Home / Business / Finisar CEO (FNSR) Jerry Rawls in Q2 2018 Results – Earnings Call Transcript

Finisar CEO (FNSR) Jerry Rawls in Q2 2018 Results – Earnings Call Transcript



Finisar Corporation (NASDAQ: FNSR)

Q2 2018 Earnings Conference Call Results

December 7, 2017 at 05:00 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 Finisar Corporation announces the teleconference of results of the second quarter. Just a quick reminder, today's call is being recorded.

And now, at this moment, I will pass the things to Jerry Rawls, president and CEO.

Jerry Rawls

Thank you, Kimberley, and good afternoon everyone. We appreciate you taking the time to listen to our conference call today. A reproduction of this call must appear on our website within eight hours. An audio playback will be available for two weeks after the call by dialing 1-855-859-2056 for home use or 1-404-537-3406 for international, and then follow the instructions, enter conference ID 61569772. [19659002] I need to remind you that any forward-looking statement in today's discussion is subject to risks and uncertainties, which are discussed in detail in our annual and quarterly SEC filings. Actual events and results may differ materially from any forward-looking statements. In addition, the Company does not assume the obligation to update any prospective information presented. Unless otherwise indicated, all results discussed are not based on GAAP. You can find a complete reconciliation of our GAAP with the non-GAAP results 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 see them by connecting to the Investor Relations Page of our website at finisar.com. Click on Investors, then scroll down to the Webcast Files and click on, you will see a list of earnings calls for the second quarter of 2018.

And now, in the quarter. In the second quarter, we experienced strong demand for our 100 gigas QSFP28 transceivers. However, our total 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 year 2018. This decrease was mainly due to lower revenues from our Chinese OEM customers . In addition, during the second quarter, we began to send production quantities for our VCSEL matrices for 3D detection. 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 VCSEL manufacturing capacity using 6-inch wafers. We plan to begin volume production at our new Sherman facility in the second half of 2018 calendar year.

And now, I'll let Kurt check the rest of the numbers. Kurt

Kurt Adzema

Thanks, Jerry.

Sales of data communication products decreased by $ 1.7 million or 0.7% compared to the first quarter of fiscal year 2018, mainly due to lower demand for 10-transceivers and below, 40-gigabit QSFP transceivers and 100 Gigabit Ethernet CFP transceivers. This is partially offset by the increase in the sales of 100 gigs QSFP28 transceivers and the new revenues of the VCSEL matrices for 3D detection.

Sales of telecommunications products decreased $ 7.9 million or 9.5% compared to the first quarter, driven mainly by lower revenues from our Chinese OEM customers. In the second quarter, we had two clients of 10% or more. Our top 10 clients accounted for 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, mainly due to lower income levels, unfavorable product mix and other manufacturing cost absorption at our VCSEL factory in Allen, Texas. This under-absorption was mainly due to our shipping production quantities of our VCSEL matrices at the end of 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 went into effect on August 1. Non-GAAP operating income was $ 25.9 million or 7.8% of revenues, compared to $ 46 million or 13.5% of revenues 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 previous quarter.

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

Interest and other income were approximately $ 2.4 million in the second quarter. Taxes not audited by GAAP for the second quarter were approximately $ 2.2 million. Non-GAAP taxes for the remainder of fiscal year 2018 are estimated at approximately 6.5%. Capital expenditures were approximately $ 45.2 million in the second quarter.

Construction continues in the third building of our manufacturing site in Wuxi, China. We expect the construction of this building to be completed in the second half of the 2018 calendar. It is estimated that capital expenditures for the third quarter of fiscal year 2018 will be approximately $ 50 million, not including the cost of the building we acquired in Sherman, Texas for $ 20 million as well as any improvement costs that we begin to make in the building during the quarter.

We exclude from our non-GAAP results, charges or benefits that are not in cash or that we consider to be outside of our main operating results. These totaled $ 20.2 million of charges last quarter. If we include all of these items as required by GAAP, we generate a net income of $ 5.9 million or $ 0.05 per diluted share compared to net income of $ 19.9 million or $ 0.17 per share diluted in the first quarter.

This concludes my comments, and we'll go back to Jerry.

Jerry Rawls

Thanks, Kurt.

