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Fabrinet  (NYSE:FN)
Q2 2019 Earnings Conference Call
Feb. 04, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to Fabrinet's Financial Results Conference Call for the Second Quarter of Fiscal 2019. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions on how to participate will be given at that time. As a reminder, today's call is being recorded.

I'd now like to turn your call to your host, Garo Toomajanian.

Garo Toomajanian -- Managing Director

Thank you, operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabrinet's financial and operating results for the second quarter of fiscal year 2019, which ended on December 28, 2018. With me on the call today are Seamus Grady, Chief Executive Officer; and TS Ng, Chief Financial Officer. This call is being webcast and a replay will be available on the Investors section of our website located at investor.fabrinet.com. Please refer to our website for important information, including our earnings press release and investor presentation, which include our GAAP to non-GAAP reconciliation.

I would like to remind you that today's discussion will contain forward-looking statements about the future financial performance of the Company. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from Management's current expectations. These statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise them in light of new information or future events, except as required by law. For a description of the risk factors that may affect our results, please refer to our recent SEC filings, in particular, the section captioned Risk Factors in our Form 10-Q filed on November 6, 2018. We will begin the call with remarks from Seamus and TS, followed by time for questions.

I'd now like to turn the call over to Fabrinet's CEO, Seamus Grady. Seamus?

Seamus Grady -- Chief Executive Officer

Thank you, Garo, and good afternoon, everyone. We posted record revenue and non-GAAP earnings per share in the second quarter. Revenue in the second quarter was above the high-end of our guidance range at $403 million and non-GAAP net income also exceeded our guidance at $0.97 per share. These results also drove strong cash flows in the second quarter, with operating cash flow of nearly $35 million and free cash flow of $30 million. Upside was driven primarily by stronger than expected growth from the telecom markets. Component supply constraints that we experienced in the first quarter eased somewhat in the second quarter. However, supply for MLCC and certain ASIC parts remained constrained. As such, we continue to see some headwinds to gross margins from our efforts to mitigate these supply constraints in order to lead customer demand and drive revenue.

Looking at our second quarter performance by end-markets, both optical communications and non-optical communications business grew sequentially as well as year-over-year. Optical communications revenue was $306 million or 76% of total revenue and grew 9% from the first quarter. Within optical, 100 gig transceivers continued to generate strong revenue with additional growth from non-speed rate of products such as amplifiers and ROADMs. Growth in optical communications was led by telecom products, which at $207 million or 68% of optical revenue grew 16% from Q1 to an all-time record. Datacom products were 32% of optical revenue at $99 million, a decrease of a few percentage points from Q1, primarily due to the transition of current products to the next generation designs.

By technology, silicon photonics based optical communications revenue was $80 million, a slight decline from Q1, again primarily due to product design transitions. During the quarter, we started to see revenue from QSFP56 as two customers started migrating from QSFP28 to faster data rates, QSFP56 transceivers. Variance of the QSFP28 and now the QSFP56 transceivers, which can be both silicon photonics and non-silicon photonics-based continue to perform well with revenue up 21% from Q1 at $55 million. By data rate, as I mentioned, 100 gig programs continue to dominate optical communications production at 52% of optical revenue or $158 million. Products rated at speeds of 400 gig and above represented more than 6% of optical communications revenue with virtually all of this revenue from telecom applications.

Looking at non-optical communications, revenue was $98 million, up 1% from Q1. We continue to see momentum in the industrial laser market with revenue up 2% sequentially to $50 million. Automotive revenue increased 4% to $23 million, with traditional automotive remaining stable and new automotive applications up a little. Sensor revenue was flat at $4 million in the second quarter and other non-optical communications revenue was also stable sequentially at $21 million. Both new business and existing programs contributed to our top line growth in the second quarter with new business up 7% sequentially to $147 million or 36% of total revenue.

We continued to generate strong interest from new and existing customers. And while a little over 60% of our new building in Chonburi is spoken for or occupied, we have ample capacity to handle the near-term demand. TS will provide more color on our guidance, but we are optimistic that Q3 will represent a record third quarter for us in terms of both revenue and profitability. In summary, we are pleased with our record performance in the second quarter and remain enthusiastic about our longer-term prospects as a trusted manufacturing partner for our customers most demanding and complex products.

