Oclaro CEO Discusses F2Q11 Results - Earnings Call

Jan.27.11 | About: Oclaro, Inc. (OCLR)

Oclaro, Inc (NASDAQ:OCLR)

F2Q11 Earnings Call

January 28, 2011; 4:30 pm ET

Executives

Alain Couder - President & Chief Executive Officer

Jerry Turin - Chief Financial Officer

Jim Fanucchi – Investor Relations

Analysts

Alex Henderson - Miller Tabak

Subu Subrahmanyan - Sanders Morris

Hamed Khorsand - BWS Financial

Kevin Dennean - Citi Investment Research

Dave Kang - B. Riley

Operator

Good afternoon, and welcome to the Oclaro second quarter fiscal year 2011 financial results conference call. As a reminder, this conference call is being recorded for replay purposes through February 3, 2011.

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.

In addition, we will be discussing non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP.

A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC. I refer investors to this release.

I’d now like to turn the call over to Jerry.

Jerry Turin

Thanks, Jim. Our results for the December quarter, which ended January 1, 2011 and our guidance for the upcoming March quarter are consistent with expectations established previously. Our revenues for this recently completed quarter were $120.3 million compared to $121.3 million in the previous quarter. Our revenues from Huawei were 17% of our revenues in the quarter, CNA Nortel was 12% of our revenues, Alcatel-Lucent was a11% of our revenues.

Out of our total revenues, our Advanced Photonic Solutions business was 12 million or 10% of revenues, down $1.5 million from $13.5 million or 11% of revenues in the prior quarter.

If I look back to the March quarter of last year, APS had been 14% of our revenues. This is before the short-term flatness and declines we’ve seen as a result of tight inventories during completion of a Fab transfer ramp, as well as of excellent inventory trend by our largest customers with our product.

We are moving beyond the transfer and the inventory correction and the book-to-bill on APS was strong with customer engagements progressing nicely. For the March quarter we expect growth to resume to telecom levels, but we do remain relatively conservative as to APS expectations in that quarter.

Our telecom revenues were relatively steady quarter-on-quarter, up slightly at a $108.3 million versus $107.8 million last quarter. This was consistent with the inventory correction and related guidance we provided coming out of the prior quarter.

We believe our revenues from products deployed in 40-gig or higher networks in the December quarter were over 30% of our telecom revenues. This is not a metric, we will be reporting on a regular basis. However, this result was consistent with an expectation we put out last quarter. So, I wanted to make this achievement clear.

Our gross margins for the quarter were 30%, compared to 29% in the previous quarter. We were able to increase gross margins even while our mix of high margin APS products declined, and as our revenues from former Mintera 40-gig products increased, albeit prior to implementation of all the cost improvement that are expected to transition these former Mintera products from lower than an average margins to higher margins in the future.

For the March quarter, we are guiding to a range of non-GAAP gross margins relatively consistent with December, even while absorbing the impact of new pricing, the majority of which takes effect at the start of the March quarter.

As many of you know, the majority of our pricing is reset January 1, based on annual negotiations with many of our major customers. On an annualized basis, we historically see in the range of 12% to 15% price declines. This year we believe the annualized effect of the new prices to be closer to the bottom of that range.

These negotiations also include annual allotments of products, and this year’s negotiations also included the setting of initial prices on a number of key new product introductions for us in calendar 2011. We were pleased with the results of the pricing and with our allotments, and in particular we are gratified by the strategic tones of the negotiation processes.

Our R&D for the quarter was $15.7 million or 13% of revenues compared to $13.7 million in the previous quarter. We expect R&D to continue to range in the neighborhood of 13% of revenues. Our SG&A for the quarter was $15.1 million compared to $14.8 million in the previous quarter. Our restructuring and merger related expense was $900,000 compared to $700,000 in the previous quarter.

Our merger integration efforts to-date have been focused on sustaining design and qualification momentum, we will now be shifting emphasis to product ramp and efficient scalability to our long-term goals. Alain, will discuss more on this topic.

Accordingly, we expect our restructuring and merger related expenses to increase and trended approximately $1.5 million a quarter for each of the next two quarters, which includes outside consultants and related costs. We also expect our SG&A expense to rise for additional spend on information systems in connection with this emphasis.

Stock compensation included in cost of sales, R&D and SG&A was $350,000, $390,000 and $930,000 respectively. Our non-GAAP operating income was $6.6 million or 6% of revenue this quarter compared to $7.7 million or 6% of revenues in the prior quarter.

Our adjusted EBITDA was $10.1 million or 8% of revenues this quarter compared to $10.9 million or 9% of revenues in the prior quarter. Our non-GAAP net income was $5.9 million this quarter compared to $6.6 million last quarter.

The reconciliation between our GAAP results and our non-GAAP results includes a $1.7 charge primarily associated with the settlement estimate of a long-standing intellectual property dispute. A 1.1 million non-cash loss on foreign currency exchange generated internally between our inter company balances, this was a reduction compared to 3.6 million in the prior quarter.

