Bookham, Inc. F2Q09 (Qtr End 12/27/08) Earnings Call Transcript

|
 |  About: Bookham Inc. (BKHM)
by: SA Transcripts

Bookham, Inc. (BKHM) F2Q09 (Qtr End 12/27/08) Earnings Call January 27, 2009 5:00 PM ET

Executives

Jim Fanucchi - IR, Summit IR Group

Jerry Turin - CFO of Bookham

Alain Couder - President and CEO of Bookham

Giovanni Barbarossa - President and CEO of Avanex

Analysts

John Harmon - Needham & Company

Ajit Pai - Thomas Weisel Partners

Paul Bonenfant - Morgan Keegan

Hamed Khorsand - BWS Financial

Russ Piazza - Front Street Capital Management

Operator

Good afternoon and welcome to the joint conference call announcing the proposed merger of Bookham Incorporated and Avanex Corporation. At this time, I would like to turn the call over to Jim Fanucchi of the Summit IR Group. Please go ahead Mr. Fanucchi.

Jim Fanucchi

Thank you operator, and welcome everyone to the Bookham/Avanex proposed merger conference call and webcast. Please note that the slides accompanying today's presentation are available on the Investor Relations section of each company's website. As a reminder, this conference call is being recorded for replay purposes.

During the course of this conference call and webcast, we will be making a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include but are not limited to statements about Bookham, Avanex and the proposed combination of the companies jointly announced earlier today, potential synergies and costs saving for such combination and the timing thereof, future financial and operating results, quarterly synergies, the combined company's plan, objectives, expectations and intentions with respect to future operations, products and services.

Such forward-looking statements are based on the current beliefs and expectations of Bookham's and Avanex's management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are difficult to predict and generally belong beyond the control of Bookham and Avanex. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors.

Further information about the risks inherent in these forward-looking statements is contained in the joint investor presentation that was filed with the SEC today and in the most recent Form 10-Q, most recent Form 10-K and other periodic reports filed by Bookham and Avanex with the SEC. Neither Bookham nor Avanex assumes any obligation or intends to update any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, during this call we will be referring to non-GAAP financial measures with respect to any of these non-GAAP measures directly comparable, generally accepted accounting principal measures set forth, a reconciliation of GAAP to non-GAAP measures and included in our earnings release at Bookham's earnings release, which is available in the Investor Section of Bookham's website.

In connection with the proposed combination, Bookham intended to file documents with SEC, including a registration statement on Form S-4 containing a joint proxy statement and prospectus.

Investors and security holders are urged to read carefully the joint proxy statement and prospectus when it is filed with the SEC, and other documents filed by either company with the SEC relating to the proposed combination when they are filed, because they will contain important information.

Our speakers today are Alain Couder, President and CEO of Bookham and Dr. Giovanni Barbarossa, President and CEO of Avanex and Jerry Turin, CFO of Bookham.

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

Alain Couder

Okay good afternoon. I think today is a quite exciting day and Giovanni and I will go through the set of slides. I am assuming that each of you, have the slides in front of you and we will be referring to the number on the slide.

First of all, let me tell you that both management teams are eager that for this merger success. The industry has been talking about that for quite sometime, but today we are announcing that it can happen. The other thing is that as we talked about the combined merged company, we will restructure the new company, because the two management team believes, we need to get a new name for the company and two teams will be willing to get together and make it successful.

One thing, which is I think unique for this merger and as for you investor or analyst is quite important, the two companies are focused on metro and long-haul, and therefore together we're [having] to be an extremely powerful company on that segment of the telecommunication market.

I am going to skip over page 1 and page 2. You can read it at your leisure and Jim has already read parts of it to you.

Now on page 3, if you have already read the press release, you already have read this. But let me go through the major points. From a product standpoint, the joint product line on the metro and long-haul market these are best in class for most product lines for this market. And in particular, we are very well positioned for 40 gigabits and 100 gigabits, and reconfigurable networks.

We will continue ourselves to leverage our silicon technology for selected other markets like Bookham has been doing in the past. But in terms of our channel capability, clearly, although we have the same customer many times, one is very strong, the other is less strong. So I think a broader product line, will allow us to accelerate the customer penetration.

In terms of R&D, I shared with you quite often that the vertical integration has its limitations and that therefore we could not necessarily spend enough R&D on this product line. The two companies together can really do that in that particular market because we spend more R&D than any of our competitors. So we see this as a very important competitive advantage.

And also from a manufacturing viewpoint, the two companies are very complimentary, Avanex was fully outsourced. We are fully in-sourced, and I don't think the answer is all answered. The answer is yet unanswered. Now we'll have access to in-source and outsource and make sure that we maximize our gross margin as a result of that.

And financially, we'll discuss that more but we will be accretive in the first two quarter as to growth. The return in investment, in terms of restructuring is one of the best I've ever seen that we'll be spending less than $7 million to generate about $20 million of synergy in the structure. And cash wise, although we are prepared for the fees, and also for the restructuring, the cash after one year of the new company will be more than the sum of the cash, which has been used from their own company. So cash is very important in a downturn as you know.

Moving on to page 4, so this is the transaction summary that you can read in the press release, it’s going to be a new company with a new name. The ratio is 53.25% for Bookham and 46.75% for Avanex. And this merger can be very successful because we have very talented people in both company and we have selected talented people from those two company – those for the new executive team and for the new board.

Several times when we met I mentioned that merger we told are difficult to achieve and we have been very careful in making sure that we could succeed and the chemistry between the two management teams that we have seen so far has been outstanding and the enthusiasm of both team is also very important. So I am totally convinced that this merger will be a success.

