Lumentum Holdings Inc (LITE) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lumentum Q1 2017 earnings 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 like to introduce your host for today's conference Mr. Chris Coldren, Vice President of Strategy and Corporate Development. Sir, you may begin.

Thank you, welcome to Lumentum's first quarter FY17 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 market 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 most recent filings with the SEC, particularly the risk factors described in our 10K filing for fiscal year ended July 2, 2016.

The forward-looking statements we provide during this call, include projections for future performance are based on our reasonable beliefs and expectations as of today. Lumentum undertakes no obligations 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 financial measures should not be considered as a substitute for or superior to financials prepared in accordance with GAAP. Our press release with our first quarter FY17 results is available on our website www.lumentum.com under the investors section, and includes additional details about our non-GAAP financial measures and our reconciliation between GAAP and non-GAAP results.

The website also has our latest SEC filings, which we encourage you to review and supplementary slides related to today's earnings release. Finally, a recording of today's call will be available by 7.30 PM Pacific time this evening on our website. Now I'd like to turn the call over to Alan for his comments and first quarter business highlights.

Thank you, Chris. Demand continues to be relentless. I am pleased to have achieved both record revenues and operating margins for the first quarter. Strength and demand for ROADMs, 100G components, fiber lasers, and submarine products combined with capacity additions drove our first quarter revenues up 7% sequentially and 21% relative to a year ago. Telecom growth was strong, increasing 14% sequentially and 25% year on year. Despite the increased output, our customers wanted more.

At Lumentum, we're focused on using our Photonics technology to accelerate the speed and scale of cloud, networking, advanced manufacturing, and next-generation 3-D sensing applications. Each of these applications are currently going through or planning transitions which creates strong demand for our products. The rapid growth in cloud computing, streaming video, mobile, and other high-bandwidth applications is placing enormous demand 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.

Advanced manufacturing techniques including the cutting and welding of metals, precision machining of semiconnector wafers, printed circuit boards, and glass and plastic displays are driving further reliance on lasers. Leaders in next-generation consumer electronics, virtual and augmented reality as well as the automotive industry are looking to laser-based 3-D sensing to enhance capabilities and enable new applications.

We continue to invest in these new emerging applications to position us well with these various customers. Lumentum is a leader in Photonics technology that are critical enablers of these applications. And our investments in new products position us well for all of these future trends.

Demand from China continues to be strong and new network tenders are being awarded for additional network buildouts throughout calendar 2017. North America Metro network deployments have transitioned from trials to large city buildouts. Hyperscale data center operators continue to plan major 100G upgrades and we believe that we are well-positioned as the transition from 40G to 100G accelerates. Increasingly, network and data center operators around the world are critically dependent upon our products.

While we have added significant manufacturing capacity over the past year, we continue to be capacity limited across many of our product lines. We continue to experience challenges with some of our suppliers meeting our demand, which is also affecting our ability to meet our customers demand.

Telecom strength was driven by strong growth in a ROADM products and transmission components including tunable lasers and modulators for 100G systems. Additionally, we saw a return to strength in our submarine business, as we had predicted.

ROADM revenue grew 17% quarter on quarter, and 97% year over year driven by strong demand for blade level TrueFlex products. ROADMs are not only critical to North America metro builds that are underway and most network operators around the world are shifting to more advanced architectures that rely on the functionality of our TrueFlex ROADM products. Based on engagements with customers and network operators in China, we continue to expect that China will begin significant ROADM deployments in the next calendar year.

Datacom revenue, while up 24% year on year, declined 6% sequentially driven by decline in our 100G transceiver revenue. Demand for our Datacom products was and continues to be extremely strong, but during Q1, we encountered a quality problem with an electronic component that we sourced externally.

The supplier quality issue negatively impacted our ability to meet our customers' demand and impacted our first-quarter revenue by approximately $10 million. The supplier has implemented corrective actions to rectify the issue. We've recently resumed shipments of our 100G products that were affected by this supplier problem and we are again ramping to meet our strong customer demand.

For lower speed Datacom products, we actually saw an increase in 40G revenue, however we continue to see strong pricing pressure, with prices aggressors in the market focused on maintaining market share. Commercial lasers revenue was up 12% year over year, but declined 2% sequentially. Kilowatt fiber laser revenue was up 15% sequentially to new record levels, but offsetting this were declines in other laser products.

