Q4 2019 Earnings Call
[noise] [noise] good day, everyone and welcome to the Lumentum fourth quarter and fiscal year 2019 financial results Conference call.
As a reminder, today's call is being recorded for replay purposes through August 15th 2019.
I would now like to turn the conference over to Mr., Jim Fanucchi of Darrow Associates Mr. for New Ji. Please go ahead.
Thank you operator, welcome to Lumentums fourth quarter and fiscal year 2019 earnings call. This is Jim Fanucchi firm Darrow associates, assisting momentum with its investor relations joining the call today from the Companys management, we have Alan Lowe, President and Chief Executive Officer, Wajid Ali Chief Financial Officer, and Chris Coldren Senior Vice President of business development. This call will include forward looking statements, including statements regarding the markets in which we operate including potential market sizes trends and expectations for products and technology, including product development and projected new product releases purchasing trends and demand for our products, our expected financial performance expenses and position in the market as well as statements regarding the recent acquisition of Oclaro. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. Lumentum encourages you to review our most recent filings with the SEC, 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 March 32019 filed with the FCC on May seven 2019, and Momentums 10-K for fiscal year 2019 that ended June 29, 2019, which the company expects to file within 60 days of the fiscal year end. The forward looking statements provided during this call are based on momentum a 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 discussed on this call our non-GAAP non-GAAP financials should not be considered as a substitute for or superior to financials prepared in accordance with GAAP Lumentums press release with fourth quarter and full year fiscal 2019 results is available on its website at triple W. Dot Lumentum dot com under the.
Investors section and includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP results. We'll then items website also has this latest SEC filings and supplementary slides relating to todays earnings release and the company encourages you to review. These a recording 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 fourth quarter marketed product highlights.
Thank you Jim good morning, everyone.
Before my comments on our business.
I will start with the Sad news, we communicated in a press release yesterday.
We recently learned that our board chairman Marty Kaplan passed away.
Marty in his role as chairman with a trusted and wise advisor.
But it was much more than that it was a friend.
Truly amazing human being.
He will be greatly missed.
On behalf of Lumentum, we send the Capline family, our most heartfelt condolences and sympathy.
I will now move on to my comments on the business end markets.
The fourth quarter was eventful to say the least but it capped off the fiscal year during which we made significant progress towards our long term strategic and financial goals.
During the past year, we believe we have added to or extended our market and technology leadership positions in telecom and Threed sensing.
We introduced many highly differentiated new products and one new design wins with market leading customers in all of our markets.
And our commercial lasers business.
Unique new products enabled us to grow revenue to new record levels in a down market.
The Oclaro acquisition has given us a first mover advantage.
In a transforming industry.
First we attained a leading leading position in telecom transmission based on fundamental indium phosphide photonic integrated circuit technology.
We believe this technology will be critical to our customers ability to scale to higher network bandwidth in the future, including 800 Gigabits per second and eventually higher speeds.
Second we re vectored, our datacom business to a significantly more profitable model that is based on a highly differentiated photonic chip capability.
We expanded our datacom market focus to include Fiveg wireless and other high volume applications.
And finally, we improved our business model by achieving cost synergies on a more accelerated timeline than originally estimated and are now increasing our annual synergy target to $100 million from our initial 60 million dollar target, which we have exceeded.
These additional savings will be attained over the next five quarters.
Over the past year, we have seen a trend toward further industry consolidation.
Several other M&A deals in our space have been announced today.
There are perhaps more to come as market participants recognized the need for scale.
Fiscal 19 revenue was at a new high exceeding $1.5 billion and was up 25% relative to the prior year.
For the first time full year operating margin expanded to more than 20%.
I believe these results and accomplishments both underscore the significant progress we have made toward our strategic goals during fiscal 19 and position us well for revenue growth and margin expansion in fiscal 2000 and beyond.
I am proud to lead the best team in the industry and one that customers continually to turn to first for the photonics technologies they need to win.
Before turning to more details on our results I'd like to provide an update on our business with walk away.
On May Twentyth, we.
We.
Indicated we had stopped shipping to walk away in response to their addition to the entity list and to become compliant with US Department of Commerce for requirements.
Subsequently, we completed a detailed analysis of the products, we supply to walk away and determined that certain products were not subject to export administration regulations.
We resumed shipments of these products late in the quarter after putting in place new business processes to ensure compliance with government requirements on an ongoing basis.
We intend to fully comply with us department of Commerce requirements.
Sales to walk away were down 25% sequentially in the fourth quarter as a result of these actions.
Looking to the first quarter, we expect sales to walk away to be flat to down sequentially.
As you can imagine the very dynamic nature of the current geopolitical situation adds to the challenges of projecting future what way revenues.
