Finisar's (FNSR) CEO Jerry Rawls on Q2 2018 Results - Earnings Call Transcript

Dec. 07, 2017 9:25 PM ETFinisar Corporation (FNSR)1 Comment
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Finisar Corporation (NASDAQ:FNSR) Q2 2018 Results Earnings Conference Call December 7, 2017 5:00 PM ET

Executives

Jerry Rawls - Chairman and CEO

Kurt Adzema - EVP and CFO

Analysts

Doug Clark - Goldman Sachs

Troy Jensen - Piper Jaffray

Patrick Newton - Stifel

Dmitry Netis - William Blair & Company

Alex Henderson - Needham & Company

Tim Savageaux - Northland Capital Markets

Richard Shannon - Craig-Hallum

Simon Leopold - Raymond James

Operator

Good afternoon, ladies and gentlemen and welcome to the Finisar Corporation Announces Second Quarter Results Conference Call. Just a quick reminder, today’s call is being recorded.

And now, at this time, I’ll turn things over to Jerry Rawls, Chairman and CEO.

Jerry Rawls

Thank you, Kimberley, and good afternoon, everyone. We appreciate you’re taking the time to listen to our conference call today. A replay of this call should appear on our website within eight hours. An audio replay will be available for two weeks following the call by dialing 1-855-859-2056 for domestic or 1-404-537-3406 for international, and then follow the prompts, enter the conference ID 61569772.

I need to remind you that any forward-looking statements in today’s discussion are subject to risks and uncertainties, which are discussed at length in our annual and quarterly SEC filings. Actual events and results can differ materially from any forward-looking statements. In addition, the Company assumes no obligations to update any forward-looking information presented. Unless otherwise indicated, all results discussed are on a non-GAAP basis. A complete reconciliation of our GAAP to non-GAAP results may be found in our earnings press release and in the Investor Relations section of our website.

We have prepared some slides for today’s earnings call, you can view them by connecting to the Investor Relations page of our website at finisar.com. Click on Investors, then scroll down to Webcast Archives and click, you will see a listing for today’s second quarter 2018 earnings call.

And now, onto the quarter. In Q2, we experienced strong demand for our 100-gig QSFP28 transceivers. However, our overall revenues for the second quarter were $332.2 million, a decrease of $9.6 million or 2.8% compared to the first quarter of fiscal 2018. This decline was primarily due to lower revenues from our Chinese OEM customers. Also, during the second quarter, we began shipping production quantities for our VCSEL arrays for 3D sensing. In addition, after the end of the quarter, we acquired an approximately 700,000 square foot facility in Sherman, Texas for $20 million. This new site will be used to expand our manufacturing capacity for VCSELs using 6-inch wafers. We plan to begin volume production in our new Sherman facility in the second half of calendar year 2018.

And now, I’ll let Kurt review the rest of the numbers. Kurt?

Kurt Adzema

Thanks, Jerry.

Sales of datacom products decreased by $1.7 million or 0.7% compared to the first quarter of fiscal 2018, primarily from lower demand for 10-gig and below transceivers, 40-gig QSFP transceivers, and a 100-gig CFP Ethernet transceivers. This is partially offset by increase in sales of a 100-gig QSFP28 transceivers as well as new revenues from VCSEL arrays for 3D sensing.

Sales of telecom products decreased by $7.9 million or 9.5% compared to the first quarter, primarily driven by lower revenues from our Chinese OEM customers. In the second quarter, we had two 10% or greater customers. Our top 10 customers represented 60.2% of total revenues compared to 62.5% in the first quarter.

Non-GAAP gross margin was 30.3% compared to 34.9% in the first quarter, primarily due to lower revenue levels, unfavorable product mix and other absorption of manufacturing costs at our Allen, Texas VCSEL fab. This under-absorption was primarily due to our shipping production quantities of our VCSEL arrays late in the quarter.

Non-GAAP operating expenses were $74.6 million compared to $73.2 million in the first quarter, primarily due to the impact of the annual merit increase that took effect August 1st. Non-GAAP operating income was $25.9 million or 7.8% of revenues, compared to $46 million or 13.5% of revenue in the first quarter. Non-GAAP income was $26.1 million or $0.23 per share compared to $45.8 million or $0.40 in the prior quarter.

Average diluted shares for non-GAAP purposes totaled 115.4 million. Average diluted shares are expected to be approximately 116 million in the third fiscal quarter.

