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Oclaro (NASDAQ:OCLR)

F2Q 2013 Earnings Call

January 31, 2013 04:30 PM ET

Executives

Jim Fanucchi - Owner, Summit IR Group

Alain Couder - Chairman, President & CEO

Jerry Turin - CFO

Analysts

Kevin Dennean - Citigroup

Patrick Newton - Stifel Nicolaus

Dave Kang - B. Riley & Company

Alex Anderson - Needham and Company

Operator

Good afternoon and welcome to the Oclaro Second Quarter Fiscal Year 2013 Financial Results Conference call. As a reminder, this conference call is being recorded for replay purposes through February 7, 2013.

At this time, I would like to turn the call over to Jim Fanucchi of the Summit IR Group. Please go ahead, sir.

Jim Fanucchi

Thank you operator, and thanks to all of you for joining us. Our speakers today are Alain Couder, Chairman and CEO; and Jerry Turin, Chief Financial Officer of Oclaro.

Statements about management's future expectations, plans or prospects of Oclaro and its business, including statements about future financial targets and financial guidance, Oclaro's plans for future operations, together with the assumptions underlying these statements, constitute forward-looking statements for the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include but are not limited to statements concerning financial targets and expectations and progress toward our target business model, including financial guidance for the third quarter ending March 30th, 2012 regarding revenue, non-GAAP gross margin and adjusted EBITDA, expectations related to the integration of Opnext into Oclaro following the close of the merger on July 23, 2012; and our market conditions and our market position and future operating prospects, and our ongoing customer relationship. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including the risk factors described in Oclaro's most recent Annual Report on Form 10-K, most recent quarterly report on Form 10-Q, and other documents we periodically file with the SEC. The forward-looking statements discussed today represent Oclaro's views as of the date of this conference call and subsequent events and developments may cause Oclaro's view to change.

Accordingly, actual results may differ materially from those indicated by these forward looking statements. Oclaro does not intend and is not required to update any forward-looking statements as a result of future developments. In addition, today, we will be discussing non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.

A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC, and I refer investors to this release.

I would now like to turn the call over to Alain.

Alain Couder

Okay good afternoon. So regarding our second quarter results, we are pleased with the results in that quarter. We made significant progress in the merger and I think our results demonstrate that we have improved our execution. We delivered on revenue as the topline of the guidance that you probably read in the press release. We delivered to all the synergies that there were plans for the December quarter. And we still have more synergy to come mostly from inseed and Jerry would cover that more in detail. Jerry will also discuss the strengthening of our balance sheet which was quite successful in that same quarter.

So as a result of that I believe that Oclaro is at its pivot point. We have made great strides in spite the challenge of the past year. We executed off the merger and the subsequent integration of Opnext. We are outsourcing our backend manufacturing to Venture for great flexibility. And this activity has been executed while we were doing a massive effort to recover from the flood.

So, we have also continued to face an uncertain and changing markets and I will come back to this point later on in this afternoon. And our focus in the coming months will be to reduce our cost structure to lower the breakeven point of the company in line with what we believe are the current market situation.

These actions started and they require a few more assets to be sold to finance these action. By successfully (inaudible) Oclaro now to the current market position we expect to be well positioned for growth, when the (inaudible) spending picks up. We are a leader in the very large market who has huge potential, which is driven by this intense demand for more bandwidth and better latency.

We are a leader in key technology and widely recognized as a future of optical communication. They include a lasership technology and the ability to miniaturize and reduce power consumption through photonic integration. We also lead in the 40G under G module as one of only a couple of company with a combination of chip level photonic integration and vertical integration capability to stay off the entire market.

Altogether we have all the product and technology needed for the high goals to open market. And the customer relationship that secure our position as a strategic partner to the leader in the industry.

Let me now focus on current market condition, a product momentum and strategy moving forward. First of all, regarding the market, we are seeing a positive sign but still we are experiencing significant uncertainty. So the optical communication market in North America, we have a cautiously optimistic outlook based on the recent pickup.

In China, we have a conflicting report from various customers. There is no sign of recovery in Europe and we see a slight decrease in Japan and in the industrial and consumer market, the market is flat.

