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Finisar (NASDAQ:FNSR)

Q3 2013 Earnings Call

March 07, 2013 5:00 pm ET

Executives

Jerry S. Rawls - Chairman of The Board and Co-Principal Executive Officer

Kurt Adzema - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Eitan Gertel - Chief Executive Officer and Director

Analysts

Alexander B. Henderson - Needham & Company, LLC, Research Division

Natarajan Subrahmanyan - The Juda Group, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Kent Schofield - Goldman Sachs Group Inc., Research Division

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

William H. Choi - Janney Montgomery Scott LLC, Research Division

Ehud A. Gelblum - Morgan Stanley, Research Division

Troy D. Jensen - Piper Jaffray Companies, Research Division

Tyler Radke - Lazard Capital Markets LLC, Research Division

Kevin J. Dennean - Citigroup Inc, Research Division

Dave Kang - B. Riley & Co., LLC, Research Division

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good afternoon, ladies and gentlemen, and welcome to the Finisar Corporation Announces Third Quarter Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Mr. Jerry Rawls, Executive Chairman of the Board. Please go ahead, sir.

Jerry S. Rawls

Thank you, Deanna. And good afternoon, everyone. We appreciate your taking the time to listen to our conference call today. A replay of this call should appear on our website within 8 hours. An audio replay will be available for 2 weeks by calling area code (888) 203-1112 for domestic or area code (719) 457-0820 for international. Then enter the ID number 7734918. I need to remind all of you that any forward-looking statements in today's discussion are subject to risks and uncertainties, which are discussed at length in our annual and quarterly SEC filings. Actual events and results can differ materially from any forward-looking statements. In addition, unless otherwise indicated, all results discussed today are on a non-GAAP basis. A complete reconciliation of our GAAP to non-GAAP results may be found in our earnings press release and in the Investor Relations section of our website.

I, would like to point out that we have prepared some slides for today's earnings call, which you can access by connecting to the Investor Relations page of our website at www.finisar.com. Click on Investors, then scroll down and click on Webcast Archives. You will then see a listing for today's third quarter 2013 earnings call.

I am pleased to report that our revenues for the fiscal third quarter were $238.4 million, which is $6.3 million or 2.7% greater than the prior quarter. Our growth in revenues came primarily from increased sales of 10-gigabit and 100-gigabit per second ethernet transceivers for data communication applications. Non-GAAP operating income increased $1.5 million or 9.7%, and non-GAAP earnings per diluted share increased to $0.17 a share from $0.15 in the prior quarter.

And now I'll let Kurt review the rest of the numbers. Kurt?

Kurt Adzema

Thanks, Jerry. For the third fiscal quarter, our revenues were $238.4 million, an increase of $6.3 million, or 2.7%, from $232 million in the preceding quarter. Revenue for products for data communications was $147.7 million, an increase of $7.8 million or, 5.6%, from Q2, primarily driven by growth in 10 gig and 100 gig. Revenue for telecom products was $90.7 million, a decrease of $1.5 million or, 1.6%, from Q2.

In the third quarter, we had one 10% or greater customer. Our top 10 customers represented 54.9% of total revenues compared to 56.4% in the preceding quarter. Non-GAAP gross margin was 30.7% compared to 30.5% in the preceding quarter, primarily due to higher revenue levels, partially offset by the impact of 1 month of telecom price reductions, which typically took effect on January 1.

Non-GAAP operating expenses for the third quarter were $55.8 million, an increase of $1 million over the prior quarter, primarily driven by higher research and development costs.

Third quarter non-GAAP operating income increased $1.5 million to $17.4 million or 7.3% of revenues compared to $15.8 million or 6.8% of revenues as we controlled operating expenses and revenue levels increased.

Third quarter net interest expense was approximately $314,000. Other income was approximately $93,000. And the adjustment for net loss of a noncontrolling interest was a positive $280,000. And non-GAAP taxes were approximately $1 million.

Non-GAAP income was $16.4 million or $0.17 per diluted share compared to $14.2 million or $0.15 per diluted share in the preceding quarter. Average diluted shares for the third quarter for non-GAAP purposes totaled 99.1 million and includes the impact of converting the principal amount of our outstanding convertible notes to equity for the purposes of calculating EPS. Therefore, you need to add back up $539,000 of interest expense and other costs associated with the aforementioned convertible notes to calculate diluted EPS.

The sum of net interest, other expenses and the adjustment for net income or loss of a noncontrolling interest is expected to be a deduction of approximately $400,000 to income in our fiscal fourth quarter. Non-GAAP taxes are estimated at approximately 5.5%, for -- of non-GAAP pretax income for fiscal fourth quarter and 5.5% for fiscal 2014. In the fourth quarter, weighted average fully diluted shares are expected to be approximately 99.4 million for non-GAAP purposes. Non-GAAP EBITDA increased $2.4 million to $31.1 million or 13.1% of revenues compared to $28.7 million or 12.4% of revenues in the preceding quarter.

Third quarter capital expenditures totaled $32 million, primarily driven by the new building in Wuxi, China. Capital expenditures are expected to be approximately $32 million again in Q4, primarily driven by the new building.

Cash and cash equivalents totaled $265.5 million at the end of the third quarter compared to $262.4 million at the end of the preceding quarter. At the end of the quarter, Finisar had approximately $40 million in principal amount of convertible notes outstanding with a conversion price of $10.675 per share.

