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Executives

Alain Couder – President and Chief Executive Officer

Jerry Turin – Chief Financial Officer

Jim Fanucchi, Summit IR Group – Investor Relations

Analysts

Kevin Dennean – Citi Investment Research

Patrick Newton – Stifel Nicolaus

Stan Kovler – Morgan Stanley

Dave Kang – B. Riley & Company

Oclaro, Inc. (OCLR) F2Q12 Earnings Call January 26, 2012 4:30 PM ET

Good afternoon, and welcome to the Oclaro second quarter fiscal year 2012 financial results conference call. As a reminder, this conference call is being recorded for replay purposes through February 2nd, 2012. At this time, I would like to turn the call over to Jim Fanucchi of the Summit IR Group. Please go ahead, sir.

Jim Fanucchi

Thank you, Operator, and thanks to all of you for joining us today. Our speakers are Alain Couder, chairman and CEO, and Jerry Turin, chief financial officer of Oclaro.

Statements of management's future expectations, plans or prospects for Oclaro and its business, including statements about future financial targets and financial guidance and Oclaro's plans for future operations, and any assumptions underlying these statements are forward-looking statements under the Private Securities Litigation Reform Act of 1995. There are a number of important factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including the risk factors described in Oclaro's most recent annual report on Form 10-K, most recent quarterly reports on Form 10-Q and other documents we periodically file with the SEC.

The forward-looking statements discussed today represent Oclaro's views as of the date of this conference call and subsequent events and developments may cause Oclaro's views to change. Oclaro does not intend and is not required to update any forward-looking statements as a result of future developments.

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

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

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

Alain Couder

Good afternoon. As you know, there are a set of slides on our website that you can use to follow this call.

For the second quarter of fiscal year 2012, our revenue came at the high end of the previous guidance at $86.5 million, compared to a guidance of $75 million to $85 million. Jerry will provide you with the details of our financial results later in this call.

I would like to address four topics: first, the recovery in Thailand; second how we will make progress with our strategic initiative; third, how, as a result of all this recovery, we think we will be better positioned than before; and fourth, our cash and financial resources in relation to this flood recovery. Jerry will give you more detail on cash and financial position.

Let me start with the Thailand recovery. Obviously, this has been a major focus for us and we are quite pleased with our progress. As we announced in our press release on January 4th, we have started commercial production in four of the five affected product lines at the Fabrinet Pinehurst facility, which is a new factory for us.

In terms of the commercial shipment of the high-power lasers will resume production in November, and we are currently at pre-flood level production capacity. These were already in the Pinehurst facility.

In terms of commercial shipment of amplifiers, we resumed commercial production during the last week in December. We expect to be at the pre-flood level in March.

In terms of the commercial shipment of tunable dispersion compensators, we expect to resume production at the end of this month, and our capacity will be back by February.

In terms of the commercial shipment of lithium niobate modulators, we have begun production and will be at full capacity by the June quarter. As you know, on this product line, we have also had some limited shipments coming out of (inaudible) sites in Italy.

In terms of the commercial shipment of WSS, we are able to ship a significant part of it out of our existing Western sites and Korea. We will resume production in April and will be at full capacity in Fabrinet in the June quarter.

We're pleased with this execution. I think the team has done a fantastic job of recovering from this flood.

In terms of our strategic initiatives and our ability to secure the company, the Thailand flooded was focused with a set of people that did not detract from the efforts that we initiated last year to ensure the long-term credibility of the company and maximize the long-term return on invested capital. So last year, as we previously discussed, we focused on the implementation of processes and management across all major operations of the company. In fact, one immediate result was that the improvements that we got to recover from the Thailand flooding benefited directly from strengthening the company over the last year.

We have taken action to reduce to reduce costs and improve margins, and we believe we will improve our bottom line in the June 2012 quarter in the range of $5 million per quarter versus the June of 2011 quarter, assuming similar revenue levels.

We also continue to work to optimize our back-end assembly and test operation in Asia, and continue to look at outsourcing. This effort began early in the summer of 2011. Since the last earnings call, we have expanded our discussion and are now in negotiation with a second major contract manufacturer. Jerry will provide you with more color on the stages of the process.

