Finisar Corporation (FNSR) Q4 2018 Earnings Conference Call Transcript

Finisar Corporation (FNSR)
Q4 2018 Earnings Conference Call
June 14, 2018, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon ladies and gentlemen. Welcome to the Finisar Corporation fourth quarter results conference call. Just a quick reminder today's call is being recorded. And now at this time, I'll turn the call over to Michael Hurlston, CEO.

Kurt Adzema -- Chief Financial Officer

Actually, this is Kurt Adzema, CFO. Thank you, Jesse, and good afternoon everyone. 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 FCC filings. Actual events and results can differ materially from any forward-looking statements. In addition, the company assumes no obligation to update any forward-looking information presented. Unless otherwise indicated, all results discussed are non-GAAP basis. A complete reconciliation of our GAAP to non-GAAP results may be found in our earnings press release and in our investor relations section of our website. In addition, we have prepared some slides for today's call that can be found on the investor relations page of our website.

Moving to our fourth quarter results, overall revenue for the fourth fiscal quarter was $310.1 million compared to $332.4 million in the third quarter. Sales of datacom products decreased by 18.1 million or 6.8% compared to the third quarter of fiscal 2018 to 248 million, primarily due to the expected decline in revenues from our VCSEL laser rays for 3D sensing applications. Sales of telecom products decreased by 4.2 million or 6.4% compared to the third quarter of fiscal 2018 to 62.1 million, primarily due to the full three-month impact of the annual telecom price reductions. In the fourth quarter, we had two 10% or greater customers.

Our top ten customers represented 61.1% of total revenues compared to 63.3% in the prior quarter. Non-GAAP gross [inaudible] was 24.7% compared to 28.6% in the third quarter, primarily due to the impact of the full three months of the telecom price reductions, under absorption of fixed manufacturing expenses, and our Allen Texas VCSEL laser fab and an increase in non-cash inventory reserves. Non-GAAP operating expenses were 72 million compared to 72.4 million in the third quarter. Non-GAAP operating income was 4.6 million or 1.5% of revenue compared to 22.7 million or 6.8% of revenue in the third quarter, primarily due to lower revenue and lower gross margins. Interest and other income was 3.9 million in the fourth quarter. Non-GAAP net income was 5.8 million or $0.05 per diluted share compared to 22.8 million or $0.20 per diluted share in the third quarter, primarily due to lower revenues and lower gross margins. Non-GAAP taxes for the fourth quarter were approximately 2.7 million, a decrease of 0.3 million compared to the third quarter.

Non-GAAP tax rate for fiscal 2019 is estimated at 11% to 13%. Average floated shares for the fourth quarter for non-GAAP purposes were totaled 116 million. Average diluted shares are expected to be approximately 116.8 million the first quarter of 2019. Capital expenditures were approximately 55.2 million in the fourth quarter of which 4.4 related to the construction of the third building of our Wuxi, China manufacturing site and approximately 27 million related to the uplight of our building in Sherman, Texas and the initial deliveries of capital equipment for that site.

Construction continues on the third building of our Wuxi China manufacturing site. We expect the construction of this building to be completed in the second half of calendar 2018. Capital expenditures other than for Sherman, Texas for the first fiscal quarter are estimated to be approximately 30 million, which includes approximately 5 million related to the construction and fit out of the third building of the Wuxi China manufacturing site. In addition, for Sherman, Texas for the uplight of the building and additional equipment, we expect capital expenditures of approximately 100 million in the first quarter.

We excluded from our non-GAAP results a number of charges or benefits that were either non-cash or outside of a core ongoing operating results. These totaled 24.1 million last quarter. If you included all of these items as required under GAAP, we generated a net loss of 18.3 million or $0.16 per diluted share compared to a net loss of 55.7 million or $0.49 per diluted share in the third quarter. That concludes my comments and I'll turn it over to Michael.

Michael Hurlston -- Chief Executive Officer

Thanks, Kurt. We expect revenues for our first fiscal quarter of 2019 to be in the range of $305 million to $325 million. We expect first quarter non-GAAP gross margins to be approximately 26% to 27%. Non-GAAP operating margins are expected to be approximately 4% to 5%. Non-GAAP earnings per diluted share are expected to be in the range of $0.10 to $0.16 per share. While our fourth quarter financial performance is disappointing, I'm encouraged by our outlooks for revenue growth in improved gross margins in the first fiscal quarter. We expect to see an increase in demand for our VCSEL laser rays for 3D sensing applications in the second fiscal quarter in connection with the expected timing of new product introductions by our customers.

