LITE - Earnings call transcript Q2 2019

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Operator

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. you. Thank Instructions] [Operator CFO Vice Interim begin you your conference. and Coldren, President, Senior may Chris

Christopher Coldren

Welcome Second to Earnings Matthew. you, Thank Lumentum's Call. Quarter XXXX Fiscal

Officer. As Interim is this Financial Matthew Chris highlighted, Chief Coldren,

Lowe, for our on expectations recent risk we current me subject including the expectations. President and and differ Jim review uncertainties Joining statements projections XXXX sizes; August in statements which our XX-Q during as products which for accordance statement regarding GAAP. our from obligations who positions prepared products; required our Relations. our statements was update including regarding actual acquisition to our with our today. materially most we XX, that we Associates as call reasonable participate, otherwise markets are Non-GAAP this and recent The technology, considered later financials forward-looking market from including law. in beliefs helping Darrow also with was by should to call these the to May which could trends XXXX, factors for all and particularly note, this fiscal projections Lumentum include This XX, today's expect the to described the are SEC provide of call and Fanucchi based declared financials non-GAAP. S-X risks statements, and on Executive cause the demand will with undertakes expectations including or Officer; with and and Oclaro. our future discussed results on relating XXXX, filing on superior potential Chief are financial quarter expenses in for acquisition be as to filled development product and We and market, and us statements registration well our Investor as results which Oclaro Form the performance, file projected substitute XX-K performance the stated, SEC the not week. and is Please you SEC, on as of to a effective filings in this call, with releases; unless Alan forward-looking of in encourage expected statements, on applicable for These trends except of purchasing second to product new no are

is a non-GAAP Investors non-GAAP includes Our under with results reconciliation available press and www.lumentum.com fiscal and release second financial our our section measures between GAAP our our about details the quarter website and XXXX on additional results.

Our website relating review, Time call will today's supplementary our this on latest our has slides to be XX:XX we to SEC which A.M. you recording A of and release. morning also website. by earnings Pacific today's filings available encourage

call turn Now, highlights. I product Alan to and over market and for the to would his quarter comments like second

Alan Lowe

Thank results. Good here very you, pleased quarter our discuss to Chris. morning, to I'm second everyone. be

to rationale. not high is ultra-fit our review of be excited and chemistry, performance our circuits combined photonic elements combined months indium this acquisition the is joining Oclaro I leading transmission the after I we some XX, the of strongest the I our team more December transport First, could is about team's nine The [ph] key phosphide of design to integrated and and like anti-trust the industry's talented has of unparalleled. products. of lasers future forces and together. team created take after approval capability recent Oclaro. the China announcing regarding strategic acquisition. would acquisition to would and telecom comments industry's bright make former excellent. and receiving with purpose employees believe nearly shared from On I it, closed the Further, like and of portfolio manufacturing opportunity

only infrastructure leadership The the lasers world's first wireless, full networks. wavelength Indium optical the level. fiber. are of expanding indium at toward of and range size for importance devices phosphide communication long-haul center, circuits transmission integrated are their the cost. increasing are access, the photonic over higher lower for optimum rapidly to phosphide power practical the light chips is generating spanning Customer in lower Photonic unrelenting at data chip photonic and consumption, speed, smaller and drive metro requirements

and thesis sustainably way competition chip level. innovation of future at customer scale from the our communication transmission to is only meet requirements that is and differentiate phosphide fundamental the Our economies in optical photonic ourselves the indium market

industrial in these in believe the arsenide strategy. believe market. have gallium We this sensing automotive validates materials We the meaningfully strategy indium penetrate and employed could consumer we phosphide markets and with markets consumer and success same our further

element centers. The data data of flowing networks in acquisition to optical second clear to position of through a increasing become structure growing our continues communications and market. world leadership establish rationale improve optical industry ever more reliant and The on amounts is the the to

a our final further and create industry to long-haul, advantage is on transceiver growth. and transmission of relationships with a growing Oclaro, optical and deployments consolidation. transport technologies. further high-speed capabilities. the phosphide at strong element chips differentiated existing XXXG metro datacom, is With has he global, across creates growth long-term us Next and market-leading new including pace with and XG, and new accelerate competitors along these avenues of a emerge of every technology utilizing levels level remarks, participate In datacom access relied. it and the consolidating are hyperscale in a of well Further, competition regional, We is provide acquisition rapid components Hyper transceiver ROADMs photonic has becoming continue drive believe accelerating higher have in The range sales complements that will are long-term to industry, level, consolidation. acquisition technologies data requirements. are economics declines. rationale industry we first network growth leadership in favorable profitable products The indium believe more differentiation given for of leadership acquisition is high-speed driving customer The market It consolidation. Profitability anticipated new at for Combining DCI see center long has position communication in the transceivers. chip left bandwidth we growth products our is generation in wireless This critically gives of it leadership. more limited chip meaningful acquisition. we needed will on day module The our Oclaro wireless and so options network market. operators. XG establishes with catalyzed This to some will access the mover speed accelerate market, technology, and and that network challenging. and none cost datacom and Chris' markets deployments Though through the to profitably build-outs us price which the wireless, competitive markets. product competitors these in more the the in will details profitable positioned

million, turning Now Revenue contribution to our second million the contained results. $XX.X acquisition. $XXX.X quarter from at of

