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Finisar Corp (FNSR) Q1 2019 Earnings Call Transcript

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Finisar Corp (NASDAQ: FNSR)
Q1 2019 Earnings Call
Sep 6, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

And now at this time, I'd like to turn things over to Kurt Adzema, CFO.

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Thank you, and good afternoon, everyone. I need to remind you that any forward-looking statements are subject to risks and uncertainties which are discussed at length in our SEC filings. Actual events and results can differ materially from any forward-looking statements. The company assumes no obligations to update any forward-looking information presented. Unless otherwise indicated, all results discussed are on a non-GAAP basis. A reconciliation of GAAP to non-GAAP results may be found in our press release and on our website.

We have also prepared some slides for today's call that can be found on our website. Moving to our first quarter results, overall revenue for the first fiscal quarter was $317.3 million compared to $310.1 million in the fourth quarter of fiscal 2018. Sales of telecom products increased by $17.1 million compared to the fourth quarter of fiscal 2018 to $78.2 million in total. This is primarily due to an increase in demand for wavelength selective switches driven by carrier deployments in India and China.

Sales of datacom and sensing products decreased by $9.9 million compared to the fourth quarter of fiscal 2018 to a total of $238.1 million, primarily due to lower demand for 40-gig transceivers. In the first quarter, we had two 10% or greater customers. Our top 10 customers represented 62% of total revenues compared to 58.4% in the fourth quarter of fiscal 2018.

Non-GAAP gross margin was 27.5% compared to 24.7% in the fourth quarter of fiscal '18, primarily due to lower levels of additions to non-cash inventory reserves and a favorable product mix compared to the prior quarter. Non-GAAP operating expenses were $68.3 million compared to $72 million in the fourth quarter. Non-GAAP operating income was $18.8 million or 5.9% of revenues compared to $4.6 million or 1.5% of revenue in the fourth quarter, primarily due to higher revenue, higher gross margins and lower operating expenses.

Non-GAAP interest and other income was approximately $4.2 million in the first quarter. Non-GAAP net income was $21.3 million or $0.18 per diluted share compared to $5.8 million or $0.05 per diluted share in the fourth quarter. Non-GAAP taxes for the first quarter were approximately $1.7 million and non-GAAP tax rate for the remainder of fiscal 2019 is expected to be approximately 10%. Average diluted shares for the first quarter for non-GAAP purposes totaled $117.2 million and are expected to be approximately $118 million in the second quarter.

Capital expenditures were approximately $112.7 million in the first quarter, of which approximately $4 million related to the construction of the third building of our Wuxi manufacturing site and approximately $97 million related to the uplift of the building in Sherman, Texas and the delivery of capital equipments for that site.

We expect the construction of our -- the third building of our Wuxi manufacturing site to be largely completely by the end of the second fiscal quarter. In the second quarter, for our Sherman, Texas facility, we expect approximately $35 million in capital expenditures for the uplift of the building and additional equipment. We also expect an additional $28 million in other capital expenditures in the quarter including $3 million related to the construction and fit out of the third Wuxi building.

We exclude from our non-GAAP results a number of charges or benefits that are either non-cash or that we consider outside our core ongoing operating results. These totaled $39.8 million last quarter. If you include all of these as required under GAAP, we generated a net loss of $18.5 million or $0.16 per diluted share compared to a net loss of $18.3 million or $0.16 per diluted share in the fourth quarter of fiscal 2018.

That concludes my comments and I'll turn it over to Michael.

Michael E Hurlston -- Chief Executive Officer

Thanks, Kurt. We expect revenues for our second fiscal quarter of 2019 to continue to grow and be in the range of $315 million to $335 million. This is primarily due to an increase in the demand for VCSEL arrays for 3D sensing applications in connection with the expected timing of new product introductions, partially offset by lower revenues associated with our 10-gig and below ethernet transceivers.

We expect second quarter non-GAAP gross margin to continue to improve and be approximately 28%. Non-GAAP operating margins are expected to continue to improve with a combination of higher revenue levels, better gross margins and lower operating expenses and to be approximately 7% to 8%. Non-GAAP earnings per diluted share are expected to be in the range of $0.19 to $0.25 per share.

