Good day, everyone, and welcome to the Lumentum Third Quarter Fiscal Year 2019 Financial Results Conference Call. As a reminder, today's call is being recorded for replay purposes through May 14, 2019. I would now like to turn the conference over to Mr. Jim Fanucchi of Darrow Associates..

Thank you, operator, and welcome everyone to Lumentum's fiscal third quarter 2019 earnings call. This is Jim Fanucchi. I'm from Darrow Associates, and I'm helping Lumentum with it's Investor Relations.

Joining the call today from the company's management team, 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 participate, 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 positions 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 and Exchange Commission, including the company's Annual Report and Form 10-K filing for the fiscal year ended June 30, 2018, filed with the SEC on August 28, 2018, and the company's quarterly report and Form 10-Q for the fiscal quarter ended December 29, 2018, and that was filed with Securities and Exchange Commission on February 7, 2019, and in Lumentum's 10-Q for the fiscal third quarter which the company expects to file with the SEC later today.

Forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today, and 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 are non-GAAP, non-GAAP financials should not be considered as a substitute for or superior to financials prepared in accordance with GAAP.

Lumentum's press release with it's fiscal third quarter 2019 results is available on its website under the Investors section and includes additional details about our non-GAAP financial measures and a reconciliation between our GAAP and non-GAAP results.

Lumentum's website also has it's latest SEC filings and supplementary slides relating to today's earnings release. Lumentum encourages you to review these. A recording of today's call will be available by 11:30 A.M. Pacific Time today on our website. Now, I will turn the call over to Alan for his comments and third quarter market and product highlights.

Alan?.

Thank you, Jim. Good morning, everyone. I'm pleased to be here discussing our third quarter results and progress on achieving our strategic goals. The third quarter continues to seemhave started more than a year ago.

For the fifth quarter in a row, strong demand for our new products drove double-digit quarter-on-quarter revenue growth in ROADMs and fiber lasers. Once again, we attained new record revenue levels for both of these product lines.

With a full quarter contribution from the Oclaro acquisition, our telecom revenue mix is now approximately 40% transmission and 60% transport;this is more balanced when compared to Lumentum's historically heavy transport mix and is closer to the overall telecom market.

This mix could further balance out overtime as new higher speed transmission products, including DCO modules ramp later this year. We believe the telecom market should be strong based on the continued growth in global network bandwidth requirements and the needed infrastructure for 5G.

We are well positioned to capitalize on these trends with our industry-leading transmission and transport products. During the third quarter, we announced to our telecom customers two strategic actions catalyzed by the Oclaro acquisition. First, we are rationalizing overlapping product lines, which we expect to have minimal impact to revenue.

This rationalization should result in gross margin improvement once completed over the next few quarters. Second, we are discontinuing some legacy telecom product lines where growth and profitability forecasts are inconsistent with our long-term goals.

Revenue from these products is approximately $15 million per quarter at present, and will decline to zero once we satisfy our customers last time [ph] buying needs over the coming three to four quarters. In early March, at the OFC trade show, we announced a fundamental shift in our datacom strategy.

We are now focused on datacom chip sales and will stop selling datacom transceivers over time. We also announced the sale of several of our datacom transceiver product lines to Cambridge Industries Group or CIG. This transaction closed on April 18, 2019.

We expect sales of our remaining datacom transceiver product lines to ramp down to zero as we bleed down inventory with only chip sales remaining in the future. We are trying to do this as quickly as possible, but this process could take up to four to five quarters. Currently, datacom chip revenues are approximately $20 million per quarter.

Since the announcement of the transaction and our clarification on our datacom strategy, we have seen increased interest from new customers for our datacom chips as we will no longer compete with them at the transceiver level.

We are investing in new datacom chip development and expect sales of chips to customers serving the datacom and 5G markets to grow over time. Since our last earnings call, we have made good progress on winning 3D sensing business for future product cycles.

Customers around the world know they can count on our proven and unrivaled reliability and volume capability. The market for laser-based sensing is still in the early innings.

We believe the market opportunity over the long run is tremendous as the applications that use our 3D sensing lasers, enhanced security, safety and new functionality in the billions of electronic devices that people around the world rely on every day.

We believe our leadership position in the market is sustainable and we will see strong growth in our 3D sensing business over the long run. We have shipped hundreds of millions of devices with unmatched performance, quality and reliability. This experience is a valuable advantage and it's difficult for our competitors to replicate in overtime.

Turning to the third quarter results; revenue was $432.9 million, up 16% quarter-on-quarter, driven by having a full quarter of revenue from the Oclaro acquisition as well as continued strong growth in telecom transport products and commercial lasers. 3D sensing revenue declined quarter-on-quarter seasonally as expected.

Revenue from our telecom product lines grew 41% sequentially, again driven by the acquired telecom revenue and by strong double-digit quarter-on-quarter growth in ROADMs and telecom transport sales. Demand from our customers for our telecom products is very strong and is spread across a broad customer and geographical base.

Chinese customers are an increasing portion of our ROADM revenue which should be expected given the limited historical deployments of ROADMs in China. However, their contribution is still well below their share of the market.

