Oclaro's (OCLR) CEO Greg Dougherty on Q4 2017 Results - Earnings Call Transcript

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About: Oclaro, Inc. (OCLR)
by: SA Transcripts

Oclaro, Inc. (NASDAQ:OCLR) Q4 2017 Earnings Conference Call August 2, 2017 5:00 PM ET

Executives

Jim Fanucchi - Investor Relations

Greg Dougherty - Chief Executive Officer

Pete Mangan - Chief Financial Officer

Analysts

Alex Henderson - Needham

James Kisner - Jefferies

Mark Kelleher - D.A. Davidson

Michael Genovese - MKM Partners

Fahad Najam - Cowen and Company

Tim Savageaux - Northland Capital Markets

Richard Shannon - Craig-Hallum Capital Group

Troy Jensen - Piper Jaffray

Paul Silverstein - Cowen & Company

Dave Kang - B. Riley and Company

Operator

Good day, everyone and welcome to the Oclaro Fourth Quarter and Fiscal Year 2017 Financial Results Conference. As a reminder, today's call is being recorded for replay purposes through August 16, 2017. I would now like to turn the conference over to Mr. Jim Fanucchi of Darrow Associates. Mr. Fanucchi, please good ahead, sir.

Jim Fanucchi

Thank you, operator and thanks to all of you for joining us. On the call today are 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 statements, 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 September 30, 2017 regarding revenues, non-GAAP gross margin and non-GAAP operating income, 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 represent Oclaro's current 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 does not require 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 the discussion of their usefulness and limitations, is included in today's earnings press release, which we have filed with the SEC and I refer investors to this release. Also, we have posted a supplemental slide deck to accompany today's results in the Investors section of our website.

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

Greg Dougherty

Thanks, Jim and thank you all for joining today's call as we report both our fourth fiscal and our 2017 fiscal year end results. I would like to start the call by stating that fiscal year 2017 was a remarkable year for Oclaro. In 2017, we achieved year-over-year revenue of 47%. Our gross margin for the year was 39% up 11 points from 2016. We improved our non-GAAP operating income by $105 million and significantly strengthened our balance sheet. These tremendous results were driven by our 100 gig and beyond product portfolio, which doubled in revenue over 2016.

I'm very proud of the Oclaro team for delivering such outstanding financial performance as 2017 was indeed a great year. During the fourth quarter, our QSFP28 and CFP2-ACO fueled solid revenue of $149 million. This revenue was achieved despite an $11 million sequential decline in China sales. I will say more about our view on China in the China market a little bit later. Q4 also marked the last quarter of our 40 gig line card shipment following the successful execution of our end of life strategy for this product line.

As we projected, our QSFP28 sales in the quarter doubled compared to Q3. Together the QSFP28 and ACO product families accounted for over 40% of our total sales. We expect that the demand for both product lines will continue to be strong through fiscal year 2018 driven by the continued growth in the metro and data center market. Our 100 gig and beyond sales were $121 million in Q4 and represented 81% of our total sales. During the quarter, we saw sales of our client side CFP family declined by 25%. Our 40 gig and below product sales also decreased by over 20%, both of these sequential reductions were expected.

The mix of our datacom and telecom sales remained at about 50-50. As data center both intra and inter plus the metro market continue to drive growth. Overall I'm very pleased with our success serving the Web-scale customers both directly and indirectly. Our non-GAAP gross margin for the quarter came in at 41% essentially flat with Q3 despite the lower sequential sale. We once again delivered very strong non-GAAP operating income of $34 million. I'm very pleased with our fourth quarter results as well as the tremendous year we had in 2017.

With that I'd like to turn the call over to Pete, to take you through the numbers and guidance and I will return to let you know, what we're seeing in the market. Pete?

Pete Mangan

Thanks, Greg. Good afternoon, everyone. Here are the financial highlights for the fourth quarter and fiscal year 2017. Regarding revenue Q4 2017 sales of $149.4 million represented a quarterly decline of 8% due to the expected softness in China in the end of life of our 40 gig product. Compared to Q4 last year, sales grew 28% on a normalized 13-week basis with 100 gig and above portfolio growing 63%, then offset by a decline in 40 gig and lower product of 32%.

