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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

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

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

Mark Sue - RBC Capital Markets, LLC, Research Division

James M. Kisner - Jefferies & Company, Inc., Research Division

Ehud A. Gelblum - Morgan Stanley, Research Division

Troy D. Jensen - Piper Jaffray Companies, Research Division

Ian Ing - Lazard Capital Markets LLC, Research Division

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

Dave Kang - B. Riley Caris, Research Division

Georgios Kyriakopoulos

Kent Schofield - Goldman Sachs Group Inc., Research Division

Finisar (FNSR) Q4 2013 Earnings Call June 19, 2013 5:00 PM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the Finisar Corporation Fourth Quarter Financial Results. Just a quick reminder, today's conference is being recorded. And now, at this time, I'll turn things over to Jerry Rawls.

Jerry S. Rawls

Thank you, Jessica, 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# 8003705.

I need to remind all of you that any forward-looking statements in today's discussions 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 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.

We have prepared some slides for today's earnings call. You can access them by connecting to the Investor Relations page of our website at www.finisar.com. Click on Investors, then scroll down to Webcast Archives, and click. You'll see a listing for today's fourth quarter 2013 earnings call.

I am pleased to report fiscal fourth quarter revenues of $243.4 million, which is $5.1 million or 2.1% greater than the prior quarter. Our growth in revenues came primarily from increased sales of 10-gigabit and 100-gigabit Ethernet transceivers for datacom applications. Non-GAAP operating income increased $2.7 million or 15.3%, and non-GAAP earnings per diluted share increased from $0.20 a share -- to $0.20 a share from $0.17 in the prior quarter. And with that, I'll let Kurt review the rest of the numbers. Kurt?

Kurt Adzema

Thanks, Jerry. Revenue for products for data communications was $163.9 million, an increase of $16.3 million or 11% from Q3, primarily driven by increased sales of 10-gig and 100-gig Ethernet transceivers. Revenue for telecommunication products was $79.5 million, a decrease of $11.2 million or 12.3% from Q3, primarily as the result of sluggish carrier capital expenditure levels and a full 3-month impact of the annual price reductions for telecom products, most of which as in prior years went into effect in January.

In the fourth quarter, we had 110% or greater customer. Our top 10 customers represented 59% of total revenues compared to 54.9% in preceding quarter. Non-GAAP gross margin was 32.2% compared to 30.7% in the preceding quarter, primarily as a result of favorable product mix. Non-GAAP operating expenses for the fourth quarter were $58.3 million, an increase of $2.5 million over the prior quarter. This increase was primarily driven by higher employee benefit and payroll tax amounts associated with the beginning of the calendar year, the cost of the OFC trade show in March and increased compensation expenses.

Fourth quarter non-GAAP operating income increased $2.7 million to $20 million, or 8.2% of revenue, compared to $17.4 million or 7.3% in the preceding quarter. This is primarily driven by improvement in gross margins. Fourth quarter net interest expense was approximately $187,000. Other expenses were approximately $282,000.

The adjustment for net loss of noncontrolling interest was a positive $226,000, and non-GAAP taxes were approximately 0. Non-GAAP income was $19.8 million or $0.20 per diluted share compared to $16.4 million or 17% -- $0.17 in the preceding quarter.

Average diluted shares for the fourth quarter for non-GAAP purposes totaled 99.9 million. This includes the impact of converting the principal amount of our outstanding convertible notes to equity for purposes of calculating EPS. Therefore, you need to add back $539,000 of interest 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 $300,000 to income in Q1 FY '14. Non-GAAP taxes are estimated to be approximately 4% to 5% for fiscal 2014.

In the first quarter of fiscal '14, weighted average fully diluted shares are expected to be approximately 100.5 million for non-GAAP purposes. Fourth quarter capital expenditures totaled $25.4 million, which is lower than our prior guidance of approximately $32 million. This was a result of the slight delay in the timing of payments related to the new manufacturing facility we are building in Wuxi, China. We still expect the building to be completed in the second half of calendar 2013. Capital expenditures are expected to be approximately $32 million in Q1 of fiscal 2014, primarily driven by the new building.

Cash and cash equivalents totaled $289.1 million at the end of the fourth quarter compared to $265.5 million in the preceding quarter. There are a number of noncash or infrequently occurring charges, which we excluded from our non-GAAP results. These totaled $15.9 million last quarter. If you include all these items as required under GAAP, we generated income for the fourth quarter of $3.9 million or $0.04 per diluted share compared to a net loss of $3.4 million or $0.04 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 continue to invest significantly in new optical subassemblies and subsystems to strengthen our position as the #1 optical subsystem supplier. Our R&D teams are continuing to develop industry-leading products at a rapid pace, which allow us to continue to broaden our extensive line of subsystem products. We are pleased to announce that we have begun beta shipments of our 100G LR4 CFP2 module, which utilizes 4 of our internally, directly modulated 28-gigabit DFB lasers, with power dissipation of less than 8 watts maximum and 6 watts typical. We believe that this power consumption is significantly lower than our competitors using EML-based solutions. With the Finisar CFP2 modules, our customers can now offer 10 modules per line card, providing a total 1 terabit bandwidth. This module is expected to be in full production later in 2013.

