Lumentum Holdings Inc
NASDAQ:LITE
| US |
|
Fubotv Inc
NYSE:FUBO
|
Media
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
| US |
|
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
| CN |
|
NIO Inc
NYSE:NIO
|
Automobiles
|
| US |
|
Fluor Corp
NYSE:FLR
|
Construction
|
| US |
|
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
| US |
|
TopBuild Corp
NYSE:BLD
|
Consumer products
|
| US |
|
Abbott Laboratories
NYSE:ABT
|
Health Care
|
| US |
|
Chevron Corp
NYSE:CVX
|
Energy
|
| US |
|
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
| US |
|
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
| US |
|
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
| US |
|
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
| US |
|
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
40.28
88.06
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Fubotv Inc
NYSE:FUBO
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
C
|
C3.ai Inc
NYSE:AI
|
US |
|
|
Uber Technologies Inc
NYSE:UBER
|
US |
|
|
NIO Inc
NYSE:NIO
|
CN |
|
|
Fluor Corp
NYSE:FLR
|
US |
|
|
Jacobs Engineering Group Inc
NYSE:J
|
US |
|
|
TopBuild Corp
NYSE:BLD
|
US |
|
|
Abbott Laboratories
NYSE:ABT
|
US |
|
|
Chevron Corp
NYSE:CVX
|
US |
|
|
Occidental Petroleum Corp
NYSE:OXY
|
US |
|
|
Matrix Service Co
NASDAQ:MTRX
|
US |
|
|
Automatic Data Processing Inc
NASDAQ:ADP
|
US |
|
|
Qualcomm Inc
NASDAQ:QCOM
|
US |
|
|
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
Lumentum Holdings Inc
You don't have any saved screeners yet
Good morning. My name is Matthew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter Fiscal Year 2019 Lumentum Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Chris Coldren, Interim CFO and Senior Vice President, you may begin your conference.
Thank you, Matthew. Welcome to Lumentum's Second Quarter Fiscal 2019 Earnings Call. As Matthew highlighted, this is Chris Coldren, Interim Chief Financial Officer. Joining me on today's call are Alan Lowe, President and Chief Executive Officer; and Jim Fanucchi from Darrow Associates who is helping us with Investor Relations.
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 our recent acquisition of Oclaro. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-K filing which was filled with the SEC on August 29, 2018, and the registration statement on Form S-4 relating to our acquisition of Oclaro which was declared effective on May 31, 2018, and in our 10-Q for the second quarter of fiscal 2019 which we expect to file with the SEC later this week.
The forward-looking statements we provide during this call, including projections for future performance are based on our reasonable beliefs and expectations as of today. Lumentum undertakes no obligations 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. Our press release with our second quarter fiscal 2019 results is available on our website www.lumentum.com under the Investors section and includes additional details about our non-GAAP financial measures and a reconciliation between our GAAP and non-GAAP results. Our website also has our latest SEC filings which we encourage you to review, and supplementary slides relating to today's earnings release. A recording of today's call will be available by 11:30 A.M. Pacific Time this morning on our website.
Now, I would like to turn the call over to Alan for his comments and second quarter market and product highlights.
Thank you, Chris. Good morning, everyone. I'm very pleased to be here to discuss our second quarter results.
First, I would like to make some comments regarding our recent acquisition of Oclaro. On December 10, after receiving anti-trust approval from China and nearly nine months after announcing it, we closed the acquisition. I believe joining forces with the talented employees of the former Oclaro has created the industry's strongest team and the industry's leading portfolio of telecom transmission and transport products. Further, the combined team's capability and design and manufacturing of high performance indium phosphide lasers and photonic integrated circuits is unparalleled. The chemistry, ultra-fit [ph] and shared purpose of the combined team is excellent. I could not be more excited about our bright future together.
I would like to take this opportunity to review key elements of our acquisition is strategic rationale. The first is leadership at the indium phosphide photonic chip level. Photonic chips are at increasing importance to the full range of the world's rapidly expanding communication infrastructure spanning access, wireless, data center, metro and long-haul networks. Indium phosphide lasers and photonic integrated circuits are the only practical devices for generating the optimum wavelength of light for transmission over optical fiber. Customer requirements are unrelenting in their drive toward higher speed, lower power consumption, smaller size and lower cost. Our thesis is that the only way to meet future customer requirements in the optical communication transmission market and sustainably differentiate ourselves from our competition is innovation and economies of scale at the fundamental indium phosphide photonic chip level.
We have employed the same strategy in the industrial and consumer markets with gallium arsenide materials and we believe our success in these markets validates this strategy. We further believe indium phosphide could meaningfully penetrate consumer and automotive sensing market.