So now moving on to the following page, which is page 5, you have here the revenue of the company and in the industry. So you clearly are looking at the side of tier 1 type of company and Finisar, JDSU and Opnext. And then Bookham and Avanex, with many others were kind of tier 2 companies.

I think that by putting our two revenues together we can really start playing in the tier 1 camp and we can become in fact, in long-haul and metro market probably one of the largest, if not the largest company in the market segment.

So, why do you think we believe that we are so powerful together? Let me explain that on the following slide.

On the following side we have looked at all the products and offerings, which are important for the metro and long-haul market and as you can see the two company complement each other very well. Meaning if in one case, one company is very strong, the other company is less strong or we should say weak to be fair sometimes.

Thus if you put together these two companies you end up with a variety of products. And as you can see we are almost a market leader everywhere. We still have to get some market share in the transmission module and in the WSS ROADM, but these aside I think we are extremely well positioned.

And as you can read from the slide, Avanex brings modulators, micro-optics, dispersion compensation products with [thinner load generation], integrated module as well as advanced subsystems. And Bookham has been clearly, we discussed that many times in the past that we are very strong at the chip level, with indium phosphide technology and gallium arsenide addressing both submarine and terrestrial markets. And whether it’s a [pump laser] or high performance is tunable as a receiver, transmission and amplification modules.

So the two together make it very strong and in fact if you turn the page and go to page 7 now and compared with competition, it is very clear that in that market segment only JDSU has a similar offer to us. The others were point offers that address only a portion of the market. It comes straight out out of this slide, I don't need to go much beyond that.

By turning to page 8 now, the growth in bandwidth is and has been there despite the downturn. If you look at it worldwide, we are reading that bandwidth demand is still continuing to grow pretty fast in country like South Africa, China, India, and even in the U.S., the demand for bandwidth continues to be there.

And this is a unique opportunity for the new company. And Giovanni has a very strong project called the [FDCOR] technology, I think he has much better skills than I am to explain to you how the technologies that the new company has can really be winning in this market. So, Giovanni?

Giovanni Barbarossa

Thank you, Alain. So, let me make a couple of points about what the real needs to date of the network operators are. There is no doubt the carriers are facing substantial challenges to compare the cost of ownership of their networks as they experience an unprecedented growth in traffic.

Now as a combined company, we will enable the full spectrum of next generations solutions that the carriers needs to contain the CapEx as well their OpEx. And basically, we'll combine leadership in those segments, in those fastest growing segments of our markets, which is important for the growth of the combined company.

So those are tunable transmissions, especially efficient transmission, high-speed transmission, as well as low power consumption and automated regeneration solutions. And finally, what we called intelligent a reconfigurable wavelength management solutions.

If we go to slide 9, that gives you a picture of our presence as a combined company that we will have as soon as we close. With our combined product portfolio we basically have technology and market leadership in transmission, regeneration and wavelength management, internal as well as line application, in metro as well as long-haul and submarine networks.

Our combined component technology will basically differentiate our modules of system solutions for all optical network needs.

If we go to page 10, this is a pretty compelling value proposition that the combined company would be able to provide to our customers. OEMs require next generation solutions at lower costs. As a combined company owning the chip and the component technology and the modular design will enable the combined company to extract cost from the subsystem products through software and hardware integration. And provide better integrated solutions they would be able to meet with the aggressive cost target of our customers.

The ROADM node subsystem is a very good example of how the combined company can provide a competitive and definitive solution by leveraging pump laser and filter technology in amplifier and wavelength selector switch modules to provide best in trans ROADM solutions on a blade.

If we go to page 11, this is another example of where the combined company will be able to excel in the market. The combined portfolio of technology and products in transmission will enable us to address possibly our next generation needs end-to-end. For example, for high speed spectrum efficient transmission application, we will be able to own the component and module technology that enables the special [form] of our modulation format. But also tunable dispersion compensation solutions, which basically complement each other to provide system designers that both differentiate each other's portfolio such as higher transmission speed application for the – as well as the 100 gigabit per second.

So we are very excited about this combination which will overall improve, will overall strengthen our position in the market.

Now let me turn the presentation back over to Alain. Alain?

Alain Couder

Thank you, Giovanni. By the way I hope you appreciate the mix of transactions in Italian accent as you can get the music to this merger that would be a very successful, I can tell you. So together I think the relationship with our customer, our equipment vendor is going to be a quite strong. I already referred to that. The new company has good relationship with all the customers and as for instance, Avanex is very strong with Alcatel, while Bookham is getting design wins that doesn't have a loss of revenue yet. Bookham has two top customers Nortel and Huawei who are not that strong for Avanex, but a clear opportunity for their products.

These three would allow the new company to accelerate penetration in each of these two accounts, and they really don’t have product over lap. So we don’t have to expect to lose much revenue as a result of this combination. Thus here they are on their own we are seeing the opportunity for our customer penetration really impact and accelerate the growth.

And as you will remember I have been focusing on ease of doing business that’s something extremely important as far as the company to be successful. The new company will continue to keep up these goals and also continue to push innovation.

Moving to page 13, I don't want to forget what we are doing in non-telecom market. I think this is a big asset for us in term of stability of our business. We have three major customers, ASML, Roche and Yokogawa in that business. And in the March quarter last year, these businesses grew while telecom was going down. And this time we expect something similar to happen for the March quarter. But it does leverage the other technology investment we have in telecom. So I think this is great and we continue to do that.

Now turning to page 14, if you look at the company from a geographic view point, it does strengthen the footprint of the company, the 24/7 presence and the support, which is so important for our telecommunication customer. It also deal with some areas, for instance, as you know, Bookham has moved all its manufacturing to Shenzhen, But Shenzhen is performing very well, that was a single point of failure and Avanex has also rather with through Fabrinet, although they were more diversified than we are.

