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Executives

Jim Fanucchi – IR, Summit IR Group

Alain Couder – President and CEO

Jerry Turin – CFO

Analysts

Paul Bonenfant – Morgan Keegan

Edward Zabitsky – ACI Research

Sven Eenmaa – Thomas Weisel Partners

Jon Gruber – Gruber & McBaine Capital Management

Oclaro, Inc. (OCLR) F4Q09 (Qtr End 06/27/09) Earnings Call Transcript July 23, 2009 5:00 PM ET

Operator

Good afternoon and welcome to the Oclaro fourth quarter of fiscal year 2009 results conference call. At this time I would like to turn the call over to Jim Fanucchi of the Summit IR Group. Please go ahead Mr. Fanucchi.

Jim Fanucchi

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

As a reminder, this conference call is being recorded for replay purposes through July 30, 2009. On today’s call the statements made about management's future expectations, plans or prospects of Oclaro Incorporated and its business that constitute forward-looking statements for the purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995 including statements concerning future financial targets and financial guidance, potential merger-related synergies and cost savings and Oclaro’s plans, objectives, expectations and intentions with respect to future operations, financial objectives, products and growth opportunities.

There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including the impact of continued uncertainty in world financial markets and the resulting reduction in demand for our products, the future performance of Oclaro and its ability to realize the expected benefits and synergies as a result of the merger with Avanex Corporation and acquisition of Newport assets, increased costs and the lack of funding availability, and the risk described in our most recent annual report on Form 10-K, most recent quarterly reports on Form 10-Q and other documents we periodically file with the SEC.

The forward-looking statements included in this presentation represent Oclaro's view as of the date of this presentation. Oclaro anticipates that subsequent events and developments may cause Oclaro's views and expectations to change. However, Oclaro specifically disclaims any intention or obligation to update any forward-looking statements as a result of developments occurring after the date of this release.

Those forward-looking statements should not be relied upon as representing Oclaro’s views as of any date subsequent to the date of this call. In addition, during this call we will be referring to Oclaro non-GAAP financial measures. With respect to any of these non-GAAP measures, directly comparable Generally Accepted Accounting Principle measures are set forth in a reconciliation of GAAP to non-GAAP measures and included in our earnings release, which is available on the investors section of Oclaro website.

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

Alain Couder

Thank you, Jim, and good afternoon to all of you, different on the different time zones. I think the summary of what I would cover today is we execute I think (inaudible) what we told you before. We described last year’s events, this quarter outlook as well as our view and our positioning and Oclaro’s opportunity for fiscal year 2010.

So, what did we do last year, fiscal year 2009, you know. First quarter, this was the best quarter ever, revenue of $67 million for ex-Bookham and non-GAAP (inaudible) we are very close to break even. As you know in the second quarter, the downturn happened and we pushed on to brake quickly and hard, generated cash from operations in spite of the downturn.

Third quarter, we signed the Avanex-Bookham merger and financial results were on target. And fourth quarter, we signed the swap of assets with Newport and to be become what we believe is number one major supplier of laser diodes, and results above guidance as you may have read in the press release. So we are quite proud of our ability to execute and I want to thank all the employees of Bookham, Avanex, and now Oclaro for all the good work they have done in the recent months and quarters.

So the result of this work you know is Oclaro, a new name for the company, but really a new tier 1 supplier of optical components to two selected markets, which are the long-haul metro markets for telecommunication and merchant [ph] diode market for the industrial application. We clearly are number one or number two on those selected markets, and we're also quite proud that we have been designated recently by Huawei as a strategic supplier.

And in fact, it is part being a tier one company bring to us, we're having strategic discussions with all our major suppliers. The other thing that we have as a result of that, we have broadened the customer base and we have been taking market share. We have more proof point of that in the June quarter, where we had some new design win with two tier one customers to produce growth for this fiscal year of 2010. Huawei continued to be a 10% customer.

We also minimized the impact of Nortel [ph] chapter 11 as a result of this diversification of our customer base, and in addition to that we now have 10 customers between 5% and 15% of revenue in the June quarter of last year. So that gives us stability and also visibility of Oclaro in the market, which is a good start for 2010. In terms of NPI, we have been taking market share and we have been improving the margin through our vertical integration strategy for tunable product and amplifier pump.

