Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Jim Fanucchi – IR

Jerry Turin – CFO

Alain Couder – President and CEO

Analysts

Kevin Dennean – Citi Investment Research

Alex Henderson – Miller Tabak

Ajit Pai – Stifel Nicolaus

Subu Subrahmanyan – Sanders Morris

Hamed Khorsand – BWS Financial

Oclaro, Inc. (OCLR) F1Q2011 Earnings Conference Call October 28, 2010 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. The conference call will begin momentarily. We are allowing more time for participants to connect. Once again, thank you for standing by and please do not disconnect.

Good morning and welcome to the Oclaro first quarter fiscal year 2011 financial results conference call. As a reminder, this conference call is being recorded for replay purposes through November 4, 2010. At this time, I would like to turn the call over to Jim Fanucchi of the Summit IR Group. Please go ahead, 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.

Statements of management's future expectations, plans or prospects for Oclaro and its business, including statements about future financial targets and financial guidance, and Oclaro's plans for future operations and any assumptions underlying these statements, are forward-looking statements under 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 risk 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 views as of the date of this conference call and subsequent events and developments may cause Oclaro's views to change. Oclaro does not intend and is not required to update any forward-looking statements as a result of future developments.

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

Alain Couder

Thank you, Jim and good morning to everyone. So we just finished our September quarter and we have a 43% year-over-year growth on a quarterly basis. At the same time our expectation was better and specifically, in term of gross margin, as Jerry will explain to you. We have probably since Europe, where we've seen several of our customers announcing, announcement getting down for the December quarter. This is a result of several carriers being slow to deploy their network of pushing it out. And we are thinking now in (inaudible) roughly around the world.

So, we found about this not with the announcement but in fact in mid-September where now customer told us they needed to perform inventory correction. These are push outs some of the orders to the next quarter or cancel the order altogether. So, why this was going on booking remained strong and our book-to-bill in the September quarter came in at one. We are giving cautious guidance for the December quarter as it (inaudible) flat from the September quarter. However, Calendar 2011 continued to look good internal growth. I can reiterate what we expect, that we expect to grow 30 to 40%.

We plan to give you a lot more detail on how we will make it happen during the (inaudible) conference in New York on November 12 and at the same time, I will share with you what we call internally our $1 billion plan. Let me now give you some color on our growth. Our Mintera acquisition is doing very well and the demand for 40G's excellent. We are moving production from our WSS product from (inaudible) to Fabrinet in Thailand and should be able to scale volume in the June quarter. By that time we believe that our latest two acquisitions will start to become an important contribution to our growth.

We also have some excellent growth drivers from our core business. (inaudible) we're going to be growing again with production from Europe and Fab. As you remember we transfer from Tucson to Europe and as we speak we are producing (inaudible) products like Tunable XFP and compound a faster TDC. All of those are very high growth products.

In the December quarter, we continued to catch up on capacity to (inaudible) to our customer in Calendar 2011. So with that as our first and very successful Oclaro conference this month, the Oclaro team has united and is very energized by the (inaudible). I will share it with you in November and now I would like to have Jerry to give you all the numbers. Thank you.

Jerry Turin

Thanks, Alain. Our revenues for the September quarter, which ended October 2, 2010, were 121.3 million, up 7.7% from 112.7 million in the prior quarter and up 43% from the September quarter of the prior year. Our September revenues include three million from Mintera, which became part of Oclaro in a deal that closed July 21, 2010. We're pleased with the momentum of Mintera's 40 Gb business. We see a strong backlog and solid growth for that business in the upcoming December quarter.

Revenues from our Advanced Photonic Solutions business, which we also refer to as APS were 13.5 million or 11.1% of total revenues. This is down from 14 million or 12.7% of total revenues in the prior quarter. We're completing our European bring up of the Spectra-Physics Fab transfer which has contributed to sluggish APS revenues over the last two quarters. However, we also saw softness in some of the consumer markets, third by Advanced Photonic Solutions and expect APS revenues to be down next quarter.

For the remainder of our telecom business, Alain elaborated on our revenue results for the quarter and our visibility into December at this point in time. From a customer point of view, our 10% customers were well away at 15% of total revenues and Alcatel at 13%.

Our non-GAAP gross margins were 29% in the September quarter, down two points from 31% in the June quarter and below guidance. Our APS revenues were down as a percentage of revenue. These tend to be high margin products. We added the Mintera 40 Gb products to our revenues. Today these are low margin products. We are on a solid pathway for turning the Mintera products into strong margin contributors in step functions throughout Calendar 2011.