We continue to add ROADM capacities, but demand outstripped our ability to slide in the third quarter, and this will continue throughout the fourth quarter. We believe the growth in our ROADM and transport revenue has outpaced the telecom transmission revenue growth for several reasons. One simply relates to timing.

In new network deployments, the transport equipment is installed first and then individual transmission wavelengths are lit up overtime. The other reason for strong ROADM growth are -- the other reasons for strong ROADM growth are more fundamental and long-term in nature; the new colorless, directionless, contentionless or CDC network architectures.

The number of ROADMs per network node and the number of ports per ROADM, and therefore the average selling price is increasing. These more advanced ROADMs enable customers to achieve the needed network reconfigurability and capacity. Additionally, ROADMs are pushing into new geographies and applications.

Earlier I discussed China, which has historically not deployed ROADMs domestically. Chinese domestic deployments have started, which significantly increases the addressable market over time. In terms of new applications, we are seeing ROADMs push further towards the edge of the network replacing fixed optical add-drop.

Switching to telecom transmission; we continue to make progress on our high-speed coherent products, including indium phosphide photonic integrated circuit-based components, 200-gigabit DCO modules and future 400-gigabit and 1.2 terabits DCO products. We expect these products to ramp in volume and to be a growth driver later this year.

Turning to our industrial and consumer product lines, which includes 3D sensing. As expected, third quarter revenue was down 35% quarter-on-quarter, driven by usual seasonality in the consumer electronics market.

We continue to make excellent progress with Android customers and additional new design wins on both front and the world-facing applications. For the first time, we had a single Android customer drive more than $10 million of revenue in the quarter.

Looking ahead to the fourth quarter, we expect 3D sensing to be flat to slightly down, driven by seasonality on existing products not being fully offset by initial ramps for new product cycles. Given our current mix of customer opportunities in historical trends, our fourth quarter should be the seasonal low of 3D sensing revenue.

We expect 3D sensing to ramp up again this summer and into the fall timeframe. Our commercial lasers segment revenue was up 14% quarter-on-quarter. During the third quarter, we benefited from capacity expansion and further ramp volumes of our newest fiber laser products to meet strong customer demand.

We again achieved record revenues from our kilowatt class fiber lasers, which grew 23% sequentially and 135% relative to the same period the prior year. Also of note, is the significant improved -- significantly improved gross margin for our laser segment. We've made significant strides and product cost reductions.

Contributing to this, we moved we moved pump laser production to our new facility in Thailand, which is achieving lower cost than our prior manufacturing location. We are making healthy investments in new laser product development targeting higher growth material processing applications.

Over the long run, we believe we have good opportunities for growth driven by new product introductions. In the fourth quarter, however, we expect lasers revenue to decline from the third quarter levels. Our largest fiber laser customer has communicated that their inventory of our products has reached targeted levels.

Throughout my remarks, I've highlighted significant long-term trends that create terific market opportunities for Lumentum. Further, I've highlighted our strategy to accelerate growth and drive sustainable margin expansion and customer and end-market diversification. It is a very exciting time at Lumentum for all of our stakeholders.

I will now hand it over to Wajid..

Thank you, Alan. Good morning, everyone. I'm very happy to be here on my first earnings call after joining Lumentum. I will first run through the third quarter financial results, add some additional details around the Oclaro acquisition and then provide our guidance for the fiscal fourth quarter of 2019.

Net revenue for the third quarter was $432.9 million. GAAP gross margin for the third quarter was 20.4%. GAAP operating margin was negative 17.6% and GAAP diluted net loss per share was $0.98.

Compared with prior periods, our GAAP numbers were significantly impacted by charges related to the Oclaro acquisition, including restructuring and asset write-downs related to product line exits. Third quarter non-GAAP gross margin was 39%, which was down by 110 basis points from the prior quarter due to product mix.

Non-GAAP operating margin for the third quarter was 17.8%. Non-GAAP operating expenses totaled $91.8 million or 21.2% of revenue, and increased $24.3 million due to having a full quarter of the acquired business as well as the seasonal impact of new calendar year resets of labor fringe rates. R&D expense was $52.8 million. SG&A expense was $39 million.

Non-GAAP net income was $69.9 million for the third quarter and includes $3.8 million of net interest expense and tax expense of $3.3 million. Non-GAAP diluted net income per share was $0.91 based on a fully diluted share count of $76.7 million. Turning to segment and product line details.

Our Optical Communications segment revenue at revenue at $377.9 million, increased 16% sequentially. Within our Optical Communications segment, Telecom revenue at $243.4 million was up 41% sequentially. Datacom revenue at $57.3 million was up 72% sequentially.

Industrial and consumer revenue at $77.2 million was down 35% sequentially, due to lower 3D sensing revenues in the quarter. Optical Communications segment gross margin at 38%, decreased 170 basis points sequentially due to lower industrial and consumer and the revenue mix.

Our laser segment revenue at $55 million increased 14% sequentially, driven by growth in fiber laser sales. Third quarter lasers gross margin was 46% and increased 330 basis points due to higher volumes and product cost reductions. Cash and short-term investments totaled $697.5 million at the end of the third quarter.