Our did not guidance contribution. any acquisition include prior

growth XX% new Strength revenue of capacity at sequentially, ROADMs ROADM acquisition, drove the our strong telecom lines by Excluding grew demand lasers guidance. came product fiber our from and midpoint and expansions base. is in quarter-on-quarter levels. Demand in driven primarily in Revenue the record to the and from customer roughly strong contribution our products manufacturing in for prior across sales the product XXX% days spread XX% and XX ROADMs year. the grew of and telecom relative customers our telecom lines. is a from revenue geographical to Oclaro's broad very -- ROADM prior

The our we ability Company will to outstrip datacom the add demand revenue revenue capacity, quarter. decline anticipated previously Datacom to partially quarter. acquired levels. third to quarter, slightly was the to but datacom sequentially. ROADM relative offset revenues continue down in expect third decline the We the throughout combined historic supply In by was

impacting product be We in this in continue revenue. this and challenge margin of sales to transceivers area selective is our

have With the of sales in we which we continue the will the closing to now XG markets, acquisition, expect and grow. we datacom chip

product Turning XD includes lines, Sensing. and consumer our to which industrial

run product from for XD Android and android this on planted. market sensing as new came safety progress is sensing diode believe quarter market over additional long quarter-on-quarter, we the the demand the security, laser the opportunity second revenue and opportunity in We every The new lasers. as driven expected, softer tremendous customer for design customers for applications be expected enhance continue and based of its As were is excellent consumer infancy. people make in functionality to The down electronic industrial still rely seeds market with to long-term XX% lasers by revenues wins. continue our laser that and billions lines use in that devices additional day.

enabled shipping devices. calendar XXXX, additional of announced half XD second the high-end sensing or During started customers

of customers the XD facing existing engagements higher During we run. sensing opportunities customer the including in to allow strong calendar Several sensing we leadership to subsequent we sensing rapid release lower APIs are these that enabled believe volume sensing devices bring enable product today, will new and market new over these expect and these XD customer will of XD could additional in learnings, in world on supplier developed ecosystems products. products and have We software announce sustainable business is position will to adoption The are in these priced, XXXX, of in expected years capabilities. device, our growth XD cycles. new our in and see the functionality more content products We come. based expand initial believe and new incorporation -- our long first in broad step the customer per

world that around have We capability the a they rely proven customers can know, upon.

the several of difficult The to unique this to valuable performance, to shipped us unmatched millions experience lasers. in it's be experience overcome. replicate success the and us We to will next of for gives attribute our push devices even critical [indiscernible] require requirements generations with reliability. generation date is the more differentiation quality believe generations of Customer technology have sensing to hundreds We the come a that XD same and depth further devices future advantage and enabled product current capability. of and

prior relative XX% Lasers was Commercial segment year. revenue Our up to and quarter-on-quarter X% the

capacity quarter, from lasers, ramped sequentially products our class benefited our We and demand. strong record expansion laser from the revenue kilowatt of and XX% grew During relative customer fiber further year. which meet we again to newest XXX% the prior fiber to volumes second achieved

Lumentum capacity, that for to in by product targeting healthy driven Throughout even long-term for growth margin wins laser stakeholders. sustainable drive at making is Further, it the diversification. processing have for expansion create new highlighted good growth of highlighted and XXXX, strategy our in hand We for and new opportunities market production and the and my closing accelerate applications addition I've terrific It are over trends all more with the calendar have product in higher we more growth. very to Lumentum, significant long customer development I Oclaro end-market our acquisition. design and run, now of and market Chris exciting material growth, over so a investments I'll opportunities remarks, to time details.

Christopher Coldren

million Thank for and provide second our additional a then the for you, the Net XX.X%. quarter share revenue first $XX.X the margin acquisition. second financial for Alan. will contribution through operating run the third of second Oclaro $XXX.X details Oclaro quarter million results, around per from X.X% $X.XX. the diluted add and net some acquisition, revenue I guidance GAAP the margin quarter. quarter was and included income GAAP was was gross was GAAP

to to $X the million second Included the XX%. SG&A operating Operating net with expense was the in Non-GAAP aforementioned increased quarter which expense $X.XX. expense impacting based the million. net quarter Oclaro shares revenue. $XX.X share includes tax [indiscernible] The due upon and second XX in was share XX.X development $X.XX adjustment addition tax R&D was million XX.X% the a approximately of investments diluted of adjustment an expense. the expenses quarter diluted one-time acquisition. approximately expense million. due includes tax income and is was includes negative it's This million. share count impact our the $X.X a or includes Non-GAAP the $XX.X last from tax the the to in a $X.X acquisition, to per new million expense related in X.X Non-GAAP days. product and million income to million added approximate fully quarter. approximately due $XX.X Second full of acquisition income margin only was R&D for $XX.X Oclaro acquisition of other estimated the count quarter flat totaled million and new for was for year of tax being

