Oclaro's (OCLR) CEO Greg Dougherty on Q2 2017 Results - Earnings Call Transcript

| About: Oclaro, Inc. (OCLR)
This article is now exclusive for PRO subscribers.

Oclaro, Inc. (NASDAQ:OCLR) Q2 2017 Results Earnings Conference Call January 31, 2017 5:00 PM ET

Executives

Jim Fanucchi - Darrow Associates, IR

Greg Dougherty - CEO

Pete Mangan - CFO

Analysts

Troy Jensen - Piper Jaffray

Paul Silverstein - Cowen and Company

Alex Henderson - Needham

James Kisner – Jefferies

Patrick Newton - Stifel

Michael Genovese - MKM Partners

Tim Savageaux - Northland Capital Markets

Dave Kang - B. Riley & Company

Jorge Rivas - Craig-Hallum Capital Group

Alex Henderson - Needham

Operator

Good afternoon everyone, and welcome to the Oclaro Second Quarter Fiscal Year 2017 Financial Results Conference Call. As a reminder, today's call is being recorded for replay purposes through February 14, 2017.

At this time, I would like to turn the conference over to Jim Fanucchi of Darrow Associates. Please go ahead, sir.

Jim Fanucchi

Thank you, operator, and thanks to all of you for joining us on the call today, our CEO, Greg Dougherty and CFO, Pete Mangan. Statements about management's future expectations, plans or prospects of Oclaro and its business, including statements about future financial targets and financial guidance; Oclaro's plans for future operations, together with the assumptions underlying these securities, constitute forward-looking statements for the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements concerning financial guidance for the fiscal quarter ending April 01, 2017 regarding revenues, non-GAAP gross margin and non-GAAP operating income; the growth of Oclaro's 100G and beyond product revenues; customer demand for Oclaro's products and Oclaro's future financial performance and operating prospects.

There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including the risk factors described in Oclaro's most recent Annual Report on Form 10-K, most recent Quarterly Report on Form 10-Q, recent Form 8-Ks and other documents we periodically file with the SEC. The forward-looking statements discussed today represents Oclaro's views as of the date of this conference call and subsequent events and developments may cause Oclaro's views to change. Accordingly, actual results may differ materially from those indicated by these forward-looking statements. Oclaro does not intend and is not required to update any forward-looking statements as a result of future developments.

In addition, today we will be discussing non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP.

A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures, together with a discussion of their usefulness and limitations is included in today's earnings press release, which we have filed with the SEC and we refer investors to this release. Also, we have posted a supplemental slide deck to accompany today's results in the Investor section of our website.

I would now like to turn the call over to Greg.

Greg Dougherty

Thank you, Jim, and thank you all for joining today's call as we report the results for our second fiscal quarter 2017.

I am very happy to report on the excellent results for our second quarter. For Q2, in addition to having achieved very strong revenue growth, the Oclaro team once again delivered the best gross margin and operating income performance in our history.

For the quarter, our revenue came in at $154 million growing 14% over last quarter and 64% over the same quarter one year ago. Our results reflect the strength of our 100G and beyond product portfolio, which grew by 60% to $114 million and represented 74% of our total sales.

We also had a strong quarter for 10G product sales, which grew by almost $5 million from Q1. This growth was driven by very strong demand for our 10G tunable product portfolio. Our telecom line side sales grew by 25% sequentially and represented 55% of our total sales. The sharp increase was driven by excellent execution by our operations team on the CFP2-ACO C product line. D

Datacom or client side represented 45% of our total sales for the quarter. Our strong revenue results help drive the highest gross margin and operating income in the history of Oclaro. In the quarter, we delivered gross margin of 40%, thanks to excellent execution, favorable product mix and benefits from foreign exchange rates.

The strong gross margin resulted in $36 million of non-GAAP operating income. This translated into non-GAAP earnings per share $0.21. I'm very pleased with our second quarter results and I believe that we will continue to demonstrate profitable growth.

With that, I'd like to turn the call over to Pete to take you through the financials and then I'll return to provide our guidance and talk about what we're seeing in the market, Pete?

Pete Mangan

Thanks Greg. Good afternoon, everyone. Here are a few additional details on the recent quarter. As Greg mentioned, sales of $153.9 million increased 14% over Q1 and by 64% over Q2 fiscal 2016. The 100 gig and above revenues reached $113.8 million, increasing 16% from the last quarter and 130% from the like period one year ago. The improvement was primarily driven by the ramp of our CFP2-ACO product.

For our 40 gig and lower speeds, revenues increased by $2.4 million to $40.1 million in the quarter, but was down 10% from the same quarter one year ago. In Q2 the same top four customers from last quarter contributed 22% 2016 and 10% respectively.

