Avanex Corporation F2Q07 (Qtr End 12/31/06) Earnings Call Transcript

Feb. 6.07 | About: Avanex Corp. (AVNX)
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Avanex Corporation (AVNX)

F2Q07 Earnings Call

February 06, 2007 04:30 pm ET

Executives

Maria Riley - Director of Communications

Jo Major - Chairman, President & CEO

Marla Sanchez - SVP & CFO

Analysts

John Harmon - Needham & Company

Todd Koffman - Raymond James

Hamed Khorsand - BWS Financial

Jeff Osborne - CIBC

Dave Kang - Roth Capital

Presentation

Operator

Welcome to Avanex Corporation's fiscal 2007 second quarter financial results conference call. All lines will be in listen-only mode until the question-and-answer portion of the call. Please note, that this conference call is being recorded.

With us on today's call are Jo Major, Chairman, President and CEO; and Marla Sanchez, Senior Vice President and CFO.

I would now like to turn the call over to Maria Riley. Ms. Riley, you may begin.

Maria Riley

Good afternoon and thank you for joining us today.

I would like to remind you that this call contains forward-looking statements, including statements regarding third fiscal quarter of 2007 revenue and gross margin expectations, accounts receivable, operating expenses, cost reduction measures and trends, improvements in direct margins, inventory charges, market trends for the ROADM long-haul metro and submarine market, financial and operating goals and initiatives, our product development and manufacturing strategies, and changes in the markets for our products. Actual results could differ materially from those projected and/or contemplated by the forward-looking statements.

Factors that could cause actual results to differ include general economic conditions, the pace of spending and timing of economic recovery in the telecommunications industry, and in particular, the optical networks industry, the Company's inability to sufficiently anticipate market needs and develop products and product enhancements that achieve market acceptance, problems or delays in reducing the cost structure of the Company, the Company's inability to effect its restructuring goals or to successfully transfer manufacturing operations to lower cost regions, any slow down or deferral of new order for products, higher than anticipated expenses the Company may incur in future quarters, or the inability to identify expenses that can be eliminated.

Please refer to the risk factors contained in the Company's SEC filings, including the annual report on Form 10-K filed with the SEC on September 28th, 2006, Form 10-Q filed on November 9th, 2006, and subsequent filings with the SEC. Avanex assumes no obligation and does not intend to update any forward-looking statement, whether as a result of new information, future events or otherwise.

In addition, because non-GAAP information is being presented on today's call and in order to comply with the SEC regulations, please note that Avanex has provided a reconciliation table attached in today's press release, which can be found on Company's website at www.avanex.com. Avanex believes that this non-GAAP information provides investors with greater transparency to information used by management in its financial and operational decision making, and helps investors better understand the Company's operating results, and provides historical comparability.

Non-GAAP information should not, however, be considered superior to, or a substitute for financial information prepared in accordance with GAAP. Investors should review the reconciliation of the non-GAAP financial information to the most directly comparable GAAP financial information as provided in the tables accompanying today's press release.

I would like to take this opportunity to remind you that the Company will present at the Thomas Weisel Technology Conference in San Francisco tomorrow February 7th, the Roth Capital Partners Annual OC Conference on February 21st in Laguna Niguel, California, the Bank of America Technology Conference in New York City on February 22nd, the Raymond James Institutional Investors Conference in Orlando, Florida, on March 6th, and the B. Riley Investor Conference in Las Vegas on March 14th. We hope to see you there.

And with that, I will now turn the call over to Jo Major, Chairman, President and CEO. Jo?

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Jo Major

Thanks, Maria. Good afternoon, everyone, and thank you for joining us today. I would like to start today's call by saying how very pleased I am with the Company's performance this quarter. Our second quarter of fiscal 2007 was an exceptionally strong quarter for the Company and the team executed well on many fronts.

Revenue grew to a new record $55.6 million, up 9% from $50.9 million in the prior quarter, and up 54% from the second quarter of the prior fiscal year. We saw strong growth from our new products, led by our integrated amplifier developed for next generation network deployments, as well as solid growth from our transmission products and initial revenue from the submarine market.

Our top customers in the quarter were Alcatel at 28% of revenue, Tellabs at 21% of revenue, and Infinera and Cisco, each at 10% of revenue. We were also pleased with our gross margin improvement this quarter. For the second quarter in a row we achieved a new gross margin record. Gross margin grew to 19% from 10% in the previous quarter. Margin expansion will continue to remain the key initiative for the Company throughout the fiscal 2007.