There are a number of noncash or infrequently occurring charges, which were excluded from our non-GAAP results. These totaled $24.1 million last quarter. If you include these items, as required under GAAP, we generated a net loss for the third quarter of approximately $3.4 million or $0.04 per diluted share compared to net income of $0.3 million or $0.00 per diluted share in the preceding quarter.

That concludes my comments. I'll turn it over to Eitan.

Eitan Gertel

Thanks, Kurt. During the quarter, we continued to invest significantly in new technology and products, especially in the high-bandwidth products for 40 Gig and above. For the telecom market, we shipped a number of our new 100 gigabit per second coherent line-side transponders. All the customer feedback has been very positive, we continued to win new customers and are ramping our capacitors -- our capacity, sorry, to meet demand.

We continue to invest in the development of next-generation wavelength selective switches that are smaller, lower power and higher performance. Finisar has the broadest offering of Flexgrid WSS product in the industry, which enables the service provider to deploy next-generation optical networks. We continue to make good progress in our previously won ROADM line cards project, as well as engaged in a number of new line card opportunities. All our line cards use our LCoS, WSS Flexgrid optical channel monitors and optical amplifier technologies.

For the datacom markets, our newest parallel products in the QSFP CXP and proprietary form factors are seeing very strong traction to the market. We are very excited about our optical engine, which is an extremely small, low-power device but is being designed into routers, switches, transport servers and supercomputing applications. Currently, we are primarily shipping 10 gigabits per second per channel devices. But expect shortly to begin shipping 25 gigabits per second per channel devices.

The optical engine technology will enable our customers to have over 300 gigabits of bandwidth for these applications.

The newest small form factor in short and long reach applications for 100 gig clients is the CFP2, which offers higher density and lower power consumption than the CFP form factor. We continue to ship initial quantities over CFP2 to customers, and we believe that our CFP2 devices have the lowest power consumption in the industry. This power efficiency was enabled by Finisar internally developed 100G transmitter and receiver technology.

Finisar will have a major presence in the Optical Fiber Conference the week of March 18 in Anaheim. We will have several new product announcements during that week.

Now I'll turn the call back to Jerry for final comments.

Jerry S. Rawls

Thanks, Eitan. I'm pleased to report that for our upcoming fourth quarter, we expect revenues to grow for the third consecutive quarter. We believe revenues for our fiscal fourth quarter will be in the range of $235 million to $250 million. Non-GAAP gross margins are expected to decline slightly to approximately 30.5%. This will be the result of 3 months of reduced telecom prices. The higher revenues in the fourth quarter will partially mitigate the impact of the lower telecom prices.

We expect fiscal Q4 operating expenses to be approximately $56.8 million, and non-GAAP operating margin to be approximately 7%.

Non-GAAP earnings per diluted share should be in the range of $0.15 to $0.19 a share.

Now I would remind you that Finisar is a company that is driven primarily by growth in demand for bandwidth by enterprises and service providers. A demand for bandwidth is projected to grow virtually forever from the pervasive distribution and creative use of video, photos and digital information. Bandwidth is enabling for many online apps. Over time, carrier spending must increase to provide more bandwidth capacity. Finisar is uniquely positioned with our broad product line, extensive customer engagements, profitable vertically integrated business model and strong balance sheet to capitalize on this market opportunity.

Now I'm going to turn it back over to Deanna, and open it up for questions. Deanna?

Question-and-Answer Session

Operator

[Operator Instructions]

We'll hear first from Alex Henderson with Needham & Company.

Alexander B. Henderson - Needham & Company, LLC, Research Division

So the first thing I'd like to ask is just a simple one, which is, can you give us some sense of the general direction of the wave selective switch and line card business? I know that telecom was down. But can you tell us whether the -- that portion of your business, has your ramping those line cards is bucking that trend or not?

Eitan Gertel

I think the last quarter, compared quarter-over-quarter, we were pretty flat quarter-over-quarter.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Right. And the second one is actually something that I was expecting to hear on the call, which is there's been a lot of discussion around silicon photonics. Obviously, some people think that this is a negative development for the datacom portion of your business that's where you're seeing a lot of your strength. Can you address how you see silicon photonics and whether you think there's a material meaningful difference between your monolithic circuitry technology and what silicon photonics can do in terms of the size, cost and power parameters?

Jerry S. Rawls

Alex, I don't think so much about technology as we --as I think about products. And as a company, we provide solutions for our customers.

And in the enterprise world, we've got them at speeds everything from 1-gigabit to 100-gigabits. We use indium phosphide, gallium arsenide, CMOS, silicon germanium, any technology that is available that provides the economics and the performance that satisfies our customers. And all these technologies are available to us through foundries or through our own factories. Now with respect to silicon photonics, it is an interesting technology, but it is one that we haven't used so far in our products because it wasn't economical or it didn't provide competitive performance. The question is in the future, will we use silicon photonics in our product? And the answer is maybe. We are absolutely agnostic when it comes to technology. We'll use whatever makes sense for our customers. And there may be a time when we can't directly modulate a laser or we can't provide some property that we can only get through silicon photonics, whether it's packaging density or really just performance. And if that time comes, we will use one of the multiple foundries that produce and sell custom silicon photonic circuits, and there's at least a half a dozen of them today. So I don't -- I don't think silicon photonics -- I don't look at it as a threat. I just look at it is another technology that we will likely eventually use in our product, but just haven't found yet that it was -- that it provided the right solution.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Well, with all due respect, since there's obviously a concern that Cisco might be of developing their own products in this area, can you at least address to what extent you think that this CPAC product is at risk -- a risk factor for you and whether the CFP4 form factor is competitive on a cost basis and the like? Because clearly, this is -- I mean, it's impacted your stock substantially as this has been thrown around out on the field. So can you at least address that issue?