We're quite well placed in the 40-G technology. As you know we are supplier of components to all the companies shipping for 40-G products today, but we are also coming with disruptive technologies using photonic integration in such a way that we can get the 40-G at a cost, which compete very well with 10-G that is shipping now.

In terms of telecom business, we're also quite proud that as a result of last year execution, we were EBITDA positive several quarters, and we also had a non-GAAP operating margin that has been positive for the first time. So besides this positioning and the execution, we also have improved our processes. We started to work last year on return on invested capital, specifically in manufacturing. We have worked on the NPI [ph] progress, a major thing compared to the start of a project, and improving the way of working with our customer. In terms of shipment, on time shipment has been consistency of over 90% out of Shenzhen, which is very much in line with the ease of doing business that we have been pushing towards the company for the past two years.

In addition to that, we manage our inventory down to generate cash through the downturn and also minimized the E&O exposure. So better positives, I think we have created what I would call a production machine. At the same time, we are starting fiscal year ’10 with some challenges. We're planning on the assumption that there will not be a significant market recovery for this fiscal year. As always it is important to do it that way.

And in addition to that, plus an overall reduction to execute on synergies are being worked on and they are done in such a way that we can cope with slow growth and pricey clients of the industry.

At the same time, new product introductions and ramp of those new products is critical to maintain an increase of market share, and this is being done in a very competitive environment as everyone is looking for more revenue in this market, and we are doing that along WSS, the tunable dispersion compensation, 40-G transponder, and tunable pluggable, and we also have one thing, which is I think new to the market is that some of the tier one customers are looking at potentially changing their technology and making some of the components in partnership with the chip company, and as a result of that we are in discussion with those companies because we think we're kind of the unique potential partner for them.

So, that is the challenge for fiscal year ‘10 but also an opportunity to beat our competition. So for the September quarter, which is the current quarter both transactions are behind us. So we are refocused on execution. No more destruction and no more banker and lawyer working with us. We are just focusing on the real stuff and we have to deliver to our plan.

Our current limit [ph] in the telecom revenue is growing about 3% to 5% quarter-over-quarter. So it is not tremendous growth, but it is nice to see that, you know. We believe the merchant diode has hit the bottom and we expect revenue to improve over the fiscal year, and our recent new product introduction in telecommunication is gaining traction in 40-G. We've more demand than we can sell. So we selected three strategic suppliers, and we're working with those three customers to deliver DPQSK 40-G products. In tunable dispersion compensation, we also have very good momentum to gain market share and in 10-G small form factor, we are coming out with a new version that can work longer distance and there is a lot of interest for this new product.

The other point is that we also continue to work on inventory turn and continue to improve our inventory turn. So in terms of integration both of the Avanex-Bookham merger and the Newport transaction, I think we are very proud that we had no customer disruptions since closure, and customer satisfaction continued to be the top priority. I tell everyone in the company, you should take risk. We need to win, but don't take risk with customer satisfaction. That is absolutely critical to our future and to our growth.

The management teams are now fully operational and fully effective. In fact some give me the feedback that it feels like we have been working together for a year, when it has been almost 3 months already. So this is very comforting that we work as one company already from a management standpoint, and we have already triggered two-thirds of the synergy. So that is a quite good thing to have done because this is going to create results in the coming quarters.

In terms of the in feed that has been using the Bookham pump, 980 pump, in our telecom product; we already have 90% of customer acceptance for the Bookham pump. So this is going to really play on the synergy side. We're doing the sensing on the filter and this will be an efficient transaction in the September timeframe. So this is also going to improve the margin of the product that use hard-coated filter, and we have also taken a fair decision to optimize the use of outsourcing (inaudible) and own manufacturing in Shenzhen and that also will play to improve our profitability.

So, this is for the integration; we are on track. That is basically the summary of what we have to say. And in terms of customer, we have seen inventory buildup in the past as you know, this is gone. But at the same time for most customers the visibility is poor at this time. They have about – for most of them they say it is 4-week visibility, and we have to deal with that and have enough flexibility to be able to respond to that. We have several design wins on small form factor and on the 40-G that will generate growth this year, which means that given this market was flat; we can generate growth with those design wins. We should be able to take market share.

In terms of strategic partnership, we have started discussions with several tier one customers as I was discussing before, and price reduction continue, but we look at numbers, you know, with Jerry, and although we are hearing grumbling from people expecting that there is more price reduction than in the previous year, we have no evidence of that. We think that the price reduction continued to be around 15%, and what we tell our engineer is that this is life. This is what has been true for the Moore’s law in the semiconductor industry, and we have to innovate to reduce our costs otherwise somebody else will. And that how we will continue to improve our results.