In addition to 10-kilometer single mode fiber LR4 CFP2 solutions, we are developing multimode fiber products including SR10, which is 10 channels of 10 gigabits and SR4, which is 4 channels of 25 gigabits, each of which utilizing our patented digital diagnostics functionality. We're also continuing our efforts on the CFP4 form factor, which allows further reduction of size by about 50% and reduce the power consumption even further. CFP4 modules will be available in the 2014. We have started alpha shipments of our parallel, 24-channel, board-mounted optical assembly, which allows us up to 28 gigabits per channel, supporting more than 600 gigabits between transmitters and receiver module. Our parallel 28-gig BOA offers what we believe is the smallest footprint available in a transceiver and is ideal for board-to-board interconnect optical backplanes and chassis-to-chassis applications.

Our SFP wire is another program transitioning from R&D to production. It is 10-gigabit active optical cable with SFP+ connectors on each end. It delivers significant performance and power consumption benefits when compared to copper solutions. The demand for this new product has been very strong, and we are ramping production. We have also made great progress with several of our telecom development projects. Our tunable 4x28 gigabit CFP direct detect module has continued to gain strong traction for a low-cost line-side 100-gig links with few hundred kilometer range. This is a proprietary product that Finisar developed and has been adopted by a number of customers who would like a cost effective 100G line-side solution in the CFP form factor.

Lastly, we are continuing to increase shipments of our 100G Coherent OIF module with our vertical integration for lasers, modulators and receivers, we believe we will be an industry leader in this very important and fast-growing market. Now, I'll turn the call back to Jerry.

Jerry S. Rawls

Thanks, Eitan. We are very optimistic about our fiscal year 2014. As we start the new fiscal year, I am happy to report that we expect revenue and operating income to grow again in the first quarter. This will be our fourth consecutive quarter with sequential revenue and earnings growth. We believe revenues for our first quarter of fiscal 2014 will be in the range of $245 million to $260 million. Non-GAAP gross margins are expected to continue to improve from 32.2% last quarter to approximately 33% in the first quarter. Non-GAAP operating margins are expected to continue to improve and be between 9% and 10.5%. Non-GAAP earnings per diluted share are expected to be in the range of $0.22 to $0.26 per share.

For the full fiscal year 2014, we expect revenue to grow 10% to 15% over fiscal 2013, driven by continued strength for 10-gig, 40-gig and 100-gig Ethernet products for datacom and increased telecom carrier spending in the second half of the year. Fiscal 2014 will be our first year with revenues over $1 billion.

During the fourth quarter of fiscal 2013 and during the first week of the first quarter of fiscal 2014, the company completed the divestment of 2 nonstrategic subsidiaries of Ignis AS, which had been acquired by Finisar in May of 2012. These divested businesses accounted for approximately $5 million in revenue during the fourth quarter of our fiscal 2013. Finisar's revenue is driven primarily by growth in the demand for bandwidth from the increasing distribution and use of video, photos and digital information. Furthermore, one important trend is that data centers are becoming larger with an increasing number of longer meshed connections. This will drive increasing optical content and data centers and create more opportunities for Finisar products.

Over time, enterprise and carrier spending will increase to provide more bandwidth capacity. We believe Finisar is uniquely positioned with our broad product line, extensive customer engagements, profitable vertically integrated business model and strong balance sheet to capitalize on these market opportunity opportunities. And now with that, I'm going to turn it back over to Jessica and open it up for questions. Jessica?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from Bill Choi from Janney.

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

Wanted to understand the breadth of the strength across the 100 gig. Clearly up to this point, it has largely been the CFP, whether that's broadened, and any sense for the magnitude of the sequential increase?

Jerry S. Rawls

Well, it's still largely CFP. It's not to say it's only CFP, but that's the largest one in the segment. We also sell C.wire, CXP, and they're important contributors, but they're not as big as the CFP.

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

And how are you feeling about lead times overall in the categories? And any concerns about your one big customer whom is looking to swap out to their own product, whether there's any kind of inventory build going on there?

Jerry S. Rawls

Inventories are relatively normal, and I don't see any distortion. Lead times, I mean, I could point to some really difficult to manufacture products, where we -- our CFP 100-gig lead times are probably 12 to 16 weeks. I could -- there are other relatively complicated products that might have longer lead times, but I would say most of our products, the lead times are what we would consider sort of normal range and within, I think, a very reasonable expectations.

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

The 12 to 16-week, do you have a comparable number for the prior quarter? And again, just any kind of sense for sequential growth rate in over 100-gig sales?

Jerry S. Rawls

Our lead times are about the same now as they were last quarter for our 100-gig CFP. But we had increased our capacity some, so we're able to deliver more units.

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

Okay. One last question from me then. Just trying to understand if there's any been -- any increase in visibility on the telecom since last quarter. And I guess, just a broad question about service provider spending overall, because you are benefiting from some service provider spending pickup in your datacom business, which is the core in edge routers, driving 100 gigs. So just overall perspective about service provider spending and whether you have any more visibility versus the last quarter?