Major regional sales in the quarter had China at 42%, Southeast Asia 26, Americas 21 and EMEA 10%. Our second quarter GAAP gross margin was 39.5%, up from 34.2% in the prior quarter and 28.3% in Q2 '16. Our non-GAAP gross margin was 39.8% and improved 1100 basis points over the prior year and 540 basis points over the prior quarter.

The improvement year-to-year was driven by a richer 100 gig and 10 gig product mix and from scale that we leveraged our manufacturing overhead. On a quarter-to-quarter basis, the improvement was also from a richer mix of a 100 gig product that included a favorable foreign-exchange related to the Yen, the renminbi, and the pound.

Without the benefit of FX, non-GAAP gross margin in the December quarter would have been 38%. Our non-GAAP operating expenses were $25 million in Q2 and represented 16% of sales down from 19% last quarter. In the quarter, OpEx benefited $1.1 million from the weaker yen and pound.

At today's current exchange rate, we believe we can maintain operating expenses in the range of 16% to 18% for this year with R&D of 9% to 10% and SG&A of 7% to 8% of revenue. GAAP operating income was $33.4 million for the second quarter. This compares with $17.9 million in the prior quarter and $2.5 million in the second quarter of fiscal 2016.

Our non-GAAP operating income was $36.2 million or 24% of sales and compared with $20.9 million or 15% last quarter and $5.3 million or 6% in the second quarter last year. On a GAAP basis, net income in Q2 was $30.3 million or $0.18 per diluted share. This compares with $3.4 million or $0.02 per diluted share in Q1 and breakeven in the quarter one year ago.

As a reminder in Q1 the GAAP net income included a charge for the retirement of our convertible notes, which reduced GAAP net income by $13.3 million. On a normalized base, our second quarter non-GAAP net income was $36.3 million or $0.21 per diluted share. This compares with $20 million or $0.14 per diluted share in the prior quarter and $3.1 million or $0.03 diluted share in the second quarter of fiscal 2016.

Now turning to the balance sheet for Q2. Our cash including restricted cash was $243.5 million an increase of $14.2 million in the quarter. The increase in cash was a result of Q2 adjusted EBITDA of $41.2 million, which also funded CapEx of $17.2 million and working capital and prepaid of $9.8 million.

Regarding CapEx for the remainder of fiscal 2017, we expect to invest in the range of $40 million to $50 million to expand our manufacturing capacity. In turn, an additional depreciation of approximately $1 million per quarter will start in the March quarter.

For working capital in the quarter, accounts receivable of $107.5 million were commensurate with sales and remained flat at 64 days. Inventory of $82.3 million also remained relatively flat for the prior quarter at 81 days. Accounts payable and accrued expenses of $122.5 million for 106 days of payable compared with 101 days in the first quarter. The increase was mainly due to the timing of payments at calendar year end.

That completes the review for Q2 fiscal 2017. I will now turn the call back to Greg to cover the third quarter guidance and his closing remarks.

Greg Dougherty

Thanks Pete. I'd like to start by providing our guidance for the third quarter of fiscal year 2017. For Q3, our revenue is expected to be in the range of $156 million to $164 million. Our non-GAAP gross margin is expected to be in the range of 36% to 39%, translating into non-GAAP operating income in the expected range of $32 million to $36 million.

The higher sequential revenue guidance takes into account the seasonal price negotiations, which were towards the more favorable end of the usual 10% to 15% reduction. It also reflects a projected several million dollars drop in our revenue, coming from our 10 gig and 40 gig product lines.

Going forward, we expect Q3 sales of our 40 G and below products to be in the mid $30 million range and to drop by another few million dollars in Q4 as we end the 40 G line card program.

Our technology leadership in the 100 gig and beyond plus our tunable lasers, have us well-positioned for ongoing success. We continue to see strong demand for our products in the three market drivers that we've talked about during calendar year 2016; China, metro market and data center applications.

China continues to be very strong for us, growing 9% sequentially in Q2. We expect to see continuing strength in China as our 100 gig coherent port counts continue to grow and provincial network buildout increase. This translates into more growth for our narrow line with tunable lasers, our lithium niobate modulators and 100 G client side transceivers. Many of these products remain sold out.

While we continue to experience sold-out conditions for our 100 G client-side CFP transceivers during Q3, we do expect to shift the CFP2, CFP4 and QSFP28 transceivers to accelerate through the summer.

We also continue to experience strong demand for our 10 G tunable devices and modules. Here we're seeing a combination of a need for 10 G Metro applications, as well as the shift for using tunable transceivers such as the T SFP+ to replace fixed wavelength modules. In addition to all of this demand, we expect to see increasing CFP2-ACO activity in China throughout calendar year 2017.