GAAP net loss in the quarter was $8.6 million or a loss of $0.04 per share, compared with a net loss of $9.7 million or $0.05 per share in the previous quarter, and a net loss of $18.5 million or a loss of $0.13 per share in the second quarter of the prior fiscal year.

I'm very proud of the team's consistent execution, as shown by our continued non-GAAP net loss improvement. On a non-GAAP basis, net loss in the quarter was $3.5 million or a loss of $0.02 per share, a $3.5 million improvement over the prior quarter's non-GAAP net loss.

From a market perspective, we remain confident in the overall long-term trends. We see strong demand for low cost solutions that enable flexible networks, and our mission is to create solutions targeted at making reconfigurable metro and metro edge networks more affordable and easier to install.

In the metro and long haul markets we see increasing demand for bandwidth at the consumer level, driven by bandwidth intensive services, such as high definition TV, IPTV, Internet video exchange services, online gaming and multimedia mobile devices, like the newly announced iPhone.

Overall, we see the metro market, which accounts for 52% of our revenue, growing approximately 14% in calendar 2007. Long haul sales account for approximately 48% of our revenue, and we see this market growing at about 11% in calendar 2007.

In these markets, we see stronger demand for modules and subsystems that integrate functionality, like our integrated OPM amplifier, and for products that enable economic flexibility, like our tunable 10 gig transponders and the ROADM that we will showcase at OFC on March 26th. As such, we have dedicated resources to address these markets, and they are a key focus for the Company.

In calendar 2007, we expect the market in the first half of the year to be roughly flat due to changes in certain large deployment schedules, followed by growth in the second half of the year. We continue to see the submarine market firming up for calendar year 2007 and 2008. In November, we discussed our view of the submarine market and its signs of recovery driven by programs in the Pacific region, with the most notable program being the Trans-Pacific Express, or TPE.

We estimated an optical component submarine market opportunity of $30 million to $40 million in calendar year 2007 primarily associated with TPE. Since we last spoke on this topic, the architecture and funding for TPE was finalized, led by a consortium that includes Verizon and Asian telecom carriers. The configuration of the cable system changed due to new market dynamics and trends.

Originally, the specifications for TPE were up to eight fiber pairs in a ring system with an approximate length of 20,000 kilometers. Based upon the specifications defined in November, we estimated that the TPE opportunity was based on a four fiber pair ring system with an approximate length of 20,000 kilometers.

The final configuration is an 18,000 kilometer point-to-point system with an initial installed capacity of only two fiber pairs. The smaller architecture significantly reduces the scope of the overall program, and the optical componentry opportunity to $8 million to $10 million.

The reduced scale of TPE is partially offset by an increase in the total number of programs announced over the past few months. Based on TPE and other industry announcement, a trend appears to be emerging where submarine capacity is globally upgraded with more cable routes, but minimizing the initial installed cost of each individual route.

The increase in the number of announced submarine programs in the pipeline leads us to believe that recovery of this market extends over the next few years. We now see the submarine pump component market ramping in the first half of calendar '07 to an annualized run rate of approximately $20 million to $25 million per year, and being relatively flat over the next couple of years.

I will now turn the call over to Marla for details on the financials.

Marla Sanchez

Thank you, Jo. Revenue in the second quarter of fiscal 2007 was up 9% to $55.6 million compared with $50.9 million in the prior quarter, and up 54% when compared with revenue of $36.1 million in the second quarter of the prior fiscal year.

As Jo mentioned, the increase in revenue was primarily driven by strong demand for our new products, including our new integrated amplifier and a good increase in transponder sales. Revenue breakout by region for the second quarter was 51% in North America, 39% in Europe, and 11% in Asia.

Gross margin in the quarter was 19% compared with 10% in the prior quarter, and 8% in the second quarter of the previous year. We are pleased with the significant improvement in gross margin due to the programs we implemented two quarters ago aimed at reducing inventory charges, improving our supply chain, increasing manufacturing yields and managing our product portfolio. Execution of these programs significantly expanded our gross margin. We expect continuing improvements to our cost structure with the future execution of these programs, and we are still targeting gross margins to be in the 20% to 25% range by the June quarter.

