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Executives

Doug Dean - Vice President of Investor Relations

Gilles Bouchard - President and Chief Executive Officer

Robert J. Nobile - Chief Financial Officer and Senior Vice President

Analysts

Daniel Morris - Oppenheimer & Company

Paul A. Bonenfant - Morgan Keegan & Company, Inc.

Ajit Pai - Thomas Weisel Partners

Rahul Khanwalkar - Jefferies & Company

Edward Zabitsky - ACI Research

Opnext, Inc. (OPXT) F1Q10 Earnings Call August 6, 2009 4:30 PM ET

Operator

Good afternoon. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the Opnext Incorporated First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the conference over to Douglas Dean, Head of Investor Relations. Mr. Dean, you may begin your conference.

Doug Dean

Good afternoon and thank you for joining us today. I am Doug Dean, The Vice President of Investor Relations for Opnext. Today, we will discuss our financial results for the first quarter ended June 30, 2009 and provide some commentary regarding our market conditions and business outlook.

We'll begin with remarks from Gilles Bouchard, President and Chief Executive Officer of Openxt, along with Bob Nobile, our Chief Financial Officer and then we'll take your questions.

As always in our prepared remarks, and our responses to your questions, we will rely on the Safe Harbor exemptions and on the rules and regulations of the securities act and the Safe Harbor statements in the Company's filings with the SEC.

And now, let me introduce Gill.

Gilles Bouchard

Thanks, Doug and good afternoon everyone. I am pleased to report that our revenues were up sequentially and for the June quarter, were 85.3 million, compared to $83.6 million in the previous quarter. This increase included nearly 17% increase in our 10G and below product line and as expected, was offset by 12% decline in 40G product sales, which returned to more normalized levels following the spike in demand during the March quarter.

These trends, together with indications from our customers suggest that demand has stabilized. I am also pleased to report side operational improvements. The cost reductions actions we've put in place contributed to high gross margin and reduction in operating expenses which in turn contributed to positive cash flow from operations.

These positive results were achieved while we continued to invest heavily in new products and technologies resulting in increased design wins and improved momentum with our customers.

Now, let me turn it over to Bob to review the details of our first quarter performance.

Robert J. Nobile

Thanks, Gill and good afternoon everyone. We generated total sales of $85.3 million, representing an increase of 1.7 million, compared to the previous quarter. Sales of our 10G and below products increased about 17% to $48 million, as sales increased in all major product categories with the exception of 300-pin fixed wavelength modules.

Sales of our 40G products decreased 4.7 million to $35 million as the anticipated decline in 40G subsystems was partially offset by increased sales of 40G modules. And finally, industrial and commercial product sales decreased about 15% to 2.3 million.

Compared to the quarter ended June 30, 2008, our sales increased 1.1 million from 84.2 million, including 32.3 million from Opnext subsystems, formally StrataLight Communications, Inc.

Sales of 40G products increased 25.2 million from the prior year, as sales of 40G subsystems were partially offset by decreased sales of 40G modules.

Sales of 10G and below products decreased 21.2 million from the prior year, reflecting lower sales across most product categories except XFP modules. And sales of industrial and commercial products decreased 2.9 million or 55% from the prior year.

In the quarter ended June 2009, sales to Ciena, Cisco and Nokia Siemens Networks represented approximately 58% of total sales, as compared to 59% in the March quarter, as increased sales to Ciena and Cisco were partially offset by decreased sales to NSN.

Geographically, revenues in North America represented 49% of our total sales, while Europe represented 33%, Japan 9% and the rest of Asia was approximately 9%.

Gross margin was 19.6%, compared to 8.7% for the quarter ended March 31, 2009 and for the June and March quarters included 340 and 460 basis points negative effects from non-cash charges and cost associated with the acquisition of StrataLight. Excluding these effects, as well as the impact from stock based compensation expense, non-GAAP gross margin was 23.2%, compared to 13.5% for the quarter ended March 31, 2009.