Capital additions during the third quarter were $31 million. Now turning to more details on the acquisition expense synergies; as highlighted, when we announced the acquisition, we expected synergies would be in excess of $60 million per year within 12 to 24 months from the close of the transaction.

Through the third quarter, we have achieved more than $20 million in annual expense synergies. We expect synergies to continue to grow in the fourth quarter and into fiscal year '20. Now onto our guidance for the fourth quarter of fiscal 2019; noting again that all projections are on a non-GAAP basis.

We project net revenue for the fourth quarter to be in the range of $405 million to $425 million. This revenue projection includes telecom increasing, driven by continued market growth and capacity expansion.

Datacom decreasing by $20 million to $25 million, due to the product line divestiture that was completed earlier in the quarter and continuing declines in remaining datacom transceiver sales. Commercial lasers decreasing 15% to 20%, driven by the factors Alan mentioned earlier.

And industrial and consumer, which contains 3D sensing to be slightly down due to seasonal factors. We project fourth quarter operating margins to be in the range of 18% to 20%. And diluted net income per share to be in the range of $0.85 to $1. These projections incorporate an approximate share count of $77 million.

In this guidance, we are benefiting from synergies attained to date. We are projecting higher operating margins on lower revenues. This is despite lower revenue from our higher than average margin 3D sensing and Commercial Lasers product lines. With that, I'll turn the call back to Jim to start the Q&A session..

Thanks, Wajid. Before we begin our Q&A session, I would like to ask everyone to limit discussion to one question and one follow-up, so we can make sure everybody has an opportunity in our Q&A session. Operator, let's begin with the question-and-answer session..

[Operator Instructions]The first question comes from Simon Leopold of Raymond James. Your line is open..

Thank you very much for taking the questions. I wanted to start out with kind of picture on what you see going on in the 3D market, longer-term beyond the one quarter guidance.

And maybe to help frame that, so, if we think about the full-year calendar '19, do you expect it to be a growth year versus calendar '18? And in terms of the context of the trends, how do you think the mix is trending between Android and non-Android phones over sort of the next, let's say, one year or so? And I have a follow-up..

Yes, Simon, this is Alan. I think it's hard for us to tell the mix between Android and non-Android revenue mix future because it's very, very dependent upon what phones and what devices the 3D sensing gets put on, and whether or not those are high volume or not.

I think the data point that we shared in the script was that we have an Android customer that was more than $10 million in sales last quarter, trying to indicate that we are in the Android business and they are adopting 3D sensing and again in the very, very early stages.

So, I expect that 3D sensing for Android customers will grow more rapidly than it has in the past, as we look out over the next four quarters.

So, year-over-year, Chris, do you have a view on calendar '19 versus '18?.

Certainly, we think it will be up year-over-year, given expectations around the second half of this year, we feel that calendar '19 obviously there were some challenges in various smartphone supply chain that impacted demand and our expectations are that those -- more in line with customer volumes versus [Technical Difficulty]..

Does that answer your questions?.

Thanks. Yes, it does. Very helpful. And then I just wanted to maybe get level set on how do you think about operating expenses over the longer-term. In your March quarter your reported quarter, your gross margin was better than expected, but your operating expenses were higher and it could be just simply how we're allocating after the Oclaro deal.

So, you've got a number of moving parts with the cost synergies going on.

Is there may be some way to help us think about what would be a normalized or sort of fiscal '20 kind of OpEx expectation post synergies?.

Yes, I mean, I think going forward, as Wajid said that we've realized about $20 million of synergies since the acquisition was completed. I would say that probably half of those are in OpEx and half of those are in operating expense -- COGS. And that moving forward, the additional will be also shared between COGS and operating expenses.

We did make some major announcements, for instance, closing our Lithium Niobate fab in Italy. We've communicated that to the employees and that shows up in our GAAP numbers for fiscal Q3, but won't show up in the savings or synergies until we actually cease operation, which would be late this calendar year.

So, I think we're going to continue to see operating expenses come down. At the same time, we'll see COGS come down to realize the synergies..

And so June OpEx maybe down a little bit from March, but then further declines later in the year?.

Yes, I think so. I think we'll see operating expenses down in the June quarter from the March quarter..

Your next question comes from Rod Hall of Goldman Sachs. Your line is open..

Yes, thanks for taking the question, guys. I wanted to -- sort of I think we heard you say that you have $20 million in chip revenue for Datacom. I just want to confirm that you've said that, and kind of get an idea for how that revenue goes in the future.

And could you also confirm that is well above group average gross margin revenue? And then I've got a follow-up to that..

Yes, we said it was approximately $20 million. Today, we expect that to grow over time. I think two things. One is, now that we've sold a set of product lines to CIG, they become a chip customer and we'll start to seeing that growth in chip revenue from that base of $20 million a quarter.

And then, as we also said, now that we are not a transceiver competitor, that actually opens up the market for us to sell more chips going forward to competitors -- what used to be viewed as competitors.

So, we expect that chip revenue to grow steadily over time and it is above the average gross margin as you would expect on a chip basis than the corporate books margin average..

Okay. Thanks, Alan. And then I wanted to see, could you guys just comment on what's going on with inventory in China, and kind of it would be nice to know what that could -- like what's your own inventory exposure looks like there.