So we are de-risking manufacturing but at the same time we are going to be able to play between inhouse and also outsource to make sure that Fabrinet gets us the best margins that our internal people manage to get, the best benchmark in terms of manufacturing, for the productivity, efficiency and quality and so on. So this is going to strengthen a lot of what the two companies were able to do alone.

In term of customer service. For instance, in Japan and Italy, Avanex has a good presence and customers and business, we will be able to give better service to our Japanese and Italian customers and Bookham has strong presence in U.K. and China, will be able to give better services to the Avanex customers.

And in terms of our R&D, we have started some R&D and a little more than a year ago in Shenzhen at Bookham but Avanex started more than four years ago an R&D center in Shanghai, which has some very good team and very good processes that we will both leverage and strengthen and compliment what Bookham has been doing in the past.

So I am sure you are waiting for page 15 because it is where our investor – you really try to understand whether this is accretive or not. So let's go to page 15. And on page 15, the growth opportunities on the top left of the slide, improved gross margins from combination we know, and also I think I already mention that. The leverage model as we put more in Shenzhen clearly will be posting better gross margin and when Jerry goes through our December number he will be able to give you the proof of that.

But at the same time we have been working with Fabrinet as supplier for broadband are doing excellent job, so in summary, Fabrinet and all the subcontractors will do the same so in the end I expect boosting gross margin from this combination of in-out and outflows.

Supply chain saving is obvious but you don't need two supply chain for one company, so we will have some saving here. In term of R&D we will leverage our global presence with high skills, lot of experience in the western world with lower cost region R&D with enthusiasm, energy and all that. I think this works to our advantage.

And in terms I said we'll be combining the sales organization we don't need two accounts now per customer. We'll be able to sell more customers better as a result of that and obviously a public company costs a lot of money. We have to deal with all the filing, the [industrialization] and all that. So we will be keeping only one public company and that’s just another thing that we can tell you.

So all of those efficiency we are looking into it and see how much it is going to cost to restructure and I think that is all of those. And if we have done that several years ago it could have been quite expensive, but each company has done a great job to clean its own house and to end up very complementary.

So as a result of that, we will spend no more than $7 million in restructuring and we will be generating $20 million out of the synergy in the first full quarter of the company. I think its pretty good. If you want to have higher number, the first full quarter multiplied by four will be $28 million and with less than $7 million spent at that time. So this is very exciting.

Beyond that we are – let's look at yes all the potential synergies. We have new opportunities to extend quickly to new customer, but also as we grow the business there is more products entry that's possible. For instance, pumping to Avanex, I'll be fair is a clear opportunity and other that we will be looking at in a lot of detail. So this deal is financially very compelling, and I would like to turn to slide 16 which is a question you always ask me, when are you going to be profitable? And what is your target cost structure?

So, this is an example. It is very difficult in this downturn to really get to very precise number, but the way we have done it, it is sizing the improvement that will result of the creation of the new company.

The last two column of the cost structure of each company for the cumulative 12-months ending in September '08 that means September '08 because we are announcing our result today, but Avanex will announce only next week.

Thus the total Bookham revenue is 12-months finishing last September, was $247 million for Avanex $198 million, a total of the $445 million. If it is divided by four, that's about $110 million.

And therefore after 12-months of operating together that means with the first full quarter, we believe that the new company at a level of $110 million per quarter, assuming the economy recovers enough to get there, we'll be able to generate about 7% of our gross margin.

So as you compare that to the last year Avanex and Bookham number, this is about a jump of 10 points at a similar level of revenue. So I think this is quite compelling by itself and we are going to keep long-term model to go to 10% operating margins.

And as you know, we have significant tax losses and they are available as tax queries for the future, so we're not being taxed for sometime. So I think the new company clearly has a very exciting cost structure.

And moving to page 17, this year we are looking at the new organization, we selected the best people for a given job, and at the Board level, we have three from Avanex, including Giovanni himself. We have three from Bookham, including Bernard Couillaud, who will be the Chairman, and plus myself, who will be part of the Board and be the CEO of the new company.

As Giovanni being on the Board, that also expects us to work with me for several months and after closure to let me make sure that we do the merger successfully also, put the company in underlying track from a strategic viewpoint.

As you can see from this slide, the company will be made of three divisions; two telecom and one non-telecom. And with support from the various other functions, that mean technical importance, sales and marketing, finance and so on. And Jerry will continue to be the CFO, and Jim will be the COO.

One thing I would like to mention to you, in order to get to the absolute personal conviction that the merger was doable, we did a two-day onsite of the two management team, and I think the chemistry of working together was there, the eagerness of winning together was there. And that's made me very convinced that this new management team supported by this very good Board will make the new company a success.

So now turning to page 18, I’m not going to add anything this is a repeat of 12th slide. As I said, we are ready to win together, but before I conclude I would like to ask Jerry go through the Bookham results. Jerry?

Jerry Turin

Thanks Alain. The message we want to convey today from a Bookham standalone quarter point of view, is that we continue to execute improvements in our business that allowed us to maintain our cash balances, our non-GAAP gross margins and our adjusted EBITDA prior to the impact of a bankruptcy filing by a major customer on January 14th, 2009.

Because of the significance of this event, I'll try to be clear in describing the related impact on key financial statement accounts as I move along. Revenues in our second quarter of fiscal 2009, which ended on December 27, 2008 were $50.2 million compared to $66.5 million in our September quarter and $59 million in the same quarter of the prior fiscal year.