Now for details on the fourth quarter and full fiscal year performance.
Telecom revenue was up 65% in fiscal 19.
Within telecom transport revenue increased by nearly 50%.
In the fourth quarter Telecom revenue declined 6% sequentially due to lower shipments to walk away.
Partially offsetting the walkway decline was growth in other customers.
Despite the geopolitical disruption during the fourth quarter, we again achieved record ROADM revenue.
We were able to partially offset lost walkaway ROADM revenue in the quarter through sales to other customers. After we redirected manufacturing capacity to them late in the quarter.
Fourth quarter revenue from coherent transmission modules with up 10% sequentially with sales of both Hcl and DCIO products growing.
Looking to the first quarter, we expect telecom revenue will be flat to up sequentially.
Telecom customer demand outside of Wal way is strong.
However, this demand is for different mix of products and while way purchases from us and for which our supply chain had been driving material.
Challenges in obtaining supply of long lead time materials is currently the limitation.
Additionally, impacting telecom isn't expected temporary dip and our submarine business, which has historically been a lumpy project based business.
Looking further out based on our expected based on expected continued strong growth and global network bandwidth and data center traffic the needed optical infrastructure for Fiveg wireless we believe the telecom market should be strong on a multiyear basis.
We believe the strength, we have seen in telecom transport over the past year is a leading indicator of future strength and demand for transmission products.
We are well positioned to capitalize on these market trends with our industry, leading telecom transmission and transport products and deep customer relationships.
We benefit from global bandwidth expansion, regardless of who build or supplies the networks.
Our next generation products, including M. buy in and high Port Count Twin Roadms.
DCIO modules, including ZR and longer reach.
And high baud rate indium phosphide components, including those for 800 Gigabits per second are critical to our customers global our global customer base.
Turning to Datacom early in the fourth quarter, we closed the previously announced divestiture, our Japan based Datacom transceiver business.
This was a key milestone in our strategic pivot to focus exclusively on photonic chip sales in the Datacom market and exit the challenged Datacom transceiver business.
Since the announcement of this transaction, we have seen strong engagement from customers for Datacom photonic chips, including in Fiveg wireless applications.
This drove fourth quarter, Datacom chip sales up 11% sequentially to new record levels.
In many cases, new customer interest is from leading competitors, who previously would not purchase from us due to the competitive nature of the transceiver as competing in the transceiver business.
As a reminder, we are discontinuing all remaining datacom transceivers and certain low margin telecom product lines.
Revenue from revenue from these product lines totaled $31 million in the fourth quarter.
And should decline to zero over the next few quarters.
Turning to our industrial and consumer product lines, which includes Threed sensing.
Fourth quarter revenue was up 13%.
This growth.
This growth with larger than our prior guidance for both industrial diodes in Threed sensing lasers.
In the case of Threed sensing in the fourth quarter, we started ramping deliveries to customers.
To support customers product cycle expected to start this fall.
We expect unit growth to exceed price declines as Threed sensing is expected to be incorporated in a higher percentage of end customer models and supply chain inventory levels appear to be more normalized when compared to last year.
Taking into account the accelerated fourth quarter shipments and expectations around global smartphone volumes and our market share. We expect threed sensing revenue in the first half of fiscal 20 to be slightly up from the first half of fiscal 19.
We continue to make good progress on Threed sensing customers worldwide, including in world facing applications.
Favorable consumer and media reviews for initial world facing enabled smartphones has caused customers product roadmaps to more broadly incorporate threed sensing threed depth sensing for photography, and augmented and virtual reality applications.
Based on customer activity, we expect major smartphone manufacturers to introduce products with new world facing capabilities in calendar 2000.
This combined with increased customer demand for smart phones, driven by future Fiveg availability should drive a significant increase in threed sensing market in calendar 2021.
We are very well positioned for this growth up growing opportunity.
Customers around the world and know they can count on our proven an unrivaled reliability and volume capability.
We have shipped hundreds of millions of devices with unmatched performance quality and reliability and expect to exceed a half a billion cumulative devices shipped by the end of our first quarter.
This experience is a valuable advantage it is difficult for our competitors to replicate.
Turning to commercial lasers as highlighted earlier, new products enabled us to grow fiscal 19 lasers revenue to new record levels in a down market.
This growth was driven by a nearly 100% increase in fiber laser sales relative to the prior year.
In the fourth quarter, our commercial laser segment revenue was down 13% quarter on quarter as expected.
Our commercial lasers business is important to our long term strategy.
It provides us a significant addressable market to grow into while leveraging our core set of optical technologies and manufacturing capabilities.
Further it provides us a level of customer and end market diversification.
Looking to the first quarter, we expect lasers revenue to soften further as we enter the seasonally weaker fall time period.