Turning product to line the segment details. and

was sensing Communications increased was revenue Industrial Consumer XX% and Optical up revenue gross at at revenue Our XX% consumer Optical XX.X% industrial million our at lower to segment, basis Communications Telecom sequentially decreased sequentially. segment $XXX.X in million X% Optical due due points was and Within Communications down segment at revenues. million $XX.X $XXX.X to XX $XXX.X sequentially. at lower million revenue sequentially down revenue sequentially, XD the mix. X% Datacom margin

$XX.X fiber in increased segment million sequentially, laser sales. by XX% revenue at Laser Our growth driven

Second product gross and cost points was XXX and due lasers' volumes margin increased to higher quarter XX.X% reductions. basis

due a Now balance stock combined portion and on term $XX.X unvested cash consideration Since million. million The acquisition. tangible million Company's second was between associated cash turning annual XXX second levels quarter the shares. was excluding consideration ending in of investments. The customers' continuing is stock cash are by an $XXX.X synergy expense. had the The geographies new of of which than Lumentum's focused basis purchased the This the million cash The consideration than ongoing companies acquisition rate strong paying materials, of on year $XX by this total loan first raw to in more the only capabilities, loan consideration or the quarter, the X% of by fees approximate and Lumentum during strong grants acquisition million $XXX.X short-term business and quarter, was $X.X pre-acquisition lower during Today, LIBOR the XX quarter. details million. of expense of and After and interest first also at million. the consisted more new $XXX.X for two generation is investments similar manufacturing the the cash plus the $XXX The new opportunities. the a the employees with the term we was interest in we same interest our portion of of sheets, approximately consideration, types to funded in funded results end cash related quarter have points. additional short-term $XX billion of million per expense cash to

acquisition, more believe from to will we To of As in these be the year, $XX highlighted expense the $XX we synergies. XX estimate million date, of XX that announced per months excess synergies annual we the transaction. we when achieved than million close within in have

and attainment and the since We expect we will Work fourth our modest the then expense gives transaction synergies be confidence third into new XXXX. to expect ability done in of of the in us target. level accelerate quarter obtained the in synergy quarter to closing exceed fiscal year our meet or reduction

important include to acceleration I these roadmap innovation expense product Company's is the combined due did resulting revenue from think engine. synergies to new or product differentiation it increased highlight any not profit -- or

our long-term it However, for types create these we believe underpins that transaction. over is of the most the run, synergies will value and strategic long rationale the

several growth operating quarter. all increasing revenue projections increasing range. to continued changes to the of the and again project full consumer related of approximately million Telecom reset product at to million the and be due seasonality, to XX% $XXX with declining in midpoint share dollars million quarter of of acquisition. include an calendar $X.XX increasing of Notable the labor projections incorporate Consumer quarter million range full $X.XX. of fringe rate income the in our tax to in new $XXX customer of We new Now are onto range the Commercial that third for year. by million the and electronics third now projections revenue These quarter in noting and primarily for XX%, of projections a to having in the expense include Note, the a our third per fiscal a net share in $XX line market due acquisition, Lasers quarter our having have approximate full driven the to product diluted of Industrial Datacom to additional and a be for to growth, of due guidance margin XXXX, million quarter-on-quarter $XX the on count million $X to range XX non-GAAP and expense basis of Oclaro quarter net to

We are there product these of Datacom level on on of clarity providing few in provide the quarters. the projections ongoing past this given more has been change don't expect an We basis. detail the over amount to lines

to the question-and-answer Now session. before to start turning Matthew, question-and-answer like and the everyone the call to session, ask to discussion begin limit Matthew let's over I would please follow-up. one question to one

Operator

Samik Chatterjee JP from [Operator the Morgan. comes of Instructions] line Our question with first

Your line is open.

Samik Chatterjee

with and -- in-line in can I lower, with had margins issued. that of revenue with kind and came us quarter you you're and or by the point of margins the gross guidance But were If front, you margins integration building with of the kind help operating you start-off terms on what kind the gross of relating the the is operating in you that in Oclaro expectation margins, starting just one line to on off? can itself, you the driven that Oclaro of for kind

Christopher Coldren

a remarks I'll first has would couple is product of the make any say first see additional. if and I mix. -- Alan

quarters, So to have back Oclaro sensing with gross obviously if then, But margin, quarter. prior decline margin. forward, with there any been the those And and look ours. was certainly, you the in been in gross we're an margin merged our has had is to further, not below Oclaro -- lines impact going at product go running prior XX% Oclaro no going breakout that XD

margin some So associated of of level there dilution acquisition. is to the

Samik Chatterjee

I follow-up question. sensing XD the if so, with just And can

your are guys become of, smartphones where how think kind it about Is the in your thinking comparable time kind expectations, you horizon of positioned volumes ramp XD diversification horizon android one-year guys customer on the you're on for about should what we volumes, those with on volumes launches, base? you time your obviously, when or those as see before you kind on to You're up have lead a of a multi-year it more of customer. terms sensing

