Opnext's CEO Discusses F2Q 2012 Results - Earnings Call Transcript

Nov. 1.11 | About: Opnext, Inc. (OPXT)

Opnext, Inc. (NASDAQ:OPXT)

F2Q 2012 Earnings Conference Call

November 1, 2011 16:30 ET

Executives

Steve Pavlovich – Investor Relations

Harry Bosco – Chairman and Chief Executive Officer

Bob Nobile – Chief Financial Officer

Analysts

Dave Kane

Tim Savageaux

Operator

My name is Philip and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 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.

I would now like to turn the call over to our host, Steve Pavlovich. Sir, you may begin.

Steve Pavlovich – Investor Relations

Thank you and good afternoon and thank all for joining us. Today, we will discuss our financial results for the second fiscal quarter 2012 ended September 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 about the financial results. Then Harry will talk about operational plans, market trends, and our expectations for the future all followed by Q&A.

As a reminder, the matters we will be discussing today include forward-looking statements and as such are subject to the 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-Q, quarterly reports on Form 10-K and 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 – Chairman and Chief Executive Officer

Thank you Steve and good afternoon everyone. As I am sure most of you know, Fabrinet is our primary contract manufacturer of 10G modules. And in light of the historic flooding that has impacted their facilities in Thailand we want to start by expressing our concern for and sincere thanks to the Fabrinet employees in Thailand who are enduring great hardship. Even in extreme difficult conditions, the Fabrinet team is working to minimize the impact on Opnext business. We will discuss the situation in Thailand and its likely impact on our business later in the call.

Today, we reported $86 million in revenues for the second fiscal quarter in September 30, 2011. It’s roughly compared to Q2 last year, but down 8% from last quarter. This shortfall versus our guidance provided in August was primarily related to soft demand for 40Gs subsystems and line side modules. As I mentioned on our last earnings call, visibility of 40G subsystems demand is limited. And demand tends to fluctuate quarter-over-quarter based on the limited customer base in our ordering patterns.

In addition, the shift by larger OEMs in China from externally purchased 4G modules to internally produced modules was faster than we had anticipated. I am pleased to report that despite lower than expected revenues and continued appreciation of the yen, we achieved positive adjusted EBITDA which is indication that our efforts to reduce product cost and control expenses are working.

Now, let me turn over to Bob to discuss the financial results in more detail.

Bob Nobile – Chief Financial Officer

Thanks Harry and good afternoon everyone. Revenue in the quarter ended September 30, 2011 was $86 million, a decrease of $7.1 million or about 8% compared to the June quarter and essentially flat compared to the second quarter ended in September 2010.

10G and below revenue decreased $5.7 million or 11% to $44.9 million compared to the June quarter and was down $11.5 million or 20% compared to the second quarter of last year as lower 10G telecom and SFP module revenue was partially offset by higher 10G datacom revenue. 40G and above revenue decreased by $2 million or 6% to $32.1 million from the June quarter, with $1.5 million of the decrease coming from 40G subsystems while lower revenue from 40G line-side modules were partially offset by higher 40G and 100G client-side module revenue. 40G and above revenues increased $9.8 million or 44% from the quarter ended September 2010.

Revenue from industrial and commercial products sales increased to $9 million or 7% from the June quarter and 17% from the quarter ended September 30, 2010 representing the ninth consecutive quarter of IMC growth. In the September quarter, Cisco was the only customer to represent more than 10% of total revenues. While revenues in the Americas represented 54% of our total revenue, Europe represented 13%, Japan 11%, and the rest of Asia was 21%.

Gross margin was 20.1% in the quarter ended September 30, 2011 compared to 21.8% in the previous quarter while non-GAAP gross margin was 21.9% compared to 23.5% in the June quarter. About half of the gross margin percentage decrease has resulted from foreign currency exchange rate fluctuations as the average yen’s dollar exchange rate appreciated by 5% to about ¥78 per U.S. dollar. Given the negative effect resulting from lower sale volumes, the fact that our gross margin percent decreased only 80 basis points at constant exchange rates demonstrates that our cost reduction efforts continue to outpace the declines average selling prices.

Turning now to our operating expenses, R&D expense was $14 million in the September quarter compared to $13.5 million in the June quarter, while non-GAAP R&D expense increased to $13.6 million from $13.1 million. This increase was primarily due to foreign currency exchange rate fluctuations. SG&A expense was $13.5 million in the September quarter compared to $14.5 million in the June quarter while non-GAAP SG&A expense decreased to $12.4 million from $13 million. The decrease in the non-GAAP SG&A expense was primarily due to lower spending partially offset by the negative effects of foreign currency exchange rate fluctuations.