This 970 basis point improvement reflects the benefits realized from the lower material and outsourcing costs, lower manufacturing spending and favorable product mix, which more than offset the negative effect from lower average sealing prices.

In addition, the increase in non-GAAP gross margin includes a 320 basis point net benefit from lower inventory charges, a 240 basis point benefit from improved optical chip in TOSA production yields and a 150 basis point positive effect from more favorable foreign currency exchange fluctuations and hedging programs.

Research and development expenses decreased 2.9 million to 19.1 million from 22 million in the quarter ended March 31, 2009; primarily as a result of lower non-cash charges and costs associated with the acquisition of StrataLight. Excluding these items as well as the impact from stock based compensation expense, non-GAAP research and development expenses were 16.9 million or 19.8% of June sales. The 1.1 million decrease from the March quarter, primarily resulted from lower R&D related material and outsourcing costs and reflect the benefit from our cost reduction actions.

Selling, general and administrative expenses decreased 6.4 million to 14.4 million from 20.8 million in the quarter ended March 31, 2009; primarily as a result lower non-cash charges and costs associated with the acquisition of StrataLight. Excluding these items as well as the impact from stock based compensation and class action litigation expenses; non-GAAP selling, general and administrative expenses were 11.3 million or 13% of the June sales, compared to 11.7 million or 14% of sales in March.

The $400,000 decrease from the March quarter included a 1.8 million reduction in non-GAAP SG&A spending, resulting from our cost reduction actions that exceeded the non-recurring benefit realized in the March quarter from the reversal of previously recorded bonus and bad debt accruals.

Operating loss for the June quarter was 23 million, as compared to an operating loss of 118.9 million for the March quarter. The sequential reduction in operating loss; primarily resulted from lower non-cash charges and costs related to the acquisition of StrataLight.

The June quarter included about 14.5 million of non-GAAP items, which will decrease over the remainder of the year. Excluding the non-cash charges and costs associated with the acquisition of StrataLight, as well as stock based compensation and class action litigation expenses, non-GAAP operating loss was 8.5 million, compared to 18.5 million in the March quarter, representing a $10 million reduction on a 1.7 million increase in sales.

Net loss was 23.7 million, or negative $0.27 per fully diluted share, compared to a net loss of 118.8 million or negative $1.39 per fully diluted share for the quarter ended March 31, 2009.

Net loss in the June quarter includes a $0.02 positive effect from foreign currency exchange fluctuations and hedging programs compared to the March quarter. Non-GAAP net loss for the quarter ended Jun 2009, which excludes non-cash charges and costs associated with the acquisition of StrataLight and stock based compensation and class action litigation expenses was 9.2 million, or negative $0.10 per fully diluted share.

This represented a 55% reduction, when compared to the non-GAAP net loss of 18.5 million in the March quarter.

Cash and cash equivalents decreased by 3.6 million to 165.3 million at June 30, 2009, as 1.7 million of capital expenditures and 2.8 million of capital lease payments exceeded $900,000 of cash generated from operations.

Excluding cash and cash equivalents, working capital decreased by approximately $8 million, resulting from a 5 million reduction in accounts receivable due to improved day sales outstanding and a 6.8 million increase in accounts payable due to the extension of credit terms with certain vendors.

These were partially offset by a 2.9 million increase in inventories and an 800,000 increase in prepaid expenses and other current assets.

And now let me turn it back to Gill to discuss our operational plans, current view of market conditions and guidance.

Gilles Bouchard

Thank you, Bob. Last quarter, we detailed the key elements of our operational plan. This plan is designed to produce breakeven cash flow from operations at a revenue level of 95 million, assuming an exchange rate of 100 yen to the dollar, as intent is also to improve operating leverage through lower SG&A and higher contribution margins.

Now let me provide you more insights into the four key elements of this plan. First, the cost reductions actions we previously announced were designed to reduce the fixed cost structure of the company and are expected to provide 25 million in annualized benefit. We realized about half of the savings during the March quarter and almost all the rest during the June quarter.