Finally, on China, as you know the temporary export license for ZTE, which remains a greater than 10% customer is currently set to expire at the end of February. At this time, we do not expect to see interruptions in our ability to continue shipping product to ZTE. However, we cannot be certain of what ultimately will happen.

The 100 G Metro market and its demand for the CFP2-ACO began ramping during the last quarter. We expect demand for the ACO in the metro market to stay strong and ramp through calendar year 2017. We are very well positioned with the two primary equipment suppliers to this market.

We also continue to see very strong demand for the ACO from both traditional equipment suppliers and new website 2.0 customers for data center interconnect applications. We also expect to see this demand continue growing for 2017.

We believe that calendar 2017 will be year the 100 G takes off for interconnection within the data center. We continue to be sold out of capacity for QSFP28 LR4 and CWDM products for datacenters. We expect the market to be sold out or at a minimum, remain very tight for at least all of the calendar year.

The impact of datacenter architectures continues to broaden. I am pleased with the increased penetration of core indium phosphide laser technology inside the datacenter, at the edge of the datacenter and between datacenters. Our proprietary building blocks such as indium phosphide tunable lasers, mock center modulators and directly or externally modulated high-speed lasers are proving to be key enablers to the massive and cost-effective scaling of the cloud infrastructure.

In summary, our multiple market drivers China, the metro market and datacenters continue to be healthy. We continue to have good visibility into the market demand in all three of these segments and we have several confirmed purchase orders that take us well into calendar year 2017.

In addition, we've negotiated or are completing negotiations of several multiyear contracts or extensions contracts for some key product like the ACO that run as long as through calendar year 2018.

As evidence that we continue to be the leader in the 100 G and beyond technology and products, we are now shipping baby units of our CFP8 PAM4 400 gig transceivers. The CFP8 utilizes our unique high-speed EML laser technology. It is being shipped to enable design wins at network equipment manufacturers, where these transceivers will primarily be used in 400 G system demonstrations and trials with leading service providers. We expect to be shipping qualified product of this part in the second half of calendar year 2017.

Given the strength of the markets that we're serving, combined with our technology leadership for 100 gig and beyond, we feel very good about our prospects not just for our Q3 as reflected in our guidance, but for the fiscal year 2017 -- but for the entire calendar year.

As a result of this confidence, we expect to grow our total revenue in calendar year 2017 from between 25% to 30% when compared to the prior year. We also believe that we can maintain our gross margin in the upper 30% to 40% range. This gross margin when coupled with about 17% operating expenses should leave us with the sustainable non-GAAP operating income as a percentage of sale in the high teens to low 20s.

Oclaro is quite a different company from just the year or so ago. We feel very good about our recent results and our future prospects. We're confident in our ability to continue executing in operations, innovating and design and growing profitably.

I want to end by thanking our customers and our shareholders for their support. I also again want to recognize the very talented Oclaro team. I am proud of what we have accomplished. Given the strength of our people and our technology, I remain very optimistic about our future.

With that, that concludes our prepared remarks and I'll turn the call back to the operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator instructions] We'll go first to Troy Jensen with Piper Jaffray.

Troy Jensen

Hey congrats on the great results gentlemen.

Greg Dougherty

Thanks Troy.

Troy Jensen

Hey Greg, can you just repeat your 2017 guidance. I missed some of it and just have some follow-ups after that?

Greg Dougherty

You mean the part where I fumbled. You're talking the full year guidance. For the full year, we said we would grow -- this was calendar year 2017. We would grow between 25% to 30% and that we could -- we felt we can maintain our gross margins in the upper 30% to 40% range, which translates into an operating income of the high teens to low 20s for operating income as a percent of sales.

Troy Jensen

Okay. Perfect and I guess I missed the calendar year piece of that, I thought you were talking about fiscal year.

Greg Dougherty

Yes, that's right.

Troy Jensen

No worries. Makes sense. Hey so quick question, just regarding the bomb cost within the ACO, just because if you've been able to drive down the bomb for the drivers, [TAs] and specifically you've been reduced as much as the ASP reduction you've seen?

Greg Dougherty

Our supply chain group is doing an outstanding job of negotiating with our suppliers. We also get the benefit of significant increases in volume and also one of the things that we did which sounds fairly elementary, but was a big year for Oclaro, was we did multiple source many of the key compliments within the bomb, which also gives us the ability to have a stronger negotiating position.

Troy Jensen

All right. Fair. Then just I do have one more question, I'll seize the floor, but specifically on ACO's maybe kind of three-part, can you give us any color on revenues, units and specifically on competition can you talk about on fiscal [CNI] have had a second supplier qualified yet?

Greg Dougherty

I'll start on the second question. We're not aware of anyone being qualified at either place. On the first question, I guess the best way to say it is that the ACO was the number one driver for our 100-gig growth in the quarter and also it's the number one driver in our telecom growth for the quarter.