Over the past three quarters, we have made progress in reducing our inventory charges while we still have room for improvement. Excess and obsolete charges, including contingent liabilities for the quarter, were $4 million compared to $4.9 million in the previous quarter, and $8.2 million in the June quarter.

Managing these down to the $2 million to $2.5 million range in the coming quarter is a top priority for us. On a GAAP basis, operating expenses in the quarter increased to $19.9 million, compared with $15.6 million in the prior quarter.

Contributing to the quarter over quarter increase was $2.1 million in legal, accounting and consulting expenses associated with a potential acquisition that we were actively pursuing, but decided to pass on. Also during the quarter, we incurred expenses related to severance payments and higher than anticipated SOX and auditing expenses. We do expect to see a reduction in OpEx in the third quarter.

Combined R&D, sales and marketing, and G&A expenses were 34% of revenue compared with 29% in the previous quarter, and 33% in the second quarter of the prior year. Excluding acquisition due diligence-related expenses of $2.1 million, combined R&D, sales and marketing, and G&A expenses were 30% of revenue.

Again, our long term goal is to manage these expenses to the 25% range of revenue. GAAP net loss in the quarter decreased to $8.6 million or a loss of $0.04 a share, a $1.2 million decrease when compared with a net loss of $9.7 million, or a loss of $0.05 per share in the prior quarter.

Net loss in the second quarter of the previous fiscal year was $18.5 million, or a loss of $0.13 a share. Non-GAAP net loss in the second quarter of fiscal 2007 decreased by 50% to $3.5 million, compared with $7.1 million in the previous quarter. Non-GAAP net loss on a per share basis was $0.02 in the second quarter of fiscal 2007, compared with $0.03 in the prior quarter.

Non-GAAP net loss excludes share-based payments, amortization of intangibles, restructuring charges, gains and losses on the disposal of property and equipment, loss of debt refinancing, and due diligence expenses.

Moving on to the balance sheet. At the end of the second quarter, cash and investment balances were $57.9 million compared with $61.9 million at the end of September. In the second quarter of fiscal '07, we used approximately $4 million in cash. Collections were not as active as we would have liked, and we are focusing on improving. We decreased our DSO by three days, offset by a revenue increase of 9%. During the quarter we collected approximately $12 million related to the delayed invoicing in the September quarter.

At the end of the second quarter, worldwide head count was 665 employees compared with 659 at the end of the prior quarter. North American and European head count increased from 424 to 436 due to a slight ramp in staff to address the submarine growth and additions to support the continued increase in our modulator business.

Headcount in Asia decreased from 235 to 229, due to a reduction in temporary staff required for inventory verification. As of December 31st, 2006, we had 163 employees located in North America, 113 in San Donato, 59 in Shanghai, and 172 in Bangkok. At the end of December, our Nozay campus consisted of 158 employees.

With that, I would like to turn it back to Jo for a recap and a look at our guidance for the third quarter fiscal 2007. Jo?

Jo Major

Thanks, Marla. Before providing guidance, I would like to clarify a point I made in prior comments. Metro and long haul revenue was 52% and 48% respectively in our second quarter of fiscal 2007. My previous comments may have confused it with the entire year. We are very pleased with the growth we experienced over the past four quarters.

As I previously mentioned, we expect some near term flatness in market demand due to the delay of capacity expansion projects. But we do anticipate the market to return to growth in the second half of calendar 2007. For the third fiscal quarter of 2007, we are now forecasting revenue to be in the range of $54 million to $57 million, and gross margin to be between 17% and 21%.

With that, we now welcome your questions, and we will turn the call over to the operator.

Question-and-Answer-Session

Operator

[Operator Instructions].

We will pause for just a moment for the first question.

And your first question comes from John Harmon with Needham & Company. Good afternoon.

John Harmon - Needham & Company

Hi. Good afternoon.

Jo Major

Hi, John. How are you?

John Harmon - Needham & Company

Good.

Marla Sanchez

Hi, John.

John Harmon - Needham & Company

Let me say congratulations on the rapid growth you've been seeing and getting your margins up.

Jo Major

Well, thanks.

Marla Sanchez

Thank you.

John Harmon - Needham & Company

My first question just roughly I wonder if you could talk about your margins increased about 9.5 points sequentially. How much of that roughly is due to volume, and how much of that is due to getting these charges down?