In summary, we are still looking for tangible sign of a system recovery. We saw increase in booking in the first 12 week of this quarter but it is too early to draw conclusion. So, this is for the market. Now, in term of new product and this is where we are quite excited about the situation. As you know, an important part of our strategy is to maintain a growth of our topline and improve our gross margins, and we do that through product innovation and introduction of new product. And several new products are starting to shift and demonstrate the acceleration of new product line. For instance in 100G coherent, we ship 60 copies of the new 100G coherent module which was about the $2 million in revenue. We accelerated the shipment of the 100G lithium niobate modulator and that was also something important and the new generation of 100G CFP is ramping production this quarter. So that’s another important accomplishment.

At 40G, the new form factor 40G clients on (inaudible) are shipping this month a so called QSFP+ and at synergy, we now have this 17 design win for the Tunable XFP and we continue to gain share. As a (inaudible) level, with a new (inaudible) targeted at current network is starting production at Fabrinet. So that’s quite a few thing that all gravitates about 10G, 40G and (inaudible) of transmission but most of them around the future coherent based network.

So the (inaudible) is at the pivot point. It now started as one company and we expect that our new product and technology will create course this calendar year.

So, now moving to the technology because we need to continue to prepare for the future that is where we think Oclaro has some crown jewel. We invest in future technology and the chip level and call it a technology. I think this is what sets us apart. If you look at the optical communication with our indium phosphide fab in the UK, we can miniaturize the size and the power consumption of 100G component and beyond. This applies for instance to narrow line with laser that will come soon specifically for (inaudible) the 100G coherent. We will also come with a modulator, in indium phosphide and with a support with small receiver.

All of that is going to enable smaller packages with lower power dissipation and this smaller packaging will either include the DSP, the Digital Signal Processor or they will not and this is important because many of our last customer ask their own proprietary DSP or digital signal processor and they want to have this as a differentiator but they are looking at us for all the optical components that we could then package in a tiny module and make a difference.

We have the largest detailed production capacity in the world as we discussed before. And our detail are now being designed as inseed into the clients on receiver which came to us from Opnext as 10G and 100G and this include detailed rays and the detailed clarification is ongoing with some major customers.

In addition, we are working on a RAID amplifier and hybrid amplifier and we are well positioned on those product segments as you know. And this will also have more compact line cut and then a part of those amplifiers, a very important component is a so called 980 pump. And there we continue to lead with innovation for instance with two leaser in one package.

Now moving towards the other market industrial and consumer and you will be able to see all those new product if you go to photonic quest next week in San Francisco. We have a fog laser technologies that continue to be in high demand and we continue to increase the power. We have a multi-head laser which is gaining traction and by multiplying the number of head, you increase a printing speed. We have a red laser, that is essential to the new, very tiny display market that could go for instance in cell phones. And we are also exploring adjacent market that could liberate some of this technology.

So, in summary Oclaro, as the new Oclaro that means a combination of Opnext and Oclaro is mastering the leading laser technology in photonic integration which having to be critical to the optical space and the ability for our customer to provide differentiated product.

Now, talking about our customers, I mentioned this last time but our customer relationship continued to strengthen and we improved our execution and we did even our new products and our customers, they'll ask that our technology portfolio and the new product, the primary reason why they are strategic partners to that. We're engaged in multiple design win in all geographies and in particular, many design win are focused as we're gaining the market share with new products as that we lost during the flood.

So, that's for how our customer and now in some of operation, I already mentioned that we are moving manufacturing from Shenzhen to Malaysia. The first product was produced in Malaysia, fully qualified by customer and shipped by customer and that means that in the future, we'll be fully able to rely on two strategic contract manufacturer, Fabrinet and Venture and this will give us the affectability to weather the future cycle of the telecommunication market.

We continue to impose our on time delivery and our quality and the move in the new building in Japan which is off (inaudible) which I mentioned last time is on schedule and we have achieved the first sample from this new fab to the customer for qualification. So, we are also working at the simplification of footprint in North America to have greater efficiency. So lot of improvement going on that are going to be more efficient as a company.

So, my conclusion is the following. We have a strong position in a last but cyclical market with many valuable and differentiating assets. We have started to take action to lower the breakeven point of Oclaro, to lining with our current market expectation. We don't plan to pay the company on an eminent recovery of the commission market.

In summary we continue to innovate, serve our customer well, during this down cycle. So we are well positioned to capitalize on the inevitable upswing in the market when (inaudible) returns.