Operating loss for the September quarter was $10.6 million compared to $7.8 million in the prior quarter. On a non-GAAP basis, the operating loss for the September quarter was $7.1 million compared to $4.2 million in the June quarter. The increase in non-GAAP operating loss primarily resulted from lower revenues and a $1.3 million negative effect from foreign currency exchange rate fluctuations.

Net loss was $10 million or negative $0.11 per fully diluted share compared to a net loss of $6.2 million or $0.07 per share in the June quarter. Net loss for the June quarter included a $2.1 million net gain on the sale of technology assets. Non-GAAP net loss was $6.5 million or negative $0.07 per fully diluted share in the September quarter compared to a loss of $4.6 million or negative $0.05 in the June quarter.

EBITDA was negative $1.5 million compared to positive $2.2 million in the June quarter, which included the $2.1 million net gain on the asset sale. Adjusted EBITDA was positive $100,000 compared to positive $1.9 million in the June quarter. As Harry mentioned, we are pleased with our adjusted EBITDA results despite the quarter-over-quarter decrease. This quarter’s result was accomplished that $86 million of revenue in an effective Yen foreign exchange rate of ¥78 per U.S. dollar as compared to our previous discussed goal of break-even adjusted EBITDA at $93 million of revenue assuming an exchange rate of ¥80 per U.S. dollar. Cash and cash equivalents of September 30 were down $6.7 million from June 30, 2011.

During the quarter, we used $1.9 million of cash in operations, $2.2 million for CapEx, and $2.4 million to fund capital lease obligations. We ended the quarter with $90.5 million of gross cash and $71 million net of short-term debt.

Before I turn it back to Harry, let me give you some background information as well as an update on the contract manufacturing operations provided to us by Fabrinet in Thailand. During the quarter ended September 30, 2011, products manufactured by Fabrinet represented $37.3 million or 43% of our total revenue. In addition, Fabrinet manufactured some of the TOSAs used in the 10G products we sold this quarter.

Our products primarily consisting of 10G modules are manufactured at Fabrinet’s Chokchai facility in Thailand. Operations at this facility have been suspended since October 22 when floodwaters infiltrated the first floor offices and manufacturing space. In addition, production was limited in the week prior to the shutdown as operations were impacted by local transportation and utility issues. Fabrinet believes that it is unlikely that production will resume at the Chokchai facility before the end of the calendar year.

We currently have about $16 million of inventory in Thailand consisting of approximately $8 million of raw materials and $8 million of finished goods. It appears that most of the finished goods were undamaged. However, we believe most of Fabrinet;s working process has been damaged including some of our raw materials. We also have production equipment at the Chokchai facility, primarily consisting of 10G module test sets with a new original cost of about $31 million. Some of the more sophisticated measurement equipments was moved by Fabrinet personnel to the second floor of the building and appears to have escaped damage by the flood. Once again access to the inventory and equipment in the dry areas, we can quantify the extent of any damage.

Fabrinet has informed us that it expects the insurance providing contractually by them to be adequate to cover the cost of replacing the inventory and equipment. The flood has also impacted several of our vendors in Thailand. We have alternate supply for all, but one of the constraints and we are working on that one to resolve it.

Now, I’ll turn it back to Harry.

Harry Bosco – Chairman and Chief Executive Officer

Thanks Bob. Let me start by discussing our action plans recover from the flood situation in Thailand as Bob just described. First, we have already started the process to increase our 10G module capacity at our manufacturing facilities in Totsuka, Japan and Freemont, California. Both facilities have experienced as manufacturing the products being transferred from Thailand, which should allow for smooth transition. The associated supply chain operations will be managed by Opnext with the support of Fabrinet.

Second, we will use existing contract manufacturers in China to assist in the production of certain 10G modules and a total production at Fabrinet will be observed by the available capacity of existing contract manufacturers in Japan. Third, we are adding extra resources to exploit the process, including two experienced contractors who recently established the contract manufacturing operations at Fabrinet.