Second, we are also working to reduce our variable costs with the goal of outpacing future reductions in average selling prices. On this front, we are focused on product redesigns and a series of supply chain improvements which would also help us to improve our inventory turns.

During the June quarter, these actions contributed to the improvement in gross margin. The third element is to intensify our customer engagements and to excel redesign wins. As we said last quarter, our customers are more focused on network on sourcing from stable preferred suppliers like Opnext.

Highlighting our equipment to the customers, we were the only optical components company to receive a technical support award from Huawei.

We believe we win, because we offer our customers a compelling value proposition. We are the partner of choice for new and changing technologies like 40G and 100G, thanks to our device technology manufacturing know-how, heritage of Japanese quality and design experience. We have the capabilities to sustain lower costs and high quality levels as technology mature and production volumes ramped; and in addition, our financial stability, specific future investments and supply to our customers.

We believe our position is confirmed by the breadth of our deign wins. For example, our 40G opportunities continue to expand rapidly. We are now qualified in 33 product slots across 21 different customers. Three of these qualifications were for 40G subsystems deployments in new Tier 1 carriers in three different regions.

We also currently have about 60 additional 40G opportunities at various stages across 30 different customers. And we are seeing strong activity in 10G applications with over 240 opportunities.

And finally, the fourth element of our plan is to continue to invest in leading edge technologies and products. In the June quarter, we spend about $17 million in R&D, of which about 50% was spend on 40G and 100G technologies, 30% was spend on advance technology in the 10G space and the rest was spend on fundamental research and non-communication products.

Developments in network architecture continue to play to the strength of our product portfolio. The aggregation layer is moving to 10G links. Metro Networks continue to deploy 10G, Zygo Networks are moving to 40G and we are already seeing strong interest in both our line-side and client-side 100G developments.

We remain committed to preserving cash, while investing in key 10G, 40G, and 100G technologies. Industry sources suggest that network usage has continued to grow at a significant pace, even as optical component demand slowed appreciably over the past year. As a result, we believe we will be well positioned as demand returns and the market emerges from the current downturn, which is not expected to occur before 2010.

For the remainder of this year, sales of our 40G subsystems product will vary depending on the timing of carrier deployments and while we expect modest growth in our 10G and 4G module business, visibility remains limited and, therefore, we remain cautious.

With that in mind, we expect revenues to be between 80 and $90 million for our second fiscal quarter ending September 30, 2009.

And with that, I'll now turn back to Doug to begin the Q&A portion of the call.

Doug Dean

Thanks, Gill. That completes our prepared remarks and now we'll be glad to take your questions. The operator will now provide instructions on how to submit your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Daniel Morris with Oppenheimer.

Daniel Morris - Oppenheimer & Company

Hi guys, thanks for taking my question. Just turning over guidance, essentially you have the same guidance as last quarter, with a relatively wide range, could you just talk about if, can we refer from that that there really hasn't been much change in the backlog or the order balance or anything like that?

Gilles Bouchard

Well, Dan, first as you know, the lot of our revenue is driven by VMI and other programs. So, the backlog is not the only way (ph) that we have, we look at lot of customers forecasts and overall demand. Well, I think as I indicated, what we see is requiring some market segments form the lows of last quarter, but only in modest growth looking forward. In addition, as I mentioned that the 40G subsystem business is quite lumpy in nature, so have to be cautious in terms of the quarter-to-quarter variations.

If you remember, in last quarter we give the indication that this would be about a $30 million average business for the rest of the year. It came out above this quarter. But, yet we have to assume that it's going to be between the trend of plus or minus 10 to 15% because of the lumpiness nature of deployments.

Daniel Morris - Oppenheimer & Company

Okay. So, I guess, if we look at 40G specifically then since we got a little bit higher run rate in this past quarter, we are expecting 40G to taper off maybe a little bit in the next quarter?