Interest and other income was approximately $2.4 million in the second quarter. Non-GAAP taxes for the second quarter were approximately $2.2 million. Non-GAAP taxes for the remainder of fiscal 2018 are estimated at approximately 6.5%. Capital expenditures were approximately $45.2 million in the second quarter.

Construction continues on the third building of our Wuxi, China manufacturing site. We expect construction of this building will be completed in the second half of calendar 2018. Capital expenditures for the third quarter of fiscal 2018 are estimated to be approximately $50 million, not including the cost of the building we acquired in Sherman, Texas for $20 million as well as any uplift cost that we start to perform on the building during the quarter.

We excluded from our non-GAAP results, charges or benefits that are either non-cash or that we consider outside the core ongoing operating results. These totaled $20.2 million of charges last quarter. If we include all these items as required under GAAP, we generated net income of $5.9 million or $0.05 per diluted share compared to net income of $19.9 million or $0.17 per diluted share in the first quarter.

That concludes my comments, and I’ll turn it back to Jerry.

Jerry Rawls

Thanks, Kurt.

We expect revenues for our third fiscal quarter of 2018 to be in the range of $325 million to $345 million. We expect revenue for datacom products which include sale of VCSEL arrays, to grow in the third quarter. We expect revenue growth for 100-gigabit QSFP28 transceivers where we believe we are the largest supplier in the world. In addition, we will have growth from our VCSEL arrays for 3D sensing. This will be partially offset by declines in both 100-gig CFP and CFP2 Ethernet transceivers, as well as declines in 40-gig and lower data rate transceivers. We expect telecom revenues to decline compared to the prior quarter, primarily due to the impact of one month of the annual telecom price increases -- price decreases, excuse me, which typically take effect January 1st. However, we did achieve full qualification of our CFP2-ACO coherent transceiver at a key OEM customer and we still expect to finish qualification of the ROADM line card of that customer in late Q3 or early Q4. In addition, we believe we are well-positioned in the China market for ROADMs as we are the largest supplier there for wavelength selective switches.

We expect third quarter non-GAAP gross margins to be approximately 30% to 31%, as the benefit from the sales of additional VCSEL arrays is offset by the impact of one month of the annual telecom price decreases.

We expect operating expenses to be relatively flat at approximately $75 million. Non-GAAP operating margins are expected to be approximately 7.5% to 8.5%. Non-GAAP earnings per diluted share are expected to be in the range of $0.21 to $0.27 per share.

While the near-term environment is a bit uncertain, we remain very optimistic about our long-term growth prospects. In particular, we are very excited about our recent purchase of the new facility in Sherman, Texas. We expect production of 6-inch wafers there in the second half of calendar year 2018.

We expect Finisar’s VCSEL technology will be used in a variety of applications including several high volume uses in consumer and automotive. Finisar’s rich history in this technology covers more than two decades, two decades of research, development, design, and manufacturing. It is gratifying to see those investments produce a business area for Finisar.

And with that, I am going to turn it back over to Kimberley and open it up for questions. Kimberly?

Question-and-Answer Session

Operator

Yes. Your first question is from Doug Clark with Goldman Sachs.

Doug Clark

[Audio gap] sequentially. What was the assumed QSFP28 impact, is that expected to grow or decline?

Kurt Adzema

Doug, you cut out in the first part of your question. Can you please repeat it?

Doug Clark

Sure, sorry. Can you hear me now?

Kurt Adzema

Yes.

Doug Clark

Okay. As part of the data, well, basically, I am curious about the QSFP28 sales in the October quarter and then expectation for the January quarter as well. Did it grow in January and is expected to again in January?

Jerry Rawls

The answer is yes and yes.

Doug Clark

Okay. And then, as a follow-up to that, I guess where that question comes from is number of peers have talked about a bit of incremental price pressure competition as well as mix shift from LR4 to CWDM4. Any comments or insight on either of those two dynamics?

Jerry Rawls

Well, I think those are -- both dynamics are going along in the market and I think it depends on who your customer is and how severe the competition is. And some customers have more stringent qualification requirements than others. So, I mean, it does vary across the market; it’s not uniform from customer-to-customer. But, I think in general, we would say, yes, there was a trend to work from LR4 to CWDM4.

Doug Clark

Okay. And then, my final question was on VCSEL, just a clarification, and I assume they go hand-in-hand. But, does the fact that you have production volume output, imply that you achieved qualification out of key customer?

