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Opnext Inc. (NASDAQ:OPXT)

F1Q2012 Earnings Call

August 4, 2011 4:30 pm ET

Executives

Steve Pavlovich – VP, IR

Harry Bosco – Chairman and CEO

Bob Nobile – CFO

Analysts

Subu Subrahmanyan - Sanders Morris

Scott Sattler [ph]

Ajit Pai - Stifel Nicolaus

Dave Kang - B. Riley & Co.

William Stein - Credit Suisse

Operator

Good afternoon. My name is Alisha [ph], and I will be your conference operator today. At this time, I would like to welcome everyone to the Opnext First Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Steve Pavlovich, Vice President of Investor Relations. Sir, you may begin.

Steve Pavlovich

Thank you. Good afternoon and thank all of you for joining us. Today we’re going to discuss our financial results for the first fiscal quarter 2012 ended June 30, 2011. We’ll begin with Harry Bosco, our Chairman and Chief Executive Officer for an overview of the quarter, followed by Bob Nobile, our Chief Financial Officer, who will provide additional detail on the financial results. Then Harry will talk about market trends, operational plans and guidance and of course, followed by Q&A.

As a reminder, the matters we will be discussing today include forward-looking statements and as such are subject to risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. Such risks and uncertainties are discussed in the company’s filings with the SEC, including the press release filed today and our most recent annual report on Form 10-K, quarterly reports on Form 10-Q and any applicable amendments. Please refer to the Safe Harbor language contained therein. In providing forward-looking statements, the company expressly disclaims any obligation to update these statements.

Also let me mention that throughout this conference call we will be referencing both GAAP and non-GAAP financial measures. A complete reconciliation of the non-GAAP financial measure to the applicable GAAP financial measure including a reconciliation of adjusted EBITDA to EBITDA can be found in the press release we issued today, which is available on our website in the Investor Relations section.

So, with that, I’ll turn it over to Harry.

Harry Bosco

Thank you, Steve, and good afternoon, everyone. Today we reported $93.1 million in revenues for our first fiscal quarter ended June 30, 2011, up 18% compared to Q1 last year, but down 2% from last quarter. When we guided to $93 million to $97 million in revenues during our last call, we assumed that the midpoint of 40G and above and 10G and below revenues would be each about flat compared to the March quarter.

The approximate $2 million shortfall from the midpoint of our guidance primarily resulted from production constraints late in the quarter due to lower than expected 100 Gigabit CFP module yields and 40G DQPSK interoperability issues experienced during two new customer implementations. Our 100G CFP yields are improving and the interoperability issues have been closed at one customer and are in process of being closed at another.

Despite the sequential revenue reduction, our progress toward profitability and better working capital management continued this quarter. Non-GAAP gross margins improved to 23.5% and we delivered on our breakeven adjusted EBITDA objectives. In addition, we made significant process reducing our DSOs and inventory levels.

Now, let me turn it over to Bob to discuss the financial results in more detail and then I’ll be back to talk about our operating plans, the current market dynamics and our guidance.

Bob Nobile

Thank you, Harry. And good afternoon, everyone. Revenue in the quarter ended June 30, 2011 was $93.1 million, a decrease of $2.2 million or about 2% compared to March quarter. 10G and below revenues increased $1.7 million or 4% to $50.6 million, primarily due to strength in datacom module sales. 40G and above revenues decreased by $4.1 million to $34.1 million or almost 11% from the March quarter. This was primarily due to a $2.8 million decrease in 40G subsystem sales and the production constraints Harry mentioned.

Revenue from industrial and commercial product sales decreased 2% to $8.4 million, representing, I’m sorry, increased 2% to $8.4 million, representing the eighth consecutive quarter of I&C growth. Compared to the first quarter ended in June 2010, total revenue increased $14.2 million or 18%.

Sales of 10G and below revenue were down 9%, compared to the first quarter of last year, primarily due to a decline in 300-pin module sales and to a lesser extent, lower XFP sales, while 10G datacom sales grew by more than 20%.

40G and above revenues increased $17.8 million or 109% from the quarter ended June 30, 2010. This was driven primarily by growth in 40G and 100G module sales. Sales in industrial and commercial products increased $1.7 million or 25% compared to the quarter ended June 30, 2010. This quarter, Cisco and FiberHome each represented more than 10% of total revenues and on a combined basis represented 40% of revenues. In the March quarter, these two customers represented 28% of total revenue.

