Finisar Corporation F2Q09 (Qtr End 11/02/08) Earnings Call Transcript

| About: Finisar Corporation (FNSR)

Finisar Corporation (NASDAQ:FNSR)

F2Q09 Earnings Call

December 9, 2008 5:00 pm ET


Jerry Rawls - Chairman, President, and Chief Executive Officer

Eitan Gertel - Chief Executive Officer

Stephen Workman - Chief Financial Officer, Senior Vice President of Finance, Secretary


John Harmon - Needham & Co.

Natarajan Subrahmanyan - Sanders Morris Harris Group

Ajit Pai - Thomas Weisel Partners

Paul A. Bonenfant - Morgan Keegan & Co.

John Lau - Jefferies & Company


Good afternoon. My name is Kara and I will be your operator today. I would like to welcome everyone to the Finisar second quarter financial results conference call. (Operator Instructions) Jerry Rawls, President and Executive Chairman of the Board for Finisar, Eitan Gertel, Chief Executive Officer for Finisar, and Steve Workman, Chief Financial Officer, will be hosting this call. (Operator Instructions) Mr. Rawls, Mr. Gertel, and Mr. Workman, you may begin your conference.

Jerry Rawls

Good afternoon, everyone. We appreciate your taking the time to listen to our conference call today. A replay of this call should appear on our website within eight hours. An audio replay will be available for two weeks by calling 800-642-1687 for domestic or 706-645-9291 for international. Enter ID #74889122.

Now I need to remind all of you that any forward-looking statements in today’s discussion are subject to risks and uncertainties which are discussed at length in our most recent quarterly SEC filing. Actual events and results can differ materially from these forward-looking statements.

As a reminder, we break down our revenues between two business segments: optics and network test equipment, which we often refer to as network tools. In addition, we break down our optic revenues by distance with optical transceivers design for short distance data center links designated as LAN/SAN, and optical products designed for longer distance applications, referred to as either metro telecom or analog and CATV. We also identify those products capable of transmission speeds greater than 10 gigabits per second. WE also break down of our revenues by going to the Investor Relation section of our website and looking under financial information.

Now turning to Finisar’s results for the second quarter of fiscal 2009 which ended on November 2, 2008. Total revenues $159.5 million, up $30.8 million or 23.9% from $128.7 million in the previous quarter. Our original guidance for the quarter was for revenues to be between $156 and $167 million.

Optics revenues of $147.7 million were up $32 million or 27.6% from $115.8 million in the previous quarter, reflecting the impact of the merger with Optium, which became effective on August 29.. As a result of that closing date, we picked up only two months of their operating results in this quarter. That’s important to understand, not only for the impact on revenues this quarter, but also for the increase in operating costs and expenses compared to last quarter.

Revenues for 10 gigabit per second and 40 gigabit per second products for all applications totaled $54 million, up $21.8 million or 67.6% from $32 million to $32.2 million in the previous quarter. Again, that’s due primarily to the Optium merger.

I think it’s also worth pointing out that this level of business is three times what we were doing only one year ago.

Network tools revenues decreased to $11.8 million or down $1.1 million or 9.1% from $12.9 million in previous quarter. The decrease was related to the first quarter spinout of our Net Wisdom product line into a new company, Virtual Instruments, in which we have a minority equity interest. We recognized about $1.1 million in Net Wisdom revenues last quarter before it was sold. I think it’s also worth noting that approximately 60% of this quarter’s revenues for network tools equipment or $7 million dollars was from new products that were only introduced within the last year, including 6 gigabit SAS/SATA, 8 gigabit Fibre Channel, and 10 gigabit Fibre Channel over Ethernet.

We only had one customer that represented more than 10% of our total revenue in the second quarter. Our top three customers accounted for 30% of total revenues, as compared to 29.5% last quarter, while our top ten customers represented 59.4% of total revenues compared to 54.7% last quarter.

As you can see, there was not a lot of change in customer concentration as a result of the merger.

At this point, I’ll let Eitan walk through a little more color on our optics revenues.

Eitan Gertel

Thanks, Jerry.