We continue to manage down the underlying balances to lower levels and we are exploring other mechanisms to further reduce the potential GAAP earnings volatility associated with this technical accounting related gain or loss. We see our earnings release online for a complete reconciliation of all non-GAAP measures.

Now on to the balance sheet; our ending cash, cash equivalents and restricted cash was $78.1 million compared to $94 million in the prior quarter. While we continue to generate positive operating earnings, we are in the investment and growth mode as well.

Our receivables increased to $105.7 million from a $101.9 million, although our revenues were relatively level quarter-to-quarter. This is the fiscal yearend for many of our large customers and as it will be common for the end of December many of these customers held back December payments until the first week of January, when the amounts were by and large collected. This timing difference had an adverse impact on our quarter in cash balance.

Our inventories increased to $82.8 million from $72.6 million at the end of the prior quarter. This increase was largely a strategic investment to scale up our buffer stock of chips, our material stocks and our staging of strategic stocks, the key levels of our production process in order to give our customers the flexibility they need.

While we expect inventories to continue to increase moderately as we grow the company, we do not expect to replicate the step function magnitude of the December quarter’s increase in this investment area.

Our CapEx in the quarter was $11.4 million, compared to $6.9 million in the prior quarter. This is consistent with messages we’ve delivered as the CapEx rising to both close capacity gaps and the scale of ramp of new products. We expect the similar level of CapEx investments in upcoming quarters. We also do not anticipate experiencing any significant capacity issues in the upcoming few quarters, other than associating with improving yields on APS laser diode products as we continue to ramp the production in the European fabs.

To the extent any other constraints due arise, we expect they would be relatively unique in cause by changing business conditions at the time, rather than our previous time lag in catching up to the 2010 surgeon [ph] demand in the phase of extended material and capital lead times we face as the technology industry rebounded of the prior year economic downturn.

To conclude on cash, we expect to use net cash for investment in our growth in our scale, until that turns around into net cash generation later in calendar 2011. Some of investment has been incurred in connection with ramping the businesses as we acquired in the last year as expected. We remain comfortable with the expected levels of our cash balances. As we continue to fund our operating growth and our business model expansion, we expect all these balances have reached above the 60 million level.

This excludes any cash required for strategic investment, should any be made although at this point in time we are clearly focused on our organic growth and the efficient scaling of that growth. We continued to have no debt, we have a line of credit facility that is not drawn and our networking capital was approximately $175 million.

Our weighted average diluted share count used in non-GAAP EPS for the quarter was 51.2 million shares and we expect that all relatively steady the March quarter.

Now let me reiterate our guidance for the fiscal quarter ended April 2, 2011. We expect revenues to be in a range of $123 million to $131 million. We except non-GAAP gross margin to be in a range of 27% or 31%. We except adjusted EBITDA to be in a range of $6 million to $11 million.

Now let me hand off to Alain.

Alain Couder

Thank you Jerry, and good afternoon. So, far the December quarter was one of stabilization we didn’t see these surprises in term of all the push out, all the cancellation as the business really happen as expected you know. And we have executed as a result of that on guidance and we had slight push on the margin side, which was clearly one of our focus.

So, when we look forward the year that is in front of us, that is the year of strength in all the market we serve, telecom and non-telecom, and as we under seeing several new products and that we get more detail on that later on. We are expecting to accelerate our growth in the second half of this year.

So, in my recent customer visit, I’ve learned following. First, the serge in demand that we experienced coming out of the downturn is over. At the same time, all our last customer are seeing a solid and sustainable growth for the year to come, and it is consistent with the share of our revenue in December. We see those people doing fairly well.

In the telecom, the fundamental that we describe during the Analyst Day in December, I feel that’s very true, that means a push for additional bandwidth and the push for low latency is clear, its there and continue to be pushed by the content providers and other new application social, media and so on you know.

Our customer relationship has also strengthened in the past several months. We clearly are now working as a top tier vendor to the telecom OEM and also to our non-telecom customer.

One proof point of that is that we are clearly aware of all the new designs and we get involve, and there is a chance of participating new design early in the game, which means that rather than coming after the fact and being second supplier, we have the opportunity to be the first supplier in many instances. That’s a quite positive in our relationship with customers.

So, recently we are annual quite [ph] and allocation negotiation that Jerry already mentioned, and this negotiation was markedly different from this past year and more positive in tone, but also in results. We are clearly being working with our customer on the partnership release type of relationship and long-term view. As I said before, we are involved yearly in the design. And also Jerry told you, we are pleased with the result in term of prices, but also in term of the allocation we’re getting for each of the product we are selling.

So that’s a positive note that ended last year and as a result of that we are quite confident. I will come to that, on what we can achieve this year. So certainly the execution on the cost reduction that we had launched before, together with this price allocation. We expect as the result of that to be able to sustain gross margin level in March, which is almost all always as you know a difficult quarter, because the major price reduction with the telecom customers does happen from most of them in January and for one of them even on December 1.