Sales of our 100 gig and above product accounted for $120.6 million or 81% of Q4, 2017. During the quarter, QSFP28 sales doubled but did not offset the revenue decline of $11 million from the client side CFP family. Sales of our 40 gig and lower speed decreased by 21% in the quarter from 10 gig softness in China and 40 gig end of life. Major regional sales showed less dependency on China which was 32% of total sales down sequentially from 36%. Americas was number one with 39%, up from 28%, Southeast Asia was 18% and EMEA was 10%.

In the quarter, we continue to diversify our customer base with our top four customers representing 55% of revenues versus 68% two quarters ago. Our top four customers in Q4 contributed 17%, 13% and 12% respectively. Please note for the total fiscal year 2017 our top customers were Cisco with 18%, ZTE 18%, Huawei with 15% and Nokia 12%. Our fourth quarter gross margin of 41% was flat with the prior quarter and was up from 32% in Q4, 2016. The 900 basis point improvement over Q4, last year was paced by a richer 100 gig product mix and great scale as we further leverage our manufacturing overhead.

GAAP operating expenses for the quarter were $31.4 million up from $29 million last quarter and $27.4 million in the fourth quarter last year. Our non-GAAP operating expenses were $28.6 million in Q4, 2017 or 19% of sales up from $27 million or 17% last quarter and $25.7 million or 21% in the same quarter last year. The spending increase was predominantly in R&D expenses. Going forward we expect that operating expenses will be in the range of 19% to 20% of sales.

GAAP operating income was $29.9 million for the fourth quarter. This compares with $37.7 million in the prior quarter and $12.8 million in the fourth quarter of fiscal 2016. Our non-GAAP operating income was $33.3 million or 22% of sales and compares with $40.5 million or 25% in the prior quarter and $14.9 million or 12% in the fourth quarter last year. On a GAAP based net income in Q4 was $56 million with $0.33 per diluted share and included a tax benefit of $25.7 million from the capitalization of our Japan NOLs and other net deferred tax asset. Without this benefit, the Q4, 2017 net income would have been $30.3 million or $0.18 per diluted share. This compares with $38.2 million or $0.22 per diluted share in Q3 and $11.8 million or $0.09 per diluted share in the quarter one year ago.

Please note for fiscal year 2018, as a result of capitalizing our Japan NOLs, our tax provision for the year will be in the range of 20% to 25%. However, on a cash base the range will be between 5% and 10% as we expect to burn off the remaining NOLs for our client side business in Japan and continue to utilize the $470 million of UK NOLs for our line side business. Finally for Q4, 2017 non-GAAP net income was $33.9 million or $0.20 per diluted share. This compares with $39.9 million or $0.23 per diluted share in the prior quarter and $14.4 million or $0.11 per diluted share in the fourth quarter of fiscal 2016.

Now turning to the balance sheet for Q4, total cash [indiscernible] $257.5 million, an increase of $3 million over the prior quarter. The change in cash was driven by adjusted EBITDA of $39.3 million and primarily offset by the funding of CapEx at $18.4 million and working capital of $15 million of which most was related to inventory. Regarding to fiscal year 2018 CapEx, based upon our budget for the fiscal year we now expect to invest in the range of $65 million to $75 million which is a similar level to fiscal year 2017.

For the year we expect spending to be front end loaded and to add about $1 million per quarter in depreciation. Regarding working capital in the quarter accounts receivables of $122 million grew by five days to 74 days of sales due to the timing of shipments in the quarter. The inventory of $101 million or 105 days increased by $12 million in the quarter with a ramp of newer 100 gig and beyond product. Accounts payable and accrued expenses were $131 million or 117 days payable and was essentially flat over the third quarter. That completes the review of the fourth quarter.

As a recap for fiscal year 2017, as Greg mentioned it was a tremendous year for Oclaro. On the strength of 100 gig and above sales which doubled and grew by $230 million in the year, total sales grew 47% to $601 million. Gross margins improved 11 points to 39% and operating income grew by over $100 million and contributed 20% of total revenue.

Now turning to our guidance for Q1, fiscal 2018 which ends on September 30, 2017. We currently expect revenues to grow to $151 million to $159 million in the quarter. We expect non-GAAP gross margins in the range of 38% to 41% and we project non-GAAP operating income to be in the range of $30 million to $34 million or 20% to 21% of sales. This concludes our financial update.

I will now turn the call back to Greg for his additional comments and his closing remarks.