$147.7 million in optics revenue this quarter. Products for short distance, LAN/SAN applications totaled $63.3 million. That’s up 4% from $60.8 million just last quarter.

Interestingly enough, that increase was due entirely to increase in revenue from 8 gig Fibre Channel products, while the revenues for 10 gig Ethernet and 2 and 4 gig LAN/SAN applications were down slightly from last quarter.

There was no impact related to the Optium merger with respect to this portion of our optics business.

Metro telecom revenues totaled $81 million this quarter, up $26.1 million from $54.9 million last quarter, due to the impact of the merger.

Of that total, more than half or $45.1 million were from products targeting the 10 and 40 gigabit markets. While $25.4 million were from products for less than 10 gigabits.

Revenues from ROADMs products for metro and telecom application contributed $8.8 million dollars this quarter. That’s about the same level as recorded by Optium in the last quarter before the merger.

Analog and cable TV product revenues were only $3.4 million dollars in this quarter. That was down from $8.1 million in the last quarter reported by Optium before the merger. In fact, if you ask which area of our business were lighter than we anticipated, analog and cable TV were probably at the top of our list. That probably peaks the credit crunch and the fact that many cable TV operators are highly leveraged.

As Jerry mentioned, revenue for 10 and 40 gig products for all applications totaled $54 million for the quarter. Products for pan gig LAN/SAN applications totaled $8.9 million, down from $10 million last quarter. Despite being down quarter-over-quarter, this is one area of our business that we believe is poised for growth as we are currently in customer qualification for a number of new 10 and 40 gig products. We’ll come back to that in a minute when we discuss our outlook.

Most of our 10 and 40 gig revenue, $45.1 million, was from metro and telecom applications. While we don’t want to break out for competitive reasons, I would point out that 40G continued to grow on a sequential basis, a trend which we believe will continue over the next couple quarters, even in this difficult environment.


Jerry Rawls

Thanks, Eitan. Before talking through our revenue outlook, it is probably instructive to consider the guidance that some of our customers and competitors have issued in the last several weeks. Obviously the world’s economy has changed a great deal since our analyst day in New York a couple of months ago.

We’ve seen some of our networking and telecom customers guide to sequential revenue declines on the order of 10 to 14%, but at the same time some of our storage customers forecast stable revenues or small increases for their upcoming quarter. That is probably a reflection of the continued growth and information to be stored. If the growth and storage companies continue to seek cost efficiencies with server virtualization and data center consolidation, both of which drive the demand for more fiber optic connections.

That theme also seems to be playing out in our network tools business, where our customers appear to be moving ahead with product development efforts, targeting storage networking applications. About 40% of our total revenue is driven by storage applications and our storage systems customers are forecasting that this portion of our business will continue to hold up reasonably well in 2009, despite the challenging environment.

Most of our competitors have guided to sequential revenue declines of 8% to 15%. The magnitude of these reductions pales in comparison to the tech bubble that burst back in 2001. Our revenues fell by almost 50% in two quarters back then, due in part to the fact that we were faced with huge excess inventories on our customers’ warehouse shelves.

This time around, the industry supply chain is much healthier and much tighter. Over 50% of our revenues the past couple of quarters came from just in time inventory hub pulls by our customers. We in turn have established just in time hubs for many of our suppliers. Just to make things more interesting, we will have a couple of additional challenges in our third quarter. Namely, a two week shutdown at the end of December for most U.S. and European customers and Chinese New Year, which starts on January 26 next year. That means that the last week of our quarter, which ends on February 1, 2009, is affectively shut down for products being produced in our Malaysia and Shanghai plants. Obviously we’ll be working ahead of that to mitigate any potential impact on our customers.

So with that backdrop, I’ll let Eitan walk you through our revenue outlook for the next couple of quarters.

Eitan Gertel

Thanks, Jerry.

Based on the observation Jerry has made and the fact that we are driven by a healthier storage market, we think optic revenue will decline on the order of 5 to 10% in our upcoming Q3.

As 5 to 10% sequential decrease would put our optics revenue in the range of $133 to $140 million dollars.

