Earnings Call: Q3 2019

May 7, 2019

Good day, everyone, and welcome to the Lumentum Third Quarter Fiscal Year 2019 Financial Results Conference Call. As a reminder, today's call is being recorded for replay purposes through Jim Fanucchi of Darrow Associates. Mr. Fanucchi, please go ahead. Thank you, operator, and welcome everyone to Lumentum's fiscal third quarter 2019 earnings call. This is Jim Fanucchi. I'm from Darrow Associates, and I am helping 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 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 regarding 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 annual report of Form 10 K filing for the fiscal year ended June 30, 2018, and filed with the SEC on August 28, 2018, and the company's quarterly report on Form Ten Q for the fiscal quarter ended December 29, 2018, and that was filed with the securities Change Commission on February 7, 2019, and in Lumentum's 10Q for the fiscal 3rd quarter, which the company expects to file with the SEC later today. Forward looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today, and 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 press release with its fiscal third quarter 2019 results is available on its website under the Investors section and includes additional details about our non GAAP financial and a reconciliation between our GAAP and non GAAP results. Lumentum's website also has its latest SEC filings and supplementary slides relating today's earnings release. Lumentum 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 third quarter market and product highlights. Alan? Thank you, Jim. Good morning, everyone. I am pleased to be here discussing our 3rd quarter results and progress on achieving our strategic goals. The 3rd quarter continued a theme that started more than a year ago, For the 5th quarter in a row, strong demand for our new products drove double digit quarter on quarter revenue growth in ROADMs and fiber lasers. Once again, we attained new record revenue levels for both of these product lines. With a full quarter of contribution from the Oclaro acquisition, our telecom revenue the overall telecom market. This mix could further balance out over time as new higher speed transmission products including DCO modules ramp later this year. We believe the telecom market should be strong based on the continued growth in global network bandwidth requirements and the needed infrastructure for 5G. We are well positioned to capitalize on these trends During the third quarter, we announced to our telecom customers 2 strategic actions catalyzed by the Oclaro acquisition, First, we are rationalizing overlapping product lines, which we expect to have minimal impact to revenue. This rationalization should result in gross margin improvement once completed over the next few quarters. 2nd, we are discontinuing some legacy telecom product lines where growth and profitability forecast are inconsistent with our long term goals. Revenue from these products is approximately and will decline to 0 once we satisfy our customers last time buy needs over the coming 3 to 4 quarters. In early March at the OFC trade show, we announced a fundamental shift in our datacom strategy. We are now focused on datacom chip sales and will stop selling datacom transceivers over time. We also announced the sale of several of our datacom transceiver product lines to Cambridge Industries Group or CIG. This transaction closed on April 18, 2019. We expect sales of our remaining datacom transceiver product lines to ramp down to 0 as we bleed down inventory with only chip sales remaining in the future. We are trying to do this as quickly as possible but this process could take up to 4 to 5 quarters. Currently datacom chip revenues are approximately $20,000,000 per quarter. Since the announcement of the transaction and our clarification on our datacom strategy, we have seen increased interest from new customers for our datacom chips as we will no longer compete with them at the transceiver level. We are investing in new datacom chip development and expect sales of chips to customers serving the datacom and 5G markets to grow over time. Since our last earnings call, we have made good progress on winning 3d sensing business for future product cycles. Customers around the world know they can count on our proven and unrivaled reliability and volume capability. The market for laser based sensing is still in the early innings We believe the market opportunity over the long run is tremendous as the applications that use our 3 d sensing lasers, enhanced security, safety and new functionality in the billions of electronic devices that people around the world rely on every day. We believe our leadership position in the market is sustainable and we will see strong growth in our 3 d sensing business over the long run. We have shipped 100 of millions of devices with unmatched performance, quality and reliability. This experience is Turning to the 3rd quarter results, revenue was $432,900,000, up 16% quarter on quarter driven by having a full quarter of revenue from the Oclaro acquisition as well as continued strong growth in telecom transport products and commercial lasers 3d sensing revenue declined quarter on quarter as seasonally as expected. Revenue from our telecom product lines grew 41% sequentially, again, driven by the acquired telecom revenue and by strong double digit quarter on quarter growth in ROADMs and telecom transport sales. Demand from our customers for our telecom products is very strong and is spread across a broad customer and geographical base. Chinese customers are increasing are an increasing portion of our ROADM revenue which should be expected given However, their contribution is still well below their share of the market. But demand outstripped our ability to slide in the third quarter, and this will continue throughout the 4th quarter. We believe the growth in our ROADM and transport revenue has outpaced the telecom transmission revenue growth for several reasons. One simply relates to timing. In new network deployments, the transport equipment is installed first and then individual transmission wavelengths are lit up over time. The other reason for strong ROADM growth are the other reasons for strong ROADM growth are