The volatility and push outs we experienced in orders in the last couple of weeks of September also led to a product mix of relatively lower growth margins than we would have expected. This contributed to the remainder of our revenue growth, tending to be weighted toward products coming from contract manufacturers. So, in this quarter our margins did not benefit from the added scale of running more revenues through our internal facilities.

We also had about $500,000 of adverse foreign currency impact on our manufacturing overhead costs in Europe. For the December quarter, we do not see our product mix changing for the positive at this time. For example, our expected revenue decline in APS for the December quarter is largely due to an inventory correction and a particularly high margin consumer market. We expect relatively flat revenues overall in December so we do not expect to drive any corresponding gross margin expansion from shipping more revenues out of our internal manufacturing facilities.

Also the Mintera and Xtellus gross margin improvements that are underway have not been scheduled to come on track in December. Accordingly, we've been cautious in our gross margin guidance for December. As of today, we do expect to resume gross margin improvement traction throughout 2011. Where we need to be cautious is the timing because of our limited short-term visibility. We do expect to see overall growth, an upwards gross margin trajectory returning. For example, we expect a return to growth in high margin APS business.

We expect much of our future growth in telecom to be focused around our higher margin products, including some of the exciting new products described by Alain, like Tunable XFP. We expect to improve Mintera’s margin as we enter it as a (inaudible) version of their 40G DPSK transponder and then again, by integrating our own internal components into their products. And then as we transition more of their production into our internal manufacturing model. And we expect Xtellus WSS margins to improve as we extend 2010 product qualifications cycles into significant revenue growth in 2011, allowing us to reap the rewards of both added scale and improved deficiencies.

Just to give you a data point validating our positive product positioning, already in the December quarter, we expect approximately 30% of our telecom revenues to be derived from products deployed in 40 Gb or above network applications.

Our R&D expenses in September were 13.7 million, up from 11.5 million in June. This corresponds to 11% of our revenues for the September quarter. The increase includes the addition of Mintera R&D spends as well as our continuing investment in organic growth opportunities. Our SG&A expenses in September were 14.8 million, up from 14.1 million in June. The increase reflects the addition of Mintera and the timing of our annual audit costs.

Store compensation included in cost of sales was 300,000, included in R&D was approximately 300,000 and included in SG&A was approximately 700,000. Within our other income and expense categories, interest expense includes 500,000 of non-cash accretion associated with the finer points of the GAAP accounting for the purchase of Xtellus. We continue to be debt free and therefore our convential interest expense is minimal.

We also had a loss of 3.6 million on foreign currency. This relates to an accounting process generating a non-cash impact reconciling the intercompany receivables and payables between our foreign subsidiaries. I've discussed this line item in the past. It tends to fluctuate from gains to losses and vice versa as currency rates move back and forth over time.

From a profitability point of view, our adjusted EBITDA in September was 10.9 million, down from 12.3 million in the prior quarter. This includes 1.3 million of operating loss associated with absorbing approximately two months of Mintera, an amount consistent with expectations we laid out going into the quarter.

Mintera aside, our EBITDA was relatively flat from the June quarter. The message here is that while we're not at all satisfied with the results for the quarter, we've demonstrated that the new Oclaro, in the same quarter, can absorb both an inventory correction and a short-term margin setback and still maintain solid profitability until resuming the drive towards our business model targets.

On to the balance sheet. We ended with cash, cash equivalence and restricted cash of 94 million compared to 112 million last quarter. Cash used in the quarter includes $12 million paid in connection with the Mintera acquisition.

Our receivables at the end of September were 101.9 million, up from 93.4 million at the end of June. The increase was consistent with the growth in our revenues and the addition of Mintera.

Our inventories at the end of September were 72.6 million, up from 62.6 million at the end of June. The increase includes the addition of Mintera. The remainder of the increase was to invest in supporting the growth of Oclaro, including an increase in certain strategic stocks. Of all utility of order patterns and mixed rate in the quarter also added a small amount to our ending inventory.

With (inaudible) point of view, our CapEx was 6.9 million. We expect a similar number in the December quarter. From a liabilities point of view, we continue to have no outstanding debt. We did pay down 2.7 million in restructuring liabilities in the quarter. This included $2 million in scheduled payments upon the termination of a lease of an empty facility going many years back to one of our predecessor companies.