We will continue to work with Fabrinet to evaluate what equipment and inventory can be salvaged. Recover the equipment, raw materials, and finished goods when access is possible and then assist them in restoring operations when the water recedes. Although this approach of expanding internal manufacturing capacity is inconsistent with our long-term strategy of moving module manufacturers to low cost regions, this is fastest path to recover production and support our customers. We are fortunate to have experienced teams in Totsuka and Freemont, which would allow us to recover our manufacturing capability as quickly as possible. We will continue to update you as we progress with our plans.

Now, let’s turn to the market and operations. Our 100G coherent program continues to be to be well-received as we actively engage DWDM system providers on our 100G module and line card approach. We believe based on these engagements and progress in our labs, our investments to date will allow us the opportunity to address this market with modern additional investment.

Our 100G coherent module was demonstrated at ECOC in September. And we expect to start shipping functional samples of modules and line cards with several customers by the end of the calendar year. On the client side, we continue to see solid demand from multiple customers for 100G CFP module. We are qualified or in the process have been qualified in almost 30-slot with 19 different customers. The 40G and above market will continue to be driven by major carrier deployment and upgrades across all regions of the world. The transition of higher speed product is accelerating as all optical infrastructures are being deployed to accommodate the balance need.

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 year-over-year growing trend, is a better indication of market demand. Our 40G and above revenues group 44% from the second quarter last year and 72% over the past 12 months. We are now qualifying 83 slots across 28 customers with only 30 additional slots in qualification.

Despite the payroll market conditions, an year-over-year growth of 40G and above revenues, there are some challenges. As I previously mentioned, some of our customers, the larger China based OEMs our 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 cost will continue to be a critical selection factor. To address this situation, we were supplying components and sub-assemblies to our customers who have decided to build our modules.

In addition, we anticipate that the custom line-side solutions especially at 100G, will eventually move to module-based designs and offer further opportunity for growth. Our L4 module, a multi-way link 40G transceiver and CFP package is shipping now. And the QSFP version, solar package is expected to start shipping to the customers at the end of this year. The QSFP end applications in date centers where power density costs are key factors for success. We view this as a significant opportunity for growth.

Our 10G and below book to ratio was 1 this quarter and prior to the Thailand flood 10G demand appeared to be rebounding toward level from a year ago. The 10G module remains very important to us and we plan to deliver working samples of our tunable XFP in first counter quarter of 2012 with (indiscernible) production by the middle of next year. Now, let’s talk about the progress of our operations, the costs of the flood recovery, we continue to lower our product costs by working with our suppliers and contract manufacturers and by increase in this vertical integration of our products.

We have reduced our non–GAAP OpEx from $28 million per quarter in fiscal year ’11 the $26 million of the quarter in the first half of fiscal year ’12. And as with the costs of flood recovery, we expect to reduce the OpEx the $25 billion in the third quarter of this fiscal year and we have targeted $23 million in the fourth quarter. (indiscernible) approximated $2 million of each of the last four quarters, and we’ll continue to focus our efforts and the expense control and working capital management.

Turning now to our outlook for the current quarter. Given the uncertainty around the time of recovering from the flood in Thailand we will not be providing guidance the December quarter.

So with that I’ll turn it back to Steve for the Q&A portion of the call.

Steve Pavlovich – Investor Relations

Thanks Harry that completes our prepared remarks and now we’ll take your questions. The operator will now provide instructions on how to submit your questions. Go ahead operator.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question or comment comes from (indiscernible).

Unidentified Analyst

Thank you. Two questions, Bob you might have mentioned this but can you tell us as a last quarter what percentage of your output came from Fabrinet. And then are there some subassemblies there not the finished goods going out of Fabrinet or subassemblies which are incorporated into modules, so what percentage of your revenue overall could be impacted by Fabrinet in the quarter?

Bob Nobile

Yeah. As I said this quarter, the quarter ended in September 43% of our revenue came from products manufactured in the Fabrinet Chokchai facility. And a portion of that revenue had 10G TOSAs that were also built at that facility, but they tend to be a very small percentage.

Unidentified Analyst

Got it. So, the sub assembly part is small, it’s mostly finished good.

Bob Nobile

That’s correct.

Harry Bosco

Yeah, actually, we manufacture most of those folks out of Japan.

Unidentified Analyst

Understood. So, that part also can be moved. And if you look at that 43% of revenues, I mean, I know is it all 10G or the 40G DQPSK modules also manufactured at Fabrinet?

Bob Nobile

It’s virtually all pending products less than 1% of our 40G and both products came out of the Fabrinet facility this quarter.

