Lumentum Holdings Inc (LITE) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lumentum fourth-quarter and full-year 2016 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Chris Coldren, Vice President of Strategy and Corporate Development. You may begin.

Thank you, Stefanie. Welcome to Lumentum's fourth-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 positions 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 third-quarter ended April 2, 2016. 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 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 our fourth-quarter and full-year fiscal 2016 results is available on our website, www.lumentum.com under the Investor 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 our latest 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 fourth-quarter and full-year business highlights.

Thank you, Chris. Wow, what a year. Just over a year ago, we became an independent public company, and this team hosted our first earnings call. Since then, we have seen our telecom, datacom and commercial lasers businesses all strengthen dramatically. Relative to our fourth quarter of last year, our telecom revenue was up 18%, with ROADMs up nearly 100%. Our 100G datacom revenue is up 241% and our lasers revenue is up 35%.

This growth, primarily driven by new and differentiated products, resulted in more than a 200 basis point expansion in gross margin. This gross margin expansion, combined with operating leverage and the cost savings of being an independent public company, resulted in more than a 700 basis point increase in operating margin.

Demand continues to be strong. At Lumentum, we are focused on using our photonics technology to accelerate the speed and scale of cloud, networking and advanced manufacturing. The rapid growth in cloud computing, streaming video, 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 continues to be strong. North American metro deployments are starting to ramp as our customers are transitioning to full-scale deployments. Hyperscale data center operators continue to plan major 100G upgrades and we expect rollouts to begin in the first half of our fiscal year.

Fourth-quarter revenue was $241.7 million, and fully diluted earnings per share was $0.41. Revenue was at the high end of our guidance, and our earnings-per-share exceeded our guidance.

While we added capacity, demand still exceeded our ability to supply during the fourth quarter. We experienced challenges with some of our suppliers, which also impacted our ability to meet our customers' demand. We continue to bring new capacity online and are working closely -- very closely with our suppliers to improve their delivery. However, we expect we will remain supply-limited during the first quarter.

Telecom revenue was up 4% quarter-on-quarter. Our TrueFlex ROADM revenue grew approximately 21% quarter-on-quarter and grew 226% year-over-year. These ROADMs are not only the basis of the North America metro builds that are starting, but have broad traction across our customer base. This is due to network operators around the world shifting to more advanced architectures that rely on the functionality of our TrueFlex product.

Total ROADM revenue grew approximately 13% quarter-on-quarter, as TrueFlex growth continue to be partially offset by declines in older non-TrueFlex products. We continue to expect that China will begin significant ROADM deployment in the next calendar year as they begin to deploy them into their metro networks.

Our datacom revenue grew 3% sequentially and achieved a new record level of $47 million. Datacom revenue growth was driven by sales of our 100G product, which increased approximately 40% over the prior-quarter and now represents more than half of our total datacom revenue. Partially offsetting the 100G revenue was declines in the 10G and 40G revenues as the market for these products has become even more competitive with price aggressors focused on maintaining market share.

Commercial lasers revenue was up 22% sequentially and 35% year-on-year, driven primarily by kilowatt fiber lasers returning to growth. We continue to make progress improving yields and output, and expect our overall first-quarter laser revenue to increase slightly again.

Book-to-bill for optical communications and lasers were both above 1. We saw strong bookings in the fourth quarter and that strength is continuing into the first 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 believe we are well-positioned with our new products, customer relationships, design wins and our ability to execute.

I will now hand it over to Aaron for more details on our financial results and our guidance for the first quarter of fiscal 2017.

Thank you, Alan. Net revenue for the fourth quarter was $241.7 million and at the high end of guidance. We had an excellent fourth quarter and increased revenue by 4.9% sequentially despite the third quarter having one extra week. Also, revenue grew 15.7% compared with the same period last year.

Our full-year fiscal 2016 revenue was $903 million and increased 7.9% compared with last year's $837.1 million. GAAP gross margin was 32.9% and increased 560 basis points quarter-on-quarter from the positive impact of higher volume, and last quarter having inventory provision expense related to our legacy 3D sensing product.

GAAP operating margin was 4.2% and GAAP diluted net income per share was $0.23. Our fourth-quarter non-GAAP gross margin was 34.1% and increased 190 basis points relative to the prior quarter, driven by a sequential increase in optical communications' gross margin.