The second element of our acquisition rationale is to establish a clear leadership position and to improve the industry structure in the growing optical communications market. The world continues to become more reliant on ever increasing amounts of data flowing through optical networks and data centers. Next generation wireless and access technology, including 5G, will further accelerate network bandwidth requirements. The economics of 100G and higher speed technologies along with ROADMs are becoming more favorable every day for network operators. This is accelerating the pace of global, long-haul, regional, DCI and metro network deployments utilizing these products and technologies.
The optical communication components industry has long needed industry consolidation. We believe our acquisition of Oclaro has given us a first mover advantage in consolidation. Further, we believe it has catalyzed and will accelerate further consolidation. The acquisition establishes leadership in high-speed transmission that complements our existing transport leadership. With market-leading products and technology and strong long-term customer relationships in a growing and consolidating industry, we are well positioned for long-term profitable growth.
The final element of our acquisition rationale is to create options to profitably participate in the datacom market. It is anticipated that growth in hyperscale data center build-outs and 5G wireless deployments will drive new levels of growth in the high-speed datacom markets. Profitability in these markets at the transceiver level is challenging. Hyper competition and limited product differentiation are driving rapid price declines. Though some competitors have left the market, we continue to see new competitors emerge at the transceiver module level, so none with indium phosphide chip capabilities. Combining with Oclaro, it gives us a differentiated leadership position across a range of photonic chips on which the datacom, wireless, and access market is critically relied. This creates new avenues to profitable growth through meaningful chip sales and more cost competitive transceivers. In Chris' remarks, he will provide more details on the acquisition.
Now turning to our second quarter results. Revenue at $373.7 million, contained $29.6 million of contribution from the acquisition. Our prior guidance did not include any acquisition contribution. Excluding the acquisition, revenue came in at roughly the midpoint of our prior guidance. Strength in demand in manufacturing capacity expansions drove ROADM and fiber lasers to new record levels.
Revenue from our telecom product lines grew 21% sequentially, driven primarily by the strong growth in ROADMs -- ROADMs sales and the 20 days of contribution from Oclaro's telecom product lines. ROADM revenue grew 29% quarter-on-quarter and 110% relative to the prior year. Demand from our customers for our telecom products is very strong and is spread across a broad customer and geographical base. We continue to add ROADM capacity, but demand will outstrip our ability to supply throughout the third quarter. Datacom revenue was down slightly sequentially. The previously anticipated decline was partially offset by the acquired datacom revenues in the quarter. In the third quarter, we expect datacom revenue to decline relative to combined Company historic levels. We continue to be selective in our sales of transceivers in this margin challenge product area and this is impacting revenue. With the closing of the acquisition, we now have chip sales in the datacom and 5G markets, which we expect we will continue to grow.
Turning to our industrial and consumer product lines, which includes 3D Sensing. As expected, second quarter revenues from industrial and consumer diode laser product lines were down 10% quarter-on-quarter, driven by softer demand for 3D sensing lasers. Android customer revenue came in as expected and we continue to make excellent progress with additional android customers and additional new design wins. The market for laser based sensing is still in its infancy. We believe the market opportunity over the long run is tremendous as the applications that use our lasers enhance security, safety and new functionality in the billions of electronic devices that people rely on every day. The seeds for this long-term market opportunity continue to be planted.
During the second half of calendar 2018, additional customers announced or started shipping high-end 3D sensing enabled devices. During calendar 2019, based on customer engagements we have today, we expect new and existing customers will announce and release additional new 3D sensing enabled products. Several of these opportunities are expected to bring new functionality that could expand our content per device, including world facing capabilities. We believe these new customer products are the first step to broad incorporation of 3D sensing in lower priced, higher volume devices in the years to come. The customer learnings, software APIs and supplier ecosystems developed in these -- in these initial products will enable and allow more rapid adoption of 3D sensing in subsequent product cycles. 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 a proven capability that customers around the world know, they can rely upon. We have shipped hundreds of millions of devices with unmatched performance, quality and reliability. The advantage this experience gives us is a valuable attribute and it's difficult to replicate and overcome. Customer requirements for the next several product generations to come require us to further push the [indiscernible] capability. We believe the same technology differentiation and unique depth of experience that enabled our success to date in the current generation devices will be even more critical to future generations of 3D sensing lasers.
Our Commercial Lasers segment revenue was up 10% quarter-on-quarter and 9% relative to the prior year. During the second quarter, we benefited from capacity expansion and further ramped volumes of our newest fiber laser products to meet strong customer demand. We again achieved record revenue from our kilowatt class fiber lasers, which grew 12% sequentially and 133% relative to the prior year. We are making healthy investments in new laser product development and production capacity, targeting higher growth material processing applications in calendar 2019, and over the long run, we have good opportunities for growth, driven by new product design wins in addition to market growth.
