Earnings Call: Q1 2019

Nov 1, 2018

Good morning. My name is Emily and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 School Year 2019 Lumentum Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you. Chris Coldren, Interim Chief Financial Officer, Senior Vice President Strategy And Corporate Development. Please begin your conference. Thank you, Emily. Welcome to Lumentum's first quarter fiscal 2019 earnings call. This is Chris Coldrin, Interim Chief Financial Officer, Senior Vice President of Strategy And Corporate Development. Joining me on today's call is Alan Lowe, President and Chief Executive serve. 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 our pending acquisition of Oclaro. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10 Q filing, for our first quarter fiscal 2019, which we expect will be on file with the SEC later today, Our 10 K filing, which was filed with the SEC on August 28, 2018, and the registration statement on Form S4 relating to our pending acquisition of Oclaro, which was declared effective on May 31, 2018. Forward looking statements we provide during this call, including projections for future performance, are based on our reasonable beliefs and expectations as of today. Lumentum undertakes no obligations to update these statements, All results and projections are non GAAP. Non GAAP financials should not be considered as a substitute for or superior to financials prepared in accordance with GAAP. Our press release with our first quarter fiscal 2019 results is available on our website, www.momentum.com under the Investors section and includes additional details about our non GAAP financial measure and a reconciliation between our GAAP and non GAAP results. Our website also has our latest SEC filings, which we encourage you to review and supplementary slides relating to today's earnings release. A recording of today's call will be available by 11:30 am Pacific Time this morning on our website. Before turning the call over to Alan, we have some additional comments relating to the pending acquisition of Oclaro. First, today's call is not an offering of securities. The information disclosed today is qualified in its entirety by the S4 proxy statement perspectives on file with the SEC in connection with the proposed transaction. We encourage security holders to read the joint proxy statement perspectives and other documents filed with the SEC carefully as they contain important information about this pending transaction. Further on the pending Aclaro transaction, we previously mentioned that we have received HSR approval and that Aclaro stockholders approved the transaction at their meeting in July This merger is subject to certain approval in China and completing call as our earnings report and guidance, and we will not be sharing incremental information relating to the status of our pending acquisition of Oclaro beyond our prepared remarks. None of the trends, uncertainty or guidance discussed today take into account to Claro. Now, I would like to turn the call over to Alan for his comments and first quarter market and product highlights. Thank you, Chris. Good morning, everyone. I am very pleased to be here discussing our first quarter results. Strong telecom and fiber laser demand, along with 3 d sensing expansion across multiple customers and their products drove solid first quarter results. Revenue was up 18% quarter on quarter and 46% relative to the prior year. We achieved new record revenues in ROADMs and fiber lasers. During the quarter, we also These include 1st shipments of number 1, the highest port count WSS in the industry, our twin 1 by 35. 2, first products based on our new disruptive M by N ROADM platform. 3, fiber laser products based on our 4 kilowatt single module that delivers industry leading brightness and enables even higher performance and lower cost for machine tool customers. And finally, time of flight VCSEL arrays, which enable world facing consumer mobile applications, including shipments to Android customers. Increasing customer demand Our differentiated products and design wins and investments in additional production capacity set the stage for our second quarter as well as the years to come. Our year over year improvement in financial performance highlights that our strategy of investing in differentiated products in multiple end markets each critically dependent on photonics and driven by strong long term trends is succeeding. The world is becoming more reliant on ever increasing amounts of data flowing through optical networks and data centers. Globally, regardless of who is supplying the optical networking equipment or who is deploying the network, the products and technologies, momentum supplies are essential. Higher levels of precision, new materials, and factory and energy efficiency are all increasingly important to manufacturers around the world To address these trends, suppliers of manufacturing tools globally are turning more and more to laser based approaches and the types of lasers that we supply. Lazered based 3 d sensing is a rapidly developing market. The technology enables computer vision applications that enhance security, safety and new functionality in the electronic devices that people rely on every day. With our proven high volume manufacturing strategy and learnings from having shipped 100 of millions of devices, Our primary focus is on new customer design wins and our new pipeline of products based on even more advanced laser designs which are needed in order to meet increasing customer requirements. 