Eitan Gertel

We have seen softness during the last quarter, which includes, as we said on the call, it's a combination of some softness in specific customers and the telecom price reduction for the whole quarter. But as we look forward, we see strength in the number of products, and it continues to improve. And also, some other new products that are getting into our production. So overall, we feel good that the strength of the telecom will become -- be coming second half of the year.

Operator

And we'll now move to Alex Henderson from Needham & Company.

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

So can you talk a little bit about the ROADM market? Sienna had indicated after their earnings release that their ROADM business was up about 25% year-over-year and that they'd gone from the dual carrier to the single carrier, adding some capacity capability on their chassis to take more ROADMs. And Verizon's saying they want to push hard on ROADMs this year. But it doesn't look like it that kicked in very much in the quarter. Can you talk a little bit about what you're seeing there, and particularly whether you're starting to move towards those line-cards?

Jerry S. Rawls

Yes. I would say that -- we can't talk -- we can't be specific on customers, but all I can tell you is some of our customers were softer than others and some new customers we have started delivering WSSs that we haven't before. So we are gaining share in the market, and looking forward to combination of line-cards and WSSs are actually looking as a positive growth towards the second half of the year.

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

Was it essentially flat in the quarter? Was it down in the quarter? Was it down just on pricing?

Kurt Adzema

Alex, it was essentially flat but obviously with the pricing going down and units increased to offset the price aversion.

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

I get it. Great. And can you talk a little bit about Cisco as a customer, were they again a large -- they're certainly a 10% customer, again, I assume. And do you expect to continue to grow with Cisco this year? And obviously, there's a lot of contention around Cisco given their outsourcing -- insourcing.

Eitan Gertel

It's not for us to talk about specific customers, but we'll look at all our customers, even the biggest ones, and we say that we see our share keeps growing with those customers.

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

So do you still think you have a good reason and chance to grow with this customer despite their insourcing?

Eitan Gertel

We don't have any reason to think otherwise. So the answer is yes.

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

Okay, great. And then the last question, the wave selective switch competition, was the pricing off as much there as it was in other products? Or was that a little more stable? And how should we think about the mix to the higher-end products in that side?

Eitan Gertel

You mean the year-over-year reduction or -- there was nothing specific over this quarter but the year-over-year reduction overall telecom average was, we said, to [ph] 10% to 15%. And I think this is right within the average, the older WSSs. As the newer ones coming in, obviously, you start from fresh. So they're [indiscernible]...

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

Have you seen that ship start though?

Eitan Gertel

Start shipping the newer models of WSSs, yes.

Operator

We'll now go to Mark Sue from RBC Capital Markets.

Mark Sue - RBC Capital Markets, LLC, Research Division

Gentlemen, just as a higher level, if we look at CPAC versus CFP, I guess one customer's intent is one thing. Yields and getting it to work is another. As that occurs, it seems that the ten-strip [ph] for CFP2 is actually broadening and you're getting a lot of the power savings down as well. Are you seeing a further divergence in the industry, kind of what are people are cascading, maybe their interest and thoughts on CPAC and further migration to CFP2 and subsequently CFP4. Just kind of like a dialogue of some customers [indiscernible], that will be helpful.

Jerry S. Rawls

The problem with comparing CPAC with CFP2 is that CPAC is only offered by one supplier. And CFP2 is -- will be offered by many equipment suppliers, as well as many optical suppliers. So trying to think about the comparison and demand by customers, CPAC is a proprietary product and there's not really...

Mark Sue - RBC Capital Markets, LLC, Research Division

Would you say that the metrics and performance are actually on parity, if not better than what you see if you look at [ph]?

Jerry S. Rawls

Well, I think you're right. The metrics or performance or all in par and maybe marginally better in power dissipation. But other than that, they're very, very close in terms of the density that you can put in terms of gigabits per line card or gigabits per blade. It's all very comparable.

Mark Sue - RBC Capital Markets, LLC, Research Division

Okay, that's very helpful. And gentlemen, just on telecom, I guess it's usually right around this time, it's still a waiting game for most of this as we are optimistic about second half. Should we focus on a particular region for activities to kind of percolate? Is it North America or should we rather turn our efforts into China with the 4G build should help some of the optical as well? And from a linearity point of view, when you say second half, are we thinking in the later part, so the second half of the second half or should we start seeing [ph] this corner when we get to the full time frame?

Eitan Gertel

So from a geographical area, it's tough to say but we'd say North America and China are -- that's where we see demand. But you have to remember that we see demand from a customer they deploy around the world. So we don't know exactly where all their hardware will end up. And as far as the timing, we can't say it's going to be perfectly linear and where exactly it's happened. And we think that it's strength -- it's continued to strengthen the demand for telecom. It's a mix of the market and our new products ramp, and we think it's happening during the second half, but it's going to be very hard to time exactly where the -- or how it's going to happen though it's going to be perfectly linear.

Operator

And we'll now move to James Kisner from Jefferies.