Our shares outstanding at the end of the quarter were approximately 48 million basic and 51 million diluted. We expect our share count to be relatively consistent for the December quarter. Before moving on to questions, let me reiterate our guidance for the December quarter and to January 1, 2011. We expect our revenues to be 116 million to 124 million. We expect our gross margins to be 27% to 31%. We expect our adjusted EBITDA to be 6 million to 11 million.

Operator, can you open the lines for questions?

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions) Our first question comes from the line of Kevin Dennean, Citibank. Please go ahead.

Kevin Dennean - Citibank.

Great. Thanks. And good morning, everyone.

Unidentified Company Representative

Good morning.

Kevin Dennean - Citibank.

Jerry or Alain. Could you discuss the sequential decline in gross margins in a little bit more detail? Maybe, kind of break it down into factors such as mix, the impact of mix, the impact of utilization and were there any higher depreciation costs in the quarter? I think you brought some back end capacity online?

Jerry Turin

So the depreciation doesn't change very much quarter to quarter, even with the higher CapEx rate that we're spending and I would so that it's pretty much an even split between the factors we described. Mostly, the mixed. Breaking it down by mix between one division going up or down or one product [indiscernible] I wouldn't want to get that granular because that would imply describing our actual merge by division which we don't want to get into.

However, APS certainly is a high margin business and as we're ramping Mintera into the cost reductions we've implied it's a lower margin business and then the latent quarter mixed change between internal manufacturing versus external manufacturing. I would say it was probably an even balance between those categories. Maybe just miscellaneous small things probably of similar magnitude to each of those and then the $500,000 foreign currency change as well. So you add a few of those in equal proportions and I think you come to most of the difference from say the middle to the low end of guidance given that we were at the low end of the revenue range.

Kevin Dennean - Citibank

Great. And can you talk a little about your current manufacturing utilization rates and maybe if you could give us, describe it in terms of front end and then package [indiscernible]?

Jerry Turin

Yeah. Front end we probably range from 40 to 60% capacity that tends to be capacity limited with very few machine bottlenecks so if we actually added a few pieces of equipment that would be in the few million dollar range, you'd probably see those numbers go down to 20 to 30% so we have significant capacity in the front end. In the backend we're probably getting close. We're probably over 80% in our Shensend backend facility and again, with only a few million dollars I think we can add, you know, we've been talking about this, about 30% utilization within Shensend and then from there it would be a question of rebalancing production in Shensend. There's still some low value added connectors and things like that or better done that would be leading to outsource not necessarily impacting the scalability thesis so that's kind of the front and back end and capacity story.

Kevin Dennean - Citibank

Okay and just one more quick one from me though. If I'm calculating this right it looks like your incremental gross margins were about 640 basis points. It's a significant decline from the prior quarter and even most of last year so, and I think it's below the level, the 50% level that you discussed previously so understanding that, it's somewhat a function of mixed and probably more so revenues? Can you talk about how we should think about this going forward? Is 50% off the table, 50% incremental gross margins off the table for now?

Jerry Turin

No, I think we're pretty close to that. I think we're certainly on the stealth end of that in September but we're not that far below it for September and I wouldn't expect much movement from that for in December but I think we get back to a few points about that as we to the middle of next year and execute the margin improvements on the startups and start driving more of our revenue growth through some of the products, the new products and the products that tend to be weighted more towards our Shensend facility versus contract manufacturers.

So I certainly think we get back to that. Probably don't get back to that in March though just because the timing of pricing year-on-year. The momentum that we turned around in March, you're probably just offsetting that so I wouldn't expect a traction until June.

Kevin Dennean - Citibank

Is the 35% gross margin target by the end of fiscal year still in play or is that delayed by a quarter or two?

Jerry Turin

You know we just have very limited visibility and revenue growth rate now. We actually have a couple of months of inventory slowing through or adjusting or do we have a quarter and a half given our model is based, our gross margin model is primarily based on scale. Then secondarily I'd say mix and given the mix coming back through [indiscernible] growth and APS and growth in some of our certain telecom products it's a little early to tell now whether growth resumes in the middle of this quarter, middle of the December quarter or does it resume in the middle of the March quarter and that adds some variability to when we get that traction to move back in that direction. I think that it would be good if we got back to 35% in June. I think that would be strong performance. I don't think it's out of the question but I think that would

be a very strong performance getting there in June but we certainly should be on track in that direction.

