Lumentum Holdings Inc (LITE) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lumentum conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Chris Coldren, Vice President, Strategy and Corporate Development. Mr. Coldren, you may begin.

Thank you, Daria. Welcome to Lumentum's third-quarter fiscal 2016 earnings call. This is Chris Coldren, Vice President of Strategy and Corporate Development. Joining me on today's call are Alan Lowe, President and Chief Executive Officer; and Aaron Tachibana, Chief Financial Officer.

This call will include forward-looking statements, including statements regarding Lumentum's expected financial performance, expenses, trends and position in our markets, as well as expectations related to our customers and our products. 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 fiscal second-quarter ended December 26, 2015.

The 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 obligation to update these statements except as required by applicable law.

Please also note, unless it is otherwise stated, 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 the third-quarter fiscal 2016 results is available on our website, www.Lumentum.com, under the Investors section, and includes additional details about our non-GAAP financial measures and a reconciliation between our GAAP and non-GAAP results.

Our website also has related SEC filings, which we encourage you to review, and supplementary slides relating to today's earnings release. Finally, a recording of today's call will be available by 7:30 p.m. Pacific Time this evening on our website.

Now I would like to turn the call over to Alan for his comments and third-quarter business highlights.

Thank you, Chris. Demand is strong and increasing. Network and data center operators around the world continue to upgrade and expand their networks. They plan even larger investments in optical infrastructure over the coming years.

The rapid growth in cloud computing, video streaming, mobile and other high-bandwidth applications is placing enormous demands on networks in terms of capacity, connectivity, and efficiency. These demands can only be met with advanced optical communication technologies, including 100G and higher data transmission, and advanced ROADM architectures. Lumentum is a leader in these enabling technologies, and our investments in new products position us well for these trends.

Increasingly, network and data center operators around the world are critically dependent upon our products. Demand from China is strong now, and expected to increase. North American metro deployments are poised to ramp as our customers begin to transition from field trials to full-scale deployment. Hyperscale data center operators continue to plan major 100G upgrades, and we expect rollouts to begin in the second half of the calendar year.

Despite investing in additional manufacturing capacity, we continue to have challenges in meeting some of our customers' increasing demand. In the third quarter, we executed to plan. Revenue was $230.4 million, and fully diluted earnings-per-share was $0.32, both above the midpoint of guidance and at record levels.

While recent company growth has been driven by our Telecom business, our Datacom business became a major driver of growth in the third quarter. Datacom revenue grew 30% sequentially and achieved record levels of $45.5 million. Datacom growth was driven by revenue from 100G products, which increased approximately 140% over the prior-quarter, and now represents over 40% of our total Datacom business. We expect our Datacom revenue will continue to grow in the coming quarters as 100G network upgrades continue and hyperscale data centers transition to 100G.

Telecom revenue was up 2% quarter-on-quarter. Increased demand more than offset typical third-quarter seasonal declines driven by price reductions. Third-quarter optical communication ASP erosion, which is typically about 3 percentage points higher than the other quarters, was just below 6%.

Our TrueFlex ROADMs revenue grew approximately 30% quarter-on-quarter. These ROADMs are not only the basis of the North American metro builds that are about to start, but are finding broad traction across our customer base. This is due to network operators around the world shifting to more advanced network architectures that rely on the functionality of our TrueFlex products.

Total ROADM revenue grew approximately 4%, as TrueFlex growth was partially offset by a decline in revenue from older non-TrueFlex products. We expect ROADM growth to accelerate as non-TrueFlex ROADMs become less meaningful and TrueFlex continues to remain strong. ROADM growth for the next several quarters or years will be due to the broad base of customer demand and will accelerate when the metro deployments in North America move from field trials to larger full-scale network upgrades.

Adding to this, we expect China will begin significant ROADM deployment in the next calendar year when they ramp up the use of ROADMs in their metro networks. Currently, several Chinese carriers are evaluating ROADMs, and during this calendar year, will deploy a modest number of ROADMs.

Commercial lasers was up slightly. We saw increased demand for our solid-state lasers, which was offset slightly -- by slightly lower fiber lasers. As highlighted in our last call, our customer demand for our kilowatt fiber laser remains strong, but we had challenges meeting this demand for one of our products. We continue to make progress improving output, and expect our overall fourth-quarter laser revenue to increase again.

Book-to-bill for optical communications and lasers were both above 1. We saw strong bookings in the third quarter, and that strength has continued into this quarter.