Jerry S. Rawls

Well, I think -- for example, in the OFC trade show that's going to come up in a couple of weeks, you're going to see CFP2 transceivers from Finisar, 100-gigabits per second. They are -- they can be an architecture on a 19-inch blade, can handle 8 of those or 10 of those, which I think is exactly the number that is advertised for the CPAC. And the power consumption for our device is less than 7 watts. I think that's also more than competitive with what we've seen in public statements. So I don't know that it's not competitive literally right now. The offerings that we have using what we would view as traditional technology that is direct modulated lasers, free space optics with a silicon photonics solutions. So I don't -- I think that there's been a lot of gross exaggeration about the "threat" of silicon photonics. And I don't think it's -- I don't think it's net positive for us that our -- a large customer would choose to go and make their own optical transceivers. That's -- it can't be positive. But I don't -- we don't yet know what the impact of that is going to be. And it's beyond the scope of this call for us to try to predict that.

Operator

We'll take our next question from Subu Subrahmanyan with The Juda Group.

Natarajan Subrahmanyan - The Juda Group, Research Division

Jerry, could you talk about -- when you look at the April quarter whether which unit drives revenues? Is it telecom, datacom, both? And if you look at telecom last quarter, I think you'd expected growth in both telecom and datacom. Telecom was down. So can you talk about what did not play out as you had hoped on the telecom side?

Jerry S. Rawls

Well, it was close. Our telecom revenues were just down a smidgen. And -- but it didn't -- we expected to get growth sort of across-the-board in our telecom product lines. We had strong growth in our tunable XFP, but we didn't get quite the strength or the bounce back that we expected to get in sort of the other telecom product offerings. But needless to say, our Enterprise offerings were quite strong in the quarter. In the fourth quarter, we expect again to see -- this time, we expect to see telecom to be either flat or down a little, and we expect to see growth in the datacom sector.

Natarajan Subrahmanyan - The Juda Group, Research Division

Got it. And if you look at kind of the overall bigger picture trends correlating with CapEx some of the a positive commentary from the optical system vendors, including in Sienna today, how do you view kind of the telecom trend through the course of the year especially, you expect down again in April. Do you think that's some sort of a base for growth on there?

Jerry S. Rawls

That one's hard for us to predict. I'm going to let Eitan talk about that one.

Eitan Gertel

I think in general, I mean people talk for a while about improvement in telecom. One thing you have to remember in our telecom numbers is that our results included the 1 month of price reduction and next quarter when we talk about flat to telecom quarter-over-quarter, it concludes 2 additional months of telecom pricing reduction. But overall, in telecom industry, I mean, we're expecting a recovery to come. We just can't point to the exact quarter when it happens. So a lot of people talk about second half of the year. Some people talk about even further. But we wait and see before we try to guide to it. So I would say that as far as the number of products and are we ready for a ramp to happen, I would say we are more ready than we have ever been. So we'll wait for that to happen.

Natarajan Subrahmanyan - The Juda Group, Research Division

If I could just clarify, Eitan, is it your customers who are saying it's kind of second half of the year for an improvement, for telecom?

Eitan Gertel

There are some people who are pointing to that and some other point to the beginning of next year. I don't think they exactly know.

Operator

We'll take our next question from Mark Sue with RBC Capital Markets.

Mark Sue - RBC Capital Markets, LLC, Research Division

So on telecom, does the pace that you're booking from some of your largest customers and some of the projects that we're looking at, does that potentially indicate an upturn in terms of what they're relaying to you over the near term? Or does that still feel somewhat nebulous in terms of that segment of the business and in terms of just your order activity and where inventories are out there, if you could just address that, that would be helpful. And then just on the point on Cisco, what would be the incentive for Cisco to make their own components for just internal consumption? Is that just because customization or is it because of pricing that they can't get from their suppliers? And how do you ensure that others don't follow Cisco, that you can actually continue to drive your share across a broad range of customers?

Eitan Gertel

I'll say -- first of all, if you look at where the telecom is, we don't believe that there's significant inventory out there that is causing us issues. It's overall operating companies or service companies' demand, and there's a lot of new products that we are ramping at the same time when you look at our revenues. So I would say we are participating in all the good news you're hearing, but I think telecom as a whole have not started upgrading across-the-board. And when that happen, like we said, we feel that we are more ready for that from a market share point of view and from a product point of view and capacity than we have ever been. As far as the next question, we cannot comment on our customers. I mean, it's going to be -- our customers, they don't want us -- they don't like us to talk about them, and it's hard for us to comment on specific customers. But I think if you look at us as a whole in the history of the company, we are the largest company delivering optical solutions in transport equipment to our customers, and we are advancing a technology at the rate which we enable our customers to win. And as long as we keep producing the service this way, we believe we're going to keep growing and enable our customers to do what they need to do without a need to develop internal capacity.

Mark Sue - RBC Capital Markets, LLC, Research Division

My thoughts on inventories is that I agree with you that the inventories are actually at low levels. Does that actually give you a springboard in terms of at least replenishing that? Just any thoughts of what indications might be from a lot of these vendors who are now at low inventory levels.

Eitan Gertel

A lot of our business -- first of all, if you look at the datacom, majority of our business by far is customer managed inventory. More and more of our business over telecom is basically Vendor Managed Inventory, sorry -- Both businesses and the growth of that share in the telecom business. And basically, we see -- as they need product, they order product. So we don't think there's any of those inventories -- nobody has complained to us about inventory in a meaningful way. So we don't think that problem exists in the market at this point.