In addition to the increase in demand for our VCSEL laser arrays for 3D sensing applications in the second fiscal quarter from our primary customer, we are either in process or have completed qualifications with many new VCSEL array customers for both consumer and automotive applications, which will drive future growth in this important market segment. In our new VCSEL laser fab in Sherman, Texas, we have completed the uplift of the building and installed a significant amount of the capital equipment for our first phase of capacity.

We have begun the internal qualification for a process of all the equipment and still expect to be qualified and in production using our six-inch wafers by the end of this calendar year. In our core business, we are continuing to see a very strong demand for ROADMs on a global basis with India and China beginning to deploy ROADMs in large volumes.

For the upcoming 5G transition for wireless, we're a leading supplier of the major OEMs of 25-gig and 100-gig data rates for both short and long-reach applications. We also believe we're well positioned for the 100-gig to 400-gig transition in the enterprise and data center markets starting in calendar 2019.

Finally, I'm happy to report during the first fiscal quarter, we made better-than-expected process and our efforts to focus the product portfolio and be more strategic as to how do we invest our R&D dollars. This in turn allowed us to make great strides toward our goal of a sustainable operating margin of 12% to 15%.

In addition to further gross margin improvements that we're expecting in the fiscal second quarter, we expect to further reduce operating expenses. Last quarter I said that to achieve our operating margin model, we needed to manage our operating expenses to 18% to 20% of revenue, and we now expect operating expenses to be approximately 20% to 21% in the second fiscal quarter. Over the coming quarters, we will continue to take additional steps to execute the plan consistent with these financial objectives.

With that, I'm going to turn it back over to Catherine and open it up to questions. Catherine?

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Simon Leopold.

Simon Leopold -- Raymond James -- Analyst

Great. Thank you for taking the question. I wanted to see if we can look at how to think about 3D over the longer term, given that it's a market that has been to-date very lumpy and very seasonal. But you mentioned the fact that you've got some automotive and some new customers, assuming Android customers coming into the mix. This is pretty challenging for us to figure out how to model what a one and two-year time-frame might look like trying to take into account seasonality and other trends. Is there anything you can offer to help us think about modeling 3D?

Michael E Hurlston -- Chief Executive Officer

Yes, Simon, good question and good afternoon to you. I think, remember, at least in the near-term, our limitations are going to be capacity. As we've described in a number of the different calls, our Allen fab is a gate for us and it's capacity limited here in the near-term.

I think we've talked about capacity potential in the Allen fab of $20 million to $25 million from a revenue basis. As we start ramping Sherman that capacity gate comes off. But I think the market here in the very near-term is still dominated by one customer.

So, I think that our ability to show revenue growth is going to be in terms of increasing market share in that customer. I think we are winning and making progress in other segments of the market, but the reality is that the volumes pale in comparison to leading customer in this area. So, we continue to make progress, but I think that our revenue growth as we look out is going to be dominated by a single customer.

Simon Leopold -- Raymond James -- Analyst

So, that's helpful. I think the other thing I'm trying to get a little help with is, typically that one customer demand tends to be biased toward the second half of the calendar year. So, with many of us trying to establish models with expectations that Sherman opens up toward the end of the calendar year, how should we think about April and July in terms of the capacity coming online relative to what the demand might look like since it's usually softer for that one big customer?

Michael E Hurlston -- Chief Executive Officer

I think we're going to try to the extent that we can to linearly load. I think that we're going to try to plan our capacity in anticipation of the ramp that as you correctly called out is in the second half of the year. So, we're going to be doing some things, I think, to better plan our capacity and make sure it's a little bit less lumpy. But no doubt, the demand is relatively seasonal and shipments themselves will be weighted to the middle and second half of the year.

Simon Leopold -- Raymond James -- Analyst

Great. And just one last one on 3D if I might. This quarter, I assume, it was similarly modest to the April quarter. You've excluded, I think, some of the impact from gross margin in the pro forma. What is the burden on gross margin from the Sherman facility or the incremental D&A that's been excluded, if any?

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Yes. So, again, until we get into production in Sherman, we are excluding the start-up costs associated with the hiring and the qualification of that facility. And so in this quarter, it was approximately, I believe, $7 million.