This is a very exciting time for us, as demand continues to grow for bandwidth and speed across the world's data centers and the communication networks that connect them. We are strongly positioned with our products, our technology roadmap, our customer relationships and design wins, and our team's ability to execute.

I will now turn the call over to Aaron for more details on our financial results and our guidance for the fourth quarter.

Thank you, Alan. Net revenue for the third quarter was $230.4 million and above the midpoint of our guidance. While we had an additional week in the quarter, we also lost manufacturing capacity in Asia due to the Lunar New Year holiday.

GAAP gross margin was 27.3%, and decreased 390 basis points quarter-to-quarter, driven primarily by a one-time inventory provision expense related to our 3-D sensing business. GAAP operating loss was 1% and GAAP net loss per share was $0.13. Our third-quarter non-GAAP gross margin was 32.2% and decreased 50 basis points relative to the prior quarter, driven by a sequential decline in optical communications gross margin, which was not fully offset by the increase in commercial laser's gross margin.

Non-GAAP operating margin for the third quarter was 8.8%, a decrease of 20 basis points sequentially. Non-GAAP earnings-per-share was $0.32 based on a fully diluted share count of [61.5 million], along with $400,000 of other expense primarily from foreign exchange losses and $200,000 of tax expense. Optical communications revenue was $197.2 million, an increase of approximately 6% relative to the prior quarter, driven by a $2.1 million or approximately 2% increase in Telecom, and a $10.5 million or approximately 30% increase in Datacom, which was partially offset by $1.2 million or approximately 9% decrease in industrial and consumer revenues.

Optical communications gross margin at 29.8% declined 90 basis points sequentially. As Alan mentioned, the third quarter has seasonally higher ASP erosion profitable communication, which more than offset the positive impact of higher volumes. Commercial lasers revenue was $33.2 million, an increase of $700,000 quarter-on-quarter. Gross margin at 46.7% increased 300 basis points due to the impact of cost reduction actions as well as favorable mix.

We had three customers that each contributed 10% or more of our third-quarter revenue, consistent with what we had in the prior quarter. Operating expenses totaled $53.9 million, with R&D expense at $32.8 million and SG&A expense of $21.1 million. The sequential operating expense increase was driven by the extra week as well as elevated payroll taxes at the beginning of the calendar year.

Income tax expense was $200,000 for the quarter, as we continue to realize a low tax rate due to the utilization of net operating losses, and also by having a long-term annual tax deduction related to the amortization of the stepped-up tax basis realized during the spinoff from Viavi Solutions. Our cash balance was $157.2 million at the end of the third quarter, and we remain debt-free.

Capital equipment additions were approximately $31 million or 13% of revenue during the third quarter. As highlighted on our last call, this level of CapEx is meaningfully above historical investment levels of roughly 4% to 6% of revenue. We are increasing investments in capital equipment in order to expand capacity to meet the rapidly growing demand from our customers, particularly for our 100G and ROADM products.

We expect CapEx investments in the fourth quarter to be in the range of $25 million to $30 million.

Now on to our guidance for the fourth quarter of fiscal 2016. We project net revenue for the fourth quarter to be in the range of $232 million to $242 million, with operating margin in the range of 8.5% to 10.0%, and earnings-per-share to be in the range of $0.32 to $0.38.

In considering this guidance, please note that the fourth quarter is a normal 13-week period versus the 14 weeks last quarter, and therefore, operating expenses related to the extra week will decline sequentially. However, fourth-quarter operating expenses will still be larger than our last 13-week period, which was Q2 or December 2015 quarter.

This is primarily due to the fourth quarter, including the full impact of annual merit salary increases, elevated payroll taxes during the first half of the calendar year, as well as our continued investments to drive future growth. While we have, and continue to add, manufacturing capacity, we continue to expect, on certain product lines, demand may still exceed our ability to supply, whether due to our internal manufacturing capacity or components that we purchase from vendors.

Now I'll turn the call back over to Chris to begin the Q&A session. Chris?

Thank you, Aaron. I would like to ask everyone to limit discussion to one question and one follow-up. Daria, let's begin the question-and-answer session now, please.

(Operator Instructions). Alex Henderson, Needham.

Thanks very much for the question. So I was hoping you could give us some sense, you said in your comments that you are seeing clear increase in demand out of China and during the quarter. But the open questions is still whether the Chinese come back with another round of large orders.