This is a very exciting time for us. Demand continues to grow for bandwidth and speed across the world's data centers and the communication networks that connect them. Manufacturers around the world are increasingly using advanced laser-based techniques. Global consumer electronic leaders look to laser-based 3-D sensing capabilities for next-generation applications. 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 second quarter FY17.

Thank you, Alan. Net revenue for the first quarter was at $258.1 million and exceeded the high-end of guidance. First-quarter revenue increased 7% sequentially and 21% compared with the same period last year. GAAP gross margin was 31.7% and decreased 120 basis points quarter-on-quarter. GAAP operating margin was 6.5% and GAAP diluted net loss per share was $0.06.

GAAP diluted net loss per share includes a $22.7 million non-cash expense related to the derivative liabilities associated with the conversion feature of our Series A preferred stock. The liability amount adjusts upward with increases in our stock price, the corresponding offset is to other expense within the GAAP income statement. Our first-quarter non-GAAP gross margin was 34.2% and increased 10 basis points relative to the prior quarter. The sequential increase was driven by a 20 basis point improvement in optical communication gross margin.

As Alan highlighted, the supplier quality issue in the first quarter for our 100G Datacom business negatively impacted revenue and gross margin. Also negatively impacting gross margin were inventory reserves associated with lower speed 10G Datacom products, which will reach end-of-life soon.

Non-GAAP operating margin for the first quarter was 12.7% and exceeded the upper end of our guidance range. Our operating margin expanded 110 basis points sequentially as gross profit dollars grew faster than operating expenses. Non-GAAP earnings-per-share was $0.49 based on the fully diluted share count to $62.4 million and also exceeded the upper end of our guidance. These earnings include $200,000 of other income and $2.2 million of tax expense.

Now, for some additional detail. Optical communications revenue was $218.3 million, an increase of 9% over the prior quarter driven by a $20.5 million or 14% increase in telecom revenue, which was offset by a $2.8 million or 6% decrease in Datacom revenue and a $600,000 or 7% decrease in industrial and consumer revenues. Optical communications gross margin at 32.5% increased 20 basis points sequentially from higher volume and the mix of products.

Commercial lasers revenue at $39.8 million, a decrease of $700,000 quarter on quarter. In the first quarter, fiber laser revenues increased 15% to a record $17.2 million. Commercial lasers gross margin at 43.2% was flat with the prior quarter. We had three customers that each contributed 10% or more of our first-quarter revenue which was consistent with last quarter.

Operating expenses totaled $55.5 million or 21.5% of revenue compared with last quarter at $54.4 million or 22.5% of revenue. R&D expense was $33.8 million and SG&A expense, $21.7 million. Income tax expense was $2.2 million for the quarter and equated to an effective non-GAAP tax rate of 7%.

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 $24 million in the first quarter. In addition to expanding capacity for telecom and Datacom products, we're also adding equipment to prepare for emerging 3-D sensing applications. Our cash balance was $166.8 million at the end of the first quarter, an increase of $9.7 million over the fourth quarter of FY16.

Now on to our guidance for the second quarter of FY17, noting that all projections are on the non-GAAP basis. We project net revenue for the second quarter to be in the range of $258 million to $270 million with operating margin in the range of 12.4% to 13.7% and earnings per share to be in the range of $0.47 to $0.55. From a segment perspective, we expect commercial laser revenue to be down in the second quarter due to seasonal weakness from micro materials processing laser demand and also timing of customer projects and project transitions. We expect our optimal communications revenue to more than offset the decline for commercial lasers. Also, as we continue to invest in new products, our OpEx could trend up a bit to meet the timing and needs of our customers. Now, I will turn the call back over to Chris to begin the Q&A session.

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

Thank you, sir.

(Operator Instructions)

Alex Henderson, Needham & Company.

Thanks, guys. Let me just start off with a couple of clarifications, because you left some stuff out on a limb there a little bit. The charge -- or the cost of revenues of $10 million in the quarter, was that resolved before the end of the quarter or was that resolved after the end of the quarter and if it was after the end of the quarter, is there a similar divot or some portion of divot in the current quarter as a result of the resolution timing?

Yes Alex, it didn't get resolved during the quarter. I think we've determined root cause with the supplier and corrective action was implemented, but wasn't proven out until a couple of weeks ago. So, there is, to use your terminology a divot in Q2. But nowhere near the size of what our impact was in Q1. So we are back to full production and ramping up today so, it was probably the first two plus weeks of impact where we had much lower volume output than our capacity would have been able to do.