So as I was saying before this coming year, we believe it is a very strong demand for some of telecom products. And new telecom product, I should say that’s the most important. So following our Mintera acquisition, we are shipping the 40G DPSK. Right now we are shipping the 4000 and but we are coming very shortly and we started the first shipment of that product to one customer last week of the 7000, which is a significant cost reduction of the 4000.

And later of this year we also will be ramping in production with the DPSK, which is a very popular modulation technique where we are clearly allowed us market share right now, but not choosing a module, using a line curve [ph]. And then the sensing in term of the coherent modulation that will be the modulation around [indiscernible], but it is also going to have its position in the 40G market, who also will be coming in a partnership with [Clive] with a module using that type of motivation and at the end of the day, we did try to use the advantage of this type of motivation at the network level and specifically to ship up the optical switching. We see the real important evolution of the networks.

The other important introduction is a Tunable XFP. We have been sampling to several customers and we are in qualification right now, and we will be ramping in volume in the second half of the year on this product. This is clearly a new product with good margin and I think this will clearly make a difference in the 10G world. The 10G world is not over. This constant cost reduction in this world, and I think we described to you in many of days and on the price, a bit of the module level 10G continue to be extremely economical.

So, beside the module level of 40G, we are also making good progress with component level, whether its ITLA or tunable dispersion compensatory or modulator and we are also are starting to sample energy component. The other one is that we have said the road on curve will also – will stop to ramp in volume in the second half of the year.

In second term of WSS, we shipped WSS to two customers last quarter. This quarter we expect to ship to two more customer WSS product and we have a similar customer who have sampled right now and we are doing qualification of those product.

As we discussed at the analyst day, we think we are very well positioned for the high post accounts at the 23/1 which is a very high post count and we also are working on the [inaudible] as well.

So, the market continues to be very strong and we continue to evolve. So, beside the WSS itself we also are working on the line curve that combines the amplification and the WSS, and we are in qualification with one product and we are designing as a product as we speak.

So, we think that beside that, the transmission 10G continued to be a very good business for us. So, this year in term of growth and also ability thought the year to work on profitability is clearly a good year for us.

Now, if I move to non-telecom product, the Advanced Photonic Solutions team has done a great job not only to get some new technology to sell traditional market, but also to enter new markets and you saw some of the announcements that we did before Photonic quest, the beginning of the week, and this include entering the cosmetic market. This increase includes a high power laser, which is we believe is one of the most efficient in the industry.

One of the things that we can mention regarding the performance of the APS team is that we have now been shipping 100 million VCSEL and that’s the big milestone, a very significant volume. I don’t know if we are the largest producer of this type of VCSEL now, but certainly the one of the leading provider of those. So our non-telecom product will continue to be important as Jerry was saying. We expect this business to grow now as fast as the telecommunications business this year, and therefore to contribute to our growth as well.

Now the one thing that we have been working on over the past three months, is to make sure that we continue to improve execution and we’ve been looking at all of the area where we can improve, we have been working on the notion of progress all along the company, and we have been also, able as a result of that to come up with an organization as that will be simpler from a customer viewpoint, but it will also be much more efficient from an execution viewpoint inside the company.

We are going from five divisions to two business unit, one is going to be called as the Photonic Component business unit and will be led by Jim Haynes who was the CEO of the company before and will be the President of that business unit. And the second one is Optical Network Solution business unit as that will be led by Terry Unter, who used to be the CEO of Mintera and will be now be President of that business unit.

Basically to make it simple, you look at this Optical Network Solution as being all of the ex-Mintera ex-mentor product and 40G product and 100G product as the module and sub-system level and then you have these an addition to that all the amplifier and it’s a product. The only thing, which is not in amplification from this business unit, is the pump that is consider to be a component and therefore is the Photonic Component business unit.

This will also be a major simplification for us in terms of geographies, because basically the Photonic Component business unit is operating out of Europe and China and the Network Solution business unit is operating out of North America and China. So that is going to make everything more efficient.

The APS, Advanced Photonic Solution division, this will be untouched and is folded in the Photonic Component business unit, but the whole management team of this activity is now on one side and very well positioned and we have kept an independent sell force for this, to make sure we continue to roll these photonic solution business for non-telecom application.

The other plus of this organization is now we have a critical notch in our R&D organization, with each R&D organization in each of the business units having between 200 and 300 R&D engineers and therefore able to leverage resources across the globe you know.

One thing I would like to also note is that the fabs are reporting into the component business unit. And this will allow not only to have a steady production, but will also allow to push innovation not only at the chip level and at the photonic integration level, but also at the profit level and also moving to 4-inch wafer and broadcasting and making our fab, which is already recognized as leading us to be even more competitive. So that’s another element of focusing and execution and being more effective.