So for the rest of the fiscal year, we expect to execute and improve our core structure each quarter. By June 2010 quarter, we expect to be able to achieve a breakeven point, around $80 million in revenue. I think we already mentioned that in the past. The actual non-GAAP operating margin will depend on revenue growth, and with the uncertainty that I was describing before I cannot give you a number today, but I think we're securing the future by having a breakeven point of around $80 million in revenue.

And I will ask Jerry to give you the details on our financial and our guidance for this quarter. Jerry?

Jerry Turin

Thanks, Alain. The financial periods we are discussing today are going to be complicated by the timing of our merger with Avanex that closed on April 27th, and by our acquisition of the laser diode business of Newport Spectra-Physics in exchange for our former New Focus business and a swap of assets that closed on July 4th.

So, the June quarter results of Oclaro, we are reporting today include the results of the former Bookham for the three months and the results of the former Avanex for only two months since the April 27th close of our merger.

In contrast, our Oclaro March quarter results were the standalone results of the Bookham only. Also in our current June quarter, but results of New Focus are being disclosed separately in a single line as discontinued operations as required under Generally Accepted Accounting Principles. In discussing our results for the quarter, we will therefore focus on non-GAAP numbers that will include New Focus in our revenues, gross margin and operating expenses.

As Jim discussed in his opening remarks, a reconciliation of GAAP to non-GAAP measures is located in today's press release. Before I speak to our results by category, let me add a few comments so people understand the impact of the New Focus business coming out of our September quarter, and the former Newport Spectra-Physics laser diode business coming in.

Let me reiterate that for the fiscal year ended June 2010, we expect the swap of these businesses to have a mutual impact on our adjusted EBITDA. In the first six months, we expect this to be a net negative impact of $2 million to $3 million. For the second six months, we expect this to be a net positive impact of $2 million to $3 million. It is difficult to be more precise by quarter and the end result will be a function of the efficiency and timing of our transfer of the wafer fab in Tucson to our facilities in Europe.

Breaking it down more, this means a temporary gross margin dilution of $3 million to $4 million in the next six months in total, offset by an improvement in our operating expenses in amounts netting out to the adjusted EBITDA figures I just referred to. We expect our overall Oclaro revenues for the September quarter to be $1 million to $2 million lower as a result of adding the Newport Spectra-Physics laser diode business versus what we would have otherwise expected from New Focus in that quarter.

Now, onto the Oclaro revenues for the June quarter. Our non-GAAP revenues were $72 million for the June quarter compared to our guidance of $67 million to $75 million. If we had included Avanex’s revenues for all three months of the quarter, this would have been approximately $78.1 million. $78.1 million is probably the appropriate base from which to evaluate our guidance for September.

As to our GAAP revenues, which exclude New Focus they were $66.9 for the quarter. For the full quarter, Wallway was a 15% customer and Alcatel was an 11% customer. We had eight other customers in the 4% to 10% range. This demonstrates the improved customer diversification over the profile of either of our predecessor companies.

Our revenues by division are skewed this quarter due to the timing of the merger, but let me give you a general sense of the size of each so you can scope [ph] the businesses. In general each of our transmission division and our regeneration and optical routing division will tend to contribute in the range of around 40% to 45% of our revenues each, which means a substantial portion of our revenues should come from these metro and long-haul focused businesses.

Our advanced photonics solutions division would generally contribute 10% to 15% of our revenues and of course these percentages can and will vary quarter-by-quarter based on mix, share gains, market conditions in the different product areas and so forth.

Our non-GAAP gross margins for the June quarter were 25%, which is above our guidance range of 17% to 23%. Our non-GAAP gross margin benefited from a few one-time pickups this quarter, including the impact of including Avanex April results in our quarter. Because April tends to be the lowest revenue month of the June quarter, the results of that month would have had a dilutive effect on the June quarter. Excluding the one-time benefits, we believe our normalized non-GAAP gross margin was more like 21%. This 21% is probably the appropriate baseline from which to evaluate our guidance for September.