James M. Kisner - Jefferies & Company, Inc., Research Division

Just wanted to drill down a little bit on this profitability, just -- you said mix. I mean, is it fair to say that a 100-gig is a big driver of this pretty big step function in gross profitability or are there other factors at play? Can you just give us some more texture on this gross margin beat?

Jerry S. Rawls

Well, we've said all along that datacom has higher gross margins than telecom at this point, given the utilization of the fixed cost related to those products. But I would not say it's all 100 gig. I think it's broad and 10 gig as well is a big driver.

James M. Kisner - Jefferies & Company, Inc., Research Division

Is 10 gig an above average margin product? It just seems like that would be a lot more competitive than, say, 40 gig and 100 gig. How do we think about maintaining profitability?

Jerry S. Rawls

Our newer products tend to be above our corporate average.

Kurt Adzema

And datacom is above our corporate average.

James M. Kisner - Jefferies & Company, Inc., Research Division

Is 10 gig really a new product, though? I mean, that's been around for a while, right?

Jerry S. Rawls

Well, we've been shipping 10 gig now for, gee, I don't know -- our SFP+, this is probably our fifth year, maybe it's even longer than that. I don't think so, but it's really good. Third or fourth year of really, just meaningful revenues. But I will tell you that in the world of networking equipment and the 3 and 4-year refresh cycle that those equipment are bought on, are leased on, new equipment goes out the door from all the suppliers of switches and storage and servers, and there is much more optical content with a 10 gig than there was in the last generation at 1 gig. And so, the workhorse of the data communications industry is 10 gigabits.

James M. Kisner - Jefferies & Company, Inc., Research Division

Okay. And then just one final question, if you don't mind. The transition of CFP2, like how do you see that happening? I mean, is the CFP2 -- it's obviously going to be significantly cheaper than CFP1. It's going to be a lot lower power, like that would suggest to me that perhaps the CFP2 transition happens relatively quickly once you've kind of got it out there and it's ramping, and I'm just wondering, would you expect CFP to sort taper off or would it be kind of a relatively abrupt changeover? Like how do you see that transition to CFP2?

Jerry S. Rawls

I think it will be a relatively slow changeover. There's enough CFP slots that have been created, enough blades that they'll have to be filled with CFP for years, and so we'll make the product for many years to come. And for CFP2, new blades have to be designed, so that means the equipment companies have to go design new blades, qualify them, get them sold to customers. And so that transition isn't -- I don't think it's going to be abrupt. I think it will be -- I think -- I would expected it to be a relatively rapid ramp in the CFP2 after they're in full production, though.

Operator

We'll move to Ehud Gelblum from Morgan Stanley.

Ehud A. Gelblum - Morgan Stanley, Research Division

A couple of questions. Between the 10G and 100G, which one of them really drove more to the upside? Was it 100G? And if so, is that -- can you give us a sense as to what percentage of that is selling to routers versus switches or anything else?

Kurt Adzema

It was 10 gig.

Ehud A. Gelblum - Morgan Stanley, Research Division

So 10 gig really drove it? So for -- on the datacom side, we should be looking at more 10 gigs just in pure volume as opposed to 100 gig? That's more in the future?

Jerry S. Rawls

10 gig is the basic building element of optical networks and data centers, and they're just -- a lot more of them are being sold.

Ehud A. Gelblum - Morgan Stanley, Research Division

So on a quarter-to-quarter basis, it really was 10 gig and not really 100 gig that was driving this?

Jerry S. Rawls

Our sales of 100 gig were up, but our sales of 10-gig are greater in magnitude, and our increases were greater in both percentage and magnitude as well.

Ehud A. Gelblum - Morgan Stanley, Research Division

That's very helpful because it is hard for us to find 100 gig out in the wild on the datacom side. We do see it out in the wild on the telecom side as -- but not so much on the datacom side. Picking up on the telecom, any progress that you can give us on tunables, how those are going and any of the -- your progress possibly getting into some of the 100-gig telecom builds that we're seeing coming out of Sienna and Infinera?

Eitan Gertel

Our tunables are going well. I mean, the last quarter was a soft quarter because it depends on specific customers and timing of the year. But all in all, we're very encouraged by the number of new customers we added. We added some -- we continue to add the large customers to our portfolio of customers for the tunable, and we see that continue to grow. And actually, I believe that the growth will accelerate as the acceleration of the 300-PIN obsolescence. So in the next 4 quarters, it's going to be a fairly interesting period for our tunable 10G with the XFP or our newly -- products like XFP+ coming into production.

Ehud A. Gelblum - Morgan Stanley, Research Division

What's the timing of your SFP+ and do you still think you should get into that? And then to get into that, do you need to price aggressively to compete against the other guys who has a large part of that market?

Eitan Gertel

No, we don't think so. I mean, we come in with a product which is going to be -- meet all the MSA requirements. It's going to be form, fit, function. And the price will be what it will be, but we think we have a very competitive product.

Ehud A. Gelblum - Morgan Stanley, Research Division

So you think you can get market share in sockets by -- with just -- just showing up with a product that comparable price [ph]? You don't have to. I'm just trying to understand whether -- so we don't have to look forward to a price war as you try and gain some SFP+ share?