Kevin Dennean - Citibank

Okay, thanks. I'll drop back into the queue.

Jerry Turin

Thanks.

Operator

Thank you. Your next question is from Alex Henderson with Miller Tabak. Please go ahead.

Alex Henderson – Miller Tabak

So a couple of questions. Is there any specific areas within the optical segment of your business that is seeing more push out and are there alternative areas that are a little bit more robust. For instance I would think the WSS segment of the market would be fairly robust and sounds like the push outs were in some of the other optical components?

Alain Couder

Yeah. That's a good point. The new product after robust 40Gb you know which is now becoming a significant [indiscernible] of ours and whether the WSS. Those are. On WSS we will not be able to [indiscernible] revenue until we operate outside of Fabrinet. That will be in the June quarter so we cannot benefit from that yet. But on 40Gb we are seeing some very nice momentum with the product from our Mintera acquisition but also from all the other components that lead to 40Gb like [indiscernible], GDC, 12G, amplifier and then those kind of things. So these parties clearly still going well and we still have limited capacity but on the more traditional telecom products we have seen some significant inventory correction and we're also seeing in December some significant inventory corrections on the consumer related market. That's really the other area where we are seeing that. Right now it's what our customers are telling us. It is short-term inventory corrections due to basically two phenomenon. The one is the carrier deploying slower than expected the equipment. Sometimes they could not give the equipment to the carrier because they were short of electronic components and therefore

all the electrical components that didn't have the electronic part of it so this is again as Jerry was saying, this is a very short-term inventory correction and the growth will resume quickly and right now this is a very big deal. We have significant in the months of June we have significant goals coming back but we're clearing unstable carriers right now are seeing and we are seeing new news on that all around the world. It's not different in any geography at this point in time. This is where we have decided to be cautious in our guidance for the December quarter and basically gives you a flat guidance from September.

Alex Henderson - Miller Tabak

If you go and look at the various OEMs is there any specific OEMs that are strong or any areas that are weak?

Can you be a little more granular on that?

Alain Couder

No, it's all over the place. We get inventory correction both from Tier 1 and Tier 2 companies. You certainly from the recent announcement of results you certainly know that those companies have been giving guidance downward for December. Certainly part of the list but given other Tier 1 company that is not necessarily a public company also having some correction going on right now and it's true in China, in North America and in Europe.

Alex Henderson - Miller Tabak

What's gives you the confidence then that you're going to be able to produce 30 to 40% growth in CY2011 based on the uncertainty you just described. It seems like there's a little bit of disconnect there? What is it specifically that gives you that confidence to make a comment like that?

Alain Couder

I think the comment is based on the acquisition we have made. We are seeing excellent traction on 40Gb at the first point we will be able to stop the [indiscernible] of the WSS while the gross is very significant at this point in time and then we expect that the APS business is going to resume growing when we will be able to produce a chip outside of Europe. So that's our current [indiscernible]. That's the three major drivers right now. But we will give you a lot more detail on that as the analyst conference on November 12.

Jerry Turin

Let me just add one thing Alain too. For each of those the concept to keep in mind is that also represents dam expansion. So when you think in terms of growth rates, yeah, those aren't necessarily replacement products for what we're currently selling. That's us in a sense entering new markets, opening up our available markets so you're thinking about the math of layering on new markets on top of your core markets. That's where that sort of growth rate becomes plausible by adding these new businesses on top.

Alex Henderson - Miller Tabak

But, if we were to strip out the addition of quote "new businesses". What do you think the baseline growth rate of your business is?

Jerry Turin

I think probably and Alain can kick in too but I think a little bit above the market growth rate because we think in our core areas we grow with the market and take a little bit of share. And so if you think that's 15% next year or 10% or 20%. We'd probably like to achieve 5% above that. Alain, is that?

Alain Couder

It's around 15% for what we call our core business which is the business we were, as the market that we were addressing with the,

before the merger between Oclaro and between [indiscernible] and you know?

Alex Henderson - Miller Tabak

I'll cede the floor. Thanks.

Jerry Turin

Thanks

Operator

Thank you. Our next question comes from the line of Ajit Pai with Stifel Nicolaus. Please go ahead.