We expect revenues for our fiscal third quarter of 2018 to be in the range of $ 325 million to $ 345 million. We expect the revenues from data communication products that include the sale of VCSEL matrices to grow in the third quarter. We expect revenue growth from the 100 gigabit transceivers QSFP28, where we believe we are the largest provider in the world. In addition, we will have growth of our VCSEL matrices for 3D detection. This will be partially offset by decreases in the 100 Gigabit CFP and CFP2 Ethernet transceivers, as well as reductions in the 40 gigabit transceivers and lower data rate. We expect telecommunications revenues to decrease compared to the previous quarter, mainly due to the one-month impact of the annual increases in the price of telecommunications: the price reductions, forgiveness, which normally come into effect on January 1. However, we achieved the complete qualification of our coherent CFP2-ACO transceiver in a key OEM client and we still expect to complete the qualification of that client's ROADM line card by the end of the third quarter or the beginning of the fourth quarter. In addition, we believe that we are well positioned in the China market for ROADM, since we are the largest supplier of selective wavelength switches.

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

We expect operating expenses to be relatively fixed 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 short-term environment is somewhat 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 the production of 6-inch wafers there in the second half of 2018 calendar year.

We hope Finisar's VCSEL technology will be used in a variety of applications that include several high-volume uses in the consumer and automotive sectors. 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 that these investments produce a business area for Finisar.

And with that, I'm going to return it to Kimberley and open it 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 impact assumed of QSFP28, is it expected to grow or decline?

Kurt Adzema

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

Doug Clark

Sure, I'm sorry. Can you hear me now?

Kurt Adzema

Yes.

Doug Clark

Agree. As part of the data, well, basically, I'm curious about the QSFP28 sales in the October quarter and also about the expectations for the January quarter. Did you grow in January and are you expected to return in January?

Jerry Rawls

The answer is yes and yes.

Doug Clark

Agree. And then, as a follow-up to that, I think where that question comes from is that the number of peers has talked about a little incremental price pressure competition, as well as the change of mix from LR4 to CWDM4. Any comments or ideas about any of these two dynamics?

Jerry Rawls

Well, I think those are: both dynamics are going well in the market and I think it depends on who your customer is and how serious the competition is. And some customers have more stringent qualification requirements than others. So, I mean, it varies throughout the market; It is not uniform from client to client. But I think that, in general, we would say yes, that there was a tendency to work from LR4 to CWDM4.

Doug Clark

Agree. And then, my last question was about VCSEL, just a clarification, and I suppose they go hand in hand. But does the fact that it has production volume output imply that it achieved the key customer rating?

Jerry Rawls

I'm not sure he can really talk about that We have some non-disclosure obligations that really limit what we should say about any customer in that market. I can tell you that we are producing as fast as we can and sending everything we can do.

Doug Clark

Okay, I'll unplug it, I'll turn over the floor. Thank you so much guys.

Operator

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

Troy Jensen [19659043] Hello, gentlemen. Thanks for taking my question here. First of all for Kurt, on the side of the gross margin, I think, that's what surprised me the most in the quarter. Therefore, revenues were slightly below the lower end of the guide, gross margins were well below the lower end of the guide. Can you explain why they were so depressed? I think you mentioned that it had to do with the launch of 3D detection, but could you go deeper into that a bit more?

Kurt Adzema

Yes. I think what we talked about in relation to our guide, I would say, both were an unfavorable product mix, so a lot of the growth came from QSFP28 CWDM4. But, I think that while we talked about CFP, CFP2 Ethernet and dual speed went down more than expected. And as Jerry spoke, there has been a small change from LR4, QSFP28 to CDWM4. Then, part of this was mixing change. The other part of this, as we have talked in the past, is that factories have many fixed costs. I would say that our fixed costs were a little higher than expected at the factory. And to make matters worse, we are not exactly where we would like to be in the returns. And then, we do not produce as many units as expected. And so, consequently, that results in insufficient absorption.

Troy Jensen

Well, understood. And then, in 3D detection, for the new installation, you talk about the second half prepared for production. Would that be in time for the second half of the smartphone launches or is there a margin of time …

Jerry Rawls

I can not. I have no idea when the second smartphones will be released, so …

Troy Jensen

When you think of a Q4 release, Jerry. I mean, if you think about a fourth quarter release for smart phone guys, having your production up in the second half, does that give you enough time to qualify to get in there?

Jerry Rawls

I hope so. .

Troy Jensen

Well, what kind of stay there?

Jerry Rawls

It's going to be difficult, no matter what. Therefore, the answer is that we should run without problems based on everything we have learned so far and start working online and in production. And it's not a dunk, I'll tell you.