3 d sensing customers around the world over the coming years. Now, I'd like to turn to first quarter product highlights. Revenue from our telecom product lines grew 7% sequentially, driven by a 10% or higher sequential growth in each of our ROADMs, pump lasers, and optical amplifier product lines. Man from customers from our customers for these products is very strong. While we have added significant manufacturing capacity, we are still not meeting our growing customer demand. In the second quarter, based on investment decisions made quarters ago, we expect additional production capacity to come online particularly in our ROADM product lines. The strong demand for our telecom products is spread across a broad customer base and is driven by an increased in global demand for next generation optical networks. I believe it is important to highlight that in addition to an increase in the number of networks being built globally we believe our growth in ROADMs is also driven by a fundamental shift and how optical networks are built. There is no practical way to accomplish the needed network capacity and agility other than incorporating increasing numbers of even more advanced ROADMs. Speaking of even more advanced ROADMs, As mentioned earlier, during our first quarter, we shipped production volumes of our twin 1 by 35 module and blade level product lines. Which contained the highest port count WSS in the industry. Additionally, during the first quarter, we shipped first products based on our new and disruptive intentionless M by N ROADM platform. We expect volumes of these new products will increase into calendar 2019. Based on customer traction, we are adding even more capacity than we originally planned for these products. The Mxn ROADM platform creates a new class of ROADM products. These products enable network operators to scale their networks with lower cost and higher density, reliability and power efficiency compared with our current state of the art solutions. Turning to 3d sensing. 1st quarter 3d sensing shipments ramped slightly ahead of plan and were the primary driver for our growth in industrial and consumer diode laser product lines. Revenue from our industrial and consumer product lines was up 72% sequentially and up 154% relative to the same period last year. This strong growth was driven by an earlier and device types at our customers compared with last year. We expect to continue to ramp production into the second quarter to meet strong customer demand. We remain highly focused on broadening our 3d sensing customer base and product mix over time. Total revenue from multiple Android customers approximately doubled quarter on quarter. Since our last earnings call, additional customers have announced high end 3d sensing enabled devices. These new customer products demonstrate the wide appeal of 3 d sensing functionality in mobile devices. We also believe these new customer products are the first step to broad incorporation of 3 d sensing and lower priced higher volume devices in the years to come. Our product development pipeline is full. We are working with a wide range of new and existing customers on new laser designs that enabled 3d sensing and a broad range of device types and price points. Some of our latest 3d sensing laser devices also bring new capability such as world facing 3d sensing, which increased the laser content for customer device. We also continue to work on 3 d sensing and lidar for automobile applications and expect this to be a growth driver in 2021 and beyond. Within our commercial lasers business, we again achieved record revenues from our kilowatt class fiber laser, which grew 24% sequentially. During the first quarter, we benefited from capacity expansions and further ramp volumes of our newest fiber laser product to meet strong customer demand. As noted on our last call, we have also increased industrial diode pump capacity in our Tylen factory. These industrial diode pump lasers are at the heart of our fiber laser as well as those of our external pump customers Our solid state laser product lines were down sharply which resulted in a larger Consumer Electronic Fabrication markets, which are usually seasonally soft in our First And Second Quarters. Manufacturers manufacturers typically install laser based equipment capacity in the spring and summer in anticipation of the annual fall consumer electronics cycle and holiday season. This year, we believe we are seeing larger than normal seasonal declines, which could be related to overall market softness as reported by some of our with our rather limited market share, we have opportunities As such, we are making healthy investments in new laser product development and production capacity targeting higher growth, material processing applications. Datacom revenue was down slightly sequentially as we continue to be selective in We continue to make progress on these new products and expect them to contribute in the years to However, in our second quarter, we expect a meaningful decline in our datacom revenue as we passed on certain unprofitable customer opportunities. That make the markets in which we participate increasingly dependent upon our photonic solutions and create terrific market opportunities for Lumentum. Our strong year over year improvement in results demonstrate that we continue to make good progress on our key strategic objectives to accelerate growth and drive sustainable margin expansion and customer and end market diversification. We have a lot going on and it is a very exciting time at Lumentum. I will now hand the call over to Chris for more details on our financial results and our guidance for the second quarter of fiscal 2019. Thank you, Alan. Good morning, everyone. Net revenue for the first quarter was 354 $100,000, which increased 18% sequentially and increased 46% compared with the same period last year. GAAP gross margin for the first quarter was 35.6 percent. GAAP operating margin was 16.1%, and GAAP diluted net income per share was $0.72. 