Our revenues this quarter would have been $55.6 million if not for the impacts of differing revenue recognition on $4.1 million of shipments to Nortel as a result of its bankruptcy filing on January 14, and another $1.3 million of shipments to a contract manufacturing customer, which had close due to a financing delay by the same filing. Even prior to differing as revenue this still corresponds to a $11 million decrease in revenues quarter-on-quarter.

Huawei was a major customer in the quarter with revenues of $7.4 million or 15% of our revenues. Nortel was also our major customer with revenues of $5.4 million or 11% of our revenues. These revenues exclude $5.4 million of revenues deferred in connection with the bankruptcy filing described earlier.

Our non-GAAP growth margin for the quarter was 19% compared to 26% last quarter and 24% in the same quarter of the prior year. Non-GAAP gross margin excludes $0.3 million of stock compensation this quarter and $0.4 million of one-time costs associated with our transfer of photonics manufacturing operations from San Jose to Shenzhen in China. This transfer is now substantially done and we expect the cost savings to begin to appear in our March quarterly results with the full affect expected to be captured in our June quarter.

The revenue deferrals described above impacted our gross profit line by their full dollar amounts. Excluding the impact of these deferrals, our non-GAAP gross margin would have been 27%. This means that we have executed improvements in our underlying business that deliver a 1% increase in our non-GAAP gross margin quarter-over-quarter even while the underlying level of business dropped by the $11 million described earlier.

Later, Alain will provide some data points on how our business model improvements are reflected from an EBITDA breakeven point of view. Unfortunately, while our margin improvement momentum sustained our gross margins as described above, even through the revenue decrease this quarter, we do not believe that this momentum will be enough to hold margins steady through the revenue decrease, which we are guiding to you for the March quarter.

As a result, we are also guiding to a non-GAAP gross margin decrease in the March 2009 quarter, compared to our current quarter non-GAAP gross margin of 27%, which excludes the impact of the revenue deferrals. This expected decrease is almost a direct function of loss contribution due to lower expected revenues.

That said, as of now we do expect March to be our low point in revenues due to the economic downturn, although visibility is not good, this should not be taken as any form of guidance for the June 2009 quarter or beyond.

Moving on, our research and development expenses were $6.9 million this quarter, a decrease of $1 million compared to $7.9 million last quarter, and also down from $8.2 million in the same quarter of the prior year. Our R&D expenses this quarter included 200,000 of stock compensation. Our selling, general and administrative expenses were $9.3 million this quarter, a decrease of $1.4 million compared to $10.7 million last quarter, and also down from $12.2 million in the same quarter of the prior year. Our SG&A expenses this quarter included 500,000 of stock compensation.

Turning now to the September quarter, we identified the implemented cost reduction plans for the September quarter on which we have executed successfully. In addition, our operating expenses and our manufacturing overhead continue to benefit from the dollar stronger position relative to the British pound sterling. The average rate applied to our June result was $1.98 for the pound, in the September quarter it was $1.85, in this December quarter it was $1.62, and it has since fallen further and is recently been hovering down below $1.40.

Our depreciation and amortization in the December quarter were $2.8 million and $0.4 million respectively, compared to $3 million and $0.5 million last quarter. This quarter we recorded an impairment of goodwill charge of $7.9 million. This was in response to economic conditions related impact on our market capitalization that together comprised the triggering event. This is a preliminary estimate and the full evaluation will be completed during the March quarter, and this could lead to a refinement of the charge.

Restructuring charge to this quarter were $0.5 million compared to $1.5 million last quarter. This quarter the charges were in connection with our transfer of photonics manufacturing operations from San Jose to Shenzhen. As mentioned above this transfer is substantially complete, and we do not expect any significant restructuring charge in the March quarter. This expectation would of course change upon closing the transaction with Avanex.

Our non-GAAP operating loss for the quarter was $6.4 million compared to $0.8 million last quarter. Our net loss was $6.5 million compared to a net income of $2.2 million in the prior quarter. Our net loss for the quarter includes a gain of $9.9 million on foreign exchange, primarily related to the conversion of the foreign currency denominated balances on the books of our overseas subsidiaries to U.S. dollars. This compares to again a $6.5 million last quarter.

Net loss for the December quarter also includes a $7.9 million goodwill write-off discussed earlier, and the impact of the $5.4 million in revenue deferrals, also discussed earlier.

Our share count at the end of December was approximately $100 million, and this should stay relatively consistent until the end of March, of course this will increase significantly across on the closure of the transaction with Avanex.

Moving to the balance sheet, our cash, cash equivalents, restricted cash and short-term investments were $44.7 million at the end of the December quarter compared to $43.2 million at the end of September.

[Here] with the revenue drops discussed earlier, we were able to hold a cash balances relatively steady, increasing them by $1.5 million.

The major movements in the cash flow were $1.8 million generated from adjusted EBITDA excluding on the deferred revenue impact. $3.7 for CapEx, and approximately $2.2 million generated in the net changing working capital which reflects the revenue deferrals, as well as collection of some September overdue receivables in the first week of October.

Let me speak a little more specifically about the cash flow collection implications of the revenue deferrals discussed earlier piece-by-piece. As the collection of the $1.3 million of billings deferred on shipments to a contract manufacturer, this seemed to be contingent of a closing of our financing that was delayed as a result of the bankruptcy announcements. We understand there may have been some positive movement on this front, although neither the timing nor the result of it all is certain.

The other $4.1 million of billings deferred on shipments to major customer is best analyzed in two pieces. We understand from counsel the $2 million of this is in a priority file with a reasonable likelihood of collection, however, with uncertainty as to timing. The collection of the remaining $2.1 million will largely be a function of the success of the customer's ability to restructure Nortel's bankruptcy. While we expect to eventually collect some percentage of this balance, the amount collected, if any, and the timing are uncertain.