As for our GAAP gross margins, which exclude New Focus they were 25%. R&D for the quarter including New Focus was $9.1 million. Our SG&A for the quarter including New Focus was $11.9 million. We are pleased with our profits and driving merger synergies both in operating expenses and above the line. We do expect both these operating expense categories to go up a bit in the next quarter however from timing of audit fees and from including Avanex for all three months rather than the two months in the June quarter.

Our amortization expense for the June quarter was approximately $60,000. We generated no new intangible assets as a result of the Avanex merger, and so amortization should trend around these levels going forward.

Stock compensation was $1.1 million and we expect these expenses to trend relatively consistently. Approximately 300,000 of this were in cost of sales, 250,000 in R&D, and 550,000 in SG&A.

Restructuring expense in the quarter was $5.2 million, all associated with the Avanex merger. We now expect total restructuring expenses for this deal to be between $7 million and $7.5 million. Associated with the Newport Spectra-Physics deal and the related move of the Tucson fab to Europe, we expect restructuring expenses of approximately $3 million to be incurred in the first three quarters of fiscal 2010. We expect the $3 million in cash proceeds we received as part of this deal in early July to fund those expenses.

Going back to earlier restructuring of the predecessor companies, we also have a number of empty buildings under lease and in total this represents a corresponding cash burn rate of around $1.5 million a quarter. We had an income tax provision of $1.4 million in this June quarter. Approximately $1 million of this was one-time nature. The remainder corresponds to taxes in few of our international jurisdictions from which we expect a small effective tax rate amounting to a few hundred thousand dollars a quarter going forward.

Our adjusted EBITDA in this June quarter was a positive $0.7 million versus a guidance range of negative $5 million to zero. While we're proud of achieving adjusted EBITDA profitability during our first quarter as Oclaro, we would like to point out these results also benefit from the same one time nonrecurring upside pointed out in our gross margin discussion.

Now, onto the balance sheet. We ended the quarter with $58 million in cash, cash equivalents, short-term investments and restricted cash. Oclaro started the quarter with $38.3 million in cash. Avanex added $25.7 million in cash on April 27th at the close of our merger, and our net cash burn for the quarter was $6 million, coming out of the $58 million ending number. The net cash burn came from a combination of $1.3 million in CapEx, about $2.5 million in Avanex merger-related restructuring and deal cost payments, $1.5 million in payments on previously restructured building leases, and about $1.4 million net in other working capital changes offset by the $0.7 million positive EBITDA. The $25.7 million of cash contributed by Avanex at the end of April compares to approximately $29 million to $30 million of Avanex cash at the end of March.

Let me speak to a few other cash matters. As of the end of June, we have approximately $5 million to $6 million of Avanex merger-related restructuring left to pay in future quarters; approximately $4 million to $4.5 million of Avanex deal related cost to pay to lawyers, bankers et cetera; approximately $4400,000 [ph] of Newport deal related cost to pay and as mentioned earlier, we expect the Newport deal related restructuring expenses to cost approximately $3 million, and to be funded by the $3 million in proceeds we received in July.

We also expect capital expenditures to be in the $2 million per quarter range going forward. Our receivables went up to $62 million from $35.5 million including New Focus in the March quarter due to the addition of the Avanex receivables. Our inventories went up to $65.1 million including New Focus from $56.1 million in the March quarter also primarily due to the addition of Avanex inventories. If you back out the Avanex inventories and look at the former Bookham inventories, they came down by $2.7 million in the quarter, which is a testament to the continuous cash preservation efforts of our operations team in trying to manage our inventory balances.

Our accounts payable and current liabilities also including New Focus and excluding restructuring went up to about $63.4 million in the June quarter from $33.9 million in the March quarter, all primarily due to the addition of Avanex liabilities including accruals for deal costs. At the end of June, our ratio of current assets to current liabilities is about 2.7. We're not drawn on our $25 million line of credit, which we extended for an additional three years during the quarter, and we continue to have no debt outstanding.

Our weighted average shares for the quarter were 159 million, which corresponds to approximately 186 million as of the end of the June quarter. We expect this share count to remain relatively flat for the upcoming quarter.

Now, let me repeat the guidance, which was provided in our press release, along with elaboration to provide reference. For the quarter ended September 26, 2009, we expect revenues to be in the range from $76 million to $84 million. This is relative to the approximate $78 million of revenues from Oclaro, including Avanex for the full June quarter. This ranges from $1 million to $2 million lower than what would otherwise be the case as a result of the temporary dilutions from the expected revenues of the Newport Spectra-Physics laser diodes versus the expected run rate of New Focus.