Geographically for the quarter ended June 2011, revenues in the Americas represented 44% of our total revenue, while Europe represented 16%, Japan 13% and the rest of the Asia was 27%.

Gross margin was 21.8% in the quarter ended June 2011, compared to 19.6% in the March quarter, while non-GAAP gross margin was 23.5%, compared to 21.3%. Excluding the 100 basis point benefit from lower earthquake-related costs and the 30 basis point negative effect from foreign currency exchange fluctuations, gross margin improved by 150 basis points from the March quarter, despite lower sales volumes and a lower percentage of 40G and above revenues. This gross margin improvement indicates that our cost reduction efforts outpace the declines in average selling prices.

We were able to accomplish this by making better use of our contract manufacturers, working with our suppliers to design lower cost parts and increasing the vertical integration of our modules by using more in-house optical components and lower cost sub-assemblies.

Looking forward to our second fiscal quarter ending in September 2011, we expect our gross margin percentage to modestly improve at constant exchange rate.

Turning now to operating expenses. R&D expense was $13.5 million in the June quarter, compared to $15.6 million in the March quarter, while non-GAAP R&D expense decreased to $13.1 million from $15.2 million. The decrease was primarily due to the timing of material and outsourcing costs related to new product introductions. Looking forward, we expect R&D spending to average less than $15 million per quarter for fiscal year ‘12.

SG&A expense was $14.5 million in the June quarter, unchanged compared to the March quarter. Non-GAAP SG&A expense was $13 million in the June quarter, down slightly from $13.1 million in the March quarter. For Q2, we expect SG&A expense to be comparable with the June quarter.

Operating loss for the June quarter was $7.8 million, compared to $12 million in the prior quarter. On a non-GAAP basis, the operating loss for the June quarter was $4.2 million, compared to $8.4 million in the March quarter. The decrease in non-GAAP operating loss primarily resulted from higher gross margin and low R&D expenses as I previously mentioned.

Net loss was $6.2 million or negative $0.07 per fully diluted share, compared to net income of $9 million or $0.10 per share in the March quarter. Net loss for the June quarter included a $2.1 million net gain on the sale of technology assets. The net gain reported last quarter from this transaction was $21.4 million.

Non-GAAP net loss was $4.6 million or negative $0.05 per fully diluted share, compared to loss of $8.7 million or negative $0.10 in the March quarter. EBITDA was positive $2 million and included the $2.1 million net gain on the net asset sale, while EBITDA in the March quarter was positive $17.3 million, including a $21.4 million net gain from the asset sale. Adjusted EBITDA was $1.9 million this quarter, compared to negative $2.2 million in the March quarter.

Cash and cash equivalent at June 30, 2011, was $97.2 million, down $3.1 million from March 31st. During the quarter we used $1.7 million in operations, $1.6 million for CapEx and $2.3 million to fund capital lease obligations, while the net proceeds from the asset sale was $2.1 million.

Working capital increased by $3.1 million as the cash benefits from lower DSOs and lower inventory levels were used to reduce current liabilities. For Q2, we expect working capital requirements to modestly increase, while CapEx and capital lease requirements are expected to remain consistent with the June quarter.

Now, I’ll turn it back to Harry.

Harry Bosco

Thanks, Bob. Given the importance of Japan to Opnext and our colleagues there to us, let me start by updating you on the situation in Japan. During the quarter, we resolve the two remaining earthquake-related supply constraints and completed the installation of backup power systems to mitigate potential future power interruptions. In addition, we adjusted our work schedule to utilize off-peak power during the summer. So, again, I would like to acknowledge the extraordinary efforts of our team in Japan.

Now, let me turn over to our primary business focus, which continues to be returning Opnext to profitability and positive cash generation as we grow the business. This quarter represented solid progress toward these objectives. We were able to cut non-GAAP operating loss in half, deliver on our adjusted EBITDA breakeven objective and minimize cash used in operations. The fundamentals of our plan are intact. We continue to make focused investment in future products as we execute the various actions we’ve talked about in the past few quarters.

First, we are working to improve our overall gross margin. Here we have two primary areas of focus. Improve our product mix by continuing to focus on the faster-growing, higher-speed market segments and improving product cost structure. The fundamental drivers of bandwidth demand are intact and industry analyst reports along with our customer feedback continue to indicate strong growth prospects for the markets Opnext is focused on.

