Q1 2020 Earnings Call

As a reminder, today's call is being recorded for replay purposes through November seven 2019.

I'd now like to turn the conference over to Mr., Jim Fanucchi, Oh Darrow associates, Mr for New keep please go ahead.

Thank you Adam welcome everyone to Lumentums first quarter fiscal 2020 earnings call. This is Jim Fanucchi from Darrow associates, assisting lumentum with its investor relations joining the call today from the company's management team, we have Alan Lowe, President and Chief Executive Officer Watch It all Lee Chief Financial Officer, and Chris coal.

Britain senior Vice President of strategy and corporate development.

Today's call will include forward looking statements, including statements regarding the markets in which we operate including potential market sizes trends and expectations for products and technology, including product development and projected new product releases purchasing trends and demand for our products, our expected financial performance, including our guidance expenses.

The position in the market as well as statements regarding our acquisition of Oclaro. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.

Amend some encourages you to review our most recent filings with the FCC, particularly the risk factors described in our filings with the Securities Exchange Commission, including the company's quarterly report on Form 10-Q for the fiscal quarter ended September the 28, the 2019 to be filed with the Securities and Exchange Commission later today and Lumentums.

10-K for fiscal year 2019 ended on June 29. The forward looking statements provided during this call are based on momentum is it 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 result.

It's an projections discussed on this call or non-GAAP non-GAAP financials should not be considered as a substitute for or superior to financials prepared in accordance with gap Lumentums press release with the first quarter fiscal 2020 results is available on its website at Triple W. Lumentum Dot com under the investors section.

And and includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP results. Lumentums website also contains our latest SEC filings and supplementary slides relating to todays earnings release and the company encourages you to review. These documents in addition, a rig.

Boarding of today's call will be available by 11, 30 am Pacific time today on our website.

Now I will turn the call over to Alan for his comments in first quarter market in product highlights Alan.

Thank you Jim good morning, everyone.

Our strong first quarter performance underscores our continued progress toward our long term strategic and financial goals.

A revenue mix richer in new and more innovative products increased scale and acquisition synergies all helped drive sequential and year on year improvements in gross margin and operating margin.

In particular improvements in telecom and Datacom margins helped first quarter non-GAAP gross margins expand significantly to more than 45% for the first time ever.

We believe we have some sustainable technology and market leadership positions across the markets we serve.

These have been obtained through successful investments in R&D over many years and more recently enhanced by M&A.

We have irreplaceable experience and learnings developing and ramping new and innovative products and in some cases years ahead of our competitors.

We continue to invest strongly in R&D to extend our leadership positions.

Our increased scale, resulting from organic growth share gains and the Oclaro acquisition allows us to invest more in new technologies and products.

For example, our current investment in R&D is more than 30% higher than before the Oclaro acquisition, despite having reduced the number of combined product lines.

This higher investment level helps us accelerate the time to market on key customer programs, including those in new longer timeline opportunities such as Threed sensing and light are for the automotive market.

Now for further details on the first quarter performance.

Revenue increased 11% sequentially and 27% year on year.

Three D sensing with the primary driver force of sequential growth and contributed significantly to year on year growth.

Our industrial and consumer product lines, which includes three D sensing, we're up 92% sequentially and 26% relative to the prior year.

Year on year growth was driven by winning.

Strong share in a larger market as customers are incorporating threed sensing in a higher percentage of their product offerings compared to last year.

During the first quarter, we saw multiple customers launch new products incorporating.

Front and world facing Threed sensing capabilities.

These product introductions demonstrate increasing appeal of Threed sensing for biometric authentication computational photography, and augmented and virtual reality.

We have shipped more than half a billion threed sensing lasers to date.

This is an amazing accomplishment and our experience is a valuable advantage that is difficult for our competitors to replicate.

Customers around the world no. They can count on our proven an unrivaled reliability and volume capability.

Our R&D teams are very busy working with customers on their future generations of Threed sensing needs.

We expect that customers over the next 12 months, we'll incorporate additional threed sensing capabilities in their products, which should result in significant growth in our addressable market.

Related to Threed sensing since our last call. We have provided additional samples photonic devices for the automotive market, including laser assemblies for high performance light our applications.

While significant revenue is several years away from many of these applications, we're very optimistic about both the market opportunity and our ability to win customers with our unique capabilities.