Troy Jensen

Okay. Perfect. Keep up [indiscernible].

Greg Dougherty

Thanks Troy.

Operator

We'll now go to Paul Silverstein with Cowen and Company.

Paul Silverstein

Greg, I am tempted to ask where can it get better? So, could you use a better CFO? Beyond that, I don't know. On a more serious note, where can you do better from -- where are you most optimistic in terms of incremental improvement from here either on a regional or product basis?

And going back -- I missed some of the details on a sold-out products, but let me ask you the broader question, which is what percentage of your revenue is comprised of products that are currently sold out and how long do you expect that to remain the case?

Pete Mangan

Yes maybe Paul, I'll take the first part in terms of where it can get better. We continue to have opportunity on the data center, inside the data center as well as a datacenter and connect.

We have strength in the market drivers that Greg talked about across metro in China and from a product standpoint, we're still not getting all the products to the customers that want products. So, we still have a lot of work to do.

Greg Dougherty

And I guess, Paul on the sold out products, I think we were saying back in the October-November timeframe that the March quarter had several of our 100 gig products continuing to be sold out in the March quarter and that's on the narrow line with lasers with the 90 modulators CFP transceivers.

Paul Silverstein

How much, can you tell us how much revenue you're leaving on the table from the sold-out products?

Greg Dougherty

No, it's a question of us just ramping in the natural ramp that makes us comfortable with future growth.

Paul Silverstein

All right. Appreciate. I'll pass it on, thanks guys.

Greg Dougherty

Okay. Thanks Paul.

Operator

Our next question will come from Alex Henderson with Needham.

Alex Henderson

Thanks. I was hoping you could talk a little bit about the pings and pongs that drive margins up and down in the guide. I would think the mix shift to more ACO would help your margins. Obviously, you've got the yearend price reductions here in March. You've also probably got some volume price reductions as a result of steeply higher volumes for some of your customers.

But on the other side of the coin, you've certainly benefited from the exchange rate since January 1, much less in the fourth quarter. You've also got volume going across the Fab going up, which I think would help your margins. So why would the margins be less than the 4Q number on average over the course of the following year?

Pete Mangan

Yeah, I think you start with the typical March quarter. Greg had mentioned ASP adjustments in the quarter being at the lower end of that 10% to 15%. So that clearly is the number one headwind in the March quarter.

We'll bring on about a million a quarter depreciation over the next few quarters and I'll call those the two notable. The headwinds for us continue to be our own cost reduction programs, unit volume increases and FX I'll just Alex suggest that it's a wildcard. It depends on if it holds we're in a pretty volatile time and so you're right. If we got a full quarter of FX could be a benefit, but it depends on it if it holds.

Alex Henderson

So, are you assuming that the FX holds at this -- at the rates as of now or flat going forward?

Pete Mangan

Yes.

Alex Henderson

Right. And the mix we think would also help now?

Pete Mangan

A little bit. We had a good mix of performance in the December quarter, both on a 100 gig and 10 gig and so mix will help a little bit, but the more positive parts are cost reductions and additional volume.

Alex Henderson

Right. And then just going back to the volume increases for a second and obviously your volume helps you on your fab, but on the other side of the coin, are you building in the assumption of volume ramp with customers and some of that being negotiated into these multiyear contracts to give you some offset to that benefit, is that what's going on?

Greg Dougherty

Yeah, I think Alex, like we were saying back in October timeframe, our intention was to extend and negotiate some new multiyear deals, where we were willingly to give a little on price, which we didn't need to do in the short-term, but to lock up demand that extends through calendar year 2018.

Alex Henderson

Can you just give the 10% us one time and then I'll see the floor, thanks?

Pete Mangan

Yes, the 10% customers in the quarter were the same for names as last quarter, [20 to 2016 and 2010].

Alex Henderson

Thanks.

Operator

[Operator instructions] We'll go to James Kisner with Jefferies LLC.

James Kisner

Hey, thanks guys for talking my question. Again, great quarter and nice guidance. So, my question is on Datacom, I just wanted to drill down on that for a minute. You in a way disclosed speeds within a segment, but as I was kind of trying to build the model here, looks to me Datacom might have declined sequentially or I want to confirm that.

And just in general, I wonder seeing about the business transition on CFP to CFP2 and CFP4. Do you expect any decline in that revenue as you move to those other form factors that don’t have a gear box in them and maybe offset their as more gross margin dollars, but just can you talk about the impact on your revenues from that transition to CFP2 sand CFP4 also? Thank you.

Pete Mangan

In the quarter, Datacom increased to 2% in the quarter and as Greg mentioned during the calendar year there will be a shift more towards CFP2 and CFP4 and QSFP28.