Unidentified Analyst

Okay, understood. And in terms of the ability on the TOSA side you mentioned obviously that can be moved over to the Japan facility already make a lot of few on doses. And then in terms of 10G modules can you just give us some sense of kind of work volume of that or what percentage of that could be made in Japan. I think there are few points which you can we’re trying to use one is that we have month of production and other is that how much of inventory you have on hand and the other piece that we really hopeful to understand as what percentage could be moved within the quarter to your Japan facilities?

Harry Bosco

Yeah, right now, simply most of those 10G products came from Japan. We transferred into Fabrinet. So, we have experienced staff back there. So, we will start ramping up all the major 10G products there, except for the lower end 10G products which we are now working with our China contract manufacturer to absorb. And Freemont also by the way transferred to products in the Fabrinet and they have manufacturing capability already.

Unidentified Analyst

And do you think that could be done intra quarter or is that Harry longer?

Harry Bosco

And my objective and everybody is working towards this is the start manufacturing by the beginning of December.

Unidentified Analyst

Understood.

Harry Bosco

And there is of course obviously a ramp-up period based on an individual product basis how fast you can get it out.

Unidentified Analyst

Sure. And if you look at the end-market demand, if you step away from kind of the supply side issues with no change and there has been no change in the supply side issues, how was end market demand have looked in the December quarter. It seems like September came in lower FiberHome was 10% customer, you talked about some of the Chinese vendors making their own 40G modules, so that impacted 40G demand in the subsystems side, but how would December look purely from a demand perspective?

Harry Bosco

December to me look like it’s going to be close to flat with our current quarter and we just completed. We don’t see any big uptick in revenue opportunities right now, but we see it moving around. In other words, his past quarter we have seen 100G client side going up substantially, where the 40G client side going up substantially and 40G line side going down. So, and then subsystems basically essentially we were pushed out and we see that coming back again in our third quarter.

So, all-in-all, you look over, in fact, Bob said the 10G looks like a solid demand that is going to – some growth in datacom maybe telecom we expect that to flatten out and then 40G and 100G probably is going to be pretty close to flat also to this next quarter barring by that…

Unidentified Analyst

This is for December right.

Harry Bosco

That’s right. It’s just saying how many for the fourth quarter.

Steve Pavlovich

Okay. We better move on to the next question.

Operator

And your next question or comment comes from (indiscernible).

Unidentified Analyst

Maybe a question for Harry, how do you that the transition manufacturing facility, because I guess that was under the assumption that specific products got certified of specific lines, once they moved, there may have to be a recertification product?

Harry Bosco

Lot of our manufacturing talks got before Freemont. So, they have already gone through the same process that we have. In the S&P line at Totsuka has been used for those products. So, we expect this and we are not changed in the TOSA rose as the critical compounds at all. They’ll all be provided the same. So, we’re basically maybe changes in resistors, capacitor type stuff. So, expect this to go fairly smooth. It will be on a customer-by-customer basis, but the feedback from our customer so far is they are looking for way to help us expedite the PCNs if required.

Unidentified Analyst

So, you just think because there have been manufacturers historically there should be able to quickly pass certification I want need to be recertified?

Harry Bosco

We’re hoping that do not recertified because process is haven’t changed and our critical compounds have changed.

Bob Nobile

In those factories today are qualified with our customers providing other products along with going forward in the future obviously with the transitions product.

Unidentified Analyst

Okay. Any sense would like be gear the 10 billion wanted to I mean that’s the way that need to be a completely replaced for anything in the (indiscernible).

Harry Bosco

The raw materials looked okay so far to drive. So..

Unidentified Analyst

Something about the machinery space?

Harry Bosco

On the machinery right now, they have taken up the second floor again. We got the high end stuff and you use the (indiscernible) machines as soon as goes in stuff it’s easier longly time item. So, right now our Japan team in and pre model going through that in our inventory, and we will be expedited where has to go around it.

Unidentified Analyst

All right, thank you, guys. Good luck.

Bob Nobile

Thanks.

Harry Bosco

Next question please?

Operator

Your next question comes from (Patrick).

Unidentified Analyst

Good morning here in Bob. Thank you for taking my questions in the afternoon. Couple of quick questions. So, you’ve talked a little about the insurance and the Fabrinet, should have the insurance to cover both your equipment inventory. But I guess my question is do you know or have you been able to quantifying cash flow implications at this point do you think that you have any spend with one time transitory expenses? And then also with insured equipment would you guys have the option should you decide to keep your lines permanently in Japan as opposed to at Fabrinet, would be able to take the insured equipment and install it your own facilities?