In other words, is it mostly ROADMs or is there sort of normal spread of other components in that inventory? And then what do you think the risk of that is given the trade situation?.

Yes, well, I don't know what's going to happen with the trade situation. I was in China a few weeks ago. And I'll tell you that given the amount of pressure that was put on me by our customers in particular for ROADMs and pumps; I'd say that there's not a build up of inventory and that deployments are happening.

And anecdotally I was told about several greenfield deployments throughout China that are utilizing our most advanced spread by 1/35 ROADMs as well as our end by end that are being deployed today. So, those are new products that we're just ramping over the last couple of quarters. So, there's not a big build up of inventory there.

We are also shipping now with the acquisition under our belt a lot of transmission products. And again, I don't see a lot of inventory build up there in our most advanced products.

And so, I don't think given that we have been unconstrained -- we have been constrained in our ability to meet demand, I don't believe there is a big build up of the inventory that we provide to our customers in China..

Your next question comes from Alex Henderson of Needham. Your line is open..

Thank you very much. I wanted to ask first about the industrial lasers being down 15% to 20% quarter-to-quarter, it puts around at the midpoint around $47 million.

Is despite the $55 million and then the decline back to $47 million, a function of them flushing out some inventory having orders in hand and then ending up with a little bit more inventory, and this is the new run rate.

Should we be seeing 47% flat to growing modestly off of that? Or is despite down in the quarter? Just a temporary wobble as they bring some inventory down.

How do we think about the sequential next couple of quarters on that business?.

I'd say that as we've said in the past earnings calls, we've had trouble catching up with the demand and filling the supply chain at our leading customer for fiber lasers. So we have been shipping more and then they've been shipping out as they fill up their production line, which is not a one-week production cycle time.

So they have several weeks of production. Once they receive our fiber laser engine, go into their production line and ship out and put on a boat, and so there is a long cycle of inventory that we had not been able to catch up to until March. And so, now we're more shipping into what they're shipping out.

And we will ship in more as they convert more of their tools to fiber lasers from CO2, which they've been reluctant to do in the past, because we weren't able to meet their demands. So I'd say that it's an equilibrium of in and out from a inventory standpoint.

But as now they have more confidence in our ability to produce what they need, they'll continue to convert more and more of their tools away from CO2 lasers to our fiber laser.

I think we should start seeing a pickup assuming the global economic conditions of the world maintain at a stable level, we should start seeing a pickup in a couple of quarters as that conversion happens..

If I could follow-up; the other piece of the equation here is on the capacity additions in ROADMs and pumps, obviously, moved to Thailand on pumps, I assume that you're capacity constrained on both of those as those lines ramp up.

Can you talk a little bit about the timing of when you have additional slugs of capacity coming on in those critical product areas?.

Sure. For pumps, we started production last quarter in our Thailand facility. And as you may remember, several quarters ago, we actually just added incremental capacity to be able to bring up Thailand without impacting our manufacturing in Shenzhen, China. And so, we brought that up.

This quarter we're doing sizable quantities of pumps in Thailand as we ramp down our production in Shenzhen. Production in Shenzhen will stop this quarter by the end of this quarter and we will move that capacity to Thailand to bring up the capacity to the full run rate.

At the same time, we were trying to build up inventory of pumps in Shenzhen and we've just -- we're not able to not able to meet the kind of demand that we saw.

And so, we are constraints still on pumps, but expect as we bring up our capacity over the next couple of quarters in Thailand and have it totally be based in Thailand, that we will have an incremental probably 20% to 30% over our run rate peak that we saw a few quarters ago, given that we added capacity a year ago to be able to not disturb the production in China.

As far as the ROADMs are concerned, we continue to add capacity every quarter, mostly on the 1/20s and 1/35s twins and the end-by-end. And so, that's where our real fundamental growth is coming from moving forward.

But at the same time, we were constrained actually on the -- our new low cost 1/9 that we saw more and more demand and more and more ROADMs push into the edges, I talked about replacing these fixed add-drop multiplexers.

And so, I think we're going to continue to see growth in our ROADMs revenues at least for the foreseeable future from what I can tell, given that the ASPs are shifting upwards, the complexity of the ROADMs are adding ASP's, and we're getting more units out.

And so, we should see that happening both in Q4 as well as through the balance of the calendar year..

If I could just follow up on this piece of it.

So, pumps are obviously enormously important for amps, amps are important for ROADMs, are you able to produce enough pumps and amps to produce the amount of ROADMs you want to produce? Is that a gaining factor on this? And if so, are you selling any pumps externally? How should we think about the availability of pumps to sell beyond what's needed internally?.

Yes, I mean, obviously, we prioritize our internal blade -- super blade modules and the likes of those more highly integrated subsystems for our pumps. But we are shipping both to record level numbers and revenue for external pump customers, it just wasn't enough.

And so, we are still selling individual pumps to pump customers, but just weren't able to satisfy all of demand in Q3 and expect that over the next few quarters as we continue to ramp up, Thailand, we'll be able to catch up with that demand for pump..