Simon Leopold -- Raymond James -- Analyst

Okay. I appreciate that. I yield the floor. Thanks for taking the questions.

Michael E Hurlston -- Chief Executive Officer

Thanks, Simon.

Operator

Your next question comes from the line of Troy Jensen with Piper.

Troy Jensen -- Piper Jaffray -- Analyst

Hey, gentlemen. Congrats on the great results.

Michael E Hurlston -- Chief Executive Officer

Hey, Troy. Thanks.

Troy Jensen -- Piper Jaffray -- Analyst

Yeah, so a quick, I guess, just to follow-up on Simon's question on the VCSELs here. I know you've got this threshold or this capacity of $20 million to $25 million with the Allen facility. What's the probability you think you can hit that in the October or the January quarters?

Michael E Hurlston -- Chief Executive Officer

So, I think that in the October quarter, again, it's going to depend on customer demand, but I think we're optimistic that demand will match capacity. I think in the January quarter, we've talked a little bit about having a mix of Sherman in that.

So, there is a combination of Sherman and Allen in the January quarter. Again, I think, that is going to depend on how our qualification goes in Sherman. We're tracking relative to our internal milestones. But, I think, Kurt has talked about on previous calls being very dependent on the customer and the customer qualification. We still are optimistic that, that's tracking, but it's something that's variable, that's largely out of our control.

Troy Jensen -- Piper Jaffray -- Analyst

Great. Understood. How about just on datacom, I guess, that's the only area that was really weak for you guys. So, maybe just an update on pricing and the timing of your CWDM4 transceivers that have come out?

Michael E Hurlston -- Chief Executive Officer

Yeah, I mean, I think in general, what we saw in datacom, let's talk about the 100-gig market for a minute. In 100-gig, we definitely saw some ASP pressure. Our QSFP28 revenue was down, but that was offset by CFP and CFP2 revenue. Overall, 100-gig datacom revenue was still 50% of the overall datacom revenue. As we look out, I think, we've talked about some lower cost generations coming in at the end of the calendar year that give us the ability to potentially pick up market share. And those lower cost versions of the 100-gig modules are still on track and I think it gives us some ability to be a little bit more aggressive on pricing and do some gross margin expansion.

Troy Jensen -- Piper Jaffray -- Analyst

Okay. Last question from me and I'll cede the floor, but how about just an update on the visibility with China. Is demand improvement there?

Michael E Hurlston -- Chief Executive Officer

Yeah, I think, we've talked a little bit about our ROADM business. ROADMs are tend to be a leading indicator and I think Kurt talked about in his comments, certainly in Q1, we saw some good strength out of the ROADM line. Q2, as I've talked about, continues to be strong and that tends to be a leading indicator. Overall, we're seeing strength in ROADMs. I think that we're still optimistic that the core transceiver market will follow, but we haven't seen that to-date.

Troy Jensen -- Piper Jaffray -- Analyst

Great. Understood. All right, guys. Keep up the good work.

Michael E Hurlston -- Chief Executive Officer

Thanks, Troy.

Operator

Your next question comes from the line of Rod Hall with Goldman Sachs.

Roderick Hall -- Goldman Sachs -- Analyst

Yeah, hi, guys. Thanks for the question. I just wanted to check on the commentary around the guidance and the offset between the VCSELs and the 10-gig. I guess the guide is increasing by about $10 million at midpoint quarter-on-quarter. And I think I just wanted to clarify this, Kurt. I thought I heard you guys say that the increase is basically additional VCSEL revenue less 10-gig declines. And so if you're saying that you do $20 million, $25 million in the Allen facility then I guess the 10-gig declines about $10 million something like that. I just want to make sure that I understood that correctly from a guidance point of view and trajectory point of view.

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Well, I think overall, you are largely correct. So, we are saying that VCSELs are going to grow and then there is going to be a decline in 10-gig to offset that. So, I think, that's correct. I think, again, in terms of the $20 million to $25 million in Q2, again, that's a capacity number and again our goal is to get to that on a run-rate basis by the end of Q2. So I wouldn't necessarily, I think, directionally you're correct, but we're obviously not giving exact details on what that numbers going to be.

