Good day, ladies and gentlemen, and welcome to the Lumentum Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s conference, Mr. Chris Coldren, Vice President, Strategy and Corporate Development. Mr. Coldren, you may begin.

Thank you, Toria. Welcome to Lumentum’s third quarter fiscal 2016 earnings call. This is Chris Coldren, Vice President of Strategy and Corporate Development. Joining me on today’s call are Alan Lowe, President and Chief Executive Officer; and Aaron Tachibana, Chief Financial Officer. This call will include forward-looking statements, including statements regarding Lumentum’s expected financial performance, expenses, trends, and position in our markets, as well as expectations related to our customers and our products. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-Q filing for the fiscal second quarter ended December 26, 2015. The forward-looking statements we provide during this call, including projections for future performance, are based on our reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update these statements except as required by applicable law. Please also note unless otherwise stated, all results and projections are non-GAAP. Non-GAAP financials should not be considered as a substitute for, or superior to, financials prepared in accordance with GAAP. Our press release for the third quarter of fiscal 2016 results is available on our website, www.lumentum.com, under the Investors section and includes additional details about our non-GAAP financial measures and reconciliation between our GAAP and non-GAAP results. Our website also has our latest SEC filings, which we encourage you to review and supplementary slides relating to today’s earnings release. Finally, a recording of today’s call will be available by 7:30 PM Pacific Time this evening on our website. Now, I would like to turn the call over to Alan for his comments and third quarter business highlights.

Thank you, Chris. Demand is strong and increasing. Network and data center operators around the world continue to upgrade and expand their networks. They plan even larger investments in optical infrastructure over the coming years. The rapid growth in cloud computing, video streaming, mobile and other high bandwidth applications is placing an enormous demand on networks in terms of capacity, connectivity and efficiency. These demands can only be met with advanced optical communication technologies, including 100G and higher data transmission and advanced ROADM architectures. Lumentum is a leader in these enabling technologies and our investments in new products position us well for these trends. Increasingly, network and data center operators around the world are critically dependent upon our products. Demand from China is strong now and expected to increase. North America metro deployments are poised to ramp as our customers begin to transition from field trials to full-scale deployment. Hyperscale data center operators continue to plan major 100G upgrades and we expect roll out to begin in the second half of the calendar year. Despite investing in additional manufacturing capacity, we continue to have challenges in meeting some of our customers’ increasing demand. In the third quarter, we executed to plan. Revenue was $230.4 million and fully diluted earnings per share was $0.32, both above the midpoint of guidance and at record levels. While recent company growth has been driven by our telecom business, our Datacom business became a major driver of growth in the third quarter. Datacom revenue grew 30% sequentially and achieved record levels of $45.5 million. Datacom growth was driven by revenue from 100G products, which increased approximately 140% over the prior quarter and now represents over 40% of our total Datacom business. We expect our Datacom revenue will continue to grow in the coming quarters as…

Thank you, Alan. Net revenue for the third quarter was $230.4 million and above the midpoint of our guidance. While we had an additional week in the quarter, we also lost manufacturing capacity in Asia due to the Lunar New Year holiday. GAAP gross margin was 27.3% and decreased 390 basis points quarter to quarter, driven primarily by a one-time inventory provision expense related to our 3D sensing business. GAAP operating loss was 1% and GAAP net loss per share was $0.13. Our third quarter non-GAAP gross margin was 32.2% and decreased 50 basis points relative to the prior quarter, driven by a sequential decline in optical communications’ gross margin which was not fully offset by the increase in commercial laser gross margin. Non-GAAP operating margin for the third quarter was 8.8%, a decrease of 20 basis points sequentially. Non-GAAP earnings per share was $0.32 based on a fully diluted share count of 61.5 million, along with $400,000 of other expense primarily from foreign exchange losses and $200,000 of tax expense. Optical communications revenue was $197.2 million, an increase of approximately 6% relative to the prior quarter, driven by a $2.1 million or approximately 2% increase in telecom and a $10.5 million or approximately 30% increase in Datacom, which was partially offset by $1.2 million or approximately 9% decrease in industrial and consumer revenues. Optical communications gross margin at 29.8% declined 90 basis points sequentially. As Alan mentioned, the third quarter has seasonally higher ASP erosion for optical communications, which more than offset the positive impact of higher volumes. Commercial laser revenue was $33.2 million, an increase of $700,000 quarter on quarter. Gross margin at 46.7% increased 300 basis points due to the impact of cost reduction actions as well as favorable mix. We had three customers that each contributed…

Thank you, Aaron. I would like to ask everyone to limit discussion to one question and one follow up. Toria, let’s begin the question-and-answer session now, please.