Jerry Rawls

I’m not sure I can really talk about that. We have some nondisclosure obligations that really limit what we ought to say about any customer in that market. I can tell you, we’re producing as fast as we can and shipping everything we can make.

Doug Clark

Okay, I’ll take that offline, I’ll cede the floor. Thanks a lot guys.

Operator

The next question is from the line of Troy Jensen with Piper Jaffray.

Troy Jensen

Hey, gentlemen. Thanks for taking my question here. First of all for Kurt, on the gross margin side, I guess, that’s kind of what surprised me the most in the quarter. So, revenues were slightly below the low-end of the guide, the gross margins were well below the low-end of the guide. Can you just explain why they were down so much? I think, you may have mentioned it had to do with the 3D sensing launch, but could you just dive into that a little bit more?

Kurt Adzema

Yes. I think what we talked about relative to our guidance, I’d say, the two things were an unfavorable product mix, so a lot of the growth came out of QSFP28 CWDM4. But, I think as we talked about CFP, CFP2 Ethernet and dual rate were down more than expected. And as Jerry talked about, there’s been a bit of a shift from LR4, QSFP28 to CDWM4. So, part of it was mix shift. The other part of it, as we’ve talked about in the past is that fabs have a lot of fixed costs. I’d say, our fixed costs were a little higher than expected in the fab. And on top of it, we’re not quite where we’d like to be on yields. And so, we didn’t produce as many units as expected. And so, consequently, that results in under-absorption.

Troy Jensen

Okay, understood. And then, on the 3D sensing, for the new facility, you talk about second half production-ready. Would that be in time for second half smartphone launches or is there a timeframe...

Jerry Rawls

I can’t. I don’t have any idea when the second half smartphone launches are going to be, so...

Troy Jensen

As you think about a Q4 launch there, Jerry. I mean, if you think about a Q4 launch for the smartphone guys, having your production up in the second half, does that give you enough time to get qualified to get in there?

Jerry Rawls

I sure hope so.

Troy Jensen

Okay, just kind of stay tuned in there?

Jerry Rawls

It’s going to be tight, no matter what. So, the answer is, we’ve got to execute flawlessly based on everything that we’ve learned so far and getting up and online and in production. And it’s not a slam dunk, I’ll tell you.

Troy Jensen

Understood. Last question, I’ll cede the floor. Could you just give us an update on the CEO search?

Jerry Rawls

Our search committee, our Board of Directors is very active, our search firm is very active, and we have interviewed a number of candidates, all of which were very capable people, because they have been screened by professional search. So, I think we’re making progress. I don’t have anything other than that to report.

Troy Jensen

Okay, all right, understood. Good luck, gentlemen.

Operator

Your next question is from the line of Patrick Newton with Stifel. [Operator Instructions]

Patrick Newton

Yes Jerry and Kurt, thank you for taking my questions. I’m shocked if your search is active but my phone hasn’t rung yet. In all seriousness, I guess on -- in all seriousness, to follow up on the 3D sensing questions, two follow-ups there. One is, what was the revenue contribution in the quarter? And then, how should we think about 3D sensing, what’s baked into both the January and even April quarters as your yields start to improve?

Kurt Adzema

As we talked about before on the quarter we just finished, we started to ship in small volumes towards the end of the quarter. So, it was low single digit millions. In terms of forecasting on a go forward basis, obviously, we are going to have a full quarter of production, and we are working hard and making progress on our yields. But, our customers would prefer that we don’t disclose the exact number that would cut out there.

Patrick Newton

And then, I guess, pertaining to the new facility, you talked about how you have to execute flawlessly. Can you walk us through what that execution is? What’s the lead time on equipment, your epitaxial process et cetera? And the reason I ask is your time to market seems to be well ahead of what somebody like AMS has communicated with their own vertical integration process.

Jerry Rawls

Well, the nice thing is, for us, as we’ve got a beautiful facility that was -- it was a semiconductor fab before, so it’s very large clean rooms. And what we have to do is we just got to buy a lot of equipment to put it in there. So, we have our MOCVD reactors that are on order. And they are moving in that direction, their lead times are more than a half a year. But, we’ve got a place for it. And then, there’s a whole series of fab equipment from our litho, to our etching to our metal depositions et cetera. So, there’s a lot of equipment that has to come together. We have to put it online, do all the plumbing and that’s -- and then secondly, it’s a 6-inch wafer process. And we have never processed 6-inch wafers. Now, we have people in the company that have processed 6-inch wafers at prior employment, but it will be a new experience for Finisar. So, it will be challenging.