Looking to the second quarter, our guidance contemplates threed sensing declining more than 20% sequentially, which is larger than the seasonal declines we experienced last year due to this years earlier ramp.

Turning to our telecom and Datacom product line Datacom product lines.

Transceiver customers, who purchase our high performance laser chips serve both the telecom and Datacom markets.

Because of this starting with the first quarter in our commentary on this call our earnings slides and in our 10-Q, we're now combining our telecom and Datacom product lines.

In the first quarter Telecom and Datacom revenue was down 8% sequentially, but was up 40% from the prior year.

More than half the sequential decline was due to the discontinued low margin product lines. We've previously discussed.

The remainder of the sequential decline was primarily due to lower shipments of non ROADM products to walk away and the expected decline in submarine revenue, we highlighted on our prior call.

Sales of roads were flat sequentially as on the net supply and demand are an equilibrium for the time between.

With that said, we remain constrained on many of our highest in ROADM products.

Revenue from telecom and Datacom products that are being discontinued totaled $19 million in the first quarter.

We expect this revenue to effectively decline to zero over the next two quarters with the majority of the remaining decline occurring in our third fiscal quarter.

Excluding these discontinued product lines telecom transmission revenue was up nicely on a sequential basis and demand is strong.

First quarter revenue was impacted by our ability to increase output on coherent modules to meet customer demand.

We have previously highlighted that strength in telecom transport is often a leading indicator of future strength in demand for transmission products.

We're now seeing an increase in demand for telecom transmission product after a lengthy period of telecom transport strength.

Sales of chips to transceiver customers grew 13% sequentially to a new record level.

We have strong engagement from new and existing customers for chips, including for Fiveg wireless network applications.

Based on the continued strong growth expected based on the continued strong growth expected in global network and data center traffic and optical infrastructure needed to support Fiveg wireless networks, we believe the market for our telecom and Datacom products should be strong on a multi year basis.

We are well positioned with our industry, leading products and deep customer relationships.

We believe from global bandwidth expansion, regardless of who.

Builds or supplies, we benefit from global bandwidth expansion, regardless of who bills or supplies networks.

Our next generation products are critical to our global customer base and exclude.

Hi performance DML email and fix so products, enabling high speed optical transceivers, including for energy and above and next generation wireless front haul and access solutions.

And by in and high Port Count Twin Roadms.

A range of high performance DCIO transmission modules and underlying highly integrated components.

And finally.

Hi, Bod rate indium phosphide components, including those for 800 gigabit transmission.

Look into the second quarter, we expect telecom and Datacom revenue will be up sequentially, driven primarily primarily by growth in telecom transmission and transceiver chip sales.

Now onto lasers.

First quarter laser demand softened more than projected due to elevated customer inventory levels, resulting in revenue dipping to $33.8 million.

Looking to the second quarter, we expect lasers to rebound to the mid to low.

$40 million level.

Over the long run because of our investments in unique new product and technologies. We believe we have good opportunities for growth driven by new laser product introductions. In addition to market growth.

Our commercial lasers business is important to our long term strategy.

It provides us with significant addressable market to grow into and provides us with a level of customer and market diversification.

Throughout my remarks, I'd highlight of the significant progress we've made toward our strategic and financial goals.

Over the past several years, we have made significant investments in new products markets design wins and M&A.

We believe these investments position us well for the future.

At momentum, we're releasing the power of light to create a bite brighter future and is a very exciting time for all of our stakeholders.

I would especially like to thank our employees for their hard work that has put us in such a great position.

I'll now hand, it over to watch it.

Thank you Alan good morning, everyone Im pleased to be discussing our strong first quarter was.

Net revenue for the first quarter was 449.9 million, which was up 11% sequentially and 27% year on year GAAP gross margin for the first quarter was 37.3% GAAP operating margin was 13.3% and GAAP diluted net income per share.

61 cents.

Again GAAP results include the impact of restructuring write downs amortization of intangibles and other charges related to the acquisition and our actions to attain acquisition synergies.

First quarter non-GAAP gross margin was 45.8%, which was up 690 basis points sequentially and 550 basis points year on year.

As Alan noted the strong year on year gross margin improvement was helped by improvements in telecom and Datacom margins as well as acquisition synergies.

non-GAAP operating margin for the first quarter was 27.3%, which was up 830 basis points sequentially and 340 basis points year on year, driven by higher gross margins.

non-GAAP operating expenses totaled 83.3 million or 18.5% of revenue SGN a expense was 37 million R&D expense was $46.3 million.

non-GAAP net income was $111.4 million for the fourth quarter and includes 2.6 million of net interest expense and tax expense of $8.7 million non-GAAP diluted net income per share was $1.44 based on a fully diluted share count of $77.6 million.

