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Oclaro, Inc. (NASDAQ:OCLR)

F4Q10 (Qtr End 07/03/10) Earnings Call Transcript

July 29, 2010 4:30 pm ET

Executives

Jim Fanucchi – IR

Jerry Turin – CFO

Alain Couder – President and CEO

Analysts

Alex Henderson – Miller Tabak

Kevin Dennean – Citi Investment Research

Paul Bonenfant – Morgan Keegan

Subu Subrahmanyan – Sanders Morris

Hamed Khorsand – BWS Financial

Operator

Good afternoon and welcome to the Oclaro fourth quarter fiscal year 2010 financial results conference call. As a reminder, this conference call is being recorded for replay purposes through August 5, 2010. At this time, I would like to turn the call over to Jim Fanucchi of the Summit IR Group. Please go head, sir.

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.

Today's statements made about management's future expectations, plans or prospects of Oclaro and its business, 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 and any assumptions underlying these statements, constitute forward-looking statements for the purposes of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

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, competition in the market for Oclaro’s products and services, the future performance of Oclaro following the closing of the mergers with Avanex Corporation, Xtellus Incorporated and Mintera Corporation and the Spectra-Physics asset swap, the inability to realize the expected benefits and synergies as a result of the mergers with Avanex, Xtellus and Mintera and the Spectra-Physics asset swap, increased costs related to downsizing and compliance with regulatory compliance in connection with such downsizing, the lack of availability of credit or opportunity for equity-based financings, as well as the factors described in Oclaro's 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 discussed today represent Oclaro's view as of the date of this conference call. 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 today's date. 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's 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 in the Investors section of Oclaro's website.

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

Jerry Turin

Thanks, Jim. Before getting into the financial details for the quarter, let me first speak about our business model accomplishments. Since the April 2009 merger of Bookham and Avanex by highlighting our results over the last fiscal year, which has just ended July 3, 2010. Our revenues in the quarter ended July 3, 2010 were 44% higher than our pro forma combined revenues for the quarter ended June 2009.

Our non-GAAP gross margin this quarter was 31%, up from 23% pro forma Bookham plus Avanex in last year’s June fiscal quarter. This exceeds the original one year merger target of 30% that isn't set for this quarter at that time. Our scale on operating leverage is beginning to translate to the bottom line.

Our non-GAAP operating income for this quarter was $9.6 million, up almost $12 million when compared to a $2 million non-GAAP operating loss for the June fiscal 2009 quarter. You could look at this $12 million year-over-year quarterly improvement as almost $50 million on an annualized basis. These results correspond to a non-GAAP operating income margin of 8.5%. This is significantly higher than our one year merger target of 5% operating income margin. Later, at the end of this call, I will update our operating margin target models.

Now, on to the details for this quarter ended July 3, 2010, our revenues this quarter were $112.7 million, up 11.4% from $101.2 million in the prior quarter. Telecom revenues for the quarter were up over 13% to $98.5 million from $87.0 million in the prior quarter. Revenues from our Advanced Photonics Solutions business were relatively flat this quarter at $14.3 million versus $14.1 million last quarter. We continue to see a strong demand environment for APS and expect to see significant ramps of new market opportunities for APS later in fiscal 2011.

Looking back to the second half of this fiscal year that just ended, APS revenues were up over 40% compared to the first six months of the fiscal year. The transition of our APS production from the former Newport fab in Tucson to our other facilities rose fabs in back end is relatively on track and on schedule.

However, our production plans for APS during this transition will be from calendar 2009 demand environment assumption. Clearly, demand is much higher than those assumed levels. As a result, we are currently concentrating first on supporting our established customer base while qualifying and ramping our new lines, which may limit APS growth for another quarter.

From a major customer point of view, Alcatel was 14% of our revenue this quarter, Huawei at 13%, and CNI-Nortel was just under 10% in the quarter. As mentioned earlier, our non-GAAP gross margins were 31% this quarter compared to the 28% last quarter. Our gross margin improvement came from our increased scale in revenue growth from realizing cost savings from the shutdown of the former Newport Spectra-Physics fab in Tucson and from moving beyond the March quarter price reduction, and we experienced the largest percentage of customer price reductions for the year. We expect the pricing environment to be more favorable in the next six months than in the prior fiscal year.

Our R&D expenses were $11.5 million this quarter compared to $11.3 million last quarter. We expect to ramp our R&D investment in future quarters while keeping within our business model profitability targets. We view our recent acquisition of Mintera as an efficient way to add talented people, particularly in the R&D area. We ultimately expect the high-speed transmission business of Mintera to deliver to the non-GAAP operating bottom line target of 20% to 22%. In the meantime though, we continue to drive our Oclaro-wide gross margins and operating margins on track towards our target models.