So $2 million or $3 million kind of hit in the quarter, this quarter?

It probably was more than that.

Okay. The second question --

But just keep in mind, we have been adding capacity. So you know, maybe $5 million of impact of lost revenue this quarter, but on a higher capacity base.

Right, I understand. The second one was -- just to get some clarification, there was a charge of inventory for writing down the 10 gig stuff, can you give us a scaling of that?

It was roughly 50 to 80 basis points in terms of impact of gross margin.

Okay. So that's nonrecurring, it's not going to occur again this quarter?

That's correct.

So, that's all in, in the prior quarter?

All in the prior quarter.

Okay, so now that I've got that out of the way, if I could just ask a question on the business. The ROADM business obviously grew quite strong, TrueFlex up 11% sequentially. I assume that's tracking to capacity additions, could you give us some sense of what the trajectory on capacity additions will be over the next couple of quarters there and have you seen any evidence of the qualification of the WSS card over at (inaudible) yet in the field?

Well, let me answer the first question, we are adding capacity, we added capacity last quarter. Our revenue is just below the peak level that we had in 2011. So as we predicted, you know, we're getting back to that point of where we were in 2011.

And as we really look at what's happening in China with the ROADM deployments, we will be adding more capacity. But at this time, we're pretty happy with where we are and with a slight amount of additional capacity coming online this quarter, I think it will really be up to what I learn on my trip to China in a few weeks as to when those deployments happen. So, we will make further decisions at that point to add capacity. As for your second question about our competitor being qualified, I really -- our customers don't tell us. But from what I can tell from the polls and the demand, I'd say that we still have the vast majority, if not all of the demand.

Okay. I'll seed the floor, thank you.

Thanks, Alex.

Michael Genovese, MKM Partners.

Great, thanks a lot. Could you just repeat what you said about the commercial lasers? I think it was a little bit weaker than I expected in quarter, but also did you say would be sequentially down again in the second quarter?

Yes, hi Mike. This is Aaron. We did say would be down a little bit during the second quarter, seasonably not a great time for the materials processing demand.

I mean, besides just down, any other help quantifying how much?

Probably going to be down 15% or so sequentially.

Got it. So then, if we sort of take that into account as well as the Datacom, if I could ask more in the Datacom 100G issue, was that in CFP2 where you were having some success last quarter? Was that the product that had the issue?

Unfortunately, it impacted many of our 100G including CFP2 [core], and one of our QSFP28 products. So it was quite impactful across the board, we were able to spring it forward in many cases, but at the end of the day, we were not able to continue in production with the part that we had, it needed to be fixed. So it was a broad issue of a common component that was common to many of our 100 gig Datacom products.

Right. So it seems like if anything, it's surprising here to investors. It's probably that -- I mean the quarter looks pretty good but that you -- as revenue guide maybe not quite as big as people thought it would. But when we account for the impact, the ongoing impact in Datacom and the commercial lasers decline, I guess it makes the [opticalcom] guidance look better. And I guess my question to you is just on these major end markets of China, Datacom and the US Metro. Have you seen anything that weaker in the last month or two? Anything that you are seeing worrying you in any of those markets or do you feel just as good or better than before?

I feel really good about all the markets. I think mainly due to our position in the market. And so if you look at China, our modulators and tunable lasers, both hit record high for 100 gig components, so we're doing quite well there. ROADMs, we have a very good share of the spend in North America and then, I'd say on Datacom, it was just super unfortunate that we ran into this issue. But our mindset with our customer was we'd rather fix the problem and ship quality parts then ship something that would be at risk to be a field issue. So we together made the decision to not ship that product and get it fixed, and now it's fixed and I'd say that we'll be back up to our normal full capacity run rate by the early part of November.

Okay. Excellent. And last quick one for me. On ROADMs, are you back up to your all-time cycle high that you had seen before and does that mean you be ahead of your expectations that you had previously set in the December quarter?

We are just below it, but a hair below it. Less than 10% below it, and certainly expect that over the next several quarters we'll bust through that. Especially as China comes online with ROADM deployment. I'm gaining confidence in that happening.

Great. Thanks a lot.

Thanks, Mike.

James Kisner, Jefferies.