I know NEO came out with comments saying that they were expecting 30,000 units of transceiver orders based on their conversations with the service providers. Can you help us with what you think the visibility is, and what your source of understanding out of China is, so that we can triangulate on that?

Yes, sure, Alex. Thanks for the question. We obviously meet with our direct customers, but we've also been more recently meeting with the three main carriers in China. And while the timing of new orders to our customers is not certainly clear, it is clear that there will be more deployments. And whether that's another 30,000 or 40,000 lines, it's not obvious to me. But I can say that every indication WE get, from both the carriers as well as our customers, indicate that there will be continuing demand through the rest of this calendar year and into 2017 calendar.

Second question, just so that I understand, the mechanics around the fiber laser, it's my understanding that you had a problem with your coupling on the laser that you were shipping, that you've resolved that problem, figured out what it is, and that you are in the process of testing or re-qualifying it. When does that re-qualification process end? And when do we get back to ramping that product into Amada?

Yes. Well, we believe we've solved the problem. We've been in production with the new process that provides a more -- much more reliable and robust structure for our fiber laser. And again, it's only one of our fiber lasers that we produce that have the problem.

We have very stringent quality requirements from both our customer and their customers. And so, until it's proven for many, many (technical difficulty) capacity through the quarter and adding manpower to be able to increase the output of this new process. And so that's what we're going through today.

We are making progress every week. We produced more last week than we did the week before. And so we are continuing to drive the demand -- or drive the capacity to be able to catch up with the really pent-up demand in this one product line that we are seeing from Amada.

So that's the back-half of calendar 2016 that it starts to ramp?

Well, no, we are ramping now. I would say that, by the next quarter or so, we should be caught up with demand. But until our customer has hundreds and thousands of hours on these fiber lasers, it's not done until it's done. So I would say we should catch up this calendar year.

Okay. Thanks. I'll cede the floor. Thanks.

Patrick Newton, Stifel.

Alan, Aaron, good afternoon, thank you for taking my questions. First, a clarification. Did I miss fiber laser revenue in the quarter? Or could you repeat it?

No, but it was $9.3 million.

All right, great. And then I guess just focusing on ROADMs, can you help us understand the relative mix between TrueFlex and non-TrueFlex so we can understand the kind of rolloff versus the growth driver there? And on the conviction in China deploying ROADMs in 2017, what gives you that level of comfort, given that it seems like long-haul still has a significant amount of, I guess, tailwinds over the next few quarters?

Yes. So, TrueFlex is roughly 70%, 75% of our overall ROADM today. And that's why we are confident that we will continue to grow our overall ROADM as the non-TrueFlex has become a much smaller share of the business.

As far as confidence in China, again, this has to do with going and talking to the carriers themselves, seeing what they are doing in their labs and in their field trials, much like what is going on here in North America. So, I think from my perspective, ROADMs will go out -- and I've been consistent in the last couple of calls -- in China in 2017. I'm gaining confidence in that conviction, as you say, based on the progress that we've made with the carriers and the major network equipment manufacturers in China that give me that extra confidence.

And by the way, ROADMs also go in the core of the network as well. Not nearly the number or count as go into the metro deployments, but -- so I think we'll -- we are seeing them today in the core network deployments, but really next year, more broadly throughout the network from the metro all the way through the core.

Great. And then as my follow-up, I guess just dovetailing off of Aaron's commentary on capital expenditures, can you help us understand the percentage of your optical platform that is currently capacity-constrained, highlighting either Telecom versus Datacom, or any way you want to frame it?

Well, we were having this discussion about how to answer this question before the call. And when we look around and ask, what could we actually take more orders of today and satisfy them in relatively short lead-times? I'd say probably 10 gig Datacom but not a lot else. So I would say the vast majority of our products are constrained.

Great. Thanks for taking --

That's why we have that elevated level of CapEx that Aaron talked about -- $30 million last quarter and another $25 million to $30 million this quarter.

All right. Thank you for the color. Good luck.

Thanks, Patrick.

Troy Jensen, Piper Jaffray.

Hey, congrats on a nice quarter, gentlemen. Hey, so Alan, you made comments in your prepared remarks about North American metro strength. Obviously there's been a lot of questions from clients on Verizon strike. So just kind of curious, your comments about the strength in metro and what you may know about just kind of the Verizon situation right now?