With revenues for network tools once again ranging from $10 to $11 million, that would put our total revenue outlook at the $143 to $151 million for our upcoming Q3. In conjunction with that lower outlook, we have undertaken a number of actions to reduce our operating costs and maintain healthy levels of EBITDA and cash flow. Steve will speak to that in a moment.

Forecasting beyond Q3, given the environment we are operating in, is highly suspect, but we think our revenues for the fourth quarter ending April 30 will show a sequential increase that could lift our top line back to Q2 levels. That belief is based on a number of customer product qualifications which have either just have been completed or should be complete in a very short time.

First with respect to products recently become qualified, they include X2LRM and LR. RGPOND OLP product for fibre to the home applications has been approved by a major telecom equipment company. The OLT redesign in the central office while the ONU product, which is still in qualification resides at the home. XFP plus 10 GSR and SSP plus ATLR. Product qualification are underway and should be completed in the very near future include at least a dozen of ROADM products quals, both 50 and 100 G version for eight different customers.

40G VSR in new smaller form factor at three telecom equipment customers and the 40G DPS for the application is five telecom equipment customers and start qual with additional five customers at this time.

By the way, as a result of this product qual, we see revenues from the sale of 40G products increasing in both Q3 and Q4.

Next product is 10pk SR. IN addition, some of you may have noticed that we recently introduced our first [parallel] optic product, which opened yet another market for us in 09.

For revenues for this product should begin to contribute to our top line at the start of next fiscal year.

Now I’ll let Steve take you through the rest of our P&L.

Stephen Workman

Thank you, Eitan. Before starting, I need to point out that in aligning the accounting practices of both companies following the merger, we adopted a different accounting principle related to the capitalization of third party costs for filing new patents. The company has decided that all such costs will be expensed going forward and will adjust prior quarters to reflect the net impact of expensing previously capitalized costs and reversing the amortization that was recorded.

The impact for the first six months of the current fiscal year was an additional charge of approximately $454,000, while that was naturally an improvement to the P&L for fiscal 2008. The impact of these adjustments will be reflected in our upcoming quarterly filing in form 10Q and has also been posted in our historical financials available on the Investor Relations page of our website.

I’ll discuss our GAAP results in a moment, but first with respect to our non-GAAP results. Gross margins were 35.6% this quarter compared to 40% last quarter. Our original guidance here was for gross margins of 36%, plus or minus a point, and we need to remember that Optium’s gross margins were lower than that of Finisar prior to the merger. In fact, the blended rate for both companies in the last reported quarter before the merger was 36.2%.

Operating expenses this quarter reflect two months of Optium. Total non-GAAP operating expenses therefore grew by almost $6 million to $44 million. That’s up from $37.3 million last quarter and that entire increase is due to the merger. There was no increase in spending in the quarter related to Finisar on a pre-merger basis.

R&D expenses grew by $3.5 million on a sequential basis to $23.1 million, representing 14.5% of revenues. Sales and marketing expense grew by $500,000 to $10 million, representing 6.3% of total revenues, and G&A expense grew by $2 million to $10.9 million, representing 6.8% of total revenue.

So the total OpEx of $44 million, as a percent of revenue, 27.6% and that was actually down compared to prior quarter and prior year.

I also want to point out that in G&A spending for our non-GAAP results, there is about $750,000 of litigation expense and that’s up from about $400,000 last quarter.

This level of OpEx, together with a 35.6% gross margin, means that operating income on a non-GAAP basis totaled $12.8 million for the quarter or 8% of revenue and that’s down slightly from $13.4 million last quarter or 8.3% of revenue.

Interest expense, net of interest income, declined to $1.6 million from $1.9 million last quarter, reflecting the payoff of our 5.25% convertible notes, while other expense of $250,000 means that our pretax income was $11.1 million or about the same as last quarter.

With the increase in weighted average shares as a result of the merger this quarter to $430 million on a fully diluted basis, non-GAAP net income of $10.3 million rounds down to $0.02 per diluted share as compared to $10.8 million or $0.03 per diluted share last quarter.

Also the $429 million or $430 million in diluted shares is a weighted average and that as of the end of the quarter there’s a total of $473 outstanding.