Our SG&A expenses were $14.1 million this quarter compared to $14.5 million last quarter. Our cost of sales, R&D and SG&A include stock compensation of $470,000, $260,000, and $530,000 respectively. Our non-GAAP operating income was $9.6 million or 8.5% of revenues compared to $3.2 million or 3.2% of revenues in the prior quarter. As I mentioned earlier, the leverage of our operating model is beginning to drop the results to the bottom line.

Adjusted EBITDA was $12.3 million this quarter compared to $5.8 million last quarter. Non-GAAP net income was $11.5 million this quarter compared to $3.4 million last quarter. Our weighted average diluted shares outstanding for the quarter were 48.2 million. We expect weighted average shares outstanding for the next quarter to be approximately 51.1 million.

On to the balance sheet, our cash, cash equivalents, and restricted cash as of July 3, 2010 were $111.6 million compared to $55.7 million at the end of the prior quarter. These balances include the $77 million net we received from our public offering of common stock during the quarter, partly offset by $7.5 million paid for our investment in ClariPhy.

Our accounts receivable increased to $93.4 million from $77.0 million in the last quarter. About $7 million to $8 million of this increase was consistent with our increased revenues. The remainder was primarily due to customers holding overpayments till the first week of July, and this is the next fiscal quarter. Catching up on these collections should contribute positively to our receivable turns and our cash positions in the September quarter.

Our inventories were up $2.5 million this quarter to $62.6 million from $60.0 million last quarter. We’ve intentionally increased our material stocks and are strategically staging more of this stock to be positioned to execute on the strong demand we continue to see out there. The increase related towards our Shenzhen back end assembly and test facility.

Fixed assets were $37.5 million compared to $34.7 million last quarter. Our CapEx this quarter was approximately $6.2 million, up from $3.7 million last quarter. Due to the reflection of our continuing investment towards executing on the strong demand we see out there. During the quarter, we repaid $2.5 million in line of credit draws we had outstanding at the end of March. We continue to be debt-free and have $25 million available under our line of credit.

Now let me hand it over to Alain for more discussion on the business. Alain?

Alain Couder

Thank you, Jerry. And good afternoon. Let me explain to you how we are achieving this result and how we have been able to make the integration at and on schedule. We always try to deliver better value to our customers. And I explained in the past that we work with the production machine and an innovation engine.

So our production machine is focused on delivering quality product on time to our customers. The Bookham-Avanex integration is complete. And for the Newport integration, as a last step, it will be for our Tucson high power wafer production that we’ll start in Europe. And this will be completed. And our engineers now focus on capital efficiencies and constantly improving test methodologies and manufacturing processes in such a way that we can optimize all the CapEx we invest in the future.

Our innovation engine is currently made of about 350 engineers. But it is quite efficient from a current viewpoint because we have one served in low-cost country, one served in Europe where basically the cost is about 70% less than in North America and the other served in North America. So this makes us quite efficient in particular compared to some of our competitors.

So our production machine and our innovation machine not only produce the result in the past year, but now that we are free of all the effort of doing these huge integration, we are going to be able to focus on further improvement and making more progress. And then we will create our future.

We are quite bullish and we believe our (inaudible) growth rate should be in the 30% to 40% range. Many of our existing products are taking market share. For instance, tunable small form factor transponders have been doing very well. Tunable in special composition as well. (inaudible), for malls and for finger navigation amplifier, all of these are constantly taking market share. And as an example, in the June quarter, in one week we did ship $1 million of tunable small form factor transponders. And we expect this turnaround to continue in the upcoming quarters.

But in addition to those great products taking market share, we have quite a lot number of new products coming out in this year. For instance, in telecom, we are coming with a tunable XFP and we are coming with two of them; one which is a high performer, and when we were tracing the 300 speed transponder, and one which will be low price to be able to replace a fixed wavelength for 80-kilometer XFP that is so popular out there.

We are also coming with 40G DQPSK transponder that we’re going to start shipping in volume, and also with new generation of amplifiers and new generation of pumps to be more powerful and more reliable. So, all of this is adding to the previous products. And on the APS side, we have some exciting products coming like on high power laser. We are growing rapidly into the cosmetic row and seeing our fab in Europe able to start producing a new wafer. You will see the APS revenue start to climb again. Next calendar year, we should have the Light Peak start shipping. And vicsol [ph] for finger navigation and also the month continued to grow.

So one of this is a business that we have done versus what we had before in the beginning of the year. But we have also, as you know, made several acquisitions. And those acquisitions come with new products that are going to further scale our growth. And that’s why we are so bullish in the growth we can have in the company. For instance, Mintera is bringing a 40G DPSK and is working on developing the so-called coherent strategy that will come later on next year. And they also continue with the existing roadmap on 100G, 0and the acquisition of Mintera should be able to accelerate our time to market on the 100G.