Throughout my remarks, I've highlighted significant long-term trends that create terrific market opportunities for Lumentum, and even more so with the closing of the Oclaro acquisition. Further, I have 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'll now hand it over to Chris for more details.
Thank you, Alan. I will first run through the second quarter financial results, add some additional details around the Oclaro acquisition, and then provide our guidance for the third quarter. Net revenue for the second quarter was $373.7 million and included a $29.6 million of revenue contribution from the Oclaro acquisition. GAAP gross margin for the second quarter was 33.4%. GAAP operating margin was 3.1% and GAAP diluted net income per share was $0.08. Second quarter [indiscernible] which was approximately flat with the last quarter.
Non-GAAP operating margin for the second quarter was 22%. Operating expenses totaled $67.5 million or 18.1% of revenue. R&D expense was $39.3 million and includes increased investments in new product development in addition to the added R&D expense from the acquisition. SG&A expense was $28.2 million. Non-GAAP net income was $78.3 million for the second quarter and includes $2 million of other income and a tax expense of $5.9 million. Included in the tax expense is a one-time tax adjustment of approximately $2.7 million due to the Oclaro acquisition impacting our full year estimated tax expense. Non-GAAP diluted net income per share was $1.15. This includes an approximate $0.04 negative impact due to the aforementioned tax adjustment related to the acquisition, and it's based upon a fully diluted share count of 67.8 million. The share count includes approximately 2.4 million new shares due to the Oclaro acquisition being in the quarter for only 20 days.
Turning to the segment and product line details. Our Optical Communications segment revenue at $325.4 million increased 5% sequentially. Within our Optical Communications segment, Telecom revenue at $172.5 million was up 21% sequentially. Datacom revenue at $33.4 million was down 2% sequentially, Industrial and Consumer revenue at $119.5 million was down 10% sequentially due to lower 3D sensing revenues. Optical Communications segment gross margin at 39.7% decreased 60 basis points sequentially due to lower industrial and consumer in the revenue mix. Our Laser segment revenue at $48.3 million increased 10% sequentially, driven by growth in fiber laser sales. Second quarter lasers' gross margin was 42.7% and increased 240 basis points due to higher volumes and product cost reductions.
Now turning to more details on the acquisition. The stock portion of the acquisition consideration, excluding unvested stock grants for continuing employees consisted of 11 million new Lumentum shares. The cash portion of the consideration was $964.8 million. The cash consideration was funded by the combined Company's balance sheets, which at the end of the first quarter, pre-acquisition had a total of approximately $1.1 billion in cash and short-term investments. The cash consideration was also funded by a new term loan of $500 million.
After the paying of $964.8 million of the cash consideration and more than $50 million in fees related to the acquisition between the two companies during the second quarter, our second quarter ending cash and short-term investments was $684.1 million. This is only $50.2 million lower than Lumentum's first quarter levels due to strong cash generation by the business during the quarter. The ongoing annual interest expense associated with the new term loan is LIBOR plus 250 basis points. Today, this results in an approximate interest rate of 5% or $25 million per year in additional interest expense. Since we are focused on similar customers' geographies and manufacturing capabilities, and purchased the same types of raw materials, we have strong tangible expense synergy opportunities.
As highlighted when we announced the acquisition, we believe these synergies will be in excess of $60 million per year, within 12 to 24 months from the close of the transaction. To date, we estimate that we have achieved more than $10 million in annual expense synergies. We expect modest level of new synergies to be obtained in the third quarter and then we expect synergy attainment will accelerate in the fourth quarter and into fiscal year 2020. Work done since the closing of the transaction gives us confidence in our ability to meet or exceed our expense reduction target. I think it is important to highlight these expense synergies did not include any increased revenue or profit due to new product differentiation or product roadmap -- acceleration resulting from the combined Company's innovation engine. However, we believe over the long run, it is these types of synergies that will create the most long-term value and underpins our strategic rationale for the transaction.
Now onto our guidance for the third quarter of fiscal 2019, noting again that all projections are on a non-GAAP basis and now include Oclaro for the full quarter. We project net revenue for the third quarter to be in the range of $420 million to $440 million with operating margin in the range of 16% to 18%, and diluted net income per share to be in the range of $0.76 to $0.94. These projections incorporate an approximate share count of 77 million and tax expense of approximately $4 million at the midpoint of the range. Note, our third quarter projections have several million dollars of additional expense related to a reset of labor fringe rate in the new calendar year.
Notable quarter-on-quarter changes in product line revenue in our projections include Commercial Lasers increasing primarily due to new product growth, Industrial and Consumer declining due to consumer electronics customer seasonality, Telecom increasing driven by continued market growth and having a full quarter of the acquisition, and Datacom increasing to $50 million to $55 million due to having a full quarter of the acquisition. We are providing more clarity on the Datacom projections given the amount of change there has been in these product lines over the past few quarters. We don't expect to provide this level of detail on an ongoing basis.