Ajit Pai - Stifel Nicolaus

Yes. Good morning. A couple of quick questions. I think the first is about your APS business. You know the business was down in this quarter and then you're guiding again for December but this is a business also that you talked about an inventory correction but when you look at the lay of the company as the business has quite strong. The auto books are strong. You had better than expected results from Newport. I just want to understand how much of that is an inventory correction and how much of that is actually a contract with Newport for selling from your Tucson Database, the diod I think finished in the June quarter if I remember right so how much of it is structural and how much is just an inventory correction on the APS side?

Jerry Turin

Yes. So let me elaborate on one thing Ajit. The supply agreement with Newport sector physics didn't expire is a multi-year agreement so just to be clear there is no step function drop off from this standup supply agreement but we certainly, given the last two quarters of the Fab transition where we hadn't built up enough inventory to support the demand during that period. We likely lost some share during that period and that's a fair observation I think. I think in the next quarter it's an inventory correction so I think it is two fairly discreet phenomenon. One is over two quarters we've not been delivering to the full customer demand because of the inventory restrictions, the limitations in what we actually built out is security stock for the transfer and then a different part of the APS seen in inventory corrections in the December quarter.

Ajit Pai - Stifel Nicolaus

Right and then you also had announced during the course of this quarter some investments in Tucson or close to your Tucson a whole lab over there. Could you give us some color as to what your investments over there are and also the symmetric connection you talked about whether it's at Newport or it's at other commercial customers.

Alain Couder

Basically the Tucson announcement is about getting out of the last new building that was, Fab was and staying with Newport and moving into a new building and at the same time at this new building we have concerns with the more R&D capacity, specifically internal packaging for the Photonix Solutions business. But it is in fact from a customer viewpoint it is a cost reduction. In fact this new building is not an increase in cost on a quarterly basis.

Jerry Turin

Yeah. But you remember part of the value proposition of the deal Ajit was to be able to shut down an entire Fab because we're bringing up that production in Europe so you shut down that Fab where you're housing all your R&D and PLM folks so you move those to a new, smaller facility and that's what the announcement was referring to, that the new facility with the new lab but with a downsizing from the big old fab facility and a cost reduction measure.

Ajit Pai - Stifel Nicolaus

Got it and then the inventory. Is it at Newport or is at other customers?

Jerry Turin

Go ahead, Alain.

Alain Couder

It's both in Newport and as Jerry was discussing it's a combination of inventory correction on some product on their side and lack of inventory on our side in the chip that we are building Tucson and I'm not qualified yet out of Europe. So we have two restrictions at supplies in the December quarter and that's why we expect the APS business to slow down again in the December quarter.

Jerry Turin

Just to be clear, Ajit. We didn't see anything unusual from Newport’s Spectra-Physics if that helps so there should be no messages derived about how their businesses are doing because I don't think what we're talking about is necessarily reflective of what's happening with them in their end market stop. No one should take that message from what we're describing.

Ajit Pai - Stifel Nicolaus

Yeah. Yeah. They had their call yesterday in the evening. I think. They're very robust results and very robust guidance. The last question is just the Xstellus transition to Fabrinet. I think its best we mention that it happened in June. Did you mean that the June quarter you'll benefit fully from it or you think the month of June is when it's going to, the transition will happen? Will it be ramping through the quarter or do we expect it to happen from the end of the month of June and happen the subsequent quarter?

Alain Couder

Currently our plan is to ramp for the full quarter but this involves a clarification with our customers so we cannot exactly predict week by week when this will be complete.

Ajit Pai - Stifel Nicolaus

Right, but your plan is to be ramping from the beginning of the June quarter but not the month of June, but not April, May, June, right?

Alain Couder

This is correct.

Ajit Pai - Stifel Nicolaus

Okay, thank you.

Operator

Our next question comes from the line of Subu Subrahmanyan. Please go ahead.

Subu Subrahmanyan - Sanders Morris

Thank you. I have two questions. Just going back to guidance and kind of auto trends, if you could and I know you mentioned there was no kind of variable at the end market. I was wondering if there was any particular variable albeit across products, one product may seem more impacted than the others? And then in terms of inventory correction and the path you have can you talk a bit now about the lower level revenues and the capacity additions that you've been doing? When we converge on demand or capacity catching up with the level of demand?