Yes. We talked to both Verizon as well as the two main network equipment manufacturers supplying into the Verizon metro build. And according to everyone we talked to, there's no impact that they've noted, or have seen, or are planning for, due to the strike. So we are still forging forward and building product in anticipation of the deployment starting later this quarter.

Okay. And then maybe one for Aaron here. Aaron, have you ever thought about like a business model target? Or can you just help us out with operating margin leverage? As the business ramps and we get into the cycle, maybe what revenue levels are -- what timeline can you give to certain thresholds for operating margins?

Sure, Troy. So -- yes, our targets are set on getting to double-digit operating margins, 10% as quickly as we can. In terms of the gross margins at 32.2%, we are about 100 to 150 basis points shy of where we had been targeting. There's a couple of reasons for that.

One is you noticed the laser mix is a little bit lighter than it has been in the past. Get the laser mix back up towards (technical difficulty) [18% to 20%], and that should contribute 50 basis points or so. And then we also are a little bit behind on consolidating into fab into the fab center in San Jose.

And that's supposed to give us close to 100 basis points of uplift in gross margins. In terms of the OpEx -- so, OpEx (technical difficulty) [23% to 23.5%] of sales, over the near-term, we expect to (technical difficulty) continue to invest for future growth. Beyond that, we anticipate being able to (technical difficulty) [22%].

All right. Perfect. I wish you luck, gentlemen.

Dave Kang, B. Riley.

My first question is regarding your ROADMs and one of your competitors -- actually I guess only competitor -- they said in the previous call that they are in the process of getting into -- getting qualified into Verizon. Has that happened? And what is your expected allocation going forward?

Well, I think you should ask them if it's happened. From my perspective, our customers are relying extremely heavily on our ability to meet their demand. And once our competitor gets qualified, it will be up to them to be able to perform. And I think, given the number of ROADM nodes in the Verizon network, I think there's plenty of it to go around for both of us. But I still expect to have the vast, vast majority of the business.

And then going back to second quarter, I believe you said you left about $10 million-ish, maybe $20 million on the table because of capacity constraints and component bottleneck. How much was it at this quarter?

It's hard to quantify, but it's probably north of that, just given that we have orders that have request dates that are within the quarter that we push out of the quarter. But given the high percentage of revenue that we get through VMIs, it's really hard to tell. Because most of the VMIs are low or empty at the end of the quarter, so that makes it hard to really kind of put a quantification on it.

But it sounds like your book-to-bill, I mean, you say it's overwhelmed. but it sounds like it's pretty solid, like maybe 1.2, 1.3, that type?

We don't break that out, but it was extremely strong. And it stays very, very strong through the month of April.

So if that's the case, then are you -- I guess this current quarter, the June quarter, I guess you are still going to be capacity-constrained. Is that why for conservative revenue outlook?

Yes. I mean, we are capacity-constrained through this year or through this quarter. I will say that one of the dynamics that happens when allocations start is that some of our customers that are VMI customers start giving us discreet orders as a signal that they really will take the product, as opposed to having it sit in the VMI house. So that's also an indicator of allocation and some of the behaviors that go on when customers really, really want the product.

So, yes, I would say that we are going to be on allocation through this quarter and into next quarter. And again, that's why we are spending between $55 million and $60 million in this half of the fiscal year in capital.

Got it. Thank you.

Thanks, Dave.

James Kisner, Jefferies.

I was just curious what your longest lead-time products are that you have right now? And how many weeks of lead-time you're looking at? And just sort of relatedly, it sounds like you may not be in allocation a couple orders from now you expect? I mean, might the CapEx levels drop more significantly after we get out of the next quarter? Or just wait and see on that?

Well, I think to give a lead-time on a new order is difficult. Because there's -- well, there's a lot of products that are, if you get an order today, will be scheduled out into the summer through August and September. I'd say that some of the products with the longest lead-times today are ROADMs, our TrueFlex ROADMs, and 980 pumps. Both because 980 pumps go in amplifiers and new lines are going out and being deployed. But also we use a lot of pumps in our TrueFlex ROADM line cards. So we've been adding a lot of capital in our 980 pumps as well as in our ROADMs and our super transport blade lines.

Does that answer your question, James?

I guess it helps. I mean, on the CapEx?