Operator

We'll take our next question from Kent Schofield with Goldman Sachs.

Kent Schofield - Goldman Sachs Group Inc., Research Division

If -- could you characterize the telecom price reductions that you guys have ended up seeing? I think you were talking about the higher end of the range. And then on the datacom side of things, for the 10 gig and the 100 gig transceiver and transponders, the strength you saw, could you talk about the use cases that you're seeing and how we should think about that -- those going forward?

Jerry S. Rawls

Well, we said earlier that our telecom price reductions or the negotiated prices for 2013 were at the higher end of our normal range, which is 10% to 15%. So they're closer to 15% than they are to 10%, and we would always hope that they would be lower but that's life. It's a competitive world. With respect to 10 gig and 100 gig in the data centers, 10 gigabit Ethernet is the workhorse of data centers. It is big volume everywhere. It is the biggest applications are in switching, and it is very broad-based. The 100-gigabit Ethernet, the biggest applications there, our for router connections and router to router connections.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

We'll hear next from Simon Leopold with Raymond James.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

A couple of things I wanted to check on. One was we're hearing some rumblings about China improving as a market for optical. And I wanted to get your perspective on the market opportunity in particular, and then some perspective in terms of what it typically means or has meant to your business as a percent of sales. And then I've got a follow-up after that.

Kurt Adzema

Sure. I think in general, we haven't seen a big uptick in China. Obviously, it represents a big opportunity for us as it has in the past. But at this point, we haven't seen that. I think that's consistent with the general comments about telecom. What was your second question?

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

And then the next thing I wanted to ask about was whether or not you're seeing an impact on your gross margin coming from wage pressure and not just the price pressure that you discussed, whether there's some dynamic going on, on that side of the equation.

Kurt Adzema

This is wage pressure for our workers or wage pressure for our customer's workers?

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

For your, your employees, particularly outside the U.S.

Kurt Adzema

Well, obviously, wages outside of the U.S. are growing at a much faster rate than they are in the U.S. but on a relative basis, the cost of obviously, doing something in Asia is still dramatically cheaper than it is in the U.S. So -- and labor is a relatively small part of our overall cost. Material is obviously, a much bigger component.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Okay. And then I -- and just the let last part of it this is in terms of the vertical integration trend, there's been a lot of focus on Cisco. Are you seeing this aspect coming from your other meaningful customers that represents a headwind or you're not worried about vertical integration from the likes of Huawei or Alcatel-Lucent?

Jerry S. Rawls

Well, Huawei has for the last 7 years plus, been involved in optical componentry or optical -- building their optical line cards, building -- in some sense, their optical subsystems. So I would say they're vertically-integrated. But we don't see any other new entrants in that space starting to focus on the development of internal optical components. I think that it's a specialized industry. It takes highly educated people, very special skills, special processing, special factory conditions, to process optics and to produce optical devices. I don't think it's one of the core strengths that most of our customers want to invest in. They mostly see themselves in the software business, systems business, ASIC business. But I think optics are generally not core to most of our customers. Though optics are important to their end customers because that's what connects their boxes. So -- but we're not -- right now, we're not seeing any other trend in that direction.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

And one last one, please. Do you see some opportunities emerging or developing for, let's say, non-OEM customers basically end users, large data center implementations, things like that?

Jerry S. Rawls

We have about 10% of our sales through distribution. And some part of those sales go to large data centers. Some go to small data centers around the world. So there is -- there is a reasonable percentage of our sales that are to the operators of data centers.

Operator

And we'll take our next question from Bill Choi with Janney Capital Markets.

William H. Choi - Janney Montgomery Scott LLC, Research Division

About the other 1/2 of that silicon photonics discussions is actually a new emerging opportunity for short-range optics. And I know you briefly mentioned optical engine, I know you just wanted to see what kind of revenue or trajectory you could talk about for this product and the market opportunity overall and how this would compare against a photonics technology that is -- seems like primarily aimed at this market at this time?

Jerry S. Rawls

I don't -- I don't think there's a technology that's in the market at this time. We've seen a lot of discussions about technology demonstrations that might yield products in the next decade. But not -- most of them aren't in the market at this

time, and there's clearly not much productization or commercialization. Our optical engine, we think is empowering for a number of our customers, and we think it is a market that is measured in tens of millions of dollars per quarter. So it's -- for us, it's a very, very attractive market segment.

William H. Choi - Janney Montgomery Scott LLC, Research Division

But can you discuss what the price points of that product would be currently versus maybe your other solutions like SR10? This is a Vixel based technology obviously, very short reach but maybe some kind of characterization of how small, how low power consumption it might be?

Jerry S. Rawls

Well, the important -- importantly, the power consumption, if you think about it on a per gigabit basis, the power consumption will be lower from optical engines. The overall cost per gigabit will be lower because the aggregate speeds are hundreds of gigabits. And I think the opportunity for the density of gigabits per square inch coming out of the faceplate on customer systems, I think is -- the density will be greater with optical engine solutions than with discrete transceivers. So I think there's a very bright future for these optical engine solutions.

William H. Choi - Janney Montgomery Scott LLC, Research Division

Okay. And any specific timing on when you could reach the tens of millions of dollars per quarter?

Jerry S. Rawls

I don't -- 2014, I would, for sure, there will be a quarter in calendar year 2014 when we will reach that level. And it's possible we'll reach it before that.