In terms of emerging from flood better than before, from a market position, our recovery will put us in a better position not only with existing products, but we will also have introduced in our pipeline a new product and new laser technology. I'm going to give you a few highlights of that, but before I do that, one immediate result of the crisis was a lot of positive creativity from our engineering team, and I'd like to give you two examples of that.

In terms of a test bench that was using vendor equipment and costing about $500,000, we replaced it with our own design, which will cost only $40,000 per bench, so that's a significant potential capital improvement for the future. Another example we were using in our 40g coherent module now in line with laser from an external vendor who got flooded, and we are right now developing our own laser that we'll benefit, of course, on this 40g coherent models. This is immediate reaction from the engineering team on that topic. The other thing we have done is have a technology road show also with our major customers. This has produced a very positive feedback on our road map, and we are now refining that road map with those customers.

So, there are two major trade shows this quarter. One is Photonics West, which is happening in San Francisco as we speak, and another one is [OFCs] that will happen in early March. So, here we have demonstrated our technology leadership. I think at Photonics West, which is more a non-telecom type of a trade show, we have demonstrated a volume achievement and leadership in our high power laser and VCSEL and we offer the broadest range of (inaudible), which is flexible, customizable and cost effective. We focus on only a few markets which are medical, consumer, metal processing and industrial.

So, let me give you a few examples of what we are showing in Photonics West this week. The first was we have a laser diode design that does enable one of our customers, Laserline, to develop the industry's first 15kW direct diode fiber coupled laser system. Another example is that our fiber coupled laser diode, which includes what we call our Prosario family, offers 30% higher performance and efficiency than any other single fiber coupled bar. We also have the Orion family that provides the best price performance. Another example is our VCSEL. We announced something at 20GVCSEL which (inaudible) in this market. We have now shipped over 100 million VCSELs and this includes more than 500,000 VCSELs at 10 gigabits in the last year alone. We believe Oclaro is going to be the world's largest supplier of VCSEL.

The other thing is the innovation around laser value solutions for the aesthetic and the medical markets and those laser solutions are being adopted more and more. I do believe innovative and pain-free capability was obviously the patient (inaudible). So those are examples of technologies that we introduced and discussed at Photonics West

Now let me move to telecom and, therefore, [OFC], which is a major telecom (inaudible) early March. Clearly, the major theme will be around coherent modulation technique, the 40g and 100g and beyond and the networks that are going to be deployed as a result of that and the technology that will be needed to support it.

As far as Oclaro is concerned, we believe that double-g and beyond is extremely important for coherent modulation and the transition to higher bandwidth will continue. The future coherent networks are a combination of using a coherent modulation that simplifies the problem of fixing the distortion that happens on the fiber. The current technique is an automatic correction of that, and it will be combined with switching capability to make a next-generation network that will be able to have not only better performance but also a full switching capability.

Along those lines, we are the industry leaders in 40g coherent module. We have a strong background in 40g, as you know, beyond coherent. We have been ramping the 40g coherent module and tripled the revenue compared to the previous quarter.

Also, in November, we announced that we are developing a 100g coherent transponder and that will be starting shipment in April of this year. We also are continuing innovation in tunable XFP and now have a version of the tunable XFP that is enabled to 300-pin performance. It's called the Zero Chirp TxAP version, and it is available now for sampling. We're also sampling a high (inaudible) wavelength selective switch. This one is very applicable to future mesh network architecture. Our technologies that use a combination of a one-axis MEM with liquid crystal core technology allows us to scale (inaudible) without compromising optical performance.

Let me go now to market condition and demand. Before I hand it over to Jerry, let me add that in terms of booking, we were quite pleased because we got bookings in excess of 1 to 1. Revenue was low, but it was well in excess. We don't yet interpret that as a positive stimulus, an indicator of a meaningful uptick, but at least it means that the demand is being sustained at this point in time. In terms of pricing cycle, despite the Thailand problem and all of that, (inaudible) pricing was in the typical range.

Now, I would like to hand the discussion over to Jerry, who will give you our financial results and position. Jerry?