1st quarter non GAAP gross margin was 40.3%, which increased 310 basis points sequentially and increased 6.30 basis points compared with the same period last year. Gross margin improvement relative to last quarter and the same period last year was driven by an increase in the mix, higher margin telecom and 3 d sensing products, as well as overall higher volumes. Non GAAP operating margin for the first quarter was 23.9% and increased by 610 basis points sequentially and more than 1200 basis points compared with the same period in the prior year. Operating expansion was primarily driven by gross margin expansion combined with leverage over operating expenses. Non GAAP net income was $85,800,000 of other income and expense and a tax expense of $600,000 recognized in the quarter. Non GAAP diluted net income per share was $1.31 based on a fully diluted share count of 65,400,000 The sequential decline in other income and expense was primarily driven by lower interest income as we moved some of our short term investments into cash holdings in preparation for the closing of the Oclaro acquisition. Operating expenses totaled $57,900,000 compared with $58,500,000 or 19.4 percent of revenue for the prior quarter. R and D expense was $31,600,000, and SG and A expense was $26,300,000. Turning to segment and product line details, our optical communication segment revenue at $310,100,000 same period in the prior year. Within our Optical Communications segment, Telecom revenue at $142,900,000 was up 7% sequentially, 29% year on year. As Alan highlighted, transport products, including ROADMs, were significant contributors to the telecom growth. Datacom revenue at $34,200,000 was down 1% sequentially, but down 24% year on year. Industrial and consumer revenue at $133,000,000 was up 72% sequentially and up 154% relative to the same period in the prior year due to 3 d sensing expansion into more customers, models and device types. Optical Communications segment gross margin 3% increased 5.50 basis points sequentially 5.60 basis points year on year. The driver of expanded gross margin were the higher mix of industrial consumer revenues, which were at higher than segment average gross margin, improvements in telecom margin associated with the higher mix Our laser segment revenue at $44,000,000 declined 22% sequentially, but was up 25% relative to the period in the prior year. Sales which were primarily solid state lasers were down quarter on quarter year over year. 1st quarter lasers gross margin was 40.2% and declined 7 seventy basis points due to the significant increase in fiber lasers in the revenue mix and lower volumes of non fiber laser. Turning to selected balance sheet related items, we ended the first quarter with cash and short term investments $734,300,000 an increase of $22,800,000 relative to the prior quarter. Net inventory declined $17,000,000 sequentially as we assumed significant levels of 3 d Sensing inventory. Capital expenditures during the first quarter were $31,100,000. Now on to our guidance for the second quarter of fiscal 2019, noting again that all projections are on a non GAAP basis, and do not take into account any effects from the acquisition of Oclaro as we currently cannot predict the timing of the closing. We project net revenue for the second quarter to be in the range of $405,000,000 to $430,000,000 with an operating margin in the range to be in the range of $1.60 to $1.75. Notable quarter on quarter change in product line revenue and our projections include telecom being up, driven by continued transport product revenue growth, industrial and consumer being up due to the ongoing 3 d sensing ramp, while datacom being down due to again being selective in sales opportunity. Before turning the call over to Emily to start the question and answer session, I would like to ask everyone to limit discussion to one question and one follow-up. Emily, let's begin And our first question comes from the line of Alex Henderson from Needham. Hey, thanks. Nice quarter. I wanted to just drill down a little bit on the datacom side. So you're saying it's going to be down. I mean, is that, are we talking about a kind of a 20% sequential decline? How big a nut is that And then second, on the industrial laser side, if you could talk about whether that would be down as well, but certainly, there's so much noise out there about weakness in the semiconductor space. I assume that that's pressuring you. On the other side of the coin, you didn't call that out at all. So I was wondering if you could give us a little bit more granularity around those two pieces. Yes. So, Alex, the datacom business, I would say it's more in the 20% to 30% decline expected. And then on the lasers piece, we expect it to be flattish quarter on quarter, plus or minus. And that's a function of you having new product growth that's driving that, offsetting season. I would say industrial weakness. It's well, as we said in the script, we continue to expect Seasonal weakness, although this year, probably stronger than normal seasonal weakness. And some growth in the fiber lasers may be offsetting that a little, but pretty much the mix and the revenue levels being roughly the same quarter on quarter. Great. Thanks. I'll see the floor. No problem. Our next question comes from the line of James Kinstner from Loop Capital. Your line is open. Thanks very much. So just quickly on the guidance, I was hoping you clarify a little bit what you're expecting for gross margin and OpEx, knowing that you don't guide that explicitly, it seems like you could have something like 43%, 40% gross margin. And then separately, just