The other thing is that right now Oclaro is perceived by many people very attractive to work for and we are able to hire some very, very senior people, but we just were able to attract two senior executives. One is Gray Williams, who used to be the Supply Chain Operation and Quality, who is taking the Supply Chain Operation and Quality and he is coming from Logitech where he spends the last seven or eight years as the Vice President of Worldwide Supply Chain and he will be leading all our backend operation, which are located mostly in Asia.

And then the other one is Bob Quinn who is joining Oclaro as Chief Information Officer. We will – we plan to automate much more of what we do in term of positives and customer interface and all that. And above a very strong background as a CIO, but also in operation. In fact in his last company RagingWire Enterprise he was the Vice President of Operation and Technology. So we are quite excited about the strengthened executive’s team and the ability that we’ll have to execute.

Now to conclude, as Jerry mentioned, we are investing in resources and we are focused on structuring Oclaro to scale you know and as Jerry mentioned, you will see that in our financial, both in term of G&A and in term of R&D. We clearly plan to become a top tier company, strong and on the strong and growing market that we sell. We are the pipeline of new products coming and as I said before, they will be ramping in the second half and therefore we expect to see maturation of growth in the second half of this calendar year and we will continue to nurture this chip with our customer.

So we saw this year confident and focused on organic growth opportunities and that should be exciting for Oclaro. Thank you.

Jim Fanucchi

Thanks Alain. Operator, please go ahead and 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) And our first question comes from the line Alex Henderson with Miller Tabak. Please go ahead.

Alex Henderson - Miller Tabak

Hey guys. Can you hear me?

Jerry Turin

Yes. I think you’re fine, Alex.

Alex Henderson - Miller Tabak

So, I was hoping you could give us a little bit more granularity on the four key areas, APS, Mintera, the WSS piece and just kind of lay out a little bit of the issues relative to what it is that you see in front of you in terms of ramping them as we get in to the second quarter and second half.

For instance, on Mintera, you’re talking about product cycle issues. How do we think about the fact that you’re not selling a coherent product relative to the ramp in that? On the WSS side, it sounds like you’ve got pretty good order visibility, so is debt predominately an issue around the Fabrinet ramp on that product line.

And on the Tunable XFP, you’ve got some trials going or some qualification going. Are you also getting some designs, because obviously you’ve got to replace the board with the 310 to really expand that market in a big way? So, could you hit some of the key hurdles in those four areas?

Jerry Turin

Sure. I think its – first of Alex, I think as far as the traction and the timing of the various ramps is very consistent with what we’ve discussed at the previous analyst day. The Mintera 40-gig products are ramping significantly now and that will continue through the year with both the DPSK, with the 40G coherent in the second half of the year, and also through out the year the DQPSK modulation scheme as well.

APS, our revenues are beginning to comeback this quarter both from the Vixel recovery, but starting to recover from another fab transfer and working back into the demand that’s there. Alain mentioned the four WSS customers, two shipping, two close to shipping a number of other qualifications and similar to previously, we see that has being due in September around – partly based on Fabrinet capacity ramp, but also based on working with those customers and the new qualifications in to that ramp.

And Tunable XFP, with samples at quite a number of customers and similarly a middle to later year ramp fairly consistent. I don’t know if there is color that Alain wants to elaborate, but I thought establishing parameters…

Alain Couder

The only thing I want to clarify is that we do a design win. We are in the final qualification stage.

Alex Henderson - Miller Tabak

Right.

Alain Couder

It is not like we were initiating qualification stage. We are very proud with the Tunable XFPs and also on WSS side, the two customers we’re shipping last quarter and two more this quarter. We have been giving sample and we are also working on designing with several other loss companies, so I think as the market potential for that pretty high.

The other thing in term of APS growth, as we expect a very strong growth which they don’t have in Telecom. As I said, we expect APS to be about (inaudible) same range. But therefore as a result of that you will see the non-telecom product grow again.

Alex Henderson - Miller Tabak

Can you give us a little bit of a sense on the APS, the guys that logged it were the biggest mouse manufacturer, but there were some fairly positive comments about trajectory of their spending. Are you seeing some acceleration in the demand for that? It sound that – I know you had a clearly large reorder from the client that had slipped. So can you give us a little bit more color on that?

Alain Couder

We have been seeing a full restart of the order and which sold for the mouse business, but not only for the mouse business we are also seeing the finger navigation, all that come in and also I think the market is broadening from mouse to finger navigation right now. And the volumes that I mentioned, 100 million shipped basically in the past three years is a fairly high volume and so certainly you know, we’re a volume leader in supplying the Vixel to those laser mice applications.

Alex Henderson - Miller Tabak

Just one last question and I’ll leave the floor. On the tunable XFP side, can you describe your competitive position in terms of the technology, strength, relative to the full functionality that’s embedded in a current 300 PIN as compared to the other alternative vendors that are out there, whether that’s JDSU, Finisar, EMCORE?

Alain Couder

We have two version of the tunable XFP. We have one that we call the non-club version and it’s clearly as I see with other competitor, but our club version should be able to replace many of the 300 PIN applications.