Eitan Gertel

We don't think so, we don't believe so. And usually, in price wars, we don't tend to lead the price reduction.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay, good thing. On your guidance, how much was Ignis -- this piece of Ignis that you divested, how large was that in all of 2013? If it was $5 million in Q4, I would imagine it's $20 million, $25 million for the year. And is your guidance therefore performing for that? Or it is -- is it just reported revenue over a reported revenue, which would mean if you hadn't gotten rid of those pieces, granted they were lower margin, then you would have been guiding to $20 million higher. Is that -- how should we be looking at that?

Kurt Adzema

Well, I think $20 million to $25 million for those businesses is a good approximation for last year. And in terms of our guidance for Q1, again, we subtracted the 5 out, right? So you should think of it as an essence growing from $238 million to the new guidance, which is $245 million to $260 million, which at the midpoint is about a 6% growth.

Ehud A. Gelblum - Morgan Stanley, Research Division

Right, and for the full year where Jerry was talking about 10% to 15%?

Kurt Adzema

So, I think if you pull out that for the full year and you say it's 20% to 25% -- or $20 million to $25 million, then you add a couple more percent to that, so instead of 10% to 15%, then it's 12% to 17% or something like that.

Ehud A. Gelblum - Morgan Stanley, Research Division

Yes. No, it's higher growth.

Kurt Adzema

Yes.

Ehud A. Gelblum - Morgan Stanley, Research Division

Do you think that's a onetime blip off of a weak year or do you think that you're a mid-teens grower for several years by what you see going forward?

Kurt Adzema

No. I think if you look at the industry growth rates, the people in general are saying we grow in the low teens. And I think Finisar has a track record of gaining share, market share over time, so...

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. Last question, Eitan. You said, I think, that your CFP2 has maximum, I think, of 8 watts of power dissipation, but then on average it's around 6. What is the standard for CFP2? Isn't that more like around 12 watts?

Eitan Gertel

I think the standard is actually 14, and we said our absolute maximum under all worst cases is going to 8. But the more typical number, what you're going to see at any time, is going to be around 6 watts. So yes, we are well below the MSA absolute maximum number.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. Now when we were talking to one of your large customers who stick to might using and decided -- and appears it might be going in another direction, they said that they appreciated that your wattage was lower, but to design a part in like a CFP2, they had to be sure that they could only go with the MSA definition rather than yours because all they knew that it was, was it was compliant. And so if something is CFP2 compliant, then they had to measure that board to that 14-watt maximum, not the 8-watt maximum that you had. And so they couldn't go with the CFP2 part. Are you seeing any resistance for people saying that and saying, "Well, I know you're better, but I can't guarantee it because it's, I mean, unless you put it down in writing, the standard is the standard. And so I can't rely, I can't build my board around your 6 to 8 watts. I have to build the board around the 12 watts to 14 watts. And that's just the -- it doesn't make the math work." Are you seeing any resistance from that perspective?

Eitan Gertel

I don't think so. I think we see people are very enthusiastic about our ability to reduce power consumption at that rates. And they design whatever they design. If somebody wants to design their worst case, sourcing by other people and make themself less competitive, that's okay. But we have ability to innovate here and to lead this by unique product. And we deliver product and we could deliver at any quantity at any rate the rocket wants to ramp. So we feel comfortable and customers want to design that in.

Jerry S. Rawls

And our data sheet reflects the lower power consumption. I mean, so you can get a speck from Finisar, and you can get the data sheet from Finisar that guarantees maximum power consumption is less than 8 watts.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. Now, for Jerry, but I'm sorry, but the last question on Wuxi. When that's built out, does that help your margin at all? Are you going to be able to move in-house something that might still be out of Finisar's manufacturing? Or is that just for pure expansion, and thus, we shouldn't look for any margin changes?

Jerry S. Rawls

That's for both. We'll continue to move some manufacturing that we do around the world in higher cost locations, and we'll continue to move that, and it gives us to space to move lots of things that we haven't moved yet. And we do have some things where we've been space constrained in Shanghai, so...

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. So we couldn't look for a little better gross margin when that finishes? So...

Jerry S. Rawls

Yes, sir.

Operator

Our next question comes from Troy Jensen from Piper.

Troy D. Jensen - Piper Jaffray Companies, Research Division

So, quickly, on the 100G components, are any of those vendor-managed inventory now or are they just stock products?

Jerry S. Rawls

I think we actually have a couple of customers where we have 100-gig CFPs and VMI.

Troy D. Jensen - Piper Jaffray Companies, Research Division

Are those your larger customers or the smaller ones?

Jerry S. Rawls

You can always assume they're larger customers. Smaller customers don't get VMI usually. So...

Troy D. Jensen - Piper Jaffray Companies, Research Division

Got you. But Jerry, I know you've always talked about 100G being the fastest growth in datacom, with 10G being bulk of the revenues, and you've kind of talked to about the magnitude on this call here. Can you just help us frame out like what percent of datacom revenues are the 10G bucket?

Operator

And we'll now next move to Ian Ing with Lazard Capital Markets.