And I would like now to ask Jerry to describe to you the detail of our financial end guidance, Jerry.

Jerry Turin

Thanks Alain. We delivered to our commitment in the December quarter, our revenues were at the top end of our guidance range, we strengthened the balance sheet and we exceeded our synergy targets for the December quarter. Revenues for the quarter were 159.5 million compared to 148.8 million in the September quarter which included approximately two months of Opnext, result post-merger.

Pro forma full quarter revenues for the September quarter including all three months of Opnext revenues were approximately 160.2 million. So in reference to the revenue by products slide that's in our presentation pack that is online, and is based on the pro forma full revenues for September, our 40-gig and 100-gig module revenues were up 16% in the quarter as we recovered from a shortage of modulators in the prior quarter. Transmission components were down 5.1 million largely due to a customer previously building up an inventory of one component type in connection with their internal transfer of product responsibility. Amps and filters were down 3.5 million primarily due to the sale of our thin film filter business and our Interlever product line during the December quarter. Sales of thin film filters and Interlevers prior to the sale were 2.5 million in the December quarter.

Our other product categories were relatively consistent quarter on quarter. From a customer point of view, Cisco, Alcatel-Lucent and Huawei were all in the 10-11% range. As Alain mentioned earlier, we’ve not seen a real tangible evidence of a pickup in market conditions even though there are positive signs like carrier CapEx spend announcements, and order flow in the first four weeks of this quarter was higher than the first four weeks of the prior quarter. A regard with we continue to see a degree of uncertainty in the market at this time.

Our non-GAAP gross margins were 15.2% compared to 13.2% in the prior quarter on similar revenue levels in each quarter. Everyone listening is probably aware that the March quarter tends to be seasonably weak in the optical space. This is largely due to new pricing, the inset of the start of the quarter for many customers. Historically, we tend to see annualized price declines in 10 to 15% range. We went into this pricing cycle expecting price declines near the top end of this range, consistent with challenges of the prolonged soft market conditions in this space. Our actual results were closer to the more favorable end of the range that is closer to 10% on an annualized basis. We believe the result of this pricing cycle is a positive reflection on the quality of our technology and our product positioning and our relationships with customers.

Now let me comment on the synergies we obtained in the December quarter. We actually delivered close to $10 million in quarterly synergies or 40 million on an annual basis. This is ahead of our previous December target of 9 million per quarter or 36 million on an annualized basis. We’re pleased with the execution that went behind these results. Most of these synergies were related to operating expenses.

As a reminder, our press release financial numbers include only two months of Opnext in the September quarter. On full book quarter basis, our operating expenses are down substantially as a result of these synergies. On the basis is presented in our press release financials, this translates to flat R&D quarter-on-quarter and 1.5 million decrease in SG&A expanses. We believe we continued our significant upsize and future synergies over the upcoming 12 months. Mostly in the area of gross margins and largely from the replacement of parts from competitors with our own (inaudible) parts for use in many of our module and subsystem products.

We previously studied total targets of greater than 45 million in annualized synergies and we continue to expect total synergies to exceed 45 million. Providing a specific target, it’s difficult, because the potential upside I just described is the function of the level of revenue growth of market conditions and the rate of using existing inventories and also the timing of qualification with cycles with customers.

In spite of these continuing improvements, there is a point we believe is important to make though. We believe our adjusted EBITDA breakeven level is in the range of 175 million to 180 million of revenues and our guidance for this March quarter remains well into the negative adjusted EBITDA territory. The expected benefit of remaining deal synergies is not sufficient to close the gap to breakeven without substantial help from the top line. While we believe our new product momentum positions us well for solid revenue growth in the recovering market, we don’t believe it’s prudent to just wait for a full market recovery.

Therefore as Alain mentioned earlier, we are evaluating alternative steps required to close the breakeven gap to ensure a profitable business model at our current revenue levels. Some actions are already underway. Our overall efforts may include sale of non-core assets or product lines or other means that may be required to finance the corresponding actions. We are evaluating many alternative approaches and will communicate specific status of actions on future quarterly calls or as otherwise appropriate as we execute to those plans. In the meantime, we executed significant financing activities in the December quarter, and we ended the quarter with $96 million in cash.