Marla Sanchez

Most of the increase is actually coming from getting the charges down. We did have a little bit due to volume. But in general, we had been targeting to try and get the improvements off of the programs that we had initiated, and we did see that come through.

Jo Major

Some of those programs have -- John, to make sure that when Marla talks about it being mixed, some of those programs are targeting direct margin itself. So we have been working pretty diligently to expand our direct margin. As we discussed before, direct margin showed a downturn when we went through the rapid restructuring of the Company.

We have been quite successful in taking our direct margins up and have been recovering. We've recovered everything we lost, and now we are gaining some above that and beyond. So it's a mix of the revenue giving us some nice flow through, direct margins rising, and a lot of the negative charges being improved.

John Harmon - Needham & Company

Thanks. I think Marla said that there was $4 million in excess and obsolete inventory charges. Would it be fair to track that from cost of goods sold? You'd get like about a 26.5% gross margin number. Is that realistic in terms of something that's attainable?

Marla Sanchez

We are targeting to try and get that number down, and I think we've talked in there about trying to hit to the $2 million to $2.5 million for excess and obsolete. There will always be some excess and obsolete. I mean, that's just the way things work. But we are trying to get it down from the $4 million level to a more manageable range.

Jo Major

Just to give you a place where a real stretch goal for the Company, John, might be 1. I think the 2 number that Marla was talking about, right now, is sort of a realistic objective for the Company in the near term.

John Harmon - Needham & Company

Okay. Thank you. And just finally on the submarine opportunity, I think, the original number was $30 million to $40 million and you told us that due to the way this cable had changed. Is that still the opportunity but spread amongst more projects versus mostly just the one, the TPE that you talked about?

Jo Major

Let's look at TPE as a standalone, and then we can talk about where we see the market shaping up. TPE is a standalone. They are building these now as sort of upgradeable cables. So, if you will, instead of deploying this thing in one shot, they are deploying a more modest system on day one, with capacity expansion opportunities in the future.

So the number that we figured, or the number that we talked about, $30 million to $40 million, was based on a much more expansive initial installed design. Where we are now, 8 to 10 for that single program is a much smaller design. But there would be subsequent opportunities for revenue, as they upgrade that cable.

The second effect that's happening is we are seeing the break that occurred in Asia is having an effect in the submarine market, where people are looking at, sort of, redundancy of cables themselves as being something that's interesting.

So we're not seeing the trend of very, very big cables, but more cables being installed but at a much lower initial installation price. And then you put those two things together and we said on the call we see this market sort of ramping through this year to a run rate for pumps of about $20 million to $25 million per year for the next couple of years.

John Harmon - Needham & Company

Got it. Thank you very much.

Jo Major

Yes. Sure.

Operator

Your next question comes from Todd Koffman with Raymond James.

Todd Koffman - Raymond James

Thank you very much. Congratulations on a great improvement in the gross margins. Let me ask you a question about the operating expenses. Outside of that 1, 2-point-something million expense for, I think you said, abandoned acquisition activity, it looks like the operating expenses are a ticking back up across the board. And just give me a little color on what's going on there.

Marla Sanchez

Sure. On the R&D, we had a little bit more expenses due to some headcount that we ended up putting in for submarine activity. We also had a little bit of an increase in the sales and marketing due to some commission payments. For G&A, besides the due diligence expense of $2.1 million, we had an increase of 845 in addition to stock-based compensation.

We had a little bit more for -- about another $700,000 for an audit expense that we didn't -- were not particularly expecting. And then we did end up having some charges for severance and some additional charges that we took for SOX compliance and auditing expenses.

Jo Major

That last charge was an accrual, Todd, that we took because we are looking at the charges that we are likely to incur for the rest of fiscal year for those matters.

Todd Koffman - Raymond James

So it's sounding like, not including that $2.1 million due diligence expense that may be on the -- within the G&A category alone, this segment could bump down a few hundred to $500,000, $600,000 per quarter, going forward, since it sounded like some of those are onetime items.

Marla Sanchez

Todd, we are expecting to bring G&A expenses down. We probably won't get into real specific amounts. But we are expecting to -- for it to bring that down, and we certainly are looking to end up dealing with some of the issues that we have to deal with, related to audit and SOX and some of the other items that we had.