However, based on customer request for quote activity. We believe the current commercial lasers market will return to growth in the new calendar year.
Over the long run because of our investments in unique new products and technologies. We believe we have good opportunity for growth driven by new product introductions. In addition to market growth.
Throughout my remarks, I've highlighted the significant progress we have made toward our strategic and financial financial goals during fiscal 19, and how we have positioned ourselves well for fiscal 2000 and beyond.
This combined with growth with the growth catalysts, we see in each of our major product lines makes it a very exciting time at lumentum for all stakeholders.
At Lumentum, we are releasing the power of light to create a brighter future.
With that said I will now turn the call over to watch it.
Thank you Alan.
Good morning, everyone before jumping into our fourth quarter results and our guidance for the fiscal first quarter of 20, I'd like to run down our full year fiscal 19 results.
Net revenue for fiscal 19 was $1.57 billion up 25% compared with fiscal 18 fiscal 19 optical communications segment revenue was up 29% driven by strong market demand for telecom products and the Oclaro acquisition.
Our laser segment revenue was up 4% compared to the prior year driven by strong fiber laser sales.
For the full year GAAP gross margin was 27.2% GAAP operating margin was negative 1.4% and GAAP diluted net loss per share was 54 cents.
These 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.
Full year fiscal 19, non-GAAP gross margin expanded 60 basis points to 39.5% driven by higher levels of higher margin products in our revenue mix as well as overall increase leverage over our fixed manufacturing costs.
non-GAAP operating margin expanded 80 basis points to 20.5% for the full year and non-GAAP net income increased more than 23% relative to the prior year, resulting in non-GAAP diluted net income per share of $4.25.
We ended the year with cash and short term investments of 769 million, an increase of 71 million relative to the prior quarter.
Now turning to the fourth quarter net revenue for the fourth quarter was $404.6 million, which was down 7% sequentially due to lower sales to walk away and the expected decline in lasers GAAP gross margin for the fourth quarter was 21.5%.
GAAP operating margin was negative 3.4% and GAAP diluted net loss per share was 34 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.
Fourth quarter non-GAAP gross margin was 38.9%, which was approximately flat sequentially on lower revenue levels non-GAAP operating margin for the third quarter was 19% non-GAAP operating expenses totaled $80.7 million or 19.9% of revenue.
R&D expense was $46.4 million at DNA expense was $34.3 million.
I think it is important to highlight here that synergies achieved to date through the fourth quarter helped drive a sequential 120 basis point expansion in operating margin. Despite a 7% sequential decline in revenue.
non-GAAP net income was $70.8 million for the fourth quarter and includes 2.4 million of net interest expense and tax expense of $3.5 million.
non-GAAP diluted net income per share was 92 cents based on a fully diluted share count of $77.1 million.
Now turning to segment and product line details.
Optical communications segment revenue was $356.8 million, which declined 6% sequentially.
Within our optical communications segment Telecom revenue at 227.7 million was down 6% sequentially due to lower while we sales.
Datacom revenue at $41.5 million was down 28% sequentially driven by the transceiver product line divestiture.
Industrial and consumer revenue at 87.6 million was up 13% sequentially due to higher industrial diode and Threed sensing revenues.
Optical communications segment gross margin at 38.3% increased 30 basis points sequentially on lower revenue due to the divestiture of lower margin datacom product lines and higher industrial and consumer in the mix.
Our laser segment revenue at 47.8 million decreased 13% sequentially fourth quarter Laser's gross margin was 43.5% a decrease of 250 basis points due to lower revenue.
From the close of the Oclaro transactions through the end of the fourth quarter, we have taken actions that when annualized achieved more than $60 million in synergies, which is the target. We put forward when we announced the transaction. We achieved these synergy levels earlier than we estimated when we announced the transaction by strong execution. After the close of the transaction.
We are not yet done on the synergy front however.
We now estimate that synergies will be approximately $100 million in total or $40 million higher than our original target.
Additional synergies will primarily benefit cost of goods sold as further operating expense synergies are likely to be reinvested in new capabilities and R&D programs to fuel growth and extend our market leadership positions.
We expect to complete the additional synergy actions over the next five quarters, although the bulk of these positive financial impacts will be realized towards the tail end of this timeline.
We continue to target the financial model announced at the time of the transaction. We believe these additional Cogs synergies should drive average gross margins to the upper half of the 40% to 45% gross margin range of the target model.
Now onto our guidance for the first fiscal quarter of fiscal 2000.
The projections, we are providing today are on a non-GAAP basis and are based on our assumptions as of today.
We project net revenue for the first quarter to be in the range of $435 million to $455 million.
This revenue projection includes.
Telecom being approximately flat to slightly up.
Datacom declining as we continue to wind down transceiver sales.