Now before turning the call over to Matthew to start the question-and-answer session, I would like to ask everyone to limit discussion to one question and one follow-up.
Matthew, let's please begin the question-and-answer session.
[Operator Instructions] Our first question comes from the line of Samik Chatterjee with JP Morgan. Your line is open.
If I can start-off with one just relating to the quarter itself, you -- kind of on the revenue front, you came in in-line with expectation or kind of in line with the guidance that you had issued. But on the operating margins and the gross margins, you were lower, is that kind of driven by the Oclaro integration and can you kind of help us with what the starting point for Oclaro in terms of gross margins and operating margins that you're building off?
I'll make a couple of remarks and see if Alan has any additional. I would say first -- first is the product mix. So obviously with the decline in 3D sensing that has an impact to margin. And then, further, we're not going to breakout any Oclaro gross margin, there is no Oclaro going forward, those product lines have been merged with ours. But certainly, if you go back and look at prior quarters, Oclaro had been running below -- our 40% gross margin was in the prior quarter. So there is some level of dilution of margin associated to the acquisition.
And so, if I can just follow-up with the 3D sensing question. You're obviously, guys where you have positioned on those launches, how should we think about the ramp up on those volumes, what are your expectations, in terms of, when the volumes on android smartphones for you guys become comparable to kind of volumes with your lead customer. Is it kind of a one-year time horizon or you're thinking about it as a multi-year time horizon before you kind of see more diversification on your 3D sensing customer base?
I'd say that we're expecting more diversification throughout this calendar year. It's hard for me to predict when the Android 3D sensing business will -- the half of our 3D sensing business, but there is certainly plenty of potential for that to happen. I think the key to that is moving from the high-end devices that are in the market today to more the mid-range, lower cost, higher-volume products and that really is in our customer's hands and we're providing them the technology and capability to announce those product. It's just not clear to us when exactly that will happen, but I think it will happen, and it's just a matter of time.
Our next question comes from the line of Alex Henderson with Needham & Company. Your line is open.
I would like to talk a little bit about the Oclaro acquisition post the conclusion of it. Really focusing on what your expectations are in terms of paring out redundant revenues and much lower margin type products that were in the Oclaro mix. Obviously, it's a pretty nice chunk of change coming in in terms of revenues, but I assume that you're going to pair some of that stuff out. So it will be helpful to have some sense of what the impact is, both on terms of reduction in revenues from consolidation, as well as the impact on margins from that?
Yes, I mean, I think you've already seen part of that in our guidance for Datacom and that's why we were very specific about absolute revenue in the $50 million to $50 million -- mid-$50 million to $55 million in Q3. We are going through the product rationalization as well as fab utilization optimization and we'll be talking to our customers later this quarter and putting them but in place the actions to drive to the lowest cost product or the highest margin product, where appropriate, where there is overlap. But the overlap is pretty minimal and we expect to drive those to conclusion throughout this calendar year.
Is it reasonable to think of $50 million to $100 million kind of range for line pairing?
Well, I think if you go back in history and look at the two companies Datacom business, you will see that there is a good chunk of that already out of our Q3 guide in Datacom. There will be more product rationalization. So it's not unconceivable that we hit that number. I think on the other side, we are focused on driving innovation to grow our healthy new products faster. So we're hoping that that will more than offset the product pairing.
And the margins on those are sub-20% gross, is that kind of the range?
On which?
On the stuff you're pairing?
There is some that are much more challenged than that that we're taking action with and that's again one of the reasons you saw the guide on Datacom in the short term.
One last question, then I can see the floor. The 3D sensing, obviously the Apple brought in numbers pretty sharply in the fourth quarter. There seems to be a wide lay of estimates for the upcoming quarter. I assume that what we're looking at here is a supply chain that had 8 weeks to 10 weeks' worth of process that takes time for that to run through. Hence, I would assume that that would result in a very low number for the March quarter. Is that the right thought process?
I'll give you [Technical Difficulty] was very different than the end of calendar 2017 where the heads up came very, very late if not even into early part of the calendar year. So there was -- there's been adjustments, both from our supply chain as well as I think through our customer's supply chain and the module integrators to address some of that, so that the buildup is not nearly like it was a year ago. That said, we don't have total visibility beyond what -- beyond our walls, but we are taking a conservative approach with respect to March quarter guide and then whatever is remaining for the June quarter in the numbers we've provided.
Chris, do you have anything?
Nothing further.
And our next question comes from the line of Simon Leopold with Raymond James.
I wanted to ask about the ROADM business, in particular. I'd like to get some updates, just my rough math suggest that the quarter you reported was $90 million, $95 million in sales, and I understand you've added capacity. So just sort of trying to get an idea of how you see that particular line of business trending and I'd like you including your answer some thoughts on the competitive landscape and how that's evolving? Thanks.