more fundamental and long term in nature. The new colorless, directionless and contentionless, or CDC network architectures. The ROADM, the number of ROADMs per network node and the number of ports per ROADM and therefore, the average selling price is increasing. These more advanced ROADMs enabled customers to achieve the needed network reconfigurability and capacity. Additionally, ROADMs are pushing into new geographies and applications. Earlier I discussed China which has historically not deployed ROADMs domestically. Chinese domestic deployments have started, which significantly increases the addressable market over time. In terms of new applications we are seeing ROADM push further towards the edge of the network, replacing fixed optical add drops. Switching to telecom transmission, we continue to make progress on our high speed coherent products, including indium phosphide atomic integrated circuit based components, 200 gigabit DCO modules, and future 400 gigabit and 1.2 terabit DCO products. We expect these products Turning to our industrial and consumer product lines, which includes 3d sensing. As expected, 3rd quarter revenue was down 35 percent quarter on quarter, driven by usual seasonality in the consumer electronics market. We continue to make excellent progress with Android customers and additional new design wins on both front and world facing applications. For the first time, we Looking ahead to the fourth quarter, we expect 3 d sensing to be flat to slightly down, driven by seasonality on existing products not being fully offset by initial ramps for new product cycles. Given our current mix of customer opportunities and historical trends, our fourth quarter should be the seasonal low of 3 d sensing revenue. We expect 3 d sensing to ramp up again in this summer and into the fall timeframe. Our commercial laser segment revenue was up 14% quarter on quarter. During the third quarter, we benefited from capacity expansion and further ramped volumes of our newest fiber laser products to meet strong customer demand. We again achieved record revenues from our kilowatt class fiber lasers, which grew 23% sequentially and 135% relative to the same period of the prior year. Also of note is the significantly improved gross margin for our laser segment. We have made significant strides in product cost reduction. Contributing to this, we moved pump laser production to our new facility in Thailand, which is achieving lower costs than our prior manufacturing location. We are making healthy investments in new laser product development targeting higher growth material processing applications. Over the long run, we believe we have good opportunities for growth driven by new product introductions. In the fourth quarter, however, we expect lasers revenue to decline from the 3rd quarter levels. Our largest fiber laser customer has communicated that their inventory of our products has reached targeted levels. Throughout my remarks, I have highlighted significant long term trends that create terrific market opportunities for Lumentum. Further, I've highlighted our strategy to accelerate growth and drive sustainable margin expansion and customer and end market diversification. It is a very exciting time at Lumentum for all of our stakeholders. I will now hand it over to Wajit. Thank you, Alan. Good morning, everyone. I'm very happy to be here on my first earnings call after joining Lumentum. I will first run through the 3rd quarter financial results, add some additional details around the Oclaro acquisition and then GAAP gross margin for the 3rd quarter was 20.4%. GAAP operating margin was negative 17.6%, and GAAP diluted net loss per share was $0.98 compared with prior periods, our GAAP numbers were significantly impacted by charges related to the Oclaro acquisition, including restructuring and asset write downs related to product line exits. 3rd quarter non GAAP gross margin was 39%, which was down by 110 basis points from the prior quarter due to product mix. Non GAAP totaled $91,800,000 or 21.2 percent of revenue and increased $24,300,000 due to having the full quarter R and D expense was $52,800,000 SG and A expense was $39,000,000. Non GAAP net income was $69,900,000 for the third quarter and includes $3,800,000 of net interest expense and tax expense of $3,300,000. Non GAAP diluted net income per based on a fully diluted share count of Our Optical Communications segment revenue at $377,900,000 increased 16% sequentially. Within our Optical Communications segment, Telecom revenue at $243,400,000 was up 41% sequentially. Datacom revenue at $57,300,000 was up 72% sequentially. Industrial and consumer revenue at $77,200,000 was down 35% sequentially due to lower 3 d sensing revenues in the quarter. Optical Communications segment gross margin at 38 percent decreased 170bas points, sequentially due to lower industrial and consumer and the revenue mix. Our lasers segment revenue at $55,000,000 was increased 14% sequentially, driven by growth in fiber laser sales. 3rd quarter lasers gross margin was 46% and increased 330 basis points due to higher volumes and product cost reductions. Cash and short term investments totaled $697,500,000 at the end of the 3rd quarter. Capital additions during the 3rd quarter were $31,000,000. Now turning to more details on the acquisition expense synergies. As highlighted, when we announced the acquisition, we expected synergies would be in excess of $60,000,000 per year within 12 to 24 months from the close of the transaction. Through the third quarter, we have achieved more than 20,000,000 in annual expense synergies. We expect synergies continue to grow in the fourth quarter and into fiscal year 2020. Now on to our guidance for the fourth quarter of fiscal 20 18, noting again that all projections are on a non GAAP basis. We project net revenue for the 4th quarter to be in the range of $405,000,000 to $425,000,000. Driven by continued market growth due to the product line divestiture that was completed earlier in the quarter and continuing declines in remaining datacom transceiver sales. Commercial lasers decreasing 15% to 20%, driven by the factors Alan mentioned earlier, and industrial and consumer, which contains 3 d sensing to be slightly down due to seasonal factors. We project 4th