We ended the quarter with cash and short term investments of 831 million, an increase of $62 million relative to the prior quarter.

This week, we made a voluntary 150 million dollar principal repayment under our term loan B facility. The impact of this prepayment will be an improvement in our other income of approximately $4 million or five cents at the EPS level on an annualized basis.

Turning to segment and product line details first quarter optical communications segment revenue at 416.1 million increased 17% sequentially within our optical communications segment Telecom and Datacom revenue at 248.1 million was down 8% sequentially.

Industrial and consumer revenue at 168 million was up 92% sequentially due to higher Threed sensing revenues.

Optical communications segment gross margin at 46.1% increased 780 basis points sequentially and 580 basis points year on year.

Our laser segment revenue at $33.8 million decreased 29% sequentially first quarter Laser's gross margin was 42% a decrease of 150 basis points due to lower revenue.

Now onto our guidance for the second quarter. The projections. We are providing today are on non-GAAP basis and are based on our assumptions as of today. We project net revenue for the second quarter will be in the range of 445 million to $460 million. This revenue projection includes.

Those telecom and Datacom, increasing sequentially, primarily driven by telecom transmission and chip sales to transceiver customers.

Industrial and consumer declining significantly due to a greater than 20% expected seasonal decline in threed sensing demand and commercial lasers, increasing sequentially as customer inventory levels are more normalized.

We project second quarter operating margin to be in the range of 24% to 26% and diluted net income per share to be in the range of $1.20 to $1.35.

These projections incorporate an approximate share count of 78 million.

With that I'll turn the call back to Jim to start the Q and a session Jim.

Thank you Wajid before turning the call over to the operator to start the question and answer session I would like to ask everyone to please keep to one question and one follow up this should help us get to everyone. Before the end time of this call operator, let's now begin the question and answer session.

Yes, Sir and once again, ladies and gentlemen, if you would like to ask a question that is star then the number one.

And your first question comes from lineup Rod Hall with Goldman Sachs.

Yes, hi, guys. Thanks for taking the question.

So my I guess my opening question is with regard to the telecom demand you had said that outside of the discontinued products you've seen good demand growth could you elaborate on what type of demand there you've seen I know you're talking about transmission, but.

Can you give us any more color regionally or.

Project wise on that that might help us understand what's going on out there the telecom world since Capex generally has been pretty weak.

Yes, Rob Thanks for the question this is Alan.

I think as you said the telecom transmission demands very strong.

David datacenter interconnect very strong.

10 gig tunable is very strong.

As well.

And I think it's pretty broad base globally.

It's hard to tell where that product ends up but I think datacenter interconnect is a key driver for a lot of that but.

I think metro Buildouts as Weve deployed all those telecom transport nodes. The metro Buildouts are filling out those those transmission lines with coherent ports that drives both coherent HCM modules as well as our components.

Okay, great. Thanks, Alan and then my follow up is with regards to handsets terminals I just wanted to I know that you added commented that non rotem shipments to walk away were.

Were down on that but I'm wondering if you could talk a little bit about the handset shipments there and whats how the dynamics are going I noted they they lost share in Europe . It then they've been refocusing on China, and then just more broadly what's going on with Android in terms of three D. are you seeing others.

Coming into fill that void that.

Exists now because away in Europe , and so on with Threed models of their own.

Yes, our our comment regarding non ROADM revenue being down was specific to telecom and datacom.

Our.

Threed sensing with law way was.

It was actually up by believe slightly and we're seeing broad adoption and very active design ins for next generation of Android.

Handsets using threed sensing so we're we're pretty optimistic with the outlook on on Android as a whole.

And you guys does share loss that you were I think anticipating in December on three d. It doesn't seem like that's materializing in this guidance, but just double checking.

Yeah, we're very comfortable with our share both in the short term as well as in the long term we've done a good job, making sure that we.

Get our customers what they need when they need it with the reliability they expect.

Number one and the number too a lot of new products are going to get in introduced throughout next year, and we're extremely well positioned with our customers design teams to make sure we're leading the way there so I think.

Share is.

Sure as a good thing for us right now.

