the end of this fiscal quarter, we will have shipped over 500,000,000 units of 3 d sensing products. And that's hard for our competitors to keep up with. And the quality level and reliability levels, the product we ship, is, is phenomenal, absolutely phenomenal. So I think the combination of having scale, reliability, and the investment in R&D for new products is going to continue to have us, be out in front and that's why we're pretty confident, especially as you look forward into calendar 'twenty, content per phone is going to go up. Products are going to change to higher technology. I think we're going to continue to stay out on the front. We're continuing best in new technologies that give our customers new capability to do those things with their devices. Okay. That's helpful commentary. Second question for me on telecom stuff here. Obviously, ROADMs seems a very strong trends here. Maybe if you look out in telecom outside of ROADMs, what you're seeing here in terms of growth here from your non Huawei customer base here? And do you worry about any sort of inventory builder? Inventory build outside of Huawei? Yes. And outside of rodents, yes. Notes have it wrong. No, I don't. I think we are, well, set aside some rain, because I think that there was probably some shift been accepted last quarter in anticipation of this new environment. And why we think that the submarine will be down this quarter I don't see a build up of inventory. And in fact, I see the opposite because we're still not able to, as I said, meet the demand for ACOs and coherent components and ROADMs clearly are challenged there as well. Okay, great. Thanks for that. That concludes our time today. I will now turn the call back to Alan Lowe for closing remarks. Thank you, operator. I want to thank our customers for their business and partnership. I also putting us into an excellent position in the markets in the market for the long term growth. We regularly discuss our business and investor relations 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 we look forward to talking with you again in another few You may disconnect at this