So other acquisitions have been around WSS, the Xtellus, and we will be starting ramping WSS in the years to come. VOS [ph], which are coming from a small acquisition called AON. So all of that is very significant. It cannot have a cumulative effect between the products already shipping next year; the new products introduced this year, and now the ramping of the products that we’re getting from acquisitions.

In fact, the Mintera is interesting because beyond getting new products, we also, as Jerry was saying, got the higher class team experienced in telecom and first system designing and software. That’s the type of kill that we didn’t have. And being able to hire in advance a set of people without other experience is extremely important. It will also at best raise the architectural clairvoyance in the telecom field.

This team that Terry Unter, the CEO of Mintera, accepted to stay onboard and to lead the new division and each division would be responsible for all our strategies and all our energy module and some first system associated with that. And their expertise will be an excellent asset to bring more value to our customers. And they will be able to look at migrating up the vertical cushion into the system light up for transmission applications. So that’s more exciting news for the future.

The Mintera acquisition has also helped us to strengthening our partnership with ClariPhy. Now we are going to be the only company to get immediate access to the 40G chip. And let me remind you that on ClariPhy, not only we have done an investment, but we also have a core marketing agreement where we will be marketing an optical component together with the ClariPhy chip and together with the well formed design to help our customers accelerate time to market. So I think we are going to be extremely well position in strategy. We have the three modulation technique in terms of products and we are one of the best chips in the industry.

In addition to that, we are constantly exploring potential addition to our technology portfolio and potential growth accelerator. We have more than 10 small companies on our radar screen today. So we are clearly not going to acquire those 10 companies. We are making the right selection. And we are considering many criteria.

But some important criteria as the ability to infeed our product into the product coming from the acquisition or the ability to use the products from the acquisition to feed our own current products and therefore increase the number of Oclaro-developed components into our new products. And in addition to that, some of those acquisitions will expand our market – the markets that we can access, and therefore also allow us for our future growth. So with these, we will look at how we can improve our long-term business move there. That’s also part of the acquisition criteria that we have.

I think I mentioned it to you before. We have a plan to scale the company quickly and reach the $1 billion revenue rate in two or three years. We have a significant organic momentum, and we are driving to this level. We may also supplement these momentums with strategic acquisitions. And the strategic planning process takes place each year during the summer. And as we develop these plans, we will give you more information. We are quite pleased with the momentum we created during the first year the big business of Oclaro.

I am grateful to all the people for their contribution. We all learned to work smarter and not only harder. And we are putting in place a learning organization to deliver better value to our customers. And as I travel around the world, I see the level of enthusiasm increasing and plenty of new ideas emerging. Now people are confident in the future of Oclaro.

And I’ll tell you this makes a lot of difference. The level of energy is outstanding. But we have (inaudible) with these customers. We are entering into long-term partnerships to create together the optical system of tomorrow and growth in telecom and in photonic solutions. And we strive to make it easier for our customers to do business with us. I’ve said that in the past, but I will not stop put it in your data, it is so important. So with these progressions and innovations, we are growing fast and we are also improving our profitability faster.

So with this, let me ask Jerry to give you our improved target model and our guidance.

Jerry Turin

Thanks, Alain. So before summarizing our guidance for the next quarter, let me update you on our business model targets. We’ve previously indicated that we expect to achieve 35% gross margins for the June quarter of this coming fiscal year and with solid revenue demand, we could achieve target as early as this December. Today we reiterate those expectations.

We’ve previously defined our non-GAAP operating income target margin to be 10% at 35% gross margins. Today we are increasing that target operating model to a range of 12% to 15% non-GAAP operating income at 35% gross margins. When we first achieve 35% gross margins, we would initially expect non-GAAP operating margins to be in the 12% range. With continued revenue growth at 35% margins, the non-GAAP operating margins will continue to have leverage and should scale from the 12% range towards 15%.

Let me remind you that we continue to have a longer term goal of driving our model towards 40% gross margins or even higher. And if successful, our operating margin should continue to scale accordingly.

Now, let me conclude with our guidance for the quarter ended October 3, 2010. We expect revenues to be in the range of $120 million to $126 million. This includes revenues from Mintera of approximately $3 million to $4 million. We expect non-GAAP gross margins of approximately 31% to 33%. We expect adjusted EBITDA of approximately $12.5 million to $15.5 million.

Now, let me turn it back over to Jim for questions.

Jim Fanucchi

Operator, at this time, please open up the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from the line of Alex Henderson with Miller Tabak. Please go ahead.

Alex Henderson – Miller Tabak

Hey, guys.

Alain Couder

Hi.

Alex Henderson – Miller Tabak

Just on the guidance very quickly, the guidance on the gross margin, 31% to 33%, what would the margin impact of the Mintera piece be if it was the midpoint of that Mintera guidance? How do we think about what the margins would have been exclusive of Mintera, in other words?

Jerry Turin

Not really a significant difference, Alex, with the scale of our total revenues. The impact is $3 million to $4 million of Mintera is not significant although the margins would be below that range.