The full fiscal year 2016 non-GAAP gross margin was 33% and increased 50 basis points year-over-year. Non-GAAP operating margin for the fourth quarter was 11.6%, an increase of 280 basis points sequentially. Non-GAAP earnings-per-share was $0.41 based on a fully diluted share count of 61.8 million.

These earnings included $100,000 of other expense and $2.5 million of tax. For the full fiscal year 2016, non-GAAP operating margin was 9.2%, an increase of 380 basis points year-over-year. Non-GAAP earnings-per-share was $1.29 on a fully diluted share count of 61.2 million.

Now for some additional detail. Optical communications revenue was $201.2 million, an increase of approximately 2% over the prior-quarter, driven by a $5.1 million or approximately 4% increase in telecom revenue, and a $1.5 million or approximately 3% increase in datacom revenue, which was partially offset by a $2.7 million or approximately 22% decrease in industrial and consumer revenue.

Optical communications gross margin at 32.3% increased 250 basis points sequentially as a result of higher volume and the mix of products. Commercial lasers revenue was $40.5 million, an increase of $7.3 million quarter-on-quarter. In the fourth quarter, fiber laser revenues were $14.9 million and achieved the highest levels since the prior peak during Q2 of fiscal year 2015.

Commercial lasers' gross margin at 43.2% [decreased] 350 basis points due to mix and cost. In Q4, we recorded a reserve to upgrade some older fiber lasers to move to a new manufacturing process that has enabled fiber lasers to return to growth.

The reserve had a negative impact of 200 basis points for the overall commercial lasers' gross margin. Our focus has been to return fiber laser revenues back to growth as we worked through the production challenges over the past few quarters. And now that we have done that, we will focus on reducing costs going forward.

We had three customers that each contributed 10% or more of our fourth quarter revenue, which was consistent with last quarter. Operating expenses totaled $54.4 million or 22.5% of revenue compared with last quarter of $53.9 million or 23.4% of revenue. R&D expense was $34 million and SG&A expense, $20.4 million.

Income tax expense was $2.5 million for the quarter and equated to an effective non-GAAP tax rate of 9%. As we go forward, we expect the non-GAAP tax rate to be in the range of 7% to 10%.

Capital equipment additions were approximately $20 million or 12% of revenue during the fourth 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 have been increasing our 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 first quarter to be in the range of $20 million to $25 million. Our cash balance was $157.1 million at the end of the fourth quarter, approximately flat from Q3, and we remain debt-free.

Now on to our guidance for the first quarter of fiscal 2017, noting again that all projections are on a non-GAAP basis. We project net revenue for the first quarter to be in the range of $245 million to $255 million, with operating margins in the range of 11% to 12.5%, and earnings-per-share to be in the range of $0.40 to $0.46.

Now I will turn the call back over to Chris and begin the Q&A session.

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

(Operator Instructions). Simon Leopold, Raymond James.

I wanted to follow up on your data center business, specifically if you could talk to what kind of exposure you have to what we typically call the web scale or cloud providers and how you see that particular trend evolving for you?

Yes, thanks, Simon. This is Alan. We have -- if you go back to our Form 10, we had significant customers in the hyperscale data centers as they ramped up 40 gig. But as our 40 gig business has declined, we have a very small percentage of our revenue with the hyperscale guys, although that is increasing over the last couple of quarters, but still in single-digit millions of dollars.

I think as the transition for the hyperscale guys goes into full force at 100 gig, we are extremely well-positioned and are counting on significant growth from a very small base, but significant growth overall for our business coming from hyperscale. Specifically in our QSFP28 varieties of products.

And the timeline for that, that you are thinking?

I'd say most significantly would be the second fiscal quarter. We'll see some of it this quarter. We have got orders from hyperscale guys, but they are not huge. And frankly, the demand we have on our 100 gig products, CFP2 and CFP4, where our margins are substantially better than the QSFP28, we are moving most of our capacity to satisfy those customers, frankly. But as we add more capacity, we will be able to devote the CFP2, CFP4 and then the hyperscale guys as well.

And just as the follow-up I would like on that is, just overall, what percent of total revenues are 100 gig-related when you think about all the form factors, the CFP flavors and the QSFP? Thanks.

Sure. So, on the datacom side -- do you have that?

It is roughly 58%.

On the datacom side.

Total on the datacom.