Jo Major

Couple of things --

Todd Koffman - Raymond James

Two more questions. Just a clarification on the guidance for the second half of calendar '07, when I think you said you expect a return to growth. That's a return to growth over the calendar first half level of business?

Jo Major

Okay. So what we said -- just to clarify the comments, what we said was we'd break two markets for you, metro and long haul. We said that annual -- so the revenue -- or the market for calendar '07 would be 14% bigger than the calendar '06 market. So that's one thing we said. And 11% bigger for long haul, '07 over '06. So that's one set of comments.

The second set of comments is a little bit more qualitative, in that we think that from what we can see, the first half of the market, the market is basically going to side -- excuse me, for the first half of the calendar year, the market is going to basically go sideways. And then the second half of the year, you'll see the growth in the market to account for the growth that we see year-on-year.

Todd Koffman - Raymond James

Okay. So I think if I heard you correctly, Jo, you are implying from your qualitative comment, that you expect the business -- the market to grow in the second half over the first half.

Jo Major

Yes, absolutely.

Todd Koffman - Raymond James

And just a last question. On this couple of million dollar expense you incurred, a big due diligence expense for a transaction that never occurred. Any other color on something like that, which kind of looks a little bit of an oddball expense, since usually an expense like that would be paid after a transaction actually occurs.

And then, what's the thinking on some of your ongoing big fixed costs that you talked about that have been a drag to the business?

Marla Sanchez

Okay. Well, on the cost that didn't occur, since we are looking to want to continue looking to be a consolidator in the field, we will continue to look at others. I mean, normally, you are correct. They don't necessarily get expensed after they occur. But you can capitalize them if the merger goes through or an acquisition goes through.

But since we are looking to participate actively, there is the possibility that we won't take every opportunity that comes our way, and we might have some expenses. But that isn't what we plan on doing regularly.

Jo Major

Maybe I can take a shot at it too, Marla's comments about we do think that the market needs to consolidate. We do want to play a strong role in consolidation. And I think it's worthwhile to reiterate as we did on the last call and we've done in different public settings, what we're looking for in terms of mergers of companies.

One is I think we really think that scale is important in the industry. It helps a lot of things, from purchasing to our interactions with our customers are helped by scale. We have identified internally several key technologies that we want to have within the company. So we're really looking for acquisitions to provide us with those key technologies.

I think the third part of it is we're very proud of the work that we have done in restructuring Avanex. And we've learned a lot about international restructuring and international law. And I think that we can do a really good job in the industry of helping find synergies and helping execute to get costs -- excess cost out of the result of the company.

I think the last thing that we're really looking for is we worked for a long time to improve the financials of the company. We think that we are getting the company really close to profitability and are obsessed with that goal. And we want to make sure that the mergers that we consider we can find a really quick way of turning the resultant larger company into a profitable organization very, very quickly. We don't want to ask our shareholders to wait another year or two for us to figure out how to make this a profitable company.

With regards to the second one, you know, Todd, we talked -- we've talked very honestly and very candidly about this company's basic strategy is to have a lower fixed cost base as possible. And any time we have higher fixed costs, we try and take those and either make them profitable, or find a way to work them outside of the Company.

We have entered in discussions with some of the representatives of the workers councils and the unions about different paths in France. But at this point, that's all we should say about what's going on with that particular facility.

Todd Koffman - Raymond James

Thank you. Good luck.

Marla Sanchez

Thank you.

Jo Major

Thank you, Todd.

Operator

Your next question comes from Hamed Khorsand with BWS financial.

Hamed Khorsand - BWS Financial

Good afternoon. Great quarter, guys.

Marla Sanchez

Thank you.

Jo Major

Hi, Hamed, how are you?

Hamed Khorsand - BWS Financial

Very good. My question is regarding, I remember the last earnings call, there was references to gross margin being hit due to a charges that were related to this quarter, the second fiscal second quarter related. Were there any charges in this gross margin figure related to the fiscal third quarter?

Marla Sanchez

Yes. There were. There were about 500,000 related to that.

Hamed Khorsand - BWS Financial

And could you also tell me how significant Nortel was to your business this past quarter?

Jo Major

Because they weren't a 10% customer, we haven't broken them out individually in terms of the revenue. Nortel is a very, very key OEM customer for us. We have a nice long working relationship where we supply them with a pretty broad range of products that are nice levels of product integration.