Alex Henderson – Miller Tabak

Mintera margins are below the 31% to 33%. Can you give us some sense of where they are?

Jerry Turin

Quarter stays [ph] at substantially below the 31%, and by the March quarter, as we said in our press release a week or so ago, we expect to be able to take that to the 40% to 45% range, not by March actually, but towards the end of next year. So that should scale fairly consistently from revenue growth, from putting some of our products in, from executive different stages of integration.

Alain Couder

And moving manufacturing to low-cost countries as well.

Alex Henderson – Miller Tabak

So the curve on the Mintera is a function of a couple of variables. Obviously the assumption associated with the timing of revenue ramp and then also redesign of the product, what quarter should we expect the redesign to kick in and what run rate do you need revenues to get to that target margin?

Alain Couder

I think before redesign, we are going to move the current product, the 40G DPSK to Asia in such a way that we have much better manufacturing cost. Right now, they are being built in Texas. So we don’t need any redesigning product. And then we will not have to redesign. In fact, it’s much more than better of using a component as infeed to their current design, whether the components they are using are very close to the one we have. So if we need the requalification because they are different components, we definitely need to redesign for these same products.

Alex Henderson – Miller Tabak

So two quarters for that to occur?

Alain Couder

I think we’ve said in the press release that we will break even in March. Break even in March from an operating point of view. I think in terms of gross margin improvement, I think it will be fairly steady, probably not a lot gets accomplished in one quarter, but when you think about transitioning products, aligning operations, in-feeding products as well as scale from revenue growth. It should be fairly steady between now and towards the end of next year where hopefully we’d reach those targets we were at. I think anything more granular than that would just be even more precision than we have at this point in time, Alex.

Alex Henderson – Miller Tabak

And the revenue scale needed to get to that target margin?

Jerry Turin

If you look at – what we’ve said about their 18-month target, maximizing the (inaudible) at $70 million, I don’t think we need to get quite to that level, but something approaching that sort of level, something probably in the $10 million to $15 million a quarter level, nothing – clearly you need scale to get that, but it’s not entirely scale contingent.

Alex Henderson – Miller Tabak

Okay, great. You had mentioned in previous calls that you’ve had some component availability issues that inhibited your sales in the prior quarter. Was there anything of that else again this quarter that we need to know of?

Jerry Turin

Well, in a big picture sense, certainly very similar to March – very similar to the March quarter and the June quarter. We had more demand than we deliver to. Probably in similar proportions, even though we weren’t able to increase from just over $100 million in March to $113 million roughly in revenue in June, with all of that scale added in telecom. So we certainly delivered a great deal more of the demand. There were still headroom above that and we could have delivered substantially more. And again it’s partly broken down between test and between getting some of these electronic components. And probably that continues a bit into September and maybe a bit into December.

Alex Henderson – Miller Tabak

So the same $5 million to $6 million level you indicated last quarter?

Jerry Turin

That’s – certainly that much at least now.

Alex Henderson – Miller Tabak

And the book-to-bill was above 1, I guess?

Jerry Turin

I was just above 1. It wasn’t as dramatic as the March when it was roughly 1.35 I think. So that’s good because I remember a lot of the questions during the quarter were about inventory levels or double orders. And I think we’ve got our real rational order book that’s really consistent with a strong – what we see going forward.

Alex Henderson – Miller Tabak

And I see the slow comeback. Thanks.

Jerry Turin

Thanks.

Operator

Our next question comes from the line of Kevin Dennean with Citi Investment Research. Please go ahead.

Kevin Dennean – Citi Investment Research

Great. Thank you, gentlemen. Congratulations on a great quarter, first of all. Regarding gross margins between 31% and 33% for the next quarter, can you talk about the puts and takes that will put you at one end or the other of that range?

Jerry Turin

I think it’s – in this particular quarter, I think it’s largely going to be volume-driven, product-driven. As we mentioned in the APS business, it’s going to be somewhat flat and APS tends to be a high margin business. So it’s not going to be driven by a mix shift towards the high margin business. We probably have a few minor cost savings here or there, but we don’t have big moving pieces like we have in the last 12 months. So I think it’s fair to relate it to revenue growth across our broad portfolio, and the more scale we deliver, the more likely we’d be at the top end of the range.

Kevin Dennean – Citi Investment Research

So it’s just a simple – it's a simple volume game?

Jerry Turin

Yes. I think for September, it pretty much comes down to that. There is maybe a couple specific products where we may have some upside opportunity that can be a little bit higher margin, but nothing that’s a driver that I’d put forth as something that needs to happen or is a key driver within that range.

Kevin Dennean – Citi Investment Research

And then just following up on that, Jerry, so your 35% gross margin target for December, again, is that largely a function of volume? And do you feel that you have the capacity in place for you to get those levels earlier?