Troy Jensen

Understood. Last question, I'll give the floor. Could you give us an update on the search for CEO?

Jerry Rawls

Our search committee, our Board of Directors is very active, our search firm is very active, and we interviewed several candidates, all of whom were very capable people, because they have been filtered by search professional. So, I think we are making progress. I have nothing more than that to inform.

Troy Jensen

It's okay, it's okay, 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, thanks for answering my questions. I'm surprised if your search is active but my phone has not been ringing yet. In all seriousness, I suppose, in all seriousness, follow up on the 3D detection questions, two follow-ups there. One is, what was the contribution of income in the quarter? And then, how should we think about 3D detection, what's going on in the quarters of January and even April as yields start to improve?

Kurt Adzema

As we talked about earlier in the quarter that we just finished, we started to send in small volumes towards the end of the quarter. So, it was millions of low single digits. In terms of forecasting in the future, obviously, we will have a full production quarter, and we are working hard and advancing our returns. But, our customers would prefer that we not disclose the exact number that would cut there.

Patrick Newton

And then, I suppose, with regard to the new installation, you talked about how it should be executed impeccably. Can you explain what this execution is? What is the delivery time in the team, its epitaxial process, etc.? And the reason I ask is that your time to market seems to be way ahead of what someone like AMS has communicated with your own vertical integration process.

Jerry Rawls

Well, the good thing is, for us, since I have a beautiful facility that was – it was a semiconductor factory before, so it's very large clean rooms. And what we have to do is buy a lot of equipment to put it there. So, we have our MOCVD reactors that are in order. And they are moving in that direction, their delivery times are more than half a year. But, we have a place for that. And then, there is a whole series of fabulous equipment from our litho, to our engraving to our metal depositions, and so on. So, there are many teams that must join. We have to put it online, do all the pipes and that, and then, second, it's a 6-inch wafer process. And we have never processed 6-inch wafers. Now, we have people in the company who have processed 6-inch wafers in previous jobs, but it will be a new experience for Finisar. Then, it will be challenging.

Patrick Newton

And then, just one more if I can, Kurt, in the gross margin. He has consistently indicated that mix is ​​the biggest impact. He also reported that the annual price negotiations negatively affected the April quarter. I suppose that, as a kind of intermediate vision of the gross margin, do you see mixed tailwinds of improved 3D detection, ROADM or some new product that could help the results in the medium term or, conversely, we could see continuous challenges from the change of mix to more CWDM4 for less for 40G or competitive pressures? And the reason why I ask is because of the fact that 30% has historically been a rather rigid gross margin for the Company.

Kurt Adzema

Well, once again, we do not provide guidance beyond the quarter in which we are. I think, you're right, there are many factors that could help improve margins, certainly improving our performance for our VCSEL, and the production of that facility could have a good impact for us. As you also point out, in the fourth quarter, you will also suffer the erosion of telecommunications prices during the three full months. And as Jerry said, a change is happening where most of the growth you're seeing is CWDM4, which has gross margins lower than LR4. So, I would say, there are a variety of factors that are moving, and we certainly do not provide guidance beyond the quarter in which we are. But, obviously, we are working very, very hard to try to improve the performance of our Allen VCSEL factory, and that could certainly be a positive impulse to help us compensate some of those negative aspects of which he also spoke.

Operator

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

Dmitry Netis

Thank you all for answering the question. Jerry, maybe you start a kind of high level question first. Could you put the land here on the hyper-scale side of the business? I think several colleagues have seen a bit of air in their pocket in the last quarter. Are you seeing that the situation is improving? I know, there's been a transition, mainly the LR4 to CWDM4 that you've been discussing. Is that really the main problem here or is there something else at stake? And when can we see the type of inflection or when can we get out of that pocket?

Jerry Rawls

Well, from our point of view, 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. Therefore, our revenues have risen quite consistently quarter by quarter, as far as I can remember. Therefore, we are still optimistic in the market. And it is clearly one of those segments that is driving the company.

Dmitry Netis

Good. And then, if I just look at the QSFP28, you were guiding for 100 million types of execution rate businesses, coming out of this quarter. Just curious, have you guessed that number? You may have said that. So, I apologize if I missed it. If it did, that would imply a percentage growth rate of 17, 20% of the previous quarter. Can you confirm that? And then, with that kind of growth rate will it continue for 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 together We'll be about $ 100 million in our Q2, and I would say it was only at that stadium. And we certainly expect it to grow significantly in this next quarter. And we continue to add some capacity, especially with regards to CWDM4. So, I would expect that the growth we're going to see really be in CWDM4, in Q3, and that's what is helping to compensate, probably, what we'll see, erosion, continuous erosion in 10 gigabytes of 40 gigabytes and CFP, CFP2 Ethernet .