[Operator Instructions] Your next question comes from Blayne Curtis of Barclays. Your line is open..

Hey, guys, this is Tom O'Malley [ph] on for Blayne Curtis for Blayne Curtis. I was wanting to get a little more color here with all the divestitures and selling of businesses. What do you guys think longer-term about the margin profile, obviously, guiding into June here you're seeing flattish margins for the lower revenue.

But longer term, what do you think that looks like and how does that drive earnings growth?.

Yes. So, our operating margin last quarter in Q3 was 17.8%. We guided on lower revenue and a less favorable mix to 18% to 20% operating margins. So, I'd say, that we are continuing to drive operating margins in what I would call our seasonally weakest quarter of the year.

And so, we're going to continue to see that operating margin growth as we expect our 3D sensing business to really pick up in the second half of the calendar year. And I'd say that we will be north of 20 points of operating margin as that mix becomes more favorable. So, I would say, we are on track. We're going to continue to realize those synergies.

We've only gotten 20 out of the -- $20 million out of the synergies and we expect that to continue through the next several quarters..

And then just a little more color on Android in the quarter; you guys said one customer was $10 million.

The first part is did you guys have multiple 10% customers in the quarter? And then the second part is, how much was the total contribution from Android? I guess better to say that is how much was outside of that one $10 million?.

I mean, we do have other Android customers. We were just trying to make a point that Android now is a more significant portion of our overall 3D sensing business and that we expect that to grow quite rapidly. We don't breakout individual customers that are 10% of a given product line.

We break it out once a year in our [inaudible 00:34:56] as far as 10% customers for that year. So, beyond that, we're not going to break up much more detail..

Your next question comes from Samik Chatterjee of JP Morgan. Your line is open..

Hi, thanks for taking the question. I just wanted to follow up on Alex's earlier question about ROADM capacity.

Alan, can you give us some sense of as you increase capacity on ROADMs? How has your primary competitor there reacted in terms of capacity addition? I guess, what I'm trying to get to is once the tailwinds from China moderate, maybe one or two years old, how do we get comfort that the industry is not in a overcapacity situation at that point in relation to ROADMs?.

So, I think there's a couple of underlying changes that are different from past cycles, where we had five or six competitors vying for the same ROADM slots and now we have a very concentrated competitive landscape.

And at the same time, the transition from simpler 1/9 type ROADMs to very complex high port count and CDC type ROADMs, give me confidence that we're going to continue to push the technology and continue to have that leadership on providing our customers what they need, what they want when they want it.

I think, as I said also, that we are in the very, very early stages of deployment in China. We're seeing strong growth across the globe on our higher port count and CDC type ROADM architectures. And so, I don't have a crystal ball to say what's going to happen two years from now, but I'd say that we're still not able to satisfy the demand.

The orders -- firm orders that we have for this quarter and see that being constrained even as we had 10% ROADM revenue every quarter for the last five quarters. So, we expect that to be constrained for the next quarter or two..

Okay, got it. Can I just quickly....

As far as our competitors are concerned, I think we believe we have a few year lead on the technology and the kind of architectures that our customers are asking for. And we're continuing to invest more and more R&D dollars into making sure we keep that transport leadership, especially in ROADMs..

Got it. I just want to quickly follow-up on the synergy targets here. I mean, you've got $20 million in kind of the first quarter that you fully consolidated Oclaro.

How do we kind of think of the upside here on the $60 million target that you have like 24 months out from do we look at kind of potentially some upside for that $60 million?.

I mean, I think as we start realizing the synergies we'll be updating whether or not we think we can get more. I think what we said when we announced the deal and we're very confident that we would exceed $60 million of synergies. We're still confident of doing that. Some of the synergies come in chunks.

And as I said before, we notified our employees in Italy that we're closing that Lithium Niobate fab, but we're running a hot right now to build up inventory to satisfy our customers last time by requirements. And then by the end of this calendar year, we'll start seeing that the synergies resulting from that decision.

So in the December quarter, we should see a pickup of -- beginning of pickup from that kind of a synergy as well as -- we're still working on our ERP consolidation move into Oracle from what was -- what is an Oracle and SAP environment.

And once that happens, then it will be probably early part of next calendar year will be another chunk of synergies as a result of that. So there -- it's not going to be a smooth $5 million or $10 million a quarter. We'll see it come over time, probably over the next four or five quarters..

Your next question comes from John Marchetti of Stifel. Your line is open..

Thanks very much. Alan, I was hoping maybe you could spend a minute or two on that ROADM demand outside of China.

A lot of focus obviously, there on not only some of the greenfield opportunities, but as they're putting in that technology for the first time, wondering if you can comment a little bit on what you're seeing sort of rest of world, North America and some of the other geographies as that's more of an upgrade situation given that they've had that technology deployed for some time..

You mean outside of China?.

Yes..

Well, I wouldn't say that there is a whole lot of people that have existing ROADM networks that have 21 or 35 or end-by-end architectures installed. And so, I'd say, that those are new opportunities for new greenfields. And whether that be in Japan, we're seeing a lot of demand for L band, L band ROADMs and the infrastructure to support L band.