Greg Dougherty

Thanks, Pete. I'm very pleased to see the growth in revenues that we're projecting in our guidance for our first fiscal quarter of 2018. Our forecast takes into account two strong headwind, the market in China and the ramp down of the client side CFP platform as the market transitions the QSFP20 form factors. Despite these strong headwinds and consistent with our last earnings call, we expect this to calendar year 2017 revenue growth by about 20% compared to 2016. This implies that we expect our second half of calendar 2017 revenue will be relatively flat when compared with the first half.

With China, we continue to have limited visibility aside from the supply contracts we have in place with some of our Chinese customers. We are expecting our revenue in china to be down sequentially in Q1 by about 15% and to be flat to down in Q2. This is consistent with our view at our last earnings call. While there is a lot of discussion in the market place about new tenders and inventory levels being reduced, we have not seen it broadly materialize into increased demand from our customers. Therefore, we're maintaining our conserved stance on China.

We continue to see reduction in demand for our client side QSFP portfolio across all of our customers. We expect to have revenue from these products decline over the next few quarter. This drop off is a result of both continued inventory situation with some of our customers and the transition from the CFP platform for the QSFP28. Specific to the Chinese market, we are also not seeing significant demand yet for the QSFP28 platform to offset this shipment demand. But we fully expect this condition to change in calendar 2018.

Finally, we expect revenue from our 40G and below product to be relatively flat in the range of high 20s to $30 million per quarter throughout fiscal year 2018. In Q4, we saw a significant increase in sales of customers in the Americas as both data centers and metro sales grew strongly. During the quarter, the Americas bypass China as our largest revenue region. And as Pete said earlier, for 2017 Cisco was our largest customer replacing Huawei. While we continue to expect the healthy market in the Americas and a slower China market for us over the next couple of quarters, we still believe the fundamental demand drivers in China remain intact. We anticipate growth from the regions return again later this fiscal year, driven by new metro and prudential network deployment.

Growth in China should be further aided by an increase in demand for 25 gig and 100 gig optical transceivers which are used in 5G front haul deployment. We're well position to serve what could be a very significant new market for Oclaro due to these transceivers requiring industrial operating temperature ranging. Our laser chip and packaging technologies enable us to address this requirement and differentiate ourselves in this market. While we will likely see most of the growth over the next few quarters from the ACO and QSFP28 product family as both the metro and data center market upgrades to 100 gig and beyond. We expect both of these markets to stay strong throughout fiscal year 2018 particularly in North America and gradually building China.

On the ACO front, we remain the market leader. While we continue to anticipate competition it is not yet fully materialized. We do expect to see some competitors get qualified in our Q2, on a limited set of product. Our multi-year supply contract remain in place and they give us certainty of market share, minimum levels of quarterly demand and agreed to pricing for the next couple of years.

In addition, we expect to see ACO demand begin to pick up from Chinese customers in calendar year 2018. We also expect revenue from our 100 gig and beyond discrete components for coherent systems to grow during this year. Demand for 100 gig QSFP28 products continues to be very strong. Our operation team has done an excellent job of ramping capacity and we expect our sales to remain robust over the year. Our 400 gig products for both client and line side are starting to shift and generate modest revenue. We expect our 400 gig client CFPA transceivers, lithium niobate modulators and tunable lasers to increase in revenue throughout this coming year.

Moving from revenue, we remain bullish about our business model. We believe that we will be able to maintain our gross margins in the high 30s below 40 percentage range. This margin translates into operating income in the high-teens to 20% range. We also expect to continue to generate cash throughout the year.

To summarize, we had an outstanding fiscal year 2017, our position in the data center and metro market looks very good. With highly differentiated products and a new product pipeline that will offer us exciting opportunities in the future. We have also further diversified our customer and geographical mix. We are well positioned for our new year as we commence it with strong set of 100 gig and beyond product, which are ramping well. Our strong customer market positions, plus a very strong financial model give us very many reasons to be optimistic.

In closing, I want to thank our customers and shareholders for their support. I also would like to again congratulate and recognize the Oclaro team for an outstanding year and excellent results for our fiscal Q4. I'm proud of what we've accomplished. We remain very optimistic about our future. That concludes our prepared remarks and I would like to turn it back over to the operator for question. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] we'll have our first question from Alex Henderson, Needham.

Alex Henderson

So, it's nice to see a company that's got a good handle on their business and understands how to communicate it. It certainly wasn't the case in a prior call this week. I guess my primary question is, as you're looking at the CFP and CFP2 products, are you experiencing both volume pressure there or are you also taking into mid-year pricing pressure as we go into the QI 3Q quarter and do you expect that to sustain under pressure on pricing into the fourth quarter?