Roderick Hall -- Goldman Sachs -- Analyst

Okay. All right. So that's helpful. That's clear. And then, I guess, can you give us any idea of what sort of milestones we're testing on the Sherman output you have? I mean when will you know definitively whether your test is good and everything's fine there on track or I guess there are lots of milestones, but could you give us some idea what the major milestones there are?

Michael E Hurlston -- Chief Executive Officer

We started running end-to-end production already. So, we're definitely tracking to a set of internal milestones. We have to go through a product qualification. So, we've got our first material out from an end-to-end perspective. We begin testing that and going through internal qualification.

I expect to refine the recipe a few times before we're done and qualified. And as I said, I think, we're on track for end of the year for that. And at some point, we're going to have customers come in and start their qualification process in parallel with us.

The goal being that those qualifications are as coincident as possible, but we definitely don't control that and I have no commitments from customers in terms of when they're going to get this thing qualified. But I think the next thing that we expect to be doing is testing the end-to-end material that comes out and validating that it's actually meeting specification.

Roderick Hall -- Goldman Sachs -- Analyst

And then just one last one. I'm sorry for all the questions. On these other customers you mentioned automotive and so on, when would you expect material revenue from them? Is that sort of mid next year or earlier, I mean, when do you think that will contribute meaningfully to your revenue?

Michael E Hurlston -- Chief Executive Officer

We've talked about seeing revenue from those customers as early as our fiscal Q3. And, again, I would say that the overall landscape is dwarfed by one customer, but we certainly would expect to see revenue from other customers, even consumer customers in calendar, sorry, fiscal Q3.

Roderick Hall -- Goldman Sachs -- Analyst

Okay, great. Thanks for all the answers. I appreciate it.

Michael E Hurlston -- Chief Executive Officer

Good questions. Thanks.

Operator

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

Michael Genovese -- MKM Partners -- Analyst

Great. Thanks for taking the question. On the strength in China and India, on the WSS, can you talk about the outlook going forward there? I mean that was very, very strong and if you look out over multiple quarters, how do you think that will trend from here?

Michael E Hurlston -- Chief Executive Officer

I think that Kurt's talked about it historically, the WSS demand can be lumpy. I think what's different this time is that rather than manual switches in the Chinese networks, the operator seemed to be deploying WSS. So it's happening regionally and it's happening across all the different operators. So, it seems that there's a little bit more sustainability to it than there has been in the past. And as Kurt talked about it's not just China, we see strength in India and even in the US and Western Europe. But I would say overall it is dominated by China. We see a change in behavior with the Chinese customers in terms of how they think about deployment and I think it may have a little more sustainability than it's had in the past.

Michael Genovese -- MKM Partners -- Analyst

Okay, great. And then I wanted to ask about the potential to sell some other products to those same customers, more on the transmission side. So, integrated coherent receivers and transmitters, things that we think about as components more than modules. How are you thinking about that market these days?

Michael E Hurlston -- Chief Executive Officer

Yeah, I think, generally our -- what Kurt talks about on our telecom business is and particularly in China is dominated by our tunables both our duplex and BIDI. You talked about the ITTRA integrated coherent product, I think, that we've shown that and we've had some press releases on that product. We're actually very optimistic that it offers a level of integration and some differentiation from an optical front-end that is unique and unprecedented. But I don't think that we'll see material revenue for that in our fiscal '19. I think that's much more of a 2020 event before we start seeing that being impactful.

Michael Genovese -- MKM Partners -- Analyst

Okay. Thanks again and congrats on the solid quarter.

Michael E Hurlston -- Chief Executive Officer

Thanks, Michael. I appreciate it.

Operator

Your next question comes from the line of James Kisner with Loop Capital Markets.

James Kisner -- Loop Capital Markets -- Analyst

Hey, thank you. So I appreciate your comment on QSFP28 revenue being down. I was kind of hoping you could give us a little more granularity on how much it was down maybe in terms of millions of dollars. I think you said 40-gig was also down and again I was hoping you could help us understand the contribution of 40-gig or perhaps how much it was down, just the moving pieces there? And just stepping back here a little bit on, again, on QSFP28 it seems like the industry is preparing for a pretty significant increase in volume half over half in the second half of this calendar year for QSFP28. And I guess I'm just wondering if you're not expecting that, why would you not see that? Is it might you or anybody anticipate if you successfully delivered a cost-reduced product just can you sort of explain perhaps the disconnect there because it sounds like perhaps you're not expecting the same ramp the rest of the industry is on that? Thanks.