You know, when we see some softness in the market as we see looking ahead for the next six months, it's a great time to reach out to the customers that have been even working with over the last several years and make sure you understand their programs. And make sure you have the development teams aiming at the right thing.

So that when we see the market returning to robust and healthy growth, we have all of the right products lined up. I don't think it's appropriate for us to discuss specifics of any customer that's not top 10 or 10% customer.

Hamed Khorsand - BWS Financial

Okay. And related to Tellabs, was there a specific project you guys were working with, that were such a significant amount of revenue this past quarter?

Jo Major

We actually haven't said. There is a lot of public announcements about Tellabs, and where it's pulling its revenue from. So I'd encourage you just to go into the public domain and look there. We benefit from their successes just like they do. They are a great customer for us.

We really have done everything we can to try and make sure that we get the products there on the right time, so that they can run really hard with their opportunities. And we have got some really nice interesting design slots for their next generation work. So they are a great customer for us, and we are real happy to serve them.

Hamed Khorsand - BWS Financial

Thank you.

Jo Major

You bet. Thank you.

Operator

Your next question comes from Jeff Osborne with CIBC.

Jeff Osborne - CIBC

Great. Thank you. Congratulations again on the gross margin improvement. I was just wondering, Jo, if you could expand on the wavelength blocker opportunity, what you are seeing there? And then also, is that broken out in the metro or the long haul figures that you cited?

Jo Major

Okay. So, when you say wavelength blocker, I'm assuming, Jeff, that -- by the way, thank you for your compliment. I'm assuming that when you are talking about the wavelength blocker, you are in fact talking about the ROADM we are discussing?

Jeff Osborne - CIBC

Correct.

Jo Major

Yes. So in fact, we haven't said what the internal physics of the ROADM are. A wavelength blocker is just one type of ROADM. But we haven't discussed what's on the inside of this ROADM. This ROADM is primarily aimed at metropolitan deployments, and even sort of metro edge deployments.

It's designed to be just the right feature set to make -- to get -- it's the right feature set required for the functionality that people need. And then, a real heavy focus on making sure that it's small, making sure that it's very, very low cost, and it's very, very manufacturable. A lot of the pieces of this ROADM have been already made in production for several years by Avanex.

So we have a lot of confidence that as we bring this ROADM out, we will ramp it very quickly. We also have a lot of experience with the cost structure of it. So we are pretty confident that we can come out and give a real nice value proposition to our customers and provide (inaudible).

Jeff Osborne - CIBC

Great. And then, in regards to that 52% from metro in the second quarter. Could you just share with us what that was in the first quarter, just so we can see the rhythm of the numbers there?

Jo Major

Yes. About -- on an apples-to-apples basis, it's about four points lower. So I believe it was 48% in the -- we'll check. We've got that number around. Can you check, Maria, while we get to the next question?

Maria Riley

I will get that to you, Jeff.

Jeff Osborne - CIBC

And then just the last question I had was in terms of getting from the 19% gross margin level currently, to the 20% to 25% in the June period. Clearly, almost half of the reduction in the E&O charges will help. But what are the other levers to get to 20% to 25%? And in particular, just as submarine ramps up, it seems like 20% to 25% could be conservative, or no?

Jo Major

So just a couple things, and I will let Marla talk about some specifics that -- so Marla will talk about the programs that are driving this. And I just wanted to clarify something. When we talked about 20% to 25% gross margin as our target, we always think of our business, the core business, as not including the submarine revenue.

It simply because the submarine revenue comes in and it kind of comes in bursts, and it's this thing that is very nice. It has got good margins. And so it can make your core business look artificially better than it is when it comes.

So what we have been telling the investment community is that if we have a quarter with sizable submarine revenue, we pull it out, say what the revenue level was, and then describe our core business. The 20% to 25% represents where we want to take our gross margin of the core business by the June quarter. And then Marla, you can tell about the programs.

Marla Sanchez

Some of the programs, as was mentioned in the past, is we have got programs targeted at trying to improve the direct material margin. Programs to improve to try to bring the negative variances down, such as the E&O that you mentioned. And then we are always constantly looking at how we can end up improving anything related to overhead costs.

Jeff Osborne - CIBC

Great. And then just a last follow-up was on the $20 million to $25 million for the industry for submarine. The clarification, is that for the industry? Or is that for Avanex on an annual basis?