Pete Mangan

It's volume pricing Alex. I think the one publicly discussed case in China; we elected not to go after that with pricing. And we are just booking at, either inventory corrections or just volume coming down.

Alex Henderson

Second question, that inventory build does that totally voluntary new products ramping into it or are you actually having some involuntary in there as well?

Pete Mangan

You mean on CFP family?

Alex Henderson

Well your inventory was quite strong in your balance sheet.

Pete Mangan

Balance sheet it was related to our newer 100 gig products, both QSFP28 and ACO.

Alex Henderson

To my last question, I was confused by your tax guidance. What should we be using for non-GAAP tax for 2018?

Pete Mangan

5% to 10%.

Alex Henderson

So no change in that guide.

Pete Mangan

No.

Alex Henderson

Okay, perfect. I'll see the floor. Thanks.

Operator

We'll go next to Paul Silverstein, Cowen and Company. Sir, please check your mute button.

Jim Fanucchi

Operator, let's go ahead and move on to the next one we'll rotate Paul back in.

Operator

We'll move next to Patrick Newton, Stifel.

Patrick Newton

Multi-part question on China. I guess one is, could you walk us through what the benefit was of this long-term contracts and maybe how much of your Chinese business would have been covered under those contracts or that would have triggered min ship or share clauses in both the June quarter results and September quarter guidance. Second part would be, are the trends from your two large Chinese OEMs relatively similar or they're varying quite dramatically? And then the last one is, you did kind of talked about voluntarily walking away from some CFP business, due to pricing. Can you quantify the size of that business?

Pete Mangan

On the first question, the long-term contract. I think everyone's familiar that we have a substantial contract with ZTE. We also have for specific product also some supply agreement contracts with Huawei. So there is some of that covered from both of the major customers. In terms of trends, it remains and this is the thing about China that I think people do miss a little bit, it can be product and company specific. I think telecom components might be slightly stronger than CFP, CFP2s, CFP4 types of businesses in China and so a lot depends on that mix, more so than the customer.

And your third question, I'm sorry. I forgot it, Patrick.

Patrick Newton

On the CFP business, you voluntarily walked away from, if you could help us quantify the size there.

Pete Mangan

It was the one that was talked about, when people were on the tour of China. I can't really quantify it, but it was the one that's best on that tour.

Patrick Newton

Okay, great. Thank you. And then I guess on that ACO side, can you help us understand how revenue trended in the June quarter results and then I think you're pointing to a reacceleration in September, can you just highlight if you have any constraints that you highlighted last quarter or anything that would preclude you from seeing kind of that back to the basic you've been doing in the prior quarters.

Greg Dougherty

Yes, we mentioned in the last earnings call that we expected to see, that we were having a shift in a specific type of ACO and that we had good visibility as to what it would be in our Q1 this quarter and I think that you can see that in the guidance.

Patrick Newton

And June quarter would be relatively flattish or just up slightly, or can you just quantify that? On the ACO?

Greg Dougherty

I think you're pretty accurate there.

Patrick Newton

Okay and then.

Pete Mangan

We mentioned Patrick the combination though QSFP and ACO was about 40% of revenues.

Patrick Newton

Okay and then, I'm sure I missed it Greg. You gave us an FY 2017 guidance then you proceeded to shift that towards a calendar year 2017 guidance. So I was really waiting for your FY 2018 guidance, I must have missed it in prepared remarks. Is there anything you want to maybe guide us to as far as how we should try to balance some of the strength that you have on the ACO side, the QSFP28 and against China being flat for the first half or flattened out in the first half of the year, before we turn into growth in the back half?

Greg Dougherty

Yes, Patrick I would say we're still looking at a similar second half of the calendar year, with China flat to down and we remain cautious on that. So we're staying really within the calendar year, we didn't mention anything about fiscal year at this time. Yes.

Patrick Newton

Great. Thank you. Good luck.

Operator

We'll go next to James Kisner with Jefferies.

James Kisner

I guess, I'm interested in your comments again more about CFP family versus QSFP28. I think you said it was going to decline for next couple quarters. The CFP family I guess I'm wondering how you, things don't imply that might actually stabilize. I'm also just wondering when you think that QSFP28 might crossover become a bigger either revenue or gross profit contributor than CFP family. And then I guess one final piece in there, is just on the QSFP28, I mean how much CWM4, you've seen in there?