So Japan is actually doing quite well, North America is doing well, Europe is doing well. And we are engaged with our customers on Next-Generation ROADM blades and Super Transport Blades around these new High Court Cowen ROADM architectures and CDC architectures, both in C and L band.

So I'd say that our R&D and new product introduction pipeline is quite full to address the global market. And so these new ROADM architectures are required as the network speed become faster and faster, and in preparation for the 5G rollout.

I really do think that there's infrastructure spend happening today in anticipation of 5G coming to market over the next several years..

And then maybe if I can ask a similar question on the laser side in terms of outside your largest customer;what you're seeing there in the potential for new customers to come on, and maybe how the current sort of economic backdrop, particularly in Asia, maybe impacting that and how we can think about that going forward in terms of broadening out that base of demand for the laser business..

Yes, when we talked about our largest customer, we're talking about largest customer for fiber lasers.

Is your question specific around fiber laser or commercial laser business in general?.

I think both, to be fair. I'm just trying to see what kind of gets that business back up on a more consistent growth trajectory as it's been a little bit lumpy over these yield last several quarters..

Okay. Yes. So I'd say there's really two dynamics. One is in the micro machining and that is cyclical within a year around consumer electronics. And so, I'd say that tools get installed now in the first half of the year in anticipation of consumer electronic demand in the second half of the year.

So typically, our micro machines, our nanosecond pulse, our ultrafast lasers have a better first half of the calendar year than second half. We've seen slow impact in the first half, and so we're not expecting a big pickup on that in the short-term.

Although, we are investing -- we're increasing our R&D spend in lasers significantly to get out in front of new product requirements for ultrafast lasers. And so we expect that in calendar 2020, that business should pickup as a result of new material processing for glass cutting and other kinds of materials that use the ultrafast lasers.

On the fiber lasers, we have been over last 10 years, very, very closely partnered with a Amada. They continue to be our priority. But now as we've caught up on demand, we are branching out to see what we can do to drum up other business in our fiber lasers area.

So I wouldn't say there's any short-term pickup that you should model into your models in the next couple of quarters but I would say, end of the calendar, year-end into calendar year 2020, we should see that broadening of our customer base on fiber laser..

Your next question comes from Meta Marshall of Morgan Stanley. Your line is open..

Great, thanks. I just wanted to kind of get some context for how you're thinking about the DCO ramp, kind of into the second half of the year, and just where you are with kind of testing product or how long you think customers will need to test product before that product ramps? And then, maybe second question, just on the Datacom business.

It would seem as if you were no longer kind of have any direct relationship with the hyperscalers, given the move more into the Chipset business, and just wanted to kind of see is that correct or just where you would intend or plan on kind of engaging directly with the hyperscales, kind of going forward. Thanks..

Well, I'd say that from a -- being a chip supplier, we are still very, very engaged with the hyperscalers. In fact, some of them actually are our chip customers.

And so, I think that's going to intensify as we work with our transceiver customers to make sure that we're providing the right photonic chipsets to go with their ICs that make the transceivers. And so I think we're actually being viewed as more the independent provider of the technology to the hyperscalers.

And so I would think that that relationship with hyperscalers would actually increase as opposed to decrease on the Datacom side.

From a DCO standpoint, we are sampling customers now and we expect that -- assuming that goes well, and I don't see any reason why it shouldn't go well, that we should start seeing revenue in our first calendar -- first fiscal quarter of FY 2020. And then the ramp is going to really be dependent upon how those qualifications go inside.

I'd hate to say that we're going to count on tens of millions of dollars in the second half, but I think that there is certainly a desire by our customers to qualify us and have a viable second source to the [inaudible 46:09] producing DCOs today..

Got it. Thanks..

Your next question comes from Thejeswi Venkatesh of UBS. Your line is open..

Thank you. Given the positive commentary we've heard from you on Android 3D sensing so far on this call, I wonder if you might comment on whether we should expect to see high volume Android phones with 3D sensing on it.

And then how much is the Android revenues so far has been time-of-flight VCSELs versus structured light?.

Yes. So Thejeswi, this is Chris. I think you can expect -- certainly at a single customer driving more than $10 million a quarter, that's now starting to get to -- not quite least customer volumes, but is getting to reasonable volumes.

Our discussions with other Android customers are leading us to believe that as we exit this calendar year into the new calendar year, there's opportunity or I think what you would classify, as more of a higher volume Android model. As you imagine, it's a dynamic market and customers are somewhat secretive with their product plans.

But I think that's the time window that today relate this calendar year on next calendar year as the best opportunity for something that becomes multiples of where the kind of opportunities are today in the market. In terms of time-of-flight, we've got a reasonable mix, I would say, a lot of the revenue today is time-of-flight.

One of the main drivers for that is many of the Android customers are focused on world-facing phones or world-facing 3D sensing in their phones today and time-of-flight is the technology of choice for world-facing applications. So we've got a pretty healthy mix of time-of-flight and structured light customers..

Your next question comes from George [ph] of Jefferies. Your line is open..

Hi guys, thanks very much. I wanted to go back to the discussion of ROADM and ROADM capacity. I think you mentioned 10% capacity additions over the last five quarters. I was just curious about why aren't we able to ramp that ROADM capacity a bit faster.