Alex Henderson - Miller Tabak

And how does that compare with the competitive products?

Alain Couder

We haven’t seen the company’s product come as yet. To my knowledge no one is shipping tunable XFP, exactly the same performance of the 300 PIN.

Alex Henderson - Miller Tabak

Do you understand that the JDS products can straight replace the 300-pin?

Alain Couder

That is not my understanding right now, but maybe it is a new news of another world.

Alex Henderson - Miller Tabak

Right, thank you very much.

Operator

Thank you. And our next question comes from the line of Kevin Dennean with Citi. Please go ahead.

Kevin Dennean – Citi Investment Research

Great, thanks very much. Just a couple of questions around the guidance. I think the guidance implies about a sequential increase that achieved almost 9%. And I guess if you can talk a little bit Alain and Jerry about what are some of the puts and takes that will put you at either end of that range. And similarly on the gross margins guidance, 27% to 31%. What sort of scenario could drive a decrease in gross margins and up revenue quarter?

Jerry Turin

Well we certainly – keep in mind as the baseline and March should take most of your pricing. So you have a natural gross margin decline and then you work against that to build that backup. So where we are certainly striving to hold our margins even quarter-to-quarter and you will see we’ve given the same guidance for March that we did in December.

From a momentum point of view, if we were to be able to increase yields out of the APS fabs, get at faster rate, increasing revenue opportunity, that’s obviously a high margin business for us. On the bottom end you never know when you get surprised from a reserve or an adverse hit from the operation side of it. Within that it’s largely mix in volume and again you can see that regarding to a similar range as last quarter with the pricing impact factored in, so we have some upward momentum within that.

Kevin Dennean – Citi Investment Research

Okay and then on the top line Jerry, what are the put and takes on the sort of what you wanted in the revenue range?

Jerry Turin

Well, I think – yes, I think that the revenue drivers are fairly consistent across the board. I mean certainly we have some come back from APS and certainly we continue to have strength in the 40-gig business, but I don’t think the growth that we have projected is relatively concentrated. So I think it’s fairly broad-based and then if demand continues strong and you push hard and you execute maybe more towards the top end and less execution maybe in a different place within the range, I don’t know that there is...

Kevin Dennean – Citi Investment Research

So it’s a more general marketing or even anything dependent on say a quick ramp in APS or a certain type of product.

Jerry Turin

Exactly. So we are certainly not contingent on the quick ramp in APS. It’s certainly not contingent solely on strong 40G although those are good parts of our business. I think all of the business is fairly steady with a couple of particular strong areas and then it becomes again a question of maintaining the order of momentum we have and executing to it.

Kevin Dennean – Citi Investment Research

And then just one more for me; I guess really around your customers. Can you give us a sense for this year versus last year, what percentage of your customers or how did the percentage of your customers taking annual contracts compare this year versus last year? Because I think, last year when you had a lot of customers taking annual contract, is just the sign of bullishness that people were a little bit concerned about tightness in the supply chain, tightness in the front-end components, so they wanted to lock in as soon as possible.

Alain Couder

I think we see the trend of annual contracts more and more, but what we also see is that we don’t necessarily see price reduction at once in January; by April in the annual contract to get the price reduction to be spread more over the year. January continued to be the biggest price adjustment. Let we see more price along – price reduction along the year. But it is negotiated once a year and we don’t need to go back on that you know.

Kevin Dennean – Citi Investment Research

Okay, great. Thank you very much.

Operator

(Operator Instructions) And our next question comes from the line of (inaudible) with Stifel Nicolaus. Please go ahead.

Unidentified Participant

Yes, hi thanks for taking my questions. First I wanted to ask, what was the book-to-bill in the quarter for the telecom business?

Jerry Turin

Well the overall book-to-bill for the company was about 0.95, it was a bit higher for APS, a bit lower for telecom. Telecom slowed during the Christmas weeks and has been a good steady this month. We came in with some backlog and we feel pretty good about the overall picture. We are probably 70%, maybe 75% recovered by this form for the quarter, which is what we really look at. So that’s a fairly good position.

Unidentified Participant

Okay. And then just to clarify, you said before that APS was above one in book-to-bill right?

Jerry Turin

It was above 0.95 is what I said, but it was above one.

Unidentified Participant

Okay. And in terms of – if you look at the gross margins, what are your expectations in terms of getting gross margins to the mid-thirties level and what does the business mix need to look like for that?

Jerry Turin

Well, we’ve – I don’t want to get too granular quarter-by-quarter-by-quarter, but we talked about potentially being back in the 35% range by the end of the year and that’s the function of growth. That’s the function of ramping products like Tunable XFP with nice margins, that’s a function of APS coming back within the portfolio, which is our strong margin business. And it’s a function of completing our cost improvements in the Mintera 40 gig products, where right now their revenues are doing very well.