We expect non-GAAP gross margins to be in the range of 19% to 23%. This is relative to the 21% we believe to be the normalized gross margin for the June quarter. This guidance range also includes a temporary gross margin dilation of 2 to 3 points as a result of the Newport transaction, about one half of which should be offset in our bottom-line results by reductions in corresponding operating expenses.

As mentioned earlier, we expect the transfer of the Newport Tucson fab to our European facilities over the upcoming quarters to turn the Newport transaction accretive to our overall results when complete. And finally we also expect adjusted EBITDA to be in a range of negative $6 million to break even. Thanks. That concludes our prepared remarks. Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Paul Bonenfant with Morgan Keegan. Please go ahead.

Paul Bonenfant – Morgan Keegan

Yes, hi thank you. First question is one I guess in the housekeeping category; can you give us the dollar amount of your revenues per segment? Telecom, non-telecom, or how are we to break them out nowadays?

Jerry Turin

We gave a general breakdown. I didn't want to get specific because of confusion between the $72 million for the stock period versus for the entire period. Let me just pull the figure up here though, and give you the frame of reference. So for the full quarter for the $78 million, the non-telecom was $9.4 million and the telecom would have been the remainder, broken out relatively evenly between transmission and regeneration of optical routing.

Paul Bonenfant – Morgan Keegan

Okay, and what would Avanex revenues have been in the quarter?

Jerry Turin

Not sure, Paul. We actually are operating our business units on an intertwined basis already. So currently, we don’t [ph] the specific product and allocating those back to Avanex versus Bookham would be an exercise beyond how we are actually running the company already.

Paul Bonenfant – Morgan Keegan

Okay, and you're talking – you mentioned in your commentary that you're not seeing a rebound in the market and yet relative to your $78 million that you would have recognized this quarter, 76 to 84 looks like there is a pretty good chance for an up-tick. Can you talk to how much of that you think is inventory restocking versus, I guess you said you have some potential wins and share gains relative to your competitors?

Alain Couder

Like I said, we see a growth of 3% to 5% in telecom quarter-over-quarter and right now we think this is mostly the result of design win in our (inaudible) that mean our tunable product, gain block amplifier and those kind of things. The 40-G is still a very small number at this point in time, but that's what we are seeing right now. We see our customers are very cautious. I don't think they are doing any inventory rebuild at this point in time. They are more turning to us, to provide flexibility [ph] to be able to deliver very, very quickly, maybe 2 to 4 weeks whenever the need of product.

Paul Bonenfant – Morgan Keegan

Okay, and last question. In prior quarters, you had talked about three rather significant customers bringing down inventory. Would it be safe to assume that that's pretty much come to an end at this point?

Alain Couder

It is gone.

Paul Bonenfant – Morgan Keegan

I'm sorry.

Alain Couder

It is gone, you know. (inaudible) as of now.

Paul Bonenfant – Morgan Keegan

All right. That's all I have for now. I'll get back into the queue and give someone else a chance. Thank you.

Jerry Turin

Thanks, Paul.

Operator

Thank you. Our next question comes from the line of Edward Zabitsky from ACI Research. Please go ahead.

Edward Zabitsky – ACI Research

Thank you. Good afternoon. So I wanted to ask a couple of questions. First of all I just want to clarify, did you say that on the 980 nm your in feed [ph] was 95% transitioned?

Alain Couder

No, we said that 90% before Avanex had (inaudible). The contract to procure 100% from another supplier. So we are transitioning this quarter everything we can to Bookham pumps that all of this needs the customer requalification. What we are quite proud of is that after two months, we have 90% of the volume of pumps, which have been already required by customers to use Bookham pump instead of other suppliers’ pump.

Edward Zabitsky – ACI Research

Okay, so how much of that impact of the changing in feed source was seen in the Q4, and how much do you expect to see in Q1?

Alain Couder

In Q1 almost – in Q4 almost nothing because like I said the Avanex has a contract with other supplier for 100% of their supplies. So we did and the contract was expiring at the end of June. So most of the pumps that we used in (inaudible) were other suppliers pump in less profit.

Edward Zabitsky – ACI Research

Okay.

Alain Couder

And this quarter is going to be the opposite that 90% of the pumps that we are using ex-Avanex product are going to be Bookham pumps.