Prior to the announcement of this bankruptcy, we would have hoped to manage our cash balances to remain above $40 million at the end of the upcoming March quarter, even on our lower revenue guidance. However, the collection of any of these deferred revenue amounts in March is subject to a significant doubt. We now expect cash balances to drop probably below $40 million at the end of the March quarter.

Our overall accounts receivable dropped to $33.1 million at the end of December, compared to $51.2 million at the end of our September quarter. This drop is primarily due to lower revenues including the revenue deferrals discussed earlier. And collection of our September receivables has been held over at the end September and paid in the first week of October.

Our inventories were $58.4 million at the end of December, relatively flat compared to $58.5 million at the end of our September quarter. Our fixed assets were $32.5 million at the end of December compared to $32.7 million at the end of our September quarter. Our CapEx of $3.7 million was largely offset by $2.8 million of depreciation in the quarter. Our total current liabilities were $36.6 million at the end of December compared to $41.1 million at the end of September, primarily associated with a decrease in accounts payable.

To conclude on the balance sheet, let me remind that we have no debt on the books and that we have access to amounts available under our $25 million line of credit, in addition to our cash, cash equivalents and short-term investment balances.

Now, before I turn it back to over Alain, let me speak to our guidance for the quarter ending March 20, 2009. This guidance assumes no turnaround of the deferred revenue items discussed above. Given the economic conditions there is less visibility than typical and accordingly our guidance ranges are more [broad] than normal. As mentioned earlier while we expect March to be a low point in revenues through the downturn, visibility is not good and this should not be taken as any form of guidance for the June fiscal quarter.

And for the March quarter, we expect revenues to be in the range of $43 million to $50 million, we expect non-GAAP gross margin, which excludes stock compensation to be in a range of 15% to 22%. We expect adjusted EBITDA to be in a range of negative $6.5 million to negative $1.5 million. Alain?

Alain Couder

Okay. Thank you, Jerry. And I'd tell you I am quite pleased with what we have achieved in the last quarter. We acted very quickly when the downturn hit and the result is that we were able to preserve cash and the gross margin if we take the Nortel bankruptcy out would have been 27% compared to the 26% of the September quarter but with $11 million less in revenue.

That means we really have production machine increasing our profitability, which is on the move and this is the situation as we decided to merge with Avanex. So what we have done beyond the financial and the gross margin, we extended our customer base, with increased momentum in Japan where we think we have two new tunable laser design wins with key customers.

The largest US carrier are adopting DQPSK, and as you know, this is a modulation technique that we have chosen for our photonics integrated chips. And this will pay-off and as you know, as we integrate more, we will reduce the cost and power consumption which is key for the future of very high speed networks.

We'll continue to be a chip layout choice, tunable, 40G DPSK transponder and line-gap solution. Last quarter, we closed three transponders and three line-gap design wins. Well that's a very nice momentum for our future revenue. We got our first brief production DQPSK/40G transponder, and shipped our first devices to customer.

So in summary, around the 40 gigabit, I think we are engaged with mostly one vendor. So either component or transponder, and either DPSK or DQPSK, so we are quite well positioned.

We also launched in relation with high speed our new ultra-compact gain block for 40 gigabit and 100 gigabit single channel amplifier. We also launched out of our Zurich lab, the next generation high power laser multi-emitter device that takes high power laser to 25 watts.

All these accomplishment illustrates our core competence at the chip level, chances that people are skilled and experienced. I'm quite proud of the engineer I meet when I travel. They really have great experience, and great field, and great dedication to make the company successful.

And as we continue our effort to better serve our customer, we received the Huawei Excellence Core Partner award, (inaudible). I think this is the best demonstration of our ability to serve customer is getting awards from those. And it is a great recognition for manufacturing and execution where we are doing everything that we can to combine flexibility and responsiveness, and also ability to resolve issues that our customers encounter at the last minute and price discounts and the best we can.

We also completed the transfer of most of our San Jose operations to Shenzhen which will improve the profitability of our PTS division as we have been discussing in the past. In term of the R&D market, our PTS division they have grown 17% from the December quarter over the September quarter, and that's the market where we are probably gaining the market share as we speak, we are quite excited about that.

So bottom-line, in the first few months, we lowered our adjusted EBITDA breakeven to about $53 million. And while we continue to provide good services to our customer and we continue to innovate, we see it measured by the number of design wins as we have been having recently. So that's quite an exciting position to be in, and as you know, it is in a downturn then you gain market share and make a real difference. I think we are very well positioned to do that.

And as we now, with our action we are a new company, we're even stronger, we expand our modulator footprint and therefore this shows it to our customer. We also bring to our amplifier capability, the best in class amplifier platform, these are the platforms from Avanex, best in class dispersion compensation and more as Giovanni explained to you.

So that’s going to be the ability to accelerate customer penetration and based on the current short-term timing and the execution of synergy, we expect, as I said before, to generate $20 million of total saving over the quarter of this first year, while we spend less than $7 million in that period for restructuring.

I believe this merger is a extremely exciting opportunity and I would be very happy to discuss it further with all of you but for the time being operator, could you open the line for questions. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And our first question is from the line of John Harmon with Needham & Company. Please go ahead.

John Harmon - Needham & Company

Hi, good afternoon.

Alain Couder

Good afternoon, John.

Giovanni Barbarossa

Hi, John.

Jerry Turin

Hi, John.

John Harmon - Needham & Company

You can hear me. A few questions please. I guess first of all regarding your optical amplifier, because I believe that Avanex is the market leader and has pretty good business as well. I mean I don't know if you want to talk about [split shares]. Do you anticipate any issues with the public venture regarding your entire market concentration in this area?