Jerry Turin

Thanks, Alain. Revenues in the quarter ended December 31st, 2011 were $86.5 million compared to $105.8 million in the prior quarter, with the decrease due to the flood in Thailand. We did come in above our guidance range of $75 million to $85 million, so we are pleased with the result.

Telecom component revenues were down to $22.3 million from $24.8 million in the prior quarter. We saw some strengthening in Asia; however, this was more than offset by a decrease in external modulator revenues due to the Thailand flood. Transmission module revenues were up, at $31.4 million, from $24 million in the prior quarter. The increase reflects growth in revenues from our (inaudible) XP and our 40-gig coherent transponder products. We probably had more demand upside in this category; however, we were limited in the short term by availability of printed circuit boards we purchased from our contract manufacturer in Thailand.

Amplification, dispersion compensation and switching revenues were down to $20.6 million from $40 million in the prior quarter. This was the category most severely hit by the floods in Thailand. Many of our amplifier products, our tunable dispersion compensation products and some of our WSS products are sourced from Thailand.

Our industrial and consumer revenues were down to $12.2 million from $17.1 million in the prior quarter. The substantial portion of the decrease was in high-powered lasers, which were impacted for part of the December quarter by the flood. We also experienced some seasonal softness in our consumer lasers as well.

Major customers -- greater than 10% of revenues -- were Fujitsu, at 14%; Infinera, at 11%; and Ciena, at 10%. Other customers traditionally over 10% include Huawei and Alcatel, which were both at 9% this quarter, with mix changes associated with the flood having an impact on revenues by customer.

Non-GAAP gross margins were 13%, compared to 23% in the prior quarter. The decrease was primarily due to the significant drop in revenues caused by the flood in Thailand, while our fixed manufacturing and overhead base through the rest of the company remained largely in place. In addition, lower overhead absorption levels in corresponding de-stocking of inventory contributed to the decrease. Non-GAAP R&D was down to $16.6 million, compared to $17.4 million in the prior quarter, as we continue to manage costs carefully. Non-GAAP SG&A was $13.5 million, compared to $16.6 million in the prior quarter. The decrease was due largely to the timing of annual audit fees, the recovery of a bad debt, lower professional fees, and our continuing efforts to manage down cost in this area.

(inaudible) compensation for the quarter was $380,000 in costs of sales, $375,000 in R&D, and $915,000 in SG&A. Cost and expenses directly associated with the flood totaled $9.1 million, and are included in a discreet line in our income statement. This category includes write-off of flood-damaged inventory and equipment, which totaled $7.2 million, and also the cost of personnel directly engaged of flood recovery and other incremental outside costs of the recovery.

Adjusted EBITDA in the December quarter, was -$14.3 million, compared to -$4.5 million in the September quarter, and compared to our guidance range of -$13 to -$18 million. Our higher than guided revenues, and our cost control efforts contributed to the adjusted EBITDA, coming in at the better end of the range.

While it is too early to guide to any sort of revenue levels for the June 2012 quarter, right now it looks like by the June quarter we'll have improved our EBITDA bottom line in the range of $5 million per quarter, versus June 2011, assuming similar revenue levels. Shares outstanding were $51.5 million at the end of December and we expect that to be relatively consistent at the end of the fiscal quarter and at April 1, 2012.

Now into the balance sheet. Cash, cash equivalents and restricted cash were $54.3 million at the end of December, compared to $51.7 million at the end of September. We did not draw any amounts under our line of credit during the December quarter, $19.5 million out of our $45 million line remains outstanding at the end of December.

Recently, our insurance carriers committed to paying an advanced payment of $6.2 million, on our Thailand losses in the next few weeks. To the best of our knowledge, as of now, we believe this is only a relatively small portion of our total reserves set aside by the insurance company. So at this time we believe our existing capital resources are cash, the insurance commitment, amounts available under the line, will be sufficient to support us through the flood recovery period.

In the meantime, we have a number of other activities underway, which we should update you on. And since they could have further incremental cash ramifications during 2012, let me speak to them now.

The last earnings call, we described our progress in negotiations to transfer our Shenzen manufacturing operations to a major contract manufacturer. We have since opened the deal up to competition and are now deep in negotiations with a second contract manufacturer. This continues to be part of the comprehensive evaluation of our long-term assembly and test strategy that started in the first half of 2011.