Pete Mangan

So on the CFP family, we do think it will have a long tail, I think the first stage is it's going to be relative to what we mentioned 25% down in the June quarter and we expect this to continue to be down the next couple of quarters. We do think that it will have a long tail though. On the QSFP tradition, we said on the June call that from the revenue point of view the crossover would be this year and that's about it clear as we'll be on that. And then on, again I forgot the third question.

Greg Dougherty

The majority James was LR4.

James Kisner

To the strong majority?

Greg Dougherty

Yes.

James Kisner

I guess just one follow-up. Gross margin was pretty consistent quarter-on-quarter. And you guys have been conservative, but sequentially with revenues up and to me, this higher margin products are increasing, why would your gross margin go down at the midpoint of guidance, for the coming quarter? Thanks.

Pete Mangan

It continues to be mix that we continue to have, new products come on. But with these contracts of ASP [ph] adjustments in it. So overall the midpoint of guidance, it would be to 39.5% and those are the key elements. I think the other comment I would make is, we're bringing on depreciation about $1 million a quarter and so when you take both mix and the extra depreciation we're bringing on, so those are the two things I would point you to.

James Kisner

Thank you.

Operator

We'll go next to Mark Kelleher with D.A. Davidson.

Mark Kelleher

Just a couple. Pete I think you mentioned, you called out R&D is stepping up in the quarter, can you talk about what that was for? And what you might be investing in there?

Pete Mangan

Yes, I would just keep it as simple of it, it's some labor but it's also new materials for future products. So it's not all. So it should - staffing.

Mark Kelleher

So should we expect that level to remain [indiscernible] new base?

Greg Dougherty

Yes, I would say inside or 19% to 20% going forward about 10%, you should focus on R&D investment.

Mark Kelleher

All right. And could you just give us an update on your production capacity, where do you sit there?

Greg Dougherty

We don't really talk about what our capacity is, I think we're doing a great job executing and ramping our product lines and keeping our customers happy.

Mark Kelleher

The QSFP has been taking more of production right over from the CFP, that's what we've been doing.

Greg Dougherty

Yes well it's a nice product that we're ramping and as Pete said, we doubled it in the June quarter, when compared to the March quarter and we're continuing to grow capacity on numerous product lines within the company.

Operator

We'll go next to Michael Genovese with MKM Partners.

Michael Genovese

I guess, I wanted to ask about the full calendar year guide, based on your comments. I think if we back out to December quarter, based on - comes in several million lower than debt consent. And if China is going to be flat in that quarter, are you basically seeing other stuff slowing down in December.

Greg Dougherty

Mike, it's Greg. So if you look at two headwinds one is China, which we expect to be flat to down in the December quarter. and we also expect the CFP family, which is you know because of very strong product line for us to be down also, that I think is what is tempering where we go in the December quarter.

Michael Genovese

Okay what about, I mean can we look out to December - CFP2-ACO and QSFP28. I mean should we get similar trends on those products that we see in September.

Greg Dougherty

So we'll see, I think we said in the call. We still expect the ACO and QSFP28 to keep growing through the year. And you know as China picks up again in the second half that impacts a lot of the discrete components that aren't showing the growth now. So you know when you look at the company, we got China down which involves mostly discrete component, you've got the 1040 being flat and then you've got the CFP family going down and so then the ACO and QSFP getting up.

Michael Genovese

Okay, let me just one last question. Just about visibility of China in general because I mean we've had a couple of few quarters for the industry here where people have been supplied negatively on China's visibility. What are your chances that we could be surprised to the upside with orders coming in quickly you may not be seeing at this point? Or would you expect to get about large lead times from the orders that would have come on?

Greg Dougherty

So I guess the best way to answer that Mike, is some of our revenue for the next few quarters is already covered with contract, in fact a good chunk of our China sales. Could there be upside to it? Yes, sure. But aren't really strong signals to suggest that. And again it might be company or product specific, so we might be seeing an uptick on a certain product between this downtick on others and we're just giving you the integrated view.

Michael Genovese

Thank you, Greg. Appreciate it.

Operator

[Operator Instructions] we'll go next to Fahad Najam with Cowen.

Fahad Najam

I just want to quickly revisit the revenue contribution in the quarter from CFP and QSFP28. If I heard you correctly Greg, you said CFP client side revenue was down 75%. Did I hear that correct? And then this is how you said it might.

Greg Dougherty

No, Fahad it was down to 50, client side family was down 25% quarter-on-quarter and we expect it to be down sequentially over the next two quarters.