Greg Dougherty

And James on this shift, I think you have it right. So, the CFP there is a couple of benefits in the sense that there is a fewer suppliers and we've been pretty well maxed out in terms of capacity for the last several quarters.

As you shift to CFP2, CFP4 and QSFP28 for optical transport and routing type applications, that shift will bring lower average selling prices, which has obvious impact on volume from an ASP point of view, but because the cards that use those tend to be more dense than you also have some upside in volume and then on top of that because the gearbox is not in the CFP2 and CFP4 and QSFP, from a margin percentage, there should be a benefit there.

James Kisner

Just to clarify, I was asking about the Datacom 100 gig specifically, it was like 40 gig was actually up sequentially 40 gig and below. So, data comes up sequentially, but does that mean that 100 Datacom was down sequentially and is that -- is there any capacity constraints that affect that as well, thanks.

Greg Dougherty

Yes, I don’t think you can interpret it that way. Datacom Telecom is separate from 140 gig and below. So, keep in mind our 40-gig line card business has been coming down.

James Kisner

Okay. Thanks a lot.

Greg Dougherty

Sure.

Operator

Thank you. We now to go to Patrick Newton with Stifel.

Patrick Newton

Greg and Pete congratulations. Maybe asking a prior question a little bit differently, could you just help us understand the mix of modules versus components in 100 gig business currently?

Greg Dougherty

No. We usually don’t break that out. We don’t do it on individual device.

Patrick Newton

Okay. And then China, Greg you had a bunch of positive commentary there, 100 gig port counts going on, provincial network growing, I believe you also said that ACO been adopted if you could confirm that. But I guess the key question is, is, should we see China grow sequentially through calendar 2017?

Greg Dougherty

So, on the ACO question, we've been saying for well over a year now that in 2017, we think that there will be some adoption of ACO in China and we continue to see that momentum. And I guess we have been saying that we would start shipping in small quantities probably around the middle of the year and we're echoing that and saying it should ramp through the year for us on the ACO product in China.

I guess in terms of sequential growth, we're obviously not going to guide China that way. What we have been saying publicly though has been that we expect China revenue to grow but it may drop as a total percent of sales because of the growth in the datacenter in metro markets, which tend to be more North America and European centric.

Patrick Newton

Okay, great. And then I guess just kind of dividing down to the ACO, my sense is that the contribution now is led by DCI followed by Metro and then you have China coming in to the model in a couple of quarters. If we look out exiting calendar year '17, is that still the right mix of the revenue contribution from the ACO or could the metro market actually surpassed DCI?

Greg Dougherty

I think it's the right mix with metro picking up quite a bit towards the end and getting close. And I guess Patrick it's difficult for us to be very granular on that because we sell one part that goes on to multiple platforms at our customers and so they can be using it in a long-haul network, can be using it in a DCI, in a router a switch or using it on a Metro card. So, it's hard for us to distinguish.

Patrick Newton

Great. And then just last one Greg is trying to understand your [ZTE] commentary. I think you talked about the current extension of a stay beyond February being difficult to predict, but my question is if it's not extended and there is an export plan that is enforced, do you feel like Oclaro has the right pieces in place, I guess meaning less than 25% of content in the U.S. that you could work around any injunction and continue to ship product?

Greg Dougherty

I guess the best way to say that is that, first we have no reason to believe things will change. However, we can't predict and particularly in times right now, it's very hard to predict some of the political wins.

We do think that in general that a couple of things, one is that many of the products could go to other customers and then we also would follow all of U.S. export rules and make sure that we comply completely and apply for licenses and think that we could likely be granted licenses. But we would follow with the belt-and-suspenders approach, export while we make sure that we were 110% compliant.

Patrick Newton

Great. Thank you for taking my questions. Good luck.

Operator

And Michael Genovese with MKM Partners. Please go ahead.

Michael Genovese

Thanks very much and congratulations guys on excellent execution in a strong environment. I guess my first question is I just want to get a temperature on what you feel your lead in CFP2-ACO is and specifically how long do you think it will be before supply in the industry catches up with demand in the industry and several competitors start to have volume of the product?

Greg Dougherty

So, we think we still enjoy a nice lead particularly around differentiation with performance with the 200 gigabit and 250 gigabit levels. We have been saying that we will have competitors. We expect to have competitors and the market needs competitors, Mike and so we see that happening through 2017.

What we have done though is we have signed some long-term contracts that will protect our leadership position at a couple few of the largest potential customers for this part and we feel very good about the market share that we'll enjoy for quite some time.

Michael Genovese

On the first part of the question with the supply sort of catching up with the level of demand, do you have any comments on how many quarters out that might possibly be?