Patrick Newton

And then, just one more if I may, Kurt, on gross margin. You’ve consistently indicated mix as the largest impact. You’ve also communicated that annual pricing negotiations negatively impacted the April quarter. I guess, as kind of take an intermediate term view of gross margin, do you see mixed tailwinds from improved 3D sensing, ROADMs or some new product that could aid results in intermediate term or conversely, could we see ongoing challenges from mix shift to more CWDM4 for lower for 40G or competitive pressures? And the reason I ask is I think 30% has historically been a pretty sticky gross margin for the Company.

Kurt Adzema

Well, again, we don’t provide guidance beyond the quarter that we are in. I think, you’re right, there is a lot of factors that could help improve margins, certainly improving our yields for our VCSELs, and production out of that facility could have a nice impact for us. As you also point out, there is -- in Q4, you will have also the telecom price erosion for the full three months. And as Jerry talked about, there is a shift going on where most of the growth you are seeing is CWDM4, which has lower gross margins than LR4. So, I’d say, there is a variety of factors moving around, and we certainly don’t provide guidance beyond the quarter we’re in. But, we are obviously working very, very hard to try to improve the yields out of our Allen VCSEL fab, and that certainly could be a positive driver for us to help offset some of those negatives that you also talked about.

Operator

The next question is from the line of Dmitry Netis with William Blair & Company.

Dmitry Netis

Thanks guys for taking the question. Jerry, maybe start kind of a high level question first. Could you sort of lay the land here on the hyper scale side of the business? I think several peers have seen a bit of air pocket this past quarter. Are you seeing the situation improving at all? I know, there’s been a transition, mainly the LR4 to CWDM4 that you’ve been discussing. Is that really the main issue here or is there something else going on? And when can we see sort of the inflection or when can we be exiting that air pocket, if at all?

Jerry Rawls

Well, from our standpoint, I would say that our Web 2.0 sales are still doing pretty well. We saw a substantial increase in the quarter. I think, we will -- we are expecting an increase again in Q3. So, our revenues have been up pretty consistently quarter-to-quarter for as far as I can remember. So, we are still bullish on the market. And it’s clearly one of those segments that is driving the Company.

Dmitry Netis

Okay. And then, if I just sort of look at the QSFP28, you were guiding for 100 million sort of type of run rate business, exiting this quarter. Just curious, did you hit that number? You may have said that. So, I apologize if I missed it. If you did, that would have implied sort of 17, 20ish type percent growth rate from the prior quarter. Can you confirm that? And then, with that type of growth rate continue for persistent to the January quarter or should we expect a bit of a slowdown there?

Kurt Adzema

I think we talked about last year expecting QSFP28 revenues altogether to be about $100 million in our Q2, and I would say it was just in that ballpark. And we certainly expect it to grow meaningfully in this next quarter. And we continue to add some capacity, especially as it pertains to CWDM4. So, I would expect the growth we are going to see is really going to be in CWDM4, in Q3, and that is what is helping to offset probably what we will see some erosion, continued erosion in 10-gig 40-gig and CFP, CFP2 Ethernet.

Dmitry Netis

Got you. And then, last question, if I may. The top-two customers was one, a U.S. customer and another China customer. Can you comment on that?

Kurt Adzema

We can’t comment on who the customers were.

Dmitry Netis

Okay. And so, maybe I will just ask a question on China then. Knowing who your big customer is in China, what are you seeing on the ground? It’s what your sales people are seeing or telling you, is there a recovery anywhere inside, when can we see that potentially? What’s the expectation right now on China and your top customer as far as inventory…

Jerry Rawls

I was just in China visiting with our top customers, and I found that in the Web 2.0 space, there was optimism about 2018 but in the OEMs, there was not so much. The biggest story that I heard from the OEMs was that 2019 was going to be a particularly good year as infrastructure for 5G wireless started to roll out, and there would be a lot of optics procured in 2019, but 2018 from the OEMs was nothing to write home about.

Dmitry Netis

And do we know if the inventory is kind of at the levels where you will start to pick up more of a kind of a run rate business going forward or we’ll still have some potential inventory overhang here?

Jerry Rawls

Well, I think most of the inventory has worked out. I can point to one customer I think still has some lingering inventory. But, the issue is the run rate for 2018 may not be -- is going to be nowhere like the 2016 run rate, that was clear.