Now, let me turn the call over to TS to discuss the details of our second quarter performance and our outlook. TS?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Thank you, Seamus, and good afternoon, everyone. I will provide you with more details on our performance by end market and our financial result for Q2 as well as our guidance for Q3 of fiscal year 2019.

Total revenue in the second quarter for fiscal year 2019 was $403.1 million. Note that our adoptions of ASC 606 this fiscal year contributed approximately $3 million to our second quarter revenue. This mean that we exceeded the high-end of our revenue guidance of $380 million to to $388 million under ASC 605 by $12 million. Non-GAAP net income was $0.97 per share and was also above our guidance range, despite a $0.01 per share foreign exchange headwind in the quarter. ASC 606 impact on net income was immaterial. Looking at the second quarter in more detail. Our growth was driven primarily by the telecom market within optical communications. Optical communications represented 76% of revenue with non-optical communications representing 24% of revenue.

Now, turning to the details of our P&L. A reconciliation of GAAP to non-GAAP measures is included in our earning press release and investor presentation, which you can find on our website. Non-GAAP gross margin in the second quarter was 11.6%, an improvement from the first quarter, but a little below our target range as we continue to see supply constraints for certain components having a negative impact on overall gross margin. We continue to anticipate reaching our target range of 12% to 12.5% on a quarterly basis this fiscal year.

Non-GAAP operating expense was $9.4 million in the second quarter, down from the first quarter, but up from a year ago. As a result, non-GAAP operating income was $37.5 million, an increase from the first quarter and a year ago and non-GAAP operating margin was 9.3% compared to 8.5% in the first quarter. Taxes in the quarter was $0.7 million and our normalized effective tax rate was 5.9%. We continue to anticipate an effective tax rate of 6% to 7% for the fiscal year. Non-GAAP net income was a record $36.5 million in the second quarter on $0.97 per diluted share, up from $0.92 in Q1 and $0.72 a year ago. On a GAAP basis, which includes share-based compensation expenses and amortization of debt issuing cost, net income for the second quarter was $31.5 million or $0.84 per diluted share, also a record performance.

Turning to the balance sheet and cash flow statement. At the end of the second quarter, cash and investment were $382.5 million, an increase of $30.1 million from the first quarter. Operating cash flow in the quarter was $34.7 million and with CapEx of $4.3 million, free cash flow was $30.4 million in the second quarter. We did not repurchase any shares during the second quarter. Management will continue to evaluate the buyback program based on the stock market condition and our cash position each quarter. As such, as of the end of the quarter, $17.6 million remain in our repurchase authorization.

I would now like to turn to our guidance for the third quarter of fiscal year 2019. While we are now reporting under ASC 606, this guidance is based on ASC 605 and we will provide a reconciliation with our third quarter results. After reporting record revenue and net income in the second quarter, we anticipate continued year-over-year growth, but a small sequential decrease in total revenue in the third quarter with continued sequential growth in telecom, offset by a small decline in datacom and a small seasonal decline from non-optical communications. Despite this sequential decline in total revenue, we remain very optimistic and confident in our market position as reflected in anticipated year-over-year growth.

For the third quarter of fiscal 2019, we anticipate revenue to be in the range of $384 million to $392 million. From an earning perspective, we anticipate non-GAAP net income per share in the third quarter to be in the range of $0.86 to $0.90 and get net income per share of $0.71 to $0.75 based on approximately 37.6 million fully diluted shares outstanding. In summary, we are pleased with our record performance in the second quarter. Our strong market position make us optimistic in our business momentum.

Operator, we would now like to open the call for questions.

Questions and Answers:

Operator

Thank you, sir. (Operator Instructions) And our first question will come from Alex Henderson with Needham & Company. Your line is now open.

Alex Henderson -- Needham & Company -- Analyst

Hey. Thanks. A couple of quick questions just on the modeling data. The first one is the tax line came in well below forecast, looks like about a $0.04 positive to the numbers relative to what we had been modeling at 6.2%. Should we be expecting, since you're guiding to 6% to 7% for the year, that we make that up and that, in fact, for the full year on an annual basis we're in the 6% to 7% or are you saying that in the back half you expect 6% to 7% on a quarterly basis?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Alex, this is TS. Good afternoon. Yeah. I think for the particular quarter, we report a little bit low, 700,000 tax expense. Moving forward in the second half, I would still go back to 6%, 6% to 7%.