And then okay, great. Thank you our.

Thanks, Ron.

And your next question comes from the line of Alex Henderson with Needham.

Thank you very much so I was hoping to talk a little bit about.

What's your expectations are as we go into the new year in terms of pricing given you normally see 10% to 15% price reductions and.

In the first quarter, but it seems like the constraints around programs and pumps may result in that being less pressure point this year than the traditionally to can you give us any color on that.

Yes, I mean, I think that has been at least from my perspective, some transition with respect to having these annual biddings in some cases that we are now.

Working so closely with our customers that.

There is it not abnormal to have a multiyear agreement with our customers that have price reductions over time to make sure that.

We're working with them to ensure that they get what they need.

I think from a standpoint of expectations for the March quarter, having a huge reduction in the area of 10% to 15% on telecom and Datacom I don't think that's the new normal anymore I do think that theres going to be continued reductions, but I'd say on the low end of the scale from from the normal.

Would be my expectations that we can follow up about one more question on that the shifted transmission seems a little bit of a surprise to me I would've thought you'd seen more on the road them and pump side driving the upside to the business.

Sounds like you're.

Former oclaro.

Gcs ratio products are doing quite well can can you just give us a little bit more granularity around those tickets are harder for us to track.

Yes, as we just can't make enough.

We have it.

As we said in the past Alex transport is a leading indicator of transmission strength and we're seeing that in spades right. Now in fact, we saw last quarter, we weren't able to fill our aimco demand and a little bit to our surprise, we weren't able to fill our tunable 10 gig supply demand so.

We're continuing to see a broad range of demand for for Aimco.

And we think Theres, a long tail in Asia as well as demand for our DCIO products as we start to introduce those into the marketplace.

Okay. So you're starting to see that the impact of rolling out a lot of Rotem says driving an acceleration in global demand for transport is that would what I'm hearing for transmission, yes, absolutely perfect. Thank you very much.

Thanks.

And your next question comes from line of Samik Chatterjee with JP Morgan.

Hi, good morning, Thanks for taking my question.

Supply and demand isn't button so.

Ramp up and then you mentioned kind of differentiated products. So just wondering if you can give us the breakdown of what portion of your order portfolio do you think is differentiated looks.

Guys higher growth versus maybe the remaining portion of that.

Yes, sure I think.

As he said in the prepared remarks, our supply demand on road bumps as reached more of an equilibrium as a whole I would say that we're still constrained on the very high end in some.

Specialty products where were.

Autumn wrote on demand is still robust I'd say that were our our expectations are that that it's probably flat to down slightly in the December quarter, but.

That that's more than offset by.

Strong strong demand in the telecom transmission, including a Ceos and 10 gig tunables as well as DCIO season in 2020.

And just one data com, you're guiding to kind of sequential improvement there as well I'm just wondering if chip sales so ramping faster than you will you expected because I think that piece on not body expectation was that maybe one more quarter of kind of sequential declines before you start chip seems kind of a whole would have been the decline some be off.

So can you just help me with us.

Yes, I just just for clarity.

In the first quarter, we had $19 million of what we call discontinued products, which are our lithium niobate modulators and our Datacom Transceivers, we expect that to go to zero over the next couple of quarters again with the bulk of that reduction coming in the March quarter.

MLP emails and Vixel technology and products. So I think we're going to continue to see strength in the chip sales through.

2020, especially as the Fiveg rollouts.

Become more meaningful next year.

As a reminder, ladies and gentlemen, please limit yourself to one question and one follow up question.

Hey, guys. This is Tom O'malley on for Blayne Curtis I just wanted to ask quickly on the margins you guys have clearly undergo the turns transition here to more high quality business and you saw substantial increase here in the December the September quarter can you talk about how you see that going forward is this a sustainable level for margins and.

Longer term is this kind of the right area to think about you guys from a margin profile.

Yes, hi, a sell Wajid I'll take that question. So on the margins, you've probably seen that our margins have improved.

Quite well both year on year, and and sequentially as well we talked at though at our last conference call about moving our gross margins levels up to the upper portion of 40% to 45% and we felt that it was both our product differentiation as well as the synergy work that we've had with the acquisition.

Flowing through in executing and improving our gross margins. So generally we have better gross margins in the back half of the calendar year than in the first half of the calendar year, primarily because of Threed sensing by year on year. So Q2 over Q2 in Q3 over Q3.