Yes. So, On the CapEx front, so again we are spending roughly $25 million to $30 million this quarter. Demand still looks pretty strong. So as we get out into the Q1, we don't need to spend the level that we spent the last two quarters. It will start to tail off. And it's our belief that CapEx will return back to the 4% to 6% of revenue level towards the back-half of FY17.

Okay. And just one last one if I can sneak it in. On pricing, you said it was down 6%, and I'm just kind of confused why almost all your products are in shortage, that you are seeing worse than usual price declines. Could you clarify why that is?

Yes. I wouldn't say it's worse than normal. I'd say that typically the March quarter has the brunt of the annual price reduction. Some of these price negotiations were done months, if not quarters, ago. And as I said in the past, products like our ROADM line cards, those prices were negotiated two years ago. And so those are done and set in stone.

I'd say also that we are in this with our customers to win. And taking advantage of a short-term blip is not what we intend to do -- not that this is a short-term blip, so let me back that up a minute. We don't try to take advantage of our customers. We need them to be competitive to win in the marketplace because we value their long-term partnership.

So I wouldn't say that just under 6% was anything abnormal, because we typically see 2% to 3% in the other quarters. And so that kind of adds up to that 10% to 15% that we typically see in an annual production.

Thank you very much.

Rod Hall, JPMorgan.

Thanks for the question. I guess I'll start with a question and then a clarification. The Datacom 100 gig revenue was up I think 140% quarter-over-quarter. Can you just comment on what drove that? Was that a Web 2.0 customer, your -- the largest one that you guys have talked about in the past? Or is there any other color you can give us on what's driving that growth?

And then the clarification, I just wanted to go back to the Verizon strike and ask you -- you said there's no impact. But at what point would there be? How long would the strike have to run before you think demand would be impacted? Or do you think there would be any impact from a longer-running strike? Thanks.

Sure. So the cause of the growth in 100G was mainly to our network equipment manufacturers. As they deploy their 100 gig line side products, they need a client side transceiver. So a lot of CFP2's and CFP4's and now QSAP28's are going out into those client sides of the Telecom networks.

We are starting to see some traction in the hyperscale data centers customers, but more in the pilot type applications, although we have received a multimillion-dollar order for QSAP28s from a major hyperscale data center customer that we've never done business with before that we expect to start shipping this quarter but -- as well as into next quarter.

So I'd say that, again, the hyperscale really takes off in the second half of the calendar year and contributes meaningfully then. But the growth we saw in the March quarter was mostly to the network equipment manufacturers. As far as the Verizon strike impact, I suppose there could or should be impact if it lasts a really long time. I don't have a crystal ball on that.

Every indication I've got is that there's no impact. But I assume if it goes on for months and months, that there may be an impact. But, to date, in the horizon that I see, I can't foresee any impact in the next few months.

Okay. And just one more if I can sneak it in. The -- just wondering, last time we saw you, you said you thought the real ramp in North American component supply for the 100 gig rollout would happen in late May/early June. Is that still the timeframe that you expect component demand to ramp in? Or do you have any more visibility on when you expect the ramp to occur?

Are you talking about the Metro deployment?

Yes. Metro 100 gig.

Yes, I think that's still consistent with our current thinking.

Okay. Great. Thank you.

So, May and June and July.

Okay. Thanks.

Simon Leopold, Raymond James.

Thank you for taking my question. This is [Molicio] for Simon Leopold. Last quarter you talked about a production constraints which reduced sales by close to $10 million to $20 million. Can we get an update on that? Did this quarter includes any catchup sales from that slog of revenue does lead to the December quarter?

Well, I wouldn't say that we reduced sales. I would say that we weren't able to satisfy demand from our customers by, say, $20 million last -- in the December quarter. That demand I would assume was satisfied in the January/March quarter. But -- and again, there was demand that wasn't satisfied in the March timeframe that's being satisfied now. And there's orders today that customers want this quarter that is not going to be satisfied this quarter.

So I wouldn't say it's a reduction in revenue. I'd say it's an allocation that we've been having to deal with that, again, why we are adding so much capital to our production capability. So I think your question is, did that demand go away? And I would say no, the demand did not go away. Because as an industry as a whole, I think for most of the products that we ship, there's allocation across the industry.

Okay. And the other question I have is what portion of the sales do you generate from China? Is all this equipment ultimately deployed in China?

So this is Aaron. So in terms of the percentage of business in China, we ship roughly 1/3 of our business into Hong Kong and China. All of APAC is roughly 60% of business.