Gilles Bouchard

I can't really predict exactly what it's going to be. Again, it's just intrinsically being very lumpy; the fact that it's 33.2 this quarter doesn't mean it's going to 33.2 next quarter. It's going to vary again plus or minus 10 to 15% quarter-over-quarter on this 30% run rate, that we think represent the current market.

Daniel Morris - Oppenheimer & Company

Okay, but the range is somewhere between 30 and 35 you think for the next couple of quarters?

Gilles Bouchard

For the total 40G business or just for the subsystem business?

Daniel Morris - Oppenheimer & Company

For 40G.

Gilles Bouchard

40G, yes, there would be the 30 for subsystem, plus three to five to six for the module business, so that could be the range to look at it as a midpoint.

Daniel Morris - Oppenheimer & Company

Okay, great. And just maybe question on gross margins, how should we look at that gross margins going forward? It look likes you realized quite a few one-time benefits. Do we have more room for expansion or maybe what's your long-term target and how do we get there?

Robert Nobile

Dan, for the current quarter, we should look at our or we should look at the current quarter as, we've reached our base line here. Our yield have normalized, the cost reduction actions that we put in place have been realized. There is also in the current quarter, although we had a quarter-over-quarter benefit, we still had about a 150 basis points of inventory charges, which we really wouldn't expect to reoccur next quarter. So, that's kind of your baseline as to where we are.

Now, after the cost reduction actions we put in place, today we have about a 40% variable margin, assuming constant exchange rates, right, and similar product mix, so it's volume ramps, you'll get a natural improvement from that. And then based on all the other actions that the Gill talked about earlier from addressing our variable costs, we would expect those over time to outpace the average selling price declines.

Daniel Morris - Oppenheimer & Company

Okay, great. Thank you.

Operator

Our next question comes from the line of Paul Bonenfant with Morgan Keegan.

Paul Bonenfant - Morgan Keegan & Company, Inc.

Yes, hi. Thank you. My first question has to do with your customer mix. It looks like you had an appreciable shift, looks like Ciena will place the Alcatel-Lucent in the top three. And I am wondering is this on the strength of 40 gig and StrataLight sales partnering with Ciena?

Gilles Bouchard

Yes, you're right Paul. There was a specific carrier deployment that we did with Ciena that led to this number.

Paul Bonenfant - Morgan Keegan & Company, Inc.

And would this be a one-time event or should we expect to see this in future quarters?

Gilles Bouchard

At this level, we expect it's a one-time event, although, there are still some trailing revenue from it. But, for this particular deal, I think it is the one-time event.

Paul Bonenfant - Morgan Keegan & Company, Inc.

Okay. And with regard to 40G deployments, I am wondering if you're seeing any appreciable shift relative to the mix of 40G client-side versus 4 by 10G lines client-side?

Gilles Bouchard

Yeah. That's an interesting question. I think what we are seeing this year, Paul is the growth in muxponders being stronger than in transponders. The markets having started off stronger in transponders than through the muxponder deployment have really caught up. And in terms of the future, I think there are different opinions on those, but in general most of them tend to think that after the muxponders are catch up this year, the growth rate will be somewhat similar on both sides. But, again that remains to be same for next year.

Paul Bonenfant - Morgan Keegan & Company, Inc.

Okay. And I was wondering if you could address and I apologize if you did earlier, strength and weakness by application maybe whether you seeing strength versus weakness in telecom applications versus enterprise and datacom?

Gilles Bouchard

Yeah, yeah. It's a good point. If you look at our results in the period, there was a strong or it's a good recovery on the datacom side. What we observed last year is the enterprise market was the first one to be affected by the downturn. And while telecom market was affected, I think actually the blow was softened by the cycle times in the telecom market. So what we saw this quarter is a nice snapback on the datacom side, which as I recall, was also being heavily impacted by inventory and supply chain effects. So, while both segments grew this quarter, we saw larger growth in datacom.

Paul Bonenfant - Morgan Keegan & Company, Inc.