Great and then my follow up.

We actually don't give that out in the 10-Q, we only a name them, but we don't actually give the percentages.

Thanks.

And your next question comes from the line of John Mcgeady with Stifel.

Thanks, very much Alan I wanted to go back to the comment that you made about sort of transport leading transmission sales and I'm curious as you as we're looking out over the next several quarters or year or so do you actually see transport starting to lag in transmission growing faster and how do we think about that maybe in the overall mix of the business and doesn't have a margin impact.

Yes. Good question I don't have a crystal ball, but I'd say.

Returned from what May be a flat flat period here today.

So were our expectations are as we continue to introduce new products in wrote them that those will be adopted by our network equipment manufacturer partners as well as the service providers.

So I think well.

There may be a flat period today, our expectations are rotem growth continues through 2020, but at the same time transmission now is building out.

Those this transmission lines that the transport networks of have deployed.

And then maybe just as a follow up on the on the chip business. It seemed like it grew a little bit sooner than you were expecting or that demand is come in a little bit more quickly I'm curious if you can just talk a little bit about how much of that is maybe serving existing customers that you used to be sort of a transceiver provider to we're selling.

Versus maybe some new customers that are coming in now and buying chips given that you don't compete with them anymore.

Yes, I'd say, it's a mix of both I'd say, we're getting.

We're getting sales from customers frankly, we didn't even know existed.

But I'd say, it's a broad range of customer interaction.

In a broadening of our customer base in the chip sales that that is pretty excited.

Thank you.

Thanks, John .

And your next question comes from line of Mehta, Marshall with Morgan Stanley .

Great. Thanks, guys.

A couple of questions just what on the commercial laser business and kind of expecting that business to bounce back is that better industrial conditions that your.

Yeah I'll take the lasers question I I don't think that we're seeing the light at the end of the tunnel with respect to industrial.

Demand I think we're seeing that last quarter, there was a significant inventory correction and not just one customer, but several customers that had the laser shipments being significantly down actually more than we had expected so.

I'd say that it was just an inventory correction and now we're starting to ship more in line with our customers shipments out to their customers and so I think thats. That's the only thing we're seeing on lasers.

Yes, I'll take a lot of late question so.

I think the best way to to look at our sales Allawi is.

Continuing on.

Over time.

But we'd also highlight that they were a significant datacom customer or transceivers.

And with the exit of that business or or ramp down at that business.

That is also causing a long way revenues to decline.

Got it. Thank you that's helpful.

And your next question comes from the line of Johnson's second Tenish, whether you'd be us.

Can you talk broadly to China demand beyond wall way of what you're seeing from a tender activity perspective, and maybe how other customers are reacting.

Yeah, I think there's a tremendous amount of activity in China on the tenders side.

I do think anecdotally theres a lot of deployments going on it as well so we're seeing a broad.

Base of demand from not just walk away, but from from other customers.

Both in telecom and Datacom.

So I think it's broad based and its.

Thank you and as a follow up where are you with the synergies.

So I saw its wajid here so at our last conference call. We have said that we were targeting a new synergy level of approximately $100 million as we had already achieved the original target of 60 million. We continue to make progress towards a 100 million dollar synergy target if you remember.

We had said that it would take four or five quarters to get there and we thought that many of the synergies would come in during the tail end.

Of that time period that we had outlined and it was part of the reason why we felt confident that our average gross margins on an annual basis would move to the upper half before due to 45% some of which we were already seeing the benefit of in this quarter as well as in our guide for next quarter and so we're continue to track to that.

And your next question comes from the line of Simon Leopold with Raymond James.

Two I'd like to ask one is just if maybe we could double click a little bit more on on the telco Datacom trends. This we go from December into March.

I think one of the things I suspect, maybe helping December and I want to clarify is maybe some some purchases related to the end of life that maybe that that is part of the factor boosting December and leading to a more than seasonal decline in March if you could help with with that aspect and then I've got a follow on thanks.

Yeah, let me try to answer that and Chris can correct me.

I would say that again $19 million of discontinued sales in the September quarter. That's it's going to go down in the December quarter and then.

Go down even further in the March quarter.

I'd say that we're seeing strength, primarily in the telecom transmission side of that as well as the Datacom chips and so we went from one record last quarter data conscious were expecting new records this quarter and I would've expected in the March quarter, we're going to see continued growth on on Datacom chips.