In addition, we've closed a number of design wind for our VCSELs in consumer and automotive applications. Our opportunity funnel continues to increase in areas beyond automotive and handsets. We continue to make progress with respect to uplift of the building and the ordering and receipt of capital equipment for our VCSEL laser fab in Sherman, Texas for 3D sensing applications and still expect to be qualified in in-production using six-inch wafers by the end of the calendar year, which we expect to significantly increase our production capacity.

In our core business, we're seeing increased demand for our ROADMs as India and China deploy more advanced networks. In our datacom transceiver business, we're seeing increased unit volumes in the data center market but this is being offset by continued AST pressure. We have a set of cost reductions in process to provide greater pricing flexibility.

On the horizon, we believe we are well positioned with the major 5G wireless OEMs on 25 gig and 100 gig data rates for both short and long reach applications. We also believe we're well positioned for the 400g transition starting in calendar year 2019.

Finally, I spent the last two months understanding the details of our products and opportunities. Given what I see on the horizon, I believe we can ultimately get to a sustainable operating margin of 12% to 15%. We plan to do this by ramping in new markets, changing our product mix, and focusing on the priorities. Fundamental to achieving this objective will be managing our operating expenses to 18% to 20% of revenue. These changes will not happen overnight and will take multiple quarters to implement, but we've already begun taking steps to execute to a plan consistent with these objectives. With this, I'm gonna turn it back over to Jesse and open it up for questions. Jesse?

Questions and Answers:

Operator

Thank you. If you would like to ask a question please press *1 on your telephone keypad. The first question comes from Alex Henderson with Needham. Your line is open.

Alex Henderson -- Needham -- Analyst

Great. Just a couple of housekeeping stuff if I could start off with. Could you just give us a sense of what the ROADMs did quarter to quarter in the just reported quarter and what you think it might look like going sequentially into the upcoming quarter? Is that growth going to accelerate?

Kurt Adzema -- Chief Financial Officer

I'd say ROADM or WSS was relatively flat in the quarter we just finished but as Michael mentioned, we're seeing increased demand for deployments in China and India and that will drive meaningful growth in our fiscal Q1.

Alex Henderson -- Needham -- Analyst

Going back to the datacom comment, I get the impression that you were implying that volume and up pricing down in the upcoming quarter to net roughly flat, is that segment guide?

Kurt Adzema -- Chief Financial Officer

We think datacom overall on a revenue basis will be relatively flat in fiscal Q1.

Alex Henderson -- Needham -- Analyst

Can you give us any of the pings and pongs on what's going on there in terms of mix between fall off and LR growth and CWDM4 -- what segments you're seeing pricing pressure in most aggressively? What's going on with AOC or what's going on with PSM?

Kurt Adzema -- Chief Financial Officer

Well, I'd say for us again, the main areas we focus on are LR4 and CWDM4 I'd say we're seeing the most price erosion in CWDM4 but I also think that's where we're seeing the most unit growth as well.

Alex Henderson -- Needham -- Analyst

Has the pricing accelerated to the downside? Stabilized? It fell off pretty hard last year and CWDM4 in the back half but seems like it was stabilizing somewhat. Have you seen any reduction in the rate of decline? Can you give us any kind of trajectory to that?

Kurt Adzema -- Chief Financial Officer

I think as Michael said, we are continuing to see ASP pressure so prices up for CWDM4 continue to decline. I wouldn't say the pace of decline is accelerating the prices certainly continue to decline.

Alex Henderson -- Needham -- Analyst

One last question then I'll see the floor. The Allen plant -- have you fixed your yield issues over there?

Michael Hurlston -- Chief Executive Officer

Yes, I mean I wouldn't say we're out of the woods on yield but I think we made substantial improvements in the yield and we've used some of the slowdown that's occurred. Kurt talked about the lack of absorption. We've used some of the time period to where we weren't in full production to work on yield issues.

Alex Henderson -- Needham -- Analyst

Great. I'll see the floor. Thank you very much.

Operator

Your next question comes from James Kisner with Loop. Your line is open.

James Kisner -- Loop -- Analyst

Thank you so much. Just another question around 3D sensing -- I was hoping you could maybe quantify how much impact you're seeing from the absorption Allen and if that production did not exist what would your gross margin have been? Is it fair to say your gross margin is negative on 3D sensing at this point? I'm just wondering what you're expecting in terms of impact from this in the coming quarter from Allen or absorption if at all?

Kurt Adzema -- Chief Financial Officer

Well, our revenues as expected were relatively low for 3D sensing this quarter and obviously, we've created a lot of expenses both in terms of capital equipment as well as people to handle higher demands and I think as Michael mentioned, we expect to see increase in demand in our fiscal Q2.