Commercial lasers, decreasing approximately 20% driven by the factors as Alan mentioned earlier.
And industrial and consumer increasing as we enter the seasonally strong time period for Threed sensing.
We project first quarter or operating margin to be in the range of 22.5% to 24.5%.
And diluted net income per share to be in the range of a $1.12 to $1.26.
[noise] feeds projections incorporate an approximate share count of $78 million.
With that I'll turn the call back to Jim to start accumulate session Jeff.
Thank you Adrienne.
Turning the call over to the operator to start the Q and a session I would like to ask everyone to keep to one question and one follow up that should help us get to everyone before the end of our one hour timeframe operator, let's begin the question and answer session.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that is star then the number one on your telephone keypad well pause for just a moment to compile thank you and a roster.
First question comes from the line of Alex Henderson of Needham.
Hey, first a clarification.
You said that the three D sensing would be up slightly from the first half of 19, but im not sure whether you meant the first half of 19 fiscal year or first half of 19 calendar year could you clarify that please.
Yes, we were tuck in first half of fiscal year compared to first half of fiscal year.
Great and that's what I thought okay.
The next six months, we expect to be.
Flat to slightly up from.
First six months of fiscal 19.
Perfect.
Second question, if I could the.
Uh huh.
Wow way stuff, obviously is top of mind.
Have you asked the government for any exclusions.
Relative to walk away and.
It has the Threed sensing piece been included in the band.
So far or is that something that might be.
Allowed to ship in at some point.
Yes, I think.
As I said, we've really developed a new process to make sure we comply with regulations.
The majority of our products are not subject, yes. They are.
Across the board with respect to.
With respect to.
Being allowed to ship so I don't want to comment on specific products, but I would say that the vast majority of our products are not subject to Yale.
Okay, and if I could ask just one more question how long do you think the supply constraints on.
Telecom will be evident a in is that a matter of just simply shifting the type of product that you're producing as a result of any shifts in production or is that.
Something that you think it will last well into the back half of the year and maybe even into next year can you give us any timeline on that.
Yeah, I don't see report thanks, Yeah, I, certainly expect to be able to solve the supply constraint over the next several months. It is impacting this quarter and into a bit of Q2, but we're we've got a whole a whole focus on making sure that the gating material items and suppliers are being coach to help us and I'm sure, we'll make progress but it is impacting.
You know this quarter in the beginning of next quarter.
Super Thank you very much.
Thanks Alan.
Once again at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
That's star then the number one on your telephone keypad.
Your next question comes from the line of Samik Chatterjee of JP Morgan.
Hi, This is Joe could us on for Sonic.
My first question is related to the three D. Sensing guidance you guys kind of see more bullish in terms of three D sensing ramping into the well your fiscal first half.
Can you just provide us an update or whether you're seeing that coming from your largest customer or whether that's <unk>.
More optimism around adoption from the Android camp.
Yeah, we're not going to talk specifically about customers, but I'd say that.
We've been working on new product design wins across the board Oh.
With our largest customer as well as Android and.
I'd say that you know.
Were.
Could you know based on where we are today, we expect looks good.
Good first half of the fiscal year that said I'd say that you know we weren't expecting as much growth as we saw in the fourth quarter.
And we think that that is a bit of a result of earlier ramp of new products for the fall and but we still believe that the inventory levels are or.
In a better situation than they were a year ago. So that gave us confidence that the first half of fiscal years in pretty good shape.
Got it and then relative to your gross.
Long term target of being in the upper range of your gross margin target is that so clarification is that largely coming from the synergies or is that kind of coming from the mix of business that you guys are seeing.
Yeah, Hi, it's a it's wajid here, it's it's a little bit of both we're seeing favorable product mix across our product lines and we're expecting that to continue over the next number of quarters, but in addition to that it's the $40 million of annualized synergies that we expect to flow through in the tail end of that five quarter period, that'll that'll really help us and give us confidence in moving up the range of 40% to 45%.
And just a clarification on the synergies where exactly are you guys seeing the upside to the synergy targets.
Well I think across the board I think we've made some decisions more rapidly and executed more rapidly than we had originally advertised and that's why we were able to get the full $60 million down already I'd say looking forward, we still have some product rationalization to take place.
As well as in my prepared remarks, I talked about some of the lower margin telecom products exiting over the next several quarters and that along.
Kind of drags along a bunch of fixed costs in fab that that it was going to go away during that time period. So I think it's a combination of really focused on how do we streamline our manufacturing processes. How do we combine our ERP system, which is not done and we'll be done later this fiscal year. So it's a combination of those things that give us confidence that there's another 40 million to go just just to add to that I mean, we've got just like with the first 60 million, we had clearly defined actions with timelines and a bottoms up it's the same with the next 40 million and we've got a bottoms up with clearly defined.