Alex Henderson -- Needham & Company -- Analyst

So it's 6% to 7% on a quarterly basis, not on a full year basis then?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

That's correct.

Alex Henderson -- Needham & Company -- Analyst

Good. Okay. That helps. And then the other one was, I was a little surprised that the decline of $400,000 or so in the sales and marketing line and what normally is a seasonally stronger quarter, can you give us some rightsizing on that? Should we be thinking that that comes back up toward the $10 million, $10.5 million range or will it stay down here at this lower level?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

No, we had a couple of adjustments in the last quarter, FQ2. Moving forward, I still look at around $11 million per quarter.

Alex Henderson -- Needham & Company -- Analyst

$11 million per quarter on the sales and marketing line?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Yeah. That's correct, Alex.

Alex Henderson -- Needham & Company -- Analyst

That's non-GAAP?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

That's non-GAAP, yeah.

Alex Henderson -- Needham & Company -- Analyst

All right. Okay.

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

That is on (inaudible) the AICC(ph), of course.

Alex Henderson -- Needham & Company -- Analyst

Right. Can you just tell me what was -- you said that passive has improved, but you said some chips were still tight. What supplies are you still struggling with?

Seamus Grady -- Chief Executive Officer

Alex, this is Seamus. So primarily MLCCs and also certain ASIC devices. Overall, we did see an improvement in the quarter, but we still have some tightness on a couple of categories here, MLCCs and ASICs being the two main ones.

Alex Henderson -- Needham & Company -- Analyst

So it sounds like you're expecting to get back to the 12% plus -- 12% or better range over the year. But given that you didn't say that about the March quarter that we should be below that 12% hurdle in the March quarter?

Seamus Grady -- Chief Executive Officer

I think we -- I mean, we did improve from, I think, we were at 11.2% the prior quarter then 11.6% in Q2. I think we continue to see some improvement and we said we think we can get back to the 12% range before the end of the year. Whether we get back there in Q3 or in Q4, we still have that component, I would say, slight headwind on the components there, but we think we can get back there certainly in this fiscal year, whether it's Q3 or Q4 remains to be seen.

Alex Henderson -- Needham & Company -- Analyst

Okay. One last question, then I'll cede the floor. I hate forecasting ForEx, but since December 31st, there's been a spike in the exchange rate back to February levels, that ForEx move I know you hedge it on operationally, but it does show up in the ForEx exchange line. What are we assuming for the March quarter in that line? Are we assuming $2 million, $3 million hit in that line or are you assuming zero in that line?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

So, Alex, for our guidance, we assume zero and the reason is that for this quarter it's already fully hedged, I have basically all the baht I need for this quarter, March quarter. Now moving to June quarter, I have partially hedged and obviously you're right the baht do a U-turn right now is appreciating right now. And again, we have dollar-cost average down to buy for June and September quarter. So you are probably assuming the baht stay at this level, 31.3 this morning. In September quarter, you might see some headwind on the gross margin again. But again, we don't know yet because it stay at 31.3 today, they might back up to 33. So we're watching it very, very closely.

Alex Henderson -- Needham & Company -- Analyst

If I assume the exchange rate stays at this current level all the way through 2019, would that be a headwind against your gross margins in the June, September, December quarters?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

We'll be in the June -- excuse me, September, most probably in September and December quarter, assuming it stay at 31.3.

Alex Henderson -- Needham & Company -- Analyst

And we have to assume a flatter currency unless -- harder to forecast currency than your numbers. I appreciate the content. Thank you.

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Thank you.

Seamus Grady -- Chief Executive Officer

Thank you, Alex.

Operator

Thank you. And our next question will come from the line of Troy Jensen with Piper Jaffray. Your line is now open.

Troy Jensen -- Piper Jaffray -- Analyst

Hey, gentlemen. Congrats on the great results.

Seamus Grady -- Chief Executive Officer

Thank you, Troy.

Troy Jensen -- Piper Jaffray -- Analyst

Hey. So first, how about on the silicon photonics, you said it was down slightly there. I think you mentioned some product transitions, if anything else you can kind of provide on -- some details on what happened?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

I think if you look at on the longer-term in our silicon photonic as a technology segment, it's still doing very well. Last quarter, we've seen some design transition mostly from one customer. The rest of the customer in that group, all doing well.