James Kisner -- Loop -- Analyst

Is there some native impact from 3D sensing in Q1 that you could maybe help us understand what the impact is?

Kurt Adzema -- Chief Financial Officer

I'd say the impact in general in the volumes that we plan to produce aren't gonna be materially different from quarter to quarter so we'll continue to have that impact in our Q1 but obviously as we start to ramp production and capacity again in Q2 that should help the under absorption problem.

James Kisner -- Loop -- Analyst

I mean, gross margins -- you're gonna be up sequentially if that's still a factor in the coming quarter like why are margins going up sequentially?

Michael Hurlston -- Chief Executive Officer

I think it's mostly due to mix. Our mix is such that we see the margins going up and overall we've got a favorable -- Kurt talked about the 100 gig, I think we'll see more 100 gig coming online and that's gonna help the gross margin number.

Kurt Adzema -- Chief Financial Officer

I think the other thing is we talked about part of the reason for the lower gross margins in Q4 versus Q3 were non-cash inventory reserves and that's basically a mathematical calculation having to do with the fact that revenues were declining. Now we're forecasting revenues to start to grow in Q1 so that should -- we shouldn't have that same level of impact in Q1 that we saw in Q4.

James Kisner -- Loop -- Analyst

Just last follow-up on 3D and I'll pass it. I think you said in your release that datacom was down sequentially driven mostly by 3D sensing but datacom was down I think 18 million sequentially so that would imply that you were down at least 9 million in 3D in this quarter. Is that right? And with 3D down by more than half sequentially? Thanks.

Kurt Adzema -- Chief Financial Officer

You can certainly deduce that but that were other products as well I would say 40 gig, in general, tends to decline as well. But as we said, primarily it was the 3D laser rays.

James Kisner -- Loop -- Analyst

So the volume of that is 10 stablemen it sounds like? Ten gig?

Kurt Adzema -- Chief Financial Officer

Ten gig was relatively flat last quarter so I don't know if I'd say stable but I would say last quarter was flat relative to Q3.

Operator

Your next question comes from Simon Leopold with Raymond James. Your line is open.

Simon Leopold -- Raymond James -- Analyst

Great, thanks for taking a question. First, I just wanted to clarify what I think is obvious. 3D is reported in your datacom segment, correct?

Kurt Adzema -- Chief Financial Officer

Correct.

Simon Leopold -- Raymond James -- Analyst

And at some point would you break it out if it does become material enough as a separate linem? Is that your expectation or do you expect to include it in datacom forever?

Kurt Adzema -- Chief Financial Officer

I think as it becomes material then we will break it out, but we're just not at that point yet.

Simon Leopold -- Raymond James -- Analyst

Okay. And I wanted to ask about what's going on with QSFP28s -- it sounds like you had good volume but when I read the press release, you pointed to the 3D and the VCSEL production as the factors pressuring your gross margin. I would have guessed pricing in QSFP28 would've also been an element to the lower than expected gross margin. Is that part of it? Am I just incorrect in that assumption? Could you help us with the gross margin bridge?

Kurt Adzema -- Chief Financial Officer

Well again, I think there are two different questions but if you're asking why it was lower than expected in terms of our guidance then I would say it was the under absorption in the non-cash inventory reserves. As we talked about on the last call, we did expect price erosion in CWDM4 this quarter and there definitely was price erosion but that was built into the guide.

Simon Leopold -- Raymond James -- Analyst

So you would characterize there's an element for the relatively low gross margin versus historical but not a surprise in the quarter. Is that fair?

Kurt Adzema -- Chief Financial Officer

I would say, yeah, I don't think pricing for CWDM4 was a surprise for the quarter.

Simon Leopold -- Raymond James -- Analyst

And you offered us some commentary on the capex for the first quarter and it does look like maybe there are some timing issues versus April. Can you help us understand what your capex budget is for the full fiscal '19?

Kurt Adzema -- Chief Financial Officer

What I would say -- I'd kind of break it up into three components. I would say for the core business we'll probably spend approximately $25 million quarter on capex. I think for what's remaining on the Wuxi building, I would expect to spend, let's say, $8 million to $10 million. Some of that, as I mentioned, is gonna happen this quarter. I think the rest will be primarily in Q2 as we finish that building. And I think as you look at Sherman, as I mentioned, this quarter we're gonna probably spend about $100 million of capex and then I think in subsequent quarters probably gonna spend another at least $20 million to $30 million primarily to improve the facility so that we can easily more quickly add capacity as we move beyond phase one hopefully sometime in the future.