And I realize it's a very testing intensive process, the production of ROADMs, but I'm just wondering if there is any opportunity here to ramp capacity in a faster way? And then also I'm wondering on from ROADM technology perspective, are you seeing any more activity around Flex-Grid? Thanks..

Yes, so just a couple of things. We call our flexible grid TrueFlex. And I'd say that last quarter over 90% of our ROADMs shipped are TrueFlex and expect that to be the case moving forward. I didn't say that we were only getting 10%; I'd say that over the last five quarters, we've gotten a minimum of 10%.

And if you look back, two quarters ago, we grew more like 25%. And so we are adding capacity as fast as we can, but we are now getting into big numbers, and so adding 10% on a $100 million is more significant than adding 10% on $20 million. And so those capacity increases come in two ways.

One is improving productivity and yield overtime, and that comes out of just the existing capacity. But when we add capacity, they normally come in chunks of capacity additions for given product line. And so that's when you see a big step up of ROADM capacity.

But again, getting $10 million to $15 million of additional ROADM revenue out in the quarter is non-trivial and we're trying to just keep up with demand and haven't been able to do so, so far..

I think also it's useful point out that, it takes three to six months often to add capacity.

And so capacity that's coming online today is based on decision several quarters ago, and if the market [inaudible 00:00] inflect upwards, it's a little more challenging to handicap where it's going to be, or what we have to do today or it's going to be six months, and we don't want to get too far ahead of ourselves, and that's why the [indiscernible] capacity constraint situation here in the past year, year and a half on ROADM..

And just one other data point;year-over-year ROADM growth is approximately 80%. So, that's pretty a good job by the team to add that kind of capacity over a fourth quarter period..

Your next question comes from Michael [ph] of MKM Partners. Your line is open..

Great, thanks. I was just hoping you'd walk us through the Datacom divestiture again.

So I think you're guiding down in Datacom $20 million post the divestiture for the quarter, but if you could walk us through the steps in the quarters beyond that? And then secondly, just from your perspective -- because I don't really track everybody's research out there, but in terms of the $20 million for next quarter, what percentage of sell-side analyst do you think change numbers after the divestiture?.

I would say, we probably saw about five sell-side analysts, couple in the past two days, so fairly if you incorporated the divestiture and expenses going into our press release this morning..

And as far as your question on how should you look at Datacom going forward, last quarter, we did $57 million in Datacom. Our guidance said that you should take $20 million to $25 million out this quarter and we had three weeks of all the Datacom business in as we divested on April, 18.

And again, so if you look at $32 million to $37 million of Datacom revenue, of which $20 million dish is chip sales in Q4, I'd say that chip sales should go up over time, but the transceivers of that $12 million to $17 million will go to zero over three to five quarters on a pretty straight line..

And then my follow-up; I know there's been a lot of discussion of ROADM capacity, but I just sort of want to add -- ask straight out, because I'm still confused whether the ROADM sales in the quarter hit your expectations? My expectations are about $105 million, were you able to get there or was it short of that because of capacity constraints?.

Well, demand was certainly much, much higher than that. We got just about $200 million and we could have done a whole lot more than that. I'd say that we were constrained by capacity.

And I would say, it wasn't just on the high-end product, it was across the board, and that's why we're continuing to add capacity, work on productivity increases and expect that to continue to grow over the next three quarters..

Your next question comes from Troy Jensen with Piper. Your line is open..

Just another follow-up here on the divestiture. So I guess I'm trying to figure out how much laser chips sales are you guys going to capture here, right.

If you're divesting $20 million to $25 million in revenues, how much of the laser business, the chip sales would that customer create in these upcoming quarters? Our indirect [ph] question would be, what percentage of the bottom is the laser chip?.

Yes. So just to be clear on the $20 million to $25 million, the majority of that is the divestitures. There are products we're just phasing out and not continuing, that were legacy momentum products. So those won't be adding incremental chip revenue.

I'd say that the business the way they've divested $2 million to $3 million of incremental chip revenue in a quarter to support CIG is something that you could expect.

But as they grow and the 400 gig transceiver was just hitting the market, I think we're expecting that business to be very, very successful for them, and then turn very, very successful for us from a chip revenue standpoint moving forward..

Okay, perfect. And then one follow-up; I know you said on the call, a couple of times you guys reached by $20 million in annual synergies sales. I believe [indiscernible] when this divestiture was announced, Chris said that this is included in the $60 million synergy number that you're trying to achieve.

So I guess my question is, are you guys actually at kind of a $40 million synergies based on the guidance you gave us for June, or is there -- or am I thinking about that wrong?.

I think you're -- our prepared remarks, commented that through the third quarter, we achieved more than $20 million of synergies, obviously with the CIG transaction closing. Now here part way through the fourth quarter, we will see additional synergies in this quarter.

With that said, obviously, there's set costs that transfer the day we closed the transaction to CIG and there is also a set of costs that are going to take us some time to remove if you will, stranded costs.

So I think you're going to see the kind of numbers we talked about from a synergy standpoint related to the divestiture and not just the divestiture, but also the product line exits. So teathering [ph] in Q4, as well as in the Q1 timeframe..