Troy Jensen -- Piper Jaffray -- Analyst

Okay. How about -- I know you don't like to talk about customers, but Cisco is acquiring Luxtera and I'm pretty sure Luxtera is one of your customers in this category. So could you maybe just help us size the opportunity there? Have you had any discussions with Cisco and they're intense on ramping up silicon photonics?

Seamus Grady -- Chief Executive Officer

So yeah, Cisco is a customer. There's nothing that we have noted yet. And as far as we know the deal -- that acquisition hasn't closed yet. And all I would say is historically we have benefited from those type of consolidations, but I think for us it's too early to say yet what the impact might be.

Troy Jensen -- Piper Jaffray -- Analyst

All right, perfect. And then, Seamus. I know you're saying end of last year that you kind of had multiple conversations with customers about the China tariffs and I know it'd be kind of a further out opportunity, but just love to get an update there, does any of these conversations get more serious?

Seamus Grady -- Chief Executive Officer

Yeah. So I think we continue to have conversations with -- and discussions with several customers, but they remain really discussions at this point. Like I said, they are still primarily at the discussion stage, nothing solid, it's nothing concrete to report there yet. It takes a long time as you can appreciate, Troy, it takes a long time from the initial discussion until it turns into real business, that can be six to nine month process, best case. And then you have the qualification time line on top of that.

Troy Jensen -- Piper Jaffray -- Analyst

Yeah. Okay, understood.

Seamus Grady -- Chief Executive Officer

Roughly (inaudible).

Troy Jensen -- Piper Jaffray -- Analyst

Totally understand. Keep up the good work, gentlemen.

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Thank you.

Seamus Grady -- Chief Executive Officer

Thank you, Troy.

Operator

Thank you. (Operator Instructions) And our next question will come from the line of John Marchetti with Stifel. Your line is now open.

John Marchetti -- Stifel -- Analyst

Thanks very much. Good afternoon. I just wanted to spend a minute, if I could, Seamus, on the datacom business. Obviously, it's kind of been bouncing around you, a little bit weaker in the December quarter, you're talking about it being weak again in March. Just curious, if you could sort of give us some color in terms of what you're seeing either from a demand or a pricing front, just trying to get a sense of maybe how that business or your expectations for that business as we kind of climb through '19?

Seamus Grady -- Chief Executive Officer

So I think you're right, John. The demands for datacom component, strictly transceivers, remains strong. The markets has been experiencing some pretty intense price pressure and we've been doing our best -- our products with our customers to work with the customers to reduce costs for these components, make our customers competitive in the marketplace. So I think the volume -- the demand remains strong, but there is some very significant pricing pressure coming from the end markets. While this can impact our revenue like it did this past quarter, we typically share in the cost savings that we're able to generate with our customers. So we're able to preserve our margins. So that it -- and again, the decline there in datacom, it's not isolated to one particular customer, it's across the board. But the demand is strong in terms of volume, but the price pressure is pretty intense. In addition, we don't expect the revenue there to go up in a straight line. We point out that we expect revenue from all the product lines to be flat to up on a year-over-year basis, which does indicate continued positive trends.

John Marchetti -- Stifel -- Analyst

And, I guess, following up on that, the move to QSFP56 and some of the things that you mentioned needed in silicon photonics, would you expect those areas to be growth areas as you go through the year and then some of the other, obviously, the pricing and some of the drop off in 28 occurs? I'm just trying to think about this from a trends perspective.

Seamus Grady -- Chief Executive Officer

Yeah. I think that's fair -- that's a fair assumption. The transition to QSFP56, it's two customers. And it's on products that are 400 gig and above. So the volume growth that comes with that then, it -- again, it won't be in a straight line, especially when a customer transitions maybe from a QSFP28 100 gig product for example to a QSFP56 400 gig product. With that additional bandwidth that you have there, it takes it into the time for the volume to catch up. But it's a high quality problem that we like to have because it means we're working on the most current generation and next generation products. But like I said, with that does come the fact that sometimes they don't grow in a straight line. We're happy to live with that.