Yeah, I think that delay to think about it is.

The datacom.

Transceivers are burning off somewhat linearly, but we asked in telecom products that are a little bit more of a I wouldn't say are helping necessarily the end of life products in December but they drop off much more precipitously.

In the March quarter, I think also looking to the March quarter I know Alex asked the question about alias piece.

And ASP declines I'd also add there is another driver of seasonality in the March quarter.

Generally folks are our manufacturing in Asia, and and many in China at our customer level and therefore.

Their output in that quarter, Ken can decline, so I think even in a more moderated ASP environment, we are still going to see seasonality on in the telecom Datacom world in the March quarters, driven by holidays.

In the in the March quarter in Asia.

Great and then as my follow up but wanted to see if you could talk a little bit more about your expectations for the Threed sensing market in calendar 20, specifically.

Yes, I mean, I need to maybe a little easier for me to think in our fiscal year saw thinking fiscal 21 on that but certainly on we think that theres going to be at a reasonably.

On.

An inflection point in the market as we go from fiscal 20 to 21, which is.

A combination of everything you said right, we've got world facing coming in in a much more substantive manner.

So that expands the dollar content addressable by by a in a phone as well as it may be a driver of customers transitioning from having no feeding sending to threed sensing to have that computational photography capability.

On top of that.

Certainly the expectation that fiveg could could start a broader spending cycle on it as certainly I know many of us sitting in the room here have a December 2017 phone and and here is that something grades coming in in 2020.

So I think there'll be some pent up demand that'll that'll drive.

Vertically integrated or as advanced in the three D sensing technology in house find the technology more accessible and so I think we start getting out into our fiscal 2001, where the market for threed sensing can start having a b or at the end of it.

Thank you very much.

And your next question comes from line of George Notter with Jefferies.

I guess, obviously the thing that really stood out here in the quarter was the gross margin upside and certainly I would imagine the mix of Threed sensing was a big piece to that but obviously other elements to you mentioned the synergy piecemeal clearone.

Certainly the Oh, yeah discontinuation of certain transceiver products, but can you walk through exactly where the upside surprise on gross margins came from the interesting if you could kind of piecemeal that out for us to some degree integrate thanks.

From some of the activities that we had we executed on our operations team executed better than we had expected on those synergies. So thats certainly how to benefit for us in the normal part of our our business outside of the acquisition. We did see some material cost benefits that were were better than expected and that helped us.

As well.

The continuation of some of the.

Better than we expected and so that did lead to some upside and moving forward. We mentioned earlier that we continue to expect to see gross margin improvements year over year. If you take a look at our Q2 guide it's not like it was just a onetime event and year over year. If you take a look at the midpoint of our operating margin guidance.

Points to higher gross margins versus last year and even into fiscal Q3 in Q4 as we take a look at some of the synergies that are both the flow through.

Got it and then just as it.

I when it's all going to delight that that you know that threed sensing as a percentage of the overall revenue was was not necessarily changed a whole lot year over year. So I think we had good well in holding margins on three D sensing, but it was really everything outside of Threed sensing that particularly.

In the telecom datacom space between synergies as well as.

The percentage of revenue from.

Newer and more differentiated products year over year.

Was was greatly improved.

And so there really is Canada.

Yeah, I, just you mentioned, yet again the supply demand equilibrium in general there obviously, that's a real change from the experience you guys you've seen over recent years any concerns about inventory correction.

I wrote them business or if theres, a buildup of inventory I do think.

You know in talking with our customers and there are new new metro tenders going on throughout the world and I think that theres going to be new Greenfield and transport networks. The deployed in the coming here, so I'm not I'm not concerned.

Whether or not in the December quarter is a down quarter for roadms or not I think long term.

Thanks very much.

I'm looking ahead to the March quarter for three D. Considering the.

Guidance for December , which I think is down more than seasonally normal and it seems like the unit picture is pretty good theres not a lot of inventory out there and your share position is pretty good so.

Wondering how we should model three d. for the March quarter, if it could be.

Not down as much as we would normally sick March would be down.

I think Mike it's a little early to be talking about March in on Threed sensing given how dynamic the threed sensing market.

Certainly as you know were we share your optimism around around units and a and how our customers are doing but with that said.

Got a long way to go through.

Through our December quarter, and see where customer demand lands and.

Based on.

History.

We know it's difficult to predict a threed sensing that far out.

In calendar 2021, so I think long term, it's a good situation.