As to our line of credit, we have flexibility for approximately $32 million and additional availability at the end of December, are based on our account receivable balance of that specific point in time and presuming the new structure of the line of credit today. This credit facility was amended on January 23, to bring Silicon Valley Bank into the syndicate and to raise the structure of the line to $80 million. We also continue to work on collection of insurance policies.

Our accounts receivable were $120 million compared to $112 million last quarter. We saw our DSO increased to 68 days from 64 due to the mix of customers certain of which have different payment terms and from a more backed weighted shipping quarter which can impact a level of collections within the quarter. We're striving to drive that back towards 64 to 65 days, a level we've been able to achieve in recent quarters.

Our inventories were down to $151 million from $155 million last quarter. As we entered the production transfer phases of our Venture deal and complete the related transfers, we expect to continue decreasing inventories and improving terms accordingly.

Because it cost so much of cost space since the close of the merger, our accounts payable on accrued liabilities dropped by $17 million in the December quarter. This actually has a onetime negative cash impact because it's like paying back a form of debt. So in the first quarter, your cost cuts don’t necessarily translate into cash upsides, however these corresponding cost cuts will continue to have effect quarter on quarter into the future and will continue to benefit those quarters going forward.

Our CapEx for the December quarter was above 4.7 million and we expect that to trend in the 4 to 5 million range for the next few quarters. Our share count at the end of December was 91.8 million and we don’t expect any significant changes during the quarter at this point in time.

Now prior to some concluding comments, let me reiterate our guidance for the quarter ended March 30, 2013. Revenues in the range of 140 million to 155 million, non-GAAP gross margins of 10% to 14%, adjusted EBITDA of negative 25 million to negative 13.5 million.

So in conclusion, we have a strong position in a large but cyclical market with many valuable and differentiating assets and technologies. We plan to take action to lower the breakeven point of our Oclaro to a line of our current market expectation. While we see some positive signs in the market, we don’t intent to bet our future on the imminent recovery of the telecom optical market.

We have continued to innovate and serve our customers during this down cycle. As a result, we believe we are well positioned to capitalize on the inevitable upswing in the market when the carrier spending does kick in.

Now I would like to open the call to questions.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Kevin Dennean with Citigroup, please go ahead.

Kevin Dennean - Citigroup

I guess one quick housekeeping question, sorry if I missed it already. Was there any update on additional potential insurance proceeds?

Jerry Turin

I didn’t spell off the status but it’s very much similar to the previous number we had put out, 24 million in claims outstanding. We certainly won’t collect 24. There will be a negotiation process involved with the insurance companies and coming to a number. But we're very active in making good progress on that front. So no more detailed update than that.

Kevin Dennean - Citigroup

Okay. And Jerry apologies again if I missed this, but can you help us bridge from the gross margins that you just posted of 15% non-GAAP to the 10 to 14%. You know particularly the low end of the range, what would push you down there? Is that simply a function of pricing or is there some negative mix going on?

Jerry Turin

No, the biggest thing is if you correlate the revenue levels Kevin, because we still continue to be primarily a scale driven margin business. So, at the bottom end of the ranges, you can see that's lower than what will reported for December. That scale has an impact, of course pricing has an impact. While we were pleased with the results, it certainly creates headwind in March. We'll have some cost savings and some small amount of synergies in March but certainly not enough to offset the scale and not mess up the pricing entire way, so it's that sort of mix.

Kevin Dennean - Citigroup

Okay one last quick one from me Jerry and then I'll drop back into the queue. You mentioned potential sale of additional noncore assets. So I guess can you help us understand how much more in noncore assets you have left. And these noncore assets, are they from a gross margin perspective, are they above corporate average or below corporate average?

Jerry Turin

Yes, we can't be specific on that Kevin because there's not a direct action plan of specific actions that we are taking or would take and certainly there is a mix of business profiles and opportunities to generate cash and that all goes into the mix and it needs to be consistent with our views of the vision of the company. so that's why there's not a simple answer today for us to come out and be more precise in those things because of the fairly complex evaluation of what we think is the right thing.

Operator

Thank you, our next question comes from the line of (inaudible) with Morgan Stanley, please go ahead.

Unidentified Analyst

Couple of things on the synergy numbers that you were talking about, the $45 million target, and what you have done so far, Jerry, how do we see those synergies? is there some number that I can kind of do the math on and see what the synergies are on the P&L and how do we keep track of that of the total synergy number that you're looking for? Where can we see it? I know it fluctuates with revenue and things but how do we get our arms around tracking that synergy and then I have some questions on the breakeven levels.