We are still below average margins. Essentially we’re preparing the former Mintera cost base and building materials and as we advance over the quarter, those products will start coming out to shine [ph], then we’ll have more of our internal content and that will turn into a margin driver. So a combination of how the usual suspects, growth plus traction in those subs and good margin products that we know we have.

Unidentified Participant

And how much, I mean data revenues in the quarter?

Jerry Turin

Well, we don’t want to get to this closing, but I’m trying to still remember what sort of guidance I’ve given before. I think they were about four million in the September quarter and I think we’ve said they could be in the 6 million range in December and they were in that range. And so that’s the sort of foundation we have and the sort of growth we are seeing in that.

Unidentified Participant

And in terms of modeling purposes, looking at the March quarter, you mentioned that the SG&A and R&D are moving higher. How are they going to sequentially increase should we think?

Jerry Turin

R&D I think in terms of 13% range, you know it could be a touch more than that, but I think in terms of our model and that when Alain mentioned investing in R&D that we continued to invest in that that sort of metric. I wouldn’t look for a dramatic change in SG&A, but we started to have more audit fees as well as some additional IF costs. So, I’d see it step up, but I wouldn’t call it a step function in spending.

Unidentified Participant

Great. Thank you.

Operator

Thank you. And our next question comes from the line of Hamed Khorsand with BWS. Please go ahead.

Hamed Khorsand – BWS Financial

Hi, just a couple of questions here. The allocation that you were talking about you receiving, do you think that has to do with the quality of your products or is it just the competitors not having capacity?

Jerry Turin

Well, I think – why don’t I start and wrap it up Alain. I think the fundamental concept of this play is customers are looking more and more at their long-term road map and more and more who can provide a broad range of products and technologies that they need. And that they want to support those players that they are going to be partnerships with and theirs relatively a few number of players in that division.

I think capacity comes into play not so much the way it was last year, where everything was based on capacity, but I think in terms of not having faith in smaller guys at this point in time when you have larger guys that have proven their ability to deliver and be a good supplier. Alain is there anything you wanted to add.

Alain Couder

No. That’s it. You said it all, that’s fine.

Hamed Khorsand – BWS Financial

Okay. And then my other question was, as far as gross margin goes how much of a benefit could you see with the APS transition? Is it going to be a step process or is it going to be a gradual?

Jerry Turin

In March, it’s going to be gradual. It’s going to be gradual. That was my – we want to be sure that everyone recognizes that while we are getting the product out and we’re supporting the basic customer needs, its not a dramatic ramp over a night and it’s a modest deal to why we continue to refine the process.

Hamed Khorsand – BWS Financial

Okay and could you just talk about visibility a little bit, as far as what you are seeing from the customers?

Alain Couder

I think in term of the APS, as far as the Advanced Photonic Solutions, we clearly have very strong traction for the traditional application in high value for material processing and medical and cosmetics and now we have the – you might have seen from our press release who are entering the home appliances before we enter the hair removal and we just announced that we are entering the wrinkle reduction market and also in April although we are expanding the market though we are going after, in term of VCSEL they clearly – we’ve expanded from the mass business to the single navigation.

We’re also starting to ship this quarter for one application as an optical cable, which is equivalent to Light Peak per say, is being question as you might avoid the (inaudible) price, but we are still shipping to one customer. So we are kind of broadening and our customer, some of our customers have surfaced from our problem, of showing them the fab that what we have seen in this week and Photonic plus is upcoming very strongly, because technology wise we do our best you know, that’s basically what it is.

On the telecom side I think the December number demonstrate that the top three guys who are also our Pepsi (ph) customer having a very nice growth potential. In fact with some of them we have extremely high growth plans for this year, which also means that some of the tier two people, except for (inaudible) from what you might have seen some recent announcement.

Hamed Khorsand – BWS Financial

Okay, thank you.

Operator

Thank you. And our next question comes from the line of Subu Subrahmanyan with Sanders Morris. Please go ahead.

Subu Subrahmanyan – Sanders Morris

Thank you. I had a couple of questions. First if you could talk about the order pattern. I know in mid-November you were tracking at a book to bill that at 1.05 to 1.1 and I was just wondering if there was a change in trend that made the book to bill overall go down and sequentially where orders are down on an absolute basis?

Alain Couder

But until before Christmas, we were in the same position and then people when seeing probably at the end of the year, because the other one’s down sharply in the last two weeks of the year. I think it’s our understanding right now it’s a holiday season explanation more than anything else because last week the other were upcoming very strong.

Subu Subrahmanyan – Sanders Morris

In the last couple of weeks, got it. And on for revenue for WSS in churn, I know you had mentioned that in September. Jerry was that the number you gave which is about 6 million for Mintera, is that – did I hear that right?

Jerry Turin

That was probably about right. That’s the validation of what we had said we would expect, but we are not going to be disclosing any of our go forward revenues by each of our product lines, so.

Subu Subrahmanyan – Sanders Morris

And for WSS and for (inaudible) this inclination, just talking as base line where we are.