was hoping you could you mentioned world facing, you're hoping to give us sort of your latest thoughts on that. I mean, you said in March, you know, Fc, Alan sounded very confident. This is something that would be broadly adopted to handsets by second half of calendar next year. I'm just wondering if you could update us on that. Do you still feel confident about that? Are you getting more or less confident about that prognostication? Thanks. Yes. So on the guidance piece, yes, we don't guide gross margin. I would expect gross margin I think if I heard you correctly being in the 40% range, I think it's going to be higher than that. I think the piece that maybe is missed here as OpEx, we expect we'll be increasing. We had a bit lighter quarter on OpEx. Probably than expected, given both timing of some R and D offset payments we received from customers, where we're developing products specifically for them. As well as, as we entered the new fiscal year, we started trimming investment in less profitable product lines, which you can do pretty, pretty quickly, and plan to grow investments in, other more attractive product lines and that tends take a little bit more time as you need to hire people and ramp up spending. So I think that's probably more the missing piece that you're hitting on in the guide is that the operating expenses should be coming up quarter on quarter. And as far as this is Alan, as far as the world facing, we are shipping today, production volumes of world facing. So I'm expecting that either products will be announced or have been announced, imminently and should ramp through 2019. Again, as I said in my prepared remarks, today, they're going into high end, high end mobile devices and that we expect that through 2019 to 2020, they'll be expanded to a broader range of product portfolio. Thanks. Just to quickly follow-up, what I said was like 43%, 44%. Mid-40s gross margin realistic, Chris? Just to follow-up. Yes. Thank you. Our next question comes from the line of Troy Jensen from Piper Jaffray. My apologies. It looks like Troy has left the queue. With that, we do have Simon Leopold from Raymond James. Your line is open. Great. Thanks. Hard to stick to one question on this, but I'll try. Within your outcome, it looked like gross margins were nice improvement, versus the last quarter. I know you don't disclose by by the sub segments, but did the improvement sequentially come from 3d or telecom? I'm just trying to get a sense of the source of what led to that improvement, what got better? Yes. So I would say it's both. So, as we highlighted, we shipped record revenues of, our ROADM products and they garner better than average telecom margins So with an improvement in mix of products like pump lasers and ROADMs, and the telecom piece, telecom is up, And then certainly 3 d sensing is above corporate average as well as above the overall Optical Communications segment average gross margin. So the increasing 3d sensing as well as the industrial products that are in there in the mix continue to accrete gross margin. Just to clarify that point though, did the 3 d Sensing gross margin get better or is it better because it's more in the mix? I'm just trying to get a sense of whether it improved or it's just a mix question. I would say that given our manufacturing strategy, we tend to have a more variable cost. So we're not seeing huge increases in margin or with volume, but we do have some element of fixed costs and pricing from our suppliers that is volume dependent, if you will. And therefore, we have seen improvement quarter on quarter in pensing gross margin. Great. And just as my follow-up, on the ROADM WSS business, guestimating you're a little bit over $70,000,000 in the quarter. Can you help us understand, where you are in terms of your targeted capacity, planned capacity? What's the most you're capable of producing? Thank you. Well, the most under capable producing last quarter was what we produced. I mean, as I said in the prepared remarks, we have more demand than we're able to satisfy And early this calendar year, we, made decisions to add capacity that's coming online now and will continue to come online through the 1st calendar quarter of next year. So I would expect that from your baseline guests, we're going to continue to add significant capacity on a quarterly basis. I would say of the magnitude we saw last quarter, if not greater. So you'll you'll just rough math, you'd be at, like, 80 ish million kind of capacity? We certainly have demand beyond that. And so we're trying to chase that as fast as we can both from added capacity as well on. So I don't think that's out of the question. Great. Thank you for taking my questions. Thanks, Simon. Our next question comes from the line of Mark Kelleher from D. A. Davidson. Great. Thanks for taking the questions. I'm wondering if you could just talk a little bit more about 3 d laser market. The market share there? What are you seeing in terms of competitive pressures? Are you going up or down in your market share? We've been seeing company after company come out and say they had great 3 d sensing revenue. So just wondering maybe and maybe compare that to the Android share versus the the Iphone share and maybe talk a little bit about seasonality going into Q4 on 3 d lasers as well. That'd be great. Well, I think we're not going to be specific about what share we have at each customer, and breaking it out the way you ask would probably do that. I would say that we're very happy with the share that we've got both on today's products as well as the design efforts that we've got going for next generation of devices. So I'd say we still have a very, very high share, doubling or tripling output on a small number