John Marchetti -- Stifel -- Analyst

Right. Right. And then if I can just get in one last one up maybe on the telecom side, obviously, some continued strength in that business. In discussions with your customers, is there any concern at all that with all the noise about what may or may not happen with Huawei in China and things like that that there is a chance here that we actually have some over-ordering going on for customers serving that China market and that if things ultimately smooth out, that there is a chance that we have a pull back on that demand front just because of some early sort of over-ordering in anticipation of an action that may or may not occur? Just curious in your conversations with customers, how they're viewing sort of that China market right now?

Seamus Grady -- Chief Executive Officer

Yeah, that's not something we've discussed with our customers, John. Honestly, it's -- of course, there's always a chance that some of the customers and companies in the supply chain somewhere along the way are over-ordering. If they are, we -- they wouldn't necessarily tell us that they were and we really don't have any visibility into that, I'm afraid, John. And it's just not something (Multiple Speakers)

John Marchetti -- Stifel -- Analyst

Okay. Thanks very much. Thank you.

Seamus Grady -- Chief Executive Officer

Thank you, John.

Operator

Thank you. And our next question will come from the line of Alex Henderson with Needham & Company. Your line is now open.

Alex Henderson -- Needham & Company -- Analyst

That's a surprise. So I wanted to ask a couple of questions relative to the merger between Oclaro and Lumentum. How do you think that that impacts you? Do you suspect any change in production location that would favor you or any cutbacks in product line that might hurt you and if those cutbacks occur with other companies that are currently serving benefit, how does that all shake out relative to your positioning?

Seamus Grady -- Chief Executive Officer

I think it's really very early to say. It's too early to say I think at this stage. Again, they -- we're -- we've been building products historically for both companies and now for Lumentum, they are our number one customer and historically have been in 2007 -- in our last fiscal year, were at 17% customer, now they are at 20 -- roughly 23% customer.

Alex Henderson -- Needham & Company -- Analyst

Right.

Seamus Grady -- Chief Executive Officer

But it's really too early to say, Alex, what the impact might be in terms of any product shakeouts. I guess, from our perspective, we're reasonably optimistic in the sense that there is very little product overlap and what we make and what we have made historically for both companies.

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

And then, Alex, this year, we will learn more tomorrow from the Lumentum earning call, which I intend to dial into.

Alex Henderson -- Needham & Company -- Analyst

The good news is the call happened before the morning call, so before the morning open. The second question I wanted to talk a little bit about is, have you changed -- seen any change in the rate of adoption of the capacity at the new plant? And -- I mean, 60% is pretty good, but it seems like that's starting to level out a little bit, has there been some slowdown of footprint commitments?

Seamus Grady -- Chief Executive Officer

No, I wouldn't say so. I think maybe the way to think about it, Alex, is you know the -- our existing customers, the majority of our existing customers are at the Pinehurst facility and they prefer to keep all the manufacturing at Pinehurst. And then from time -- and that facility is essentially full. And then from time-to-time customers may free up additional space in Pinehurst as they move -- as a product comes to end of life and a line gets moved out and a new line moves in. So we are still able to grow -- in other words, obviously we want to fill Chonburi as fast as we can, but there isn't necessarily a direct correlation between the pace at which we increase our occupancy in Chonburi and the pace at which we have to build the overall revenue of the Company. We're above -- slightly above 60% right now in terms of occupied and spoken for. And I would say, versus our own internal targets, we believe we're very much on track as regards getting full in Chonburi.

Alex Henderson -- Needham & Company -- Analyst

Well, as I understand it, that's actually nicely ahead of where your original targets were. When do you think...

Seamus Grady -- Chief Executive Officer

Yeah.

Alex Henderson -- Needham & Company -- Analyst

...you might have to make a decision on actually starting the plant for the next build?

Seamus Grady -- Chief Executive Officer

I think we've always kind of said, once we get to 70% utilization. We're probably maybe toward the end of the summer, I think we're probably looking at starting to make some decisions on probably what to do with our next building in Chonburi. It's relatively straightforward for us. We own the land there. We have the details -- specifications for the building, so we know exactly what we build. So we are able to move pretty quickly, but probably toward the end of the summer I think would be fair TS, don't you think?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Yeah, (inaudible) the timeframe, yeah.

Seamus Grady -- Chief Executive Officer

Yeah.

Alex Henderson -- Needham & Company -- Analyst

Okay. And have you guys made any progress in finding a full-time CFO to replace TS's retiring position?