Jerry Turin

Yes, so if we are looking at the December quarter, it's pretty straight forward. the $10 million that we said that we attained and most of that goes to operating expenses and if you look at the historical run rate of the two companies, you can kind of see how that falls out as the as the substantial portion of that. I'm going forward most of the incremental synergies to taste the 45 and beyond 45. we are not sure how far beyond 45 we can commit because of the factors I mentioned, that’s all going to be in gross margin for the most part. So as we progress through the year and report on results from a gross margin point, it's in that context that we provide color as to what we're accomplishing from a synergy point of view, and if at such time as we get to the market certainty and further clarity on timing of some of those inseeds, we may be able to clarify that number, but at this point in time we're sticking with the statement that we expect to exceed our original total target but we can't be more precise than that.

Unidentified analyst

So is there a way I can see that 10 million in the numbers that you've done so far. I mean OpEx from before.

Jerry Turin

Correct, if you look at R&D and SG&A for the December quarter and maybe trend back over a period of quarters of the two standalone public companies, you'll see something I think looks like a good 8 million to 9 million on average probably came from those line items.

Unidentified analyst

Okay, so that's how we measure it. Now the other 35 profit from a COGS line and is that how you get to the breakeven because some of the gross margin has to be somewhere in the mid-20s to make the breakeven work.

Jerry Turin

So need to back up, so that 10 million is a quarterly basis and that translates to 40 million on an annual basis and the total synergy is 45 million on an annual basis, there's not an incremental 45. So the 40 million represents a sizable portion of the total synergies, while we think our synergies will probably be more than that 45, we're not ready to state what that sort of potential upside level is.

Unidentified analyst

Okay, so that brings me to breakeven level. I believe it was 1.75 and the adjusted EBITDA breakeven level before now was a little bit higher 1.75 to 1.80. Can you go over why the change given it sounds like your synergies are on target or actually look a little better? and then what is the gross margin that (inaudible) ends up to hit that breakeven unless there's some other non-cash cost not ticking up. You need a mid-20s gross margin to be adjusted EBITDA breakeven at 1.75 to 1.80. Is that right or maybe I'm missing, my math may be wrong?

Jerry Turin

We've not disclosed what the full P&L looks like at breakeven. As far as 1.75 to 1.80, perhaps is the influence of pricing considered, perhaps it's the influence of the variation in mix you could have, at a 1.75 range. Depending on mix, you could require 1.80 to over the same cost page. So that’s why it’s a small range.

Unidentified analyst

So that cost basis we're looking at is the roughly 47 million you did this quarter and that's what you have to absorb in the gross profit, in the gross marine line. Is that about right? And just trying to do math, revenue tons what gross margin gives us the 47 million. It sounds like we’re not going to have that much more in terms of synergies in that 47 million and so we have to create that in the gross profit line which is a mid-20s gross margin up from 9 and the low teens.

Jerry Turin

It certainly requires an increase in gross margin and that comes both from the increase in revenues. So, if you look at the top end of our range, 155 to 175 or 180 as its potential revenue increased to translate quite rapidly given our scale and given our fixed cost structure and the upward leverage built into the business model. Also includes cost improvements that wouldn’t promise any synergies but standalone cost improvements in terms of product cost and inseeds of Oclaro product as well as incremental amounts in synergies.

Unidentified Analyst

And then finally on the price declines and the annual price declines. Did you say that they were closer to 10% than the 15% this time around, but then you said you were cautiously optimistic or more cautious? Trying to put those two comments together.

Jerry Turin

Well I think two different things, one is we were closer to 10%, so that’s a good sign. I think that’s a positive in terms of customer relationships in market position. I think a totally independent point, which maybe Alain wants to elaborate on is, that market condition, we get some data points but we don’t know that we have enough clarity to say we’re seeing a pickup in that's sustainable in the market. So, those are two independent points. Alain, did you want to elaborate on the market?

Alain Couder

On the market, like I said we have some sign that it might be picking up like the increase in booking rate in the first four week as compared to last quarter and the second one is that we have seen a significant trend of improvement in North America. But this only a four weeks data, so based on past experience before we can say that we have achieved sustainable recovery. We want to be cautious and at the same time, we would like to be optimistic. But being cautious is probably the wise thing to do until we have tangible time to the recovery is there.