Jerry Turin

Yes. Two things that I’d say. First of all, December, I think we started seeing the chance for a significant upside in APS, as we finish with a lot of the transitions that were in place. So driving the higher margin APS business is another potential driver in December, although we’re certainly not guiding to December at this point. And as far as having the capacity in place, we continue to invest significantly. We’ve almost doubled our CapEx this quarter. We certainly have significant CapEx in the pipeline. We’ve spent $6.2 million this quarter. I’d be very surprised if we didn’t spend at least $1 million more than that in the next quarter. And we’ve built up some of the inventory stocks as well. So we are definitely investing towards the increased demand, and we believe we’ll have the capacity to deliver growing revenues in September and most likely into December too.

Alain Couder

I think another factor that Jerry had mentioned in his script, which is the fact that the price pressure is less than it has been, while reduction of the cost of our products continued at the same pace. So that’s another important element of the ability to improve our gross margin moving forward.

Jerry Turin

Yes. I wouldn’t say that we need to see more of that in order to achieve the top end, but I think that’s the fact that can help carry us.

Kevin Dennean – Citi Investment Research

And then, Alain, could you talk a little bit about acquisitions as part of the game plan going forward? You made the strategic investment in ClariPhy. You bought Mintera. Can you talk a little bit about the venture capital and private equity players are thinking about your sector? Are they better sellers now than they were just a few years ago? And if that’s the case, can you talk about what that may mean for the industry in general and Oclaro in particular?

Alain Couder

There are several companies where VC invested seven or eight years ago. And therefore they are again at the front. And they have to – they need a negative. So that’s becoming a lot more flexible long-term that they were one at the best. At the same time, some of those companies, which have been successful and which are now profitable and don’t need any more money from the VC, those ones could be more expensive. But I think both Xtellus and Mintera are good examples of that situation, whereas the VC ramped (inaudible). And we are certainly not going to buy something that we don’t need. We have very specific criteria, like I mentioned. But I think we should have more potential where we can buy at the revenue multiple must be lower – own revenue multiple.

Kevin Dennean – Citi Investment Research

Great. Thank you very much.

Operator

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

Paul Bonenfant – Morgan Keegan

Hi, thanks. I wanted to start with a question of clarification. You talked about your pro forma revenue year-over-year in the June quarter. What was that number that you mentioned for the combined Avanex-Bookham?

Alain Couder

It was –

Jerry Turin

78.6.

Paul Bonenfant – Morgan Keegan

78.6. Thank you. Okay. And following on the earlier question about capacity constraint, it sounds like you left another at least $5 million to $6 million on the table this quarter. Can you give us any updates on how those impact you in future quarters? I mean, do you supply constraints easing or is this something that’s going to continue to provide downward pressure on the top line growth in September?

Alain Couder

There are two factors there. We have invested more in CapEx in the June quarter in such a way that in terms of capacity, we are stretching out. But our customers have very short visibility on their orders. And therefore we get very short-term orders, and we do not necessarily have all the materials and components which is needed. So as soon as these very short-term visibility exists from the carrier, I think we see some level of business that we can achieve because of that. But we are clearly investing in CapEx and also increasing the capital efficiency through better test methodologies and better manufacturing processes in such a way that exceed in terms of capacity by the end of the year. We still have to catch up with the demand.

Paul Bonenfant – Morgan Keegan

Okay. Now in the past you talked, Jerry, about OpEx either on an absolute dollar basis or a percentage of sales. How should we think about OpEx in the coming quarter? I think it came in a little bit below expectation this quarter. You’re adding Mintera on top next quarter, but it looks based on your EBITDA guidance that OpEx will remain in check here. Am I thinking along the right lines?

Jerry Turin

Yes, I think that’s fair. I think – we speak about our R&D line and certainly we find to invest that towards 12%. And with most of Mintera’s operating expenses being in the R&D line, you can think about that as significantly out into the R&D line, but still within our business model targets. Mintera has a little bit of SG&A, but not a huge number relative to the company. So I think for the first time in June, we probably have a reasonable basis for SG&A for thinking about a modest growth rate inflation. Just a little bit of growth here and there, but something that should scale very nicely. In contrast to all the previous quarters, there has always been moving parts with significant actions still underway in various other deals we’ve done. So I think June should be a fairly clear reflection. September may be up a little bit more (inaudible) timing of our annual audit and the fees for that tend to be September quarter loaded. But again I wouldn’t say that’s dramatic from a trend point of view.

Paul Bonenfant – Morgan Keegan

Okay. And one more before I get into queue, curious – how do you get the operating income breakeven by the March ’11 quarter? I mean, the assumptions there, obviously a lot of moving parts. You talked about cost reduction synergies I guess include the potential infeeds. Is that the majority of it or are you assuming some significant top line growth between now and then?