Simon Leopold -- Raymond James -- Analyst

And that 20 to 30 you're mentioning -- that's for the balance of the year or is that per quarter?

Kurt Adzema -- Chief Financial Officer

That would be for the balance of the year assuming we spend the roughly $100 million this quarter. Obviously, trying to time the exact timing of equipment and invoicing and stuff is a little bit challenging but yes, that's assuming we spend the full $100 million this quarter.

Simon Leopold -- Raymond James -- Analyst

And given the spending and the timing, when do you expect the Sherman facility to be in meaningful production? Do you still think of the fall time frame? Should we think of it as September, October? Or is it later than that?

Michael Hurlston -- Chief Executive Officer

Yeah, I think we said fall and I think October I'd say is generally the earliest we'd expect it but I think a lot is gonna depend on customer calls and things that are somewhat out of our control. But we're currently planning to be early fourth quarter to be online.

Operator

Your next question comes from Doug Clark with Goldman Sachs. Your line is open.

Doug Clark -- Goldman Sachs -- Analyst

Hey, great. I actually want to follow-up on the question just on capex. I know there's some timing element into it but based on your comments from last quarter, the Sherman facility capex should've been about double what it actually was in the April quarter so I understand that some of that is falling into July. I just want to be clear: Does that impact again in all the timing would perhaps push out the eventual full production of Sherman later into 2018 relative to what you previously had been expecting?

Kurt Adzema -- Chief Financial Officer

I think in terms of the capex you're right, it was a little bit lower than expected in Q4. I will say that we actually spent -- at the end of Q4 we had 16 million of pre-payments as it related to equipment that are not recognized as capex until the equipment is actually their end installed. So that 27 and change is a little deceiving relative to the forecast we had before. In terms of timing, I think Michael said just answer the question, which is we expect to have this facility up and running by the end of the calendar year and I think that's consistent with what we said in March.

Doug Clark -- Goldman Sachs -- Analyst

Can you -- on the $9 million in product writedown that you took in the quarter, can you be a little bit more specific into what product areas that was derived from?

Kurt Adzema -- Chief Financial Officer

Obviously, it's highly confidential information we'd prefer our competitors don't know but obviously, as Michael has said, I think one of the things we're trying to do is drive a more focused product strategy and as a result of that, we have to take reserves and write-offs as necessary. But we're not gonna delineate exactly that but I'd say our primary focus right now is cost reducing the 100 gig as we've talked about and then getting ready for the 400 gig transition that's starting in calendar '19.

Doug Clark -- Goldman Sachs -- Analyst

Okay. And then final question for me, actually a two-parter. Number one: It looked like there was $3 million of start-up costs that were non-GAAPed out I'm assuming that's kind of the incremental costs from Sherman. I just want to be clear if that's right, is that kind of the right incremental expense that we should start to see from the Sherman facility as you start to produce product out of it? And then your point on the gross margins on the non-cash reserve. I just want to be clear: That was not included in non-GAAP, correct? So when you were talking about that impact as an incremental negative versus expectation, that was strictly GAAP, right?

Kurt Adzema -- Chief Financial Officer

Yes. So a couple things; let's talk about Sherman first. So you're right, the $3 million start-up costs that relates to the Sherman fab as we talked about last time, I think the prior quarter, was about 600,000. Obviously, we're hiring a lot more people, training people, getting machines installed, et cetera. And I expect that number to increase as we get closer and closer to production. And then once we're in volume production, the most costs will get largely absorbed by the production of products, if that makes sense. But we're not providing guidance. And I would expect that number to continue to increase over time.

Your second question on non-cash reserves. That does impact our non-GAAP results. You have an ENO reserve that goes up, that does impact our non-GAAP results. So it does have -- we don't non-GAAP that out. Anything, if we're discontinuing products, that's a different story. But it's just normal ENO reserve inventory reserves that go up that does impact non-GAAP.

Operator

This next question comes from Joseph Wolf with Barclays. Your line is open.

Joseph Wolf -- Barclays -- Analyst

Thank you. A question on the breadth and the depth of the 100g market. If you look at the data sensor customers now versus a year ago to where you think it'll be a year from now, how do you think that's doing in terms of port growth and your opportunities that they're in? How much more -- is the pricing decline normalized? Are we inflecting on the price declines in that market as you look at the opportunity?

Michael Hurlston -- Chief Executive Officer

I think as we look out across the near term I think the port count is gonna continue to grow. We've seen some pretty robust forecast from our customers and the numbers are gonna continue to grow. I think Kurt talked about the pricing. What I would say there is that it continues to decline. I don't think that the rate is abnormal but we don't see the bottom yet, either. I think it's continuing to fall at sort of a straight line. I don't think we've reached bottom yet, unfortunately.