The 40G and above market growth will continue to be driven by major carrier deployments and upgrades across the regions of the world. The transition to higher-speed products is accelerating as all optical infrastructures are being deployed to accommodate the bandwidth needs.

We anticipate the revenue growth will continue to fluctuate from quarter-to-quarter, due to the nature of network capacity expansion plans. So we believe looking at the year-over-year growth trends is a better indication of market demand.

As mentioned before, our 40G and above revenues grew 109% from the first quarter of last year. In addition, we have had a solid quarter of 40G and above module qualifications. We added six new 40G slots and are now qualified in 79 slots across 28 customers. The 100G CFP modules are qualified in two slots with two customers and are in the qualification process for 17 slots with 12 customers.

Despite the payroll market conditions and the overall growth of 40G and above revenues, there are some challenges. Some of our customers are developing modules for internal use in addition to purchasing from outside suppliers like us. We anticipate this will continue on a case-by-case basis and the cost will continue to be critical selection criteria.

On the other hand, we anticipate that custom line-side solutions, especially at 100G, will eventually move to module-based designs and offer a further opportunity for growth. The second step towards profitability is to continue to lower our product cost by working with our contract manufacturers, suppliers and increasing the vertical integration of our products.

Our next-generation 40G and 100G modules will include optical subassemblies that we believe will offer significant cost reductions for the current designs. We will continue these types of efforts across the entire product line. Our improvement this quarter to non-GAAP gross margins to 23.5% is evidence that we have begun to realize the benefits from our efforts.

Finally, we plan to improve profitability by reducing operating expenses. We expect R&D spending to average less than $15 million per quarter in fiscal year '12 and we expect to favorably leverage our SG&A infrastructure as we grow the business.

Before moving to our guidance, I'd like to say a few words about the status of our development programs. Our 100G coherent module program continued to be well received as we actively engage DWDM system providers on our 100G module approach. We believe based on these engagements and progress in our labs, our investments to date will allow us the opportunity to address about half of the market with modern additional investment.

And so we continue to see this as an exciting future revenue stream for the company. In addition, we plan on introducing our tunable XFP module and our LR4 module in a QSFP+ package in the fourth quarter of this calendar year.

Now as we move on to guidance for the September quarter, let me first provide some context. Demand during the second half of the June quarter softened after a book-to-bill of more than one during the first half. We believe some of the demand in the first half was due to our customers building safety stock based on their concerns arising from the earthquake in Japan.

So while we remain confident about the long-term fundamentals, at present demand remains soft and we don't anticipate any significant growth in the near-term. Given this, we expect revenues to be between $89 million and $95 million for our second fiscal quarter ending September 30, 2011.

So with that I'll turn it back to Steve and open up the Q&A session.

Steve Pavlovich

Okay. Thanks, Harry. So that completes our prepared remarks and now we'll take your questions. Operator, could you provide the instructions on how to submit questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Subu Subrahmanyan.

Subu Subrahmanyan - Sanders Morris

Hi. I had two questions. First, if could you talk about the level of impact that these production constraints posed during the quarter and as well as if there was any impact from the manufacturing constraints from the earthquake which had a revenue impact for the quarter, if you could quantify that?

The second question is your view of the market, given the weakness that you've seen in the last few weeks, the commentary that you are hearing from customers, the trajectory you're expecting past September the shape and magnitude to recovery potentially.

Harry Bosco

Subu, this is Harry. Let me start by saying that we had about a $2 million this past quarter from these manufacturing constraints. And really it's two kinds of constraints. One was we put in new machines to ramp-up the 100G CFP production and we suffered some yield issues with that. That has now been – we're back to normal on that.

The second is when you do these qualifications and some of the customers, we have two new customers, the requirements are really not specified on the module. It's more of the timing between the modules and the customer's equipment.

So we basically had to change some firmware to change some timing to line up with customer's equipment. And that customer's equipment by the way is determined – the timing on that is determined by the system provider. So we've gone through that with the first one and now we're going through it with the second one and basically it was not like we had to replace any products. It's mainly just changing in the timing.

And now once that timing is fixed and we have the qualification there, now we expect the ramp to start. If you talk about the earthquake impact, we had some minor stuff that carried over from the previous quarter but nothing real significant.

Subu Subrahmanyan - Sanders Morris

Okay. And when the overall market environment and the (inaudible) you saw in the last couple weeks?