Okay. Last question if I may, we've talked in the past about how the downturn has led to more realistic valuations in particular among privately held companies, wondering if you could prioritize your usage of cash when including their relative to potential acquisitions? And with that I'll get back in the queue. Thank you.

Gilles Bouchard

Well, I'm not sure with the answer of this, Paul. We obviously, continue to monitor potential acquisitions and deals. You're right, the values have become much more reasonable and if we find a right strategic fit for the right price, we'll be willing to move on it, but again at this point we are not making announcement.

Paul Bonenfant - Morgan Keegan & Company, Inc.

Thank you for taking my questions.

Gilles Bouchard

Thank you, Paul.

Operator

Your next question comes from the line of Ajit Pai with Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

Yeah, Good afternoon.

Gilles Bouchard

Hey, Ajit.

Ajit Pai - Thomas Weisel Partners

Couple of quick questions, I think the first one is just looking at the pricing environment up, for especially when as you got the 40G, are you seeing any differences in the base of pricing degradation and 40G relative to previous generations of products?

Robert Nobile

No, I think at this point Ajit pricing declines on 40G modules are kind of tracking where you would expect the technology is at this point. Obviously, the subsystem element of 40G has price decline that are less than what we experienced on the module business. But, our 40Gs are tracking kind of where we expected them to.

Ajit Pai - Thomas Weisel Partners

And sub 40G, are you seeing trends fairly stable, the pricing declines inline with sort of long-term declines or is it accelerated over the past couple of quarters?

Robert Nobile

I think we talked about the acceleration in the 10G module business last quarter, coming from the December time period. And being a couple of points on an annualized basis higher than it was historically. I think, we're seeing that trend stabilizing and possibly been reverting a little bit closer to the historical levels, but not very different.

Ajit Pai - Thomas Weisel Partners

Got it. And when you're getting forward pricing, when you have all these design wins in all these different systems, what kind of forward pricing are you getting right now in the sense, are you able to fix pricing for 12 months, 18 months, how you are, what's the sort of broad timeline which you are able to fix pricing for?

Gilles Bouchard

You mean with customers, right?

Ajit Pai - Thomas Weisel Partners

Yes.

Gilles Bouchard

It's very different by customer, how did we have a set of customers, with whom we're doing quarterly pricing, and all the way through annual pricing with others. So, it's kind of a broad spectrum from quarterly to annual.

Ajit Pai - Thomas Weisel Partners

Got it. And this is even wherein it's a new design win, it's still a quarterly or an annual, it's not longer than that?

Gilles Bouchard

Yeah, I mean the design win, obviously is based on some current pricing and price forecasting. But, there is always a minimum pricing renegotiation, on a quarterly or annual basis.

Ajit Pai - Thomas Weisel Partners

Got it. And then the last question would just be looking at your cash balances, your cash declined very slightly this quarter, which is impressive just given the profitability of the company or lack of profitability. But, on the go-forward basis, as your profitability improves, especially as you get the full impact of some of the cost savings. Can we expect the cash to have, net cash and the balance sheet to have bottomed already and expect improvement from this point onwards or do you expect to burn a little more cash before things bottom? Could you give us some indication of where you think the net cash balances will bottom?

Robert Nobile

Yeah, I think, it will depend upon how quickly the revenues materialize, Ajit. The improvements that we saw this quarter, in both accounts receivable and accounts payable; were some structural changes that we made. And those benefits will remain with us going forward. But, you're not going to get the quarter-over-quarter impact, again in the next quarter.

Inventories, we have action plans in place, obviously to bring those down and improve our turns. So, with that in mind, we would expect, our cash again to be, once we -- excuse me guys.

Gilles Bouchard

Well, I think to summarize as it be on the P&L on side, there's structural improvements we saw, our structural -- on the inventory side, frontier performance I don't think it's quite where it needs to be yet. So, I expect the company to perform better on this. And on the margin side as I indicated we are going to continue to work to improve it. So, if you look at four elements I think, you've got two which are I think, have improved and will be stable and two other shall be still has lot of room for improvement.