Yes, thank you very much. My first question -- I'd like to drill down a little bit on 3-Ds (inaudible) comments you made, I joined the call a little bit late so I apologize if you gave some of this detail. Your former sister company was saying that pretty much all the major phone OEMs would likely be looking at 3-D sensing, probably the second half of next year that would be ramping for many OEMs. I'm wondering if you have the same view and could you verify the dollar content per phone opportunity that you think is coming from that for you?

I don't know that we have a sister company. But --

(inaudible) I'm talking about, to be clear.

I'm [totally] joking. I would say that the customers that we're working with are super secretive and for us to talk about the dollar content per phone or other kind of device or augmented reality or automobile would be premature at this time and I would say there's a lot of activity going on. We are increasing our R&D spend, we're spending capital in anticipation of being successful. So I would say hold tight and in the January earnings call we will give you a better update at that time.

Okay. So, thank you for that. And just, we've been hearing some rumblings that there's been some issues with the Tomahawk Switch still looking for 100 gig, just wondering if you are seeing any evidence of that, does that create any risk from your perspective that the 100 gig QSFP28 ramp could be delayed, paused, or slowed?

I think it has been delayed and I think it has been paused, which is from my perspective, very good for us given that we had this challenge in the September/ October time frame with this component. So I don't think that we've lost any the ground with our hyperscale customers with respect to that, but it's a good thing. And don't think it's really even happening this quarter in a meaningful way. So much of our Datacom 100 gig products are really the client side of telecom networks and the CFP2 and CFP4 format, although QSFP28 is picking up, it's not getting to that hyperscale kind of volume this quarter that I would've expected three or four months ago. I would say, that there is lots of talk and we're adding capacity in anticipation that it happens early in the March and June quarter and so from my perspective, is not a bad thing that it got delayed.

From your perspective, it's essentially resolved, like it's not continuing to cause a bottleneck for 100 gig QSFP28 demand?

It is today, I think. I think there's anticipation that will get resolved and be up and running in the first half of next year. I would say, as we said in the script, our 48 Datacom business was up last quarter which was somewhat of a surprise, but I would say there is no indication that I have that the first half of next year won't be a transition to 100 gig in a major way.

And lastly on the capacity constraints you are seeing with some of your suppliers. Are you getting the sense that there's a lot of activity that these are going to be alleviated, is your supply chain getting more aggressive and getting some of these [selective strain] to loosen up here in the next couple quarters or is demand just so strong you're not likely to catch up anytime soon?

I think we are working with these key suppliers, I think the surprises that get us, but we are working with everyone that's critical to the ramp that we're expecting, to put buffer inventory in front of our factories and be able to have the flexibility when our customer mix changes. Which you know, in tight situations when the mix changes it's hard to up flex. But we are working to try to get those suppliers to increase their capacity and put the VMI inventory in front of our factories. So I would say that we will have that taken care of as we get into the big ramp and the hyperscale 100 gig stuff.

Thank you very much.

Thanks James.

Troy Jensen, Piper Jaffrey.

Thank you, and nice quarter, gentlemen.

Thanks.

Just back on 3-D sensing, it seems like everybody's uptick here. If we're going to assume this is a second-half opportunity should we think there's going to be preproduction volume hitting in the June quarter timeframe?

Troy, I really would hesitate to give you guidance on that for multiple reasons. One is, customers don't want us to do that, and then number two, it could flip or it could pull in. And I think what we're doing is fully investing, building dedicated teams, buying capacity and capital and anticipation of it happening and if and when it does happen we will be ready. So, I wouldn't -- it'd be premature for me to tell you that there's major 3-D sensing in the June quarter.

Understood, that's fine. Can you also just give us an update on your ACO? I think previously we thought kind of shipping, or maybe shipping samples at the end of the year.

Yes. I'd say first of all, I think we're making tremendous progress with the single-chip solution at the wafer level and device level so we're very pleased with that. We are getting units, we're making units on our production line in our [SAVs] and in the CMs, so I think from that perspective we're really happy with that. I think we still will be giving data samples this quarter and early next year we'll be in production. And I think from my perspective the decision that we made to do the single-chip solution to provide a cost advantage is still the right decision and so I'm pretty happy with where we are. I think that said, just another data point around the components of 100 gig, is our 100 gig modulators and tunable lasers last quarter grew approximately 20% and we expect that to grow again this quarter. So both have markets to address and I think we're going to continue to see discrete components grow until the ACO market and ACO product costs come down to the point where I think our single-chip solution can get it.