All right. I say keep up the good work..

Your next question comes from Richard Shannon of Craig-Hallum. Your line is open..

Hi guys, thanks for taking my questions as well. I have a question on 3D sensing as we look into the second half of the calendar year. Alan or Chris, if you could comment on kind of the competitive environment as it leads to your expectations for share.

You've talked in the past about having some share minimums, wondering if those are -- you're expecting those to stay in place or are they roughly the same levels as you had before? And as that leads into any comments about ASP [ph] changes that you expect in second half of the year? Would be helpful also..

Well, we can’t talk specifically about negotiations either ongoing or close with our customers. But I'd say that we believe that we still have a very, very large share. We expect that to continue through the second half of this calendar year. And at the same time, prices do come down in consumer electronic devices.

But we expect our costs to be able to keep up with those ASP reductions, and therefore continue to have above average and above 50 points of gross margin with respect to our 3D sensing revenue. So I don't see any reason why we are going to lose a bunch of share.

I think as we listen to our competitor -- one competitor make their announcement about their 3D sensing revenue, it gave us even higher confidence of our very, very high share there..

Okay, that's helpful. Second question for me is on your pluggable business. I wonder if you could help us understand the dynamics with the ACO product line that came in from Oclaro.

And obviously, adding in your own to be qualified DCO this year, whether you expect that pluggables business to be able to grow in this calendar year? And then just as a sidebar, you mentioned 1.2 terabit modules, that’s something expected to be even qualifying or sampling this year?.

Absolutely. I think to answer your first question, pluggable revenue. If you look at ACOs, ACOs are going to be pretty stable as network deployments continue and as existing networks light up more wavelengths, they're going to continue to buy ACOs.

I think as we look at DCOs, we should see a ramp up in the second half of the calendar year to not cannibalize the ACOs, because I think it's actually different slots and different systems as we go into. So we should see growth in that pluggable business.

And as I said before, I think customers are looking for a viable second source for the DCO module and I think we're the guys to be doing that. On the 1.2 terabits, that we are going to start shipping and start seeing some -- but it's called meaningful revenue in our first fiscal quarter..

Your next question comes from Tim Savageaux with Northland Capital. Your line is open..

Good morning. I'm glad to sneak in again. Questions focused on 3D sensing. And Chris, I didn't quite hear your response to the calendar year growth question, but I think you said you expected calendar year growth in 3D sensing 2019 over 2018.

I guess my addition to that question is, would you expect that to be the case with your largest customer? And then the kind of try and flesh out the magnitude of the ramp in the second half, as I look up and down the supply chain in terms of what commentary and plans there have been.

It seems to me that the supply chain is gearing up for something on the order of a 30% plus increase whether you measure capacity or revenue for this sort of second half calendar ramp relative to previous ramps. Last couple of years, your 3D revenue has been pretty tightly bunched.

And that kind of $230 million to $240 million range for the second half of 2017 and 2018. I wonder how you feel about that potential growth trajectory. And also if you could comment on that calendar year growth question..

Yes. I will start with the calendar year growth question and say, I think in calendar 2018, we continue to under shift, I would say, relative to customer shipment out, if you will, because in calendar 2017 or even in the first half of calendar 201, probably over shipping at that point in time.

And therefore, had a negative impact calendar 2018 overall revenues for us.

As we turn into calendar 2019, I don't have perfect data here, but we believe that the level of inventory or excess inventory [ph] and calendar 2019 is less than going into calendar and therefore, even if customer end units don't significantly grow up -- go up, we should be able to -- growth in the calendar year.

I don't want to get into any specifics situations at customers, but I think given we have a lot of concentration in our lead customer, the comments would apply to them as well..

Our last question comes from Mark Kelleher from D.A. Davidson. Please go ahead..

I just wanted to go back to the ROADM ramp and connect it to your commentary on the transceiver ramp following that.

How strongly, how closely linked is the transceiver ramp to the ROADM ramp? And what's the -- what sort of the timing we should anticipate? Will transceiver be pretty hot and heavy in a year or two? What's the timing there?.

I would say that installing ROADMs in accents of transceiver -- I mean, there's not a lot of purpose in putting our ROADM or ROADM network, if you're not going to be ramping the transmission equipment that goes through those ROADM. There are some scenarios where you upgrading some structure.

But that wouldn't contributes to level of ROADM sales that we're seeing clearly new network deployments that will drive transmission equipment going through those ROADMs. In terms of timing, it can be a few quarters delay.

I don't think there's any hard and fast rules, depends on what network operators in the end customers, if you will, have in their plans of whether they want to resolve [ph] all of the ROADMs first or half of the ROADMs first and then start installing transmission equipment.

But I think the level of ROADMs sales, as well as the commentary we have from our customers about their plans would continue to give us confidence that we're going to see an increasing transmission market as we look [ph]..

Okay, great. I'll leave it there. Thanks..

That was our final question. I'll now turn the call back to Mr. Alan Lowe for closing remarks..

Thank you, Chris. 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 for long-term growth. We regularly discuss our business and 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..

This concludes today's conference call. You may now disconnect..