is still a small number. So I would say that given our leadership position on the manufacturing, on cost and on the design funnel that we've got and our ability to ramp our R and D investment in 3 d sensing has been quite confident that we're going to have large share for the foreseeable future. And the seasonality into Q4, is that expected to be greater than Q3 calendar? For 3 d sensing. So, we highlighted that our, our, one of the primary drivers of growth quarter on quarter is going to be 3d sensing going into the December quarter. Thanks Mark. Our next question does come from the line of Troy Jensen from Piper Jaffray. Your line is open. Hey, thanks gentlemen. Sorry about that. Congrats on the nice results here. Hey. So, Alan, maybe for you, could you give us just an update on Oclaro and just maybe your thoughts on timing to close the transaction and I guess I'd be curious to know how their performance has been over the past 6 months since they've been kind of quiet? Well, I think you'd have to ask them, but, you know, I think as Chris indicated in the prepared remarks, we're continuing to work with the China regulatory approval and continuing to make progress there. But beyond that, it's hard to say. I can tell you we'll will close within a couple of days of getting approval and that's in the agreement. So, that's why, you know, we our our, for instance, our interest expense, our interest income was down as we move more of our, more of our investments to cash in preparation of that. So, we can't predict the future, but I would say that we're making progress and continue to be hopeful that it'll happen sooner rather than later. Are there any hard deadlines in the contract or if you don't get some approvals in certain time frames that the deal gets shelved or? So yes, that's it's certainly the document is filed publicly that there are dates that the transaction continues And if the outstanding item is, antitrust approval, it will continue for an even further time period, but ultimately Yes, there is an outside date, all acquisition agreements generally. Perfect. And maybe just one last follow-up for me. Just a telco strength. Seems like it's been a couple of quarters now. We've had really good results from you guys and even the rest of the industry here last quarter and we'll probably see it as a report more now for the next few weeks. But do you think the telco strength is sustainable? I mean, is the driver prepping for 5G? Is it the 400G cycle? I just hope to hear your thoughts on the sustainability of the strength. Well, I'll give you my view on it and then Chris can chime in as well. I'd say we've got some fundamental growth drivers around, ROADM deployments not just in the regions where ROADMs have been strong, but also we are, as we've been talking about for the last couple of years, we're seeing real ROADM deployments in China for real networks and no more trials anymore. So I'd say that from that perspective, when you have more ROADMs, you have more amplifiers and more pump lasers, And that's what we saw from growth drivers in last quarter that I think fundamentally will be sustainable as we continue our differentiation and in the twin 1 by 35 and the m by n ROADM that's really getting the tremendous amount of traction. Yes. And I'd add to that that certainly as we have commented in the script that, we believe we're seeing a big shift in and how networks are being built ultimately, which means over the long run the ROADM and and certainly all the other parts that go in and around ROADMs are increasing, part of network deployments, if you will, from a percent of spend standpoint. Compounding that if I look at our percentage of revenue, on ROADMs from customers outside of North America, it's lower than I would expect, given the percentage market share that our customers outside North America have of their business. If you were saying we were fully saturating the road to market. But the reality is our customers outside North America primarily in China, have been slower to adopt rotums, particularly for domestic deployments, but are rapidly from a product design standpoint, closing that gap So we expect that there's a lot of upside just in bringing, other geographies from a customer standpoint up to the same level that, for example, our North American customers have in spending on ROADMs. So we think obviously the telecom market can move around quite a bit as Alan highlighted, we're sold out on those products and adding a lot of capacity. So I think short to medium term feels good and long term feels good, but in between is always hard to handicap. All right. Thanks again and congrats. Our next question comes from the line of Samik Chatterjee from JP Morgan. Your line is open. Hi, good morning. Thanks for taking my question. I just wanted to broadly ask you about if across your portfolio? Are you seeing any impact on either demand from tariffs? Or even as you kind of guiding to pretty strong margins, are you emitting in any kind of impact on margins from tariffs overall? Yes. So we did pay tariff last quarter. It was in the 100 of 1000 of dollars less than a penny a share. And we we factor that into our guidance going forward. I think fundamentally, we are we have been over the last couple of years in a transition period of of moving out a large contract manufacturer in China and into other contract manufacturers outside of China, including in in Thailand as well as our own factory in Thailand. So we've already seen some benefits and some flexibility with respect to shipping product out of our type facility, to the U. S. Whereas if it happened a year ago, we'd be paying tariffs on those products. So that transition is happening over the next 3 or 4 quarters and