Jerry Turin

I think, Paul, there is some good top line growth in that. I think, as you know, in previous quarters, it was kind of tough in the 40-gig world, and orders have certainly picked up. And Mintera’s standalone experience, some of that pick up in September. And in addition to some of the new products and cost reduced products, we certainly see orders picking up in the land of 40-gig, and that helps.

Alain Couder

We do always start showing upfront, but we’d have been (inaudible) their operations, their RAS [ph] and all that into our own structure. And our own structure can solve most of the volume they have. So we see a significant reduction of override in what used to be Mintera before. So that’s a big element of being able to break even in March.

Paul Bonenfant – Morgan Keegan

And that revenue is all the current product, right? The 40G adopted DPSK given –?

Alain Couder

There are two 40Gs. There is a 40G that our plant is shipping, and there are no sampling, cost-reduced 40G called 7000 that will be coming in the (inaudible) volume production.

Paul Bonenfant – Morgan Keegan

Got it. Thank you for taking my questions.

Jerry Turin

Thanks, Paul.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Subu Subrahmanyan with Sanders Morris. Please go ahead.

Subu Subrahmanyan – Sanders Morris

Thank you. My question is regarding orders and book-to-bill. You mentioned the book-to-bill at 1.35 approximately in March versus probably around 1. So the actual level of orders, actual levels declined quarter-over-quarter. And can you talk about kind of the linearity and levels expedite, the thing that you had referred to in the last call? And then Xtellus, can you give us a revenue number? And finally, Jerry, on foreign exchange, that was a good benefit to your overall income this quarter. Can you talk about how we should think about that going forward?

Jerry Turin

Well, there wasn’t very much FX pickup really. We spent a little bit in Europe and Italy, but that’s quite a small overhead base. The talent has been in a reasonable position for a number of quarters now. So there was maybe a couple of few hundred thousand of FX pickup through our different operating expenses and overhead areas. From an Xtellus point of view, we don’t disclosed revenues by product line and WSS is one of many product lines now. So, no more than what we tracked in our individual ramps in different tunable products or so forth, we won’t be speaking to that on a quarterly basis.

From an orders point of view, I think the best way to look at how we are positioned at this quarter end is where we typically look at, which is from an owner coverage point of view. And now we’re between 85% and 90% coverage for the September quarter. So that gives you a gauge on how we are pretty good and that we are in a pretty strong position from an order point of view. Chinese [ph] point of view, I think we and, from what I gather, a lot of folks in the space and similar spaces maybe saw a little bit of a slowdown in early April as people digested the huge order flow in March. And then that seemed to stabilize, and it’s been now growing at nice levels since then and we feel good about our coverage right now.

Subu Subrahmanyan – Sanders Morris

And do you want to comment specifically on the absolute level of orders in June versus March and how we should think about trend going into September?

Jerry Turin

No, I think the coverage what the guidance gives you that number and we feel that a strong demand continues in the second half of this calendar year.

Alain Couder

What we can say is that April in terms of order was a little slow. But May and June level was strong. So in (inaudible) March quarter, we are at 1.3, maybe April (inaudible) still, but clearly the business is picking up in May and June and July as well. So it’s a very nice position to be in.

Subu Subrahmanyan – Sanders Morris

All right. Thank you.

Jerry Turin

Thanks.

Operator

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

Hamed Khorsand – BWS Financial

Hi, just a few questions. Can capacity increase in the industry overall cause demand easily in the next few months? Everyone is increasing capacity lately.

Jerry Turin

That becomes a question of how we execute and how our peers execute. So that’s why it’s important to remind folks that we are not talking about fundamental capacity. In our case, as Alain said, it’s really getting down to the timing of bringing in certain materials. So it’s not infrastructure-related. To the extent it’s been capital-related, it’s largely us ramping test capacity versus fundamental infrastructure. And we’re getting – we are starting to get on top of that. As Alain said, it’s good for us; it is becoming more of a material thing. And I don’t – so again it becomes the execution of that.

Alain Couder

It is a customer satisfaction issue that we do have the necessary capacity to deliver in a short period of time. But the way we are – they breaching obviously is not only because the demand is there for current products, but that was – as I was saying, we’re also introducing several new products in the coming months, and we also are going to stop the scaling of the product that we acquired through acquisition. So the combination of those three puts us in a very powerful position to grow reasonably fast.

Hamed Khorsand – BWS Financial

Okay. And how the customers coping with the types of (inaudible) double ordering?

Jerry Turin

No, we’ve not seen any examples of double ordering. And like I answered a second ago to say that we think that the order pattern is quite rational. If I had seen a similar book-to-bill as we saw in March, then you might worry about the system was getting overheated or inventory is building up or double orders. But where we are at now, we don’t think there is any of that.

Hamed Khorsand – BWS Financial

Okay. And then last question, the market share gains that you’ve been talking about, are they mostly because your competitors haven’t been able to meet with demand or is it because you’re executing as far as the quality of the product?