[Operator Instructions] Our first question comes from the line of Alex Henderson of Needham.

So I was hoping you could give us some sense, you said in your comments that you’re seeing clear increase in demand out of China during the quarter, but the open question is still whether the Chinese come back with another round of large orders? I know [NEO] came out with comments saying that they were expecting 30,000 units of transceiver orders based on their conversations with the service providers. Can you help us with what you think the visibility is and what your source of understanding out of China is, so that we can triangulate on that?

We obviously meet with our direct customers, we’ve also been more recently meeting with the three main carriers in China and while the timing of new orders to our customers is not certainly clear, it is clear that there will be more deployments and whether that’s another 30,000 or 40,000 lines, it’s not obvious to me. But I can say that every indication we get from both the carriers as well as our customers indicate that there will be continuing demand through the rest of this calendar year and into 2017 calendar.

The second question, just so that I understand the mechanics around the fiber laser, it’s my understanding that you had problem with your coupling on the laser that you were shipping, that you’ve resolved that problem, figured out what it is and that you’re in the process of testing or requalifying it, when does that requalification process end? And when do we get back to ramping that product into Amada?

We believe we’ve resolved the problem. We’ve been in production with the new process that provides a much more reliable and robust structure for our fiber laser. And again, it’s only one of our fiber lasers that we produce that had the problem. We have very stringent quality requirements from both our customer and their customers and so until it’s proven for many, many hours and many thousands of hours in the field, there’s also concern that maybe it hasn’t fixed. I’ll say every indication to date is that we have tens of units in the field that have hundreds of hours and so far so good, so we believe the problem is solved. It’s now a matter of being able to reproduce this process in high yield and high output and we’ve been adding capacity through the quarter and adding manpower to be able to increase the output of this new process. And so that’s what we’re going through today. We are making progress every week. We produced more last week than we did the week before. And so we’re continuing to drive the demand or drive the capacity to be able to catch up with a really pent up demand in this one product line that we’re seeing from Amada.

So that’s the back half of calendar 2016 that it starts to ramp?

Well, no, we’re ramping now. I would say that by the next quarter or so, we should be caught up with demand. But until our customer has hundreds and thousands of hours on these fiber lasers, it’s not done until it’s done. So I’d say we should catch up this calendar year.

Our next question comes from Patrick Newton of Stifel.

First, a clarification, did I miss fiber laser revenue in the quarter or could you repeat it?

No, but it was $9.3 million.

And then I guess just focusing on ROADMs, can you help us understand the relative mix between TrueFlex and non-TrueFlex so we can understand the kind of roll off versus the growth driver there? And then on the conviction in China deploying ROADMs in 2017, what gives you that level of comfort given that it seems like long haul still has a significant amount of, I guess, tailwinds over the next few quarters?

TrueFlex is roughly 70%, 75% of our overall ROADM today and that’s why we’re confident that we will continue to grow our overall ROADM as the non-TrueFlex has become a much smaller share of the business. As far as confidence in China, again this has to do with going and talking to the carriers themselves, seeing what they’re doing in their labs and in their field trials much like what is going on here in North America. So I think from my perspective, ROADMs will go out and I’ve been consistent in the last couple of call in China in 2017, I’m gaining confidence in that conviction as you say based on the progress that we’ve made with the carriers and the major network equipment manufacturers in China that give me that extra confidence. And by the way, ROADMs also go in the core of the network as well, not nearly as the number or account as they go into the metro deployment, but – so I think we’re seeing them today in the core network deployments. But really next year, more broadly throughout the network from the metro all the way to the core.

And then as my follow up, I guess just dovetailing off of Aaron’s commentary on couple expenditures, can you help us understand the percentage of your optical platform that is currently capacity constrained, highlighting either telecom versus Datacom or any way you want to frame it?