Okay. Thanks for that and then my follow up I'm not sure. If somebody already asked this I don't think you want to answer it but I'm going to ask it seems important since this is the first quarter, you're combining telecom and Datacom to just if you did give a more precise breakout for what it was Q1 the mix of telecom Datacom.

Well as we've combined them I don't think we're going to.

The.

Exit of Datacom modules.

Yes, some of that was in telecom on the lithium niobate modulators, we talked about on prior calls so it's a mix of datacom modules and lithium niobate, but I'd say the other data point that we gave was that datacom chips were up 13% to record levels. So that's that's our future in Datacom and.

We're pretty bullish on the outlook of Datacom chips.

Alright, thanks, guys.

Yes, good morning, and another three D. Sensing question, so sounds like the competitive environment hasn't really changed that much I'm just curious, though when you go into new when a new slot are you willing mainly because if you kind of proven volume capabilities or are there specific technology.

Then just as well.

Yeah I'd say.

One is what you indicated.

Not just capacity, but the proven reliability of shipping a half a billion units with no field barriers is pretty firm phenomenal and not easily replicated by our competitors I say number two is our R&D team and their ability to meet our customer.

Patients in requirements and timing.

As we were working on products today that will we released in 2020 in 2000 2021 and 2022.

So I think our pipeline of new products is phenomenal and then third is the technology that we're able to provide to our customers as they continue to push the applications to do more with Threed sensing, we're enabling them to do that through the advancements in technology that we bring to market and that differentiates us.

Okay. That's helpful.

And then kind of as a follow up here.

What's your current view of the light our market what does that become a real meaningful opportunity.

I think in terms of deep being meaningful we're still looking out at least several years.

And in a wide range of customers that a wide range of levels on meaning we have.

Partnerships with folks, where we may be supplying laser chips or or or or low level packaged lasers, all the way up to selling a much more sophisticated.

Centralia coherence of light, our module or really leverage a lot of the photonic integrated circuit capabilities, we have as well as leverage our rotem switching technology for for beam scanning.

And so you know.

And you get designed in because the auto manufacturers have very long product development cycles than any sort of freeze or their their their product requirements and their supply days.

In the now timeframe, but revenue appears several years later.

Okay. Thank you.

Hi, good morning, and congrats on the the Great result.

Optical com side, when you look to be guiding December .

Kind of solid.

In product lines, and ER and flattish.

Demand I guess cross the rest of the the world.

So you're talking about telecom datacom right because in our optical correct is oh, sorry, Tds Telecom datacom, yeah. So we're expecting transmission to be very strong as we add more capacity that that's trying to keep up with the growth in demand.

For our coherent components coherent modules as well as as I said before 10 gig tunables.

We are seeing you know I would say that the September quarter was at a very low point for our submarine shipments were seeing that pick up a little bit more and that's a result of our transition out of RCM in China in to our own factory or customer took inventory to make sure. They had during that time.

Submarine and passive products, but I think the out as well as Datacom chips were going to continue to see datacom chip growth offsetting.

Some of this end of life product, we talked about yeah, I mean, I think as you know [laughter].

Try and does not take down into Datacom detailed but.

We do expect that that portion of the telecom and Datacom, we'll turn the quarter in terms of growth this quarter on meaning that the chip sales will overwhelm transceiver declines so that headwind that we had.

In prior quarters of all will now start to turn to a tailwind on on the Datacom side and I think on the telecom transmission side. Another point to add is we've had it leave a lot of design wins on our on our coherent modules and so and customers continue to say.

Alan market the system. So we've had customers that may be been pretty successful in some new customer opportunities that are also driving.

The tailwind we're seeing in transmission so it could be not just market growth, but some some unique situations, where we have some customers that have won some good business on that are using our products, where maybe you know that.

The prior versions that there are customers customers were using we're not using our products and that enables us to to get a strong growth.

And I Wonder is here I don't know how long that would take to translate into revenue.

But I wonder if you could discuss.

When you talk about coherent module demand.

To what extent.

That might be playing a factor.

In this stronger demand outlook, and what sort of opportunity.

That represents a for you guys throughout the balance of a fiscal 20 on the CFP two DCIO front.

Yeah, I'd say that we're certainly seeing a broad base of interest in our CFP two DCIO.

Over the last few months as a result of what you said I'd say, we will see a pickup in DCIO revenue in the December quarter, and then a real meaningful ramp up throughout calendar.