Edward Zabitsky – ACI Research

Okay, very good, now I guess for Jerry, the mid point of the gross margin guidance range for this quarter is 21% roughly in line with what you felt it was last quarter on an adjusted basis. Is the in feed change kind of equaling and offsetting the Newport transaction with respect to Newport?

Jerry Turin

To some degree, not dollar for dollar, but you're right that if not for the Newport transaction, the midpoint would have been more like 23 or 23.5. So certainly, one goes in one direction and the other goes in the other direction.

Edward Zabitsky – ACI Research

Right, and I'm not taking away anything from the game. So just trying to understand…

Jerry Turin

There is plenty of other puts and takes quarter-to-quarter, but you know those are two, you know, certainly two factors and you have them moving in the right direction Ed.

Edward Zabitsky – ACI Research

Okay, very good, and one last question. You mentioned the 40-G per second DPQSK product. The three strategic customers, are these subsystems/component vendors or they system companies?

Alain Couder

There are system companies. That means the product we are talking about is the 300 pin transponder [ph]. So it is in the tier telecom equipment manufacturers.

Edward Zabitsky – ACI Research

Okay, I wasn't sure if it was a laser and modulator or if it was a full transponder. That's answered.

Alain Couder

These are full transponder. It is at least the transmitter being the combination of the laser and the modulator.

Edward Zabitsky – ACI Research

So basically at this point we are waiting for these customers to win deals with this new product.

Alain Couder

What I can say is that one of the customers has already tested our technology with one North American carrier successfully.

Edward Zabitsky – ACI Research

Very good. Thank you very much.

Jerry Turin

Thanks Ed.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Sven Eenmaa from Thomas Weisel Partners. Please go ahead.

Sven Eenmaa – Thomas Weisel Partners

Hi. This is Sven Eenmaa calling in for Ajit. I have a quick question. In terms of your synergies, you mentioned you have achieved around two-thirds of those. Does that number apply on the operations side or is that combined cost of sales and operations and in terms of the rest of the synergies what is the expected timing here?

Jerry Turin

Yes, so let me just set thing level, Sven. We triggered about two-thirds of (inaudible). So for example something was triggered a few weeks ago in June. Only small you know, percentage of the benefit would have received in June. If I go back to the original synergies they were probably about half the operating expenses, half the gross margin. If I go to the two-thirds that have been triggered, a substantial portion of the operating expenses have been triggered and the gross margin impacting will more even through the year. The ones that we spoke to was the 980 pumps, Alain talked about that a few minutes ago, but otherwise the remainder tends to be more even and above the line. That gives you kind of the breakdown that helps.

Sven Eenmaa – Thomas Weisel Partners

That's very helpful. And second question, I just wanted to ask in terms of Nortel, how big of a customer were they in the current quarter and obviously what are the expectations in terms of that revenue stream?

Jerry Turin

Well, they weren’t – I identified our greater than 10% customers and they didn’t fall in that group, but you know they continue to be a significant customer for us and they had always been a more significant customer for Bookham than the Avanex side of the business. So to some degree it is the mathematical change that puts them below 10%. If you're going to add anything, Alain?

Alain Couder

Yes, the amount that makes the 10% value higher, but we continue to have a good supplier relationship with Nortel you know.

Sven Eenmaa – Thomas Weisel Partners

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Jon Gruber with Gruber & McBaine Capital Management. Please go ahead.

Jon Gruber – Gruber & McBaine Capital Management

Yes I am – you guys really complicated everything by this Newport deal. This is the world's most complicated report plus your report (inaudible). I don't get it but my question is on gross margin, March you said in this release it was 23, adjusted it is down to 21 in June. So why did it fall and it is going to adjust it, you know if you add back the 2 to 3 to 22 to 25. So basically no revenue gain or minute revenue gain. Why is it going back up? You know, this is – why it went down to two points in June on higher revenue and why is it going back up in September?

Jerry Turin

It is a different mix of business in June Jon. So March was Bookham's stand-alone and June was the first quarter of Oclaro, and September you know we're seeing a little bit of revenue growth and we are seeing some more of the synergies come through. So, you know, there were – Ed was asking Alain about the 980 pump synergies earlier, and so those come and help the margin. So I think the June to September question is a little bit more revenues and a little bit of execution on the synergies side and you know just taking things one step at a time and maybe getting a point or two extra margin.