The alternative of transferring our Shenzen assembly and test activities to a contract manufacturer could still generate $30-$40 million initially, with more potential for upside in the long term. The exact timing of any deal being signed, should a deal be signed, and the timing of corresponding payment streams, are obviously still a work in progress and therefore not at all guaranteed regardless.

As mentioned earlier, over the remaining course of 2012, we also expect to collect additional insurance proceeds under our property and business interruption policies, are beyond the $6.2 million formerly committed as an advance thus far. While the exact timing and amount, if any, of additional insurance proceeds cannot be determined at this time. The corresponding collection would also contribute to strengthening our balance sheet further.

While it is premature to assume collection on any of these amounts on any of these transactions or other items I've just referred to, it is worth noting that none of these potential financing opportunities would represent equity dilution to shareholders.

So let me return to more of the key balance sheet areas. Accounts receivable were down to $59.7 million, from $81.2 million at the end of the prior quarter, are due to the lower revenues as impacted by the flood. Because of the lower revenues, our receivables collections in the March quarter will be lower and this will put pressure on cash in the March quarter. However, as described earlier we believe we have the resources lined up to support our flood recovery.

Inventories were down to $83.3 million, from $100.5 million in the prior quarter. As discussed in the last earning call, inventory reduction was a key objective this quarter. Out of this $17.2 million decrease, approximately $6 million was due to reduced inventory levels in Thailand, associated with lower production caused by the flood, and corresponding inventory write offs.

The remaining $11 million of inventory reduction was primarily to pay off some hard worked and disciplined execution, to our inventory reduction goals, and we'd like to applaud our internal teams on this result. Our fixed assets were down to $63.8 million, from $69.5 million at the end of the September quarter. Three million of this decrease was due to flood related write off of negative value of equipment; our CapEx conversely was $3 million this quarter. This is down from a quarterly run-rate of $10 million per quarter back in fiscal 2011.

We expect to be able to fund our Thailand recovery with approximately $10 million CapEx in total, we expect CapEx in the March and June quarter, somewhere in the $6 million per quarter range. These quarterly levels would include that CapEx number associated with the flood recovery and as for our borrowings as mentioned earlier, we continue to have $19.5 million outstanding under our $45 million line of credit and otherwise have no debt on our balance sheet.

Now before I conclude with our guidance, let me reiterate our key messages for the call. Our Thailand flood recovery is ahead of schedule largely thanks to the tremendous effort of our employees. We continue to work on our strategic initiatives for long-term scalability. We believe our market positioning and certain existing product and new product areas and our pipeline of new product and new technologies continue to improve in spite of the flood, and we expect our financial resources in place to be sufficient to support us through June 2012, the flood recovery period.

Let me conclude by reiterating guidance for the quarter ending April 1st, 2012. We expect revenues in the range of $90 million to $97 million, non-GAAP gross margin in the range of 14%-19%, adjusted EBITDA in a range of -$13.5 million to $9 million. We will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions).

In order to give everyone a chance to participate in the question and answer session, we ask that you please limit your questions to one primary question and one follow up. If you have additional questions, you can get back into the queue. Our first question comes from the line of Kevin Dennean with Citi Investment Research. Please go ahead.

Kevin Dennean – Citi Investment Research

Jerry, Alain, how are you? Quick clarification. You mentioned that you are now dealing with a second prospective buyer of the Shenzen facility. If I remember correctly, I thought the expected timing of that transaction would be first calendar quarter. Does that get pushed out because now you are dealing with a second buyer? I know the timing is always uncertain but should we think of this of being more of a June quarter event?

Jerry Turin

It's still possible in the March quarter. Like you said, you can never be definitive on timing of these things, though, but it is still possible in the March quarter.

Kevin Dennean – Citi Investment Research

Ok, great, and Alain, on your comment that the book to bill is well above 1, previously in guidance you mentioned that the June quarter would probably have about a $10 million to $12 million residual impact. Is that still the expected amount of revenues that are affected by the Thai flooding, and can you put that in context verses the well above 1 book to bill?