Total depreciation and amortization of $7.4 million in the quarter means our non-GAAP EBITDA was a healthy $20 million dollars and that’s up slightly from $19.4 million last quarter.

We exclude certain non-cash or non-recurring items from our non-GAAP results. The merger with Optium normally would have resulted in adding approximately $151 million in goodwill for a total of $239 million on our balance sheet.

While it is unusual to write off goodwill in the same quarter as a merger is consummated, these are unusual times and in light of the deterioration and the macro economic environment and a much lower market cap as of the end of the quarter, it was difficult to substantiate this amount of additional goodwill. As a result, we recognize the non-cash charge of $178.8 million to reduce goodwill to approximately $60 million.

In addition, we recognize non-cash charge of $10.5 million related to the merger for R&D in process.

Other items excluded from our non-GAAP results include a non-cash charge for $4.8 million for slow moving and obsolete inventory. $3.8 million in stock comp expense. $2.2 million for amortization of intangible assets related to prior acquisitions. $1.7 million for a non-cash charge related to foreign exchange transaction loss. $1.4 million for non-cash charge related to a step up in the value of finished goods inventory in the Optium merger. $1.2 million for a non-cash charge related to the permanent impairment of the minority investment. That was all offset to some degree by a non-cash tax benefit of $8.4 million.

So including these items under GAAP, gross margins were 30.2% this quarter, compared to 38.4% last quarter and 31.6% one year ago, while the net loss of $186.8 million was $0.44 cents per share and that compares to a net income of $4 million or a penny per share last quarter and a loss of $10.8 million one year ago or $0.04 per share.

A complete reconciliation between GAAP and non-GAAP is included in our earnings release and is also available on the Investor Relations portion of our website.

CapEx this quarter increased to $9.9 million and that’s up from $5.6 million last quarter. Most of that increase is unrelated to the merger and ran hotter than normal due to the ongoing expansion of our facility in Shanghai and the build-up in our production capabilities in Malaysia and Shanghai and anticipation of transferring certain products there. This level of CapEx should decline certainly over the next couple quarters.

Our cash balance at the end of October, represented by cash and short-term investments, as well as this quarter increased to $9.9 million and that’s up from $5.6 million last quarter. Most of that increase is unrelated to the merger and ran hotter than normal due to the ongoing expansion of our facility in Shanghai and the build-up in our production capabilities in Malaysia and Shanghai and anticipation of transferring certain products there. This level of CapEx should decline certainly over the next couple quarters.

Our cash balance at the end of October, represented by cash and short-term investments, as well as certain long-term debt securities, which can be readily converted into cash totaled $51.9 million. That’s down from $124.6 million last quarter, as a result of paying off the remaining balance of our 5.25 convertible notes.

If you consider that we also picked up $31.8 million with the starting balance sheet of Optium on August 29, that means our net cash position other than the pay down of our convertible notes decreased by $12.4 million this quarter and that was due primarily to an increase in accounts receivable, totaling $8.4 million net of the starting balance inherited from Optium on August 29 and a payables balance that declined by $6.4 million, again, net of the starting balance inherited from Optium.

The swings in work in capital means that our cash balance should recover in the upcoming quarter, offset to some degree by $8.4 million in non-recurring payments that we’ll have to make related to merger obligations.

DSOs for the quarter came in about 54 days. That’s up from 41 days last quarter, largely reflecting the different AR positions of Finisar and Optium before the merger.

Net inventories were about flat with last quarter considering that we inherited net inventory of about $35.2 million on August 29. Our ending inventories do not reflect the lower guidance for our upcoming Q3, but it’s difficult to turn the ship on such short notice. As a result, we believe that inventory levels should decline over the next couple of quarters by perhaps $10 million, which should help improve our cash position.

In terms of the quality of our cash balance, I would like to point out that we do not own any auction rate securities. We own only a small balance of the highest grade mortgage back securities and we do not see any indications of impairment with respect to any of our money market investments.

With respect to our borrowing arrangements with Silicom Valley Bank, we have not borrowed anything at the end of the quarter under a $45 million dollar secured line of credit. In addition, we have an additional $6 million available to borrow under a non-recourse receivables purchase agreement.