Sure. I don't think your math is too far off, Simon. And I'd say that growing by 30% or 29% quarter-on-quarter was no simple task. Had we've been able to grow another 30%, we would have sold all of that as well. So there is still tremendous amount of pent-up demand for our leading edge technology from Twin 1x20s to even higher port count. And now on the MxN product line where I'd say we have, if not years leadership in those kinds of products, so we're expecting and we are seeing continued demand strength across all of the regions from Europe to China, to North America on all of those products. At the same time, we're starting to see continued strength at the low end edge ROADM where historically we had not had such a competitive offering. We announced a very competitive offering in calendar '18 and that product line is sold out.
So it's a broad range of product demand that our customers are asking us for and I think we -- from a competitive landscape standpoint, we are out in the front and continue to invest to maintain that leadership to continue to have a large share of that market.
And just as a follow-up, I wonder if you could give us your perspective on the 3D sensing market, in terms of, two opportunities as I see them, one, world facing and two, 5G. How either of those could play into the opportunities as we look out beyond calendar '19 perhaps? Thanks.
Well, I'd say from a world facing, we have multiple designs with multiple customers pretty much across the Board in the who is who and mobile devices working on time-of-flight, world facing sensors. And so, we're very confident in our leadership ability to meet the market demand of these products where the technology continues to evolve and get pushed. So I think that will come into fruition. It's already starting to ship. We'll see more and more devices throughout calendar '19, as well as into calendar '20. And I think the interesting thing there is, that's a whole new set of application use cases that should drive our customers to want to introduce those things sooner. So that's again, out of our hands, we're just enabling the technology and the capabilities.
As far as 5G is concerned, I mean, that's really more of a question for our customers and when they come out with 5G capable handsets and what they put on those devices. So hard for me to say, but I will tell you, the carriers are getting ready and investing, so it's coming.
[Operator Instructions] And our next person is Michael [ph] with MKM Partners.
First question, on the ROADM demand, specifically in China, can you discuss from your perspective the evidence that these are real tenders turning into real deployments by multiple carriers versus inventory build going on. So what's your view on that?
We have direct interaction with the carriers in China and they have -- this is beyond those pilot type of deployment. This is real deployments that are happening today. And so based on the constant pressure from our customers, executives, across the globe, including in China, I have to believe that there is not a tremendous amount of inventory buildup, but again, we don't have full visibility for that. I will say that we know that the product we ship into our network equipment manufacturers in China are ending up being deployed in the field and so that gives us confidence that these are real demand that our customers need and are deploying and it's verified by the carriers in China.
I'd add on that. Our engagement with our lead customers as well as the carriers in China date back several years and -- but we don't as Alan said have great visibility per se into inventory levels on our customer, at least the rate of deployment that was advertised when we kicked off these programs between our network equipment manufacturing customers and the carriers seem to be what's coming to provision. So they're not. It's not a recent surge, if you will. We've seen in ROADMs sales, out of the blue, it's very consistent with the several year roadmap that we've had between the equipment manufacturers and the carriers.
I think the other thing, Michael, is that with these higher port count ROADMs and more complex ROADMs, the average selling price is substantially higher than a 1/9 edge ROADM that we sell and have been selling for many, many years. So part of the uptake in ROADM revenue is average selling price in these when 1/32 type devices where it's multiple factors of higher price compared to a normal one of our competitors.
And then as a follow-up; this strength, when you talk about 100% year-over-year growth, it does seem to be concentrated in the ROADM area, you're probably also seeing it in pumps and amps, some other type of very high double-digit growth rate, but what about the pull through to our transmission and specifically the Oclaro portfolio, are we going to see specifically for these metro build, other regions like China or other regions where the Oclaro demand is still in front of us, that's going to catch up with this strong ROADM demand we are seeing or I guess, another way of asking is, why is it so concentrated in ROADMs and will it broaden out at some point?
Yes, I would say there is a couple of pieces that Mike. First is, certainly we expect ROADMs as a ROADMs and pumps and other transport products is a leading indicator if you will of future transmission deployments given you need to put the ROADM and the amplifier infrastructure in generally ahead of the transmission infrastructure. I would say though that we are seeing disproportionate growth in the transport and particularly ROADM space, simply because previously there were not significant deployments in China that were ROADM based, but there were 100 gig, 200 gig ports deployed, whether that be in long-haul and then switching to regional. So we expect to see great growth in the transmission, as you said, using the word pull-through, but I think the ROADM piece is a bit more pronounced, given from a geographical standpoint, China not being a large consumer domestically at least that is a ROADMs in the past, and now -- now they are.
Now with that said also, China's consumption, at least our Chinese customers there, if we summed up all of the ROADM consumption, it's still below their share of the world by new networking market and therefore we continue to believe there is continued growth above market growth in bringing our Chinese customers up to the levels that they should be purchasing ROADM's app.