Operator

Your next question is from the line of Alex Henderson with Needham & Company.

Alex Henderson

Great. Just to clarify that last statement. When you say nowhere, CY16, I mean, you mean nowhere near the growth, you’re not talking about an absolute dollar, you’re talking about growth?

Jerry Rawls

I’m talking about absolute dollars. I don’t think -- the indications I got from some of our Chinese customers, I wouldn’t expect that 2018 will be as large as 2016.

Alex Henderson

All right. It is still up though relative to 2017 in that calculus?

Jerry Rawls

Not so -- that’s not clear. There are some that seem to have more confidence than others, but I didn’t come away with a warm and fuzzy feeling about 2018 from China demand.

Alex Henderson

Just a couple of pieces. Could you talk about the ROADM business in the quarter, was it flat, down, up, sideways and what are your expectations there?

Jerry Rawls

It was up.

Alex Henderson

Up a little, up a lot?

Jerry Rawls


It was up, I don’t know, 10% quarter-to-quarter.

Alex Henderson

So, are you starting to see a pickup in demand in China or are you picking up the demand as a result of rest of the world, where’s the growth coming from?

Jerry Rawls

There’s a fair amount of it comes from China. But, the rest of the world, we have a lot of customers that are not only European and Japanese as well. So, it’s not like we think that the wavelength selector switch business is booming but it’s -- you know it’s doing okay. And I don’t think that from everything I learned in China that 2018 is necessarily going to be a big year for ROADMs. There will be ROADMs procured and there will be regional deployments or provincial deployments but no big scale rollout is expected.

Alex Henderson

And then, on the 10-gig, can you parse between the tunable telecom products and the datacom products, please?

Kurt Adzema

I’m not sure, 10-gig, the datacom side is kind of in the mid teens percent of datacom. And I would say on the telecom side 10-gig is probably around 30% of telecom.

Alex Henderson

Thanks for the data. But I was -- what I was asking is there a difference in the trajectory of the two is what I was asking? Is tunables declining as well as the datacom 10-gig? Everybody assumes 10-gig, 40-gig datacom is declining but I guess I was looking for a read on the tunables?

Kurt Adzema

Yes. I would say 10-gig tunable has been relatively flat but I think we are starting to see signs that there might be some decline coming on in the next couple of quarters.

Alex Henderson

And just going back to the ramp in VCSELs. Obviously, you don’t want to talk about, too granular. But can you give us a sense of what kind of band of capacity you would have if you get to reasonable production yields? Is it a $30 million to $40 million kind of business quarterly? And assuming the second fab doesn’t come on-stream.

Jerry Rawls

The capacity that we are building down there is going to -- would for us, the more than a $100 million a quarter in revenue.

Alex Henderson

That’s with the new capacity coming on stream in the 6-inch fab, right?

Jerry Rawls

Correct.

Alex Henderson

So, excluding that is to 30 to 40 and then the rest would be the other, is that the right way to think about it?

Kurt Adzema

In what period, Alex, when you say 30 to 40?

Jerry Rawls

When you say excluding, what are we excluding?

Alex Henderson

I’m assuming you are producing on 4-inch fab today and you are not ramping that capacity substantially since you are going with 6-inch capacity. So, I’m assuming most of the volume that you are doing today is on that 4-inch fab and therefore that has some limited capacity until the -- this limits to how much that could go to before you get the other production up and running. And it sounds like it’s like 30 to 40 and then when you add the sort of 6-inch and take up towards 100 plus.

Jerry Rawls

I don’t think we’ve ever said it could be as much as 40 million a quarter. I think, I once said that if we hit the yields that we are targeting, we could probably do 30 million a quarter out of that Allen fab. But that’s probably as good as we are going to get down there. Maybe we will surprise ourselves. That’s not perfect yields but those are reasonable yields. We are not at that yield level yet and -- but we are making progress every week.

Alex Henderson

So, couple of quarters to ramp that towards that level, is that right way to think of it?

Jerry Rawls

I can’t predict that. It may be two quarters and it may be four quarters.

Alex Henderson

Going back to the gross margin question and I apologize for the long rows of questions here. But the gross margin pressure associated with the fab coming on stream, when I look at the hit in the quarter, how much of it was from that, how much of it was from pricing pressure on 100-gig? How much of it was from mix shift? Could you help us a little bit more on that granularity between those?