2020 years, we get qualified at our customers and ship more meaningful volume. So we're putting capacity today too in anticipation of that type of growth throughout 2020.

And I think what were some of the strength. We're seeing today is still hcl based and that gives us confidence that hcl has as perhaps longer legs than than than many think if you will and that there.

Customers are winning new business with with ERP systems that I think will extend or you know how long lease yield business will.

Remained strong for us and maybe just to add one thing in order to make it DCIO you have to be able to making a CEO and the components that go into any CEO and it is actually more complex and so I'd say that we have credibility in the DCIO market. We have components that our customers are designing into 400 gig and even higher data rates.

In the indium phosphide high bandwidth products and so I think from that perspective, our customers can count on us and and they are counting on this to be able to ramp up the DCIO modules to meet their demand.

And your next question comes from the line of can zinc when Rosenblatt securities.

Oh, Thanks for taking my question so.

We are facing a lot of capacity constrained outside the Golden pump laser and also you laser shopping Japan, So what kind of plan. The capex you're looking at for next year in order to increase the supply. Thanks.

Yeah, I mean, as he said today were not facing well, we're facing supply constraints on the high end wrote them pumps seems to be okay. As we've completely transitioned out of RCM in China, we had to add extra capacity last year to make that transition.

Once a smooth and seamless to our customers. So I don't think we have a whole lot of capex needs for a pump growth and we can produce a whole lot more pumps today than we could produce a year ago. A and then we are spending money in in our fab in Japan to grow that output as we've seen strong demand.

But I would I wouldn't say, it's anything abnormal to our historic Capex and I'd say that our calendar 20, Capex plans are probably.

Lower than our COVID-19, Capex plan, given we had to spend a bunch of money to make that transition from C. M in China to our own factory in Thailand, and so I think a lot of that heavy lifting is done.

Okay. Thanks.

In the past you probably gave the guidance for the Threed sensing business the revenue.

What kind of the do still provide deck, obviously its a.

It's not a.

Finally, there were provided guidance upfront sort of numerically on on three D. Sensing per se bubble. We did highlight in our prepared remarks was that sequentially, we expected a greater than 20% decline in in our three D sensing, but I think that's reasonably.

Explicit given we breakout our consumer industrial business.

And and I think it's common knowledge that the industrial pieces substantially less than the consumer piece. So.

Okay got it thanks.

That's all my questions. Thanks.

And your final question comes from line of Richard Shannon with Craig Hallum.

Great. Thanks for taking my questions are fitting me in here I guess I'll follow up on a couple of topics you've had some questions for.

For the December quarter, you talked about some strengthen the telecom part of your business and just want to make sure I caught correctly. That's it's largely from Cosan 10 gig tunables that they catch that correctly.

Oh, Yeah. Those are two main drivers, but I'd say that we're all are also seen coherent components demand increases we are supplying those components that are in our agios and TCOS to customers who are building their own.

TCOS or line cards for higher speed a coherent transmission.

Okay, and the and strengthen the call here it makes sense in the your desire to discuss the Hcl here. Thank you Tunables is interesting here, maybe if you could discuss where that demand is coming from bretts regional usage, and maybe talk a little bit understanding of why your score or you think you're seeing strength and will stand.

Yeah. So I think that this is that Theres a couple areas first it is certainly.

<unk> in a in a telecom network as you as you upgrade core of the network to higher speed, you know 100 gig and above.

The edge of the network also gets upgraded and and so using each of you DM technology at 10 gig using our consumables and we say tunable 10 gig. Its you know these are in very compact asset P. plus form factors side. So they're finding a lot of clickability at the edge network as well as we're seeing and I'm emerge.

Morning.

Opportunity as we look to.

Both the cable NSL in wireless markets, where they're also finding use for for 10 gig and and eventually or that the same 10 gig platform in a sense being turned up to 25 gig.

Okay, Great. This all the questions from me. Thank you.

Thank you very much.

Okay, and I'll now hand, it back over to Alan Lowe.

Great. Thank you Adam I'm just to close we want to update you that we regularly to discuss our business at Investor events. These events are listed on our website in the Investor Relations section and our regularly updated this concludes our call for today, we would like to thank everyone for attending and we look forward to talking with you again in another few months. Thank you.

And this concludes today's conference call. Thank you for your participation you may now disconnect.

[noise].