Bob Nobile

When we look at the cash impact upon us, okay, for us kind of look at the business absent to flood, okay. And we would have expected through the December quarter cash from operation that our capital lease payment it would be relatively consistent with the last several quarters. We were also expected our CapEx requirements that to be less than what we have been sending the last few quarters even that demand is somewhat flattened out, all right?. Then when we look to longer term impact of potential impact of the flood. Whatever variation we’re going to have in the P&L we see that we should be able to compensated with variation and that we’re continue – I mean variation to working capital through management of working capital and just the effects of the changes. Any CapEx requirements that we’re going to need to fund new or additional equipment here we need to be done through the insurance proceeds or available catalyst programs that we have in all dependent upon the timing.

Unidentified Analyst

And so there is an insurance proceeds would allow you to state that equipment (indiscernible) necessary?

Bob Nobile

Yes.

Unidentified Analyst

Okay. And then I guess given that you’re moving operations away from Thailand and inter Japan given the strong Yen how should we think about the impact to a gross margin and I would as you ramping these lines how should we think about yield or given that you have (indiscernible) past should deal to ramping up not be much an issue.

Harry Bosco

The year on always margins right now in the 90% range. So, we don’t expect that to a big problem and allowing engineering staff had those yields are improved to that level (indiscernible). So, we think that there will be a fairly smooth transition.

Unidentified Analyst

And Bob, on a gross margin?

Bob Nobile

When you look at the yen it’s trading now to about 78 little over 78.3 I think when our last moved earlier today little bit lower our target rate of 80 yen that’s price itself across those maybe a $0.5 million or so quarter just on currency. Harry talked about our continuing efforts to reduce our breakeven point. And we’re now a on a path that (indiscernible) fourth quarter we can get our OpEx down to the $23 million range we’ll have positive adjusted EBITDA at a revenue level consistent with that we did this quarter, which is substantially improved from what was originally $97 million level for core breakeven point to recently reduce down to $93 million, now we are down to $85 million.

Harry Bosco

Yeah. And the other part about this, (indiscernible), is we are going to try and use Fabrinet’s purchasing organization to help us out stay as is, but we will manage the overall supply chain. And the other part is we are not going to keep it in Japan. We are going to get back to our – taking it back out eventually. And we will pick it on a product-by-product basis, because we want to certainly get the higher run-rates out there.

Unidentified Analyst

Okay.

Harry Bosco

We better move on. Next question please.

Operator

Your next question or comment comes from the line of (Dave Kane).

Dave Kane

Thank you. Good afternoon. First question is regarding your Chinese customers, so what is the mix between make versus buy now and what you think the trend will be for next year?

Harry Bosco

Well, it’s one of them says they are going to do everything themselves. And one says they are going to buy half from the outside and do half inside.

Dave Kane

Now, for one that’s doing plans to do all internally are they a significant customer to you. I know, you are making some 10% customer, but….

Harry Bosco

They fluctuate, they were a significant customer of quarter and they went back down. So every customer is significant to us. And then there is really three big suppliers in China right now, they are Chinese OEMs.

Dave Kane

Okay. And then on the 40G you said that less than 1% came out of Fabrinet, but I guess the final assembly is earning California, but what about any sub-assemblies they came out of Fabrinet for your final assembly to be done in California facilities for 40G?

Bob Nobile

There are no sub-assemblies of components in our 40G and above products that come from Fabrinet.

Dave Kane

Okay, got it. Okay.

Bob Nobile

And most although some of our modules, some of our line-side – actually our line-side DPSK modules come from California. The rest, the 40G, the QPSK module and the 100G client side and the 40G client side modules all come from Totsuka.

Dave Kane

Got it. Just a couple more if I could, so you said Japan and the Freemont in production by beginning of December if that’s what you are targeting? So, how long does it take for full production after talking maybe four weeks or by January you will be in full production or just give us a trajectory as far as production ramp?

Harry Bosco

We don’t know yet. I’ll pass its going to come up. It’s going to be on a product-by-product basis and obviously we prioritized the products, but typically I don’t think it’s a matter of getting the yield up, it’s going to be a matter of having enough lines running to get. So, you’re not likely to starting over again Dave.