Kurt Adzema

Those are all very big factors honestly. So, I think, I’m not going to provide any more granularity on that. All three of those were material factors, revenue being down, the mix being unfavorable and then obviously the costs in Allen.

Alex Henderson

Was pricing in a 100-gig factor as well?

Kurt Adzema

Pricing is always a factor and then obviously varies by product. So, as Jerry said, we’re starting to see more competitive pricing on the QSFP28 side. But, I would say, the other three factors were bigger in the quarter we just finished.

Operator

[Operator Instructions] Your next question comes from the line of Tim Savageaux with Northland Capital Markets.

Tim Savageaux

Hi. Good afternoon. Couple of questions here. First on the telecom side. I wonder if you could talk to the magnitude of contribution you are expecting from your ACO qualification in January. I would have at least thought that was significant an opportunity, maybe make October sort of a trough quarter in telecom. I wonder with increasing ACO contribution and your expectations on the ROADM side, do you think January has a chance to be trough quarter on the telecom side. And if you could talk to again some sort of order of magnitude for ACO contribution in January?

Kurt Adzema

I would say, ACO in terms of Q3 is the result of the qualification that Jerry mentioned. We expect it to be up but still not up as much as we like it to be. So, it’s not huge yet. We obviously expect it to have a bigger impact over time. But, I would not say, it’s having a big impact in Q3. Obviously, we expect to have a bigger impact in Q4. I think, the flip side of that is that Q4 will have the three full months of the telecom price reduction. So, we are not providing guidance for revenue growth in telecom in Q4 but obviously those are two key factors. But, I would say, we don’t have -- in our guidance, we don’t have a lot of impact from the recent qualification of the ACO at the one key customer, baked in.

Tim Savageaux

Got it. Thanks. And then, over to the 3D sensing side, I just want to clarify one thing you were discussing earlier with regard to current capacity, which you’ve said before, and given your gross margin performance, we’ll assume that your yields aren’t where you would like them to be and probably gauge the capacity that way in terms of where you are able to ramp near term. Did you say you are adding an incremental 100 million per quarter? Let’s say everything goes right out in the second half of calendar 2018, or you will get to a total of 100 million in capacity, including the 4-inch?

Kurt Adzema

To be honest, we are still figuring out that. As Jerry talked about, we’ve ordered a lot of the long lead time items. So, we are still finalizing what the exact equipment it’s going to be and how many wafers we’re going to be able to add to capacity. Obviously, capacity is only part of the equation. You have to have capacity and then obviously you have to have the customers. So, I would say, it’s still little bit early for us to start predicting revenues in the second half of the year. But needless to say, we have with adding Sherman, assuming we execute as we would like, we’re going to have significant increase in the second half of the year and capacity and be able to both, be making VCSEL pixels on 4-inch out of Allen, as well as 6-inch out of Sherman.

Tim Savageaux

Okay. Well, 100 million was your number, not mine, but either way. Let me finish on that by asking about investments in that capacity. You’ve talked to your current capital budget not including the facility investment in Sherman. I think looking at the type of capacity we’re thinking about adding an investment here in total is bordering on a $100 million. And I wonder if you could sort of make a comment on that other 100 million number. And finally, it would seem to me, regardless of NDAs and everything else that you’re committing here in a few seconds to invest a $100 million in a new facility, without having received production qualification from your major customers. That would seem like a strange thing. Does it seem strange to you as well?

Jerry Rawls

Well, you made a big assumption there.

Tim Savageaux

Which one?

Kurt Adzema

Alex, I would say -- let me answer your first question and then I’ll answer your second question. Sorry, Tim. Sorry. So, we spent $20 million on the building, we talked about that. We’re going to have to do some level of uplift on the building to fit out some things. So, my guess is, we’ll spend at least another $20 million on that. And we expect to spend over a $100 million on top of that on equipment over the coming, let’s say, year. So that gives you a sense of the amount of money that we’re investing. And I think in terms of -- we obviously have some confidence based on our interactions with a variety of customers in both consumer and automotive that this is going to be a very important space for us and we feel very good about our relative position in this space, and that’s why we’re making the investment.

Tim Savageaux

Okay. If I could just squeeze one more in there, this is maybe Alex like. But, anyway, if you had unlimited capacity right now, based on the demand that you’re seeing, what could you ship on a quarterly basis?

Jerry Rawls

We don’t have unlimited capacity.