Christopher Coldren

say sensing sensing for plenty business will when that I'd happen. calendar hard we're that predict certainly to -- half diversification me expecting but to potential for of of is throughout It's XD year. this business, there the Android XD the more our

we're in and I in and moving that high-end our that the more to devices mid-range, customer's providing is to higher-volume key will really hands happen, that just think a are those and to think product. not exactly them to us will clear the I It's cost, technology products when from and lower of the capability but just announce today time. is it's market the happen, it the that matter

Operator

Henderson next Alex comes from Needham Our question & of line Company. with the

Your open. line is

Alexander Henderson

pretty a were Oclaro that products of like would paring pair acquisition bit I in redundant are of it. about change your of it's a you're mix. type much I post of to assume but out. out conclusion terms revenues, talk in in chunk coming nice on stuff Oclaro some the little expectations focusing that the of lower in revenues Obviously, what to the terms margin and that Really going

have So on sense of well be impact consolidation, the as that? as terms helpful some from in it what will margins of to revenues from both reduction impact is, on the

Christopher Coldren

guidance mean, in QX. why for -- million part think were Yes, million specific million of $XX to you've mid-$XX seen to in million and I $XX $XX Datacom the our very revenue we in that's absolute I about already that

talking and going where place product those be well is to year. drive pretty product, we'll our overlap later to or in calendar we this conclusion there highest product the as to actions this and cost are them utilization throughout lowest drive to to but customers But margin is the putting rationalization the minimal overlap. where appropriate, optimization through the We fab quarter and expect the as

Alexander Henderson

think of to million it kind Is $XX to reasonable for line range $XXX of million pairing?

Christopher Coldren

business, more product you that think Well, QX our Datacom is guide if of that be out see at and you chunk a already look in go history There I back of two the will rationalization. good in will Datacom. there companies

So it's number. hit that not unconceivable we that

grow to on faster. think I on healthy we innovation are focused new side, driving our products the other

offset than So we're hoping pairing. that the that product will more

Alexander Henderson

are that the gross, on is And of range? sub-XX% the margins those kind

Christopher Coldren

which? On

Alexander Henderson

stuff the On pairing? you're

Christopher Coldren

one challenged saw some is action with the There are reasons than term. the in that and more that's much that that the we're short Datacom guide you on of again taking

Alexander Henderson

XX pretty to at I then question, Apple can the that right Is takes to the very a would last had estimates a that that would sensing, for There the chain I the looking in upcoming obviously here One result of low I thought wide seems that Hence, worth through. a in fourth sharply that quarter. lay to weeks supply assume run assume in is The what XD see floor. time that quarter. process the process? for quarter. brought that be of X number numbers for the March we're weeks'

Alan Lowe

Difficulty] the not [Technical you came year. part early than where XXXX very, very heads calendar give into the even up if different of was very calendar end I'll late the of

quarter integrators well there So the customer's not of -- our is that as buildup so have our June our remaining was Chris, chain quarter taking in total what we don't it whatever is year respect then ago. anything? I said, for that, been was we've a from supply visibility you to adjustments, module are some March provided. supply beyond walls, think approach address the and do and the a chain conservative but both like guide we That nearly -- there's as the to have with numbers beyond through

Christopher Coldren

Nothing further.

Operator

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

Simon Leopold

was wanted understand my added some business, I'd you reported I million, like suggest rough million in and get I the $XX in ask math just capacity. the $XX to that ROADM to about you've particular. sales, updates, quarter

competitive how idea on thoughts an and answer trending the you landscape Thanks. your evolving? including get and particular you that that's of line of So business just like sort I'd how of see trying to some

Christopher Coldren

XX%, well. been that And quarter-on-quarter task. your think able don't Simon. sold we would another of I too was is or off, XX% grow no Sure. say by as that far we've XX% all Had have math to I'd simple growing

technology China, Twin have, products. of we ROADM the the same is there edge North say now At of product for MxN I'd had time, we're of strength America historically low strength if amount are those to a from And expecting across continued those all product in very a of higher the out. end even leading port years tremendous pent-up on continued sold our we're kinds we not products, to we on to so still seeing offering XxXXs count. to line demand competitive demand where and all such regions leadership and We So not where offering. competitive that from starting the see announced Europe edge had at in calendar 'XX is line

asking of a are it's have competitive So us landscape invest I the market. and range maintain customers front that continue out a continue think and are that of to to to share leadership we from in demand a large product that we for -- standpoint, broad our to

Simon Leopold

two as we you I could the us And into your out facing see beyond Thanks. sensing just market, opportunities XG. play terms perspective on as opportunities those of, follow-up, XD if two, calendar the 'XX and perhaps? How world wonder I give of either look in a could as one, them,