Jerry Turin

If I can answer first, Kevin, I think you said the June quarter and I think you meant the March quarter as far as revenue impact range we had talked about previously.

Kevin Dennean – Citi Investment Research

Yes, thank you. The March quarter.

Alain Couder

Yes, the March quarter is still in the range we discussed and as I discussed also, the recovery will have very minimum impact left in the June quarter. What I can say on bookings is that they are very much in line with what would have been a flat (inaudible) in the market. We were in the trend and we continued that trend and we didn't see any slow-down because of the flooding.

Kevin Dennean – Citi Investment Research

Alain, do you think that you've seen orders improve as a result of the flooding from customers maybe being concerned about supply chain continuity of availability of parts?

Alain Couder

No, I think we have been seeing something pretty stable. We also have some good customer relationships where even if our customers have been asking for more from some of our competitors on a temporary basis, we have some assurance from them that they will get back to us. On the other end, we benefited from the same thing on a few product lines where our competition couldn't supply and we did supply, but overall, it's balanced, I would say.

Kevin Dennean – Citi Investment Research

OK, thanks. I have more, but I'll drop back into the queue.

Operator

Our next question comes from the line of Patrick Newton with Stifel Nicolaus. Please go ahead.

Patrick Newton – Stifel Nicolaus

Thank you. A clarification, first: I believe, Alain, that you had said 40g coherent revenue tripled in the quarter, and I just wanted you to confirm that.

Alain Couder

Yes, I confirm.

Patrick Newton – Stifel Nicolaus

OK, Also, can you discuss the revenue trends within 40g on the DQPSK as well as the 7000 series product refresh?

Alain Couder

The 4000 is the one we are currently shipping on DPSK, and we're also shipping another product called DQPSK in addition to the coherent, which we call the 5000. Right now, we haven't seen any softening of the DPSK product line. While the coherent has been ramping, as I was saying, DQPSK has never been a strong market for us. We have a product, but it has never been a strong market.

Patrick Newton – Stifel Nicolaus

OK, that's helpful. And then, just with some new 10% customers kind of peaking up in the quarter, one being Infinera and then Ciena, I guess, hasn't been a 10% customer for over four quarters, were there any specific product lines that those customers specifically came to you for, and do you see these being consistent 10% customers on a go-forward basis?

Alain Couder

I don't think we can discuss product line by customer. This would be confidential information that we can't disclose.

Patrick Newton – Stifel Nicolaus

I guess, then, a clarification, maybe, while we're still on that customer base is with Fujitsu ticking up sequentially, is it fair to say that the strength probably came from Fujitsu-Japan as opposed to USA?

Jerry Turin

I don't know that we'd want to narrow that down, and I don't know if it would be fair to say, either. I think the color I could add is that Fujitsu got well into the 10% range last June quarter and so they certainly salvaged themselves. Ciena has been in the 10% range quite often over time. If you go back the history of Oclaro and credit (inaudible) companies, (inaudible) head-to-head hit the 10% range in the past. So, not on necessarily a regular basis, but it had had hit that in the past, so. I think it's just reflection that we have a lot of significant customers, whether it's just over 10% or just under 10% range.

Operator

Thank you. (Operator instructions) The next question comes from the line of Ehud Gelblum with Morgan Stanley. Please go ahead.

Stan Kovler – Morgan Stanley

Thank you. This is Stan Kovler dialing in for Ehud. I just wanted to ask you if you could elaborate on the gross margin outlook. Just wondering if you can help us understand, first of all, how it would track to get back to that 20% level? Maybe you could help us with a revenue range if you continue to make progress towards June, if you can get there?

Also, with the context of your recent renegotiation with Fabrinet maybe you can help us understand if there are some product lines that are now certainly more profitable than others that are slightly less profitable? Thank you.

Jerry Turin

You asked about that back to the 20% for gross margin, which isn't a real huge accomplishment given the scalability of our margins both up and down and we've seen over recent years. But even within the March quarter, the top end of our guidance is 19%. So, you can see just purely from revenue scale that top end of the revenues in March should roughly correspond at that level and continue progress keeps moving in that direction fairly sharply and then other improvements in terms of more (inaudible) into our products and so forth. So, to get back into that range it’s really as simple as what got us down to this range is volumes.