And then if you look at the telecom side, it is hard to say, given that we sell ROADMs and it is typically -- the ROADMs we are selling today are typically in the 100 gig space.

But do you have something on that, Aaron?

Close to 60% or so.

Great, thank you very much.

Thanks, Simon.

Rod Hall, JPMorgan.

Thanks for taking the question. Really strong gross margin number here and then strong margin guidance as well. So, I guess my first question to you is, on that gross margin you reported, you said it was mix and scale. Could you say which of those two is most prominent? And then also within mix, just flag to us again which products specifically are driving that gross margin in the mix? And then I have a follow-up.

Hi, Rod, this is Aaron. So, in terms of the gross margin uptick, it is about half-and-half in terms of mix, and from volume. In terms of the mix aspect -- so as Alan had mentioned in his prepared remarks, some of the newer products have higher margins than some of our legacy products. So when you start looking at 100 gig datacom, some of our ROADM products, they do have higher gross margins than our typical corporate average.

And then in terms of volume, basically increasing volume by 5% quarter-to-quarter has helped us with leveraging a lot of our fixed cost in the operational area.

Okay, and then as a follow-up, I wanted to ask you -- you guys are investing more CapEx in capacity. When do you expect to be able to meet demand on -- particularly on the telecom side, I'm interested in the ROADMs and the 100 gig components? And do think there is any risk of overcapacity, because other people are also investing? Thanks.

That's a good question. So in terms of what we have been seeing historically, it typically takes six to seven months to get capacity online. So we bought roughly $90 million of CapEx in all of FY16. Most of that started to step up in the second half of the fiscal year, okay. And so a lot of that is going to be coming online here towards the back end of Q1. So, we should see the Q2 time frame, the December quarter, where most of that will be online.

And in terms of the way forward, we will continue to evaluate the economic environment, and should we need to continue to add more capacity, we'll do so. But we are being prudent. Then, in terms of our projections that go out into calendar year 2017, there is nothing to tell us today that things are going to slow down at all.

(multiple speakers) Do you think you'll meet capacity needs by fiscal Q2, Alan, just to be clear?

Will we meet the demand in fiscal Q2?

Right. Would you be able to meet demand by then?

We don't give two-quarters-out guidance, but I'd say that the way we look at investing in CapEx is really on products and technology where we have differentiated products or we have fewer competitors. So, if you look at the vast majority of our investments last year, it was for ROADMs, ROADM blades, super transport blades, 980 pumps and 100 gig datacom.

And, so, as we move forward, we don't expect to see new entrants into the ROADM or ROADM blade market, so we feel pretty comfortable about those investments. I think where there is many, many competitors, we are a little bit more conservative in adding capacity, because when things do slow down, those products will probably get hit for pricing and we don't want to be sitting with excess capacity.

Okay, thanks a lot.

Sure.

Joseph Wolf, Barclays.

Just as sort of a follow-up on the margin side, if you look at the volume and the scale, I know you have been in the process of moving facility or consolidating facilities in the United States. Is there room for more gross margin improvement on that side of the business or -- and on the mix side? Or where can gross margin improvement come from going forward?

Hi, Joe, this is Aaron. So, yes, in terms of what we had said last call, we did mention consolidation of one of our fabs on the East Coast. And we did mention that once that is fully consolidated, we should see another 58 to potentially 100 basis point improvement in margins, especially on the op com side.

So, that's yet to come. That's probably in the first half of calendar 2017. In terms of what we see forward over the next couple of quarters, yes, we typically don't guide margin go forward, but right now if the environment continues the way it is with our newer products like we had articulated, I think we could still see 20 to 40 basis points improvement each quarter, assuming volume continues to tick up as well.

Okay, and then just sort of as a tangential follow-on, you mentioned ROADMs in China, and I am wondering if you take a look at the TrueFlex mix versus the older that you mentioned, what kind of ROADMs do you think China is going to start deploying when that -- when those orders start to come through?

Yes, it is clearly TrueFlex ROADMs. That is what they are evaluating today, putting pilots in today and expect that that would be what ramps into. First of all, they are metro networks in 2017, but frankly the timing of when that happens in 2017 isn't perfectly clear to me. I think we will have our hands full with North America for the next six months or so. So, hoping it comes a little bit later, frankly, based on what we are seeing on demand side.

All right, thank you. That's very helpful.