Timelines and actions that were following which which is why Alan mentioned earlier, we've got a lot of confidence.
Around achieving that.
Your next question comes from the line of John <unk> of Stifel.
Thanks, very much I just wanted to get back to your comments about you know an expected sort of mix shift here in the telco World as you continue to move up at least over the short term away from some of the Y way mix you should we think of it you know wrote them sales maybe moderating some of that growth as we're looking at certainly the first half of this fiscal year, but maybe on a full year basis as well.
Well I think our expectation given where we are today is that wrote them.
Regardless of our guide and our expectations law, we continue to grow so were expecting volume growth in the first quarter.
And continued volume growth as we introduce new products and new design wins across our customer base globally.
So I think our expectation and we are still are adding capacity, especially for the new leading edge and by end products as well as the very high Port Count, which has brought adoption across our customer base. So we're expecting that another good year for road.
And then maybe just a follow up to Alan on the comments that you made around submarine not being a little bit lumpy for you at least in the first half of this fiscal year.
Is that a change in.
Customer behavior. There is it is it a sign that you know you're starting to see customers either move away from newbuilds into upgrades or or vice versa. Just curious what you're seeing in that submarine market as it's been relatively strong for the industry here for quite some bad.
Yeah, I think it's a combination of a couple of things one of which is it is lumpy. It's project based we are if you.
Recall, we made most of our submarine products at our contract manufacturer in China, We ramped up production in order to make the transition to our own Thailand facility and that is coming up in Thailand. So I'd say, it's a combination of two things. One is project based and lumpy we had a really strong quarter in fiscal Q4 on submarine and I think part of that is the result of winding down production in one location and moving it to bring up and a new location and that takes some time. So I think there probably was some inventory taken in Q4 that is going to be consumed over the next several months and quarters, and then bringing up a new facility and submarine takes time and so we're on track with the bring up but I'd say that this quarter is just going to be a low quarter for summary.
Those factors.
Your next question comes from the line of that just Marshall of Morgan Stanley .
Hi, This is Eric on for meta Thanks for taking our question maybe just first on the lasers business. What is the timeline for adoption of the product outside of the motto now there's a bit more capacity could you see revenue in second half of fiscal 20.
Yeah. I mean, we are we are winding down the completion of the development of a specific products for other customers and have shipped samples. So I wouldn't expect any meaningful revenue in the first half, but expect it to contribute in the second half of the fiscal year.
That's helpful. Thanks, and then on the Datacom chip sales could you maybe give us a sense I'm just the size that you would hope to achieve in that business over the next 12 months.
[noise].
I think with what's going on fundamentally in data centers and Hyperscale Buildouts in Fiveg.
The demand for unit volume is growing rapidly and we expect to really be able to.
Over the longer term double that business and I don't see any reason that we can't do that.
Thank you and then just finally on why wait if a waiver word to be granted for kind of those outstanding products that aren't shipping is is that something that you would start filling products immediately or is there a bit of a lag in timeline to start resuming shipments.
Yes, it would be it probably it.
If were unable to ship.
Today.
Building.
Product continues.
We do have some inventory.
I'll respond.
We do typically have.
And therefore, there could be some.
Some delay.
Your next question comes from the line of Tejas Venkatesh of he would be yes.
Thank you what sort of ASP declines do you expect in big sales for fiscal 2000 versus 19.
Yeah, we're not going to get into specifics on that I think.
What I, what I will answer is that we expect with world facing coming onboard and it in a meaningful way in calendar 2008.
And with a new set of chips that we believe will be introduced in calendar 2008, we will have an MSP reset or our content per device will increase in calendar 20, we believe in a in a meaningful way.
I think our our expectations and what we tried to say in the prepared remarks was that unit growth would be.
Higher than ASP reduction therefore, driving.
Growth in our first half of fiscal 20, but I think calendar 20 is going to be a very solid year for us in threed sensing.
Because more content per phone and new devices that will go into each each.
Each.
Handset or mobile device.
Thank you and as a follow up I wanted to revisit Roadms. What was wrote them revenue in Fourq you I believe you had $130 million per quarter of capacity.
So.
It sounds like you're you're still adding capacity.
So just an update on that would be would be great. Thank you.
Yeah, Hey stages, where we're not disclosing revenue by product line.
Triple digit number and we grew quarter over quarter.
Did not grow as much as we.
We had originally anticipated prior to to mid May.
But.
As we redirect companion.
Your next question comes from the line of Troy Jensen of Piper.
Yeah, Thanks, and congrats on a really nice results here.
Thanks.
Yeah, Alan maybe for you I'm I'd love to get your thoughts on the Acacia Cisco deal I mean, clearly Cisco is a big.