In light of the lower expected revenue levels in the upcoming quarter, we’ve already reacted to lower costs by eliminating most open requisitions and cutting approximately 120 positions or about 12% of the U.S. workforce. Together with targeted savings involving travel and other items, these should result in annualized cost reductions of about $13 million per year or a little over $3 million per quarter.

With that in mind, let’s turn our attention to guidance at the bottom line or the next couple of quarters. For Q3, we discussed that total revenues are expect to range between $143 and $151 million, as compared to $159.5 million last quarter. That is expected to translate to a non-GAAP gross margin on the order of 34% plus or minus a half point versus 35.6% last quarter.

In terms of OpEx, we need to remember that we have to contend with the impact of a full quarter of the merger in Q3. That factor alone would normally raise OpEx by approximately $2 million dollars for next quarter, but with the impact of recently implemented cost reductions, which should save on the order of $3 million per quarter, total non-GAAP OpEx should decline next quarter by approximately $1 million.

Combined with the lower gross profit means that our non-GAAP operating income is likely to be on the order of $5 to $6 million, representing 4% non-GAAP operating margins. With lower net interest expense of about $1.2 million plus another $250K for other items, would mean that non-GAAP net income would be on the order of $4 million and EPS of a penny.

I’d also point out that even at those lower revenue levels, with over $8 million in depreciation expense, we will still generate a healthy $12 million dollars or so of EBITDA next quarter.

Lower CapEx of $7 to $8 million and a turnaround in work in capital means that our cash position should stay above $50 million next quarter, even with the upcoming payment of $8.4 million in non-recurring items related to the merger.

Turning to the fourth quarter, an uplift in revenue in the fourth quarter back to Q2 levels, would mean that gross margins move back to the 34 to 35% level on a non-GAAP basis, while non-GAAP operating margins should improve to about 7% with non-GAAP EPS of $0.02.

More importantly, EBITDA is expected to be in excess of $20 million that quarter once again, while CapEx is expected to continue to decline.

With efforts to reduce inventory levels, our cash balance should start to increase again in Q4.

In terms of our results going forward under GAAP, we would also expect to incur additional non-cash or non-recurring charges of the type that I described earlier, which should normally be in the range of $7 to $8 million per quarter.

We’ve talked in the past about some of the manufacturing synergies that should be available to us. Keep in mind that those don’t start to be realized to any great degree until after our Q4 ending April 30 and while we’re not prepared to update guidance for next fiscal year in this call, I think it would be worthwhile for us to review that topic for the benefit of our listeners.

Eitan, do you want to handle that one?

Eitan Gertel

Thanks, Steve.

As announcement of the merger, we discussed about $10 to $15 million in annual synergies. About 5 to 10 were related to manufacturing, primarily involving transfer of products to lower cost manufacturing sites. We already knee deep in those product transfers and we expect to begin reaping the benefits, starting the first fiscal quarter.

Those synergies will begin to be realized starting in the second year following the merger. That should mean the benefit starting accruing in our quarter ending October of next year. Again, including annual OpEx synergies on the order of $5 million, the total synergies in this merger should translate to a total annual savings of $20 to $30 million.

I’ll turn the call back to Jerry for some closing remarks. Jerry?

Jerry Rawls

Thank you, Eitan.

Despite the difficult economy, we continue to remain enthusiastic about our business and the prospects for growth. I mentioned earlier that this downturn feels nothing like the collapse of the tech bubble in 2001.

Last week, Informatics released a report that suggested the effect of the general economic downturn likely will be minimal on the optical networking hardware market. They’re thinking was that consumers and businesses will continue to demand more band width, even if at a somewhat slower pace for videos, photos, mobile traffic, gaming, and other band width intensive applications and we tend to share that view. And just as we grew at a compound rate of 20% per year for several years following the crash of the tech bubble, we believe we will emerge from this downturn in a much stronger position as we continue to expand our product portfolio, our addressable markets, and our market share.

With that, I’d like to turn it back to Kara and open it up for questions.