Our next question comes from the line of Meta Marshall with Morgan Stanley.
I wanted to dive into a couple of things. First on the industrial laser business. I know that you guys have tried to expand capacity to be able to meet more than the needs of just you're kind of one major customer. I just wanted to get a sense of, are you selling to multiple customers at this point, would you expect to kind of by the end of the fiscal year. Just what -- if you're not, kind of, what level of revenue should we think of as being the level -- the threshold to meeting other customer needs. And then maybe just a second, more logistical one, on splitting the -- if we can get a split of the $29.6 million for Oclaro between Telecom and Datacom for the quarter?
Yes, maybe I'll start with the latter first and then let Alan answer the former. The $29.6 million was approximately equally split between Datacom and Telecom.
And as far as our Commercial Lasers business and record revenues in fiber lasers, that's still our primary fiber laser customer and we still have some catching up to do. So we still have not met their overall demand. We're getting closer this quarter and once we do that and satisfy their needs, we'll look at penetrating outside of that customer. So I wouldn't expect meaningful revenue this fiscal year. I think it will be more into fiscal 2020.
Our next question comes from the line of Tejas Venkatesh with UBS.
With the acquisition of Oclaro you will now obviously have a deep presence both at Huawei and ZTE, both of those systems' customers have been in the news quite a bit recently. So hoping you could characterize overall Chinese demand to the extent you can on these two customers?
Well, as we said earlier, the ROADM demand in China because of it being non-existent a year ago for domestic deployments is quite strong today at all of the leading network equipment manufacturers in China, including the two you mentioned, but there are others. I would say ROADM is very strong. I can't control what's going on between the two countries, I wish I could, but I'd say that at this point in time, we're working with them closely across the range of products from telecom, transport, next generation ROADMs through the next generation of transmission from ACOs to DCOs and 400 gig. So I'd say that the relationship engagement is broad and very strong at this point.
I would say, our aggregate exposure between those two customers is still less than their exposure if you will to their markets, which I know, you can argue as a good or a bad thing, it's a bad thing and that we want to grow that ultimately over the long run, but vice versa, there's concerns about any interruption of business with them. Yes, we have exposure and that would be very painful to lose that business, but we're not over-exposed to it relative to most other participants in the market.
And with respect to your lead customer, lead 3D sensing customer, any change in the competitive situation as you look out into the phones launched into the second half of 2019. I assume, by now you have a fair sense of what that could look like?
I mean, I think we're still very happy with our share of the production shipments that we have today. And I would say that we're very happy with where we are positioned for next generation, new designs, whether that be front facing and world facing across the product and customer portfolios. So as I said in the prepared remarks, the next generation of device is pushing the technology for higher densification, higher wall plug efficiency and things like that that don't allow people just to catch up because they have the capability today to make yesterday's product. So we're pretty excited about where we are and how engaged we are with many, many customers, R&D development efforts as part of their extension of their development. So, I couldn't be happier with where we are.
Our next question comes from the line of Mark Kelleher with D.A. Davidson.
I wanted to go back to the Datacom side. Could you just kind of clarify what your strategy is to differentiate on the Datacom side. Is that a market you're leaning too or is that something that faster speeds will lean into your strength. What exactly are you thinking about on the Datacom side?
So from a Datacom standpoint, we're very excited about the market opportunity because there's an awful lot of volume that ships in that market, both between Datacom and wireless. The real challenging puzzle to figure out has been profitability, particularly at the transceiver level over the past several years. So what we think the Oclaro acquisition brings to us is a couple of things. First is meaningful chip sales which is a -- operating at a different level in the ecosystem, our food chain, if you will, where it may not have the same kind of rapid price reductions, et cetera that are occurring at the transceiver level because there's fewer competitors than there are the transceiver level. There's also much more significant barriers to entry and a much more focus on leading-edge technology. So as you said, as we look to higher and higher speeds or lowering our power consumption at a given speed or wider environmental operating range, those are all things that play into now the combined Company's strength.
With world-class chip capabilities, if there is a way to make money at the transceiver level than we expect with that chip capability, we would be in the running as fast as anybody else could be at the transceiver level. That remains to be seen obviously because we also have to see what the competition is doing and where where prices land much in that space. So again, our strategy is to focus on where we have the best technology, lead with that, and then choose where to play in the market where there are an ability to make money.
And then as a follow-up; what chips exactly are you thinking about? Are those photonic integrated circuits? Are those DSPs, what...
So, these are lasers, either directly modulated or EMLs or electro-absorption modulated lasers as well as some receiver product, to transmit and receive indium phosphide chips.
Our next question comes from the line of Rod Hall with Goldman Sachs.