Ajit Pai - Thomas Weisel Partners

So is it fair to say that you don't expect any further cash burn from this point?

Gilles Bouchard

I think it's too early to say and especially because the timing of the receivables and the payables kind of have big impact on quarter-to-quarter cash flow. So I think, of the 80 to $90 million revenue, I think we can get close like this quarter, but we cannot absolutely be sure they will be there.

Ajit Pai - Thomas Weisel Partners

Got it. Thank you.

Operator

So our next question comes from the line of Bill Choi with Jefferies & Company.

Rahul Khanwalkar - Jefferies & Company

Hello, this is Rahul Khanwalkar, calling in for Bill Choi. My first question was for your breakeven guidance. Obviously, the guidance is constrained by two factors. One is 95 million revenue and yen, dollar-yen exchange rate of 100. So, right now we are basically down on both of those factors 80 to $90 million revenue range and exchange rate is also hovering around 95-96.

So, how long do you think we will get both of these factors favorably working for the company? It may not be for couple of quarters issue right, so are you at a point where you are seriously reconsidering your business plan or at what point you will try to sort of lower the breakeven point on both factors?

Gilles Bouchard

Yeah. It's a good question. So, on the yen, I mean, obviously on this point here, your views are good as mine, when the yen will recover to 100 and above. For this quarter, our assumptions are more than 95 range, maybe we've done some hedging on that level.

On the cash flow, we're just linking to the prior question, while our breakeven plan is that 95, as I indicated, I tend to view this as a worst case and I believe we can continue improve on this plan. And again, we had -- the reason why I call it a worst case, is that we have to account for the timing, in particular receivables. But, we can particularly concern this quarter because of the summer, a lot of the shipments tend to be backend loaded in this quarter. So, that's kind of the second element of it.

Now, the other part of the plan that as you noticed, even though our operating expenses remain high, we have shifted a lot of the mix to lower SG&A and R&D. So, my view is, as long as we can maintain this close to breakeven cash performance, we will continue to invest in R&D. But, if the economy continues to be challenging, the fact that we've lowered SG&A so much, gives us a lot more flexibility, potentially to take action on the R&D side.

Rahul Khanwalkar - Jefferies & Company

Okay. And my second question is, you talked about datacom being much better than our telecom, do you breakout the datacom versus telecom revenue?

Gilles Bouchard

I don't think we've done this.

Robert Nobile

No, but --

Gilles Bouchard

Can you give some indication?

Robert Nobile

Yeah. Generally, on the 10G side of the business, the telecom business and the datacom business have roughly been approximating each other. But, as Gill indicated earlier, over the past several quarters with the datacom business being down faster than the telecom business, that ratio has shifted more towards a higher telecom component than datacom.

Gilles Bouchard

And just a quick add on this, the way we've looked at it internally historically was based on products, the datacom products versus telecom products, which becomes a little bit misleading because XFP, which is already the fastest growing segment, are starting to be using both datacom and telecom.

Rahul Khanwalkar - Jefferies & Company

So, if the mix shift occurs, even more towards datacom, how does it affect the linearity of the quarter? Is it more linear compared to telecom or about as backend loaded as telecom?

Gilles Bouchard

I'm not sure there is a key trend there. But, maybe this quarter, because telecom is a bit more heavily weighted towards Europe, and Europe's been pretty much down for August. There is more seasonality for this quarter, it might be true. I am not sure there is the same thing in other quarters.

Robert Nobile

Yeah, I would agree.

Rahul Khanwalkar - Jefferies & Company

Yeah. But, in general, datacom and telecom, linearity characteristics are about the same or one is more backend loaded than the other?

Robert Nobile

Again, as Gilles said, I think other than probably for the August shutdowns, due to the summer holidays, they tend to be fairly consistent.

Rahul Khanwalkar - Jefferies & Company

Okay. That's it from me. Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Edward Zabitsky with ACI Research.