Jo Major

That's the pump component market for the industry. So there is limited competition there, Jeff. But that is the component -- pump component market for the industry per annum.

And just one last thing, I thought I knew the number off the top of my head, but I wasn't sure. So the metro market was 52% in last quarter, or the quarter we just ended. If you go one quarter ahead, or one quarter back from that, it was 48%. So roughly half of our revenue.

Jeff Osborne - CIBC

Great. I appreciate it.

Jo Major

Sure.

Operator

[Operator Instructions].

And your next question comes from Dave Kang with Roth Capital.

Dave Kang - Roth Capital

Great quarter. Just a clarification. When you talked about market being slightly mentioned on metro and long haul, does it include submarine revenues, as well?

Jo Major

I'm sorry. Dave, can you repeat the question? We didn't catch it.

Dave Kang - Roth Capital

Yes. So when you said you expect first half of this calendar year to be flat, specifically metro and long haul you talked about being flat. But does that include the submarine market, as well? Because submarine, or could submarine provide incremental growth with long haul and metro being flat?

Jo Major

Yes. So the qualitative comments we've made, or the general comments about the metro and long haul markets, where we talked about the market being rather flat for the first half of the year, those comments were really directed only at metro and long haul.

Dave Kang - Roth Capital

So you [forward] to the model that can keep those two markets flat. But then provide incremental growth with submarine? Is that kind of a logical approach?

Jo Major

Yes. I will just repeat what we've said to help you understand. We said we are going to have some minor submarine revenue this quarter, and it will ramp in the fourth fiscal quarter. And the second half of the year up to what we think to be a steady state run rate. That's kind of the information that we've provided, Dave.

Dave Kang - Roth Capital

Right, because you said 8 to 9 -- or $8 million to $10 million in the first half of this calendar year, correct, for the TPE project?

Jo Major

The 8 to 10 -- just to be specific, the $8 million to $10 million that we said -- I just want to make sure exactly what we said. The $8 million to $10 million that we saw is the entire TPE program for pumps. And we think that will all be pulled within calendar 2007.

Dave Kang - Roth Capital

I see. Okay. All right. And realistically speaking, I mean since you did see -- I mean you have very limited competition, can we assume you will get maybe half of the submarine market? Or any kind of quantitative information you can provide as far as market share is concerned or going forward?

Jo Major

Sure. In any -- the way these things are bid, Dave, in any particular deployment, there is usually multiple people that are awarded. Essentially multiple people are going to build this cable. And typically, there is just a handful of people that can make pumps in the world, two large suppliers.

So typically on any one cable, a low percentage of the business might be 25% for us. A high percentage of the business might be 75% of the business. You know, it's a competitive landscape, and we are going to go out there and bid and all.

But that gives you kind of a range on any given cable. If you have enough cables out there, you'd probably see that, the market roughly evenly split between the two pump suppliers out there. There are people who want to enter that market. But right now, there is a couple of people actively bidding.

Dave Kang - Roth Capital

Okay. And I guess somebody asked about Tellabs. But it sounds like your product is more on the Verizon network, not necessarily AT&T. Is that a fair assumption to make?

Jo Major

We actually haven't provided that information publicly.

Dave Kang - Roth Capital

Okay. Just a couple more, if I could. You know, some of your competitors implied that they saw some disruption from Alcatel because of the merger with Lucent. I mean have you experienced anything like that? And just any kind of comment you can provide as far as Alcatel is concerned?

Jo Major

You know, we have good relationships with both Lucent and Alcatel. Obviously, Alcatel has been a very big customer of ours, has been a supportive shareholder. They've been very constructive as we've had to do some international restructuring in France.

As these companies come together, you know, we are well integrated with the purchasing group. We are well integrated with the technical groups as they go together. So there may be some little bumps here and there.

By and large, we see that proceeding pretty smoothly, and we are pretty excited honestly about the opportunities that we see as those companies come together for us. So overall, I don't think in any way that's been a real negative force, except for a little bump here and there.

By and large, I think it's a real nice opportunity for us to see some additional business opportunities.

Dave Kang - Roth Capital

Sure. And can I get some numbers? And can I get numbers for depreciation, amortization and what CapEx was for the last quarter?