But keep in mind that may not be deployed in Asia. So, a lot of our North America customers use contract manufacturers in China, as well as some of the product that we ship into North -- into Chinese network equipment manufacturers don't all stay in China, and they end up in Europe or Middle East/Africa.

Okay. That's helpful, thank you.

Sure.

Richard Shannon, Craig-Hallum.

Thank you for taking my questions. I think my first one is on the Datacom space, I think you mentioned receiving a multimillion-dollar order from a Web 2.0 that you hadn't previously worked with. Can you share with us whether this is CWM, LR4 or something else? What do you view as the share allocation?

And Alan, if you could give us a sense of what's the primary criteria for being -- getting awards now? Is it price? Is it performance? Is it ability to ramp? I'd love to get a feeling for what's most important for these customers right now.

Sure. Yes. The particular order I was talking about is for a CWDM4 order, and I would say that the criteria for getting that order was ability to give them product. And so I'd say some of our competitors are certainly good at giving price, but not necessarily delivering.

So at the end of the day, when the customer needs product, they're going to order it from the people that can actually provide it. And so I'd say that there is a group of suppliers in the industry today that have credibility and the ability to ramp, and price becomes less of an important thing.

And so we certainly price to be able to make money, whereas others may not. So I'd say the key criteria in getting that order as well as getting, I think, orders throughout this calendar year and into next, will be ability to ramp high-quality, high-volume production when we need it.

Okay. And Alan, do you have a sense of what kind of a share allocation you're getting here? Just kind of rough thoughts, qualitative or quantitative?

I really don't. They are pretty secretive on what they do. I'd say, though, that based on what I understand, it's a large share of a need that they had come up pretty rapidly. So, they'd like to have it all this quarter. We are not able to provide it all to them this quarter. So it will fall into the July quarter as well.

Okay. Thanks for that. My quick follow-up question, just looking into the June quarter guidance on the topline. Give us a sense of kind of the relative moving parts Datacom, Telecom and the commercial lasers relative to the kind of growth implied at the midpoint here.

Sure. I'd say that if you look at lasers and industrial and consumer, it's probably flattish with lasers going up, and industrial and consumer softening again this quarter. And then Datacom and Telecom both growing from today's level even in the 13-week versus 14-week.

Okay, great. I appreciate the perspective. That's all for me.

Okay, thanks, Richard.

Tim Savageaux, Northland Capital.

If I could follow up on that guidance mix question, actually given your answer to a previous question about the Web scale order. I mean, would we then assume there's a pretty big divergence on sequential growth between Datacom and Telecom this quarter. Your answer there seemed to suggest that it might be a little more similar. But given this large order that you commented that seems to have some near-term demand around it, I wonder if you can -- if we can try and go at the Telecom versus Datacom growth factor from that perspective.

I think -- it's really hard for me to say. I mean, the -- if you normalize last quarter for a 13-week quarter, our growth is not insignificant to our fourth quarter. But I'd say it's more balanced this quarter than last quarter, where we saw most of the growth come from Datacom, I'd say we'd see more of a balance between Datacom and Telecom.

And keep in mind, while we grew Telecom 2% last quarter, we probably grew units more like 7% or 8%, given the ASP reduction we had in the quarter. So I'd say that that would more normalize this quarter and have less ASP reduction, and have that unit growth reflect more in absolute revenue growth in the June quarter, whereas it didn't in the March quarter as much.

Right. Understood. And if I could maybe follow up on that on the Telecom side. Wonder if you had any comments, given some granularity on ROADM growth trends, and I'm assuming that may re-accelerate here in the quarter, but you talked about broadly being capacity-constrained in the pump and amplifier type space.

I wonder if you are seeing -- if you did see growth there in the quarter? Or you were capacity-constrained enough not to really see that and maybe have that pending capacity additions over the next quarter or two, to see a reacceleration in amplifier and pump laser growth?

Yes, I wouldn't say that our amplifier business really grew. I'd say that our pump business grew, with external shipments to external customers. But I'd also say that our pump business also grew status line internal demand for pumps that go into our line cards and to what we call our super transport blades, where we have a ROADM and an amplifier and an optical channel monitor on a blade.

So I think from that perspective, pumps were constrained for the quarter. We added capacity through the quarter. We are still constrained and we are still adding more capacity. And when we look at capital, and when we pull the trigger on capital, it's a lot easier to pull the trigger on capital where we have one competitor versus six competitors.