I guess I wanted to start on lasers margins and just the -- I know you've said that you think that eventually could get to 50%, but could you just comment on kind of whether that's still reasonable to think it eventually gets there and what sort of trajectory they might have? And then, I have a follow-up to that.
Sure, Rod. This is Alan. Yeah, I think that there is a clear path to 50% gross margin on lasers. Part of it has to do with volume obviously, but part of it also has to do with the mix between fiber laser and our micromachining business where typically in the fiscal Q1 and Q2, the micromachining revenue is low and as that comes up and has higher than average lasers gross margin that will pull up the the gross margin of lasers overall. I'd say that, as we continue to move more and more of our laser diode packages into our own factory in Thailand, we are seeing cost reductions that you saw part of the benefit in the gross margin improvements in fiscal Q2. We're going to continue to see that as we drive costs down that will also help our gross margin. So I think that the combination of driving cost down, fiber laser, as well as a mix toward additional micromachining should get us there before the end of the fiscal...
And then I wanted to do come back to 3D sensing in the guide and just check the pricing situation, I mean, we would anticipate like 10% year-over-year declines. Is that sort of in the ballpark of what you're seeing or is pricing, in particular, big VCSEL we're interested in, what's happening with the pricing trajectory and also be interested in your thoughts on inventory like how much model inventory might be out there? Is that perturbing the guide? Thanks.
I'm reluctant to be talking about our 3D sensing pricing given that I'm sure our competitors who are listening to this call. So, you can imagine, prices go down over time, whether that's low single digits or in the double digits, I'll let you be the judge of that. As far as module inventory, we really don't have much visibility of that, both at the module integrators as well as the next step in the process. So I will say that we are shipping units today and so it gives me visibility that they're continuing to build new modules, but that -- it's hard to extrapolate anything else other than that.
Our next question comes from the line of John Marchetti with Stifel.
Thanks very much. Maybe just a quick follow-up on that inventory side. You had obviously a big jump in your inventory levels at the end of the quarter. Curious as to how much of that maybe comes from the addition of the Oclaro business coming in and then how much of that is 3D sensing or VCSEL inventory that didn't sell through given some of the cuts that you've seen at your big customer?
There is very little immaterial change in 3D sensing inventory on our balance sheet. What you're seeing is a combination of both the Oclaro inventory as you would think about it coming over as well as the accounting associated with the acquisition where that inventory stepped up in value so that causes the inventory valued as well with this.
I'd say the only inventory build that we're having is, as we wind down our Chinese-based contract manufacturer, we're building up some inventory to be able to move that equipment into Thailand and not disrupt the ability to supply our customers. So there was high single digits of inventory growth, but done on purpose to make sure that we make a orderly transition to our factory in Thailand.
And then maybe just as a follow-up, for Chris. How should we think about sort of the normalized OpEx levels here as we look to the back half of the fiscal year. Just trying to get a sense for, you obviously had a partial contribution in the December quarter, but just trying to think of -- sort of where we are from an expense perspective as we start to think about the second half of the fiscal year?
So we really only guide one quarter at a time and obviously as we look to attain synergies which will bring down our operating expense. So I think, you can impute from our guidance what the operating expenses are, and then you have to make some assumption around ground synergies for the next quarter. So we don't have a good answer on being able to provide guidance for operating expenses out in Q4 and beyond.
Our next question comes from the line of [indiscernible].
So could you talk a little bit about VCSEL content in our existing clients and the potential android clients? And also could you share with us about VCSEL competition landscape in the android market? Thanks.
In what market, android market?
In android.
Well, it varies dependent upon what type of 3D sensing and whether it is world facing, front facing or both. So I would say that in the android environment, it ranges from single chip content to what I would expect in calendar '19, two to three potential chips that could drive additional content per device or additional dollar content per device. From a competitive landscape standpoint in the android market, it's a little bit different as we see the cast of people that acclaim they have volume 3D sensing at the android customers, it's a little bit different than we have with our lead customer. But I mean, they're all -- they're all capable, I think eventually will be able -- I think the key to our differentiation is pushing technology and allowing our customers to do something unique that they couldn't necessarily do with last year's technology.
Sure. So you mentioned that some of your existing clients might -- you might see a content growth this year. So do we expect a meaningful change in the content this year or can you do it next year for your existing client base?
Well, I think based on our design work with our customers, there are many that are working on world-facing time-of-flight high powered VCSELs that -- now when they announce them in the products that will increase the content per device. I can't tell when they are going to do it or what models they're going to do it or if they're going to do it on a single high-end model or they're going to put it on a range of products. We're just focused on making sure that when they do announce the product it's with our VCSEL and with our solution that gets them something that you need.
Our next question comes from the line of Tom [ph] with Barclays.