Christopher Coldren

on facing, mobile who have the multiple sensors. the we multiple say Board and world designs who working I'd devices much from with facing Well, is customers across a world pretty time-of-flight, in

technology the evolve in get so, to ability very pushed. And our where leadership continues market and meet products to these we're demand confident the of

starting as sooner. drive more see fruition. So calendar 'XX, 'XX. customers devices It's introduce and to ship. I into come more whole think there will throughout of already cases application use things We'll that interesting want is, to I And those as that's to our the should thing that think well a into new set calendar

out again, capabilities. and hands, that's technology the enabling the of we're So our just

on as question come put I they capable of far our that's customers and As when a with out XG those devices. and for handsets mean, what XG is concerned, more really they

So are and hard for it's I you, to ready but coming. investing, so tell the getting will me say, carriers

Operator

is with And Michael Instructions] next [ph] MKM person [Operator Partners. our

Unidentified Analyst

First going these ROADM tenders in question, real multiple the real inventory into discuss deployments China, that perspective evidence can build on the demand, your from versus by you specifically are carriers turning on.

what's your that? view on So

Alan Lowe

the are direct carriers interaction real and have with China We today. is that happening in This those of -- deployment. type this is have pilot deployments beyond they

And so there believe not buildup, have China, in from know based full visibility across that. of I real inventory that the that executives, tremendous our to don't network up is that but we so that customers confidence equipment on our amount and the pressure again, customers, field a ship the the constant I have deployed product China say we globe, for including we that that us are and verified the deploying gives these by being in carriers ending into China. and in manufacturers it's are demand our need in will are

Christopher Coldren

I'd add on that.

don't to great inventory least and rate that several China se network our -- at deployment kicked we levels with customers on customer, seem engagement equipment the in off manufacturing of the our to our have be when these coming said provision. visibility date into programs Our advertised carriers what's years between we was carriers Alan lead and customers as as the but as well back per

So several blue, a the manufacturers will. the it's if sales, consistent not we've not. very you seen We've recent the year It's they're out surge, had equipment in between and of roadmap with carriers. ROADMs the that

Alan Lowe

been years. ROADMs is substantially X/X that for count ROADM the many, that these many think ROADMs, sell and and edge selling higher selling than have a Michael, port average more other I higher price we complex thing, with is the

normal average to of these a in revenue the type one our So devices factors price is uptake higher when competitors. part price in of X/XX ROADM compared selling where of it's multiple

Unidentified Analyst

year-over-year XXX% to ROADM rate, us, other double-digit strength, ROADM you these pull is way going and Oclaro growth very that's concentrated you're going at about up or talk some our And regions it so in broaden what front with or does it when strong amps, China see will for about the this the of asking of transmission then where also follow-up; some seeing why metro be of guess, area, and as seeing are the regions other it is, to the probably demand we concentrated high type are out specifically portfolio, a still ROADMs seem through we like this in other I to another demand pumps specifically catch growth, but in build, is it Oclaro and to point? in

Alan Lowe

pieces Yes, say I there is of couple would Mike. a that

though First given amplifier of the the is, will and ROADMs transport indicator ROADM deployments I in is in transmission of say particularly growth and not that pumps regional. and whether future space, you based, seeing deployments that generally long-haul ROADM ROADM leading you in are ahead gig and infrastructure we we simply the to ROADMs there were as certainly and in gig, transmission a put significant a products infrastructure. China need switching expect if would deployed, were then XXX be because previously other XXX the there but that to transport ports disproportionate were

more -- ROADMs China are. expect So from to the a least a said, but domestically bit see not great a I the given the the word piece transmission, ROADM is at in being we geographical pronounced, growth consumer past, now a pull-through, they and that now is think standpoint, using in as you large

networking to levels and summed continued still there believe of customers our Chinese be purchasing said up also, that with Chinese continue growth the it's by above the ROADM's in of their new should is least up ROADM consumption, the customers our we that we market bringing growth therefore world if share there, at app. they China's consumption, market to Now all below

Operator

Stanley. from of Our Morgan the line next Meta Marshall question comes with

Meta Marshall

of I things. wanted couple a to dive into

capacity of one able industrial to just I of a you of expand year. guys to be than kind the expect kind have wanted First more this tried that of at on by you the major know to the fiscal business. to to I customer. sense of, to end needs the just customers would laser multiple point, you're are meet you get selling

-- customer for on what think kind logistical can Just being of, and you're the what Telecom if And threshold -- we the meeting as just quarter? million if between we other the more one, of $XX.X the level Datacom level -- Oclaro a a of second, get not, to the needs. then for maybe splitting should of split revenue

Christopher Coldren

million first I'll latter let maybe former. Telecom. Datacom $XX.X start Alan with answer approximately equally the split and the Yes, The then was and between

Alan Lowe

fiber have Lasers record still our primary to And laser and lasers, our revenues business Commercial customer as we still up in and far fiber that's do. catching as some