Well, we’re having this discussion about how to answer this question before the call and when we look around and ask what can we actually take more orders of today and satisfy them in relatively short lead times, I’d say probably 10-Gig Datacom, but not a lot else. So I’d say the vast majority of our products are constrained. That’s why we have that elevated level of CapEx that Aaron talked about, $30 million last quarter and another $25 million to $30 million this quarter.

Our next question comes from Troy Jensen of Piper Jaffray.

So Alan for you, you made comments in your prepared remarks about North American metro strength, obviously there’s been a lot of questions from clients on [Verizon in the States]. So just kind of curious, you know, your comments about strength in metro and what you may know about just kind of Verizon’s situation right now.

We talked to both Verizon as well as the two main network equipment manufacturers supplying into the Verizon metro build and supporting, everyone we talk to, there is no impact that they’ve noticed or have seen or are planning for due to the strike. So we’re still forging forward and building products in anticipation of the deployment starting later this quarter.

And then maybe one for Aaron here, Aaron have you ever thought about like a business model target or can you just help us out with operating margin leverage as the business ramps and when we get into this cycle, maybe what revenue levels or what timeline can you get to certain thresholds for operating margins?

So our targets are set on getting to double digit operating margins, 10% as quickly as we can. In terms of the gross margin at 32.2%, we’re about 100 to 150 basis points shy of where we’ve been targeting. There is a couple of reasons for that. One is the laser mix was a little bit lighter than it has been in the past. If the laser mix back up towards 18% to 20%, that should contribute 50 basis points or so. And then we also are a little bit behind on consolidating [indiscernible] into the fabs in San Jose. That’s supposed to give us close to 100 basis points of uplift in gross margins. In terms of the OpEx, so OpEx [indiscernible] 23% to 23.5% of sales. Over the near term, we expect to [indiscernible] continue invest for future growth. Beyond that, we anticipate being able to [indiscernible].

Our next question comes from Dave Kang of B Riley.

My first question is regarding on your ROADMs, one of your competitors actually, I guess the only competitor, they said in the previous call that they’re in the process of getting into – being qualified into Verizon. Has that happened? And what is your expected allocation going forward?

I think you should ask them at the top, from my perspective our customers are relying extremely heavily on our ability to meet their demand. And once our competitor gets qualified, it would be up to them to be able to perform. And I think given the number of ROADM nodes in the Verizon network, I think there’s plenty of it to go around for both of us. But I still expect to have the vast majority of the business.

And then going back to the second quarter, I believe you said you left about $10 million-ish, maybe $20 million on the table because of capacity constraints and component bottleneck. How much was it this quarter?

It’s hard to quantify it, but it’s probably north of that just given we have orders that have request dates that are within the quarter that we pushed out of the quarter. But given the high percentage of revenue that we get through VMIs, it’s really hard to tell because most of the VMIs are low or empty at the end of the quarter. So that makes it hard to really kind of put a quantification on it.

But it sounds like your book-to-bill, I mean, you say is 1, but you sound like it’s a pretty solid like maybe 1.2, 1.3, that type.

We don’t break that out, but it was extremely strong. And it stayed very, very strong through the month of April.

So if that’s the case, then are you – I guess, this current quarter, the June quarter, I guess you’re still going to be capacity constrained, is that why for conservative revenue outlook?

We are capacity constrained through this year or through this quarter. I will say that one of the dynamic that happens when allocation start is that some of our customers that are VMI customers start giving us discrete orders as a signal that they really will take the product as opposed to having it sit in the VMI hub. So that’s also an indicator of allocation and some of the behaviors that go on when customers really, really want the product. So I’d say that we’re going to be on allocation through this quarter and into next quarter. And again that’s why we’re spending between $55 million and $60 million in this half of the fiscal year in capital.

Our next question comes from James Kisner of Jefferies.

I was just curious what your longest lead time products you have right now, and how many weeks of lead time you’re looking at? And just related, it sounds like you may not be in allocation a couple of orders now you expect, I mean, might the CapEx levels drop more significantly after we get out of the next quarter or just wait and see on that?