Jerry Turin

I think most places – we are taking share. And in fact, what’s probably happening more often than not is the peers of ours may benefit where we’re ramping into a new product win. And there is extra demand and some of that goes over to the incumbent that we’ve taken share from.

Hamed Khorsand – BWS Financial

Okay. Thank you.

Operator

Thank you. We now have a follow-up question from the line of Alex Henderson with Miller Tabak. Please go ahead.

Alex Henderson – Miller Tabak

Let’s get there financially mute there. So you’ve made a couple of comments in the body of the earlier presentation. I just wanted to go back to – the first one was, you said you were starting to see some evidence that Light Peak was starting to see some traction. Can you talk a little bit about that because we haven’t really seen any evidence of that from our side?

Alain Couder

No, no. I said next year, meaning next calendar year that is coming. So we still have the same information from Intel. Intel is one that we decided that we cannot comment on that.

Alex Henderson – Miller Tabak

So you are expecting something to come down the pike next year, but you’re not seeing any evidence of it is at this juncture?

Jerry Turin

I think it’s signal from a formal order, former go, former go – go, no-go on a specific laptop or so forth. You really have to get into next year before that starts happening.

Alex Henderson – Miller Tabak

But is there any – I guess what I’m trying to get at is, is there anything that you can give us that would give us some sense that the program is in fact moving ahead? Because it’s very difficult to see externally.

Alain Couder

(inaudible) it is moving ahead. But for us, it’s just one more product. At this point in time, we’re probably one of the largest (inaudible) fab. We produce 14 million a quarter out of our European fab of diesel [ph]. So this is a very significant number. And I think we see a good traction on diesel, but we see not only on – Light Peak would be one of them, but recent very important win is finger navigation. So before we had the mouse, now if you look at Blackberry and other things like that, they are representing the ball by visual now. That’s another major factor of growth for us.

Alex Henderson – Miller Tabak

Okay. Going back to light gig, which is what I was focused on, there is no specific evidence of any change in the dynamics there, but you do believe it’s still progressing.

Jerry Turin

Yes, we believe so. It’s really a product or technology at option cycle. So if you think of it on a year-by-year basis and it’s not going to be a ramp in a new product cycle in the next quarter or so, so you think in terms of next year.

Alex Henderson – Miller Tabak

Okay. Second, it’s pretty clear and listening to several of the players in the optical system space that there was a point of inflection during the second quarter where their demand accelerated quite sharply around the middle of the quarter. It seems to fit [ph] pretty well your components and the experience that you saw in terms of the softness in April and then an acceleration in the back half. Is that linearity that you talked about in the latter two months showing an acceleration into the third month? The pressure with that acceleration of some of these systems (inaudible)?

Jerry Turin

I don’t know. It’s tough to go week-by-week. We get weekly bookings reports. We have major customers. I think it’s hard to be that granular in suggesting that over a couple weeks there is an acceleration in arch, Alex. One big order can have a big influence in one particular week. So I think I’d feel more comfortable with a longer stretch of time before I commented on the acceleration. But nothing inconsistent with your point anyway, that’s for sure.

Alex Henderson – Miller Tabak

Okay. Just going back to the integration of Mintera, what is the sort of dollar, not that we’re absorbing, from the acquisition quarter-to-quarter? What’s the increase in OpEx?

Jerry Turin

We’ve spoken to the operating loss potential and it’s something perhaps in the range of $2 million in September, going down to something $1.5 million in December and hopefully breakeven in March. We’re guiding to $3 million to $4 million in revenues, and we’ve said that at least initially the margins are going to be quite a bit below the low-30s range that we guide to. So I don’t have specific numbers on the OpEx lines, but that should be the metrics to give you an idea. And then most of that OpEx mathematical result should be an R&D.

Alex Henderson – Miller Tabak

And the decline in Mintera’s revenues from about $7 million or $8 million a quarter a year ago to the $2 million to $3 million range, and then we excel. And could you talk to what causes that?

Alain Couder

(inaudible) we knew about that before. And before the acquisition, several customers were worried about their financial stability because the VCs at their end of their phone. And therefore they were hesitant. And that’s now the optimal plough. This is totally removed. In fact, we had several customers. I got 15 emails back from customers. This was great because like the mental technology and so on to work with us. So did they see that rent top-up it’s very clear that when (inaudible) of their fond. And they don’t have enough money to be profitable. The big guys are very careful about buying from them. And then other fact, which plays in our favor, is that the 40G market is actually working again.

Alex Henderson – Miller Tabak

So is it reasonable to say that it’s possible to get back to that prior run rate pretty quickly then? That’s what gives the visibility and the ramp of the product?

Alain Couder

It is very much in line with the amount that we negotiated.

Alex Henderson – Miller Tabak

All right. So if you get those customers coming back, you hit those numbers pretty quickly. And so it looks like a very steep ramp, probably not so much this quarter, but rather in the couple of quarters after that as those products are redesigned into the line products.