Jerry Turin

So the first question on the patterns within the demand and orders and so forth. So, we're slightly over one to one bookings. APS was a little softer and within Telecom, I think the only trend within the trend was 40 Gb, you know quite solid. Within that, kind of one of the mixed messages and I think Alain referred to this in his commentary is at the very end of September and so far in October the orders are in pretty reasonable shape. We've got, I think we're 80% covered for this quarter so that's similar coverage to the last couple quarters when we've had the torrid demand environment so, but we have a lot of uncertainty. The underlying order supporting what we're guiding to in December. It's in a pretty strong position. I think you were breaking up on the second part of your question and I think what you were asking. I'll paraphrase and I hope I have it right is this. In recent quarters our demand has been much higher than what we've been able to deliver from a capacity and from a materials available point of availability point of view. And I think you were asking whether that's been closed and when we close that completely now that revenue growth is slower? Is that a fair characterization Subu?

Subu Subrahmanyan - Sanders Morris

Yes, that's fine. I was just asking with the trajectory of revenues being more kind of flattish and your capacity additions being fairly strong over the last two quarters, when those two converged?

Jim Turin

Yeah. So we should be in pretty good shape in December. In fact when one kind of perverse upside on slowing for the quarter is it gives us the chance to put more flexibility into our system too, so not just catching up on closing that gap but when you think about a quarter like this when you have a lot of volatility at the end and when you're just struggling to deliver what's fair for a capacity point of view, you're limited in what you can do as far as varying that product mix at the end and then you're limited in how you can shift or mix back and forth between customers. So we certainly want to get more flexibility back into our business and this is an opportunity to do that.

Subu Subrahmanyan - Sanders Morris

And ahead of typically what's a seasonally strong September quarter, I mean what was the qualitative comments from your customers as to why they're doing and kind of an inventory adjustment now because they should typically be at ramping for or getting ready for a strong fourth quarter ramp? Why choose to do it now and then come back and the seasonally weak March quarter to start ordering more? I mean subtends that are causing that to happen?

Alain Couder

Like I said its two things. The first thing is that there are some carriers who are slower to deploy the equipment that was unexpected and the second one is the serious shortage of some component that leads to some shortages on, for our customers and therefore they don't need as many optical components. That's really the two main drivers from our customer Mintera and the forecast for our customer continues to be quite strong for March and June right now.

Jim Turin

And at the same time keep in mind that the public companies have announced that they've lowered their guidance so that's kind of a clear indication of what they do expect for December and what we started seeing in the last couple weeks of September. It's very consistent with them coming to that realization at that point of time.

Subu Subrahmanyan - Sanders Morris

Thank you very much.

Jim Turin

Thank you.

Operator

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

Hamed Khorsand - BWS Financial

Hey, good morning. What is the impact to OpEx from the capacity, from the added capacity?

Jim Turin

Right now the added, there's really no impact to operating expenses from adding the capacity Hamed. R&D increases in R&D are a combination of added (inaudible) plus increasing the organic investments in (inaudible) and to some extent materials for a new product ramps. That's been consistent with us talking about a 12 to 13% investment rate and probably moving more towards 12% and then we're only at 11% even as we add the OpEx and in G&A, if there was fairly consistent except for adding Mintera plus timing of oddities and we see that going up gradually over time. From a capacity point of view we spent 6.9 in CapEx and that compares to about three, 3.5 million of depreciation. I've not got that number at my fingers but over a long period of time, a 5-7 year period of time those numbers will converge but in the short-term there's very little impact from that. Things like utilities and so forth don't change because we're not adding building space or we're not adding entire production lines where we're primarily adding test equipment and the people that man that test equipment are part of a direct that's part of our variable costs and not really part of our fixed overhead base either.

Hamed Khorsand - BWS Financial

Okay and how much visibility do you have as far as orders being pushed out or cancelled to offset what's usually a seasonal decline when you go into the March quarter?

Alain Couder

We have (inaudible) that happened in September. First week in September we were still very bullish and thinking that we would do a very strong quarter and all of a sudden basically at the end of the second week of September we saw some organization coming. This is what we have been saying as the (inaudible) of business. All the visibility in terms of orders that our customers give us is 2 to 4 weeks and right now in terms of forecast, as I said, it's March and June are still strong but they will just continue to (inaudible) on the short-term. This is also a demonstration that there has been no inventory buildup of anything significance. Either the (inaudible) or our customer right now.

Hamed Khorsand - BWS Financial

Okay, thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from Alex Henderson with Miller Tabak. Please go ahead.

Alex Henderson - Miller Tabak

So going back to the linearity of orders a little bit. Can you talk a little bit about what you've seen in October in terms of whether the orders you're seeing in October are consistent with normal trend of demand that you would see in 4Q? Can you give us a little bit more granularity on that?