Fahad Najam

Got it. If I recall last quarter, you were talking about doubling your QSFP28 revenue. Do you still see that going into FY1 Q18 and beyond to second half of 2017.

Greg Dougherty

We're not going to break out the extended growth anymore, but it will be growing.

Fahad Najam

All right. And then switching to North America, has been very solid for you. In terms of the any linearity in the quarter that you saw, was there any specific demand upticks later in the quarter that you saw, any commentary that you can provide on the big Verizon deployments and AT&T deployments?

Greg Dougherty

So the big drivers in North America are data centers both inside and inter data center markets and then the metro and of course the Verizon is one of the big names, when we talk metro in North America. I think you know we're sole source in the Verizon project build right now with ACO and we're doing pretty well with the inter data center and starting to pick up momentum in the intra data center.

Fahad Najam

Okay, and just if I could follow up. Any specific linearity you saw in the quarter in North America, did the momentum pick up in the past few weeks or any qualitative commentary there?

Greg Dougherty

No, North America has been solid for us for several quarters in a row now and we expect it to be continued to be solid. And from an overall linearity I mentioned receivables did go last, which was a little bit more backend loaded.

Fahad Najam

Appreciated. Thank you so much.

Operator

We'll go next to Tim Savageaux with Northland Capital Markets.

Tim Savageaux

You had a couple questions really than the whole cloud versus China exposure topic. And first with regards to cloud exposure. I wonder if we can equate that with CFP2-ACO and QSFP28, realizing that some of that ACO revenues and probably metro versus DCI or handset [ph] but as you look at your overall business in the cloud vertical, maybe there is some kind of additions as well. I wonder if laser chip sales or in any way material for you here in the quarter or going forward in addition to transceiver sales. But where would you put your overall? And to the extent we're looking at China exposure you reported 32% but it looks like Huawei and ZTE combined were 25% in the quarter or so, who knows how much of that's domestic? But relative to that China exposure, I mean would you take a swing at maybe trying to quantify your exposure to cloud players both inside and outside the data center.

Greg Dougherty

Sure and I guess the Tim the other way you have to think about it, right is it a lot of exposure to the cloud customers is via traditional NIM. So you know the ACO and QSFP is a good place to start, as to that, tunable SFP plus, the chip set that you mentioned and then you also add to that some of the 400 gig we're supplying today whether it be 2x200 or single wavelength 400 gig, a lot of that is finding its way to the cloud customer either directly or indirectly.

Tim Savageaux

Okay, I imagined you might attract from some of the ACO that might be heading into say metro deployments, currently China deployments in the future. But if you want tell me 50% of your business is driven by cloud, feel free to go ahead.

Greg Dougherty

I don't have a good number for you. But the way you're thinking about is the right way.

Tim Savageaux

Great. I think that's all I had. Thanks very much.

Operator

We'll go next to Richard Shannon, Craig-Hallum Capital Group.

Richard Shannon

Let's see, my first question I guess QSFP20, I think prior question regarding the mix of product LR4 versus maybe short of distance product sounds like it's heavily towards LR4. I know you've expressed some interest in the CWDM4 module as well as like two kilometer. How would you view your approach into that market? Do you expect that to be a fast grower for you and if so, can you comment on what you're seeing on pricing there?

Greg Dougherty

So as we said before, we're definitely a big player in LR4. On the CWDM4, we had some things going that were interesting for us right now and we're watching the pricing closely and we're also watching the capacity closely. We're not convinced that supply is going outspread demand and that can give us, if we're right there that will give us a very nice opportunity as we look into 2018.

Richard Shannon

Okay, so it sounds like the next of couple of quarter, it just appeal, it will be still dominated by LR4 then is it fair?

Greg Dougherty

Yes it will be.

Richard Shannon

Okay, fair enough. Maybe just a couple big picture question, you mentioned kind of looking out, in the future you mentioned 5G wirelesses and some industrial temp grade products you have there as well as 400 gig. Greg, you want to give us your swag [ph] of the extent to which you see either of those categories contributing in a noticeable way, next calendar year.

Greg Dougherty

So we're already contributing in the low million kind of range today and we expect that to grow through calendar year 2018.

Richard Shannon

And is that the low million and a year between the two or each?

Greg Dougherty

Yes.

Richard Shannon

Okay.

Greg Dougherty

Yes, 5-2 transceivers.