Joseph Wolf -- Barclays -- Analyst

Is that a global phenomenon? Meaning, if you counted your customers for 100g a year ago versus now, where are you in terms of the expansion of that market?

Michael Hurlston -- Chief Executive Officer

Yeah, I think we continue to see opportunity at our traditional OEMs. In fact, the OEM opportunity has increased on 100 gig. We've talked about it in previous calls, web 2.0 customers. Web 2.0, they have transitioned, Kurt I think talked about in the last call from LR4 to CWDM4 and we see that transition now almost all the way through. I think our exposure to the web 2.0 customers certainly looking forward I think will get better, but at the moment we're really only exposed to one.

Joseph Wolf -- Barclays -- Analyst

Okay. Then just jumping to 3D sensing for a moment. You mentioned the non-handset design winds. Just the timing on that, the ability or the flexibility to service those customers, and if you look out a year -- is it still gonna be predominately handset or will it be a couple of design winds contributing to revenue from that?

Michael Hurlston -- Chief Executive Officer

Near-term I'd say it's mostly handset. We talked about in the remarks an automotive design wind. We definitely see a lot of activity in that sector but I think product is in calendar year 2019 maybe early 2020. Some of the other opportunities that are not as big but we see production volumes happening even at the end of this year in some of these more specialized areas that involve 3D sensing. But we're definitely starting to see additional traction in the handset space, which is the highest volume opportunity.

Joseph Wolf -- Barclays -- Analyst

Alright, thank you.

Operator

Your next question comes from Mark Kelleher with D.A. Davidson. Your line is open.

Mark Kelleher -- D.A. Davidson -- Analyst

Great. Thanks for taking the questions. Just wanted to go back to a couple of other questions and go a little deeper. You just mentioned the transition from LR4 to CWDM4. Where are you in terms of your mix within those two? My question is: Even if CWDM4 were to stabilize in pricing, is there still a headwind because of the shift?

Kurt Adzema -- Chief Financial Officer

Again, I think there continues to be a shift. I mean, we're still selling LR4. What the equilibrium point is with [inaudible] is I don't think we quite know. But I think, more importantly, I think as Michael has talked about, the growth is primarily driven by the data center customers. Since they tend to buy more CWDM4, I'd expect our mix to continue to move toward CWDM4 and it is definitely already the majority both in terms of units and in revenue.

Mark Kelleher -- D.A. Davidson -- Analyst

That's helpful. You talked about cost reduction benefits helping gross margins there. Is that something that is gonna come in shortly or is that something that's longer we could expect some gross margin help longer term from those efforts?

Michael Hurlston -- Chief Executive Officer

I think a lot is gonna depend on customer pick-up. We have a couple of phases of cost reduction in play. One that's very near term and one that's more at the end of the calendar year. It's still dependent on customer calls and cycles and things of that nature, which is probably a little premature to call. But it's a continued focus of ours and as I say, we've got a couple of platforms that we're planning to introduce. One very, very near term and one further out and a lot is gonna depend on calls and customers acceptance.

Mark Kelleher -- D.A. Davidson -- Analyst

Okay. And just a clarification: The 3 million Sherman fab costs in the quarter, was that taken out of non-GAAP?

Kurt Adzema -- Chief Financial Officer

Yeah, the 3 million is non-GAAPed out.

Mark Kelleher -- D.A. Davidson -- Analyst

Okay, just wanted to double-check that. Okay, thanks.

Operator

Your next question comes from the line of Michael Genovese with MKM Partners. Your line is open.

Michael Genovese -- MKM Partners -- Analyst

Thanks very much. First, I guess I'm still confused by the guidance for gross margins in the current quarter up sequentially. Besides the reserve being less, I don't understand the product mix commentary that better product mix is gonna drive the improvement. Is that all WSF? I heard Michael talk about a 100G as part of the reason but I thought 100G datacom is putting pressure on the gross margin, so can you help clarify just what in the product mix drives the better first quarter gross margin?