So their penetrating we this closer quarter that at of their customer. getting demand. look and outside still not we have needs, and met do once that we'll satisfy We're overall

expect So this I revenue year. fiscal wouldn't meaningful

fiscal it more think XXXX. I will be into

Operator

Tejas of UBS. Our comes from next line the Venkatesh with question

Thejeswi Venkatesh

of ZTE, acquisition a have the bit customers you at recently. presence the both Huawei news in both Oclaro now and obviously have deep of With a will quite systems' those been

you demand overall these characterize could you extent Chinese the to hoping So can customers? two on

Alan Lowe

others. are can't the non-existent I China working but between products mentioned, we're demand of of for at earlier, in transport, DCOs two ROADM at I'd the next we wish range going point the is ACOs strong. generation said all them generation to because there of through the China, what's deployments say this gig. domestic ROADMs with could, strong and control from ROADM the the time, countries, XXX is as network next but that of a telecom, in equipment two transmission it would closely Well, very ago on you manufacturers I leading being I from I year across including say today quite in

broad say strong I'd and the at this engagement So that relationship is point. very

Christopher Coldren

business their less in is bad still our versa, long not grow customers know, bad you we exposure say, thing, want that markets, argue that concerns it's about and or will vice a exposure the over-exposed any good would most but other if to a have as aggregate there's a but can I and them. market. to Yes, thing we that with interruption to of which I over their very the business, those exposure two you relative lose run, to it be we're that to between than ultimately would painful participants

Thejeswi Venkatesh

And out I lead the phones change as to your a by customer, you of into respect fair customer, have situation XD could you that with sensing half what look in look launched second lead of into the now assume, like? sense competitive the any XXXX.

Alan Lowe

next are facing portfolios. would happy still I share world of where we're product think we say have customer shipments be whether the the And front facing with that new our we're and today. generation, for I production positioned very we mean, and I very designs, that that happy with across

because don't So as product. I people said of capability they densification, like device and higher is up allow make in generation the higher efficiency today plug catch things prepared remarks, technology the the just to have yesterday's next to that pushing the wall that for

development. are excited development pretty R&D are their customers, of we many, extension engaged their we many we're part So about of and as with efforts where how

So, I where couldn't be are. happier with we

Operator

next D.A. comes from Our of the with Davidson. Kelleher question Mark line

Mark Kelleher

of you will to or strategy something What I the differentiate lean Datacom about into side. go on clarify Datacom market Is your back that on you your wanted what side? is the that faster strength. kind too a thinking to Could leaning is side. just speeds to exactly that Datacom are you're the

Alan Lowe

there's we're the Datacom because lot that a to at the from market wireless. particularly several real has between that the puzzle about both standpoint, So The level past opportunity profitability, over market, in figure transceiver Datacom been out and ships excited challenging years. of an awful very volume

brings is the think Oclaro us we things. what a couple So acquisition of to

there on the significant leading-edge the et are sales a technology. much much price food fewer level cetera of not more the there's barriers First entry a may competitors There's different also to that more ecosystem, -- than transceiver are occurring and where level because the at which is reductions, rapid transceiver focus chip you meaningful level. in a if at will, is have same kind it our operating chain,

all be speeds and at as else a make the anybody power have fast are as to what speed as chip that you obviously with seen than as competition much we to running where With space. prices world-class in is So would those higher we the range, now remains said, into the consumption higher be things land to chip there doing combined environmental That transceiver that capabilities, level. transceiver we a or or look in if at operating our lowering where given money to the because level expect capability, also see is and could way wider be Company's the strength. play we that at

where focus that, market where have there So to an technology, and with make again, lead are our then strategy choose the in we on to is best where money. play ability the to

Mark Kelleher

then a circuits? integrated about? DSPs, And what... exactly thinking those chips Are photonic Are what you are as those follow-up;

Alan Lowe

as either electro-absorption or as lasers, chips. modulated receiver product, are or these to receive So, lasers well modulated EMLs and some phosphide directly indium transmit

Operator

question of Hall next line Rod Our comes from Sachs. Goldman with the

Rod Hall

I XX%, I might the follow-up comment that what -- guess kind just I they you to I reasonable whether think you've but there wanted that. have and said to to then, start gets that eventually get to on And and on margins just think a of that's still know could of lasers have? could it trajectory sort you eventually

Alan Lowe

and you that, gross micromachining higher of business to improvements do that own diode obviously, Sure, will mix factory down our the lasers the overall. the of packages part that move up the Alan. do more as with volume also help low our the in lasers. is benefit it saw comes has margin see and to going the pull fiscal revenue we Rod. laser as in cost lasers is we of XX% Thailand, continue than say to reductions up Part will has where are has on with gross in that that gross gross seeing and I'd micromachining the to to more clear margin that QX. This there margin. that fiscal average margin our Yeah, but think gross into and laser QX between it margin continue costs and a I we QX, is drive as in path typically We're of fiber of to our part also

the So I there the as toward get fiber cost down, mix well laser, think that fiscal... the as should combination before additional of micromachining of us driving a end