Okay. Last question for me and I'll seed the floor. Could you just give us some early thoughts on pricing, assuming you've probably started some dialogue with customers on what the ASP [rate] is going to look like for next year?

Don't think that we gave the data point for last quarter, but our average selling price last quarter was down about 2% and typically that quarter it's about 3.5% if you look back over the last few years. So we are starting to see the impact of better pricing reductions, if you will. And we are having discussions and settling agreements now because the customers want to make sure that they have the capacity allocated to them. So, I would say it's a better pricing environment and we're still going to have to get some pricing, but I think it's going to be better than it has been over the last several years.

Thanks, gentlemen, keep up the good work.

Thanks, Troy.

Simon Leopold, Raymond James.

Great, thank you very much. Couple of things I wanted to get into. One, Alan you did mention you are visiting China and you'll probably gather a little bit more intelligence and hopefully update us when you can. But in regards to the China ROADM opportunity, one of the things that we've heard is that the operators there are likely to deploy more traditional ROADMs rather than a CDC or TrueFlex form factor. Wanted to hear your perspective on that possibility and also to understand what would be the implications of the operators opting for more traditional rather than a next-gen ROADM form factor?

Yes, so there have been trials of both the traditional 1 x 9, and they are calling them Flex [Lite]. So they don't have the full TrueFlex capability, but certainly our TrueFlex ROADM meets the needs of that TrueFlex Lite. But there are also networks that are being deployed with our 21 x 20 technology and whether that's CDC or CD architecture is yet to be determined, I think. So I think we're positioned well for both. I think certainly on the twin 1 x 20, there's a whole lot less competition than a 1 x 9.

But we're cost effective at the kind of volumes we have to compete effectively with everybody on the 1 x 9 product and we have next-generation 1 x 9 low-cost edge ROADMs that should address the cost points that the rest of the world is looking for, including China. So I'm very happy with our position as the ROADMs start getting deployed in China.

And do you have an expectation or thought about which way they are leaning at this juncture?

I think there's going to be both being deployed and I would think that over time -- one of the things about the China carriers is that they look at the North American networks and they say, we don't want to just be good enough, we want to be as good or best of class in the networks and so they are trying everything to shift as fast as they can to the CDC kind of network. And the question my mind is how fast can they make that transition and will the 1 x 9s suit some of the networks in some of the Metro areas versus the more TrueFlex type of architectures. And so I think there's room for both and I think we're positioned well for both.

Great. And then, in terms of the develop market trends, we get the sense that long-haul is probably slowing and may be slowing at a somewhat faster pace than we thought six months ago, and Metro is really just beginning. Could you help us understand the implications for your business. Is there a risk of a pause in the telco related transmission spending, so non-ROADM related spending as you shift from long-haul oriented to metro oriented spending. How you see that playing out over the next couple of quarters? Thanks.

Yes, well I think our perspective, we don't really care if it's a Metro deployment, by a transmission standpoint or a long haul. You know, we sell -- we have different varieties of modulators and tunable lasers that go both into the long haul as well as the Metro markets. And so, from our perspective, as long-haul goes down, Metro picks up, that's okay with us. We ship similar types of products, so we address both marketplaces. I would say that you're right, that it does looks like with spending from many of the carriers are moving from the long-haul core network out to the Metro and there's where the ROADM count is high, the transmission ports are high, and 10 gig [tunables] are high. So that's a product that today we're on allocation on, that we're trying to address. So, either way for us is fine. I do think you're right though as far as where the carriers are spending today. It's really more shifted to the Metro and I would say that the Metro is in the very, very early stages. There's been a few cities, less than a handful of cities that have been deployed and so, I think we're really in the early stages there.

And one last one from me, please. Six months ago when we talked about the development of the QSFP28 market, the optics inside the data center, there was a lot of arguments and debates in the industry about what price points would look like at the end of this year, at the end of 2016. And what's your current view on what the pricing environment looks like versus what you thought it might look like six months ago? Thank you.

I don't think it changed much. I think we haven't been lowering prices, just because of capacity limitations and quite frankly, someone at CFP2, or CFP4, at higher ASP is a better deal for us. So we haven't seen a lot of change in expectation with regard to pricing. At the same time, we've been developing next generation QSFP28s to address that market, should it continue to be under pressure in the future. So I think we'll be ready for it, if and when it comes. I do think though that as the transition happens in the early part of next year, there is going to be a worldwide shortage of QSFP28s, and I hope that the pricing is rational at that time.