quarter operating margin to be in the range of 18% to 20% and diluted net income per share to be in the range of $77,000,000. In this guidance, we are benefiting from synergies attained to date. We are projecting higher operating margins on lower revenues. In average margin 3d sensing and commercial lasers product lines. With that, I'll turn the call back to Jim to start the Q and A session. Thanks, Watcha. Before we begin our Q And A session, I would like to ask everyone to limit discussion to one question and one follow-up so we can make sure everybody has an opportunity in our Q And A session. The first question comes from Simon Leopold of Raymond James. Your line is open. Thank you very much for taking the questions. Wanted to start out with kind of big picture on what you see going on in the 3 d market, longer term beyond the 1 quarter guidance. And maybe to help frame that, So if we think about the full year calendar 2019, do you expect it to be a growth year versus calendar 2018? And And in terms of the context of the trends, how do you think the mix is trending between Android and non Android phones over sort of the next, let's say, 1 year or so? And I have a follow-up. Yes, Simon, this is Alan. You know, I think it's hard for us to tell the mix between Android and non Android revenue mix out into the future because it's very, very dependent upon what bones and what devices the 3 d sensing gets put on and whether or not those are high volume or not think the data point that we shared in the script was that we have an Android customer that was more than $10,000,000 in sales last quarter. Trying to indicate that we are in the Android business and they are adopting 3 d sensing. And again, in the very, very early stages, so I expect 3 d sensing for Android customers will grow, more rapidly than it has in the past as we look out over the next four quarters. So year over year, Chris, do you have a view on calendar 'nineteen versus calendar 'eighteen? Will be up year over year, given, expectations around the second half of this year, we feel that in calendar twenty nineteen, obviously, those some challenges in various smartphones, supply chains that impacted demand. And our expectations are that those be cleaned up and hopefully we'll be shipping more in line with customer volumes versus customer Thanks. Yes, it does. Very, very helpful. And then I just wanted to maybe get level set on how to think about operating expenses over the longer term, in your March quarter, your reported quarter, your gross margin was better than expected, but your operating expenses were higher. And it could be just simply how we're allocating after the Oclaro deal. So you've got a number of moving parts with the cost synergies. Going on. Is there maybe some way to help us think about what would be a normalized or sort of fiscal 'twenty kind of OpEx expectation post synergies? Yes, I mean, I think going forward, as Wazjit said that we realized about $20,000,000 of synergies since the acquisition was completed. I would say that probably half of those are in OpEx and half of those are in, operating expense COGS, and that moving forward, the additional, will be also shared between COGS and, and operating expenses. We did make some major announcements. For instance, closing our lithium Niobate fab in Italy. We communicated that to the peak to the employees, and that shows up in our GAAP numbers for fiscal Q3. But won't show up in the savings or synergies until we actually cease operation, which would be late this calendar year. So I think we're going to continue to see operating expenses come down, at the same time, we'll see COGS come down to realize those synergies. And so June OpEx maybe down a little bit from March, but then further declines later in the year? Yes, I think so. I think we'll see operating expenses down in the June quarter from the March Great. Thank you for taking the questions. Your next question comes from Rod Hall of Goldman Sachs. Your line is open. Yeah, thanks for taking the question guys. I wanted to start, I think we heard you say that you have $20,000,000 in ship revenue for Datacom. I just want to confirm that you said that and kind of get an idea for how that revenue goes in the future. And could you also confirm that that is well above group average gross margin revenue? And then I've got a follow-up to that. Yes, we said it was approximately $20,000,000 today. We expect that to grow over time. I think 2 things. One is now that we've sold a set of product lines CIG, they become a chip customer and we'll start seeing that growth in chip revenue from that base of $20,000,000 a quarter. And then as we also said, now that we're not a transceiver competitor, that actually opens up the market for us to sell more chip going forward to competitive what used to be viewed as competitors. So we expect that, that chip revenue to grow steadily over time. And it is above the average gross margin as you would expect on a chip basis, than the corporate books margin average. Okay. Thanks, Alan. And then I wanted to see could you guys just comment on the what's going on with inventory in China? And kind of it would be nice to know what the like what your own inventory exposure looks like there. In other words, is it mostly ROADMs or is there a sort of normal spread of other components in that inventory? And then what do you think the risk of that is given trade situation? Yes, well, I don't know what's going to happen with the trade situation. I was in China a few weeks ago, and I'll tell you that given the amount of pressure that was put on me by our customers in particular for for ROADMs and pumps. I'd say that there's not a buildup of inventory and that that deployments are happening. And anecdotally, I was told about several greenfield deployments throughout China that are utilizing are more at most advanced when 1 by 32, 1 by 35 ROADMs as well as our end by end that are being deployed today. So those are new products that we're just ramping over the last couple of quarters. So there's not a big build up of inventory there. We are also shipping, now with the acquisition under our belt, a lot of transmission products. And again, I don't see a lot of inventory build up there. In our most advanced products. And so I don't