William H. Choi - Janney Montgomery Scott LLC, Research Division

Okay. Moving on to just another topic. Looking at the outperformance in the datacom and then again, a strong guidance for datacom performance next quarter, can you talk about where you're getting that sequential growth? CFP sounded like it was an area of strength this quarter. Would you expect that form factor to be up again even as CFP2 comes in? Just a little more color about products driving the sequential growth from Q3.

Jerry S. Rawls

Well, 100-gigabit CFP was strong in the quarter. But I mean, actually the strongest was our 10-gigabit SFP offerings. So I do believe that CFP will remain strong. I do think that CFP2 eventually will replace it because it is lower power. It will be lower cost and it has much higher density. And while I don't -- and CFP2, as Eitan mentioned in the presentation, we are -- we have been shipping to customers now for, gee, about a quarter. Our first of CFP2s and if you'd come to the OFC conference, you'll see in the Ethernet alliance booth, you'll see the connections of CFP2s to CFPs from various systems suppliers, the boxes, demonstrating the interoperability. It will be an interesting display.

Operator

We'll take our next question from Ehud Gelblum from Morgan Stanley.

Ehud A. Gelblum - Morgan Stanley, Research Division

Going back to the comments you made about telecom, I understand that there was a 1 month price decline, and that you seem to be a little bit out of sync with the rest of the industry, where other people are looking at it more from a lower end of their usual historical price declines. And you've seen you've gotten it from the higher-end. But I'm still a little confused about that. But you did say that ROADMs were flat in that, Jerry? Was that a price thing or because of the price declines or unit-wise were they flattened? So why was that -- I kind of looked at you as being a share taker on ROADMs and WSSs. Do you still think you are? And are you gaining share there going forward or should we look at it kind of flat over the next couple of quarters as well?

Eitan Gertel

Our ROADMs were roughly flat in revenue. Yes, there was some obviously, as far as telecom, so there was some price reduction, which was implemented for at least one month of the quarter.

And yes, we are growing our market share in ROADMs. We are shipping to new customers, which we did not ship before, and we're shipping more newer products. So continue to look at us as gaining share in our market with our products.

Ehud A. Gelblum - Morgan Stanley, Research Division

Do you think you grew share last quarter, when you look at [indiscernible] number?

Eitan Gertel

I would think -- I think the way our shipment -- we shipped in new customers, which we haven't shipped in the prior quarters. So I said maybe the answer is yes.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. So you think everyone else is probably down in ROADMs? We don't have the exact number because you have an off-quarter as well by a month, so we're always comparing apples to oranges?

Eitan Gertel

I don't know how others were. It's tough for me to compare, but I think -- I mean, what I can say is we shipped to new slots and we start ramping in those new slots and there are some of other customers we had which had some softness or -- and if you figure all that in with the price reduction, that's where we are. But continue to look forward if that -- our share will continue to grow.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. What about on the tunables side? Can you give a comment as to how tunables were?

Eitan Gertel

Tunables were -- they grew significantly within the quarter. And we -- although usually, historically first calendar quarter in the period, telecom is relatively soft. What we see that has continued to grow during the year. But that was a strong growth quarter for tunable XFP.

Jerry S. Rawls

Yes, tunable XFP was up roughly 30% in the quarter over the previous quarter.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. Can you give us a sense as to how -- just on the telecom side how large that is now? Can you tell if that's like 5% of telecom or that's not even close?

Kurt Adzema

We're not disclosing that amount.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. Can you give us a sense in the 100G? You're probably not going to tell me you're not disclosing it again also. But on the 100 gig, can you give us a sense as to how big the CFP to CFP2 part is? Is that in the 5% range? In the 10% range?

Jerry S. Rawls

It's closer to 10% than it is to 5%.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. That's helpful. As you go back and you -- so the price declines that you said, Jerry, you hinted that they were -- you've negotiated this before and they were finished. Were your price negotiations all taken care off in December or were they taken care off back when you had in your last earnings report, so was it back in October, November and that was done already?

Kurt Adzema

Our last earnings report was in December.

Ehud A. Gelblum - Morgan Stanley, Research Division

Right. And going into that, there are -- all your price negotiations were 100% finished and nothing was still on the table to be done?

Kurt Adzema

I'd say the vast majority of the stuff was done at that point.

Ehud A. Gelblum - Morgan Stanley, Research Division

And as you talked to your customers, is there any sense that there is an opportunity to be a little bit more aggressive on your side? Obviously, you can't raise prices but you can always kind of finagle things. And do you feel that the shoe is a little bit going more onto your foot or theirs? Or is it still they give price decline and you just stay fine?

Jerry S. Rawls

Our customers listen to these calls. And so we're not about to go talk about how aggressive we're going to be on our pricing or -- any of this -- that sort of stuff. I mean, I guess, the answer is we try to be competitive. We supply products that we think are best in performance and the prices, the prices are determined a lot by value to the customer and by what the competitive pressures are.

Ehud A. Gelblum - Morgan Stanley, Research Division

In that case if they're listening, let me just tell them that they should ease up on you guys because there's just some good value here. 16-gig Fibre Channel. Has that been slow and has that picked up -- that was slow to ramp in a couple of customers that actually might start picking up as we go into 2013. Is that an area that you're looking to help boost datacom?