Jerry Turin

Yes, hopefully that’s the case, Alex. I would add too that it is interesting to look back over that period you are talking about because it’s important for people down realize too, this s going to be fresh start up last year. This isn’t a fresh start up with a brand new product ramp. So they have ramped to those starts of levels before. So if the orders are there and the opportunities are there, we feel reasonably confident in the ability to ramp given their relatively mature organization and deliver to those revenues before.

Alex Henderson – Miller Tabak

Okay. One last question and I’ll see the floor. So for the $12 million you paid, you got – how many dollars did they spend on R&D and product development? Was it like 85? Did you ever get that number?

Jerry Turin

I don’t, I think, have a specific number, but they raised much from these over time. So you can decide and assume there pretty good percentage of that was invested in R&D over that period of time.

Alex Henderson – Miller Tabak

Okay, great. Thank you.

Operator

Thank you. We have a follow-up question from the line of Kevin Dennean with Citi Investment Research. Please go ahead.

Kevin Dennean – Citi Investment Research

Great. Thanks for letting me back in the queue. Alain, if I heard you correctly earlier, I think you referenced a 30% to 40% growth rate over the course of time. Can you help us think about – first off, am I correct? Did you, in fact, say 30% to 40%?

Alain Couder

Yes, I said that. At that time I was saying 20% to 30%, but we see – we are more bullish on it than we were before.

Kevin Dennean – Citi Investment Research

That’s great. Can you help us think a little bit about this growth rate, maybe by dividing it into kind of buckets of growth, APS versus telecom, new products versus share gains versus end market growth versus acquisitions someone driving it, just to get a better sense of how we should think going forward?

Alain Couder

We don’t give, as you know, by product line. But in terms of APS, we told you we’re going to stay reasonably flat until the fabs are able to produce more in Europe, which is in the fall. And then you should start seeing some significant growth again on the APS side. The other thing, I gave example of the small form factor transponder and the XFP and all our tunable products. And these are very high growth products that are coming to market this year. And for the tunable XFP, and where we took significant market share last year for the small form factor growing smaller. We have new DSA amplifier being designed with our customers. That’s another one, a very important one. And then the acquisition that we are going test – when we acquire the (inaudible) only small fraction of their revenue was WSS. So we’re going to run that to significant level. And – but there we need to put the capacity in place to do it. So we’re seeing apartment there. They already – as Jerry was saying, they already have the capacity. So when we get the other, we know we can ramp and we can scale very quickly. So it’s simply making sure that and obviously the existing products, the new products being produced, plus the products coming from the acquisition where the –

Kevin Dennean – Citi Investment Research

I guess, Alain, just to drill on to this a little bit more, if we were just to think about it very simply, what do you think the end market growth looks like for Oclaro, ex-ing out share gains, ex-ing out acquisitions?

Jerry Turin

Kevin, I kind of try and segment and not quantify it per se because some of those things are difficult to quantify. But if you think in terms of something like a 15% sort of sustainable market growth rate, within telecom and APS, we’ve got relatively new products that are taking share and are continuing to do well. We’ve got products that are being introduced into the next year that aren’t replacement of existing products. Right? So for example, Light Peak and APS are cosmetic applications, or in telecom, tuner XFP, whether its fixed wavelength doesn’t cannibalize our XFP.

We don’t do fixed wavelength XFP and 300-pin transponders should be more than you market opportunities for tunable XFP. So we’re opening up new markets in telecom and APS and then you’re layering on WSS growing from a low base and to a very large market, 30-gig; Mintera in particular growing from a low base into a large market. So if you take a 15% and you take a 30% to 40% and kind of segment the delta, I think you can probably segment it between those categories.

Alain Couder

I think one important point is that we are also expanding into adjacent markets. For instance, the tunable transmitters using fixed wavelength is more, let’s call it, difficult market for 80-kilometer fixed wavelength module. That was more qualified indicator unless in this market before. If you get the visual and optical interconnect, that’s another new market for us. If you get cosmetics with wrinkle reduction, this is a new market for us. So beyond the 15%, we have certainly new products taking market share in those markets, but we also have extension of accessible markets, which is an important element of the growth.

Kevin Dennean – Citi Investment Research

Great. Thank you very much.

Alain Couder

Thanks, Kevin.

Operator

Thank you. And that concludes the question-and-answer session. Mr. Fanucchi, I would like to turn the call back to you.

Jim Fanucchi

Thank you, operator. And thank you, everyone, for joining us. We look forward to speaking with you again when we report our first quarter fiscal year 2011 financial results.

Operator

Ladies and gentlemen, that concludes today’s call. You may now disconnect. Thank you for using the conference center.

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Source: Oclaro, Inc. F4Q10 (Qtr End 07/03/10) Earnings Call Transcript
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