Alain Couder

No, we didn't expect any problem because we are complimentary in term of customers. Its only one product with one customer that we have in common and there we don't have a lot of competition. Therefore, we don't expect any issue as a result of that.

What we do expect is that the know-how and the technicality of the Bookham shift of funds and others that (inaudible) combined with the very flexible product platform from Avanex is going to be a huge competitive advantage, and that should (inaudible), Giovanni do you want to add something to that?

Giovanni Barbarossa

Absolutely, the combination is obviously compelling. But this kind of combination of the technologies, known as the (inaudible).

Operator

I am here, I lost you for a second. Pardon me this is the operator. Mr. Harmon, you have a lot of background noise coming from your line. While they are answering the questions, is there anyway you can mute your phone?

John Harmon - Needham & Company

No. I'm in a tradeshow, it's a noisy place. I can mute the phone for a second, but it will be -- I will turn it off outside. Thank you.

Alain Couder

Do we have another question operator?

Jerry Turin

Shall we move to the next question please?

John Harmon - Needham & Company

Sorry. I missed (inaudible). It's a bit noisy here. I apologize. My second question is, you talked about taking the best of both manufacturing approaches, Bookham (inaudible) and Avanex outsourced. Given that Avanex uses the right contract manufacturer, there is about 15% gross margin, wouldn't it make sense to integrate most of Avanex's products in Shenzhen? And would you have room for it, if you wanted that too?

Alain Couder

We will want to look at it on a case-by-case visit. My expectation is that we will be able to put some more in Shenzhen, when it makes sense from a (inaudible), but we will also be able to negotiate with FiberNet and others. And the fact that you have both to give you an ongoing benchmarking capability, which I think is extremely useful to get both, your internal team and your contract manufacturing to continue to improve.

So, I don't think we want to switch to one or the other. Like I said before in the past, I said when Shenzhen will be full, we will not build another Shenzhen, we'll start outsourcing. The new company is there already, so we will certainly keep a significant portion of our manufacturing outsourced.

Giovanni Barbarossa

Well, there is no doubt that both companies combined will have more leverage than on a standalone basis. So that's really key.

John Harmon - Needham & Company

Okay, thank you. And this maybe a quick one. Third, did any of your transponders use external modulators? It seems like you have two competing technologies in this area? Thank you.

Alain Couder

We can talk about two competing or two complementary technologies here. Some customer like to design with one technology. The indium phosphide allows a photonic integration. The lithium niobate allows for better performance. But Giovanni, you know that better than I do. Do you want to add something to that?

Giovanni Barbarossa

No, no. I think you said exactly the right word, which is the technology has been very complementary for the past, at least 15 years. In your first part, as improved performance at 10G and below, I think on 40G and above, there is definitely, especially for [spectro division], what we call the special tolerant applications, and high performance applications in general. I believe lithium niobate has a long way to go, and in terms of roadmaps, the two roadmaps we have to realign to each other to make sure that we catch the maximum amount of possible market with both technologies. So I don't believe that they are in competition, but there actually are very few logistic from that standpoint in catching the widest possible transmission component market application.

Operator

Thank you. Our next question comes from the line of Ajit Pai with Thomas Weisel Partners. Please go ahead.

Ajit Pai - Thomas Weisel Partners

Yeah, good afternoon.

Alain Couder

Good afternoon.

Ajit Pai - Thomas Weisel Partners

Couple of quick questions. I think the first one is just looking at your target operating model for the combined company, where you talk about the thoughtful quarter post close target, the gross margins, R&D, SG&A, etcetera, and then the long-term target.

Could you give us your expectation of what the combined revenue run-rate will be for achieving the fourth full quarter post growth target of 31% gross margins, 12% R&D, 12% SG&A, and then the 7% non-GAAP?

Alain Couder

Yeah, what I said -- about in the one element $10 million third quarter level which would be similar to what the past 12-months finishing last September would be. And right now, we expect the economy to recover in such a way that we can achieve that in the first full quarter. But maybe it will recover faster and we recover slower. If anybody has a crystal ball a year from now, let me know it.

Ajit Pai - Thomas Weisel Partners

Got it. So right now when you're just looking at your receivables, and I think you've talked something. I don't completely understand the deferred revenues. So I would love to have you walk us through it a little bit more. But when you're looking at the increase in receivables from your June quarter to your September quarter, it went from $45.7 million all the way up to 51.2. Now your receivables have fallen quite materially, much more than just your Nortel exposure, to about 33 million. So, I'm trying to understand what the driver of that is, because you only had about I think less than $5 million of open receivables to Nortel. So what really drove that sharp drop by the collections? How much of it is direct collection and how much of it is other write-off?

Jerry Turin

The big thing is even ignoring the Nortel deferral, our revenues went down 11 million quarter-to-quarter, so that has a direct impact on the receivable. So you have that up with the Nortel, and that's the big part of the change you're talking about. Otherwise, we had about $6 million of receivables in the last week of September that have been carried over and paid in the first week of October in this past quarter and we talked about that last quarterly call as well. So if you add up those three factors, you'll see how the change works.

Ajit Pai - Thomas Weisel Partners

Right. But there are no charge-offs other than Nortel in this particular quarter?

Jerry Turin

Just the specific items referred to in the call, Nortel and the contract manufacturer.

Ajit Pai - Thomas Weisel Partners

Got it. Okay

Giovanni Barbarossa

It's Nortel in particular.