Jerry S. Rawls

Yes. 16-gig Fibre channel ramped early with the switch manufacturers. And that is pretty typical of the Fibre channel industry. The switch manufacturers introduced 16-gig switches in advance of the storage systems, in advance of servers or any other of the devices that go into SAN that have I/O ports. But the nice thing about this year is that virtually all of the big systems manufacturers that sell SAN equipment are now coming out with 16-gig I/O. So we expect that, that will increase not only the demand for NCAR or hPas at 16-gig, transceivers for systems at 16-gig but also an additional demand for 16-gig switches. So we think that's going to be a good market in this next fiscal year for us.

Ehud A. Gelblum - Morgan Stanley, Research Division

And are you worried -- and Jerry, as you talked a lot about getting into datacom, is this an area that they are getting into or you have increasing competition or is this an area where there's still not much competition?

Jerry S. Rawls

We always have competition. Every product -- I mean, almost every product we sell in every large market like this is quite competitive. So I don't -- we don't kid ourselves about that.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. Finally, on the CapEx side, you'd said you spent $32 million in the building or a total CapEx most of which I guess went to the building on a large part in Wuxi.

Jerry S. Rawls

No, no. Actually 25% went into the building.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. And the same amount next quarter?

Kurt Adzema

Maybe, yes, but around that.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay, part of the question how long does that -- when are you finished with the building and...

Jerry S. Rawls

We're going to move in the building, supposed to move in at the end of June of this year and that's when the move in starts, the building is supposed to be complete. So we're on schedule, we're on track, we're on budget, it's a good project so far. Very exciting prospects for us to be able to integrate all of our manufacturing in China into one building. And so it's -- but it's -- and we would expect that after this next quarters, CapEx that we spent on the building that following that, we think the CapEx numbers will fall off.

Ehud A. Gelblum - Morgan Stanley, Research Division

One more quarter to April quarter. So after the April quarter it falls off or after the...

Kurt Adzema

I think it will be less in the following quarter, but there will be still some associated with the building in the following quarter and I would say we'll get to a more normalized CapEx rate by the end of the year.

Operator

[Operator Instructions] We'll hear next from Troy Jensen with Piper Jaffray.

Troy D. Jensen - Piper Jaffray Companies, Research Division

So how about on the tunables? Were they capacity-constrained throughout the quarter?

Eitan Gertel

We actually raised capacity all along the quarter. So we actually were able to accommodate significant growth. So I would say by the end of the quarter, we were not capacity-constrained.

Troy D. Jensen - Piper Jaffray Companies, Research Division

And what amount of capacity are you planning on to add maybe this quarter or next in the tunable business? Is it consistently going to be adding kind of 20% per quarter or just help us out there.

Eitan Gertel

I think we got to a point where we can add 20%, 25% in the quarter if we need to. So from the fab plays -- from our fab area, we're pretty predictable and confident that we can raise what we need. But now it depends on market demand, how we do this here.

Troy D. Jensen - Piper Jaffray Companies, Research Division

And how about the same question on the 100G Ethernet stuff, kind of what rates are you adding capacity?

Eitan Gertel

I think our capacity right now caught up with our -- pretty much caught up with our demand. We are where we need today.

Troy D. Jensen - Piper Jaffray Companies, Research Division

You have more headroom to grow the [indiscernible]

Jerry S. Rawls

Remember, we transferred the manufacturing of our 100 gig Ethernet products from Sunnyvale to Malaysia. So in Malaysia, it's much easier -- it's easier for us to ramp capacity because we can operate 24/7 in a factory over there, where it's more difficult for us to do that here.

Troy D. Jensen - Piper Jaffray Companies, Research Division

Okay. Shifting gears to CFP2, CFP4, so CFP2 shipping to customers now. Can you talk about design cycles, Eitan? I mean, how long does it take them to get the product and design it into system and start selling it? Is it 6 to 12 month range? Or just help us out, when do you expect to see more revenues from CFP2s?

Eitan Gertel

I think the CFP2s will ramp for more production is towards the end of this calendar year. I mean, we have to complete -- we are shipping in the beta type product to our customers. They have to finish qualifications on in those systems so it's more meaningful towards the end of this calendar year for full GA for our customers.

Jerry S. Rawls

But we do have customers who are designing CFP2 blades right now to go into systems that will be introduced this year.

Troy D. Jensen - Piper Jaffray Companies, Research Division

Okay. That's good to know. And how about one for Kurt here? Now that things have stabilized a little bit, you're seeing a little bit better growth, have you thought about business model targets, helping us out with what revenue levels you need to hit x types of operating margins?

Kurt Adzema

We'll consider after the end of this fiscal year putting out a model come next earnings call assuming things get -- continued to stabilize and grow.

Operator

We'll take our next question from Ian Ing from Lazard Capital Markets.

Tyler Radke - Lazard Capital Markets LLC, Research Division

This is actually Tyler Radke for Ian. Just had a question on datacom exposure. It sounds like you've seen some nice growth there. Can we get your view kind of where you see the large data center deployment coming in the next quarter? And then I guess a follow-up to that would be what products would you see yourselves spending -- benefiting from these?

Jerry S. Rawls

Well, large data center deployments generally are 10 gigabit connections and above. And we will see -- in data centers a lot of 10 gigabits and at the high-end, the 40 gigabits, the QSFP products. I -- and do we see that the mega-data centers are going to continue to be built? And the answer is yes. Data centers keep getting larger. The connections get -- keep getting longer across data centers. But the mix of connections and data centers hasn't changed a lot in that -- something like 80% or 90% of all the connections are 100 meters or less and maybe it's 80% of the connections are 20 or 30 meters or less. So there -- the volume is really not in long-distance connections. The volume is in relatively short, shorter connections. But the speeds are really high now.