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Yeah, I'll take the first part of the question and I'll turn it back over to Michael. So, in terms of what actually happened in the quarter we're just in, again, we're not going to quantify every product category of how much revenue we do of this versus that. I think as we said QSFP was down a decent amount in this quarter. That was partially offset by CFP, CFP2 such that our 100-gig overall was the -- around 50% of overall datacom. But we're not going to actually quantify the exact dollar amount, but we did talk about the amount, datacom was down and we talked about the fact that, that was primarily 40-gigs. So you can deduce whatever you want to deduce from that statement.

Michael E Hurlston -- Chief Executive Officer

Just talking a little bit about sort of the outlook for 100-gig. I think that we definitely are seeing opportunity to expand the number of units, but maybe our timing is different than you're hearing from others. I think that we're seeing it more maybe very late calendar '18. But certainly '19, I think, similar to what you're hearing elsewhere, we definitely see opportunity to grow the units and grow relatively significantly.

So, I think, that we see it and maybe a bit of a difference in timing. One of the nice things that we have going is some of these internal product transitions that I talked to you a minute ago, our QSFP28 Gen3 as we call it, again, it gives us a nice cost point that as we see those ramps happening, will enable us to participate and participate on a much lower cost basis.

James Kisner -- Loop Capital Markets -- Analyst

Okay. That's helpful perspective. So, I guess, it sounds like perhaps the disconnect could be due to customer exposure or again maybe it's because you're choosing not to participate in this particularly at this time until you have more competitive products, can you clarify that aspect of it?

Michael E Hurlston -- Chief Executive Officer

I think that we understand the ramps pretty well and it's not that we're not choosing to participate, it's that the customers are telling us that the ramps are more late in the year and really early next year. I think that people tend to build on fiscal years as their budgets are enabled and all the big hyperscalers that we're talking to are indicating step-ups in demand in the first calendar quarter of 2019 with perhaps some pre-builds at the end of calendar '18. Unless somebody's telling me something that we don't know or we're missing a data point, I think, it's pretty consistent across the customer base.

James Kisner -- Loop Capital Markets -- Analyst

Okay, thanks very much.

Operator

Your next question comes from the line of Joseph Wolf with Barclays.

Joseph Wolf -- Barclays -- Analyst

Hi. Can you guys hear me OK?

Michael E Hurlston -- Chief Executive Officer

Yeah.

Joseph Wolf -- Barclays -- Analyst

Thank you. Just a question on qualification. Once you moved to the new facility, you've got other customers besides the lead one. Are you intending to move them over to the six-inch facility or do they stay on four-inch and they only have to be qualified once?

Michael E Hurlston -- Chief Executive Officer

Let me break it down a bit. Our intent is that the traditional VCSEL customers which will be our datacom customers would stay on four-inch. I think, over time, we'll attempt to migrate them to six-inch, but certainly in the time period that we're talking about, I would expect them to continue to operate on the four-inch lines. So we wouldn't have to undergo any customer requalifications. For the 3D sensing business, the VCSEL customers, the expectation is that they'll all move to six-inch in a relatively orderly fashion and coincident with the change in the calendar 2018 to 2019. So all of those customers would be -- need to be requaled and shifted over to the six-inch line.

Joseph Wolf -- Barclays -- Analyst

Thanks. And just a quick follow-up on the telecom side. Are you seeing any discussions, given the strength at the higher end in the margins about pricing going into next year for the telecom business?

Michael E Hurlston -- Chief Executive Officer

We're not seeing anything. I think that our exposures I talked about is mostly today in the tunables area. Of course, we've got the WSS business there. We typically as Kurt has talked about on previous calls, enter a pricing negotiation in the first half of the year, in the first quarter of the year, and we haven't entered those yet.