I guess, to start with the organic like data service, it was down 45%, then it's guided down again. You've got to talk about some strategic decisions with the business; can you first update that? And then further, could you see some gross margin uplift, from the product pairing with Oclaro and what does the profitability of that segment look like at these levels or else where to go in the future?
Tom, can you clarify are you referencing datacom business?
The datacom business.
Yes. And for clarity, our -- the just reported Q2 was Oclaro plus Lumentum datacom business, not just the organic business; but to your question, they are both going down quarter-over-quarter.
And the second -- sorry Tom, go ahead.
Go ahead. Just following up on the gross margin uplift of that business.
So these products are low-low gross margin, so certainly any either improvement through having a better product and replacing the low margin products or pruning out low margin products is going to result in gross margin uplift overall for the company. With that said, that's obviously got to be balance with insuring that if we were to prune products that we don't leave any overhead -- overhang of overhead if you will but I don't think that's going to be a challenge but that's something we're just best keep an eye on.
And I think just to add to that; I think as we continue to grow our chip business that will be a good bump to gross margin at datacom. And then we're continuing to work on driving lower cost, 100 gig transceivers and 400 gig next-generation transceivers to the market. So the combination of bringing in new products and driving higher levels of chip sales should drive our gross margin on the datacom business in the right direction.
That's helpful. And then just as a follow-up, your guide implies, I think a slightly higher tax rate than expected, I think about 6%. I mean, you kind of walked us through the moving parts there. Can you talk about the expected run rate there for June? And do you still expect that rate to move up slightly into '19?
I think the rate might be a little lower than -- but that's in the zip-code [ph]. I would not expect on a relative basis that to change going into the fourth quarter.
Our next question comes from the line of Tim Savageaux with Northland Capital Markets.
You'd mentioned briefly with regard to China I think but obviously there is applications, across the board the ACL platform which historically is a pretty important part of the Oclaro franchise. I wonder if you could talk about kind of trends in that product line, both focused on DCI and retro markets? And then maybe step back to address the overall cloud opportunity, maybe differentiating between data center interconnect, trends that we're seeing basically inside versus outside the datacenter, both your exposure to those by the ACL platform and how that might evolve heading forward?
So Tim, I would say the way we think about it is the following that the ACL platform that you referenced, certainly as a lot of customers today either buying mostly at the module level and some cases at the component level. The product roadmap though is to aggressively ramp DCO products across the existing ACL customer base, as well as many other customers that have not adopted ACOs, ACO is certainly our -- a little bit more complex for a customer to adopt in that, they have to have a DSP and integrate the DSP with the ACO. So we see the industry and that shifting towards DCO over the mid-term to long-term, and we're well very positioned both with the lower speed 100 gig, 200 gig, as well as 400 gig looking forward over the next few years. In terms of -- I said, throughout the customer base, thinking generally of the telecom NIMs but as you've highlighted certainly the cloud customer base we very much look to DCO modules as they -- a great way for them to get their coherent solutions without having to be experts in integrating DSPs and ACO modules or building modules themselves, buying components. And so there is definitely an emerging market here between the cloud guys, primarily for DCI.
In fact, a follow-up just to wrap up. We've covered kind of overall demand trends in China on the telecom side, they look I guess perhaps surprisingly strong. I wonder if you can make sort of any similar comments about the more carrier, metro, long-haul focus markets outside of China, and your North American and European OEM customers whether you're seeing similar trends relative to some of the growth you're looking at in China or how you would characterize that relative to your overall telecom growth?
Yes, I'd say that we're seeing broad demand growth in North America, Europe and anecdotally, throughout Middle East and Africa with respect to the products where we have clear leadership ROADMs, next-generation transmission components and ACOs and DCOs. So it is a broad range of demand that -- I think it's a combination of just pure market growth but in addition to that I believe we're gaining significant share with our leadership capability and the things that we've talked about earlier. So I think the combination of the two are driving our top-end -- top-line telecom, transmission and transport.
Our next question comes from the line of Troy Jensen with Piper.
Just a follow-up on that last question, Chris. Could you give us a timeline for when you guys expect to have the DCOs generally available?
We expect to be ramping those this summer.
Is that shipping samples or generally available?
I would say generally available.
And just a follow-up on that. Can we expect to hear you use multiple DSP partners or we'd be standardizing on just one?
We have multiple DSP partners. Certainly, we've got a lead partner, that's a very public relationship.
Then my last question; it's been while just we've got an update from Oclaro in their 400G lasers. In the same question line, when do you expect the lasers to be generally available?
I don't think we want to talk about -- that's a competitive product, for sure, but it's something that we expect to be a leader in [ph].
There are no further questions at this time. I'll turn the call back over to Alan Lowe.
Thank you, Matthew. 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 at Investor Relations events, these events are listed on our website in the Investor Relations section, and are regularly updated.
This concludes our call for today. 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.