Seamus Grady -- Chief Executive Officer

We have a very much full time CFO, TS is fully engaged. We're continuing to look, we're not in any particular hurry, we continue to -- with -- continue with the search, there's a lot of very good candidates, but we haven't found anybody at this stage that we're ready to talk about in terms of a permanent replacement, but we continue to search.

Alex Henderson -- Needham & Company -- Analyst

We will be happy to keep TS as long as he wants to stay, but my guess is that it's not long on his agenda at this point. Just going back to the optical side for a second, could you talk a little bit about where you are relative to the production facilities closures at Sanmina and moving some of those production to Thailand that your customer has been involved with, is that now grandfathered into the numbers or is there still more to come from that?

Seamus Grady -- Chief Executive Officer

So that's not a -- we don't have any direct involvement in that close down, so we're not really fully up to speed on what's going on there. Obviously, you know it's a conversation, let's say, between our customer and Sanmina. We have benefited somewhat, but the exact status of that and what's finished in terms of transferring, we don't have a good handle on.

Alex Henderson -- Needham & Company -- Analyst

Any thoughts on how that plant will -- the Lumentum plant that is going to be down the street from you is going to be integrated into your facilities and how are -- the back and forth between those two locations, I assume that those are going to be tightly wound?

Seamus Grady -- Chief Executive Officer

Our facility and Lumentum's facility?

Alex Henderson -- Needham & Company -- Analyst

Yes.

Seamus Grady -- Chief Executive Officer

Yeah, very much so, yeah. I mean, the -- some of the -- if you like some of the components in the products that we source today come from Lumentum's facility, so the -- our two operations are very tightly coupled and work very closely together, sure.

Alex Henderson -- Needham & Company -- Analyst

And one last question, if I could. The Israeli thought process progress, lack of progress, where are you on Israel?

Seamus Grady -- Chief Executive Officer

So we continue to work on all three aspects of our efforts in Israel, the three aspects being further developing relationships with our existing customers there, exploring relationships with new customers and then establishing our own facility either through greenfield or acquisition. And we continue to make progress in all three, but in terms of bringing up our own facility, it is quite slow going, I would say, because we're being very careful about making sure we have the right facility in the right location and the right size and capability. But we continue to see Israel as a great location to do business and a place where we're committed to bringing up an NPI facility. But nothing specific to announce at this time, Alex.

Alex Henderson -- Needham & Company -- Analyst

Okay. One more question, if I could. TS, could you give me a little bit more granularity on what caused that decline in the sales G&A line and why it bounces back so much? I mean, that's a pretty big delta between the three quarters.

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

So Alex, when you approach the year end, typically we adjust the bonus accrual for Management. And so we kind of expect whether we are going to meet the target or not. So if we are not meeting the target, so we leave some of the accrual. So that is one thing. And then we have certain IT systems, which we get some credit from the vendor. So again, that affect the number. So moving forward, I expect we go back to the normalized SG&A, which is about $11 million.

Alex Henderson -- Needham & Company -- Analyst

I'm sorry, did you say your bonus accrual did not hit Company targets even though you beat consensus?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Yeah. Yeah. For example, we had -- Management had certain revenues and gross margin as a target. And then as we approach the year end now, we already had two quarter behind us, we will forecast whether we're going to meet the goal, whether we're going to have a payout. So if we are not going to have a payout, we adjust accordingly. This last year, Management did not get any payout. So if you look at last year, first quarter, June quarter, we had a major write-back on the accrual and that's how we do the account.

Alex Henderson -- Needham & Company -- Analyst

I was a little surprised that you would have disappointment relative to your bonus targets when you beat the high end of the guidance band, is that because of expectations?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

I don't know, I'll tell you what, our Board is pretty tough. I mean, guidance is one thing and our internal goal is another thing, so...

Alex Henderson -- Needham & Company -- Analyst

Okay. Well, that's interesting Thank you very much for that context.

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Thank you, Alex.

Seamus Grady -- Chief Executive Officer

Thanks, Alex.

Operator

Thank you. And our next question will come from the line of Dave King with B. Riley FBR. Your line is now open.

Dave King -- B. Riley FBR -- Analyst

Thank you. Good afternoon. First on the laser segment, what was the percentage revenue? And just, how should we think about that segment going forward for the next couple of quarters with all the macro uncertainty and all that?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Okay. This is TS. I think the laser -- laser, we say about 13% of $15 million, right. $15 million divided by 400, yeah, it's about 13%.