Operator

Our next question comes from the line of Patrick Newton with Stifel Nicolaus. Please go ahead.

Patrick Newton - Stifel Nicolaus

Jerry on the insurance proceeds, the $24 million in claims outstanding, is that directed to your own insurance or does that also include potential payments from Fabrinet?

Jerry Turin

That directs from our insurance and again, the 24 is a data point in terms of claim submitted but what that turns out to become is, it will certainly be somewhat less than that and it doesn’t include anything from the other side.

Patrick Newton - Stifel Nicolaus

Okay and I think that Fabrinet has said that they have about $65 million in proceeds that’s earmarked for their own customers, I'd imagine given that displacement that you felt that you could be a decent chunk of that $65 million, could you let us know what type of payments you could be receiving via insurance, via Fabrinet?

Jerry Turin

No, I can’t really speak to that because it gets quite complicated in terms of, in our case, sometimes there is a little bit of confusion over which insurance company on which side will pick up certain pieces of it. there is other complications that make it difficult to say, I would think in terms of you know some percentage of the $24 million and then separately may be there is a little bit of upside from another hand but, keeping those sorts of terms when you are thinking about the opportunity.

Patrick Newton - Stifel Nicolaus

And then I guess on the sale of non-strategic assets and it sounds like you are turning over evaluating your business in detail. When we look at your fab footprint and the five fabs and something that you call strategic encores the business in the past, as you sit today, are all five fabs still considered strategic or its consolidation of this fab footprint, positively alternative?

Alain Couder

No I think we cannot change everything in the company at once. So initially at the merger time we decided to keep the five fab as they are, but it is obvious that over the time, we will be using the number of fabs. And in terms of non-strategic assets, the primary criteria we have is that it does not participate to our vertical integration. Look at the example of Santa Rosa for instance. There was less than 10% of the output of Santa Rosa that was going into our own product. So therefore it was what we call a non-strategic asset. Well the asset that directly participate in significant fashion to our vertical integration outfitted in a different way. So that’s the way we are looking at that and we haven’t made any decision on that. I think the important point is as investor you know that if we it, we still have some non-strategic asset by the definition I just made, that we could sell if we find it is necessary to do so.

Operator

Thank you our next question comes from the line of Dave Kang with B. Riley & Company. Please go ahead.

Dave Kang - B. Riley & Company

First of all where are your Datacom revenues reflected in, is that 10G and lower transmission modules, Jerry?

Jerry Turin

Yes, it would be component of that category. That category would also include some 10-Gig on the telecom side as well. But all the Datacom products would be a subset of that category.

Dave Kang - B. Riley & Company

In what sense transmission component, is that sort of like (inaudible)?

Jerry Turin

Tune of access fee would be in the 10-Gig module. Our transmission components would be lasers, modulators, receivers, laser pumps, integrated laser modulators and so forth, something closer to a chip level type of concept. The modules includes (inaudible) and transponders.

Dave Kang - B. Riley & Company

So I assuming that Datacom was one of the drivers in the 10G and lower transmission module business by about 2 million. So can you remind us how much of that Datacom business you lost during the floods and how much of that you’ve regained since then?

Jerry Turin

Well, we don’t break it out at that level Dave. And I wouldn’t say that all of that category is on the Datacom side. So you’ve got 10-Gig transponders, 10-Gig (inaudible) transponders and tunable XFP as part of that. I think it is fair to say though that there wasn’t just like we said at the end of September we weren’t expecting a significant increase in the shorter reach legacy 10 gig [inaudible] product and so that wasn’t part of the increase in December.

Dave Kang - B. Riley & Company

Oh I see, okay. And then I was wondering if you can just provide a little bit more clarity, you said China was – you are receiving conflicting reports, can you just provide a little bit more color, what do you mean by conflicting reports (inaudible) demand or timing?

Alain Couder

Some customers have increased demand, some raw demand for the China markets. So, they are fighting amongst themselves for market share. But in total at this point in time difficult to say whether it's recovering from the flatness we have seen recently or whether they are the first customers to regain momentum.

Dave Kang - B. Riley & Company

Okay and then I may have missed this but did you disclose about ASP decline was in the December and what to expect in the third quarter?