Ajit Pai - Thomas Weisel Partners

Okay and then just from a pricing environment when you're looking across the board, you've watched this weakness both in the last quarter, your guidance for the next quarter also appears to be showing greater and greater softness in terms of end customer demand. So not necessarily looking for a forecast on when you're going to see the uptick. But would love to get two things, one is whether the pricing environment is deteriorating as demand drops, capacity utilization falls, both in your case as well as your competitors, as people try and to maintain share. And the second would be, in terms of geographies, any color that you can give us, as the Huawei business is much stronger than North American and European business? Any other trend that you can provide for us?

Alain Couder

I think in terms of geography, there is certainly more momentum we've got here outside of the US, like South America, India, China and so on. And this does reflect the [Indian] suppliers, mainly Huawei and Alcatel who are serving those markets, seems to be well positioned. But at the same time, I don't think we should discount the US suppliers also are seeing some momentum. Right now, like as Jerry said visibility in the March quarter will be the lowest quarter. So hopefully this will continue to be that way.

But clearly we have everything we need to preserve cash in this difficult environment and emerge with more market share. I mentioned all the design win in particular that we are getting at this point in time, and there is close cooperation, we have the R&D organization of our customer. I think this is absolutely unique. The win of two major customers in Japan, in all, where we've been fairly weak so far, is a very nice expansion of our footprint. So, it's not only a matter of market, I think you should look at our ability to gain market share and more customer as well.

Ajit Pai - Thomas Weisel Partners

Right. And pricing?

Alain Couder

Excuse me.

Ajit Pai - Thomas Weisel Partners

On the pricing front, have you watched any material deterioration in your ability to…?

Alain Couder

We have seen the usual price pressure and price decrease here. I don't think we have seen anything different from what I have seen in the past in terms of price pressure.

Ajit Pai - Thomas Weisel Partners

Okay. And then one broader question just in terms of the merger? Were you in discussions over the past couple of months with other parties in terms of potential mergers? And this applies to both companies. Like, is the industry preparing for a much further consolidation, did you get that feeling? And how long was this particular discussion, the one you had, that you've announced today. How long was it in serious progress?

Alain Couder

I'd tell you, that I have been only 18 months in this industry, and everybody is talking to everybody in this industry, COO's are having lunch with COO and other things. We talk to each other all the time. Very clearly in the recent months, Giovanni and I have been talking in detail and making sure that we would be able to make this merger successful, and you see today the result of it.

Ajit Pai - Thomas Weisel Partners

Got it. Thank you so much.

Operator

Thank you. (Operator Instructions). And our next question is from the line of Paul Bonenfant with Morgan Keegan. Please go ahead.

Paul Bonenfant - Morgan Keegan

Yes hi. Thank you. My first question is a housekeeping one. I'm wondering, if you could give us the breakdown between the telecom and non-telecom revenue? And in the past you've talked about tunables, I know you don't disclose it as a percentage of revenue, but if you could tell us whether it increased or decreased sequentially?

Jerry Turin

The non-telecom was 12.8 and the math from the revenues will give you the telecom, remainders to telecom.

Paul Bonenfant - Morgan Keegan

And the tunables?

Jerry Turin

The tunables, let me just…

Alain Couder

As you can see we are not as well prepared as we usually are, because we have been dealing with the merger. So, we have to use (inaudible), I'm sorry about that.

Jerry Turin

So it was about 15% of revenue of [telecom], about $8.3 million.

Paul Bonenfant - Morgan Keegan

Okay. And your guidance relative to the reported revenue of 50ish million is for sales down or sales flattish to down 14%, if I were to include the revenue, deferred revenue, it would be down 11% to 23% sequentially. And I am wondering if you could speak to whether that is broad-based or specific to one or two customers? I know you just talked about it in the context of geography, and maybe while answering that question you could update us. Last quarter you had talked about three North American customers bleeding down inventory, and whether that persists or has been corrected either in part or in whole?

Jerry Turin

I think it's fairly broad based within the telecom group. I think the non-telecom sector has been a little bit soft for a few quarters now. So, we don't see any additional softness in that business for us. But I can't really isolate the margins in telecom, I think its general softness. As far as the inventory adjustments, we see a little bit of that coming back in March but not appreciable, but we see more of that coming back in the June quarter which is one reason why we see at least for now March is the trough with June likely moving up but again that's framed within the broader economic conditions out there and limited visibility.

Paul Bonenfant - Morgan Keegan

Okay. And switching over to a couple of questions on the merger, did you talk about how that $7 million in synergies would be spread across COGS and OpEx?

Alain Couder

No we did not. And we do not intend to disclose that.

Jerry Turin

We've done our initial work trying to scope some of the potential savings out. But keep in mind that we're two separate companies and the final decisions can't be final, that's how -- the deal was closed and you are only one entity moving forward.

Paul Bonenfant - Morgan Keegan

Okay. I am just catching that. Some of that was either implicit/explicit in your targets, your long-term targets which seemed quite aggressive, relative to the current operating models, especially the long-term targets of 35% gross margin, 25% OpEx, 10% operating margin. I thought I heard you say that some of these assumptions were based on an annual run rate of $445 million or $110 million per quarter, based on year-to-date results since September. Obviously the conditions have deteriorated since then. What if the economy doesn't recover, do you have a [low rebound] for your expectations?

Jerry Turin

Well from a synergies point of view, that's not based on higher revenue, that's based on kind of the existing run rate. As far as achieving the 12-month target, clearly there is kind of a modest recovery built into that, but that's largely, synergies and execution. And as far as the long-term model, I think you have to look what historically each company has attained on its own, and think about the incremental contribution of the synergies of the companies above that to get to that long-term model. So clearly there is the synergy, clearly there is economic recovery, and clearly there is an assumption of revenue growth beyond that and getting into the long-term model.