Jim Turin

Well at the top level, given our guidance I think we're seeing order patterns very consistent week by week with that. I'm not sure there's, it seems to be fairly broad based, right so it's not like it's concentrated in a couple of large orders with a couple of large customers. It seems to be fairly diversified from a product point of view and customer point of view and I don't really have much more on that. I don't know Alain whether you do but that is what it is, I think?

Alain Couder

Yeah we are on track and we did a little over one in some of book to billings September quarter and the first three weeks of October seems to continue with a similar trend at this point of time.

Alex Henderson - Miller Tabak

So help me understand this inventory correction commentary then. It sounds like you had. I mean it said that you had expected you were pretty well covered for the full quarter by the middle of August and yet you saw enough fall off to result in you coming in at the bottom of your band of guidance for the September quarter and yet you're saying your book to bill was above one and you're saying that order rates were normal in the currant month? It seems like there's a contradiction in that?

Alain Couder

No there's no contradiction. We were very bullish when we were discussing that meaning that we thought that we would clearly come up very high-end of the guidance. Even at the beginning of September and we have a fairly fullish forecast for the December quarter's that time so this inventory correction has basically put us in a situation where at the end of September we came out at zero end of guidance that we are getting flat for the December quarter. Well we will (inaudible) with what we knew at the beginning of September with the significant low revenues, that's what we are getting today. So that's where the (inaudible) comes in.

Jerry Turin

And then just to elaborate, Alex in the second half of September it was order cancellations and push outs so they were orders that were there. They weren't necessarily orders that didn't materialize.

Alex Henderson - Miller Tabak

Can you give us the magnitude of the dollar value of that?

Alain Couder

I think basically I gave it to you by saying that we were expecting to have a very strong high-end of guidance as the end of September.

Alex Henderson - Miller Tabak

So about $15 million or so?

Jim Turin

No.

Alain Couder

No it's more like

Jim Turin

No we delivered 121 million of revenues and we were guiding towards 126 and APS was a little soft within that regard wish so you're talking about whatever range of numbers that amounts but more like 4 million plus or minus. Certainly nothing like 15 million.

Alex Henderson - Miller Tabak

But you also took the top off the, what you would have expected for the fourth quarter?

But put the 4 million, $5 million from 3Q and then what you lost out of the fourth quarter?

Jim Turin

As far as trends, yes. As far as new orders plus the phenomenon you're talking about so if you add it all up that probably is getting closer to the range of month, month and a half ago what we would have thought was possible for December. Sorry I thought you were speaking to September again.

Alex Henderson - Miller Tabak

So the second question is given you're in the period when you normally do your price negotiation how's this impacting your pricing

thinking for 2011 and how should we be thinking about price decline in the January timeframe when you normally see the bulk of your annual price cuts?

Alain Couder

It's a little too early to give you a number because we have done less than 25% of our product distribution but we don't see any middle change in price erosion from what we have seen this year. That's basically where we are.

Alex Henderson - Miller Tabak

You're saying the rate of decline in pricing in 2011 will be comparable to the rate of decline in 2010?

Alain Couder

(inaudible) again this applies only to 25% of revenue.

Alex Henderson - Miller Tabak

But isn't that?

Alain Couder

It's pretty much year to year to give you

Alex Henderson - Miller Tabak

That sounds like a change in what you were thinking though? I think you had indicated in September you were expecting it would be of somewhat less of a price in 2011?

Alain Couder

That was our hope and is still our hope but I don't have any firm fact yet to speak to that. I think we can speak to that at later.

Jerry Turin

Yeah and it becomes a factor of (inaudible) if you're thinking about entire 2011 and if you think about the mix between new product ramps in the new markets where you're establishing price lines versus seeing adjustments year-on-year so that's a mixed element of estimating the 2011 price declines that needs to be factored too and again it's a little early to come up with that metric.

Alex Henderson - Miller Tabak

I'll cede the floor. Thanks.

Operator

Thank you. And this concludes the question-and-answer session. Management, please proceed.

Jim Fanucchi

Thank you everyone for joining us today. We look forward to speaking with you again when we report our second quarter fiscal year 2011 financial results.

Operator

Ladies and gentlemen, this concludes the Oclaro first quarter fiscal 2011 conference call. You may now disconnect. Thank you for using the conference center.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Oclaro CEO Discusses F1Q2011 Results - Earnings Call Transcript
This Transcript
All Transcripts