Alain Couder

We cannot give you any guidance for (inaudible) for June, but we gave you an indication of processes in management and improvements they are going to give in some bottom line. What I said is that in the June quarter we're expecting the range of $5 million improvement (inaudible) June 2011 quarter. So, that can give you some indication that we just wanted to give you an indication we will give you guidance in the next earnings call.

Stan Kovler – Morgan Stanley

OK. That's helpful. Do you feel like you were taking share in some of the 40g markets or do you feel that it was more just a rising tide that lead to that nice revenue ramp in that segment?

Jerry Turin

On 40-gig we're the first ones we believe to market with 40-gig coherent transponders. So, it’s not a question of taking market share or rising tide, but coming with a solution for customers that have been anxious for it.

Alain Couder

There's another product that's a module in 40-G which is the (inaudible) product that has been acquired by Cisco. This is clearly not the reason why Cisco bought CoreOptics. Right now we are busy being the only supplier of 40-G coherence. Also, announced, another module for first shipment in April time frame.

Jerry Turin

And at DPSK we've been the clear leaders from the get-go and continue to be.

Stan Kovler – Morgan Stanley

That's helpful, thank you.

Operator

Thank you. Our next question comes from the line of Dave Kang with B. Riley & Company. Please go ahead.

Dave Kang – B. Riley & Company

Thank you. Good afternoon. First of all, just a clarification regarding your cash balance of $54 million. Does it include $6.2 million from your insurance carrier?

Jerry Turin

No, Dave. That $6.2 would arrive in very early February. It's committed but it's not cash we received, even as of today.

Dave Kang – B. Riley & Company

Then regarding your depreciation and amortization, how should we model that going forward?

Jerry Turin

I think fairly consistent in the recent quarters. If we go back early into 2011, our CapEx (inaudible) and we start to see depreciation start to ramp up. With our reduced CapEx levels now and going forward we should see something fairly stable with the last couple of quarters.

Dave Kang – B. Riley & Company

I may have mentioned this, but did you give out XFP number, what that was? If you can talk about the funnel heading into this year.

Jerry Turin

We didn't give the tunable XFP number or the 40 gig coherent number but we tried to do in the slides that we have on our website is give you some product breakouts and category breakouts and tunable XFP and the 40 gig module are drivers of the growth in transmission module. As far the pipeline for tunable XFP in broader market conditions and competitive conditions, I don't know, Alain, if you wanted to comment on the big picture of where we stand tunable XFP.

Alain Couder

Basically, we have been shipping the so-called negative chirp, which is the same type of product that JDS has been shipping before we stopped it. We came to market with zero chirp, which is the same performance as the 300-pin module. We are something (inaudible) now and this one we have been catching up. We are head-to-head with competition on that. This improves significantly our market position in tunable XFP

Dave Kang – B. Riley & Company

Now, regarding your cost reduction program of about $5 million, is that going to be completed this quarter, March quarter, or June quarter? Just wanted to clarify that.

Jerry Turin

That would be the impact in the June quarter. Actually, Dave, there are things that we're doing that we expect to continue to have, positive benefit through the second half of the year; things that won't be completed until then. So the $5 million is a point in time and then we may have a chance to stretch it beyond that as we move forward.

Dave Kang – B. Riley & Company

OK. Got it. And the last question is regarding your modulators. You said production capacity should be pretty full at level by June. What about at the end of March quarter entering June quarter, let's say sometime in April. What do you think about your capacity will be about 50% or 70%? Any guess there?

Jerry Turin

I cannot give you an exact number because it depends on how quickly we get, let's say north of 50.

Dave Kang – B. Riley & Company

North of 50. Got it. Thank you.

Operator

Thank you. And our next question is a follow-up question from the line of Kevin Dennean with Citi Investment Research. Please go ahead.

Kevin Dennean – Citi Investment Research

Great. Thanks for letting me come back with a follow-up. Just on gross margins, I know you addressed this a little bit. I think either in the script or in a question. But the declining gross margins in the current quarter, in the December quarter that you just reported, can you maybe bracket it in terms of under-utilization, the impact of mix, and any other relevant factors that you think are in there? Similarly if you could help us think about the same factors in how we get to the March outlook.