And so things like pumps and ROADMs, where we have a very limited set of competitors, we are a lot more able to add capacity with a clear conscience. So I think that's what we are trying to do in those kinds of product lines. Where also our customers don't have a lot of choice, and so if we don't come through, we disappoint them. So we really try to make sure that we put capacity in place to make sure our customers get what they need to satisfy their customers.

Thanks.

Doug Clark, Goldman Sachs.

This is Balaji Krishnamurthy on for Doug Clark. First off, just two quick questions on products. How large was your QSFP28 revenue base now? And are you still on track for CFP2ACO by the calendar fourth-quarter? And then last quarter you talked about some organizational changes with R&D sales and operations. Could you talk about how that's impacting your business now? Thanks.

Okay. How large is QSFP28? It grew very rapidly last quarter, but it's still in the $2 million per quarter range in the March quarter. We expect that to continue to accelerate. And as we get into more meaningful hyperscale data center guys, that will become a very, very large part of our 100 gig business.

CFP2ACO by the end of the calendar year, absolutely, we are still on track, making excellent progress at the PIC level, the photonic integration at the chip level, where again we have the single-chip solution that does the laser and the modulator that we think will be very differentiated. Albeit not first to market, we believe we will have best of cost and best of volume. But as I said, really by the end of the calendar year, we will be releasing that product.

So, re-org, yes. So we promoted and moved some people around. We promoted Vince Retort, who was -- has been running our R&D very effectively for years, to be our Chief Operating Officer, and promoted some people from within R&D to lead R&D. John Martino now runs all of our R&D working for Vince.

And so I would say that to my great satisfaction, that R&D teams and operation teams are working a lot more closely together, which was really one of the desires of the change that we made. And I'd say that we are working more as one team as opposed to two silos of teams, given the change that we made. So I think what we strive to go get done is happening, and so I'm very happy with how things are transpiring so far.

Great, thanks.

(Operator Instructions). Joseph Wolf, Barclays.

I had a follow-up question for the commentary on the 100G to the sales to the NIMs. And I'm just wondering if you could -- or if you have the visibility into the breadth of the exposure across the hyperscale market? Meaning if there are 7 to 10 big global players, how many do you think you're ending up in?

You mentioned the one selling directly. How many -- if you look across that, how many opportunities do you think you have and how long does that last? Are the global players all going at the same rate? Or is this a multiyear opportunity?

Well, I think it's a very long opportunity. If you look at what happened in 40 gig, the transition at 40 gig, that started several years ago and is now finally winding down. And I think what's different this time is that in the 40 gig transition, only a few of the hyperscale data center guys were buying directly from the optics suppliers; whereas today, the 100 gig, all of them are.

And so I'd say that North America will go first; China is probably not until 2017, although we are working with the major hyperscale guys in China as well as the -- all of the suppliers -- or all the hyperscale guys here. There are some that are leading the way. The ones that we got the order from, I'd say would be kind of trailblazing the way. And I'd say that, by the end of this calendar year, all of the major North America Web 2.0 customers will have made that transition in new greenfield data centers that they are building.

And I'd say that means that every new data center that they build, and there's plans to build many, many new hyperscale data centers over the next several years, will take advantage of the 100 gig QSFP28. And those come in different forms and functions, from a 100 to 300 SR product to 500 meter PSM4, which we are supplying and have design wins there to hyperscale guys, to the CWDM, which is really [2 kilometer] reaches. So we are seeing a lot of interest from the Chinese guys as well as the North American guys, but I would say again that the Chinese Web 2.0 probably doesn't kick in until 2017.

Thank you, that was very helpful. And then I guess with the component supply constrained for you, how is that impacting your cost and pricing? And does that continue? Or are your suppliers adding capacity like you are?

Well, our suppliers are certainly adding capacity. We expect price reductions with our suppliers much like our customers expect it with us. And so suppliers that treat us like a partner, and are more interested in our long-term business than making an extra dollar next quarter, are the ones we're going to stick with. And so we've seen the kind of cost reductions that we would expect in normal times, even when there is a supply constraint.

So I don't think there's any different dynamic from that perspective on our cost. So we are continuing to try to drive cost down, not only from our suppliers but also in productivity and yield within our factories and our CM.

Thank you.

Meta Marshall, Morgan Stanley.