Tyler Radke - Lazard Capital Markets LLC, Research Division

All right. That's helpful. And then if you think about your exposure on wireless LTE deployed, can you just walk us through where you see -- I'm not sure you think about this as the back haul remote RF card opportunity and then just how we should think about that in terms of percentage of sales?

Jerry S. Rawls

Wireless for us is an interesting opportunity that is -- that is today most -- I would say the biggest impact for us is in China. We had lots of wireless return path and lots of new LTE antenna instruction -- installations where the optics, our fiber goes right to the top of the antenna as opposed to having power amps at the antenna that drives signal's down, coax cables to that base station at the base of the antenna. Now we've got fiber to the top to the antenna and the base station can now be located a mile away, 2 miles away and you can aggregate multiple antennas into a single base station for multiplexing back to a central office. So lots of optics are now appearing in wireless. And I think it's an -- it's an interesting area for us. The speeds are generally between 6 gigabits per second and 10 gigabits per second. Distances are typically anywhere from 500 meters to 10 kilometers.

Tyler Radke - Lazard Capital Markets LLC, Research Division

And we think about that as a percent of sales, I mean, is it [indiscernible]

Jerry S. Rawls

As a percentage of our total revenue?

Tyler Radke - Lazard Capital Markets LLC, Research Division

Yes.

Jerry S. Rawls

Oh, gee, total percent of our total revenue is for sure less than 10%.

Tyler Radke - Lazard Capital Markets LLC, Research Division

But I guess in terms of your segment, I mean, in terms of telco maybe around 10%?

Jerry S. Rawls

Gee, I bet it's less than 10% of our telecom sales.

Tyler Radke - Lazard Capital Markets LLC, Research Division

Okay. Then last question, back to the Wuxi factory, if that comes online and assuming everything goes according to plan, how should we think about utilization rates from here? I mean -- I mean where are they now? And then taking a step further, what's the incremental operating margin in those margin opportunities?

Jerry S. Rawls

Well, let's see. I think -- first of all, if you think about our utilization rates, they're not really related to buildings so much as they are related -- it's related to the equipment that we have in the buildings. So, for example we have a big factory in Malaysia and it has almost 200,000 square feet of empty space right now that we could move into. Clearly, the building doesn't limit our capacity. Our capacity is only limited by how much production equipment and how much test equipment that we have in that factory. And most of our lines run at relatively high utilization rates. Particularly most of our new products run at particularly high utilization rates. So -- and I think the Wuxi factory, it will be no different but it will give us lots of opportunity for expansion so we can add new equipment, add new production lines and ramp capacity in, whichever, in the areas that we need to but we can do it in the same site. We don't have to go find another building. We don't have to go find another space to operate. So I think the efficiencies that wil offer will be important to us. How that turns into impact and financial impact, I think, has a lot to do with volumes. Part of our model is vertical integration, and we have operational leverage. It clearly works. The higher our revenues go, the higher our margins go and more -- our bottom line grows faster than our top line. So what we are -- we are anticipating is that we're anticipating that our revenues are going to continue to grow, and we're going to fill up that Wuxi factory.

Operator

We'll take our next question from Kevin Dennean with Citi.

Kevin J. Dennean - Citigroup Inc, Research Division

Jerry, just following up on the last answer that you gave. You mentioned that as you ramp volumes, ramp revenues, you'll get natural manufacturing leverage. In the past you used to talk about the importance of mix. Should we think about this being primarily a volume and revenue game now going forward for expanding gross margins or is mix still a big part of the equation for you?

Jerry S. Rawls

Mix is always an important part of it. I mean, volume pays off, no question, right? For any one product line, the more volume we get, generally the higher the margins are going to be. But we clearly have a difference in the margin profiles of a number of the products that we sell. Newer higher performance products generally carry higher margins than older, lower performance products. So in generally, datacom products have higher margins than telecom products.

Kevin J. Dennean - Citigroup Inc, Research Division

Okay. So if we look back to kind of when you're printing 35% type gross margins, was that in your view, primarily a function of the mix back then, the utilization rates back then or a combination of both? And if the combination, can you help us think that through and relate it to...

Jerry S. Rawls

Well, it was both. We had -- if you remember when that happened back in our peak quarter was Q3 of our fiscal year '11. We had $263 million in revenue that quarter. We had a big quarter and wave length selective switches. And so even in the telecom world, our margins were higher in those days. But we had -- we had a lot of volume, and we had good -- a favorable product mix. We had good 10 gigabit sales at the same time. So I don't know how you can distinguish, Kurt, do you have any idea how to distinguish the impact of volume versus product mix? I mean, we can't say one is not important because they both are.

Kurt Adzema

Yes, no. Absolutely, both of them have a big impact on our business and obviously we need both volume and favorable product mix to offset the annual ASP erosion. So it's a combination of all 3 of those things that ultimately lead to what our gross margin ends up being for a given quarter.

Operator

We'll take our next question from Dave Kang with the B. Riley.

Dave Kang - B. Riley & Co., LLC, Research Division

First, a clarification. You said tunable XFP was up 30%. Now was it volume or sales?

Jerry S. Rawls

Sales.

Dave Kang - B. Riley & Co., LLC, Research Division

Sales. Got it. Got it. And then you said WSS ROADM sales were flat. What should we expect for both WSS ROADMs and tunable XFP for this current quarter since you said telecom will be flat to down?