Sure.

Alex Henderson, Needham.

I was hoping you could go through some thoughts on what's going on in China in terms of the China broadband build, particularly relevant to the coherent side of your business. And, similarly, talk to what you see as the trajectory of orders for those type of products.

Yes. It has remained strong for the first half of the calendar year. There are further tenders about to be awarded, from what I understand, and expect tens of thousands of ports to be awarded in the second half of the calendar year with growth -- what I am being told is growth into 2017 over 2016 in the number of coherent ports.

So, I think that's what they tell me. I think anecdotally, I use the scale of how often I get visited from the procurement organizations and the Chinese NIMs, and I can tell you it is frequent and often, as often as yesterday. So, the demand is very strong. It's expected to maintain strength through 2017, but with the caveat that things can change.

So, we are very optimistic with how it has gone so far. And we'll have visibility certainly through the end of the calendar year if not into 2017.

The second question I had for you was on the industrial laser. Obviously, you fixed the coupling problem. You have now field-tested that fix and it looks like it is pretty well-addressed.

So, can you give us some sense of what the slope of recovery in that business will be? And do you think that you can get your margins back up over two or three, four quarters back up to the 50% gross margins you were enjoying before that issue happened?

Yes, well, I can tell you that the problem has been resolved. It has been more than field trials. It has been end customers for quarters, and very successfully. So, we have reached the point where our customer is very confident that the fix we have implemented is a complete fix for the problem.

We saw dramatic growth last quarter from $9.3 million to $14.9 million, so that's a pretty dramatic trajectory on fiber lasers. I expect that to grow again this quarter, but not to the same magnitude. And as we go into next calendar year, the demand from our main customers is expected to grow dramatically, especially as they build confidence in the 4 kilowatt laser that they now have. We are already seeing more demand come from them, so I would expect to continue to grow through the next six quarters.

The margin point?

Oh, margin, oh, yes, I mean, if you look at the numbers last quarter, as Aaron indicated in his speech, we took a 2% margin hit for a reserve we took to upgrade some older lasers to the new process. So, putting that aside, we're at 45%. I think we now are going to focus on cost reduction as opposed to implementing this new process, and we will get back on that cost reduction path to get us into the high 40s.

I am not committing to [50%] gross margin, but I would say that we should certainly be in the high 40s over the next few quarters.

Great, thank you very much.

Thanks, Alex.

Meta Marshall, Morgan Stanley.

I just wanted to ask a question about following on the question on China, just whether you had seen any softness of their shipments necessarily into Europe? And, so, if we are seeing softness out of Europe, but just whether that had been reflected with some of your Chinese NIMs?

And then just in terms of an update on CFP to ACO timing? Thanks.

Sure. You know, when we ship into China, we don't know where it ends up going, so I'm not going to be able to provide a lot of color on whether they are seeing softness into Europe. I will say that, to me, Europe seems kind of flattish to up a little bit, but I don't know that from a Chinese NIM perspective at all.

The second question was on CFP to ACO. I will say that we have solved the problem at the chip level that we had, so the monolithic chip with the modulator and tunable laser, that challenge that we really have had over the last several quarters is behind us. The chip is performing well.

The modules we have in the labs are working well with multiple DSB's, and we have demonstrated 200 gig 16-QAM performance in our lab, which is what we needed to be able to go to our customers. And that is happening this quarter, and we're still on track to start shipping low volumes by the end of the year, but really meaningful volume into early 2017.

Great, thank you.

Sure.

James Kisner, Jefferies.

Thanks for taking my question. So, you guys mentioned metro deployments.. I am curious about the Verizon metro deployment in North America. Just wondering I know you guys have limited ability here into that in terms of where it is being deployed, but do you have any sense for how much the Verizon metro deployment helped in June and it is helping your guidance in September?

And I guess I'm wondering also if both key vendors are shipping there and whether or not we should expect that business to keep accelerating through the year? Thanks.

Yes, I can tell you that the deployments are happening to a few cities, and it contributed -- I don't know how much it contributed last quarter. I would say probably in the high single-digit millions of dollars perhaps. I'm not going to comment on which customers are shipping to them or not. You'd have to ask them. But I would say it is still in the very early stages and expect that we will see continued growth from the North America metro, both Verizon and beyond Verizon, over the next couple of quarters for sure and into 2017.