Great, thank you for taking my questions.

Thanks, Simon.

Doug Clark, Goldman Sachs.

Great, thanks for taking my question. I want to come back to some of the comments that you made on ROADM capacity in particular; I want to make sure I understood it correctly, in that it sounds like you're actually pausing capacity expansion on ROADMs until you get a better handle on what China demand looks like. Is that indeed true, and off that assumption, does that mean ROADM should stay at these, while elevated levels, somewhat flat?

I think what I said was we're very close to the peak level we were five years ago and that we have committed to capital that's coming online and came online last quarter coming online this quarter. But that I think that we're satisfied until we see either signals that instead of two cities in a month there's going to be five cities in a month in the future. So, and then the China, with the incremental capacity that we need to pull the trigger on. But at the same time, we're working on productivity improvements, yield improvements to be able to get more out of the capital that we have online today. So I would expect that a 10% productivity improvement over the next six months without capital adds, which is common as a result of continuing down the learning curve.

Got it. Okay. Yes that make sense, that's helpful as well. Looking at the December quarter guide as well, in turn of operating margins, the midpoint is kind of flat to up sequentially on higher revenues, can you talk a little bit about the delta between gross margins expectations for next quarter? And you also have talked about a few different areas of OpEx investment, it's remained fairly contained in the past three quarters. What levels do think we are going to get to in terms of either absolute dollar or intensity here?

Hi Doug, this is Aaron. So in terms of the Q1 results, we did 12.7% operating margin. OpEx was roughly 21.5%, we did see some good operating leverage. As we go forward, we mentioned we're going to be continuing to invest in new projects. As mentioned, we have 3-D sensing as well as other programs inside of [Opcon], the lasers we are continuously investing in. So OpEx is going to tick up a little bit in the December quarter and we think gross margins will as well. In terms of the midpoint of our guide, over 13%, compared to where we've been the last couple quarters and even four, five quarters ago. We think it's a huge improvement to where we've been. In terms of the longer-term model, we don't guide long-term. But we don't believe we are at the end of the stake here in terms of operating margins by any stretch of imagination. We're still targeting 14% to 15% operating margins as we go out six to eight quarters.

Okay. That's helpful -- actually one additional follow-up, if I can. There have been a number of mixed data points just on hyperscale data center trends, in particular, from the ecosystem. It sounds like you're not necessarily seeing that, given some customer diversification and underlying demands for either 40 gig or 100 gig, is that a fair characterization that you're not seeing downward pressure or budget freezes?

I think, if you look historically, we've had very little exposure at 40 gig in the hyperscale data centers and most of our 40 gig Datacom stuff is going to our NEM customers and client-side components, or going into NEMs that didn't sell into enterprises. So I think from that perspective, our exposure to hyperscale has been very limited over the last year. So everything, as we transition to the 100 gig inside the data center is incremental to us, it doesn't cannibalize from prior products. So, I think as I said earlier, I think that the 100 gig, the transition has flipped from what we thought was going to be now into the first half of next year and everything from that perspective would be incremental to our available market. And, I think we're positioned pretty well. I do think there has been a pause and whether that's because of the Tomahawk chip or budget freezes or what have you, it's not clear to me. But I would say that every expectation I have is that the first half next year is when the transition really happens in a meaningful way.

Great. Thanks very much.

Thanks, Doug.

Rod Hall, JPMorgan.

Hi guys, thanks for taking the question. I guess I just wanted to start on telecom, the total telecom revenue number, it looks like is up about $21 million, and your ROADM number on your 17% growth, I guess up about $9 million. So at least $12 million of increase from non-ROADM business and I just wondered, is that all mostly metro increasing? Can you just give us some color within that non-ROADM increase and what's going on there? I also wanted to talk about the -- whenever this Datacom ramp, the QSFP28 happens, I'd be curious to know if you'd handicapped it, Alan, more in Q1 or more in Q2. Which of those is two is more likely in your mind for a significant ramp? But beyond that, do you think there's sustainability in that demand or do you think we'll see a big pulse of demand and then it fall off again? Curious what you think there.