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Yeah, I mean, let me clarify that. I think it's -- we typically have the discussion starting in the fall, but it's effective the first quarter typically effective January 1. Just to clarify Michael's statement and so it's a little early to get a reading on those situations, but obviously the strength, it's certainly on the WSS side, should help us entering into those negotiations. The rest of telecom to be determined, but it's just a little bit early to get a great read on that.

Joseph Wolf -- Barclays -- Analyst

All right. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Mark Kelleher with DA Davidson.

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

Great. Thanks for taking the questions. Kurt, you talked about bringing more focus to your product development efforts and how that was going to help your leverage. Can you just give some more detail on that? Should we expect less R&D? Where should we expect the leverage on the operating line?

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Yes, well, I mean, if you look at the absolute results for Q1 versus last quarter, actually, I think we got leverage in all product categories, but certainly when it comes to focusing our product portfolio and being a little bit more careful on where we invest our R&D dollars, I think, you'll see the most in R&D, but I think we are taking out costs everywhere in OpEx, whether it's G&A or sales and marketing as well as R&D. Again just be more focused and make sure we're investing our dollars in places where we feel like we have a competitive advantage and can make money.

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

Okay. And then have you contemplated the impact that may result if some additional tariffs come into effect, and I'm sure you've gotten that question many times, but just wondering your current thoughts on how you might be exposed there?

Michael E Hurlston -- Chief Executive Officer

Yeah. This is Michael, Mark. I think that we are better positioned than our Chinese competitors by virtue of a broad manufacturing footprint. So I think the tariffs have an impact on this category of products, but I think that we feel that we are kind of in a unique situation having multiple manufacturing locations, the ability to ship out of multiple sites. So I think that the tariffs are, as they come into effect, will certainly have some impact on this category. Our ability to maneuver around them should be better than most.

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

Okay, great. Thanks.

Operator

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

Alexander Henderson -- Needham -- Analsyt

Great, thanks. I was hoping you could give us a little bit more clarity on the telco portion of your business. Can you give us some sense of what the rate of growth was in the ROADM business quarter-to-quarter? It looks to me as I play with the numbers that it was very steep and -- looking at the guide and I'm thinking was that a step-up in capacity that came on and you're now constrained going into the following quarters. So there's not much sequential improvement in it? Is that the right way to think about it?

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Yeah, I think, generally you got it right. I think, as we said, most of the increase in telecom revenue in fiscal Q1 was driven by WSS. And then to your second question, yes, we are capacity constrained, and so even though there as Michael talked about there continues to be strong demand and candidly more demand than we can fulfill, you're not going to see that same big step-up in Q2 that you saw in Q1, and I think overall telecom revenue will be relatively flat.

Alexander Henderson -- Needham -- Analsyt

So, that's a function of the capacity came in early in the quarter, you've utilized it, you stepped up, you're up at that level most of the quarter and we're waiting for the next slug of capacity to come in. And could you give us any guidance on when you might expect more capacity to come on stream?

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Well, I think, that's the question we're trying to decide is how much to invest to continue to expand that capacity, but typically it takes multiple quarters to bring on additional capacity. So, we're doing the best we can with the equipment we had. To be honest, this quarter, we were in a pretty good position given the fact that we thought we'd see this increase in demand in WSS from China a while ago, and so we had invested a bunch in capex. So we were ready to go when it came, but in terms of adding additional capex that's something we're evaluating now, but it's certainly not something that can have an impact on Q2.

Alexander Henderson -- Needham -- Analsyt

Just to be clear, you haven't ordered another slug that will be coming in late in the quarter or early next or for that matter, next quarter, if you haven't put those orders in it, six months to get it on stream. So, we should expect fairly flattish for six months and maybe addition, maybe not depending on what you decide to do. Is that the right way to think about it?

Michael E Hurlston -- Chief Executive Officer

I think, Alex, that's directionally right. I think that to be clear, we haven't ordered the extra capacity. I think we're still evaluating it. As I say, we've experienced this market before and it's been very lumpy. I think there are signs now as we go out and talk to customers that this is something sustainable. So, we're making a set of decisions now as to whether or not we spend the capex to increase the capacity. As Kurt said, I think, the overall picture right now is that demand is certainly outstripping supply and we're just trying to make some intelligent decisions around capex deployment.