Great, and just the other, follow-up in capacity constraints. Could you tell us which products specifically are most constrained? Thanks.

Sure. Maybe it would be easier to say which ones weren't. The lower speed datacom products, 10 gig, 40 gig, got plenty of capacity there. Last quarter, we saw a downtick in submarine volumes and that's very project-based. We had capacity last quarter, and now we don't have capacity. We are sold out as projects came online and orders came in.

ROADMs are sold out. ROADM line cards are sold out, 980 pumps, even tunable SFP and tunable SFP+ at 10 gig are very tight. I would say that is kind of hitting the main points.

Thank you very much.

(multiple speakers) The 100 gig (technical difficulty) sure is very, very tight. Sorry.

Doug Clark, Goldman Sachs.

Thanks for taking my questions. My first one is just a clarification on a comment that you made in the prepared remarks. You said in terms of some of the capacity constraints you had some challenges with some suppliers to meet demand. Is that capacity constraints on their end or was there something else that you were alluding to?

No, it's capacity constraints on their end mostly.

Okay.

And not (technical difficulty) -- not being able to train or ramp up to the levels that we needed them to, to utilize the capacity that we put online.

Okay, that's helpful. And then a bit of a housekeeping item. In terms of next quarter datacom versus telecom, can you give us any insight into what you expect to be relatively stronger?

So -- this is Aaron. So, in terms of telecom, we expect telecom to be up probably 3% to 5%. Datacom is probably flattish, primarily because 100 gig will grow, but the lower speeds 10 and 40 gig will drop off -- it's more competitive.

And is that competitiveness in 10 and 40 gig, is that incremental to what we have seen? I know it has been a fairly competitive market. Now I am wondering if that is increasing or changing further still?

I would say it is continuing to a lower slope than it had been last year, but at the same time the margins were bad and a detriment -- degradation of ASPs on that business make us kind of wonder why we would be bidding on that kind of stuff. But others are willing to do that. We're just not.

Okay, got it. That makes sense. And then final question for me on the North American metro deployments and particularly your ROADM competitive position. Are you still the sole-source supplier into both customers? Or have you started to see more competition as volume deployments ramp?

I don't have a crystal ball, and certainly the procurement organizations aren't going to tell us that they are not qualified. But I will say that looking at the overall demand, we are getting a very, very high portion of that. So, I think it's best to ask Jerry.

Got it. Thanks for taking my questions.

Patrick Newton, Stifel.

Alan and Aaron, thank you for taking my questions. I guess just dovetailing off that prior qualification question on ROADM, I guess given that we are now moving into the deployment phase, do you anticipate that you're going to ultimately end up with higher share during the deployment phase than maybe your expectation six or 12 months ago?

Oh, yes, I mean, I didn't expect to have 100% into the June quarter. I think it is all going to depend on how we perform and how we support our customers. And the last thing they want to do is interject variation into a deployment of a major city. So, I would say we are in a pretty good position today.

That doesn't mean that three months from now we don't have 100% share. I would say that we are focused on making sure that our customers get exactly what they need and the quality that they need, so they don't have a reason to want to buy from someone else.

Great, and then I guess we are still a couple of months ahead of annual pricing negotiation, but it seems like if there is any type of environment that would allow for Lumentum and the industry to have a more rational pricing, this would be it. So, I'm curious to get your thoughts on whether you think it is possible that we could see pricing towards the lower end of the historical range?

That's certainly my expectation.

It's great to hear. Thank you, good luck.

Michael Genovese, MKM Partners.

Should I take -- given your answer to the last couple of questions about the ROADM situation, competitively, for Verizon, should we take it to assume that you haven't changed or accelerated capacity addition plans as a response to the competitors' late qualification on that account, but you just stuck to the same plan you were originally on? Is that the takeaway?

No, I would say we changed our trajectory of capital expenditure for ROADM and ROADM line cards probably back in the February time frame, when it was clear that we were going to get the vast majority, if not all of it, until at least this point in time. So, the decisions we made in February impact what we have today coming online, and the decisions we make today would impact what would be online in the first calendar quarter.

And, so, I am not assuming we are going to maintain 100% share into 2017. But as we get closer to that, we will have to decide with our customers and make sure that we don't buy capacity that is not going to go utilized.

