Before focusing on the down-beat guidance, first the good news. OCLR reported Q3 EPS of $0.23, up from just $0.03 a year ago, and topping the $0.20 consensus estimate. As noted above, non-GAAP gross margin was very healthy, increasing to 41.6% from 27.2% in the year ago period. This improvement was driven by a couple main factors. First, strong demand for its 100 gig products drove favorable mix and higher ASPs. And second, its larger scale helped to leverage its manufacturing costs.
Also, revenue growth remained robust at 60.5% to $162.1 million, its second best topline growth rate in at least nine quarters. Again, the high-speed 100 gig products drove the results with that line now accounting for 78% of total revenue. OCLR also stated that it made some progress diversifying its customer base, thanks to solid growth in the North American and European markets.
However, OCLR still has significant exposure to China and that is weighing heavily on its guidance. During its conference call last night, management stated that China sales were down 9% in the quarter and that it was warned by a couple Chinese customers to expect an even more pronounced slowdown in the June quarter. One of these customers particularly cited an inventory correction as the main issue.
Another reason for the downside guidance is that some of its 40 gig telecom products are now discontinued. Q3 was the last quarter some of these products were shipped. As a result, OCLR now expects a $3 million revenue reduction in fiscal Q4 due to the termination of those product lines.
While the near-term outlook seems bleak, the good news is, OCLR is expecting growth to resume in the September quarter with notable strength in the metro and data center markets. Also, management remains confident in the growth opportunities in China as the country strives to become the first to deploy next-generation 5G wireless technology. Naturally, this will require even higher speed connections which should provide a tailwind for its most advanced optical components.