DCIO customer for you and oclaro or with the intention to I'm sure to get to the DC owes him.
Just thoughts on you know what this means longer term with that customer and then also were you guys. One of the bidders in the Acacia transaction.
[laughter].
Well, it's certainly not going to comment on the on the on the second part of your question, but editor.
Yeah.
Well our perspective on the deal is a good deal for everyone involved I mean, Cisco has been a long time partner customer of ours and a solid.
Really strategic customer of ours, Acacia has been a supplier to us a customer to us and a competitor to us I think the transaction.
You know has a couple of dynamics one of which is.
That customers are going to want a second sourcing we've seen activity increase with respect pcls.
Since the announcement from from from momentum and I think that you know Cisco is going to continue to be both a transport and transmission customer and.
Of ours a into the into the future. So you know all of that said I think it's a it's a very positive outcome for for the industry and a positive outcome for the month and because I expect fully to be continuing to be a supplier to sysco and to Acacia and we believe that the dynamic will.
Yeah, a catalyst for growth for us on DCIO within yards in the future.
Okay, and maybe just a question on Opex I mean, I understand of course synergies, but I mean, just specifically looking at the September numbers here.
Is opex on an absolute dollar basis is going to be declining sequentially are to get to this range or is it just going to be a bigger spike in gross margins.
Yeah, Hi, it's a watch it here, we'll probably see opex stay and within the range of fiscal Q4, plus or minus.
A couple of million dollars, you'll really see the synergies start flowing through.
Like we said on our prepared remarks within the gross margins, but more in the latter part of the five quarter timeline that we provided this upcoming quarter gross margins, obviously will be higher because we've got a stronger mix of three D sensing.
But outside of that the synergies that we talked about that are in addition to the 60 million. We already achieved a will be primarily in our cost of goods sold line. So opex will stay.
Relatively flat plus or minus based on the investment levels, we make and the timing of those investment levels.
Your next question comes from the line of Rod Hall of Goldman Sachs.
Yeah, Hi, guys. Thanks for the question I wanted to ask about the road on demand situation. So I know that you had said previously that in the September quarter, you expect it to sort of a bunch of backlog that you had in terms of orders.
And obviously I'm, assuming that that's being done and I wondered beyond the September quarter is you know now that the backlog is cleared or maybe you can clarify whether it will be what the demand situation looks like I think Alan you had alluded to some growth there, but I just wanted to clarify what that road and demand looks like you know on organic basis, as we get into the December quarter and beyond.
Yes, so so demand for roadms across all of our customer base is very strong we are not satisfying the overall demand in the September quarter.
And we'll see how it goes in the December quarter, as we add more capacity, but I'd say.
That.
The capacity is not interchangeable in every case and that like our M. buy EM.
Is a unique capacity that is not shared with other.
Product lines, and then the mix between modules or blade changes dynamically through the quarters.
So that's why it gives us confidence that the September quarter, Rotem will grow I would it have every expectation that December quarter, Roadms will grow as well.
Assuming we have the right capacity for the mix that comes through and we are seeing a shift to a continual higher core count.
When one by two by 30, fives, and buy and as well as delays associated with those newer technologies. So we're going to continue to grow our wrote them.
Capacity and our rotor revenue.
So Alan just to clarify that are you thinking there's a good chance that in December and be on the road supply will still be short of demand or you think that by the time, we get into December supply should at least equal demand, assuming you've been able to reconfigure or production the way you need to.
Well I I think again, it's going to be based on the mix, we get and as as we continue to be working with our customers across the globe on new designs for the high capacity and Contentionless in Directionless Roeder.
We believe that those will continue to be constrained for some period of time until we bring on additional capacity. So we're trying to tighten the capacity to get some flexibility, but we continue to see more demand and then our customers are forecasting in the longer term and it takes a while to add the capacity we are bringing on more capacity, but again, we're we're having to anticipate that mix, but today I'd say, we don't have any excess capacity in any of our product lines on roads.
So were virtually trying to get more out of the existing capacity drive yields drive productivity and drive output without having to add a bunch of capacity.
Okay, and then on the second kind of major question. We had was on lasers gross margins.
Those were down quarter over quarter, and I know you guys are targeting 50% could you just comment on that margin trajectory in.
What you're thinking now in terms of you know how that progresses toward that 50% goal.
Yeah, I mean, I think the drop we saw in the in the June quarter was really a volume based and revenue base and you know there are some fixed costs that don't get absorbed with lower volume.
I think.
As we expect in calendar 20.
The volume will pick back up.
And as we introduce new products from new fiber lasers to new ultrafast lasers, we expect that we will go closer to the higher higher 40% margin and could could get to 50% margin in calendar 2008, assuming the mix is right and.