Greg Dougherty

Not, not really. A lot is going to depend on whether or not competitors get qualified and can ramp their capacity. That obviously there will be some reduction in demand on us as they ramp, which we have good visibility as to what it could be for us. However, our customers still are very, very reliant on us for their supply at this point.

Michael Genovese

Great. And in China it sounds like provincial and metro has already started, it has started to bleed over from a long-haul focus to a bit more of the metro focus, but is there -- is there a so-called Phase 12 inflection coming down the road that's supposed to kick up orders to a much higher level and it sounds like CFP2-ACO probably will be used in China in metro, but will it also continue to be a discrete component market with the metro focus in China?

Greg Dougherty

Yes, I guess my comments on China would be that China will have a market for DCO's that is essentially a component market play, where people like us, the [Lumentum, Neo] supplied lasers, modulators and receivers into companies like Huawei that build their own DCO. So there will be that that type of market, which is a component play.

There will be a line card market just as there is today and just so you know the Chinese customers have redesign the line card components, so they're essentially identical to what goes into a DCO. And so, that market will continue and very likely from a volume point of view, remain the largest volume in China for 2017.

And then there is going to be an ACO market and I actually think Mike that it might be more for DCI then Metro in China. But we’ll see how that develops and if it goes into other market segments as well. We see all three markets being strong for the years to come.

Michael Genovese

Great. But on the idea of a further inflection taking order to a higher level, something called Phase 12 driving that, is that a reasonable expectation or is it not really playing out that way?

Greg Dougherty

We don't see this idea that year is backend loaded and I'm not sure our customers have -- I was in China last week, 10 days ago, our teams there a lot and we're not hearing the year is backend loaded. It could be a 46 to 45-55, but it's not a -- for what we hear, we don’t hear of any astronomical jump in the second half.

Michael Genovese

Great. I really appreciate all the details. I am just going to ask one more, basically have you had any share gain opportunities? I know you're supply capacity constraint, but are there any incremental share gain opportunities that have come in as competitors have struggled with their yields or with their firmware and their qualifications or by choosing bad parts? Have you directly benefit from any of that?

Greg Dougherty

Well. I would rather talk less about competitor problems and more our ability to ramp. We could be shipping a boatload more QSFP28 whether it be LR4, CWDM, if we could ramp faster. We grew that business in the quarter which is a good thing, but we should've grown it a lot more and I'm not totally pleased with how quickly we’re ramping it even though we're ramping it nicely. I think we could be doing better and so that's the big area where we could be taking a lot more share.

Michael Genovese

Is that because of your execution or is that because of things like laser drivers being notified?

Greg Dougherty

No, its just purely us in terms of our ramping and we’re ramping it and growing it nicely, but I'd like to be growing more because the market is wide open for us to grab a lot of market share.

Michael Genovese

Great. Thanks Greg and keep up the great work. Thank you.

Greg Dougherty

Thanks Mike. Take care of yourself.

Operator

And we’ll go to Tim Savageaux with Northland Capital Markets.

Tim Savageaux

Hi, good afternoon.

Greg Dougherty

Hey Tim.

A – Pete Mangan

Hey Tim.

Tim Savageaux

Hey and congrats from me as well on another great quarter. Have a couple of questions here. And I guess let me start kind of where we left of on the last one with QSFP28, I did expect you might you have an opportunity to ramp there.

Obviously, we saw kind of a flattish Datacom number, do you expect any change in mix maybe back toward the Datacom side as you look to your March quarter guidance? And I guess when do you expect QSFP28 to be a material part of that Datacom number assuming it's 10% plus now or somewhere around there, but should we look it in mix changes there and any margin impact coming out of that?

Greg Dougherty

Yes, I think the one thing that we've been saying is our CFP capacity is pretty well capped and so we haven't been looking to grow the last couple quarters our CFP output. And we did that intentionally because we know that that market is going to be slowing down in the summer and so we stayed slow out there and by definition, not going to grow that piece of the market.

Our other parts are all growing on the 100 gig side and I think the real point on the QSFP28, the 100 gig QSFP market I think we're finding it's harder to make some people realize and that there is a really good opportunity for a company like Oclaro to grab considerable market position right now and we’re definitely supplemented.

Tim Savageaux

Got it. Okay. And I know you've been talking about a total adjustment market over on the CFP2-ACO side, I think was on last call perhaps you originally have been talking about a $200 million to $400 million TAM and maybe narrow that up toward the high-end of the range I believe for calendar '17.

Given your commentary around China and results this quarter, do you have any I guess to your estimate of both addressable market in calendar '17 as well as your impression of [indiscernible] share that market?

Greg Dougherty

No, I think Tim that we've always factored in China, which by the way I don't think it's going to be massive revenue in calendar year '17, but it will be steady growth in the second half. So, we've always factored that in that $200 million to $400 million available market and we have indicated that it's probably going to run towards the upper half of that, but we stand by the $200 million to $400 million.