Okay, great. So, given that, but also given that you have this slope of overall capacity addition that seems to be accelerating in 1Q into the -- into 2Q of the year, are you comfortable with -- should we be modeling -- I know you don't like to give guidance, but should we be modeling the sequential growth in optical comm in 2Q higher than 1Q? Or is the prospect of more competition in ROADMs an offset to that, that we should take into account?

Well, like you say, we don't want to give guidance more than one quarter at a time. I would say that, putting aside even ROADM, that the hyperscale data center guys are a big opportunity for us to grow our topline revenue in datacom in the second fiscal quarter more than the first fiscal quarter, as we're bringing on more capacity this quarter.

ROADMs -- like I said, we are probably one or two cities into North America deployment, and I don't have a crystal ball as to how fast they will deploy those cities and which cities will be next. So, it is hard for me to really predict what will happen in the [pending] fiscal quarter.

Okay, I know I am breaking the rule here by asking one more follow-up, but on the web scale stuff, just in terms of last quarter and the next quarter going forward, is the sequential 100G datacom growth -- is that coming more from QSFP28 or more from CFP, CFP2 and maybe CFP4?

Yes, it is mostly from the CFP2/CFP4 growth. The QSFP28 number is still low to mid-single-digit-millions, whereas the CFP2 is very large. We didn't participate in CFP, so that's why we are seeing probably more growth than our competitors. As we -- as the CFP shift to CFP2 is happening, we're getting that share gain through having a good product at the right time.

Super helpful. Thank you.

Sure.

Dave Kang, B. Riley.

First question is, so because of the capacity situation, how much revenue was left on the table because of that?

Yes. Well, that's a good -- it's a tough question. We certainly --

I think you said something like $10 million to $20 million last quarter, the third quarter -- yes, third quarter, I believe?

Yes, it is probably similar if not a little bit higher than it was the quarter before.

Okay. And then what was the mix -- I guess I can work out the numbers, but what was the mix between TrueFlex and legacy ROADM? And what you think that will be by the end of this calendar year?

TrueFlex was roughly 80% of the total revenue -- revenue volume compared to legacy.

Okay, so can we expect that to be 90% by end of this calendar year?

I would expect it to be at least 90%, yes.

And what does that do to your margins? What kind of a lift can we expect?

I think in our guidance for this quarter, we are expecting some uplift from gross margins. New products have higher margins than older products, and that's why we're walking away from some of the lower speed datacom stuff and focusing on the better-margin newer products. And ROADMs are, right, the new products that we are focusing on continuing to ramp.

Sure. And the last question is, how are the modulators and iTLAs doing in terms of growth. Are they keeping up with other newer products? Are they slowing down? Or any comments on that?

The modulators actually grew over 30% sequentially -- 25%, 26% year-over-year, so in terms of growth, it is still there.

Okay, what about iTLAs?

ITLAs, we are very capacity-constrained on iTLAs and it shares capacity with tunable XFP and tunable SFP+. I don't know that we want to get down to the level of detail, but I'd tell you that we are shipping everything that we possibly can, so I would be surprised if it didn't grow.

So, is there anything other than like a 10 gig, 40 gig datacom that is coming down that seems like offsetting some of the growth of your newer products?

Yes, like I said just a few minutes ago, the submarine revenue was down in Q4 by several-million-dollars, and we expect that to bounce back this quarter.

What about 3D? Are they -- were they down or flat? Or have we seen the bottom?

Yes, 3D and industrial diode lasers were down, so I think we were down about 22% sequentially last quarter.

And do you think --?

We had mentioned 10G and 40G datacom were down sequentially.

Right, so in terms of 3D, I mean, have we seen the bottom? Or is there still more room for contraction here?

No, it is pretty low.

Yes, it is a pretty low number, so in terms of the lumpiness, just a tiny uptick or downtick gives it a big percentage change, but not that material.

Right.

But just on that point, Dave, just to be clear, we still are very focused on 3D sensing. We still believe we are the leader in 3D sensing and we're working on many, many applications that could come to fruition in 2017. So, we are by no means not happy with where we are on 3D sensing.

Could one of the applications be smartphone applications for cameras sensing?

Yes, we've been talking about mobile applications for 3D sensing, personal computers, automobiles, so we are involved in each and every segment of 3D sensing that you can imagine today.

Got it. Thank you very much.

Thanks, Dave.

Tim Savageaux, Northland Capital.