think given that we have been unconstrained we have been constrained in our ability to meet the demand. I don't believe there's a big build up of the inventory that we provide to our customers in China. Okay, great. Thanks Alan. Your next question comes from Alex Henderson of Needham. Your line is open. Thank you very much. I wanted to ask first about the industrial lasers down 15% to 20% quarter to quarter. That puts it around, at the midpoint, around $47,000,000. Is that is despite the 55, and then the decline back to 47, a function of them flushing out some inventory, having orders in hand and then ending up with a little bit more inventory. And this is the new run rate. Should we be seeing 47% flat to growing modestly off of that? Or is the spike down in the quarter just a temporary wobble as they bring some inventory down. How do we think about the sequential next couple of quarters on that business? Yes, I'd say that as we've said in the past, earnings calls, we've had trouble catching up with demand and filling the supply chain at our leading customer for fiber lasers. So we have been shipping more in than they shipping out as they fill up their production line, which is not a 1 week production cycle time. So they have several weeks of production Once they receive our fiber laser engine, go into their production line and ship out and put on a boat. And so there's a long cycle of inventory that we had not been able to catch up to until March. And so now we're more shipping into what they're shipping out and we will ship in more as they convert more of their tools to fiber lasers from CO2 which they've been reluctant to do in the past because we weren't able to meet their demand. So I'd say that it's an equilibrium of in and out from an inventory standpoint But as now they have more confidence in our ability to produce what they need, they'll continue to convert more and more of their tools away from CO2 lasers to our fiber laser I think we should start seeing a pickup, assuming the global economic conditions of the world, maintain at a stable level, we should start seeing a pickup in a couple of quarters as that conversion happens. If I could follow-up. The other piece of the equation here is on the capacity additions in ROADMs and pumps. Obviously, you moved to Thailand on I assume that your capacity constraint on both of those as those lines ramp up. Can you talk a little bit about the the timing of when you have additional slugs of capacity coming on in those critical product areas? Sure. For pumps, we started production last quarter in our Thailand facility And as you may remember, several quarters ago, we actually just added incremental capacity be able to bring up Thailand without impacting our manufacturing in Shenzhen, China. And so we brought that up. This quarter, we're doing sizable quantities of pumps in Thailand, as we ramp down our production in Shenzhen, production in Shenzhen, will stop this quarter by the end of this quarter and we will move that capacity to Thailand to bring up, the capacity to the full run rate. At the same time, we were trying to build up inventory of pumps in Shenzhen And we just were not able to meet the kind of demand, that we saw. And so we are constrained still on pumps, but expect as we bring up our capacity over the next couple of quarters in Thailand and have it totally be based Thailand that will have an incremental probably 20% to 30% over our run rate peak that we saw a few quarters ago, given that we added capacity a year ago to be able to not disturb the production in China. As far as the ROADMs are concerned, We continue to add capacity every quarter, mostly on the 1 by 20s, 1 by 35s, twins, and the end by end. And so that's where our real fundamental growth is coming from, moving forward. But at the same time, we were constrained actually on our new low cost 1 by 9 that we saw more and more demand and more and more ROADMs pushing to the edge, as I talked about, replacing these fixed add drop multiplexers. And so I think we're going to continue to see growth in our ROADM revenues. At least for the foreseeable future from what I can tell, given that the ASPs are shifting upward, the complexity of the ROADMs are adding ASPs, and we're getting more units out. And so we should see that happening both in Q4 as well as through the balance of the calendar year. If I could just follow-up on this piece of it. So your pumps are obviously enormously important for amp amps are important for ROADMs, are you able to produce enough pumps and amps to produce the amount of ROADMs you want to produce? Is that a gating factor on this? And if so, are you selling any pumps externally, how should we think about the availability of pumps to sell beyond what's needed internally? Yes, I mean, obviously, we prioritize our internal, blade, super blade modules and and the likes of those more highly integrated subsystems for our pumps. But, we are shipping close to record level numbers and of revenue for external pump customers, it just wasn't enough. And so, we are still selling individual pumps to pump customers, but just weren't able to satisfy all the demand in Q3 and expect that over the next few quarters as we continue to ramp up Thailand, we'll be able to catch up with that demand, for pumps. That's it. Thank you very much. Your next question comes from Blayne Curtis of Barclays. Your line is open. Hey guys, this is Tom O'Malley on for Blayne Curtis. I just want to get a little more color here with all the divestitures and selling of businesses What do you guys think longer term about the margin profile? Obviously, guiding into June here, you're seeing flattish margins, but it's on that lower revenue, but longer term, What do you think that looks like and how does that drive, you know, earnings growth? Yes. So, I, our operating margin last quarter in Q3 was 17.8%. We guided on lower revenue and a less favorable mix to 18% to 20 percent operating margins. So I'd say that we are continuing to drive operating margins in what I would call our seasonally weakest quarter of the year. And so, we're going to continue to see that operating margin growth as we expect our 3 d sensing business to really pick up in the second half of the calendar year And I'd say that we'll be north of 20 