Jerry S. Rawls

Well, I think we were still contemplating this last question. So...

Operator

I apologize, please go ahead.

Jerry S. Rawls

That's all right. Let's see. Troy, one of the things that I would say is that what we have said in the past, that our 100 gig was the fastest growing because on a percentage basis, it was growing really rapidly. In our most recent quarter, and I would -- for a long time, the dominant revenue generator has been 10 gig, and it is in absolute terms the fastest-growing segment that we have this quarter. I mean, the question is 10 gig out of our total is...

I don't know. Is it, what, 1/3 of the total or something like that?

Kurt Adzema

Troy, are you're asking out of datacom, how much of datacom is 10 gig or how much of total revenue is? Yes, I think, I would say it's approximately half.

Troy D. Jensen - Piper Jaffray Companies, Research Division

Perfect. And then maybe just a question for Eitan, and CFP2 in beta trials right now. But to just kind of go back, remember when you guys launched tunables XFP. It seems like it took us longer to go from betas to kind of really hitting the revenue curve. Maybe with tunables, there is an industry third [ph], someone came to market before you. So with CFP2, will you guys be the first to launch the product? Or you guys will be following someone that could potentially be getting that first slot?

Eitan Gertel

Well, I mean, in a number of cases we're the first in the customers, and we believe -- from what we know, there's other people's sampling, but we're definitely the first of this lower power consumption. So I think our ability to enable people to have higher density and to have this very efficient power consumption will enable us to ramp faster. And on the tunable XFP, you're right, it was -- we relate to the game because we had to buy a fab and to get up to speed, and I think we caught up as fast as we could. But right now, this thing is -- I don't think it can compare to ramp on the 2. It's not immediate, but it's going to be a much faster than a tunable XFP.

Troy D. Jensen - Piper Jaffray Companies, Research Division

What would you say if, going into core routers, if you have core routers as having longer sales cycles for the Junipers and the Ciscos of the world, so maybe it's faster relative, but I mean, is it still going to be kind of a slow ramp, just given the nature of the core routing cycles?

Eitan Gertel

I think it's a 2014 event and the ramp, it happens, I don't know exactly how fast it's going to happen. But it depends how quickly people want to introduce higher density core routers.

Operator

And now we'll move to Ian Ing from Lazard Capital Markets.

Ian Ing - Lazard Capital Markets LLC, Research Division

Segueing from 10-gig data center, can you talk a bit about the submerging 40-gig data center applications and your exposure there? I think your main customer has talked about it on your -- on earnings calls and your main datacom competitor.

Jerry S. Rawls

Well, 40-gig is a rapidly-growing product within our -- within our datacom portfolio. The most common form factor is QSFP, and it's going to be, after SFP+ for the next several years, my guess is that QSFP is going to be -- it will become the workhorse of the data center and the form factor that we see for probably another decade, so...

Ian Ing - Lazard Capital Markets LLC, Research Division

Okay. And then I think on the last quarter's call, you talked about your exposure to selling optics directly to data centers customers and quantifying that opportunity. What you didn't talk about, though, is are you putting more resources and efforts to serve direct -- data center customers? Or are these just orders that come through distribution with little effort?

Jerry S. Rawls

Well, orders that come to us either through distribution or direct, but -- and I can't really speak to whether our distributors are deploying more salespeople in that sector or not. I don't think so, but I don't have any real knowledge there.

Ian Ing - Lazard Capital Markets LLC, Research Division

Okay. And then for Kurt, trying to interpret some of the balance sheets and metrics here, looks like receivables are down, that sometimes the guests [ph] are more front-end loaded quarter. It also looks like your inventories are pretty low in terms of historical levels. I would expect a little bit higher ahead of some strong demands.

Kurt Adzema

Well, I think receivables, you need to remember that the geographic spread between datacom customers and telecom customers are a little bit different, and some of the non-U.S.-based customers have longer terms. And so as datacom grows, DSOs tend to go down a little bit, so I think that's what we saw there. I think in terms of the inventory, obviously, we're trying to manage inventory as closely as possible. But to the extent that we're going to grow, inventory is going to grow. Our hope would just be that we can improve inventory turns even if inventory grows.

Ian Ing - Lazard Capital Markets LLC, Research Division

Okay. Great. And then the last question is -- I guess we're trying to figure out how much runway there is on some gross margin tailwinds given 10-gig and 100-gig adoption. I mean, should we think of new products having some sort of higher incremental gross margin contribution, or...

Jerry S. Rawls

I think you can usually think about new products almost always start their life with higher gross margins. And as -- and to the extent that, over time, there are more competitors enter the market, then you see some deterioration in gross margins. But new products generally have higher gross margins, and I think there's -- with us, there's a fair amount of tailwind for gross margins, I think, because as we predict revenue increases for this next fiscal year, remember, because we are vertically integrated, we do have operational leverage that works in our favor. And when our revenues were going down, it works against us. But when our revenues are going up, it works for us.

Kurt Adzema

And the additional comment I'd say is, obviously, these newer products with the better margin are one of the key items that we use to help offset the normal course price erosion. So you need to balance those 2 factors as you think going forward.