Richard Shannon

Okay, anyway that you can suggest how fast and what kind of drivers we might expect to see moving 400 gig specifically?

Greg Dougherty

The 400 gig?

Richard Shannon

Yes.

Greg Dougherty

Well for 400 gig, it comes in a lot of different flavors. We have a lot of applications for 2x100 cards where we're supplying lasers, modulators. We also have a 400 gig single weight modulator as well as very narrow [indiscernible] laser and all of those will grow calendar 2018. We'll limit a few companies that has a CFP8 which is for client side and that's an 8x50 gigabit device that we showed at OFC. And we are shipping that now, I think they're well - I know Nokia's has come out with the platform that has a 400 gig interface and that's the only client side interface that exist today as the CFP8.

Richard Shannon

Okay, perfect. That's great deal. All the questions from me, guys. Thank you very much.

Operator

We'll go next to Troy Jensen, Piper.

Troy Jensen

Congrats on nice results. I jumped on a little late here, so sorry if I asked that's something that's already been answered or addressed, but I guess I'll just ask something offbeat here. 25G merchant lasers are just specifically, could you guys talk about your merchant laser business? That you ever quantified how big it is? You're starting to ship 25G lasers at the merchant supplier also.

Greg Dougherty

So we quantified our laser businesses not being a major area of focus, so well under 10% of our revenue and I guess I would add to that, we talked about shipping 25gig lasers that's specifically to a Web-scale customer we're not selling them as a merchant supplier. We also don't think that there is readily available, some people have been seeing [indiscernible] or soon will be.

Troy Jensen

So Greg, does 25G lasers are you reporting that in the QSFP28 product then?

Greg Dougherty

No.

Troy Jensen

Okay, so that would be additional to that as far as that type of product so.

Greg Dougherty

Yes.

Troy Jensen

And then just maybe last question from me, it would just be ACO. Any change in competitive [indiscernible]?

Greg Dougherty

No I think as said on the call, we still continue to anticipate competition coming onboard, we think that we'll have one or two competitors qualified maybe in the further to December timeframe, but on a fairly limited number of products and spec part. So we've built that into our outlook, but we'll be happy to take more business.

Troy Jensen

Yes, understood. Keep up the good work, gentlemen.

Operator

We'll go next to Paul Silverstein with Cowen.

Paul Silverstein

Guys, thanks. If you've already answered this question during the call, I can talk to you can in the call [indiscernible] I apologize [indiscernible] throughout this call due to the weather. But first off, just picking up Troy's question. Greg, I trust in your commentary you're not seeing impact competitively on ACO yet. When you talked about coming in September?

Greg Dougherty

In the September quarter, we'll see what is [indiscernible] impact of competition.

Paul Silverstein

Okay and again, if you already did this, my apologies. But QSFP28 plus ACO you said 40% revenue this quarter, can you refer a reference point? Can you tell us what it was previous quarter and the year ago quarter?

Greg Dougherty

Year ago was probably 15%. Yes year ago was very small almost no QSFP28 sampling, a year ago June was the second quarter of revenues for ACOs.

Paul Silverstein

And how about in March?

Greg Dougherty

We're not breaking it up further, Paul.

Paul Silverstein

Okay, understood. Greg, did you comment the QSFP28 supply ramp, you previously commented I think in the previous quarter it wasn't that breathing issue, that could be challenged for you. Any update on that?

Greg Dougherty

Yes, the team's done a fantastic job. Really proud of how they've ramped. As we predicted we doubled and we're continuing to grow our capacity and one big advantage we have is, laser chip technology, it gives you a lot of room on specs and everything else. So it makes it a lot easier to ramp and if you get a marginally performing chip, which people will find out in the near future?

Paul Silverstein

And last question from me. At the risk of being really obvious, the illusion that you made calm [ph] in your previous response, Greg when you say, you don't expect to see the volumes that they were referencing or alluding to, what is the basis for you, I mean your belief that it's not coming as soon as they're suggesting or at least as soon as the Street's interpreting, what they said?

Greg Dougherty

I think the Street interpreted it well today. But I guess I would say we take our input from customers are seeing.

Paul Silverstein

Okay, I appreciate it. Thanks guys.

Operator

And we'll go next to Dave Kang, B. Riley and Company.

Dave Kang

First on China, just wanted to get the numbers right. So what were China sales or the decline in fiscal fourth quarter and I thought you said in first quarter maybe they'll decline 15%. What was the fourth quarter decline?