Question-and-Answer Session


Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Your first question comes from John Harmon with Needham & Co.

John Harmon - Needham & Co.

Reading the press release, there was a statement that said you were scrambling to find additional synergies, which sounded like it was above and beyond what you mentioned at your analyst day. Is that true or was that just referring to what you had talked about then?

Jerry Rawls

Some of those are additional synergies that were included in the recent cost reductions that we looked at. There’s additional synergies probably included in there. I don’t think we want to be too additive here with respect to savings. I think there’s a portion of the $13 million annualized synergies. Part of those are related to the operating synergies that we talked about with respect to the merger, but the OpEx synergies from the merger totaled more like $5 million per year. What we dug out here was $13 million a year recently.

John Harmon - Needham & Co.

Sometimes in merger situations, you see that you would take the whole quarter of OpEx in the first two months. Was that the case or were expenses pretty linear? I know you guided basically flat.

Stephen Workman

Our operating costs were pretty flat and certainly with respect to OpEx. That was the case.

John Harmon - Needham & Co.

You gave some cable TV figures historically that were quite small, was that the cable TV return past product you had for a long time or were these just sales to the cable TV industry of normal transceivers?

Stephen Workman

That was the return path that are in our historical numbers, which we didn’t bother breaking out in the past, but we’ve included that since we break out cable TV now with the larger revenues as a result of the Optium products.


Your next question comes from Natarajan Subrahmanyan with Sanders Morris Harris Group.

Natarajan Subrahmanyan - Sanders Morris Harris Group

Two questions, first on the revenue side. For January quarter, you’ll have three months involved of Optium. So if you talk about that on apples to apples basis how much optics revenue you’re going to be down sequentially and then sounded like you’re suggesting storage might be relatively flat, can you provide some color as to what’s going to be most impacted?

Jerry Rawls

We probably would have seen on the order of $5 million additional revenue if we have had Optium in for the full quarter.

Natarajan Subrahmanyan - Sanders Morris Harris Group

So first month much lower than the other two months?

Jerry Rawls

These quarters are normally a little backend loaded. So in any case, that one month at the very start of the quarter translated to about $5 million in revenue.



Our next question comes from John Lau - Jefferies & Company.

John Lau - Jefferies & Company


Our next question comes from Ajit Pai - Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

Two quick questions. First one looking at the inventory level. I think you mentioned the last cycle where there’s a lot of inventory in the channel. This cycle, there isn’t that much. Could you give us some color as to how much, just because of slower deployment of products, how much if you had to find the amount of your inventory that is adrift of actually being obsolete, how much would that be?

Stephen Workman

We maintain an ongoing reserve that’s already included and netted against our gross inventory. So that’s several millions that we’ve been maintaining that as we go along.

Ajit Pai - Thomas Weisel Partners

So do you expect the charge-offs to actually accelerate over the next two to three quarters, over relative to the past three or four years?

Stephen Workman

I don’t think so. We do, in establishing that reserve, we take a pretty conservative view. We look at demand. Looking back over the last 12 months, we don’t do a forward-looking view and assume it’s all going to get used up and blue skies and green lights and all good inventory. So we just have a rather mechanical approach to it. We take the last 12 months of inventory, which at this point, we still think that there is room for growth going forward, but nevertheless, that’s what we used as a guide for establishing that reserve.

Ajit Pai - Thomas Weisel Partners

Looking at receivables up in this quarter, could you give us some color as to whether a large part of that was related to either deteriorating credit quality of the customers or linearity during the quarter and also whether seeing any risks higher than the past several quarters?

Stephen Workman

Actually, again, we take a rather mechanical view of establishing an allowance for bad debt at the end of each quarter. I believe that is you look at the past due levels, it’s actually gone down, I believe that’s true for the entire company, compared to last quarter. So it has to do more with it’s certainly the mix of terms that we had to contend with in the merger. I don’t believe there has been serious deterioration in the amount that we ultimately will collect.

Ajit Pai - Thomas Weisel Partners

Last question would be looking at the environment. Just given the demand slowdown right now and what’s happening. Are you seeing any material change in the environment across your product portfolio?