Just two questions. The first is you noted that optical communications gross margins were down as Telecom pricing negotiations went into effect. I just wanted to make sure that -- or get feedback as to gross margin trends in Datacom throughout the quarter.

And then second, last quarter, you had mentioned submarine -- an impact from submarine business being lower, and you expected that to come back in the second half of the calendar year. I just wanted to make sure that that timing still stood. Thanks.

Why don't you go ahead and take that?

So, in terms of gross margin, so the optical -- opcomm gross margins were down roughly 90 basis points quarter-to-quarter. And as we had articulated, most of that was due to price erosion during the quarter, because a lot of these contracts had been set in terms of pricing over the past several quarters.

In terms of the other question you had about how does that reflect with Datacom? So Datacom revenue grew 30% quarter-to-quarter. A lot of that growth came from 100G and newer products, so those gross margins are typically going to be a lot better because they are newer products. But in terms of being able to offset typical price erosion we've had all across the board of what is sufficient enough to do so.

Going forward, our objective again is to continuously lead the market with newer and newer products. Okay. The faster speed products that are getting to market quicker, which typically would give us better gross margin. So it's our idea and our objectives to be able to accrete or enhance our optical gross margins. We mentioned the Bloomfield fab consolidations, we are a little bit with that because of the current demand environment. But that's going to add roughly 100 basis points to our overall corporate gross margins going forward.

And as to your question on submarine, we actually saw a submarine uptick in the March quarter. And the submarine cable business is very lumpy, in that when a consortia decides to build the cable and get the funding, they want to go relatively quickly. And so it's lumpy. I'd say this quarter, probably submarine is down from last quarter, but I expect that the second half of the year will rebound back to the kind of levels we saw towards the end of 2015.

Great. Thank you.

Sure.

Alex Henderson, Needham.

Two questions. The delay in the Intel nightbridge chip, which is apparently causing some slowdown in timing of deployment in the supercomputer market, does that have any impact on you guys at all? Are you selling into that? Or is that more Mellanox type InfiniBand stuff?

Yes, Alex, this is Chris. So we don't really sell a lot to the supercomputer market, so we are not impacted by that situation.

Great. Second question, if you could please just give us a real clear, crisp estimate of how much revenue was due to the 14 weeks to apples and oranges into the sequential upcoming quarter? And similarly what you think the net was on the OpEx cost for the same reason? Could you give us just -- this is the best guess of what the revenue net was and not the best guess of the cost item.

Yes, I'll take the revenue one and let Aaron take the OpEx one. I'd say that on the revenue front, I would say that you could kind of look at last quarter as a 13.5 real quarter -- 13.5 week real quarter, in that we probably lost half of the production of one week. Because all of our production is not in China, some of it is in Thailand.

So I would say that, given that we were hand-to-mouth throughout the quarter, we didn't have the ability to build up inventory and ship it during that timeframe. So we lost probably half a week. So you can say it's a 3% increase on a normal quarter if you want to try to normalize what we are looking forward to in the June quarter.

Now are you baking in both the Golden Week impact and the extra week?

Yes, I'd say that we are really not impacted from a supply standpoint from Golden Week, as we don't have any production in Japan. From a demand standpoint, the Japanese customers probably slow down a little bit, but we've got plenty of demand to make up for that. So I'd say that we're really not impacted by Golden Week this quarter.

On the cost side?

Hey, Alex. On your question on --

Did that answer your question, Alex?

I think so, yes.

Okay.

Okay. And then to follow up on your question on OpEx, so the OpEx for the extra week was almost $2 million for the quarter.

Great. Thanks.

Going into Q4, that will drop off. And then we have some other puts and takes.

Thank you.

Thank you. And at this time, I'm showing there are no further participants in the queue. I would like to turn the call over to Mr. Alan Lowe for any closing remarks.

Great. Thank you, operator. You know, the Lumentum team is excited to support our customers, grow our business, and create value for our shareholders. I want to thank our employees for all their hard work that has put us in this excellent position in the market. We see strong market demand from our customers.

Our new products, including TrueFlex ROADMs and 100G Datacom transceivers are winning in the market, and position us well as we look forward. I believe we are in the early stages of a worldwide bandwidth expansion, making the future bright at Lumentum.

We will be discussing our business at several Investor Relations events in the coming weeks. These events are listed on our website in the Investor Relations section.

This concludes our call for today. We would like to thank everyone for attending, and we look forward to talking to you again in another three months.

Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone have a great day.