That the economy allows us to to really grow that business that said I'd say that lasers competitors of ours are hitting some pretty heavy headwinds and so I think we bucked the trend as we said by growing our lasers business in a pretty tough environment and we expect that calendar 20 will be a different story.
Yeah, even amplify that over the past year that a lot of the growth in lasers, and driven by our fiber lasers, which historically for us were below our lasers aperek margin given there.
Last year become a substantial portion of it.
Lasers mix and gross margins have increased often till now with revenue coming down it's compressing margins I think that the point I'm trying to emphasize is that the nonhybrid laser portion has had a pretty brutal year, but it's oh.
A higher margin than average so as Alan alluded to with.
Calendar 20, we believe non fiber laser portion.
We'll begin to rebound and that will have a very positive influence.
On the next and therefore the margin.
[noise].
Your next question comes from the line of Simon Leopold of Raymond James.
Thank you for taking my question. This is Molly ceiling for Simon.
A quick housekeeping item can you please give us the number of 10% customers this quarter I'd presume contributions please.
Oh Wow.
Uh huh.
Uh huh.
Really.
And we'll have a 10% customer detailed out in our 10-K.
Later this month.
Okay. Thank you and then I wanted to.
Gold bugs.
To the while we have a question Bugging me.
You guys reduce your.
Uh huh.
June guidance by close to a 33 million at the midpoint. Following D.U.S. addition of all way to enter the least.
Today's results highlight a.
Close to 22 million.
B to that guidance again at the midpoint and I was wondering if you could give us some color on what portion of these be could be attributed to durability to achieve more production to walk away than you previously anticipated.
I think I'll start.
Yes, 30 something million dollar a calm down when we when we re guided I think.
Look what we ended up with was was winding down.
25% or amounted to approximately $20 million.
And so.
The net net of that obviously.
Not as much as we were up and therefore, I think as we Highlander paired remarks, it was really the industrial consumer business.
Probably was the most significant driver of upside.
So we were able to.
Redirect some of that telecom business.
That we weren't able to sort of walk away to other customers. The challenge was just.
All of this happened very late in the quarter, so with our manufacturing lead times difficult to.
Ah redirect and get much impact within the quarter is really only about a month.
To go.
And then yeah.
Hi, I'm sorry [laughter].
Right well have before okay.
I know that you are no I'm going to not disclosing at this point as well.
Kind of products, you are able to ship or currently able to chipping to walk away bodies.
Given your prepared remarks is it fair to assume that the majority of products outside of telecom.
Oh.
The next question.
Your next question comes from the line of John Zang.
Uh huh.
Thanks for taking my question, so or do you mind, if you give us a little bit color you know how much capacity how much more capacity.
He adds to a meeting of the currency modem demand for water too.
The lower Oh afford or the <unk> for the modem supply. Thanks.
Yeah, I think if you look at what we did in fiscal 19, we more than doubled.
What.
Road.
We continue to add but don't expect to double again or is this a fiscal year to our capex plans for fiscal 20 are lower than they were for fiscal 19, but off a substantially higher installed capacity base. So the decisions that we made six months ago or coming online now most of which are for the very high end wrote them and buy in at high Port Count wrote them.
And we're going to continue to invest to bring that bring that in it and I think as Chris mentioned, we are over $100 million and wrote them. We grew last quarter, we expect to grow this quarter I fully expect to grow in the December quarter.
And most of that growth will be coming from the very high end rodents and ROADM blades. So.
I'm not going to give it a a number I think one of the other analysts said.
They believe we had $130 million of installed capacity I don't see any reason why we shouldn't be able to get to that.
Level of Roadms in calendar Twentys, So I hope that answers your question.
Sure. Thanks.
I'm also a one more question in addition to Fiveg and Uh Huh.
Oh, the Golden what else, you're seeing the sense in the telecom market, which could.
[laughter] upside so if your revenue in the next few quarters. Thanks.
What other products were seeing growth.
In the telecom space, Yeah could try.
Yeah, I'd say as we said in the prepared remarks, we saw a 10% growth and our yeah. Our coherent modules. So our ace Johan de shows where we're expecting a continued growth we were constrained on agios today significantly constrained at Agios is weve seen demand pick up more than anticipated and and weird. The very early stages of DCIO shipments that we expect it will continue to grow through the fiscal year I'd be a meaningful part of our telecom revenue over the next several quarters.
Thanks, that's all my questions. Thanks.
Sure.
Your next question comes from the line of Tim Savageaux of Northland capital.
Good morning, everyone.
Or should I refer to you as party a this morning.
Stuart in my two cents there.
A couple of questions.
With regard to the commentary around gross margin.
Just wanted to get a little more detailed on that.