Kurt Adzema

Well, if we have unlimited capacity, we could ship an unlimited amount. We’re not going to go into what the end demand from the customer is. Our customers would prefer us not to disclose those level of information.

Operator

Your next question is from the line of Richard Shannon with Craig-Hallum.

Richard Shannon

Hi, guys. Thank you for taking my questions. I’m travelling today. So, I may have missed a little bit of the call. I apologize if I’m repeating some questions. I just want to one quick clarification and a follow-up question. First of all, on the topic of yield that impacted your October quarter gross margins, was that specific to one product area like 3D sensing or was it more broad? Can you help me clarify that, please?

Kurt Adzema

It was specific to yields on the VCSEL arrays.

Richard Shannon

Okay. That’s what I thought, just wanted to make sure. Thank you. And my second question’s related to 100-gig datacom. Can you give us some thoughts on the relative trajectory of pricing? It seems like it’s got more aggressive in the second half of the year. How do you expect those curves to continue into next year? How you see the supply-demand environments? And are there any unusual patterns coming from the large datacenter guys, U.S. or otherwise that might be impacting near term or longer term into next year revenue, patterns? Thanks.

Jerry Rawls

I think as I’ve said before, pricing this year’s actually been okay in the 100-gig datacom. Pricing that sounds really bad is in calendar year 2018 when there is a number of suppliers who have never supplied in this industry, who are promising production capacity at some very low prices, the $64. Question is, will they be able to deliver? And if they can’t, we are going to be some -- the prices next year are going to be a lot lower than they are in 2017.

Richard Shannon

Jerry, do you feel like some of those potential suppliers are credible to the large hyperscale guys, are they kind of nipping at the yields?

Jerry Rawls

That’s hard to say. They are not -- most of them don’t have much of the track record. But that doesn’t say they are not credible. And, again, I don’t think I should comment about my competitors much, but it’s going to -- 2018 will be an interesting year in the Web 2.0 space.

Operator

[Operator Instructions] Your next question is from Simon Leopold with Raymond James.

Simon Leopold

I wanted to follow up on this pricing comment. Historically for the optical component industry, we throw around that 10% to 15% annual reduction, which is not specific to products but a broad statement. Given your product mix, customer mix, how would you characterize the kind of pricing pressure you expect to see in calendar 2018?

Jerry Rawls

I think it’s -- I think in the telecom world, negotiations are going on as we speak. And, we would expect that 10% to 15% in telecom is still the range that we will see next year. The real question is going to be in that big segment of the data center market, which is the 100-gigabit and what happens to the prices there. I would say, there is a chance that there will be more than 15% declines but it’s -- like I said, we are going to wait and see. Right now, we are still shipping everything we can build, so.

Simon Leopold

The other thing I wanted to ask about is really from an industry perspective, your view of the addressable opportunity for the 3D sensing. So, not specific to what you think you are necessarily going ship but help us understand how you are sizing the market opportunity in 2018? And presumably, I want to ask about 2019, since given the timing of the ramp of the new facility, I have to imagine you are thinking about 2019 already.

Jerry Rawls

3D sensing is essentially gigantic. If all the customers and the consumer space and the automotive space really build systems and deploy them as they are -- they have indicated to us recently, then, no matter how big this building is that we just bought, and fill it full of equipment, it’s unlikely that we can supply all of the demand that we’ll need to supply. So, I mean, it’s measured in billions of dollars and it’s really hard to project today that how many of these applications are people really going to field. But, I’ll just tell you, we are building arrays for a lot of different people in both mobile and in automotive, some of them are quite small arrays and some of them are gigantic arrays, so.

Simon Leopold

And one last one, in terms of customer vertical, specifically for the QSFP28 products that you sell. I presume that you have more leverage or more exposed perhaps than others to OEM type customers as opposed to direct web scale. And I imagine that this makes your business somewhat more resilient in terms of encroachment, in terms of pricing. I just want to get a sense of how we should think about your mix of customers for those products and whether or not my statement is reasonable?

Jerry Rawls

We sell more to the web scale than we do to OEMs. But you are right, OEMs are important market segment for us. And generally the OEMs have substantially higher qualification requirements. So, some of the Chinese competitors are unable to actually get their products qualified.

Operator

This will conclude today’s conference. You may now disconnect.

Jerry Rawls

Kimberly, thank you. And thanks everybody for tuning in today. We appreciate you taking the time to spend it with us. And we hope you would be able to join us again three months from now. Have a good day.

Operator

Thank you. Have a great day.

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