Dmitry Netis

I have you. And then, the last question, if I can. The first two customers were one, a US customer. UU And another customer from China. Can you comment on that?

Kurt Adzema

We can not comment on who the customers were.

Dmitry Netis

Agree. So, maybe I just asked a question about China then. By knowing who your big customer is in China, what are you seeing in the field? Is that what your sales people are seeing or telling you, is there any recovery inside you, when can we potentially see that? What is the expectation now in China and its main customer in terms of inventory …

Jerry Rawls

I was in China visiting our main clients, and I found that in the Web 2.0 space, there was optimism about 2018 but in OEMs, there was not so much. The most important story I heard from the original equipment manufacturers was that 2019 was going to be a particularly good year since the infrastructure for 5G wireless networks began to be implemented, and many opticals would be obtained in 2019, but 2018 of the OEMs was not nothing for Write home about.

Dmitry Netis

And we know if the inventory is at the levels where you will start looking for more of a kind of business rate execution in the future or will we still have some potential outgoing inventory here?

Jerry Rawls

Well, I think most of the inventory has worked. I can point to a client, I think he still has a persistent inventory. But, the problem is that the execution rate for 2018 may not be – it's not going to be anywhere like the 2016 execution rate, that was clear.

Operator

Your next question is from Alex Henderson's line with Needham & Company.

Alex Henderson

Great. Just to clarify that last statement. When you say nothing, CY16, I mean, do you mean growth, are you not talking about an absolute dollar, but about growth?

Jerry Rawls

I'm talking about absolute dollars. I do not think, the indications I got from some of our Chinese clients, I would not expect 2018 to be as big as 2016.

Alex Henderson

Agree. Is it still up in relation to 2017 in that calculation?

Jerry Rawls

It's not like that – that's not clear. There are some who seem to have more confidence than others, but I did not get a warm and fuzzy feeling about 2018 of China's demand.

Alex Henderson

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

Jerry Rawls

Up.

Alex Henderson

A little, a lot?

Jerry Rawls

It's over, I do not know, 10% quarter by quarter.

Alex Henderson

So, are you beginning to see an increase in demand in China or are you picking up demand as a result of the rest of the world, where does growth come from?

Jerry Rawls

There is a good amount of this comes from China. But, in the rest of the world, we have many clients who are not only European and Japanese as well. So, it's not like we thought that the business of the wavelength selector switch is booming, but it's … you know you're doing it right. And I do not think that for everything I learned in China, 2018 will necessarily be a great year for ROADM. There will be ROADM acquired and there will be regional deployments or provincial deployments but a large-scale implementation is not expected.

Alex Henderson

And then, in the 10-gig, can you analyze the tunable telecommunication products? and the data communication products, please?

Kurt Adzema

I'm not sure, 10 gigabytes, the datacom side is something like the percentage of teenagers in the middle of the datacom. And I would say that on the telecommunications side, 10 gigs is probably around 30% of telecommunications.

Alex Henderson

Thanks for the data. But I was … what was I asking if there was any difference in the trajectory of the two? Are the tunables being reduced, as well as the 10 gig of datacom? Everyone assumes that the 10 gigs, 40 gigabytes of datacom are decreasing, but I think I was looking for a reading on the optimisables?

Kurt Adzema

Yes. I would say that the 10-gig setting has been relatively flat, but I think we're starting to see signs that there might be some decline in the next two quarters.

Alex Henderson

And going back to the ramp in VCSELs. Obviously, you do not want to talk, too granular. But can you give us an idea of ​​what kind of capacity band it would have if it achieves reasonable production yields? Is it a quarterly business type of $ 30 million to $ 40 million? And assuming that the second factory does not come into operation.

Jerry Rawls

The capacity we are building there is going to be, for us, more than $ 100 million per quarter in revenue. [19659129] Alex Henderson

That's with the new capacity coming into operation at the 6-inch factory, right?

Jerry Rawls

Correct.

Alex Henderson

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

Kurt Adzema

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

Jerry Rawls

When you say exclude, what are we excluding?