Alain Couder

The Avanex margin were lower than as you know than the ex-Bookham margin and that is what caused mainly the drop in mostly in Margin in June, but with the synergy we are picking that up in September as you saw…

Jon Gruber – Gruber & McBaine Capital Management

In September will the Avanex margins be almost up to Bookham’s margins?

Alain Couder

No more Avanex and no more Bookham because the organization we have put together to create two divisions, you know, one for transmission and one for regeneration and routing, you know. So, we do not speak that ex-Avanex this is in fact a very critical point in terms of successful merger that we don’t want to refer anymore to the past in such a way that people think of this venture. So, we are just looking at the transmission division and at our division.

Jerry Turin

And there is also even more substance beyond that Jon. Again we talked about the 980 pump synergies as one of the significant synergies helping margin, and that is neither a Bookham synergy nor an Avanex synergy, it is one hand helping the other and it is an integrated product line. The same thing with manufacturing overheads and supply chains and so forth, yes those organizations are operating as one and so it is not – there is no longer that sort of distinction. To some level certainly teams are still tend to be the people they intended to work with, but it melts [ph] quite a bit and you kind of lose site of one side of the business or the other, while they are really integrated.

Jon Gruber – Gruber & McBaine Capital Management

So let me get the sense, on the revenue side, you said 76 to 84, that was the $2 million to $3 million hit because of the Newport Spectra-Physics transaction, is that correct?

Alain Couder

Correct.

Jon Gruber – Gruber & McBaine Capital Management

So if I adjust…

Alain Couder

1 to 2.

Jon Gruber – Gruber & McBaine Capital Management

What – did you say 2 to 3?

Alain Couder

1 to 2.

Jon Gruber – Gruber & McBaine Capital Management

1 to 2. Okay, you did say 1 to 2. So I would adjust the 78, one on apple-on-apples basis, what is it 1 to 2, why don’t we know what it is?

Jerry Turin

Well, because it is – because we're talking about September.

Jon Gruber – Gruber & McBaine Capital Management

Was it in June then? I just want to get a sense of whether we are growing or not?

Jerry Turin

Yes, June is New Focus in our results, and I don't know if we are in a position to publicly speak about what Spectra-Physics revenues were for that piece of their business, when it was part of their company. When we are referring to June, the reason it is a range – when we are referring to September the reason that it is a range is for the same reason our overall guidance is a range. You know, we have expectations of what the revenues might be, and we certainly had a forecast for New Focus and our forecast for the laser diodes.

Jon Gruber – Gruber & McBaine Capital Management

If you hadn’t done this transaction, we would add 1 to 2 to the 76 to 84 range?

Jerry Turin

Yes, exactly.

Jon Gruber – Gruber & McBaine Capital Management

So, 78 to 85 and…

Jerry Turin

And they would take the midpoint. Yes, something along that and I think … And I think if you go back the way to validate that is probably what the launch commentary earlier that we are probably seeing 3% to 5% growth in telecom, which is most of the business and that the laser diode side is probably – it has flattened so there should be some pick up going forward. And I think that guidance range you just calculated is probably not for OpEx, sort of metric.

Jon Gruber – Gruber & McBaine Capital Management

And then last question, what is the charge, restructuring charge on the Newport, this little division that is huge relative to what the charge was on much bigger Avanex. Why such a big hit?

Jerry Turin

Sure.

Jon Gruber – Gruber & McBaine Capital Management

On such a tech [ph] company?

Jerry Turin

The reason for that, Jon, is the whole premise of the Newport deal is shutting down an entire fab and ramping it up in Europe. One premise of the Avanex-Bookham deal is that there are great synergies between the companies in the point of view that not a lot of overlap of products or overlap of activities. There wasn’t an overlap of manufacturing facilities. So on the Bookham-Avanex deal, you are not seeing a shut down of factories and move heavy things across the oceans. So on a relative basis, the Bookham-Avanex deal is relatively clean from a restructuring point of view and the laser diode deal is entirely premised on us gaining the leverage from our operating fabs, and therefore we are ramping one down here in North America and transferring it over to Europe.

Jon Gruber – Gruber & McBaine Capital Management

Okay, thank you.

Operator

Thank you. At this time, I would like to turn the conference back over to Mr. Fanucchi. Please continue.

Jim Fanucchi

Thank you, everyone. We look forward to speaking with you again when the report our first quarter fiscal 2010 financial results.

Operator

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and at this time, you may disconnect.

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