I think to give a lead time on a new order is difficult because there’s a lot of products that are – if you get an order today, it will be scheduled out into the summer and through August and September. I’d say that some of the products with the longest lead times today are ROADMs, our TrueFlex ROADMs and 980 pumps, both because 980 pumps go into amplifiers and new lines are going out and being deployed, but also we have a lot of pumps in our TrueFlex ROADM line card. So we’ve been adding a lot of capital in our 980 pumps as well as in our ROADMs and our Super Transport Blade line. Does that answer your question, Jim?

I guess that helps. And on the CapEx?

On the CapEx front, so again we’re spending roughly $25 million to $30 million this quarter. Demand still looks pretty strong, so as we get into the Q1, we don’t need to spend a level that we spent the last two quarters. It’ll start to tail off and it’s our belief that CapEx will return back to the 4% to 6% of revenue level towards the back half of FY 2017.

And just one last one I sneak it in, on pricing, it was down 6%, and just probably confused why – almost all your products are in shortage and you’re seeing worse than usual price declines, can you clarify why that is?

I wouldn’t say it’s worse than the normal. I’d say that typically the March quarter has the brunt of the annual price reduction. Some of these price negotiations were done months if not quarters ago. And as I said in the past, products like our ROADM line cards, those prices were negotiated two years ago. And so those are done and [setting stone]. I’d say also that we’re in this with our customers to win and taking advantage of a short term blip is not what we intend to do. Not, this is a short term blip, so let me back that up a minute. We don’t try to take advantage of our customers. We need them to be competitive, to win in the marketplace because we value their long term partnerships. So I wouldn’t say that just under 6% was anything abnormal because we typically see 2% to 3% in the other quarters. And so that kind of adds up to that 10% to 15% that we typically see in an annual reduction.

And our next question comes from Rod Hall of JP Morgan.

I guess I’ll start with a question and then a clarification. The Datacom 100-Gig revenue was up I think 140% quarter over quarter. Can you just comment on what drove that? Was that a Web 2.0 customer, the largest one you guys have talked about in the past or is there any other color you can give us on what’s driving that growth? And then the clarification, I just wanted to go back to the Verizon strike and ask you, you said, no, there is no impact. But at what point would there be? How long would this strike have to run before you think demand would be impacted or do you think there would be any impact from a longer range strike?

So the cause of the growth in 100G was mainly to our network equipment manufacturers as they deployed their 100-Gig line side, products they need a client side transceiver to a lot of CFP2s and CFP4s and now QSFP28 going out into those client sides of the telecom networks. We are starting to see traction in the hyperscale data center customers, but more in the pilot-type applications, although we have received multi-million dollar order for QSFP28s from a major hyperscale data center customer that we’ve never done business with before. We expect to start shipping this quarter, but as well into the next quarter. So I’d say that again the hyperscale really takes off in the second half of the calendar year and contribute meaningfully then. But the growth we saw in the March quarter was mostly to the network equipment manufacturers. As far as the Verizon strike impact, I suppose that there could or should be impact if it lasts a really long time. I don’t have a crystal ball on that. Every indication I’ve got is that there’s no impact, but I assume if it goes on for months and months that there may be an impact. But today in the horizon that I see, I can’t foresee any impact in the next few months.

And then Alan just one more if I can sneak it in, the last time we saw you, you said you thought the real ramp in North America in component supply for the 100-Gig roll out would happen in late May, early June. Is that still the timeframe that you expect component demand to ramp in or do you have any more visibility on when you expect the ramp to occur?

Are you talking about the metro deployment?

Yeah, metro 100-Gig.

Yeah, I think that’s still consistent with our current thinking, May, June and July.

Our next question comes from Simon Leopold of Raymond James.

This is Mauricio for Simon Leopold. Last quarter you talked about production constraints which reduced sales by close $20 million. Can we get an update on that? Did this quarter include any [indiscernible] sales from that slog of revenue that slid out of the December quarter?

I wouldn’t say that we reduced sales. I would say that we weren’t able to satisfy demand from our customers by say $20 million in the December quarter. That demand, I would assume was, satisfied in the January/March quarter. And again, there was demand that wasn’t satisfied in the March timeframe that’s been satisfied now, and those orders today that customers want this quarter that are not going to be satisfied this quarter. So I wouldn’t say it’s a reduction in revenue; I’d say it’s an allocation that we’ve been having to deal with that again why we’re adding so much capital to our production capability. So I think your question was did that demand go away and I’d say no, the demand did not go away because as an industry as a whole, I think for most of the products that we ship, there’s allocation across the industry.