points of operating margin as that mix becomes more favorable. So I'd say We're on track. We're going to continue to realize those synergies. We've only gotten $20,000,000 out of synergies and we expect that to continue through the next several quarters. Great. And then just a little more color on Android in the quarter. You guys said one of our was $10,000,000. The first part is, did you guys have multiple 10% customers in the quarter? And then the second part is, how much was the total contribution from Android, I guess, better way to say this, how much was outside of that $110,000,000? I mean, we do have other Android customers. We were just trying to make a point that Android now is a more significant portion of our overall 3 d sensing business and that we expect that to grow quite rapidly. We don't break out individual customers that are 10% of a given product line. We break it out once a year in our K as far as 10% customers that year. So beyond that, we're not going to break out much more detail. Your next question comes from Samik Chatterjee of JP Morgan. Your line is open. Hi, thanks for taking the question. I just wanted to follow-up on Alex's earlier question about ROADM capacity. Alan, if you can you give us some sense of as you've increased capacity on ROADMs? How has your primary competitor there reacted in terms of capacity addition? I guess what trying to get to is once the tailwinds from China moderate maybe 1 or 2 years out, how do we get comfort that the industry is not in our overcapacity situation at that point in relation to ROADMs? Well, I think there's a couple of underlying changes that are different from past cycles where we had 5 or competitors buying for the same ROADM slots. And now we have a very concentrated competitive landscape, and at the same time, the transition from simpler 1 by 9 type ROADMs to very complex high port count and CDC type ROADMs give me confidence that we're going to continue to push the technology and continue to have that leadership on providing our customers what they need, what they want, when they want it. I think as I said also that we are in the very, very early stages the deployment in China, we're seeing strong growth across the globe on our higher port counts and CDC type rotum architectures. And so, I don't have a crystal ball to say what's going to happen 2 years from now, but I'd say that, we're still not able to satisfy the demand. The orders, firm orders that we have for this quarter and see that being constrained even as we add 10% ROADM revenue every quarter for the last five quarters. So we expect that to be constrained for the next quarter or 2. Okay, got it. Can I just quickly? As far as our competitors are concerned, we believe we have a few year lead on the technology and the kind of architectures that our customers are for. And we're continuing to invest more and more R and D dollars into making making sure we keep that transport, leadership, especially in ROADM. Got it. I just want to quickly follow-up on the synergy targets here. I mean, you've got $20,000,000 in kind of the first quarter that you've fully consolidated Oclaro, how do we kind of think of the upside here on the $60,000,000 target that you have like 24 months out from do we look at kind of potentially some upside to that 60,000,000? Yes, I mean, I think as we, as we start realizing the synergies, we'll be updating, updating whether or not we think we can get more. I think what we said when we announced the deal and we're very confident that we would exceed it ended up doing that. Some of the synergies come in chunks. And as I said before, we notified our employees in Italy that we're closing that lithium life fab, but we're running it hot right now to build up inventory to satisfy our customers last time by requirements. And then by the end of this calendar year, we'll start seeing the synergies resulting from that decision. So in the December quarter, we should see a pickup beginning of the pickup from that kind of a synergy, as well as we're still working on our ERP consolidation moving to Oracle from what was what is an Oracle and SAP environment. And once that happens, then it'll be probably early part of next calendar year, we'll see another chunk of synergies as a result of that. So there it's not going to be a smooth $5,000,000 or $10,000,000 a quarter. We'll see it come, over time probably over the next 4 or 5 quarters. Thanks. Thanks for the color on that. Thank you. Your next question comes from John Marchetti of Stifel. Your line is open. Thanks very much. Alan, I was hoping maybe you could spend a minute or 2 on that ROADM demand outside of China. A lot of focus obviously there on not only some of the greenfield opportunities, but as they're putting in that technology for the first time. Wondering if you can comment a little bit on what you're seeing sort of of World North America and some of the other geographies as that's more of an upgrade situation, given that they've had, that technology deployed for some time. You mean outside of China? Yes. Well, I wouldn't say that there's a whole lot of people, that have existing ROADM networks that have twin 2 by 35s or n by n architectures installed. And so I'd say that those are new opportunities for new greenfields, whether that be in Japan, we're seeing a lot of demand for L band, L band ROADMs and the infrastructure that support L band. So, hand is actually, doing quite well. North America is doing well. Europe's doing well. And we're engaged with, our customers on next generation rotum blades and super transport blades around these new high court count, ROADM architectures and CDC architectures, both in C and L band. So I'd say that our R and D and new product introduction pipeline is quite full. To address the global market. And so, these new ROADM architectures are required as the network speeds become faster and faster. And in preparation for the 5G rollout, I'd really do think that there's infrastructure spend happening today in anticipation of 5G coming to market over the next several years. Great. And then maybe if I can ask a similar question on the laser side in terms of outside your largest customer, what you're seeing there in the potential for new customers to come on And maybe how the current sort of economic backdrop, particularly in Asia, maybe impacting that and how we can think about that going forward in terms of broadening out that, that base of demand for the laser business? Yes. Well, when we talked about our large customer, we're talking about the largest customer for fiber lasers. Is your question specific around fiber laser or commercial laser business in general? I think both, to be fair. I'm just trying to see what kind of gets that business back up on a more consistent growth trajectory as it's been a little bit lumpier over these last several quarters? Okay. Yes. So I'd say there's really 2 dynamics. 