It being the end of the fiscal year, I am going to ask about the detail on 10% customers or customer concentration in general. You mentioned bookings demand as being fairly broad-based and have called out strength in China, and at least building strength in metro. But I guess I will offer you the opportunity to tell us who the 10% customers were for the year in terms of -- and maybe some color on what sort of trends? I imagine you have a new -- if you can confirm that you do have a third one for the year?

And absent that, perhaps any color about geographic or market strength that has been driving the business over the last quarter or so?

Hey, Tim, this is Aaron. So, in terms of 10% customers, we can't give you the specific names. They will be in our 10-K, which should be filed shortly, but we did have again three 10% customers in Q4. And for the full fiscal year, we do have the same three as 10% customers, and they will be disclosed in the 10-K.

In terms of geography two are in North America, one is Asian based. In terms of strength, in terms of what we're seeing in terms of shipping, yes, roughly 30% of our volume shipping into China, Hong Kong, location, roughly between 15% and 20% probably remains inside of China, and the rest is exported out to Africa, Middle East and/or back into Europe.

Great. And if I could follow up very quickly on the capacity point. I mean, it looks like relative to kind of where -- how you were thinking the quarter would turn out on the last call, that you may have expected a little more growth in the way of optical communications and saw some perhaps unexpected strength on the laser side. Wonder if you could sort of confirm that's the case, given your comments on capacity constraints that seem like they were sort of beyond what you have been seeing consistently in terms of -- and that was -- seemed like more just timing before, versus maybe some plans that didn't come through?

Despite that, you were able to execute very strong on the gross margin side to the extent that doesn't seem like it was sort of mix, increased mix of lasers that was driving margin so much as organic growth within optical comm. So, it doesn't seem like those capacity issues had any impact. But just in general, is that broadly correct in terms of maybe anticipating greater strength in comm and seeing some unexpected strength on the laser side?

Yes, I wouldn't call it unexpected strength in lasers. I would say that we were pleasantly pleased with the progress we made in improving yields. The demand was always there for the lasers business, but we actually outperformed our plan with respect to output and yields on our lasers, so that was a good thing.

I will say that we did have some supplier shortages last quarter that impacted our ability to grow optical comm more than we wanted, but keep in mind that, while it's a small quarter-on-quarter growth, that the Q3 number was based on a 14-week quarter, so it's not apples-to-apples until -- you know, we're pretty pleased with our growth that we had on optical comms, and overall gross margin result of good mix, new products was really -- was nice.

Okay, thanks very much and congrats on the strong results.

Thanks, Tim.

Richard Shannon, Craig-Hallum.

Thank you for taking my questions as well. Maybe just a couple for me. First of all, Alan, on the 100 gig datacom, specifically on the CFP family of products, can you talk about qualitatively the extent to which this growth you're seeing just coming from share gains versus market growth here?

And I think I may have missed your -- any comments you made about -- within that family of CFP2 versus the 2 or the 4 relative growth between all those individual product lines. Can you just give more detail there, please?

Yes, so I would say the primary growth driver was CFP2 and not on the hyperscale data center. So we saw very, very strong CFP2 demand across several regions; although we did see growth in CFP4, it is at a much smaller level.

I don't think that the 100 gig datacom market grew 40% last quarter, so I would say that we gained share. But that's mainly due to the fact that we didn't participate in CFP at all. So as a transition from customers consuming CFPs moved to the CFP4's, we get the benefit of having very, very solid and strong product in the CFP2 to capture that 100 gig part of the market. Does that answer --?

Yes, that is very helpful. Thanks, Alan. Follow-up on the ROADM opportunity in China, I think you have commented on this in the past couple of quarters, but as you have gotten three more months of experience and education about how that market may develop, how do you think of the China opportunity for ROADMs, TrueFlex ROADMs versus what you see in North America or worldwide or however you want to compare it? But how would you compare the total market availability here?

Well, I think I have gained confidence every month and every call that we have, on my belief, that TrueFlex ROADMs will be deployed in a meaningful way in China. I still feel confident --even more confident that I was last quarter.

I think the change that has happened over the last year in China is their desire not to just be good enough, but to be technology leaders. And in order to be technology leaders, our customers are realizing they have to partner with the technology leader. And that's us.