And then lastly, in 3-D sensing are people going around saying there's a (inaudible) there's a lot of competition for that? And that the margins therefore would be unsustainable, could you just comment on that? I assume you disagree with that. But why do you disagree, is it difficult to make these VCSELs, can some of the other competitors not make the same quality product, et cetera? Thanks.

Okay, thanks, Rod. Let me take a shot at the non-ROADM telecon growth last quarter. I would say we did see strength in the 100G components, both modulators and tunable lasers. And we saw a rebound in our submarine revenue in the quarter. I'd say those are probably the two major drivers outside of ROADMs. Did I miss anything here?

That's basically it.

As far as QSFP28 ramp timing. I would say probably count on second quarter of calendar 2017, but that we would expect some initial ramp up in the first quarter to the QSFP28. I would say, but it's probably sustainable. When we were on the front end of the 40 gig transition in hyperscale, where we had exposure to a large hyperscale customer, and it's in our form 10, we saw that business sustain for a year plus. And the only reason it didn't sustain longer than that was we were relying on an outside source for our optical sub-assemblies. And the 100G space we are all 100% vertically integrated, we think we'll have a competitive advantage from a cost standpoint, we would expect that to go on for multiple years. Until the 400 gig or 200 gig transition takes place.

And last question on the competition on 3-D sensing, we have competition in everything that we do. I think our advantage is that we've been in the 3-D sensing business for eight or nine years, we understand the consumer side of the market and we understand high-volume manufacturing for that space. And, we have a track record of extremely high reliability of those products and data to back that up. So, I think that gives us a competitive advantage from the other guys who may claim that they have a lot of capabilities in VCSELs as well as edge-emitters.

I just wanted -- on your answer in the first question, Alan, to come back to that. With regard to Metro, has anything changed in terms of your thinking on the acceleration of the deployment there? And can you kind of just say, it's only a couple cities down so [we understand it well]. But where do we see the real ramp in this to multiple cities accelerating? Do we see it that Q1, do we see it late this quarter? What do think is happening on timing there?

I'd say that I've had expectations probably that it would have been even more aggressively deployed than what we're seeing both from the second half of calendar 2016 as well as what we're being told for the first half of 2017. But that I think is a result of really stretching out the deployment, if you recall, last couple of calls, we've been saying maybe a two and a half to three year deployment, I think it's more probably like a 4 plus year deployment. And I think that, that's a good thing for us, by the way, so we don't have to continue to spend so much capital to meet the ramp of the North America Metro and China combined. So I think that's not a bad thing for us. But I'd say it's probably slower than what we had hoped for and what we had expected.

Great. Okay, thank you.

Thanks, Rod.

Patrick Newton, Stifel.

Alan and Aaron, thank you for taking my questions. I guess on the electrical component issue, was that across CFP2-4 and QSFP28 product families? And then given the full capacity resumption in the November timeframe, can you help us understand what amount of revenue is left on the table relative to the $10 million you cited for the September quarter?

Yes, so it was on the CFP2, CFP4, and one of our QSFP28 versions. Our silicon photonic version didn't use this component but that didn't have an issue on our PSM4. I would say, we are ramping today, we're very happy with the speed and scale of which we got back into volume production at our contract manufacturer, and the speed and scale at which the supplier who had the problem has been able to fix the problem and ramp up. I think we underutilized, probably, the first three weeks of this quarter but I would say, that probably by next week we'll be in full scale utilization of our capacity. So to compare that 10 million miss from last quarter, it's probably a 5 million miss from our full utilization of capacities this quarter. But, we continue to work on productivity improvements and yield improvements to lessen that over time.

And then, how big was the 100G business in Datacom in the September quarter, and then what percentage of ROADMs was TrueFlex?

100G Datacom was roughly $23 million.

It should of been $33 million.

It should of been $33 million, it was $10 million light. TrueFlex would've been about 80% of the total ROADM number.

And last one for me on the laser business and the 15% sequential downtick you're forecasting in December, can you help us understand the mix between your fiber business and non-fiber business?

I think our expectation is that both go down.

Relatively, similarly fast?

I would say so, yes.

Great. Thanks for taking my questions, good luck.

Thanks, Patrick.

Meta Marshall, Morgan Stanley.