Dave Kane

Right, right. So, even by January, we don’t know whether you will be at full 100% capacity at this point?

Harry Bosco

We will have a better picture of this in about a month from now of where we are.

Dave Kane

Okay. All right. Thank you very much.

Harry Bosco

Okay, thanks a lot. Next question?

Operator

Your final question comes from (Tim Savageaux).

Tim Savageaux

Good afternoon.

Harry Bosco

Hey, Tim.

Tim Savageaux

Hey, how is it going? I wanted to come back on the kind of about the cash impact or really when you think about this, I mean, what’s happening here could be part of the overall reason to have outsourced manufacturing. I mean, this usually happens over two or three quarters, this type of slowdown, but effectively it’s happening all-in-one quarter. I imagine part of the advantage of having it outsourced is that you don’t have things like unobserved manufacturing overhead and what not to pressure the financials near-term as this kind of disappears for a while? And I think I heard you said you thought the overall cash impact relative to what you are expecting before would be pretty easier to offset versus working capital. I wonder if you can kind of discuss those dynamics about the presence or less kind of overhead cost versus what you are able to do on your working capital side?

Bob Nobile

Well, I mean, you are right about the overhead Tim. Our product portfolio on a mix as we have had this quarter in the last several has built into it a 40% margin or incremental margin as the revenue growth. And that’s a combination of the products that are made internally and those made by third-parties. Obviously, the internal produced parts have a higher variable margin while those that made by Fabrinet and the other CMs have our lower margin. So, that tends to help impact the working capital management of it as well as the potential P&L impact of it as well.

Tim Savageaux

Right. It’s a follow-up on that, I mean, the question is asked about the Yen impact of gross margin, but I am more interested in the mix impact of gross margin with more 40-gig and less 10 and more internal manufacturing, I mean, might those not be positive from a gross margin perspective?

Bob Nobile

Yes, they have the opportunity be so correct.

Tim Savageaux

Okay. And couple of more quick ones, I mean, did you ever think for a moment here to use this as an opportunity to really push the company more towards 1,400 and sort of permanently reduce your focus on 10 probably customer implications of that be….

Harry Bosco

Now, 10G is going to be around for long time, because of the price differential between its 40G, 100G solutions. So, we would see now in some cases the customers they really have an opportunity to go to 40G or stand on 10G. And 10G with the tunable application on all these rhodiums is going to be a big opportunity. So, I think this form factor is shrinking. Most of the OEMs are going to standard packages and cost has come down on most of the 10G compounds. So, I think, it’s standing around for quite a sometime and we see solid demand again on both telecom and datacom, and of course, Cicso is one of our largest customers.

Tim Savageaux

And it makes economic sense for you to look at?

Harry Bosco

Yeah, I think, to get back other one, it doesn’t say we are going to move by the way all manufacturing hint to Japan forever. We still use contract manufactures and make the right decisions around that. It does say though that you are right, we may tune some products as we get through this process.

Next, I mean, what you may have here is that depending on how this quarter works out, a company that’s 70% plus 40G to 100G this quarter, smaller base but my thought was that just might be more attractive company? Right, I mean with the obviously taking care of customers as the high priority. And so I will finish on that. One more note which is just really to address the stock price, I mean, coming off the world series here, it occurred to me that Albert Pujols wanted to be in the optical component business, he could do so with this next annual salary and with something left over.

So, I know execution will drive the stock price, but as you sit here with a nominal enterprise value, any thoughts on what your approach might be to improve that situation. I think that’s obviously the Thailand thing really ship things up right, people have the uncertainty there. I think we have to go back and just prove that we are going to get through these prices and get our results.

Tim Savageaux

Opportunity to address that by bracketing the impact here and haven’t taken it?

Harry Bosco

It’s a little too early. These are the uncertainties.

Bob Nobile

This is we are dealing with this is for a week now, Tim. So, I think we have we done our best here to get the information out that we know today and we still have lot of work to do to execute on this recovery plan.

Tim Savageaux

Fair enough. Thanks guys.

Harry Bosco

Okay. Anymore questions operator?

Operator

There are no further questions at this time sir.

Harry Bosco – Chairman and Chief Executive Officer

Okay. With no more questions that will conclude our call for today. Thanks for joining us this afternoon and we will look forward to speaking with you soon. Bye for now.

Operator

This does conclude the conference call. You may now disconnect.

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