Kurt Adzema -- Chief Financial Officer

Yeah, I'd say there are multiple things. As I said first, I do think there'll be less non-cash inventory reserve impact this quarter so that's one. I think number two, just revenue growth to begin with. Remember we had, as you know, quite a decline last quarter in revenue growth that impacted our gross margins. As we kind of turn the corner here for growth, match it in prove our gross margins. A fair amount of that growth is on the WSSI and WSS tend to have higher gross margins than our overall product. I think when Michael was talking about 100 gig, what we are seeing some increase more in CFD and CFP2 and so those carry, as we know, higher than average margins so I think that was more common around CFP, CFP2 than CWDM4 and we're doing a lot to reduce costs here. I think Michael has said, there's a lot of focus of the organization to reduce costs and improve operating efficiency and I think we're starting to see some of the benefits of that but as Michael pointed out, that's gonna happen over multiple quarters over the fiscal year. So we're doing a lot to improve gross margins. They're still not where we need them to be, obviously. But as he said, it's certainly nice that gross margins in fiscal Q1 are expected to be better than Q4.

Michael Genovese -- MKM Partners -- Analyst

Great. And talking about that CFP, CFP2 coming back, improving a bit. Is that primarily in China or is that other geographies? Could you just make a more general, broader statement about what you think about China here over the next couple of quarters?

Kurt Adzema -- Chief Financial Officer

Yeah, I'll take the CFP, CFP2 question. Yes, though it is primarily from China, so again, not huge, but certainly beneficial in the quarter or expected to be beneficial in the quarter. I'll let Michael handle the broader China question.

Michael Hurlston -- Chief Executive Officer

I think in the last call there were certainly a lot of questions about what we were seeing on ROADMs in China. I would say that, as Kurt talked about in his comments, we are seeing growth in ROADMs. Some of that is China. Some of that's China deployment. And I would say more of it is actually related to India but we definitely are seeing some growth in China. The overall market, the rest of the market I'd still say is flattish for us, aside from the CFP2 skew that Kurt just talked to. Generally, we're not seeing a lot of excitement in China still but we are seeing some pockets of growth.

Michael Genovese -- MKM Partners -- Analyst

Okay, great, and if you don't mind if I'll just ask one more. You talked about 12% to 15% operating margin target and that you have a lot of new strategic plans. Can you share any hint of those plans with us? For instance, would you be selling components in addition to modules or would you be using more contract manufacturers in your mix that you currently use now or anything else that would how we get from here to there?

Michael Hurlston -- Chief Executive Officer

I think the details certainly come out. I'm not sure we're ready to signal everything. I think that as Kurt said a couple of times to multiple different people, I think a lot of things are on the table. We've turned over lots of rocks and I think that we've generated out of that some good ideas too, as I said in my remarks, shift the product mix a bit, focus I think in the transceiver market on higher margin generating products. And I think the result of all that will certainly get us to much higher operating margins.

Operator

Again, if you'd like to ask a question, please press *1 on your telephone keypad. The next question comes from George Notter with Jefferies. Your line is open.

George Notter -- Jefferies -- Analyst

Hey, sorry my -- I guess I was interested in more on China just thinking about the different trade issues that are out there right now. Obviously, you have a larger exposure Huawei, VZV, ZTE; do you see anything on the horizon in terms of trade or in terms of the environment that could impact your business there?

Kurt Adzema -- Chief Financial Officer

I'd start with the first comment, which is for us; ZTE is certainly not a huge customer. So I think that we probably have less exposure there than some. Generally, it's uncertain. I think nobody can call what's going on in China. It seems to change every single day, as you all know. The good news for us is I don't think it's impacted business for us. As I say, ZTE is not particularly a large customer of ours and we're continuing to bob along but I think, generally speaking, assisted on very uncertain environment at the moment.

Operator

Your next question comes from Meta Marshall with Morgan Stanley. Your line is open.

Meta Marshall -- Morgan Stanley -- Analyst

Great, thanks. First question just -- your OpEx guidance would kind of imply a downtick from fiscal Q4 and just as you talked about cost improvements, would these be kind of declining from this level or could it kind of stay stabilized at this level for the fiscal year? Just how we should think about that? And then second question: Just on triple camera and just whether you see that as complementary or substitutional to kind of some of the 3D sensing technology that you guys are working on? Thanks.

Kurt Adzema -- Chief Financial Officer

We talked about in my remarks that we would like to see OpEx in the 18% to 20% range. And you're right, we've had a step down in OpEx quarter-over-quarter and I think that we'll see continued step-downs on the OpEx line. Again, we think we need to be in this 18% to 20% range to run our business effectively and we definitely want to get there. Relative again to 3D sensing and triple camera, obviously the big opportunity is in handsets and we're seeing a lot of different things there. We're seeing opportunities in virtual reality and gaming. There's definitely a lot of froth and I think we're focused near term on trying to capture as much of that opportunity as possible. Triple camera, we're seeing some interest in that. Obviously, you're right Meta, that that's an opportunity. But I think the near term game is a real focus on these handset opportunities.