And from that perspective, we'll be producing very little in China. So from that, I think we'll be in good shape. I think it's also good to add that, the nature of our business, our customers, our folks who build hardware, and generally built that hardware and low cost geographies, not in the United States. So even shipments that do come from China, from our contract manufacturing partners in China generally land in places like China or Thailand dramatically. Okay, got it. And if I can just follow-up on 3 d sensing, I think in your prepared remarks, you did mention that you had a faster ramp up in F1Q than you expected property. Are you kind of thinking that's more of a pull forward of inventory from fiscal second quarter or were there certain kind of volume drivers that came in better than you expected in the quarter? You know, it's hard to tell. I think it's real demand. I don't think there's inventory sitting at our customers or at their integrators So it's either higher share or our customers products are doing better than expected. So I think from that perspective, we're pretty happy with our share and how our product is being accepted by the market. I'd say that our yields continue to be very solid. Our quality performance is extremely solid and having that track record of having shipped 100 of 1,000,000 of these things with extremely high quality gives us confidence that We're going to be the partner of choice down the road as well. Got it. Thank you. Our next question comes from the line of Joseph Wolf from Barclays. Your line is open. Thank you. I wanted to ask 2 competitive landscape questions. 1 is you talked about very strong demand in ROADMs, new products out there and not enough capacity. What is the competitive landscape there versus your new products and are your customers waiting? What are the dynamics going on in the telecom market versus your new product? Well, I'd say from the leading edge products, we have a very strong, competitive advantage I'd say our customer's waiting, based on the number of phone calls I get and have to deal with on that topic, I'd say, they don't have a lot of patients and they want more products sooner. But at the end of the day, if you're talking about a 1 by 35 or a m by n, if you want that product, you've got to get it from the person that's producing it. And that's why we're adding more and more capacity both on the existing product lines, but as well as on those those really game changing network enablers of of ROADMs. So I'm waiting, not very patiently. Thank you. And then on the on the world facing side and then specifically on the Android ecosystem where you talked about doubling, I'm wondering if that's a measurable number for us just yet. But can you talk about competition and world facing and particularly from perhaps non VCSEL based or non optical based solution sets that you're seeing as you prepare for that market? Yes. Well, maybe kind of start and reverse. It's it's tough to say entirely what we're competing against, if it's not optical, just because customers in this space are very secret about what they do. With that said, what our customers continue to message to us is that, optical techniques are, the preferred mode of operation for whether front or world facing, given the ability to operate, darkness and lights, doesn't pass through the body, if you will, which certain microwave or RF techniques can do. In terms of customers and products, there's a wide range of customers who are looking at world facing, and either have or will be shortly launching products. And I think it's a tremendous opportunity given It is, as we mentioned in our prepared remarks, has the ability to increase the content, per device beyond the front facing It also has the ability to broadly spread from being, just a pure mobile device to other devices and consumer appliances, if you will. Thanks, Chris. Our next question comes from the line of Tejas Venkatesh from UBS. Your line is open. Thank you. And my question was actually a follow-up from your last sentence, Chris. Are there new markets emerging outside of mobile consumer? That could be exciting over the next 1 to 2 years. You called out auto in your prepared remarks, but that sounds like a longer term opportunity given longer product product cycles. But are there other markets with faster product cycles that could be exciting in the next year or 2? Yes. I mean, certainly, in the consumer electronics space, there's a wide range, right? Even going back obviously years ago, in gaming and people talking about putting it in televisions and other smart devices. But as we look going forward, whether we're talking about personal assistance, smart speaker, ARVR headsets, appliances. There's very definite action out there in customers. Pursuing such products. The overall volumes of each of those individual products or market sub segments, if you will, still will be lower than as we look to smartphones and devices like that just given how high the volumes of those products are. But if in aggregate, those other consumer electronics can become a pretty meaningful amount of revenue over time. Understood. And, and is it fair to say that most of your Android revenue today is world facing? And then are the Android, guys also asking for 6 inch pixels? So, I'd say that no, we're working with Android customers on both front facing and world facing. And some products have already been announced in the Android market with front facing devices. But there's also great deal of effort. And I think imminent product announcements on, on, on world facing. As far as our customers asking for 6 inch versus 4 inch. I think frankly they don't care how we produce it. They care what the cost is. And I think that