You talked about being towards the upper end of a 40% to 45% targeted range could you go over the timing on that again.
Whether that's driven by kind of organic.
Improvements in telecom margins.
Better mix with less data com.
You know more three d. or what have you and I have follow up.
Yeah, Hi, it's a it's wajid I'll start it off and then Alan and Chris can jump in as well. So obviously product mix plays a a rule kind of quarter to quarter and so what we're talking about is looking five quarters out for a given product mix you know what do we think our gross margins are going to look like so there's a couple of positive trends that are happening organically that are supporting our our margin target of 40% to 45% Allen talked about the growth in Datacom chip sales you know, we talked earlier about having more content with three D. Sensing and in addition to all that we're expecting to have $40 million worth of annualized synergies, which we mentioned earlier on the call. We've got a clearly defined actions with timelines on and so that's going to happen probably at the tail end of the of the five quarter target that we've given but it's really those three things that are driving.
Our expectations on gross margins up looking forward, even in the lasers business as Alan mentioned earlier, we're expecting to see higher levels of revenue and so that should help us from a from an organic gross margin perspective as well. So it's all those things combined knowledge, yeah, I would just add to that that you know I I mentioned that we have $31 million.
Products Telecom, Datacom, transceivers, and low margin or telecom products that over the next several quarters are going to go to zero that will help.
Average gross margin go up, but 10 $10 million a quarter at a synergy attainment, mostly in Cogs is going to be two to two and a half or so and in itself given no mix change. So I think we're pretty confident in our ability to make that happen and so I think it's a combination.
Great and to follow up on when three D sensing it actually kind of levers out that datacom comment really depending on how fast you assume that drops off in your September quarter Guide.
What I see is actually pretty solid double digit growth being implied.
On a year on year basis in a in Threed sensing and very strong sequential growth obviously.
And so to get to your kind of up slightly calendar guide you need to have a pretty substantial decline in calendar Q4.
And maybe that comes as a result of an earlier build cycle and maybe borrowing some of that here in the June quarter.
But from a overall trajectory standpoint is am I thinking about that you know kind of the right way.
[noise] [noise].
[noise] little still little further out.
Well I mean, you did you did guide to it so.
Well I think.
It depends on the timing of what we do this quarter.
NSP highlighted also.
The overall smartphone market.
I think space.
The comments that we put in the script.
I think your head in the right direction.
Great. Thanks.
Your next question comes from the line of Richard Shannon of Craig Hallum.
Hi, guys. Thanks for taking my questions I guess 33 D. Sensing question for me Alan maybe if you can talk about the competitive environment here in terms of.
What you're seeing for capacity and also a capability.
Of competitors coming on line here and also the degree to which there are opportunities out there in three D sensing that may asking or maybe looking for lower expects that Lynn.
Lumentum may not be interested in competing for.
Oh, we're interested in everything.
Richard.
I'd say that.
We've had two years of extremely high market share and.
A year ago, we thought that that was going to go down in it.
Right now we think it's going to go down.
But we'll see.
I think our competitors are going to figure it out eventually but as I said prepared remarks by end of this fiscal quarter. We will have shipped over half a billion units of three D sensing products and that's hard too hard for our competitors to keep up with and the quality level and reliability levels. The product. We ship is is phenomenal absolutely phenomenal. So I think the combination of having scale reliability and the investment in R&D for new products is going to continue to have it the out in front and that's why we're pretty confident especially as you as you look forward into calendar 20.
Content per phone is going to go up but products are gonna change to higher technology I think we're going to continue to stay out in front, we're continuing to invest in new technologies that give our customers new capability to do things.
With their devices.
Okay. That's helpful commentary a second question for me on Telecom stuff here, obviously wrote them. So I think some very strong trends here, maybe if you look out in telecom outside of rodents.
What you're seeing here in terms of of growth here from your non while way customer base here and do you worry about any any sort of inventory build there.
Inventory build outside of Wally.
Yes, and outside of wrote obsessed.
Oh, now kind of wrong no I don't.
I I think yeah, we are well.
Satisfied summary, because I think there was probably some shipments accepted last quarter in anticipation.
And why we think that Sabrina will be down a this quarter I don't see a buildup of inventory in fact, I see the opposite because we're still not able to as I said meet the demand for 18 shows and coherent component and wrote them clearly are a challenge there.
As well.
Okay, great. Thanks for that.
That concludes.
That concludes our time today I will now turn the call back to Alan Lowe for closing remarks.
Thank you operator, I want to thank our customers for their business and partnership I also want to thank our employees for their hard work and putting us into an excellent position in the markets.
In the market for the long term growth.
We regularly discuss our business in 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, we would like to thank everyone for attending and we look forward to talking with you again in another few months.
Thank you.
Yeah.
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