Alain Couder

But then we said that WSS would not be ramping from off shore in a significant manner before we can produce in the volume at sever net and it will take on half of the year. But we started producing the (inaudible).

Subu Subrahmanyan – Sanders Morris

Understood. And then finally on the gross margin side, is that 35% gross margin which you expected exciting December this year, is that a target your still backing at this point?

Alain Couder

We don’t give guidance for the long term you know that. So we cannot give you that kind of precision you know.

Subu Subrahmanyan – Sanders Morris

Yes.

Jerry Turin

It’s our business model target. And you know if we execute the way I described, I think it was Hamed who asked the questions earlier, maybe of the spend, but we talked about the momentum and we talked about what has to happen in order to achieve that business model by the end of the year.

Subu Subrahmanyan – Sanders Morris

Thank you.

Jerry Turin

That is of the business model not of the guidance you know. It is very important. We will continue to give you guidance quarter-to-quarter.

Operator

Thank you. We have a follow up question from the line of Alex Henderson. Please go ahead.

Alex Henderson – Miller Tabak

Hi guys. So in the Analyst Day in November you had talked about targets for APS for Mintera for the WSS product and the like. Essentially those four areas that you kind of gave some granularity of where you thought that would be by the end of CY 2011.

I know you are not in the job of forecasting out there, but can you just give us a sense as you are looking at the fact that you know, full quarter closure and you’ve got a little bit better granularity on some of the issues that you were looking at; whether you still feel comfortable with the targets that you had outlined back in November or if you hear lower, any pings and pongs on that, on those.

Jerry Turin

So what we had laid out Alex was that we reiterated that, we believe we have a chance for 30% to 40% growth December on December overall. And what we did is we put some metrics out by product area where we think we have strong growth opportunities in specific product areas and did a widest scenario, high and low scenarios and kind of show that that bracketed that sort of growth quite nicely. In fact that bracketing exercise came in with numbers above that.

So we think that sort of growth rate still makes sense for December over December and we have that opportunity to get there and the mix of products that we talked about are fairly consistent as far as the assumptions within that. You know that was – when was that, that was mid-November, early December and a couple of months later we continue to have contraction in all those areas and strong positioning, as well as....

Alex Henderson – Miller Tabak

Nothing has eroded relative to that thinking process at this point. Are those brackets at this point now a quarter closer and a little execution risk as a result?

Jerry Turin

I wouldn’t say anything dramatic would change the way we characterize that. We certainly talked line by line before about the risks and opportunities and challenges in each one and we continue to work each of those along that those types of challenges.

Alex Henderson – Miller Tabak

All right. Going back to the APS, I think there’s been some discussion of that ramping pretty steeply into the back half, is that a function primarily of the availability of that capacity coming on stream and ramping up reasonably visible order trajectory that you’ve got lot of confidence in or is that a function of some large orders yet to come in that you still have a lot of issues with. How confident are you in getting that sort of $22 million to $26 million kind of rate by the end of the year. Any thoughts on that?

Jerry Turin

As far as the ramp drivers through the year, without speaking specifically about any sort of December 2011 range of revenues, within the core business, within the high power laser diode business, speaking just for those product areas, certainly increasing the yields and getting more output in itself drives more revenues.

Increasing the yield and getting more output allows us to go after the opportunities that have been pushed six to nine months as we have done this transfer with the customers that have may been forced to use Mintera solutions or where we’ve not been able to take advantage of vertically integrating our self into some of the other laser systems houses and then there is our new laser dial products ramping in the middle of the year and the second half of the year and some cosmetic applications and other applications.

Those are all strong, whether the orders are in place at this point for December that is a little premature, but those are all strong business areas and it’s along those three pathways that we have signification opportunity in each.

Alex Henderson – Miller Tabak

One last question and then I’ll leave the floor again. So going back to the ramp up at Fabrinet, the April timeframe as you start to ramp that. How do we think about the step function and capacity as it comes on stream?

Alain Couder

Basically when we start the shipping at Fabrinet in April the customer will want to re-clarify the product, because it’s a different facility so there will be some testing and that’s why we don’t see any volume ramp up before the second half of the year.

Alex Henderson – Miller Tabak

So the timeline on that is what, a couple of months retest?

Alain Couder

Yes, something like that, yes.

Alex Henderson – Miller Tabak

Okay.

Jerry Turin

And that’s for the customer Alex, right. So if you have a staggered or if you’re existing qualifications with customers don’t all get executed on the same day. So (inaudible) but its two months for each customer who goes to that process. So you have to think of it from a portfolio point of view that you are going to be working in more than product with more than one customer.

Alain Couder

In other words, don’t take it before the September quarter.

Alex Henderson – Miller Tabak

I understand. Great, thanks.

Operator

Thank you. And our next question comes from the line of Dave Kang with B. Riley. Please go ahead.