Another question I have is what portion of the sales did you generate from China, is all this equipment ultimately deployed in China?

So in terms of the percentage of business in China, we ship roughly one-third of our business into Hong Kong and China. All of APAC is roughly 60% of the business.

But keep in mind that may not be deployed in Asia. So a lot of our North America customers use contract manufacturers in China as well as some of the products that we ship into Chinese network equipment manufacturers don’t all stay in China and may end in Europe or Middle East/Africa.

Our next question comes from Richard Shannon of Craig-Hallum.

I think my first one is on the Datacom space, I think you mentioned receiving a multi-million dollar order from a Web 2.0 that you hadn’t previously worked with. Can you share with us whether this is CWDM or for something else? What do you view as this share allocation? And Alan, if you could give us a sense of what some of the primary criteria for getting awards now, is it price, the performance, is it the ability to ramp, love to get your feeling for what’s most important for these customers right now?

The particular order I was talking about is for CWDM4 order. And I’d say the criteria for getting that order was ability to give them product. And so I’d say some of our competitors are certainly good at giving price, but not necessarily delivery. And so at the end of the day, when the customer needs product, they’re going to order it from the people that can actually provide it. So I’d say that there’s a group of suppliers in the industry today that have credibility and the ability to ramp and price becomes less of an important thing. And so we certainly price to be able to make money, whereas others may not. So I’d say that the key criteria in getting that order as well as getting orders throughout this calendar year and into next will be ability to ramp high quality high volume production when the customers need it.

And Alan, do you have a sense of what kind of a share allocation you’re getting here, just kind of rough thoughts, qualitative or quantitative?

I really don’t. They’re pretty secretive on what they do. I’d say though that based on what I understand, it’s a large share of a need that they had come up pretty rapidly. So they’d like to have it all this quarter. We’re not able to provide all of them this quarter. So it’ll fall into the July quarter as well.

My quick follow-up question, just looking into the June quarter guidance on the top line, can you just give us a sense of the relative moving parts Datacom, telecom and the commercial lasers relative to the kind of growth implied at the midpoint here.

I’d say that if you look at lasers in industrial and consumer, it’s probably flattish with lasers going up in industrial and consumer softening again this quarter. And then Datacom and telecom both growing from today’s level, even in the 13-week versus 14-week.

Our next question comes from Tim Savageaux of Northland Capital.

If I could follow-up on that guidance mix question, actually given your answer to a previous question about the Web scale order, I mean, will we there assume there’s a pretty big divergence on sequential growth between Datacom and telecom this quarter. Your answer there seems to suggest that it might be a little more similar. But given this large order that you commented, it seems to have some near-term demand around it. I wonder if you can – we can try and go at the telecom versus Datacom growth sector from that perspective.

I think it’s really hard for me to say. If you normalize last quarter for a 13-week quarter, our growth is not insignificant to our fourth quarter. But I’d say it’s more balanced this quarter than last quarter where we saw most of the growth come from Datacom. I’d say we’d see more of a balance between Datacom and telecom. And keep in mind, while we grew telecom 2% last quarter, we probably grew units more like 7% or 8%, given the ASP reduction we had in the quarter. So I’d say that that would be more normalize this quarter and have less ASP reduction and have that unit growth reflect more in absolute revenue growth in the June quarter whereas it didn’t in the March quarter as much.

If I can maybe follow-up on that on the telecom side, or if you had any comments, you’ve given some granularity on ROADM growth trends and I’m assuming that may reaccelerate here in the quarter. But you talked about broadly being capacity constrained in the pump and amplifier type space, I wondered if you’re seeing – if you did see growth there in the quarter or you’re capacity constrained enough not to really see that maybe have that pending capacity additions over the next quarter or two to see a reacceleration in amplifier and pump laser growth?