1 is in the micro machining And that is cyclical within a year, around consumer electronics. And so I'd say that, tools get installed now in the first half of the year in anticipation of consumer electronic demand in the second half of the year. So typically our micro machine, so our nanosecond pulse, our ultrafast lasers, have a better first half of the calendar year than second half. We've seen slow, in fact, in the first half. And so we're not expecting a big pickup on that in the short term, although we're investing we're increasing our R and D spend in lasers significantly, to get out in front of new product requirements for ultrafast lasers. So we expect that in calendar 20 that business should pick up as a result of new material processing for glass cutting and other kinds of materials that use the UltraFAT lasers. On the fiber lasers, we have been over the last 10 years, very, very closely partnered with Amada. They continue to be our priority. But now as we've caught up on demand, we are branching out to see what we can do to drum up other business in our fiber lasers area. And so I wouldn't say there's any short term, pickup that you should model into your models in the next couple of quarters, but I would say end of the calendar year and into calendar year 2020, we should see that broadening of our customer rates on fiber laser. Your next question comes from Meta Marshall of Morgan Stanley. I just wanted to kind of get some context for how you were thinking about the DCO ramp kind of into the second half of the year and just where you are with kind of testing product or how long you think customers will need to test product before that product ramp And then maybe second question, just on the datacom business, it would seem as if you would no longer kind of have any direct relationship with the high scalars given the move more into the Chipset business. And just wanted to kind of see is that correct or just where you would intend or plan on kind of engaging directly with the hyperscalers kind of going forward? Thanks. Well, I'd say that from being a chip supplier, we are still very, very engaged with the hyperscalers, In fact, some of them actually are our chip customers. And so, I think that that's going to intensify as we work with our transceiver customers, to make sure that we're providing the right, photonic shipsets to go with their ICs that make the transceivers. And so, I think we're actually being viewed as more of the independent provider of the technology to the hyperscalers. And so, I would think that that relationship with hyperscalers would the increase as opposed to decrease on the datacom side. From a DCO standpoint, we are sampling customers now and we expect that assuming that goes well and I don't see any reason why it shouldn't go well, that we should start seeing revenue in our first calendar for fiscal quarter of FY 2020. And then the ramp is going to really be dependent upon how those qualifications go. And so I I'd hate to say that we're going to count on tens of 1,000,000 of dollars in the second half, but, I think that there is certainly a desire by our customers to qualify us and have a viable second source to, you know, the lead leak guide producing DCOs today. Got it. Thanks. Your next question comes from Tejas Venkatesh of UBS. Your line is open. Thank you. Given the positive commentary we've heard you on Android 3 d sensing so far on this call. I wonder if you might comment on whether we should expect to see high volume Android phones with 3d sensing on it. And then how much is the Android revenue so far has been time of flight VCSELs versus structured light? Yes. So, Tatus, this is Chris. I think you can expect certainly at a single customer driving more than $10,000,000 a quarter, that's now starting to get to not quite lead customer volumes, but is getting to reasonable volumes. We our discussions with other Android customers are leading us to believe that as we exit this calendar year and into the new calendar year, there's opportunity or I think what you would classify as more of a higher volume Android model. As you imagine, it's a dynamic market and customer are somewhat secretive with their product plans, but I think that's the time window that today, the latest calendar year and our next calendar year, the best opportunity for something that becomes multiples of where, the kind of opportunities are today in the market. In terms of time of flight, We've got a reasonable mix, I would say, a lot of the revenue today is time of flight One of the main drivers for that is many of the Android customers, are focused on world facing phones are world facing 3d sensing in their phones today, and time of flight is the technology of choice for world facing applications. So we've got a pretty healthy mix of time of flight and structured light customers. Your next question comes from George Notter of Jefferies. Your line is open. Hi guys. Thanks very much. I wanted to go back to, the discussion of ROADM and ROADM capacity. I think you mentioned 10% capacity additions a bit faster. And I realize it's a very testing intensive process, the production of ROADMs, but just wondering if there's any opportunity here to ramp capacity in a faster way. And then also I'm wondering on, from ROADM Technology perspective, are you seeing any more activity around FlexGrid? Thanks. Yes. So just a couple of things on on a we call our flexible grid TruFlex and I'd say that last quarter over 90% of our ROADMs shipped are all TruFlex, and expect that to be the case moving forward. I didn't say that we were only getting 10%. I'd say that the last five quarters, we've gotten a minimum of 