Harry Bosco

I see it kind of going up and down, okay, because it almost goes in like in steps on a given customer basis. It's almost like they get the order, they get qualified, they get qualified, they get the order, they place the order on us and then we feed that through to the customer. I don't see the demand going away. I just see it fluctuating.

And that's why I say we would have been in pretty decent shape if we didn't have that $2 million impact. And we expect – I don't see the uptick over the next quarter, but probably the following quarter. The demand is there, it's coming in, but it's just a matter of getting qualified in some of these system providers and then they start their deployments.

Subu Subrahmanyan - Sanders Morris

If you look at this past September, do you think what may or may not impact ability to grow is more qualifications rather than demand?

Harry Bosco

Yeah. I think it's more of – a lot of our customers are bidding for the projects, they're getting their qualifications done and then it's a matter of how fast the networks are deployed. And a perfect example is in our subsystem business where we see it continually fluctuate. We had a big punch last quarter. This quarter had dropped down. But all-in-all if you even it out, it's a pretty consistent pattern.

Subu Subrahmanyan - Sanders Morris

Got it. Thank you.

Steve Pavlovich

Okay. Great. Thanks, Subu. Next question, operator.

Operator

Your next question comes from the line of Scott Sattler [ph].

Scott Sattler

Thanks for taking the question. I had a question on the 40-gig business. Can you – small downtick in the business, a couple million, if I have a right. How much of that was coherent versus non-coherent or oriented products? I guess one of the semiconductors vendors saw some weakness out of China in non-coherent products and so just wanted to see if that's the same thing you're seeing or not?

Harry Bosco

They're all non-coherent that we have right now.

Scott Sattler

Okay.

Harry Bosco

So it's really DPSK, DQPSK and then on the good return it should reach on the client side DSR. But the downtick as Bob alluded to was really the subsystems came down $2.8 million and the rest was really the $2 million issue. We just couldn't get it out fast enough.

Robert Nobile

So basically you got $4.8 million in total outside of modules.

Scott Sattler

Okay. And so the Chinese vendors, their move to coherent, how do you see that playing out?

Harry Bosco

I see coherent is still going to deploy a lot of DPSK and DQPSK. I think the 40G, you're talking about the 40G coherent or the 100G?

Scott Sattler

Both.

Harry Bosco

Okay. We think the 40G is probably going to a shorter life certainly than the 100G because it's setting up the patterns on new routes. They'll put in 40G, a few routes. It still can't cope this with the standard 10G stuff. We have to do some engineering around those networks.

So I suspect DPSK, DQPSK will be used in those networks. New routes will be put in and a few of them will put the coherent 40G in first and then evolve that into 100G coherent. So I don't see too much in China right now moving to coherent.

Scott Sattler

Okay. Great. You mentioned modules that may be being built internally by one of your customers. I guess, is that customer an Asian customer? And what modules would those be? What products?

Harry Bosco

I think they're going to do the DPSK, DQPSK and do VSRs and these are some of the larger customers but again, what's going to happen, Scott, they're really going to double source it. I don't see them going it alone because you give the outside vendors a share of it and then keep some inside and then eventually if the cost starts to come down on the outside vendor, they'll get out of that business.

Scott Sattler

Okay. And then last question on the safety stock. What – can you break that down roughly by components? And where would be the inventory being built do you think?

Robert Nobile

You're saying the demand – why we had the demand stronger in the first half instead of the second half, Scott?

Scott Sattler

Yeah. I think you mentioned that some safety stock was being built…

Robert Nobile

Yeah. It was across is the 40G models and XFPs.

Scott Sattler

40 gig. Okay. Great. Thanks very much.

Steve Pavlovich

Okay. Thanks, Scott. Next question.

Operator

Your next question comes from the line of Ajit Pai.

Ajit Pai - Stifel Nicolaus

Good afternoon.

Steve Pavlovich

Hi, Ajit.

Ajit Pai - Stifel Nicolaus

Yeah. A couple of quick questions. I think the first one is on the 100G and 40G, the color that you provided in terms of merchant and captive providers, and I think you suggested that the basic determinant for your customers over there is tries [ph] on whether to do it internally or externally. Is that a fair assessment of, you know, what you just said?

And also, from a pricing perspective both in the 40G and 100G sides were there any changes within this quarter relative to the trends you’ve seen over the past couple of quarters?