I wouldn’t say that our amplifier business really grew, I’d say that our pump business grew with external shipments to external customers, but I’d also say that our pump business also grew, satisfying internal demand for pumps that go into our line cards, into what we call our Super Transport Blades where we have a ROADM and an amplifier and an optical channel monitor on a blade. So I think from that perspective, pumps would constrain through the quarter. We added capacity through the quarter. We’re still constrained and we’re still adding more capacity. And when we look at capital and when we pull the trigger on capital, it’s a lot easier to pull the trigger on capital where we have one competitor versus six competitors. And so things like pumps and ROADMs where we have a very limited set of competitors, we’re a lot more able to add capacity with a clear conscience. So I think that’s what we’re trying to do in those kinds of product lines. Also, our customers don’t have a lot of choice and so if we don’t come through, we disappoint them. So we really try to make sure that we put capacity in place to make sure our customers get what they need to satisfy their customers.

And our next question comes from Doug Clark of Goldman Sachs.

This is Balaji Krishnamurthy on for Doug Clark. First off, just two quick questions on products, how large was your QSFP28 revenue base now? And are you still on track for CFP2 ACO by the calendar fourth quarter? And then last quarter you talked about some organizational changes with R&D sales and operations. Could you talk about how that’s impacting your business now?

How large is QSFP28, it grew very rapidly last quarter, but it’s still in the $2 million per quarter range in the March quarter. We expect that to continue to accelerate. And as we get into more meaningful hyperscale data center guys, that will become a very, very large part of our 100-Gig business. CFP2 ACO, by the end of the calendar year, absolutely. We’re still on track, making excellent progress at the PIC level, the photonic integration at the chip level, where again we have the single chip solution that does the laser and the modulator that we think would be very differentiated, albeit not first to market. We believe we will have best of class and best volume, but as I said, really by the end of the calendar year, we will be releasing that product. Reorg, yes, so we promoted and moved some people around. We promoted Vince Retort who has been running our R&D very effectively for years to be our Chief Operating Officer and promoted some people from within R&D to lead. [John Martino] now runs all of our R&D working for Vince. And so I’d say that to my great satisfaction the R&D teams and operation teams are working a lot more closely together, which was really one of the desires of the change that we made. And I’d say that we’re working more as one team as opposed to two silos of teams, given the change that we made. So I think what we strive to go get done is happening and so I’m very happy with how things are transpiring so far.

[Operator Instructions] Our next question comes from Joseph Wolf of Barclays.

I had a follow-up question for the commentary on the 100G to the sales to NIMs, and I’m just wondering if you could or if you have the visibility into the breadths of the exposure across the hyperscale market, meaning if there are seven to 10 big global players, how many you think you’re ending up in? You mentioned the one selling directly. How many – if you look across that, how many opportunities do you think you have and how long does not last? Are the global players all going at the same rate or is this a multi-year opportunity?

Well I think it’s a very long opportunity. If you look at what happened in 40-Gig, the transition at 40-Gig that started several years ago and it is now finally winding down. And I think what’s different this time is that in the 40-Gig transition, only a few of the hyperscale data center guys were buying directly from the optics suppliers, whereas today at 100-Gig, all of them are. And I’d say that that North America will go first, China is probably not until 2017, although we are working with the major hyperscale guys in China as well as all of the suppliers, all of the hyperscale guys here. There are some that are leading the way. The ones that we got the orders from I’d say would be trailblazing the way. And I’d say that by the end of this calendar year, all of the major North America Web 2.0 customers will have made that transition in new Greenfield data centers that they’re building. And I’d say that means that every new data center that they build and there’s plan to build many, many new hyperscale data centers over the next several years will take advantage of the 100-Gig QSFP28 and those come in different forms and function from a 100 to 300 SR product to 500 meter PSM forward, which we’re supplying and have design wins there [indiscernible] to the CWDM, which is really 2 kilometer reach. So we’re seeing a lot of interest from the Chinese guys as well as the North American guys, but I’d say again that the Chinese Web 2.0 probably doesn’t kick in until 2017.

And then I guess with the component supply constraint for you, how is that affecting your cost and pricing? And does that continue, are your suppliers adding capacity like you are?

Our suppliers are certainly adding capacity. We expect price reductions with our suppliers much like our customers expected with us. And so to the suppliers that treat us like a partner and are more interested in our long term business, then making an extra dollar next quarter are the ones we’re going to stick with. And so we’ve seen the kind of cost reductions that we would expect in normal times, even when there is a supply constraint. So I don’t think there’s any different dynamic than that perspective on our costs. So we’re continuing to try to drive cost down, not only from our suppliers, but also in productivity and yield within our factories and our CM.