Operator

Your next question comes from Tim Savageaux with Northland Capital Market. Your line is open.

Tim Savageaux -- Northland Capital Market -- Analyst

Hi, good afternoon. Want to focus back on the strategic front, really on both prospects for increasing the company's focus on the device and component space relative to modules and we've seen that demonstrated both very recently and within the last few years by various participants across the space with some pretty salutary gross margin results and/or speaking to the company's manufacturing footprints which you continue to expand, at least from a capital spending standpoint. Last quarter I think you said you may come back to us with more specifics. Haven't really heard a lot of specifics. And maybe I'd like to press a little bit and say, what you're guiding to from a OpEx standpoint implies a gross margin still in the mid-30s. Obviously, the company's done much higher operating margins as a stand alone prior to that. And that's with a VCSEL ramp that's much higher margin. So it sort of implies status quo. So is the result here after four, five months in the chair, we're kind of good as we are? Or would you like to expand on maybe other plans and directions you might be heading?

Michael Hurlston -- Chief Executive Officer

I think you touched on a couple of good points. I think number one, we certainly recognize the opportunity in the component sector. I think 3D sensing in some respect is that. I think the 3D sensing component opportunity is different for us. It's obviously not a module sale and I think as we get Sherman online certainly more of the revenue of the company will be coming from the 3D sensing opportunity and that's component based. I think that there is opportunity for us, which we haven't done in the past, is sell our components into traditional optics opportunities. At this point, we haven't fully explored that and so how that's gonna contribute for us down the road we don't know. I think you touched on another point, which is the manufacturing footprints. I think that adds something again that's very much under review. Certainly, as we embark on lasers, we continue to manufacture those and we think there's an important marriage between the design and manufacture of the lasers. As you look at the module assembly type of play and our manufacturing footprint there, that's something that we're looking at to see if we can build in some more flexibility into that footprint. So in regards to your sort of overall conclusion that its status quo, I can understand where you're coming from but I think at the same time, I think there's a lot of pieces that are moving under the covers that you can't quite see yet.

Tim Savageaux -- Northland Capital Market -- Analyst

Alright, well I guess I'll follow-up and say that if the endgame of those pieces moving is 35% gross and 12% to 15% operating, which is a place you've been before and could easily get just on a VCSEL ramp, what's the point of doing that, I guess?

Kurt Adzema -- Chief Financial Officer

Well, Tim, I don't think in these industries [inaudible] easily done. I think our competitors would agree to that. I think we have a lot of work to do and obviously, we're very disappointed in our results but even to get to the range Michael's talking about I think there's a lot of work to get done from the 1.5%, which was obviously unacceptable that we had this quarter. There's absolutely no status quo going on here having been here for 13 years I can tell you that. I think we're working on a lot of things. I think we're trying to put a lot of things in place to make this company successful and it's our expectation that it will be successful. But we're just not at the point where we're gonna delineate all that for you and our competitors.

Tim Savageaux -- Northland Capital Market -- Analyst

Fair enough. If I could follow-up with one quick business question, kind of operational. You've had various competitors and suppliers talk about CWDM4 unit volumes kind of doubling in the second half of the year, doubling again in '19 or in some cases unit volume forecasts for CWDM4 units as high as 10 million or calendar '19. Would be interested in your thoughts on any of those metrics? Either kind of directionally or in absolute terms?

Michael Hurlston -- Chief Executive Officer

We definitely see growth in the market, I'm not sure it's that high but we definitely see the growth that we talked to earlier. Port counts are going up, I think across the web 2.0 landscape we see those numbers increasing. We've seen some significant forecast jumps by some of our customers. With all forecast, I'm not sure you believe everything you see. I'd say directionally, you're right, it's up. I think the magnitude sounds a little high.

Operator

Your next question comes from Richard Shannon with Craig-Hallum Capital. Your line is open.

Richard Shannon -- Craig-Hallum Capital -- Analyst

Hi, great, guys, thanks for taking my question as well. Maybe just two from me. First on the datacom side of your business. I guess a two-part question for Michael. You mentioned specifically on 400 gig. Are you seeing any opportunities in 200 gig? And if so, when might those arise and could you provide any thought process on how to think about the timing for 400 gig in any real volume?

Michael Hurlston -- Chief Executive Officer

Let me start with the first question. I think on 200 gig we certainly are seeing opportunities and I think that those have the potential of being near term than the 400-gig opportunity. I think the 400 gig we're seeing sort of late calendar '19. I think we talked about that in the last call and I think the timing of that is still in that area sort of an early ramp I would call it in late calendar '19. The 200-gig opportunity is maybe mid '19 but we're definitely seeing a couple of customers talk in a more meaningful way about 200 gig.