Harry Bosco

First of all on the 100G, there is clearly some large vendors that have done customs solutions on the 100G. And then, there are some that are going to end up moving to modules; they’re just not going to do the custom solution in-house, and I think I alluded to about half of the market is going to be those customers that buy modules as opposed to doing their own custom designs.

But we eventually see and we’ve talked to many of the people that have done the custom designs, they’re going to transition into module-based as they move on to their next generation systems. And they’ll leave that next generation of modules to the module vendors. And I haven’t seen that much change in the 40G business. We’ve seen some spotty plans of 40G coherent but DPSK, DQPSK we have not seen that much of a change.

Bob Nobile

Ajit, they’re coming down a little bit faster than they did last quarter, but that’s really only because the product line is maturing at this point. You know when we look at our quarter-over-quarter price declines, it was as we would have expected and on consistent with historical trends.

Ajit Pai - Stifel Nicolaus

Right. But it’s fair to say that the pricing on the 100G and the 40G, not surprising but much more the shift from captive to merchant is independent, going to a module based rather than custom is going to be independent of what the pricing is. That’s just the way it’s going to go and that’s the way the customers are thinking about it, is that fair?

Harry Bosco

I think what’s going to happen is they’ve come out with their initial designs to get to market early way, on the early payout.

Ajit Pai - Stifel Nicolaus

Got it. So it was more time to market that determined them going with the internal solution rather than just the price factor in the short runs. The price is not....

Harry Bosco

You just look at us. We’re going to be going to next generation design already, so – and the cost is going to start driving out of it. So they don’t want to get into that game, I don’t think.

Ajit Pai - Stifel Nicolaus

Right. Okay. And then the second question is you know, you talked about some of your supply constraints easing during the quarter and getting all the problems sorted out, can you give us some idea of when in the quarter it happened or post the quarter whether it happened?

Bob Nobile

Well, the production constraints that Harry talked about at the beginning, those were actually at the very end of the quarter, all right. The constraints that we had coming from the Japan earthquake, those were primarily in our chip fab, which was still down for several days coming into the month of April, but those, you know as the month progresses – as the month of April progressed and the rest of the quarter progressed, we were able to work our way through all of those.

Harry Bosco

And the PCV shortage we had is, that cleared up relatively quickly going into the quarter.

Ajit Pai - Stifel Nicolaus

So it would be fair to say that the margin expansion that you could see if your revenues are stronger than you expect should be stronger in terms of performance than the expansion you saw in the prior quarter?

Bob Nobile

You know, we had several in-house components this quarter built into our products, and that – the extent of that is probably not going to increase much in the second quarter. So I am not sure we are going to get into much of an improvement, but we’re expecting an improvement. We have a few others, a few other new multi [ph] TOSA and grosses coming in – in our third quarter, so we probably get another little uptick then.

Ajit Pai - Stifel Nicolaus

Got it. And then just in terms of the EBITDA, you know, from this point onwards, do you see yourself staying EBITDA positive?

Bob Nobile

It’ll depend on our R&D spend, Ajit. We did have some savings this quarter because of the timing of our spend. We still believe that, you know, when you look at our quarters over the year, we are going to average less than $15 million, but absent that, with this revenue, you know, if we maintain this revenue level and our gross margins, that – we should be there.

Ajit Pai - Stifel Nicolaus

Got it. And you did talk about the fact that you were looking and expecting design wins, but you’re waiting sense of deployments accelerating for your customers – post the design wins. In your own planning in terms of volume or ramps for these design wins, when are you modeling the biggest sort of ramp? Are you modeling it in calendar 2012 or in calendar 2011?

Harry Bosco

I think we’ll see it – I’m pretty sure it’s going to come in at the beginning of calendar year ‘12.

Ajit Pai - Stifel Nicolaus

At the beginning. Got it. Okay. Thank you.

Steve Pavlovich

Okay, operator, next question?

Operator

Your next question comes from the line of Dave Kang.

Steve Pavlovich

Hey, Dave.

Dave Kang - B. Riley & Co.

Thank you. Good afternoon. Let’s see. I may have missed this before – your Q2 guidance, what are your expectations on the 40G and 100G revenue? Are they going to be flat or…?

Harry Bosco

Right now our expectation is we’ll see the 40G and above go up relative to this quarter.

Dave Kang - B. Riley & Co.

Okay. All right.

Harry Bosco

Dave, I just want to make sure it’s dependent on the subsystem business too, that fluctuation. That’s why we had that range on there.

Dave Kang - B. Riley & Co.