Rod Hall

the of or is I guide? And XD there? in pricing, then the in ballpark what to seeing anticipate the XX% year-over-year interested inventory perturbing like we pricing trajectory inventory and just we're be interested the might also on back mean, particular, the big situation, what's guide to and I happening of pricing Is would much sensing that be model in come wanted check sort in VCSEL in, how you're declines. do that Is Thanks. your thoughts out with like

Alan Lowe

our I'm who this pricing call. XD to that listening our I'm reluctant sensing to about given be talking sure competitors are

double of prices or imagine, judge that. let digits, go time, the whether down can you that's low the single in you over I'll So, digits be

module As step both that, inventory, the as really far don't we next process. as the well module of integrators in visibility at have as much the

that but extrapolate than me say will to they're so shipping continuing that we I gives anything hard So units modules, are today other and to it's build visibility that it -- else that. new

Operator

John next Our of comes Stifel. from with the line Marchetti question

John Marchetti

just a side. on follow-up quick much. very inventory that Thanks Maybe

as to that cuts much the sell then your at business jump sensing through seen obviously inventory given in how had big addition of end XD how Oclaro at of big or the inventory that that in coming quarter. You your and is maybe of customer? from levels Curious of the VCSEL much the the some didn't a of comes you've that

Christopher Coldren

in of sensing well accounting as very is it with would over little valued on with immaterial inventory the up What think seeing inventory that as inventory There the sheet. both inventory well causes as you're combination the the Oclaro you acquisition this. is balance that coming in our where value as XD associated change stepped so a about

Alan Lowe

that as inventory we're able not up only the is, down our to we supply to I'd our into equipment inventory wind be and building manufacturer, to ability some build move Chinese-based contract say disrupt Thailand the having we're that customers.

our sure Thailand. to on make there to that in was inventory we but So purpose single of orderly a factory growth, transition high make done digits

John Marchetti

the And of the then we a here back look year. about think as levels follow-up, maybe should as sort to half just normalized fiscal How OpEx the Chris. of for we

we start trying to as -- Just the from are of a quarter, to get obviously to in half of we for, think you perspective an expense about December partial think the had year? the just sort a where of second contribution sense fiscal trying but

Christopher Coldren

as we bring will So our we time one which down quarter at look guide a to obviously expense. attain really synergies operating only and

expenses from and you ground the for some quarter. the you are, make impute So around I can guidance next think, then operating to have what our assumption synergies

on a QX So and guidance don't have operating answer good expenses provide out in being for able we to beyond.

Operator

Our of next from line question the [indiscernible]. comes

Unidentified Analyst

landscape VCSEL and potential competition the So you share also android about talk a with the little VCSEL could us bit clients? our existing about clients Thanks. in market? in And you content android could

Alan Lowe

In market? what market, android

Unidentified Analyst

android. In

Alan Lowe

dependent upon both. front whether what facing, XD or is varies type it world and facing sensing of Well, it

I couldn't in two the year's I mean, we do chip than would the that from to our to what in 'XX, additional eventually say android last they're ranges technology. think could to that environment, to single they it do three all will calendar customers, would allowing I expect have content chips be So potential at sensing with little landscape unique content bit the all in per differentiation that little we a as device or of standpoint have bit cast the with it's competitive additional and that see customers customer. our -- android necessarily dollar volume device. From android market, different the different our a able technology capable, -- people a pushing XD it's they acclaim I But is per something key drive lead content I think they're

Unidentified Analyst

Sure.

year. some that you of might content this a might growth -- see clients your existing mentioned you So

do do existing So a content expect next we base? meaningful year can this in your for the you or change it year client

Alan Lowe

or focused with and are I Well, on a device. or put to products that that what the working going them our it product high-end I something them are they our that when on it gets increase do they now it's to that content the single per can't -- high range do that world-facing they're VCSELs going they're it to our when with work design there model with products. are making on the solution announce of if VCSEL a just or on when it you to they announce think that many We're need. they're our in on based will powered tell do time-of-flight going going sure models customers, do

Operator

Our [ph] line the next with from Tom question Barclays. of comes

Unidentified Analyst

guess, then it organic I guided down start with like it's to down again. was XX%, service, data the

business; that could update in You've these decisions some got from product And Oclaro that? to gross uplift, at the segment talk where first you future? pairing the or the further, you about go to profitability can with like of then some look with the does strategic and see margin what levels else

Christopher Coldren

datacom referencing Tom, can are business? you you clarify

Unidentified Analyst

The datacom business.