10%. And if you look back, 2 quarters ago, we grew more like 25% And so we are adding capacity as fast as we can, but we're now getting into big numbers. And so adding 10% on $100,000,000 is more significant than adding 10% on $20,000,000. And so, those capacity increases, come in 2 two ways. 1 is improving productivity and yield over time and that comes out of, just the existing but when we add capacity, they normally come in chunks of capacity additions for a given product line. And so that's when you see a big step up of ROADM capacity. But again, getting $10,000,000 to $15,000,000 of additional ROADM revenue out in the quarter is nontrivial and, and we're trying to just keep up with demand and haven't been able to do so so far. I think also it's useful point out that it takes 3 to 6 months often to add capacity and so capacity that's coming online today is based on decisions several quarters ago and if the market is continuing to inflect upwards, a little more challenging to handicap where it's going to be and what we have to do today, where is it going to be in 6 months. And we don't want to get too far ahead of ourselves. And that's why been in a capacity constrained situation here in the past year, year and a half on ROADMs. And just one other data point, year over year ROADM growth is approximately 80%. So That's a pretty good team by pretty good job by the team to add that kind of capacity over a 4th quarter period. Your next question comes from Michael Genovese of MKM Partners. Your line is open. Great. Thanks. I was just hoping you'd walk us through this datacom divestiture again. So I think you're guiding down in datacom $20,000,000, post the divestiture for the quarter, but if you could walk us through the steps in the quarters beyond that? And then secondly, just from your perspective, because I don't really track everybody's research out there. But in terms of the $20,000,000 for next quarter, What percentage of sell side analysts do you think change numbers after the divestiture? I would say we've probably saw about 5 sell side analysts, couple in the past 2 days. So barely few, incorporated, the divestiture and expenses going into our press release. And as far as your question on, how should you look at datacom going forward? Last quarter, we did $57,000,000 in datacom. Our guidance or said that you should take 20 to 25 out this quarter and we had 3 weeks of all the Datacom business in as we divested on April 18. And again, so if you look at $32,000,000 to $37,000,000 of datacom revenue, of which $20,000,000 ish is chip sales in Q4. I'd say that chip sales should go up over time. But the transceivers of of that $12,000,000 to $17,000,000 will go to 0 over a 3 to 5 quarters, and on a pretty straight line. Great, great. And then my follow-up, there's been a lot of discussion of ROADM capacity, but I just sort of want to ask straight out because I'm still confused whether, the ROADM sales in the quarter hit your expectations. My expectations are about 105,000,000 Were you able to get there or was it short of that because of capacity constraints? Well, demand was certainly much, much higher than that. We got just about to $100,000,000. And we could have done a whole lot more than that. I'd say that, we were constrained by capacity. And I would say it wasn't just on the high end product. It was across the board. And that's why we're continuing to add capacity, work on productivity increases, and expect that to continue to grow over the next three quarters. Your next question comes from Troy Jensen of Piper. Your line is open. Hey gentlemen, congrats on the nice results. Thanks, Troy. Hey, guys. So, just another follow-up here on the divestiture. So, I guess, I'm trying to figure out how much laser chip sales are you guys going to capture here, right? So if you're divesting $20,000,000 to $25,000,000 in revenues, how much of the laser business the chip sales with that customer create in the upcoming quarters. Our indirect cost would be what percentage of the bomb is, is, the laser chip. Yes. So just to be clear on the $20,000,000 to $25,000,000, the majority of that is the divestiture. There are there are products that we're just phasing out, and not continuing that were legacy, lumentum products So those won't be adding incremental chip revenue. I'd say that the business that way they've divested $2,000,000 to $3,000,000 of incremental chip revenue in a quarter to support, CIG is something that you could expect. But as they grow and the 400 gig transceiver was just hitting the market. I think we're expecting that business to be very, very for them and in turn very, very successful for us from a chip revenue standpoint moving forward. Okay, perfect. And then one follow-up, I know you said on the call a couple of times you guys reached about $20,000,000 in annual synergy sales. I believe at OFC, when this divestiture was announced, Chris said that, this is included in the $60,000,000 synergy number that you're trying to achieve. So guess my question is, are you guys actually at kind of a $40,000,000 synergies based on the guidance you gave us for June, or is there, or am I thinking about that wrong? Well, I think your close, our prepared remarks commented that through the third quarter that we had achieve more than $20,000,000 synergies. Obviously, with the CIG transaction closing now here partway through the fourth quarter, we will see additional synergies in this quarter. With that said, obviously, There's a set of costs that that transferred the day we closed the transaction to CIG and there's also a set of costs that are going to take us some time to remove, if you will, some stranded costs. So I think you're going to see the kind of numbers we talked about, from a synergy standpoint related to the divestiture and not just the divestiture, but also the product line exits, tether in Q4 as well as in the Q1 timeframe. All right. I said keep up the good work. Thanks Ryan. Your next question comes from Richard Shannon of Craig Hallum. Your line is open. Hi, guys. Thanks for taking my questions as well. I have a question on 3 d sensing as we look into the second half of the calendar year. Alan or Chris, if you could comment on on kind of the competitive environment as it leads to your expectations for