Operator

And we'll now move to Patrick Newton from Stifel.

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

I guess, Jerry, I just wanted to clarify. Given your full year commentary, was your comment on second half telecom growth referencing the calendar year or your fiscal year?

Jerry S. Rawls

Fiscal year.

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

Fiscal year, okay. And then, and so I get that jive in essence with what you said last quarter, that telecom strength likely was more of a 2014 calendar event rather than second half year '13. Is that fair?

Jerry S. Rawls

Well, that's my personal opinion. I still think that, but our fiscal year '14 ends next April and so we're into 2014, and I expect that we're going to see some increased telecom orders by that point.

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

I guess either for Eitan or Jerry, you had some prepared remarks on CFP4s and talked about shipments in 2014. I'm assuming you're talking about samples shipping in 2014. And just -- I know we're looking more into the future here, but could you give us a little bit of a thought process on timing of volume production for that product line?

Eitan Gertel

I thought we said 2014, but our samples are probably going to be in the early side of 2014. So we'll see how quickly that translates to manufacturing. Full production side, that's towards the second half of '14.

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

All right. And then last one for me, for Kurt. I guess, just pertaining to your divestiture, you discussed the revenue impact. But could you help us understand any impact to the OpEx or margin profile due to the divestiture, all else equal?

Kurt Adzema

We're not going to get into those details. Let's say, in general, it's immaterial to us as you think about $5 million of revenue on a $243 million per quarter company.

Operator

Our next question comes from Dave Kang from B. Riley.

Dave Kang - B. Riley Caris, Research Division

First question is regarding new products. I was hoping if you could qualify what you mean by fiscal '14, how much new products are expected to contribute?

Kurt Adzema

Dave, it's hard to define exactly what a new product is, obviously. We're always making some changes to products and rolling out new products. It's a bit of a nonsensical comparison and hard to quantify.

Dave Kang - B. Riley Caris, Research Division

Okay, fair enough. And then regarding your first quarter guidance, I'm assuming datacom will be up. What's your expectations or what should our expectations be for telecom? Is it going to be flat or is it going to be up?

Kurt Adzema

I think we are hopeful that we'll see some modest growth in telecom, but the main driver will be 10 gig and 100 gig, as Jerry talked about on the datacom side.

Dave Kang - B. Riley Caris, Research Division

Okay. And modest growth, I mean, which products -- can you specify which products will provide that modest growth?

Eitan Gertel

It was in telecom as we said before. It comes from our tunable XFP, it comes from our 100G, and it comes from our growth in WSS, across whether it's WSS itself or the ROADM line cards.

Dave Kang - B. Riley Caris, Research Division

And was tunable XFP down last quarter, meaning April quarter and will it be up -- I guess it will be up this quarter, right?

Kurt Adzema

I'd say in general, as you saw telecom was, in general, down. We already talked about how WSS was -- slash line cards was relatively flat, but everything else was generally down as a result of the 3 months of the price erosion.

Dave Kang - B. Riley Caris, Research Division

Sure, okay. And the last question is what is the discrepancy between the datacom and telecom gross margins? And how much telecom sales needed for telecom margins to be comparable to the datacom margins?

Kurt Adzema

Well, we're not get into the details of that discrepancy. Obviously, it depends on which telecom products and which datacom products you're talking about. And a lot of that has to do with, again, where the ramp, where we have capacity and where the ramp of those products are. So that's a very hard thing to quantify, but certainly, you saw last quarter, we had a pretty dramatic shift in mix as you saw telecom down and datacom up, which we had not expected, and you saw that it had a material impact on our gross margins.

Dave Kang - B. Riley Caris, Research Division

Okay, okay. This will be my last question then. Then with telecom starting to accelerate and your utilization will start to go up, where can your overall blended gross margin -- where can it go?

Kurt Adzema

Again, I think that depends on the pace of growth and product mix. So I think that's challenging to hypothesize at this point. But obviously, we are encouraged by our gross margin last quarter, and we are encouraged on what we see this quarter.

Operator

Our next question comes from Simon Leopold from Raymond James.

Georgios Kyriakopoulos

This is George Kyriakopoulos for Simon Leopold. Let's go back to the Cisco discussion. You say that you are expecting to grow your business without a customer, but how are you thinking about your future opportunity specifically for 100-gig transceivers in that account? Should you have basically an opportunity to win back business with the CFP2, given your lower prospect? Or is it more of a 2014, 2015 event when the next generation shift before -- becomes commercially valuable?

Jerry S. Rawls

I think that a 100 gig and a small form factor like CFP2, it's not impossible, but we will sell that into some systems that every one of our customers. But I would say specifically that our largest customer, I'm not very optimistic there. I think that as faster, higher data rates as we go to 400 gig, as we go to a terabit, as we have some of the really high-bandwidth parallel products, I think there's lots of opportunities for us to sell advanced products to every one of our customers. We think we're in a great position for that, and we're very optimistic that our business is going to grow and is going to grow for some time.

Georgios Kyriakopoulos

So it seems that with your biggest customer, you kind of expect that the next-generation shift before hopefully will be able to be designed in?