Christopher Coldren

but Yes. the And for clarity, our -- reported Oclaro plus business, organic not your to down just going the business; quarter-over-quarter. datacom question, just was QX they Lumentum are both

Alan Lowe

ahead. sorry the Tom, -- go second And

Unidentified Analyst

Go ahead.

up following the Just business. gross on of uplift that margin

Christopher Coldren

certainly to we challenge will we any leave products best an don't a if just to low be for gross products be were I result balance of keep that to insuring something uplift if but are With overhead products the these pruning So don't got any on. -- gross the think going so you but products that overhead prune to is having company. low-low either we're eye margin, overhang improvement that's overall or low going said, through that better margin with that's in that's margin a obviously margin out replacing and product

Alan Lowe

at we're datacom. I our And to good we just to margin as continue transceivers XXX chip bump XXX driving on continuing the that; cost, gig to grow and to that think gig to lower business I market. add to next-generation then think transceivers be work a gross will And

chip levels margin the new in sales on business products in datacom So direction. combination right and bringing the higher gross our should drive the of driving of

Unidentified Analyst

then follow-up, talk into do there. rate your expected, implies, you And up as I that through And rate just run think guide expected tax still I helpful. think about I you walked than 'XX? you parts a the That's expect mean, move to about slightly for of rate slightly there kind X%. moving higher us the a June? Can

Christopher Coldren

but in might zip-code fourth relative I to a that be than rate would on little into quarter. basis not that's lower the -- I [ph]. think expect the the a change going

Operator

Markets. line Our next the from question Tim Capital Northland of with Savageaux comes

Timothy Savageaux

applications, step overall your the both those franchise. platform DCI maybe markets? focused seeing board the of historically outside in forward? briefly I exposure by a obviously then pretty evolve differentiating important ACL but trends how inside heading might with the both platform mentioned back retro kind datacenter, that and line, that about across China there is of we're and product to address versus think And opportunity, the cloud interconnect, wonder part ACL the You'd to Oclaro on center you which trends the talk I regard is could if maybe that data to between basically

Christopher Coldren

as -- with they that a that, the to way have a it would that to DCO module the component platform products for other about I well of across a many the The ACOs, the more is either integrate think level complex ACO. to lot certainly referenced, existing a level. base, at ramp buying DSP roadmap the in have the mostly today have little Tim, at and ACL some ACL as aggressively though customer we certainly product So you customers is that customer as not is cases DSP bit following adopted adopt the say our the ACO and customers

with the gig, XXX and looking XXX the as the forward over positioned that very XXX shifting industry the few long-term, see we're towards next gig, mid-term as years. So over both lower DCO we and gig to well well speed

I building the their DSPs modules for way modules to customer modules certainly or NIMs a themselves, of -- base, the customer -- as ACO integrating thinking coherent experts as you've highlighted said, components. In them without to in solutions great having base terms much of they to look throughout very but DCO cloud telecom generally we and buying get the be

And the guys, so there is market here cloud for primarily definitely DCI. between emerging an

Timothy Savageaux

follow-up covered wonder China a more they make about in demand kind just I trends strong. fact, up. the of perhaps sort overall telecom surprisingly the to any you're if looking In the guess that similar of can I to at look side, We've wrap on your carrier, comments growth of in focus outside of to overall relative trends whether long-haul characterize growth? metro, telecom you're similar and American China markets some you European North your how or China, OEM relative would and seeing you customers

Alan Lowe

where have North ACOs I'd next-generation throughout Yes, products and demand East say transmission leadership with and in the respect seeing Europe America, anecdotally, Middle that we're clear ROADMs, Africa we components DCOs. and and to growth broad

So in capability range believe our pure just it's it to growth with is I leadership and addition a market demand of share talked of that significant broad think combination a I that gaining but that things about we're -- the earlier. we've

and So our top-line I of think are telecom, transmission transport. the top-end two combination driving -- the

Operator

next of Jensen question Piper. Our from the with Troy comes line

Troy Jensen

Just Could Chris. have expect us available? you you DCOs that give the on a generally question, for a to last timeline guys follow-up when

Christopher Coldren

We be ramping to those expect this summer.

Troy Jensen

samples generally Is or available? shipping that

Christopher Coldren

I would available. say generally

Troy Jensen

we use on DSP follow-up a hear just one? be just multiple you And expect or partners Can on that. standardizing to we'd

Christopher Coldren

that's a relationship. multiple have We public lead we've DSP Certainly, very partners. partner, got a

Troy Jensen

the their XXXG available? lasers. In in from when question; line, Oclaro the question last same been my got it's just we've Then an lasers do expect to generally while update be you

Christopher Coldren

about I it's competitive we product, [ph]. to don't expect want sure, in -- talk but to be that's a that think we leader for a something

Operator

time. back to this at Alan I'll questions the further no are over Lowe. call There turn

Alan Lowe

for the partnership. regularly excellent Relations to want us forward in everyone like our months. with for our concludes This I call business are their We we long-term hard discuss events I website talking thank Matthew. you. and at work these Investor are and to business for for today. to you, position Relations section, again look customers our regularly events, Thank would growth. their thank on listed putting for also few another an our our to thank into employees want Investor and updated. in and We attending, Thank you

Operator

conference today's call. concludes This

disconnect. now may You

Lumentum (LITE) 5 Feb 192019 Q2 Earnings call transcript