Paul Bonenfant - Morgan Keegan

Okay. And one last question if I may, and maybe this for Giovanni, the deal seems to currently value Avanex at share price below cash, am I doing my math wrong?

Giovanni Barbarossa

I think that you've to work the contribution on Avanex.

Jerry Turin

Yeah Paul, I think that our cash (inaudible) market capital alone isn't much more than cash. So, I think you have to look at it. How we look at it is, it is a parent company, thinking about the contributions each bring in terms of historical results, pro forma results, respective results, mutual cash balance, and that's really what was based on. Really thinking about the core businesses and what each party brings to the table, rather than market caps, one of which is for low cash by far and large, which is just hovering around cash. Neither of which is really a normalized valuation by any degree.

Alain Couder

If we had agreed on market cap, we would have been renegotiating every week, because they were moving up and down for both and I think we have been [very slow], and that is each company contribution and that's how we came up with this price. I don't know, Giovanni you want to add something to that?

Giovanni Barbarossa

Yes. I think its actually a very good opportunity for Avanex shareholders to get back to the valuation that should be accretive to the company. This is what the market cap says today.

Alain Couder

Well, I know a few guys, investors, as a result of that we give as a multiple of this (inaudible) and not keep that in the penalty box. That's what we expect.

Paul Bonenfant - Morgan Keegan

Okay. Thank you for taking my question.

Jerry Turin

You're welcome.

Operator

Thank you. Our next question is from the line of Hamed Khorsand with BWS Financial. Please go ahead.

Hamed Khorsand - BWS Financial

Hi, I just wanted to get an understanding as to what are you seeing in the March quarter that you are suggesting that this might be a bottom in the guidance that you are providing?

Jerry Turin

One thing we see, which I mentioned I think in the previous response, is that our December quarter, well it was impacted by some inventory adjustment with three customers that we talked about last quarter. Some of that inventory correction comes back through in the June quarter. So asides from seeing March as a bottom, we see some upside in that and some continuing modest strength in non-telecom.

We don't necessarily see a broad economic recovery by any stretch, and certainly, there is limited visibility looking into that timeframe.

Hamed Khorsand - BWS Financial

Okay. And then also with this merger, does Alcatel get opt out of options on the Avanex contract, once the merger is complete?

Alain Couder

I don't think it is the right time to discuss this. If the deal will be approved, then we'll analyze that situation.

Hamed Khorsand - BWS Financial

Okay. And then, given that the scenario that is going on in the environment, what made you guys say okay, we should do the merger now? I just want to get to understand the timing of the merger, given that, we're just starting to see what's happening on the optical and comp equipment side right now because of the macro economic conditions.

Alain Couder

Now or later is always a question, I think that when we stop looking as if two company as they are today, the financial are very compelling in term of getting the two companies together now. Why should we wait to know well, we can do it now in a very efficient way.

So, I am always of the idea that when you can make a decision today, you just do it and execute, then you can move to the next step. And I think this is provisioning that you're running and has done. We have discussed this in detail with the two management team and we got convinced that we can exceed in doing this merger. You want to add?

Giovanni Barbarossa

No absolutely. I thought the question was why we didn't do it yesterday. I mean the reality is that the synergies are very evident and especially in this market conditions that's the best way to preserve our cash. And that's a very compelling reason to merge now, and also keep spending money, choosing same customers and so forth, especially with the duplicate sales forces, and duplicate financial teams, and duplicate Board, and so forth. I mean we just had to synergize and save the cash and return the best possible investment to our shareholders.

Jerry Turin

And I think that the same is true in any market, in the strong market, in the recovering market, and the market is still going soft to deal with that companies together are stronger than individually, timing aside, we think it's a deal that makes sense.

Hamed Khorsand - BWS Financial

Okay. Just next question, do you guys have a target date as to when this merger would be complete?

Jerry Turin

Yeah, I think we are thinking three to five months. There is the function of regulatory review processes, SEC reviews if any, and we have to get through that process to understand exactly what the timeframe looks like, but we're certainly moving right into the next phase of that process.

Giovanni Barbarossa

The only thing we know is that we have no antitrust review, so that’s going [faster and going fast], but the faster we can go, the faster we will do it.

Hamed Khorsand - BWS Financial

Okay. Thank you.

Operator

Thank you. Our next question is from the line of Russ Piazza with Front Street Capital Management. Please go ahead.

Russ Piazza - Front Street Capital Management

Yes, gentlemen. I was wondering how much of the potential cost savings that you had talked about with outsourcing/in-sourcing is built in for the $28 million that you had described earlier?

Alain Couder

Really very little if any is built in. From an operational side of it, there is some supply chain synergies and there is some modest assumptions, but there is no significant assumption with our dramatic movements of products or dramatic improvements in leverage, and we think that's more of an operation, execution up side as opposed to the automatic synergy that come from just doing the deal with us.

Alain Couder

I think, this right through we will be working on here, between the announcement and closure. As we now, can talk openly to our people and to having yet another we will get, the much better year, of what we can get. So we are being fairly conservative so far.

Russ Piazza – Front Street Capital Management

Great, thank you so much. And I [recall to] all of your efforts there. Thank you.

Jerry Turin

Thanks to you.

Operator

Thank you. At this time, we have no further questions. I would like to turn it back to Alain for any closing remarks.

Alain Couder

No, I have no more specific remarks except to say we are both very excited and Giovanni I am not sure, you want to add something to that. The two management team get to work together and so this we know we can close, we know we can make it happen. Thank you for your participation. Thank you.

Jim Fanucchi

Thank you.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude our conference for this afternoon. Thank you very much for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!