given our manufacturing strategy on 6 inch on foundry partners, and the yields and design capabilities that we have. We're able to meet their requirements for volumes, quick ramp ups as well as the costs that they need. And gets us the margin that we need as well. Thank you. Our next question comes from the line of Rod Hall from Goldman Sachs. Your line is open. I guess I wanted to start off with 3 d capacity and what you guys are thinking about investment there and how that's changed since last quarter. Are you thinking that you need to add additional capacity early next year and or do you think you have plenty of capacity to meet demand And then I have a follow-up or 2. Sure. I'd say that, you know, we continue to get better output from improved yields as well as improved methods to produce the product. So I would say that not a tremendous amount of investment is needed to increase capacity of existing products. With that said, There are investments that are needed to, to produce newer technology, different type of test technology specifically for world facing, that our partners are going to be putting in place over time. So I'd say from a From our balance sheet standpoint, our model is not to have to put out big capital investments, but to work with our partners. To have them do that. And that and that's really their job, and and how we pay them. So, I I'd say that that it's not a tremendous amount, but I think our productivity and methodologies for driving yield improvement, gets us what we need in the in the short term horizon. Okay, Alan. And then just to follow that one up. In terms of capacity need expectations, notwithstanding all the yield improvements and so on, how has that changed in the last quarter? I mean, are you thinking that you're going to need to be able to produce more, now than you thought you would a quarter ago as you look into next year? I don't know about relative to a quarter ago. I mean, we have, we have a design funnel that is bigger than I had expected a year ago. And the timing that by which those go into production And our customers decisions around, is it a high end phone or is it going to the more, lower cost, higher volume devices that we work with our customers in a real time basis and make decisions as needed. So I'd say it's kind of a, you know, our customers and our design team and business guys and that market work very closely to make sure that there's no surprises and we get them what they need when they need it. Okay. And then I wanted to go back to this ROADM question, when do you think you're going to be actually able to meet demand with capacity on ROADMs? Well, I mean, we certainly thought that we would be meeting the demand today three quarters ago when we made those investments. So we're just continuing to try to anticipate what's happening with, future demand. And as I said, products that are hugely differentiated and have a lot of traction like the twin 1 by 35 and the M by We're adding capacity hoping that, we're going to be able to meet the customer demand, but those things take 6 months to have that capacity show up and be productive. I'd say that for the next few quarters, we're going to be still in a capacity constrained environment at least. And then, when you layer on top of that, these differentiated products. We're trying to get ahead of that. So I'd say for the through the middle part of next year, we're going to have lots of discussions with our customers on how we And my last question is on lasers. I just wanted to know if, what kind of visibility do you think you've got there? And do you think that but do you feel like that's bottomed or you just don't have enough visibility to be able to tell where that laser business might bottom out? Yeah. From my perspective, you know, lasers revenue in in the short term is flat. I think it's probably the bottom from our perspective because fire related demand is continuing to be quite strong. And we have a new product pipeline from our ultrafast products that'll be introduced next year, that should drive, new design wins for us and new design wins for our customer that should propel the growth. And our next question comes from the line Mehta Marshall from Morgan Stanley. Your line is open. Hi, it's UGI Anderson on for Meta. Thanks for taking my question. On China, any changes to the demand environment there beyond just ROADMs, any pickup or is it still relatively muted And how do you feel about or where expectations heading into 2019 on those? Well, I think in the products that we talked about, ROADMs pump lasers and amplifiers, China is extremely strong today. And I think it's really still in the early, early stages of a broadened deployment within China. So my expectation is that China growth continues, in the transport side where our strength is. I think we have less visibility on what's going on in the transmission side just given where we've put our R and D dollars in the transport side. So I think from our perspective, China is going to continue to grow, over calendar year 2019. And just a second question on this. Any updates on the CFO search there? Any idea when a decision could be made? Does it hinge on the Oclaro deal? Well, on the CFO search, we're continuing to meet excellent candidates and trying to find the right person for, you know, the type of company we are becoming and the type of company we want to become in the future. And as I said on the last call, Chris hasn't screwed things up quite yet. So, you know, I'm I'm in less of a hurry to to find someone as opposed to find the ideal person for the job. So, it's it's, it certainly is a priority, but I think from from my perspective, things are working pretty well that finance team is is doing a great