Edward Zabitsky - ACI Research

I wanted to ask about redesigns you mentioned that you're doing some redesigns to lower cost. How long -- what kind of redesigns are you doing, of what products, and how long do you expect to leave impact through results?

Gilles Bouchard

This is a very broad field, because we have very broad product range, particularly in 10G. So I don't know if I can call at any specific product. It is a traditional strength in my mind of our team that's in Japan where they have this product reviews on a mentality where when we finish our first generation product, we're always starting the second generation and the third generation.

So, when you look at 40G, in the couple products, we are in the process of qualifying second generation products and some of the introductions would be in the between now and early next year, depending going on the product. On the 10G space, it's so broad that I think it's a continuum of implementation. There is a couple of electronic products, for example, we have couple there as in 10G we're introducing -- we will be introducing some of our own lasers, which tend to have higher temperature range what we call the Encooler (ph) lasers. And those will enable both performance, cost and also power reduction breakthroughs in 10G and those are in running for the next couple quarters.

Edward Zabitsky - ACI Research

And thank you. And are you doing, are you planning to add any new products that you design for the former StrataLight product Ceradays, for example or something else?

Gilles Bouchard

If you look at the whole StrataLight product kind of right now, what we call our next subsystem is subsystem line cards. Now, as the market evolves towards modules, the OPS division will be introducing some module based product as well.

Edward Zabitsky - ACI Research

Okay. Couple of more questions, the NSN revenue obviously was down in the quarter, is that due to the circuit pack or is in them buying components, or is it due to reduced demand from their customers?

Gilles Bouchard

The NSN is very simple story. Most of our business with NSN is 40G subsystems. The OPS division we just talked about from former StrataLight and if you recall last quarter, we had a spike in the first quarter, calendar quarter because we -- there've been in a product transition basically the December quarter was an unusually low. So, the March quarter was unusually high and as I said those levels have normalized around 30 million plus or minus 4-$5 million. So that's really what's happening.

Edward Zabitsky - ACI Research

Okay, very good. And one more question on OpEx, I believe the adjusted OpEx was about 28.2 million in Q1; do you have an expectation for Q2?

Robert Nobile

We have to take the kind of pieces separately. From an R&D perspective, we would expect next quarter to be relatively consistent or the future quarters to be relatively consistent with the current spending. However, on a quarter-over-quarter basis you're going to have some variability depending upon the timing of prototype builds, especially for -- as we move into the future with 100G samples.

The SG&A component is also going to be relatively consistent and that will vary for really just two items. One is we have some trade show expenses that we incur in about the second -- in both our second and fourth fiscal quarters. And then, as our revenue ramps should also have an element of variable selling cost that will also go.

Edward Zabitsky - ACI Research

Right. Okay. Thank you. Now, I wanted to go back to the question on StrataLight and on designing new components into the StrataLight products, realizing that you've, that you move form shelf to line cards. Now is there any more of our own componentary that you can design into there and therefore improve the gross margins?

Gilles Bouchard

And, also to be sure to the answer your original question well, the question was are we designing new components into the current subsystems? The answer is also yes. So we have some cost reduction programs and multiple sourcing programs in there. And again, as we look at future platforms, we are looking at integrating more Opnext Technology in our products. Yes.

Edward Zabitsky - ACI Research

Okay, very good. Thank you.

Operator

At this time there are no further questions.

Doug Dean

Okay. With no more questions, that concludes our investor call for today. Thank you all for joining us this afternoon. And operator, please provide the replay instructions.

Operator

Thank you for participating in today's Opnext Incorporated conference call. This call will be available for replay beginning at 07:30 PM Eastern Time today till 11:59 PM Eastern Time on Wednesday August 13, 2009. The conference ID number for the replay is 22205795. Again the conference ID number for the replay is 22205795. The number to dial for the replay is 1800-642-1687 or 1706-645-9291. The numbers again 1800-642-1687 or 1706-645-9291. Thank you. You may now disconnect.

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