Alexander Henderson -- Needham -- Analsyt

And at the risk of asking two granular questions and you maybe won't answer i. If I strip out the wave selective switch ROADM business and looked at the rest of it, I assume there was some growth in the other piece. Could have been nearing double digits or is it less than that?

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Yeah, significant -- like I said significant proportion of the growth in telecom was WSS.

Alexander Henderson -- Needham -- Analsyt

But did the other piece grow as well, I assume?

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Yes, modestly, but it was predominantly WSS.

Alexander Henderson -- Needham -- Analsyt

Okay. Great, that's very helpful. Thank you. Just wanted to go back to the 3D sensing for a second. Have you had any improvement in the yields out of Allen? I know you've talked about yield issues there and that you were working on getting them completed and fixed. I assume that relatively flattish kind of 3D was a function of still working through those yields. Have you finished fixing that issue or have you moved the resources to the Sherman plant and just going to let that one run as it is?

Michael E Hurlston -- Chief Executive Officer

Again that's a good question, Alex. Yield has been choppy, I mean, there's no doubt that the yield has been choppy. I think we are making progress on it and we're going to continue to invest to improve it.

I think that the thought is a lot of the knowledge on yield is transferable up to Sherman. I think part of the problem that we've had is that the run rate up until now has been relatively modest, and as such if you're -- as our operation guy tells me, if you're not practicing, then you're probably not improving.

So, we've now got to a point where we've got some run rate there and I think that we're better able to get a handle on what the real issues are and we're definitely still investing to knock them down, but you're right in saying that it's been choppy and it continues to be a little bit choppier than I'd want.

Alexander Henderson -- Needham -- Analsyt

Okay. Just one last question and I'll cede the floor. Just to be sure the 3D sensing is reported in datacom, correct?

Michael E Hurlston -- Chief Executive Officer

Yes.

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Yes.

Alexander Henderson -- Needham -- Analsyt

Okay. I just wanted to make sure I was right on that. Thank you.

Operator

Your next question comes from the line of Meta Marshall with Morgan Stanley.

Meta Marshall -- Morgan Stanley -- Analyat

Great. Thanks, guys. I just wanted to as you mentioned focusing the product portfolio, it sounded as if that R&D is for future products, but was any of that, is there any headwind we should expect to revenue of products that may have been discontinued? And then maybe a second question just as you continue to look at the product portfolio, are there any kind of additional milestones or changes that you're planning on making other than just kind of calling some R&D projects gradually? Thanks.

Michael E Hurlston -- Chief Executive Officer

Yeah, that's a good question, Meta. I think first off the good news is that it hasn't had, I think, material impact in our long-term forecast, you're right. And as we continue to resize our R&D budget and focus what we're largely finding is that we are -- we have a bunch of derivative products, back-up products, multi-generation products that were in the pipeline that were either conservative in nature or really didn't have a lot of revenue associated with them. So, as we've gone through the process, we've not seen a big change in our long-term outlook. Of course like almost any other company we're running long-range planning and we haven't seen a big drop. As we go forward, to your second part of your question, we're looking at all facets of the operation. I think as Kurt and I have talked about, we have started to look at our manufacturing operation and make sure that, that's rightsized.

We're going to continue to look at that and spend some time on getting our footprint to a level that's commensurate with current demand and current flow without impacting our ability to meet upside demand. And I think Alex's question a minute ago on WSS is kind of indicative of that.

But manufacturing is another area that we've focused on a bit this quarter, we saw some reductions in our manufacturing costs and I expect those to continue to decline to a point where we're matching, better matching our manufacturing footprint with the current demand.

Meta Marshall -- Morgan Stanley -- Analyat

Got it. Thanks, guys.

Operator

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

Richard Shannon -- Craig-Hallum -- Analyst

Great. Thanks guys for taking my questions. I want to follow up, Michael, on your response to the earlier question on tariffs. You said you have some more -- perhaps some more flexibility than some of your other competitors. Any way that you can characterize or quantify how much of your manufacturing exists outside of China that wouldn't be affected then?