And our next question comes from Meta Marshall of Morgan Stanley.

Just two questions. The first is you noted that optical communications’ gross margins were down as telecom pricing negotiations went into effect. I just wanted to make sure that or get feedback as to gross margin trends in Datacom throughout the quarter. And then second, last quarter you had mentioned submarine, an impact from submarine business being lower, you expected that to come back in the second half of the calendar year. I just wanted to make sure that that timing still stood.

So in terms of gross margin, so the [optical comm] gross margins were down roughly 90 basis points quarter to quarter. And as we had articulated, most of that was due to price erosion during the quarter because a lot of these contracts had been set in terms of pricing over the past several quarters. In terms of the other question you had about how did that reflect with Datacom, so Datacom revenue grew 30% quarter to quarter, a lot of that growth came from 100G, newer products. So those gross margins are typically going to be a lot better because they are newer products. But in terms of being able to offset the typical price erosion we’ve had all across the board it wasn’t sufficient enough to do so. Going forward, our objective again is to continuously meet the market with newer and newer products, okay. The faster speed products that are getting to market quicker, which typically would give us better gross margins. So it’s our idea in our objectives to be able to accrete or enhance our optical gross margin. We mentioned [indiscernible] consolidation, we’re a little bit behind with that because of the current demand environment, but that’s going to add roughly 100 basis points to our overall corporate gross margins as we go forward.

To your question on submarine, we actually saw submarine uptick in the March quarter and the submarine cable business is very lumpy, when consortia decide to build the cable and get the funding, they want to go relatively quickly. And so it’s lumpy. I’d say this quarter, probably submarine is down from last quarter. But I expect that the second half of the year will rebound back to the kind of levels we saw towards the end of 2015.

And our next question comes from the line of Alex Henderson with Needham.

Two questions. The delay in the Intel Knightsbridge chip which was apparently causing some slowdown in timing of deployment in the supercomputer market, does that have any impact on you guys at all? Are you selling into that or is that more [indiscernible].

So we don’t really sell a lot to the supercomputer market. So we’re not impacted by that situation.

The second question, if you could please just give us a real clear crisp estimate of how much revenue was due to the 14 weeks, to apples and oranges, it ended a sequential upcoming quarter and similarly what you think in that was on the OpEx cost for the same reason. This is the best guess of what the revenue not was [indiscernible] cost item.

I’ll take the revenue one; I’ll let Aaron take the OpEx one, I’d say that on the revenue front, I would say that you could look at last quarter as a 13.5-week real quarter, in that we probably lost half of the production of one week, because all of our production is not in China, some of it is in Thailand. So I’d say that, given that we were hand to mouth throughout the quarter, we didn’t have the ability to build up inventory and ship it during that timeframe. So we lost probably half a week. So you could say it’s a 3% increase on a normal quarter, if you want to try to normalize, but we’re looking forward to in the June quarter.

Are you baking in both the golden week impact and the extra week?

I’d say we’re really not impacted from a supply standpoint from golden week as we don’t have any production in Japan. From a demand standpoint, the Japanese customers probably slow down a little bit, but we got plenty of demand to make up for that. So I’d say that we’re really not impacted by golden week this quarter.

And then to follow up on your question on OpEx, so the OpEx for the extra week was almost $2 million for the quarter. So going into Q4, that’ll drop off, and then we have some other puts and takes.

And at this time, I’m showing there are no further participants in the queue. I’d like to turn the call over to Mr. Alan Lowe for any closing remarks.

Great, thank you, operator. The Lumentum team is excited to support our customers, grow our business and create value for our shareholders. I want to thank our employees for all their hard work that has put us in this excellent position in the market. We see strong market demand from our customers. Our new products including TrueFlex, ROADMs and 100G Datacom transceivers are winning in the market and position us well as we look forward. I believe we are in the early stages of a worldwide bandwidth expansion, making the future bright at Lumentum. We will be discussing our business at several Investor Relations events in the coming weeks. These events are listed our website in the Investor Relations section. This concludes our call for today. We would like to thank everyone for attending and we look forward to talking to you again in another three months.

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes your program. You may now disconnect. Everyone, have a great day.