Eitan Gertel

We're not breaking it down this way, but if you look forward, as I said, first calendar quarter usually is a softer quarter for telecom but in general, we expect those -- the WSS to continue the trend and tunable XFP, I would expect it to continue to grow quarter-over-quarter, but you're going to see some softer quarter and some stronger quarter along the year.

Dave Kang - B. Riley & Co., LLC, Research Division

Are they still in sort of like a mid-single-digit or high single-digit in terms of millions of dollars? And any color there?

Kurt Adzema

Which product are you talking about?

Dave Kang - B. Riley & Co., LLC, Research Division

Tunable -- tunable XFP. Are they already double-digit.

Kurt Adzema

Like I said, we're not going to give out that number.

Dave Kang - B. Riley & Co., LLC, Research Division

Got it. Got it. And then you said on telecom, I'm assuming it was a telecom price reduction that was in the higher end of the range? What about datacom? What kind of pricing are you seeing there?

Jerry S. Rawls

Well, datacom is a little different. I mean, you don't go through this annual negotiation. It tends to be spread out. It tends to be some customers on a quarterly basis, some customers on a 6-month basis, some customers on an annual basis. But there's not the tradition as there is in telecom that its always on a calendar year basis. And -- but in general, we've seen that our -- that the prices have been more stable in the datacom area than in the telecom area.

Dave Kang - B. Riley & Co., LLC, Research Division

Got it. And lastly, I've heard anywhere from 5% to 10% growth for the optical industry this year from various companies. What is your view for calendar 2013?

Jerry S. Rawls

We think we're going to grow faster than that.

Dave Kang - B. Riley & Co., LLC, Research Division

Faster than 5% or faster than 10%?

Jerry S. Rawls

I think we'll grow faster than 10%.

Dave Kang - B. Riley & Co., LLC, Research Division

Got it. But what about just generally speaking? I mean, do you feel that like we're headed for like 5% to 10% or is it going to be better than that before the industry?

Jerry S. Rawls

Well, it's hard to say. I mean, it depends a lot on how our telecom business turns out. I mean, is the second half really strong for telecom or not. I mean, I think our data center business is going to grow more than 10% for the year and the real question for us and now that was 62% of our revenue last quarter. And the question is will telecom spending really come back in 2013 or is it really going to be a 2014 phenomenon as most people -- or many people are predicting now. The reality is many of the service providers in the world are beyond that point in their network loading that they should be adding capacity. And so they're going to be addressing the bottlenecks in their networks. The real money for the optics industry comes from when there's changes in architecture, upgrades, upgrades in the speeds and the network topology that's deployed by these service providers. And in 2014, all of these advanced LTE architectures are supposed to start rolling out, and I guess these are, what, second or third generation LTE. But it's -- it should be in a very exciting time for optics.

Dave Kang - B. Riley & Co., LLC, Research Division

But are we seeing LTE rolling out now so why were we talking '14 when we should be talking '13? No?

Jerry S. Rawls

Well, some of the LTE that's in '13 is not as ROADM rich as the LTE versions that are rolled out in 2014, the colorless, contentionless, directionless flexible nodes. They're not in networks today, but they're going to be in networks. They're going to be introduced in 2014. And those are going to be huge opportunities for the optics industry.

Eitan Gertel

Plus you're going to see a lot more 100 gig in the metro, so you'll see the revamp of the metro which is happening in that timeframe.

Operator

We'll take our next question from Patrick Newton with Stifel Nicholas.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

I guess Eitan, when you discussed your customers in the telecom, the potential for future growth, you'd said some expecting second half of '13, some discussing 2014. Is there any noticeable shift in what these customers were thinking as far as growth based on where they're geographically located?

Eitan Gertel

I don't think so because the people we're talking to is -- they're worldwide. Now I don't know how many of them with the economics in Europe are predicting that Europe is going to grow strong. So they're pointing to North America a lot. But it's not only North America. So from a geographical basis, I would say majority of the growth, they say, is coming from outside Europe. But there's some, they're predicting Europe, too.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then Eitan, I guess -- go ahead.

Eitan Gertel

If you also look into China. I mean, there's a lot of announcement of projects, and you can hear that -- we're shipping some products to new projects, but we don't think at this point those are actually in full gear of deployment, but there's a lot of discussion of new things happening there too.

Patrick M. Newton - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then Eitan, I guess I'd love some thoughts about your WSS and ROADM visibility at this time. I think last quarter you talked about seeing them beginning to ramp. You talked about the expectation of rapid WSS and ROADM growth in the coming quarters. And I'm just curious if we look into the summer timeframe, if you have increased visibility or any material -- and visibility relative to a quarter ago?

Eitan Gertel

I don't think I specifically said the name of the customers because like I said, our customers do not like us to talk about them specifically. But I would tell you that in general, we have qualified our WSSs in a number of new customers, which we didn't ship historically. We're starting to ship to a number of new customers. And as they grow, as they talk about growth and the call into the summer and keeps talking about growth, that will benefit us. But without being specific to any customer, I would say, we added new customers, which we didn't have a footprint before. We added new product. We are now shipping in production full Flexgrid devices, and if that trend continues and it ties directly to deployment of telecom, we should definitely benefit from that.

Operator

And this will conclude the question-and-answer session. I'd like to turn the call back over to Mr. Jerry Rawls for closing remarks.

Jerry S. Rawls

Thank you, Deanna, and thank you, everyone, who tuned in today. We appreciate your interest in our company and hope you'll be able to join us again 3 months from now. Have a good day.

Operator

This does conclude today's conference. We thank you for your participation. You may now disconnect.

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