Jerry Turin

We don't typically disclose quarter on quarter on quarter, Dave, we talked about the annual trends are looking like and this is where we reference the annual pricing cycle. We earlier announced that we expected more towards the high end or worst end, right closer to 15 and we actually came out closer to 10% so we're pretty pleased with those results.

Dave Kang - B. Riley & Company

Got it, got it okay and then what was the profitability? Did you disclose that as well or?

Jerry Turin

Sorry Dave, could you repeat the question?

Dave Kang - B. Riley & Company

Of book to bill.

Jerry Turin

No, we didn't disclose it.

Dave Kang - B. Riley & Company

And then on the revenue guidance, I mean should we expect decline to be pretty much across the board will any particular segments be weaker or stronger than others? Can you just provide more color on that, please?

Alain Couder

Right now, we see more weakness on the old products than on the new product, that's where we are right now. This new guidance also take to account the sale of our (inaudible) facility each one to compare it to last quarter.

Jerry Turin

That's a good data point for maybe the listeners too. In the December quarter we had 2.5 million of revenues prior to the sale and on typically on a quarter, we’re in the 3 or 4 million range. So, it's not an enormous change quarter on quarter from selling that business but it's probably meaningful when you look at the March quarter where you already the headwinds from pricing.

Dave Kang - B. Riley & Company

And my last question is you had a nice increase in 40G and 100G. Was it both 40G and 100G or was it mainly 100G? Can you provide more color? and what is the mix right now? I'm assuming 40G is significantly higher, larger than 100G, is that a correct assumption?

Jerry Turin

Well, the increase was more 40-gig than 100-gig and again, last quarter you may recall, we had a short fall because we had a lack of internal modulators for our 40-gig. 100-gig continues to grow. In fact, we've got a very significant footprint in 100-gig client side that’s actually a pretty significant numbers. It's probably fairly stable quarter on quarter. And we got some pretty meaningful 100-gig coherent transponder qualification revenues out there. That was probably flat quarter on quarter but it’s a pretty meaningful number at $2 million range.

Dave Kang - B. Riley & Company

The energy coherent margin which is really the new technology, I mentioned it was 2 million, so we are very pleased with this momentum and that's something that is going to contribute to this calendar year.

Dave Kang with B. Riley & Company

Got it, thank you very much.

Jerry Turin

The 40G is still active you know. We are still selling. There are three types of 40G. DPSK, DQPSK and Coherent. So 40G is not going away. it's a market that is still there for 2013.

Operator

Thank you, our next questions from the line of Alex Anderson with Needham and Company, please go ahead.

Alex Anderson - Needham and Company

Can you within the mix of 40-gig, 100-gig just give us a sense of what portion of your revenue base is coherent versus non-coherent?

Alain Couder

I don't have the number like this, what I can tell you is that 100G is despite definitions for the line sight coherent because this is the only one, and I would have to look at the exact number for 40-gig that is still pretty much distributed between the three modulation techniques. What we have seen more recently is the 100G as a protégé coherent l-band for the Japan market you know.

Alex Anderson - Needham and Company

So I'm assuming then that there's a pretty good chunk of change in the 40-gig, 100-gig piece that's a quad LR4 40-gig, 100-gigs. Can you talk a little bit about where you're selling those going into Web 2.0 are they going into large enterprise and can you give us a little bit of a sense of what portion of the 40-gig, 100-gig is coming from that.

Jerry Turin

If I kind of back up to level set, 100-gig CST is a big part of that category and if we think on the line side 40-gig coherent DPSK and DQPSK are all significant parts of that number. There's 40-gig VSR is not an insignificant number but it would be below those other categories in terms of relevance in that category.

Alex Anderson - Needham and Company

Right, so going back to the Datacom piece, there's been a lot of comments from other vendors that this segment somewhat sold out, that there is more demand than can be filled causing pretty good demand characteristics there. Aare you seeing that as well?

Alain Couder

Yes. The demand is clearly there specifically for 100G right now.

Alex Anderson - Needham and Company

100-gig data comp. And are you sold out?

Alain Couder

Yes. If we could purchase more, we would ship more. Basically the second generation one.

Alex Anderson - Needham and Company

So, is that what’s primarily driving the sequential growth between the two quarters?