share. You've talked in the past about having some share minimums. Wondering if those are expecting those to stay in place and are they roughly the same levels as you've had before? And as that about ASP changes that you expect in the second half of the year will be helpful also? Well, I mean, we can't talk specifically about negotiations that are either ongoing or close with our customers, but I'd say that, you know, we believe that we still have a very, very large share. We expect that to continue through the second half of this calendar year. And at the same time, prices do come down and assume electronic devices. But we expect our cost to be able to keep up with those ASP reductions and therefore continue to have above average and above 50 points of gross margin with respect to our 3 d sensing revenue. So, I don't see any reason why we're going to lose a bunch share. I think if you as we've listened to our competitor, our one competitor make their announcement about their 3d seen revenue, it gave us even higher confidence of our very, very high share there. Okay. That's helpful. Second question for me is on your pluggable business. I'm wondering if you could help us understand the dynamics with the ACO product line that came in from Oclaro And obviously adding in your own to be qualified DCO this year, whether you expect that pluggables business to be able to grow in this calendar year? And then just as a sidebar, you mentioned a 1.2 terabit module. Is that something expected to be even qualifying or sampling this year? Absolutely. I think, to answer your first question, pluggable revenue, you know, if you look at ACOs, ACOs are going to be pretty stable. As network deployments continue and as existing networks light up more wavelengths they're going to continue to buy ACOs. I think as we look at DCOs, we should see a ramp up in the second half of the calendar year. To not cannibalize the ACOs, because I think it's actually different slots and different systems. This will go into. So we should see growth in that pluggable business. And as I said before, I think, customers are looking for a viable second source for the DCO module. And I think we're for the guide to be doing that. On the 1.2 terabit, that we're going to start shipping and start seeing some, what I'd call meaningful revenue in our 1st fiscal quarter. Your next question comes from Tim Savageaux of Northland Capital. Your line is open. Good morning. I'm glad to sneak in again. Questions focused on 3d sensing. And Chris, I didn't quite hear your response to the calendar year growth question. But I think You said you expected calendar year growth in 3 d sensing 2019 over 2018. I guess my addition to that question is would you expect that to be the case with your largest customer? And then to kind of try and flesh out the magnitude of the ramp and second half. As I look up and down the supply chain in terms of what commentary and plans there have been, It seems to me that the supply chain is gearing up for something on the order of a 30% plus increase, whether you measure capacity or revenue. For this sort of second half calendar ramp relative to previous ramps. Last couple of years, your 3 d revenue has been pretty tightly bunched in that kind of $230,000,000 $240,000,000 range for the second half of twenty seventeen and twenty eighteen. I wonder how you feel about that potential growth trajectory and also if you can comment on that calendar year growth question. Yes. I would start with the calendar year growth question and say, I think in calendar 'eighteen, we continued to under ship I would say relative to customer, shipments out, if you will, because in calendar 2017 or even in the first half of calendar twenty eighteen probably, for overshipping at that point in time. And therefore had a negative impact to calendar 2018, overall revenues for as we turn into calendar 2019, don't have perfect data here, but we believe that the the level of inventory of or excess inventory of calendar 2019 is less than going into calendar. And therefore, even if customer end units don't significantly grow up, go up, we should be able to grow in the calendar year. I don't want to get into any specifics on Situations at customers, but I think, given we have a lot of concentration in our lead customer the comments would apply to them as well. Our last question comes from Mark Kelher from D. A. Davidson. Please go ahead. Great. Thanks for flipping me in here. Just wanted to go back to the ROADM ramp and connect it to your commentary on the transcedent ramp following that. How strongly, how closely linked is the transceiver ramp to the ROADM ramp? And what's the what's sort of the timing we should anticipate we'll tevers be pretty hot and heavy in a year or 2? What's the timing there? I would say that installing ROADMs in absence of transceiver. I mean, there's not a lot of purpose in putting a ROADM or a ROADM network you're not going to be ramping the transmission equipment that goes through those ROADMs. There are some scenarios where you upgrading some infrastructure, but that wouldn't contribute to the level of rodent sales that we're seeing clearly new network deployments that will drive transmission equipment. Going through those ROADMs. In terms of timing, it can be a few quarters, delay. I don't there's any hard and fast rules, depends on what network operators or the end customers, if you will, have in their plans of whether they want to install. All of the ROADMs first or half of the ROADMs first and then start installing transmission equipment. But, I think the level of both ROADM sales as well as the commentary we have from our customers about their plans would continue to give us confidence that we're going to see an increasing transmission market as we look into 12 months. Okay, great. I'll leave it there. Thanks. I'll now turn the call back to Mr. Alan Woe for closing remarks. Thank you, Chris. I want to thank our customers for their business and partnership I also want to thank our employees for their hard work and putting us into an excellent position for long term growth. 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, and we look forward to talking with you again in another few months. This concludes today's conference. You may now disconnect.