Jerry Rawls

We haven’t seen anything that’s different today than it was last quarter or the quarter before.


Our next question comes from Paul Bonenfant with Morgan Keegan & Co.

Paul Bonenfant - Morgan Keegan & Co.

Where is the weakness most pronounced for next quarter? I know that you mentioned the CTV sales were down, sounds like significantly. It doesn’t sound like those are coming back. Maybe you could talk about some of the other segments, even if just qualitatively. The second part of that question is I guess why the optimism regarding the April quarter if you could provide a little color around that as well.

Jerry Rawls

The bright spot in our market portfolio is storage and there are customers that are optimistic about their forecast than others. The other parts that we serve, cable television may be the weakest of all in a percentage basis, but we see in the networking equipment space, we have a number of customers who were forecasting softer demand. In the telecom space, we also see some slowdown in capital spending. So there’s a lot of things that will be moving around and moving some south on us. When we come back to the fourth quarter, our optimism in the fourth quarter is all based upon a number of new products that are in the pipeline that are very close. I mean they’re products that we have developed, we have internally qualified, and they are now in the laboratories in the best of our customers being qualified there and they will start in production in the fourth quarter. So it is new products that will give us the boost for that fourth quarter.

Paul Bonenfant - Morgan Keegan & Co.

So would it be fair to say that the telecom exposure is really what’s providing the drag here in Q3?

Jerry Rawls

Telecom exposure is surely not the strongest part of our markets that we serve, but telecom, again as I pointed out earlier, is not as soft as cable television is.

Paul Bonenfant - Morgan Keegan & Co.

You talked about steps to reduce costs. It sounds like those were predominantly workforce reductions and I’m wondering if you have anything sort of else in your back pocket or a plan B, current view a month or two from now and help us understand what additional cost cuts you have potentially in the pipeline.

Jerry Rawls

Probably the biggest thing we can do is accelerate the synergies defined related to manufacturing. If we can pulls some of the manufacturing synergies that start in Q1 and start pulling those into Q4, that will certainly help. Beyond that, I don’t know that we want to comment too much. Obviously we have the entire company picking up dimes, so I’m sure it will be some cross reduction opportunities as we go along.


Your next question is a follow-up from the line of John Harmon with Needham & Co.

John Harmon - Needham & Co.

Numbers on the guidance, I know you’re one company now and you don’t want to break the company into Finisar versus Optium, but it might be a little helpful, you know, just looking at your guidance that’s down $8 to $13 million in the January quarter. If Optium was running at $50 million a quarter, you’d expect about another $15 million from Optium. So like you said storage is pretty stable would sort of imply that the Optium portion of the business is down about $30 million sequentially. Am I doing the math right and how did the Optium side do in the quarter and maybe for just one more quarter if you could help us out?

Jerry Rawls

When we gave guidance last quarter, we pointed to the fact that Optium would probably contribute about $36.5 million in the quarter and that’s the fact that Optium would probably contribute, contributed. So now, we missed about $5 million in revenue from having only two months, so they would have done a little over $40 and I believe their last reported quarter was $47 million. So on a full quarter basis, they will be down about $5 (mil).

John Harmon - Needham & Co.

Just doing the math, if they do $36 million in two months, then they ought to do about $50 million a quarter?

Jerry Rawls

Again, we missed $5 million. If we had them for a full quarter, they would have only done $5 million more or a little over $40.

John Harmon - Needham & Co.

Was that how the quarter fell?

Eitan Gertel

I think, John, we also said that the cable TV was down $5 million or over $5 million in the quarter.

John Harmon - Needham & Co.

I’m just trying to understand how to make sense of your guidance. The sequential decline is more on the telecom side, right, than certainly on the storage side?

Eitan Gertel

But if you take the decline, we said the biggest part of the decline was in our cable TV business.

By the way, that’s nothing to do with shared, it’s all about the business itself.


There are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Jerry Rawls

Thank you, Kara, and thanks to everyone for tuning in today. We really appreciate your time and the time you spent with us and I hope the remainder of your day is a good one.

We’ll see you next quarter.


Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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