Greg Dougherty

Yes the fourth quarter decline was 18%, we've done $11 million.

Dave Kang

Got it. Is it mainly CFP and some discrete components?

Greg Dougherty

Yes.

Dave Kang

Or anything?

Greg Dougherty

It's a broad products, with exception of ACOs, no ACOs.

Dave Kang

And speaking of 10 gig, I mean how should we, where is it now in terms of percentage revenue and how should we think about it for the next few quarters? What kind of?

Greg Dougherty

It came down 19% of revenues, $29 million and we've mentioned on the call, that it will be roughly flat going forward.

Dave Kang

I see, okay. And then, so going back to China decline, is it sort of evenly split between two major customers there or is one outperforming the other to the downside I guess?

Greg Dougherty

No we see it is as being broad based across china.

Dave Kang

Okay, got it. And lastly, on North America what was the percentage revenue? I think you said something like 30 something.

Greg Dougherty

39%, they're our largest region now.

Dave Kang

Got it. And roughly any estimate as far as [indiscernible] data centers?

Greg Dougherty

I mean our breakout was, I think I said on the call it's roughly 50-50 with the convention. But what you Dave is the, DCI market. In the telecom and the router market that comes from the datacom, so the best way to think about it, is we're about 50-50 between the two markets.

Dave Kang

Got it and lastly, any comments on European customers. It seems like their OEM results were pretty lousy. What's your exposure there?

Greg Dougherty

Well I mean one of our top four, one of 10% customers is Nokia. I think that they do pretty well and they've been doing pretty well and they've been a very consistent, very good customer of ours. You know keep in mind that some of the EMEA revenue it doesn't show up in EMEA, it shows up in Southeast Asia or even in the Americas depending on where they do their contract manufacturing.

Dave Kang

Got it. Thank you.

Operator

We'll go next to Alex Henderson with Needham.

Alex Henderson

Yes, just to be clear. When we're talking about 10 gig products here. These are almost all suitable at this point, so these are non-commodity products that are reasonably solid stable demand for metro edge type application, is that the right way to think about it?

Greg Dougherty

Yes it's used there. There is some video distribution where it's used and the other thing is Alex, in there you'll have 10 gig chip that might be used in 40 gig transceivers that we've talked about in the past and then the other area, we're as we've talked about in the past supplying some both laser and faulty detector chips into 10 gig PON.

Alex Henderson

The tunability [ph] is the key thing that makes these non-commodity product that is relatively stable.

Greg Dougherty

Yes there is suppliers, I mean there is [indiscernible] that's been the case for a long, long time. The tunable SFP and it's now mostly, they're shifting very quickly to tunable SFP plus. But some of the - like the faulty detector for 10 gig PON is also very differentiated, [indiscernible] faulty detector, so yes non-trivial part.

Alex Henderson

So going back to the 5G comment that you made earlier, I wanted you guys for being out way ahead of the curve on design and products specifically for that those application. What can you tell us in terms of the timing of when you think that might start developing into a product that is being deployed in volume, particularly in China but globally how do you see the timeline for those deployments relative to a Q119, Q120 deployment of services 5G, but telecom companies have been announcing. China Telecom announced their schedule recently.

Greg Dougherty

Yes, I think it's about a year off Alex. I mean - we're shipping a fair number of part, but it's in the - as I mentioned low $1 million range today and it will pick up. I think there is still some uncertainty of the network architecture. You know is it, 100 gig it's a 25 gig, it's a tunable and so people are still even if the stage, exploring that.

Alex Henderson

So mostly what you're shipping at this point is sampled that by second half of 2018 you think they will start actually deploying the stuff in order to be able to deploy the ramp in 2019 and then 2020.

Greg Dougherty

Yes I think there will be some level. I mean it will obviously ramp, but it will start to pick up the end of the calendar year, which is our next fiscal year.

Alex Henderson

Okay, that's all I had. Thanks.

Operator

With no further questions. I'll turn the conference back over to Mr. Jim Fanucchi for additional or closing remarks.

Jim Fanucchi

Thank you so much operator and thanks to everyone for participating in today's call. We look forward to speaking with many of you at the several investor event that we will participate in this quarter and again we'll talk to everyone when we present our first quarter fiscal 2018 financial results in the early November timeframe. Thank you and have a great afternoon.

Greg Dougherty

Thanks everyone.

Operator

That does conclude today's conference. Thank you for your participation. You may now disconnect.