Dave Kang – B. Riley

Yes, thank you. First question is , can you just talk about the supply constrain issues. Is that still an issue now and how much was left in the table in the December quarter if any?

Jerry Turin

Well, I don’t have a precise number for the December quarter, but there certainly were some constrains. You know in the March and June quarters we’re really talking, our visibility you know in the few million dollar range, so really not something that dramatic.

Of course you know APS, it’s not a type of constraint that we’re talking about, but so long as we are working our yield to maximizing our yield there is an implicit limitation within that. But outside of that we should be fairly well positioned from a capacity point of view, whether its our capacity or whether its material availability, should anything rise in the future I think it would be more of one a off based on changing business conditions. I think I used that term in the script.

Of course the last year was, the total pick up in demand in the sudden extension and lead times for material from CapEx that was driving the capacity constraints. I think now we are probably in a more normalized business environment where from time to time you are going to have some capacity or some materials that are maybe a little longer lead time than anticipated, but not as core as the condition that was there last year.

Dave Kang – B. Riley

Okay. And regarding your announcement about medical, specifically (inaudible). So have you been qualified into those device manufacturers already or what stage are we in?

Alain Couder

Yes, we’re quite financed.

Dave Kang – B. Riley

What is that again?

Alain Couder

Yes. We are 45.

Dave Kang – B. Riley

Okay. Like a single customer or multiple customer set?

Alain Couder

In term of consumer it is a single customer, but there are all other customers for the adaptor already.

Dave Kang – B. Riley

Now how big this shipment market can be? Is it kind of I know you’ve been primarily addressing (Cross Talk).

Alain Couder

No, that’s difficult to know whether you will want to share every morning as a result of that – and that’s the new way of thinking of things and this is an experiment by some of our customers there. And it’s very difficult to predict the weather thing to be extremely bullish and by everybody, whether people are thin scaled and would rather go to their (inaudible), we don’t know.

Dave Kang – B. Riley

Okay and then on the gross margin for Mintera, you had like a three-step process, just can we go over that once again. Is it still on track what we talked about before?

Alain Couder

Yes, it is on track with what we did before that. When we acquired Mintera they were already shipping drugs closer to 4000 which is a DPSK which is being build by (inaudible) in Texas and then we had the 7000, but we had some delays with the 7000, because we couldn’t approach anymore some component outside, so we touched all component but it is – we now exceeded the first one last week.

So we are coming to market with this one, which is a cost reduction, but since the DPSK modulation and then right now we are working on the dual accommodation D2PSK module and coherent modulation and those are clearly coming in, but we are right now sampling prototypes in D2PSK customer. We are not ready yet to sample a coherent to customers, but both of them should stop producing revenue until the second half of this year.

Dave Kang – B. Riley

Got it. And then once all these cost cutting measurements are done or implemented, when do you think that they will be in par with company average? Is that going to happen like in the second half may be or may be next year?

Alain Couder

Well we expect – we expect by the end of the calendar year that there will be above average margins.

Dave Kang – B. Riley

Okay.

Alain Couder

This is probably the safe to think in terms of a straight line between then and now as far as what that progress looks like. And at some point in the middle of the year cross it’s average and we can’t be a lot more precise than that.

Dave Kang – B. Riley

And then a couple of more, just under 100G coherent, I wonder if your competitors from yesterday at photonics was, but they are seeing nice ramp in 100-gig coherent, so where are you in terms of 100-gig coherent at this point?

Alain Couder

We are doing 100, we are working on 100G but at the module level, which was discussed yesterday, the (inaudible) to my knowledge you know. We are coming with a much smaller form factor and plus reduced device and I don’t think we should expect the energy to stop to something before the end of the year of the module level.

Dave Kang – B. Riley

Got it, got it. And the last question is regarding your WSS role, and it sounds like you’re seeing some traction there, but I guess most of the major OEMs already have like two vendors already as in JDSU and Finisar I mean, so does that mean you have to replace somebody or how – can you go over that process?

Alain Couder

First of all, that company is a combination of JDSU and Finisar, kind of producing up for them. So there is probably a room for themselves under that. The second one is that we are also coming with some new leading edge technology, which is different from either JDSU or Finisar and in particular it looked like this technology worked very well in the very high accounts.

Dave Kang – B. Riley

And are you really focused more on the metro or edge, because it sounds like metro might be covered by JDSU and Finisar, but edge looks like it’s wide open. So are you looking more edge by one by twos or are you still going after metro with 1/9.

Alain Couder

We have the technology – we probably are the only company which has a technology that can either do very well in the one by two or in the 1/23, because instead of using a unique technology we use a combination of two, one being the SED and the other one being demand.

Dave Kang – B. Riley

Okay, all right. Thank you.

Alain Couder

All right, Dave.

Jerry Turin

Thanks, Dave.

Operator

Thank you. And at this time, I would like to turn the conference back over to Mr. Fanucchi.

Jim Fanucchi

Thank you everyone. We look forward to speaking with you again when we report our third quarter results.

Operator

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

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