Jerry S. Rawls

Well, we have lots of products that we supply all of our big customers. We are the largest supplier in industry. We have the broadest product offering. And at any one time, we are working on many, many system, new systems with new optical products from Finisar. So I think that the aggregate opportunity for us is getting larger. I think the use of optics and all of the networking equipment is getting larger, and I think that's really positive for us.

Georgios Kyriakopoulos

Okay. So now moving to the telecom segment. The segment declined by about 12% due to weak tariff spending. Can you provide some color on that weakness? Was the weakness attributed to any specific customer or was it widespread?

Kurt Adzema

I think that's what those 2 effects we said. One is some softness from a couple of customers, and the second thing is the price reduction that's going to be -- that was for a full quarter during the last quarter. So the combination of the two contributed for the softness -- quarter-over-quarter softness. And going forward, we see that trend reverses and demand keep improving.

Georgios Kyriakopoulos

Okay. And the last question for Kurt. If I look back over 3 years, your reported gross margin every quarter was within 20 to 30 basis points of your guidance. But this quarter, gross margin came in almost 200 points above guidance. Clearly, it seems that something must really change during the quarter that surprised you on the upside. Any color around the change?

Kurt Adzema

Sure, it was all mix. We did not think that telecom was going to decline as much as we did, and we did not think that datacom was going to increase as much as it did. So I think it was, I'd say that mix was different than we anticipated for the quarter, and that resulted in a much higher gross margin than expected.

Georgios Kyriakopoulos

Okay. And then when the new China facility comes live, do you expect the gross margins to go down a bit given the initial fixed cost?

Kurt Adzema

Well, again, I think that when the new facility comes online, obviously, it's going to take some time to move all of our products into that facility. But our ultimate hope, once everything is in that facility, that we can improve margins because we'll be able to move some of the stuff, as Jerry mentioned, that is in higher cost geographies to that facility because we'll have room to do so. So it's not going to be an overnight thing, but I think ultimately, once we get in that facility and we get all of our products in there and transfer some additional stuff, I think it's going to be enough benefit for us.

Jerry S. Rawls

And we think if there's anything that increases, we may see an increase in our inventory. As we try to build some safety stocks while we're transferring product lines into the new factory and -- but I don't -- we really haven't talked much about any impact on gross margins other the positives. So...

Operator

We'll now go to Kent Schofield from Goldman Sachs.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Kurt, just to clarify the 50% -- approximately 50% 10 gig that is -- was out of datacom?

Kurt Adzema

Yes, I mean, that's a ballpark, but yes, so that's out of datacom.

Jerry S. Rawls

He's a little aggressive. It's closer to 40 than it is to 50.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Okay. Got you. And then I think Eitan mentioned that you've seen softness at a couple of customers on the telecom side and mentioned specifically this last quarter. If I look, obviously the previous few quarters before that, we saw a fairly similar softness on year-on-year declines, is that also attributed to those softness at some of those same telecom customers?

Eitan Gertel

I think one of them have been there for a couple of quarters and maybe another one is a different case. But generally, yes.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Okay. And then as far as your share within those customers, do you feel like you've held share during that time? And then going forward, do you think you can hold share, gain share, how should we think about that as those customers start to improve?

Eitan Gertel

We believe we've held the share in this process even though some of the customers had a softer period, they actually qualified more product. But in addition to that, we started shipping products to customers. We have not been shipping telecom products before, so we believe that during this period, we have extended our market share in the telecom.

Operator

And we'll now go next to Alex Henderson from Needham & Company.

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

Well, what I was thinking and I added one. I was wondering if you could help us out in understanding what the growth driver around the datacom piece is other than, obviously, 100 gig, which is strong? Is it a function of copper replacement in the data center? Is it the function of a shift to Web 2.0? Are you going into the infrastructure-as-a-service guys? And then second, can you talk a little bit about the uptake of the 100-gig light engine, particularly given the visible announcement of one of Cisco's competitors that is out with that product?

Jerry S. Rawls

Well, data center growth is -- the strongest products is 10 gig. And 10 gig, as I pointed out earlier in this call, is really the workhorse of the data center now. I mean it is -- all those Ethernet ports are being -- are shift to 10 gig. And it used to be that we talked about 1-gig Ethernet was the workhorse. And at 10 gig, there's just a lot more of the copper ports have been shifted to optical ports, and I think that trend is going to go on for a very long time.

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

Side ports are optical, and what side are copper at this point? And how much conversion do you see to drive that growth? So it was not necessarily driven by absolute growth of system sales but rather by that conversion.

Jerry S. Rawls

Correct. You could -- we could see that system sales may or may not increase at some rate. But the optical content is greater and therefore, we -- it's a greater opportunity for us.

Operator

And that is all the time we have for questions today. I'll turn the conference back over to our presenters for any additional or closing remarks.

Jerry S. Rawls

Well thank you, Jessica, and thank you to everyone who listened to our call today. We appreciate your tuning in, and we hope you'll be able to join us again 3 months from now. Have a good day.

Operator

This concludes today's presentation.

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