Alex Henderson

I guess you're producing in 4 inch fab today and you're not increasing that capacity substantially since you're going with 6 inch capacity. So, I guess most of the volume you're doing today is in that 4-inch fab and, therefore, that has a limited capacity up to … this limits the amount that could happen before you get the other production and running. And it looks like it's like 30 to 40 and then when you add the 6-inch type and you take it towards 100 more.

Jerry Rawls

I do not think we've ever said it could be as much as 40 million per quarter. I think I once said that if we reached the returns we targeted, we could probably make 30 million per quarter with that Allen fab. But that's probably as good as getting there. Maybe we will surprise ourselves. That is not perfect returns, but those are reasonable returns. We are not yet at that level of performance and, but we are making progress every week.

Alex Henderson

So, a couple of quarters to increase that level, is that the right way to think about it? [19659175] Jerry Rawls

I can not predict that. They can be two quarters and can be four quarters.

Alex Henderson

Going back to the question about gross margin and I apologize for the long rows of questions here. But the gross margin pressure associated with the fab factory going into operation, when I look at the success in the quarter, how much of that was, how much of the price pressure in 100 gigs? ¿Cuánto fue del cambio de mezcla? ¿Podrías ayudarnos un poco más en esa granularidad entre ellos?

Kurt Adzema

Esos son todos factores muy importantes con honestidad. Entonces, creo, no voy a proporcionar más granularidad sobre eso. Los tres eran factores materiales, los ingresos estaban bajos, la mezcla era desfavorable y obviamente los costos en Allen.

Alex Henderson

¿Estaba valorando también un factor de 100 gigas?

Kurt Adzema [19659174] El precio siempre es un factor y, obviamente, varía según el producto. Entonces, como dijo Jerry, estamos comenzando a ver precios más competitivos en el lado QSFP28. Pero, diría, los otros tres factores fueron más grandes en el trimestre que acabamos de terminar.

Operador

[Operator Instructions] Su siguiente pregunta proviene de la línea de Tim Savageaux con Northland Capital Markets.

Tim Savageaux

Hola . Good afternoon. Un par de preguntas aquí. Primero en el lado de las telecomunicaciones. Me pregunto si podría hablar con la magnitud de la contribución que espera de su calificación de ACO en enero. Al menos habría pensado que era una oportunidad significativa, tal vez hacer que octubre sea un trimestre mínimo en las telecomunicaciones. Me pregunto con el aumento de la contribución de ACO y sus expectativas en el lado de ROADM, ¿cree que enero tiene la oportunidad de estar a través del trimestre en el lado de las telecomunicaciones. Y si pudieras hablar de nuevo con algún tipo de orden de magnitud para la contribución de ACO en enero?

Kurt Adzema

Diría que ACO en términos de Q3 es el resultado de la calificación que Jerry mencionó. Esperamos que esté arriba, pero aún no tanto como quisiéramos. Por lo tanto, aún no es enorme. Obviamente, esperamos que tenga un mayor impacto con el tiempo. Pero no diría que está teniendo un gran impacto en la Q3. Obviamente, esperamos tener un mayor impacto en Q4. Creo que la otra cara de la moneda es que el cuarto trimestre tendrá los tres meses completos de reducción del precio de las telecomunicaciones. Por lo tanto, no proporcionamos una guía para el crecimiento de los ingresos en telecomunicaciones en el cuarto trimestre, pero obviamente esos son dos factores clave. Pero, diría, no tenemos, en nuestra orientación, no tenemos mucho impacto de la reciente calificación de la ACO en el cliente clave, preparado.

Tim Savageaux

Lo tengo. Thank you. Y luego, al lado de la percepción 3D, solo quiero aclarar una cosa que estaba discutiendo anteriormente con respecto a la capacidad actual, que ya ha dicho antes, y dado su rendimiento de margen bruto, supondremos que sus rendimientos no son t donde le gustaría que estuvieran y probablemente calcule la capacidad de esa manera en términos de dónde puede rampar cerca del término. ¿Dijo que está agregando un incremento de 100 millones por trimestre? Digamos que todo sale bien en la segunda mitad del calendario 2018, o obtendrás un total de 100 millones en capacidad, incluido el de 4 pulgadas?

Kurt Adzema

Para ser sincero, todavía estamos averiguando ese. Como habló Jerry, hemos ordenado muchos de los artículos de larga duración. Por lo tanto, todavía estamos finalizando el equipo exacto que va a ser y cuántas obleas vamos a poder agregar a la capacidad. Obviamente, la capacidad es solo una parte de la ecuación. Tienes que tener capacidad y obviamente tienes que tener los clientes. 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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