In terms of our market share, we really don't comment, but we feel that we're doing very, very well at all of the major users of the ACO right now.

Tim Savageaux

Okay. And a last question for me and it gets back on the 10-gig side, where we've been getting indications of some pretty lead times and significant demand there. So not surprised to see your strength there on the 10-gig side.

I wonder however to what extent any merchant opportunities either feeding the Datacom markets are other telecom markets have factored into some of the strength of 10 gig and maybe even 100 gig discrete wise if you can comments on the overall merchant opportunity and then maybe any margin impact from that?

Greg Dougherty

Are you referring to selling chips or…

Tim Savageaux

I am indeed.

Greg Dougherty

Okay. So, for 100 gig, we continue with the same strategy of supporting a customer too that has relationships with some of the major datacenter providers. So, that continues. We're not looking to turn that into a massive revenue stream or market for us Tim.

On the 40 gig inside the datacenter type applications, we are continuing to sell 10 gig chips, but again that's not something that we anticipate growing. The big strength for us is in tunable. What's happened to people that were buying fixed wavelength tunable transceivers, people aren’t making 100 different wavelengths of the DFD anymore.

So, it's given a new opportunity for tunable lasers to step in and then you can from both an inventory management and also availability point of view, one transceivers can satisfy the entire need. And so, that's really picked up noticeably in the last probably six months or so.

Tim Savageaux

Okay. And maybe I can squeeze one more quick one in there, just about seasonality, which is for the last two March quarters now, we've seen increases in revenue. I think we had obviously China surging last year. You might say that you've got a big product cycle going in ACO this year, but can you speak to -- should we be rethinking expectations about down Q3 seasonality for Oclaro going forward or would you characterize these as a couple of anomalous events?

Greg Dougherty

Well, two data points don't always make a trend, but I hope it's a shift. Part of it is I think last year was you're right, that the China surge if you will, this year I think the market and it's not all ACO for us in terms of driving our good guide for Q3. We feel we're growing revenue on several other products as capacity comes on and as we ramp.

I also think that pricing was a little bit more intelligent than you would just need to be smarter in terms as an industry, we need to be smarter in terms of how we're pricing the market because there shouldn't be an assumed 10% to 15% drop every quarter for the rest of our lives.

Tim Savageaux

Okay. So, there are some maybe structural changes emerging in that regard.

Greg Dougherty

I hope so.

Tim Savageaux

Okay. Thanks.

Greg Dougherty

Good. See you Tim.

Operator

And we'll go to Dave Kang with B. Riley.

Dave Kang

Thank you. Good afternoon. First, could you guys talk about tax rate for this year?

Pete Mangan

Dave, I would say, taxes for the remainder of the fiscal year will still remain in the $0.5 million to $1 million per quarter and for fiscal year '18 in the 10% to 15% rate.

Dave Kang

Got it. And then Greg when you talked about CFP market -- you expect CFP market to slow down this summer. Did you include CFP2 as part of CFP or it's just CFP alone, just wanted to clarify that?

Greg Dougherty

Just CFP. It will be replaced as we said by the CFP2. It depends on the application. CFP2, CFP4 or QSFP28 depending on the customer and the application.

Dave Kang

Got it. And so, what's your view for CFP2 market this year then?

Greg Dougherty

It should grow.

Dave Kang

Okay. So are you adding capacity. I assume you're adding capacity then correct?

Greg Dougherty

We've add capacity across all of our 100 gig transceivers.

Dave Kang

Got it and then you mentioned about CFP8 PAM4 maybe just wanted to clarify, did you just say you're sampling now or you guys expect to sample in second half this calendar year?

Greg Dougherty

We're already -- we're sampling, we'll be shipping beta units going into system demos and field trials for the first half. We'll be qualified -- we'll be fully qualified for the second half of this year.

We're in a good place in the market with that CFP8 and it all comes down to we have the best EML technology and that enables the CFP8.

Dave Kang

Got it. And which particular product does it replace?

Greg Dougherty

It's used, so the CFP8, we don't think will be the high-volume 400 gig product. It's a 25 gigabit PAM4, so you have eight channels running at 50 gigabit. So you have eight different wavelengths and then the CFP8 is obviously, the CFP8 is roughly the same size as the CFP2.

And so, it will be used in optical transport and in routers and applications like that. So, think of it as a CFP but think about what we believe the main market for 400 gig will be using 56 gig PAM4 which gives you four times 100 gigabit, so you can use four lasers and then you can put that either in a QSFP 56DD or in an OSFP package.