Great, thank you. Back to the downtick in laser demand, I know you guys mentioned that it was due to the materials processing market being down. Realizing that you don't guide more than one quarter out, but is that something that you think could be a one quarter disruption just as your own budgets are tight or is it something you feel like could continue multiple quarters? And second, on the back consolidation, is the timing of that still second-half 2017, or due to capacity constraints and just overall attention focus, will you need to move that to a little bit later? Thanks.

Thanks, Meta. In terms of the laser demand, we do see an impact here near-term in Q2, our laser business has been relatively lumpy, but we don't believe that it will be at this range over time. I think over the next couple of quarters after the December quarter, it should stroke it back to the level to where we were before. Like we had mentioned, there's customer projects and product transition timing and things like that are also impacting it, other than just the seasonality.

Yes, taking just to add on top of that, if you saw our announcement earlier this week, we announced a 3 kW and 9 kW fiber laser engine. Those products go into production in Q1 and I think that will drive incremental pick up in revenue for our fiber laser business.

Second question, in terms of the SaaS consolidation, we had mentioned in the past that the middle of first half of the year we should be consolidating and so we're still on track for that. So by the second half of the calendar 2017, we should see accretion into gross margin of roughly 72 to 100 basis points.

Great. Thank you, guys.

Richard Shannon, Craig-Hallum.

Hi, guys. Thanks for taking my questions as well. Maybe a question on 100 gig Datacom. You referenced the past questions about the delay of the pickup on that business relative to your expectations from a quarter ago, I'm talking about Tomahawks Switch delays and perhaps other spending pushouts or whatever. Alan, I'm curious whether you're seeing any discussion on the market about whether 100 gig NRZ is really the optical speed platform to be standardizing on, or could we see other ones out there like a [Phan 4] based 200 gig or something else and could that be part of the reason why there's maybe a pushout on the 100 gig?

Yes, I don't think that's the reason for it. I don't think there's a availability of 200 gig Pham 4 or the 400 gig Phan 4 for quite some time. Vince, do you want to add to that?

Yes I think, what we're seeing today in terms of delay had nothing to do with something else that's better coming along. It's more that one, the industry is sold out heavily on 100 gig optics already and then obviously as people have been asking on the call, there may be other challenges in the 100 gig ecosystem with regard to switching silicon or others parts that our data center customers need to pull their entire network. So I think it's that coming together of all of those pieces now has shifted out in time, not competition coming from 200 gig or 400 gig in the future.

Okay. I appreciate that perspective. Follow up question for me on the topic of 3-D sensing. You've characterized your opportunity as not just the mobile space, but also in other areas like automotive. Curious whether across the gamut of these applications, what kind of laser technologies are being contemplated. It seems like at least with mobile that's mostly VCSEL. Curious whether these other applications might contemplate other use as well or more focused on VCSELs there?

I'd say it's a combination of both VCSELs and edge-emitters. Most of our volume to date has been edge-emitters. But as we look forward to automobiles, there's going to be many, many sensors in any automobile and some may be VCSEL based, some may be edge-emitter based, depending on what the application is. And as I said, if you look around the computers that we are in today, those are edge-emitters, but lost of interest in VCSEL based 3-D sensing. So I think there's a market for both, depending on the application, the distance that the 3-D sensing needs to be able to detect as well as the power consumption and things like that are going into the decision. But it's really by application, the customer and we decide the best technology for the application.

Okay. And Alan, does Lumentum's differentiation between what type of laser you're offering change materially? Do you feel like it's very strong in whatever laser technology you are supplying?

I think we have strength in both. We've been in the VCSEL business for a long time, we've been in the edge-emitter business for a long time. And just for the fact, when we show potential new customers the field reliability and the testing that we've done on our 3-D sensing -- really as a result of the same team that's working on our submarine products that haven't worked for 20 years at the bottom of the ocean -- these guys are super smart and know how to test and design a technology and a product to meet the needs of consumer electronics or automobile industry or submarine cables. So I think we have a strong competitive advantage because of the history of both 3-D sensing and submarine pumps.

That's great perspective, thanks for that, Alan. That's all for me, guys. Thank you.

Thank you. There's no more questions in queue at this time. I like to turn the call back to Mr. Lowe for any closing remarks.

Thank you, Vince. I want to thank our customers for their business and partnership. I also want to thank our employees for all their hard work in growing our business and putting us into an excellent position. We continue to see strong demand from our customers and I believe we are in 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 are regularly updated. This concludes our call for today, would like to thank everyone for attending and we look forward to talking with you again in another three months. Thank you.