job under Chris. And so, you know, I'd rather find the perfect person than to fill that hole because Chris is doing a good job. Thanks so much. Just a second to your question. I'm sorry. And our next question comes from the line of Tim Savageaux from Northland Capital. Your line is open. Have one on telecom and a follow-up on 3d. On the telecom side, it seems like given your discussions and guidance that you're talking to perhaps an acceleration in sequential growth in telecom into the December quarter. I wonder if you'd comment on that. Maybe in that context, also comments on sort of what was left on the table, if you will, capacity wise, in the September quarter. And whether given the the datacom decline and accelerating telecom, this trend of gross margin expansion within optical communications is likely to continue? Yeah, I would say that our expectations are for accelerated growth in our transport side of the business. And that's allowed us to be more selective for your for your comment about not chasing lower margin business. And so that's why We have been more selective because we have been growing, the higher margin businesses and we can pass on some of that lower margin customer opportunity. And that'll drive both the short term gross margin and operating margin performance as well as the longer term. So we're going to continue to focus on investing in those higher margin products and portfolios. And being more selective in some of those lower margins, products like datacom. And just to follow-up on the telecom side real quickly, you think given your capacity situation in ROADMs and elsewhere that there's enough of a dynamic there to offset or even more than offset what's typically downward seasonality in the March quarter based on pricing declines. Well, maybe to finish the question you asked in the first part, how much do we leave on a table? We left tens of 1,000,000 of dollars on the table and I think that we're trying to work down that backlog, but, there will be a significant amount of backlog going into the March quarter that's unsatisfied. So, you know, I can't predict the future, but given where we're at and what our customers are telling us, I think that, you know, we could there will be pricing reductions in the 1st calendar quarter, but we could see a different kind of seasonal effect in the March quarter than we typically see. And if I could just follow that right along on the three d side and ask you to predict the future some more. I mean, given your guidance, it doesn't look like you're going to retain kind of your peak revenue level in three d that you saw last quarter sorry, last year. But I wonder, given the recent announcement of, you know, Face ID equipped iPads as of yesterday, the 10 R ramping, you know, kind of mid month what whether we might see kind of a much less dramatic seasonal drop off and also given the number of devices in Android that we're talking about into the March quarter from December than we saw last year or if you have any early thoughts on what sort of profile you might see seasonally in 3d? Well, I'd say that you know, our our our customers can count on us. And from that perspective, I don't think people are over ordering or over forecasting, whereas I'd say that last year, there was probably inventory on the shelf at the end of December in fears that the product wouldn't be there in January. So I think from that perspective, we may not see the kind of drop off. But again, I can't, you know, give you guidance more than 1 quarter at a time. I would say that that our broader customer base is is better for that, you know, seasonality smoothing out, but, and it's hard to tell what's going to happen as these new products get introduced and what kind of traction they have with the with the consumers. And our last question comes from the line of John Marchetti from Stifel. I appreciate you fitting me in here under the wire. Just curious as I look at that datacom business and the expectation for a fairly significant drop here going into the December quarter. Do you think that's sort of the floor there? Or as you look out next year, should we think about that potentially picking up as we get into the sort of middle of next year or second half. Just curious how you think that sort of plays out over the next couple of quarters as you start to bring on some of the new 100 gig and 400 gig products? Yes, I'd say probably this is the low point. We will be introducing our low cost CWDM4, later this quarter, and getting traction through calendar 2019. So at least my expectations are that we do grow in calendar 2019, whether that's a big growth it all depends upon what happens in market pricing because we're not going to chase that margin unprofitable business. Hey, it just seems like every time we get a new update from our from our hyperscale friends that their price expectation goes down. So it's hard to tell. I'd say that at least from my perspective, the new product development is going very well. And we think we're going to come out with a cost differentiated product that should be able to address that growing market. Thank you. Thanks, John. Good to have you on the call. And I will turn the call back over to Alan Lowe for closing remarks. Thank you, Emily. I want to thank our customers for their business and their partnership. I also want to thank our employees for all of their hard work and putting this into an excellent positioned for long term growth. We regularly discuss our business at 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. I would like to thank everyone for attending, and we look forward to talking with you again in another few months. Thank you. This concludes today's conference call. You may now disconnect.