Sure. Sure. And then on cumulative QSFP [ph], when – can you just go over the process as far as Telcordia qualification? How long in that and then how long is the design win cycle, and then going to production?

Harry Bosco

We have it right now – we have it in the CFP package and now – we’re now sampling the QSFP+ package and most of the big data center people want to go to the QSFP+ package. We have some pretty substantial quantities being requested to us by the end of the quarter, by the end of the year, I’m sorry, by the end of the calendar year, and we expect to ramp that up in the beginning of next year into decent quantities. But the QSFP package will be used mainly to interconnect the servers to the data farms, you know, the switches. And it’s 40 gigabits and they are really small, dense packages.

Dave Kang - B. Riley & Co.

Got it. Got it. So they don’t need to go through the Telcordia qualification then?

Harry Bosco

I don’t think they’re going to go through that. The people that are using these are going to go relatively quickly through.

Dave Kang - B. Riley & Co.

Got it. Got it. And can you just talk about your pricing environment? One of your competitors, it’s gotten a little bit worse last quarter. Just what do you see from your side?

Bob Nobile

This past quarter for us, Dave, was relatively consistent with our historical experience. You know, we consistently talked about somewhere between 15%, 17% year-over-year declines. You know, that equates to a 3% or 4% quarter-over-quarter decline and that’s right where we were this past quarter.

Dave Kang - B. Riley & Co.

Got it. And the last quarter for you, Bob – so CapEx for fiscal 2012, what should we budget?

Bob Nobile

For the fiscal year we’re looking at about $12 million, and that will be spread between cash spent for CapEx as well as new capital leases.

Dave Kang - B. Riley & Co.

Got it. Thank you.

Steve Pavlovich

Thanks, Dave. Next question.

Operator

Your next question comes from the line of William Stein.

William Stein - Credit Suisse

Thanks for taking my question, guys.

Steve Pavlovich

Hey, Will.

William Stein - Credit Suisse

Hi, how are you?

Steve Pavlovich

How are you?

William Stein - Credit Suisse

Good. So, I think I heard you say that, you know, fundamentals were strong but you didn’t see any growth in the near-term. I’m not expecting you to give Q4 guidance certainly, but should we have a sense that Q4 would see revenue snap back up or is it too soon to say?

And what would be the primary determining factor? Is it your print position of customers or demand for new systems?

Harry Bosco

I don’t think we can really even forecast that right now. We have to really see how the market responds to some of the situations we have right now. You have things like CapEx spending, how the carriers going to start to use their CapEx. You know, they pretty well spend their first half of the year and then it’s questionable when they spend during the second half of the year. So there’s a lot of factors that come into this.

William Stein - Credit Suisse

Okay. And then maybe you can comment a little bit on inventories at customers broadly speaking? Have you seen their inventory situation get tighter or improve from a supplier’s perspective or do they have too much inventory in your view? Any update on that would be helpful?

Harry Bosco

I think as I mentioned before that in the beginning of the quarter, we saw – I said orders coming in that looked like they were pretty strong relative to where I thought the market was. So, I thought that they were ordering the products really because they did not want to run out of supply due to the earthquake constraints.

I think that has stopped and it’s pretty well flushing out now. We still see, by the way, back at the end of the year on 40G in particular, multiple orders were placed and some suppliers could not deliver, and then they came in and delivered, and so that inventory is getting flushed out and I suspect it’s pretty well done now.

William Stein - Credit Suisse

So you think it’s done now at the start of August, do you think the inventory situation is more or less cleared up with customers and now either the guidance that you’re giving for, kind of, flattish revenue or about consistent revenue quarter-over-quarter is more just demand, not an inventory buffer?

Bob Nobile

I think what you should consider is whatever it’s going to take to flush that out has been factored into the guidance we gave for the quarter.

Harry Bosco

And we do see pockets of demand coming in on products, which is relatively normal for us. Certain products by certain customers are getting strong while other ones are dropping off. It’s just how they’re winning the projects.

William Stein - Credit Suisse

Okay. Thanks for taking my questions. I appreciate it.

Steve Pavlovich

Okay. Well, thank you. Operator?

Operator

(Operator Instructions) There are no further questions at this time.

Steve Pavlovich

Okay. Thank you very much. So no more questions. That concludes our call for today. Thanks for joining us and we will talk to you soon. Bye for now.

Operator

This does conclude today’s conference call. You may now disconnect.

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