Richard Shannon -- Craig-Hallum Capital -- Analyst

Okay, but on 200 gig you're not seeing anything this year then sounds like you're saying?

Michael Hurlston -- Chief Executive Officer

That's right.

Richard Shannon -- Craig-Hallum Capital -- Analyst

Okay, fair enough. My last and final question on kind of your enterprises within datacom. Maybe just give us a general thought process on the trends there what you're seeing in April, what you're seeing for the rest of the year in terms of growth?

Kurt Adzema -- Chief Financial Officer

Well again, I think Michael touched on probably the biggest part, right? The biggest part of our datacom business is the web 2.0 space and it's the kiosk of the 28 market. And I think in general what we've said is we expect unit growth to continue to grow, we continue to see pricing pressure there. So the challenge is obvious we don't predict more than one quarter out but trying to figure out exactly how those trade-offs happen in the coming quarter. But I'd say relatively flattish is our near-term expectation.

Richard Shannon -- Craig-Hallum Capital -- Analyst

Kurt, I apologize, maybe I phrased it improperly, but I was asking more in the lower speed enterprise stuff.

Kurt Adzema -- Chief Financial Officer

Sure, sorry. Ten gig as we said last quarter was relatively flat. This quarter we actually expect it to be relatively flat as well. But certainly, we expect 10 gig to decline over time. As we've talked about in the past, part of our challenge is that we've probably held onto the 10 gig business longer than most and it's not the greatest gross margin business due to our vertical integration strategy and so I expect that business to decline over time but certainly last quarter was relatively flattish. This quarter we expect relatively flattish but I expect that to decline in subsequent quarters. The 40-gig side we see that continuing to decline. It declined last quarter; I expect it to decline several million dollars this quarter, as well as people, continue to transition from 40 gig to 100. In fiber channel, I'd say relatively stable.

Operator

Your next question comes from Dave Kang with B Riley. Your line is open.

Dave Kang -- B Riley -- Analyst

Thank you, good afternoon. Just couple of questions on 3DS. First of all, can you talk about the competitive landscape on the VCSEL side? Sounds like we thought maybe there would be three but sounds like there could be more than three. And then, second question is on the AG meters of 443DS. Are you or will you be working on edge meters for 3DS?

Michael Hurlston -- Chief Executive Officer

I would say the competitive landscape continues to be us two six Lumentum. There's definitely talk from others that they're trying to get in the market but I think right now we see it as sort of a three-horse race. Again, I think our position is well documented in that market and we continue to believe that it's a good market with plenty of room for multiple people if additional people enter. The growth rate of the market is strong. I'd say on the second question -- and I forget what the second question is, Dave.

I think there was a lot of noise about edge-emitters. Certainly, we make an edge-emitting laser and I think that there's a lot of noise around that but we certainly have seen that dissipate. I don't think the customers seem nearly as excited about edge-emitters as they were let's say even a quarter ago. We're working on all the different aspects of 3D sensing. You've got structured light, we've got time of flight, those are our focus areas and certainly, that's where we see much more of the customer traction.

Dave Kang -- B Riley -- Analyst

Got it. And then my last question is on the high power versus the low power VCSELs. Your main competitor is making both whereas you are just focusing on high power. Assuming when Sherman facility's fully running, will you be making both or just continue to focus on higher power chips?

Michael Hurlston -- Chief Executive Officer

Yeah, I mean, I think it depends on customer opportunity. I think right now we're on the higher power side of the equation. We certainly can make low power, but I think it's all gonna depend on customer demand and customer opportunity.

Operator

And that is all the time that we have for questions for today. I turn the call back to [inaudible] for any closing remarks.

Michael Hurlston -- Chief Executive Officer

I want to thank everybody for attending. I think it was a good call and I appreciate everybody's time and attendance. We look forward to speaking to you next quarter. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 49 minutes

Call participants:

Kurt Adzema -- Chief Financial Officer

Michael Hurlston -- Chief Executive Officer

Alex Henderson -- Needham -- Analyst

James Kisner -- Loop -- Analyst

Simon Leopold -- Raymond James -- Analyst

Doug Clark -- Goldman Sachs -- Analyst

Joseph Wolf -- Barclays -- Analyst

Mark Kelleher -- D.A. Davidson -- Analyst

George Notter -- Jefferies -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Tim Savageaux -- Northland Capital Market -- Analyst

Richard Shannon -- Craig-Hallum Capital -- Analyst

Dave Kang -- B Riley -- Analyst

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