Jerry Turin

No. the primary sequential growth is in our 40-gig product, 40-gig line side and to a small degree maybe the 100-gig. But that’s where our last quarter. We had a shortage of our own internals supply of 100-gig and 40-gig modulators as in feed components. That’s where coming out of the flood recovery. as we entered September, we thought we’re in a position to secure own modulators and we got a little ahead of ourselves and so we had some shortfall and ability to serve our own internal demand and we got over that in this quarter so thought up.

Alex Anderson - Needham and Company

I see. Going to the cost side of the equation, it’s hard for us externally to tract the timing of when people left the firm and as a result, you got the cost benefits in that $10 million number. Is it fair to say that sequentially we were to look at the SG&A line, the two line items that are in it that essentially flattish sequentially and therefore you’ve gotten the majority of that benefit in there already or did they leave a little bit part way through the quarter and therefore there is another quarter on quarter improvement?

Jerry Turin

Yes, there is a 10 million savings we realized in the December quarter.

Alex Anderson - Needham and Company

And so that’s down and there is nothing sequentially on it.

Jerry Turin

Yes, that’s done. There is probably a little sequential carryover because we couldn’t necessarily execute every cost reduction on October 1st but we executed enough to realize 10 million in the quarter. There is probably a little bit upside in March just for that carryover factor but not raw material. We really try to target everything we did to realize the benefit fully in December.

Alex Anderson - Needham and Company

So, one more question on the pricing side too. I sure (inaudible) is feeling good about the fact that you are down for lower end of that price band but can you give us a little bit more sense of where in the pricing you got the benefits? What areas were firmer than the steeper end of the bracket? Where was the variance within the product line?

Alain Couder

I think the pressure was high on the Datacom side that it was on the telecom side.

Alex Anderson - Needham and Company

Can you say that again, you broke up on me?

Alain Couder

It was higher pressure on pricing on the Datacom side as on the telecom side.

Alex Anderson - Needham and Company

Okay, so the area that you found the upside was in the telecom side?

Alain Couder

In the telecom side, we got probably less than 10% annualized and retail more than 10% annualized on the Datacom side.

Operator

Our next question is from the line of Hamed Khorsand from BWS Financials. Please go ahead.

Unidentified Analyst

This is Zaheed calling in for Hamed. Just get some understanding about the industry right now. What is the catalyst for carriers to spend more? Why can't they just buy the same amount as they are now giving the advancements in the bandwidth capacity in optical components?

Alain Couder

Clearly the demand for bandwidth continue to increase at a tremendous pace. Depending on the network, the bandwidth as the core optical network increase to 60% to 100% a year. So, yes as the price of optical component goes down, the speed increases but the demand is clearly there and the fundamental demand based on cloud computing and video and images etcetera continues to increase every day and then the request for latency also continues to increase every day because people want better response side specifically in the financial community. So those two are pushing a big-big demand. One thing which is happening as well is that the carrier sitting in the North America are starting to see some traffic base on usage rather than on flat sea (ph). so there have been some movement in their tariffs to be able to do that and hopefully this time we will increase because that’s putting more revenue to the carrier and therefore more ability to invest.

Unidentified Analyst

I have question specific to Oclaro, do you think you have enough time to restructure the business again without harming the business and being able to realize (inaudible) in the market?

Alain Couder

Yes we are quite confident and we expect that we will be able to do it. As we said on the call, to make sure we have the right money to do that, we may have to sell some selective non-strategic asset that I mentioned before. but clearly we have the momentum with our customer. Our product portfolio is quite exciting specifically at the chip level. And we are progressing and I think the last quarter is a demonstration of ability to execute, if you want to look at the synergies. Executing in less than five months, in fact it is in two months because to get it out of the financial in the quarter we had between end of July and end of September to align everything in terms of cost production to realize the 10 million of synergy in one quarter. I think that’s probably the best proof point of our ability to execute, you know.

Operator

Thank you. And at this time there are no further questions. I will like to turn the conference back over to Jim Fanucchi.

Jim Fanucchi

Okay operator. And thank you every one for participating on today’s call. We do look forward to speaking with you again when we report our third quarter financial results. Thank you and good afternoon.

Operator

And certainly, gentlemen that does conclude the Oclaro’s second quarter fiscal year 2013 financial results conference call. Thank you very much for your participation, you may now disconnect.

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