Seamus Grady -- Chief Executive Officer

And then going forward, Dave, this is, Seamus, I would say, laser -- the industrial laser market for us is a key target segment. We think it's a very large market in terms of the potential and quite under-serviced, I would say, in terms of the degree to which that market outsources today. So they -- we think it's kind of in the low to mid single-digits in terms of how much that market outsources today versus optical communications about half of that -- half of the manufacturing, let's say, in the optical communications market is outsourced. And optical communications is a $10 billion marketplace, roughly. Industrial lasers about $15 billion marketplace and the degree to which it's outsourced is very small, 6% or 7%. So we see it as having very, very big potential for our future growth.

Dave King -- B. Riley FBR -- Analyst

Sure. So...

Seamus Grady -- Chief Executive Officer

And it's a very profitable bid for us in terms of the technology, it's very complementary to the capabilities we have on the -- in the optical communications side.

Dave King -- B. Riley FBR -- Analyst

So you talked about like some customers -- or gaining market share, I guess, some customers are coming to you guys. Is that still the dynamic here? I mean -- and so we should be expecting sort of sequential growth from December to March to June. Is that how we should think about it or just can you provide more color on how we should think about fiscal second half?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

I think, Dave, on a quarter-to-quarter basis, we definitely see some variations, right. In the longer-term or medium-term, we see that segment is growing simply because we are just into that this early innings. The market is so big and obviously you have some of the weaknesses in certain pockets, whether on semiconductor, the laser is weak right now, but again our customers don't participate in every segment. Okay. It depend on whether the segment material processing is continuing doing well, micro-machining is doing well. So a lot depend on the -- our customers subject to specializes in which field. All right. Sufficed to say that most of our customers are growing maybe as a one season decline in the demand. So we are quite optimistic about that sector.

Dave King -- B. Riley FBR -- Analyst

Got it. And I was wondering, I believe you're -- the strength that you are seeing in teleco, I guess ROADM is definitely one of the drivers. So wondering, if you can kind of break this segment out if possible?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Telecom, if you listen to some of my -- our customers' earning calls, they say they're sold out. They're sold out on the amplifier, ROADM and they're adding capacity. So some of these are obviously cascade down to our demand, our backlog from them. So again, if you just listen to our customers who are specializing in telecom, most of them have the -- so we have 16% sequential growth and 43% year-over-year growth for that quarter. So we'll continue to look out for the telecom who will provide the driver for the growth.

Dave King -- B. Riley FBR -- Analyst

Got it. Okay. And then maybe lastly on II-VI and Finisar. Can you just remind us, first of all, are they both mid single-digit type of customer and any overlap between those two?

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

As of today, they both are single-digit, yeah, single-digit percent of our total revenue.

Seamus Grady -- Chief Executive Officer

And not much overlap.

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Not much overlap.

Dave King -- B. Riley FBR -- Analyst

Not much overlap.

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Yeah, yeah. Because for Finisar, we always say that we only do the PCBA that we have their module pieces and then II-VI bought the line from Oclaro many years ago and that's EDFA and then a palm laser. So -- yeah, so they are really not overlapping.

Dave King -- B. Riley FBR -- Analyst

Got it. All right. Thank you very much.

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Thank you.

Seamus Grady -- Chief Executive Officer

Thank you, Dave.

Operator

Thank you. And I'm showing no further questions. So now, it is my pleasure to hand the conference back over to Mr. Seamus Grady, Chief Executive Officer for closing comments or remarks.

Seamus Grady -- Chief Executive Officer

Thank you for joining our call today. We're excited to deliver strong results and a positive outlook as we continue to position the Company for continued growth and diversification over the longer term, and we look forward to speaking with you again soon. Thank you, and goodbye.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody, have a wonderful day.

Duration: 37 minutes

Call participants:

Garo Toomajanian -- Managing Director

Seamus Grady -- Chief Executive Officer

Toh-Seng Ng -- Executive Vice President and Chief Financial Officer

Alex Henderson -- Needham & Company -- Analyst

Troy Jensen -- Piper Jaffray -- Analyst

John Marchetti -- Stifel -- Analyst

Dave King -- B. Riley FBR -- Analyst

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