And then that starts to fit into the QSFP type market which is inside the datacenter or in switches and things like that. So, that's where the mass market is. Unfortunately, the good news is we already have the lasers to make that market a reality. The bad news is that the PAM4 DSPs don't exist yet. So, we're trying to encourage DSP suppliers to move from 25 to 56 gig.

Dave Kang

Got it. And then the last question regarding on ACO, what is the current mix? I assume it's heavily datacenter so web scale with I guess Metro telecom coming on and what do you think that mix will be maybe one year from now?

Greg Dougherty

Metro clearly picked up for us in the December quarter in terms of the ACO mix. You're right Dave that it's more DCI than Metro. We expect that to continue through 2017 but the gap gets smaller.

Dave Kang

And then when you talked about that ACO ASP few quarters ago, has that number changed at all or just trying to figure out what the latest ASP is for ACO, the number that you told us before?

Greg Dougherty

How many you want to buy? We're not talking prices on the ACO anymore?

Dave Kang

Okay. Fair enough. Thank you.

Greg Dougherty

Thanks Dave.

Operator

And we have a follow-up from Paul Silverstein with Cowen and Company.

Paul Silverstein

Sorry, given the hour, but Greg I heard all of your different statements and responses on China, so my apologies, but let me just ask a broad question. I heard you say that you were in China recently. I don't know if that's just you're going to repeat, but the general question is I assume when you talk about your outlook for demand in China throughout the year that's not just based upon your conversation with ZTE and Huawei.

But I guess the general question being how much insight regarding there are limits, but how much insight do you have, I assume these conversations are directly with the carriers themselves in in addition to Huawei and ZTE, yours that not the case?

Greg Dougherty

So, we sell in the China, be it Huawei, be it ZTE, but then also Fiber Home, Shanghai Bell, we also the 10 gigabit chips and some of the 100 gigabit chips go to Chinese transceiver manufacturer and then the other thing is I think there were some recent awards where Cisco just won some DCI business there.

So, we experienced China through multiple channels that way and so we triangulate around the customers were telling us. The carrier information is also obviously very, very. However, it doesn't necessarily give you the profile of demands from the customer base and so as we look at how we plan our factories and how we do our guidance, it's based off of what the customers need from us and in some cases, with some of the program there, the firm purchase commitments that we have in China that go through 2017.

Paul Silverstein

Got it. Thank you very much.

Greg Dougherty

Sure.

Operator

Thank you. We'll go to Jorge Rivas with Craig-Hallum Capital Group.

Jorge Rivas

Hello guys. Congratulations on the great quarter. Just a couple quick questions from me. Can you talk about the trajectory of your business of the 40 gig and below its revenues for the year? I think you had some commentary about that and I missed it?

Greg Dougherty

Yes, it was in the script that we basically said. So, we did $40 million this quarter. We said it would come down to the mid-30 in Q3 and drop by another few million dollars in June as the 40-gig line card business rolls off and I guess what we didn't say, we expect to stay in the low to mid 30s for the year because we think 10 gigs have a very long tail.

Jorge Rivas

Okay. Great. Thanks. And then one last question. I think I heard you correctly, but I want to confirm with you, it seems that the QSFP28 market in LR4 and WDM it's sold out for the -- was it calendar '17 or for the rest of fiscal '17.

Greg Dougherty

No, we think that the market for LR4 CWDM the QSFP product not just for us, but we think the market is going to be either sold out or as I said at a minimum very, very tight for the entire calendar year.

Jorge Rivas

Calendar year. Okay. And then as far as the competitive environment for QSFP28, it will be ideal, it will be great to see the same trend that you saw in CFP2 ACO, but there is a lot of players up. How should we think about the pricing environment for that product in calendar '17?

Greg Dougherty

With the ACO I think is a special product and we had special technology to make that what it is today. On the QSFP28, there will be more competitors and so it will be a more competitive environment Jorge.

Jorge Rivas

Okay. All right. Thank you guys and congratulations again.

Greg Dougherty

Thanks Jorge. Thanks.

Operator

Thank you. And we have time for one more question from Alex Henderson with Needham.

Alex Henderson

Well, I'll make it real short. What's the ending share count?

Pete Mangan

It's 169 million,

Alex Henderson

And so, we're looking at flat share count growing sequentially roughly.

Pete Mangan

Yes, it's just up slightly notably.

Alex Henderson

That's what I needed. Thank you.

Pete Mangan

Okay. See you.

Operator

Thank you. And I'll turn it over to Mr. Fanucchi with any additional or closing remarks.

Jim Fanucchi

Great. Thanks, everyone for participating in today's call. We do look forward to speaking with many of you at investor events this quarter and at the Aussie Tradeshow in late March. Have a good afternoon.

Operator

Thank you. Ladies and gentlemen, again that does conclude today's conference. Thank you all again for your participation and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!