Jo Major

So you are looking for depreciation and amortization?

Dave Kang - Roth Capital

Yes.

Jo Major

Yes, hang on just a second. Marla?

Marla Sanchez

Yes. Depreciation for last quarter ends up running about $690,000. CapEx I think runs in around the 500 range. It's not terribly high for us, since we have contract manufacturing as compared to other companies that have fabs.

Dave Kang - Roth Capital

And what was capacity utilization for your European fabs last quarter?

Jo Major

So we actually don't quote that statistic, Dave. But we have basically three facilities that -- three facilities that qualify as fabs. We have a very small fab in San Donato that makes modulator chips. That fab has been running very, very nicely. We’ve seen that group dramatically increase its revenues.

So that shop is running actually pretty full and is a place where you see us adding some headcount to increase the capacity of product. The 3 to 5 semiconductor fabs we have a gallium arsenide fab and an indium phosphide fab in France. Like most compound semiconductor fabs around the world, those fabs are only partially utilized at a fairly low utilization rate. But we don't provide exact numbers.

Dave Kang - Roth Capital

Got it. And regarding Infinera, I mean is that a friend or enemy? I mean could they start to integrate a lot of discreet functions into their chips eventually?

Jo Major

Infinera is a real innovative company. I have a lot of friends that work there. So we know them quite well. We really enjoy the business relationship with them, and don't really view them as a threat at all. They do a great job producing an integrated indium phosphide integrated chip, that puts a lot of the functionality on the transmit side into a common chip.

And in certain applications, that really provides them a differentiated product that’s getting a fair amount of market attraction. So we see them as a real innovative company. We are excited to have them as a customer, and think that we can design a lot of great new products together with them.

Dave Kang - Roth Capital

Okay. Just lastly, going back to Tellabs. So, I mean 21% is very strong results from Tellabs. But was this just a one quarter thing? Or can you expect Tellabs to remain at this type of level going forward?

Jo Major

So we don't break out individual customers in a forecast way. So we tell you after the quarter is over how big a revenue the big customers for us have been, so that you know who our big players are. I think a couple of things about our industry that everybody knows our industry is based on large deployment programs. And because of that, you can see customers increase quite strongly and then sometimes they fade back a bit.

So, watching Tellabs come up, they have got some nice programs and we are enjoying a lot of that and really trying to make sure that we service their needs as they go after their big programs. But again, we don't provide forward looking guidance on a customer by customer basis.

Dave Kang - Roth Capital

Got it. Fair enough. Thank you.

Operator

And your final question is a follow-up from the line of Todd Koffman with Raymond James.

Jo Major

Hi, Todd.

Marla Sanchez

Todd?

Todd Koffman - Raymond James

Can you hear me?

Jo Major

Yes. We can hear you now.

Todd Koffman - Raymond James

On the balance sheet, you said that your collections probably weren't as great, and it seemed like if you had maybe better collections, you might have had a shot at being cash flow breakeven. But on the inventory number, it's up pretty significantly, almost 30% sequentially on, I don't know, 10% sequential revenue growth.

And you're guiding sort of flattish for the next quarter or so. What's going on with regard to inventories?

Marla Sanchez

What we did with inventory, was we did end up growing inventory, both at the finished goods and at the raw material level. At the finished goods level, we ended up building ahead in for some of the products that we had for this quarter. We had some orders that we wanted to get going on.

So we did build ahead, and we did end up taking finished goods up. And then relative to raw material, we had good pricing with a vendor on some fiber cable. And we went ahead -- which that contract was going to expire. So we went ahead and pulled forward on that to take advantage of the pricing on that.

So both of them did go up some, both on materials and finished goods. It was about equally split between them.

Jo Major

Yes. So just a couple of other comments. This was a quarter that -- this is the holiday quarter. And we got far enough ahead on the manufacturing that we actually let our operations group stand down. And so that was a nice thing that we did, and some of those products were on the shelf because of that.

So I think that rounds it up. We also had the 10% up in revenue. So you put those together.

Todd Koffman - Raymond James

Thank you.

Marla Sanchez

Sure.

Operator

Ladies and gentlemen, that was our final question, and does conclude the Q&A portion of today's call. Thank you for your participation in the Avanex Corporation's fiscal 2007 second quarter financial results conference call. You may now all disconnect.

Maria Riley

Thank you.

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