Jerry Turin

Well, I think it's obviously difficult to break down and give that level of granularity on margins, and in particular, when we haven't given those sorts of comparative measures in the past. But obviously the revenues are down significantly and I think we both understand our business model enough to understand how that scaled piece impacts. In addition, we sold through a lot of our existing inventory. You can see that on the inventory balance sheet.

So essentially in addition to just the lower absorption than is typical, we did sell a lot of inventory that already had overhead carried forward from prior quarters so you kind of had a double impact. Lower production at the fabs, so you're taking more of your overhead this quarter directly to your P&L. In the meantime, you're selling through a lot of inventory bleeding what you built up in prior quarters.

That's a significant number in saying how much of the change from March to December is. It's not a recurrence of that. Again, a pretty granular but that was a pretty significant impact this quarter.

Kevin Dennean – Citi Investment Research

OK. I guess if I can ask another one. On your 100g module, are you still on track for April shipments and is that module sampling currently?

Jerry Turin

No, we will start the sampling in April.

Kevin Dennean – Citi Investment Research

OK. Great. Thank you very much.

Operator

Thank you. And we have a follow-up question from the line of Patrick Newton with Stifel Nicolaus. Please go ahead.

Patrick Newton – Stifel Nicolaus

Yes, thank you gentlemen. I'm just trying to get a sense of your visibility. You had a statement that you didn't see a slowdown in orders as a result of the flood and we have a big book to build that is significantly above one. How would you characterize visibility? Are we perhaps in a period where we could see multiple quarters of sequential growth and maybe hit that prior $120 million peak revenue in the relative near term? Or do you feel like this is more of just a snap back from being supply constraint and you don't really have a really good sense of what in demand is looking like?

Alain Couder

Let me give you an answer in days on market. We clearly are seeing this quarter is functioning in the China market. That's a very clear sign. In the US, we have uncertainty on CapEx from Verizon and AT&T, although I didn't listen to the AT&T call this morning. I don't know exactly what they said. But I think this is still to be proven that they are going to accelerate CapEx in the first half of this year.

I think this is the unknown we have and the answer to your question because Europe is weak right now. You know the financial involvement in Europe. I am probably not able to comment on that. But from what I am reading, there is no view that it will strengthen in the next several months. That is basically the uncertainty is around the recovery of Verizon and AT&T in deploying their optical network and that's where the answer to your question is. I don't have a crystal ball, but maybe you have a better connection with them than I do.

Patrick Newton – Stifel Nicolaus

Well, I know AT&T came out and in essence said that it would be flat year-over-year at $20 billion.

Alain Couder

You have to ask of the core optical portion that when their total Cap-ex is flat, does it mean that...

Patrick Newton – Stifel Nicolaus

...that the wireless would be up and wired line would be down.

Alain Couder

Yes, but you have to look at the core optical network which is carrying all the wireless traffic and I don't know the answer to the question.

Patrick Newton – Stifel Nicolaus

You touched a little bit on WSS and on the high port count. Could you give us any update on when you expect shipments on the 1x23's?

Alain Couder

We have started to sample the 1x20 right now and it will be part of our production we're starting in Thailand, which I mentioned before.

Patrick Newton – Stifel Nicolaus

How do you expect that ramp relative to your peers?

Alain Couder

I'm not expecting a fast ramp because the 1x20 implies different structure of the network, a different network management, so I think that clearly the future network architecture will be around those high (inaudible) but those moves of (inaudible) take time, so I'm not expecting a sharp ramp on this type of product.

Patrick Newton – Stifel Nicolaus

Is it still sampling with one customer?

Alain Couder

Yeah, more than that.

Operator

Thank you. I'm showing there are no further questions, so I would like to turn the conference over to Mr. Fanucchi, please continue.

Jim Fanucchi

OK, Operator, thank you. Thank you everyone for joining us today; we appreciate it and we look forward to talking with you again when we report our finances for the March quarter.

Operator

Ladies and Gentlemen, this concludes the Oclaro second quarter fiscal year Financial Results Conference Call. Thank you for your participation. You may now disconnect.

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