Michael E Hurlston -- Chief Executive Officer

Remember, we have multiple locations. We've got obviously a manufacturing location for transceivers in Wuxi, China. The reality is that Wuxi facility does a lot of our TOSAs and OSAs and today almost all the finishing work is done in Ipoh, Malaysia. We're obviously continuing to monitor the tariffs and understand its impacts, understand all the various rules and things like that, but I think that the fact that we've got that Malaysian facility gives us some additional flexibility and that's really where most of our revenue comes from today anyway.

Richard Shannon -- Craig-Hallum -- Analyst

Okay, fair enough. Question on 3D sensing. Michael, any sense that you get talking with your current large customer here about your relative competitive position. Obviously another supplier has got the number one share position, but curious if you have an understanding where you sit relative to any others that are out there or any expectations of share that you might have over the next 12 months?

Michael E Hurlston -- Chief Executive Officer

I think our advantage has been talked about as I think there's a relationship around manufacturing in the United States, and I think as we get our Sherman facility online, we certainly expect to be in a position to take share. I think that as maybe it was Alex who was talking about previously, our yield has been choppy. We've got to get our execution right, we've got to get this Sherman plant up and running, and I think as we execute along those vectors, we naturally will be able to take share. Our share today is very, very modest as we all know, but I think we should be in a good position at the beginning of next year to begin to materially dent the current landscape in terms of shifts and share gains and then really make progress as we enter the model year of 2019.

Richard Shannon -- Craig-Hallum -- Analyst

Okay. Fair enough. One last quick question for Kurt. Just on the topic of OpEx here, I think, you talked about it coming down a little bit directionally on a dollar basis in the current quarter. How should we think about the trajectory of that line going forward? Is that something in dollars they can still decline or kind of flatten out or how would you have us think about that?

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Well, I think, again in the quarter that we're in, I think, we were trying to -- our goal is to take OpEx down probably about another $1 million and we'll continue to look at that. And I think from a modeling perspective, I would keep it relatively flat after that, but obviously as a percentage basis, as we grow the business, then it will continue to decline as -- on a percentage basis. But I'd say from a modelling perspective keep it relatively flat beyond this quarter.

Richard Shannon -- Craig-Hallum -- Analyst

Okay, perfect. That's all from me guys. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of George Notter with Jefferies.

George Notter -- Jefferies -- Analyst

Hi, guys. Thanks for squeezing me in here. I guess, Michael, I wanted to go back to manufacturing. Obviously, the company historically has in-sourced manufacturing for the vast, vast majority of the revenue. As you come in and look at the business strategically, any new thoughts about that strategy? Have you looked to outsourcing some of the manufacturing? Any new thoughts there? Thanks.

Michael E Hurlston -- Chief Executive Officer

I think that we're continuing to explore the manufacturing strategy. I think that asymptotically I'd like to introduce some flexibility to the supply chain. You're right that today everything is in-sourced. I think as we look out asymptotically, I'd like to have some flexibility in the model. Right now given the situation around the tariffs that we've been talking about, having the internal flexibility has been useful. So, how we go about executing to a more flexible model, when we go about executing to a more flexible model, I think, remains to be seen, but asymptotically, I think, that we want to introduce additional flexibility into our supply chain.

George Notter -- Jefferies -- Analyst

Great, thank you.

Operator

And there are no further questions. At this time, I would like to turn the call back over to Michael Hurlston for any final comments.

Michael E Hurlston -- Chief Executive Officer

That definitely concludes the remarks. I thank everybody for their attendance and we look forward to a good upcoming quarter. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Kurt Adzema -- Executive Vice President and Chief Financial Officer

Michael E Hurlston -- Chief Executive Officer

Simon Leopold -- Raymond James -- Analyst

Troy Jensen -- Piper Jaffray -- Analyst

Roderick Hall -- Goldman Sachs -- Analyst

Michael Genovese -- MKM Partners -- Analyst

James Kisner -- Loop Capital Markets -- Analyst

Joseph Wolf -- Barclays -- Analyst

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

Alexander Henderson -- Needham -- Analsyt

Meta Marshall -- Morgan Stanley -- Analyat

Richard Shannon -- Craig-Hallum -- Analyst

George Notter -- Jefferies -- Analyst

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