So we have gotten very, very close with the leading network equipment manufacturers in China, and doing things that we've never done before with respect to joint development budgets and things like that, that we typically had done with very much the rest of world. So, I think it's a different mindset that China has, and that's why I have gained confidence that they will be deploying our TrueFlex ROADMs in 2017.

Okay, perfect. That's great detail. I think that's all for me, guys. Thank you very much.

Okay. Thanks.

Alex Henderson, Needham.

Can you just give us a simple directive on what kind of taxes we should be expecting on a quarterly basis over the course of 2017 now that we are going into a new fiscal year?

Hi, Alex, this is Aaron. So roughly, 7% to 10% is going to be our effective non-GAAP tax rate through FY17.

And is that fairly stable quarter-to-quarter or is it -- does it have fluctuations in it?

Yes, it should be fairly stable quarter-to-quarter. It is dependent upon different geographical locations in terms of where income is earned, so it could vary a tiny bit, but that should be our average.

And going back to the one segment that just is a mystery to me is industrial and consumer business. I know it moves a large percentage one way or the other, depending on which way it goes, but are we at a trough in that business? And would it start to flatten out and improve from here? Or can you give us any directive at all? Because I have no way how to forecast that otherwise.

Yes, I mean, I think, as I said that it is really two sensor products in that industrial and consumer segment. The first is pumps for fiber lasers pretty much. And so we sell to the manufacturers of fiber lasers. And if one of them wants to build some inventory to make sure they have it to meet their customer demands, they buy a bunch and then they burn it off, and that's what we saw last quarter.

I feel pretty confident that we have the absolute best pump in the industry. We are coming out with a next generation of fiber laser pumps for both internal use as well as external sales, so I would say that we expect to see further growth in that area. And then on the 3D sensing part of the business, I would say it is at a trough today. We have a lot of different applications that could alter that in calendar 2017, probably not change -- a lot of change here in calendar 2016.

But we are going to continue to invest in 3D sensing applications, and I think we're going to see a broader range of products that offer 3D sensing into 2017.

So, is it -- it is going to gradually recover from the trough in the June quarter with a reflection of seasonality on some of those consumer products?

I think it rebounds based on new product introductions. Today, the majority of the products we are selling are in notebook computers. There is the back-to-school rush that we probably already sold to it, and the expectation is the next generation of products for notebook computers will help make that business grow.

I think mobile devices in calendar 2017 can make those -- make it grow rapidly, but that's probably a binary flip of the switch in that it is either going to be in a product that is large or it is going to be delayed, but we are still going to -- we are committed to that business and we are going to invest -- continue to invest in it.

So, one last question and I will cede the floor, the pump laser and amp business for the optical market, it seems pretty clear to me that part of the reason the telecom numbers are showing a little less growth is because you are shifting from selling amps to selling the pump lasers that are in them. As I understand it, the margins on that are better than -- on the pump lasers than the value of the pump lasers you have to put in the amp to sell it.

So, how much of the -- if we were to look at just the pump laser piece, what's the growth in that look like? And how much of a depressant is it as you outsource more pump lasers instead of building the amps yourself? How much of an impact is that on the revenues?

Well, I would say that last quarter we shipped more pump lasers than we have ever shipped in our history, and that is both internal consumption of products to go into North America metro as well as standalone amp and blade as well as external pumps.

You are right, though, we are getting out of the low-end amplifier business and shifting that to more useful higher-margin products just like pumps themselves or into super transport blades where we have significantly differentiation in our products. So I would say there is a little bit of drag from a revenue standpoint, but from a margin standpoint, we are working to optimize where we ship our pumps.

I would say last quarter again, I don't know if you heard it or not, but we were down probably $5 million in submarine revenue the last quarter, and again those are very project-based cables that we are seeing an uptick again this quarter. So we think we could grow our submarine business back this quarter and throughout the year.

Okay, I will cede the floor. Thanks.

Thanks, Alex.

Thank you. And that concludes the questions. And I would now like to turn the call back over to Alan Lowe.

Thank you, operator. It has been exciting time over the past year for Lumentum. I want to thank our employees for all of their hard work in creating a standalone, independent company and putting us in an excellent position in the market. We continue to see strong market demand from our customers, and I believe we are in the early stages of a worldwide bandwidth expansion, making the future bright at Lumentum.

We regularly discuss our business at Investor Relations events. These events are listed on our website in the Investor Relations section and regularly updated.

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

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.