Optium Corporation F1Q08 (Qtr End 11/03/07) Earnings Call Transcript

Optium Corporation (OPTM)

F1Q08 (Qtr End 11/03/07) Earnings Call

December 06, 2007 4:30 pm ET

Executives

Veronica Rosa - Director of IR

Eitan Gertel - Chairman, President and CEO

David Renner -VP, Finance and CFO

Analysts

Paul Silverstein - Credit Suisse

John Harmon - Needham and Company

Hugh Mai - Broadpoint Capital

Sam Dubinsky - CIBC World Markets

John Anthony - Cowen & Company

John Lau - Jefferies & Company

Scott Coleman - Morgan Stanley

Presentation

Operator

Welcome to the Optium Corporation's first quarter fiscal 2008 conference call. Today's call is being hosted by Eitan Gertel, Optium's Chairman and CEO, and Mr. David Renner, Optium's Chief Financial Officer. Today's call is being recorded.

And now at this time I would like to turn the conference over to Ms. Veronica Rosa, Optium's Director of Investor Relations. Please go ahead.

Veronica Rosa

Thank you for joining us today to discuss Optium's first quarter fiscal 2008 financial results. Before we begin, we would like to caution you that some of the information discussed during this call, including expectations concerning revenue growth and profit targets, business strategy, customer demand, market observations and future plans, are based on information as of today, December 6, 2007.

In addition, some of the statements we make on today's call constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and 27A of the Securities Act of 1933. We wish to caution you that such statements are just predictions based on current expectations and assumptions regarding future events and business performance, and involve risks and uncertainties that could cause actual events to differ materially.

We refer you to the reports the Company files from time to time with the US Securities Exchange Commission, which are also available on the Investor Relations section of our website, and contain and identify important factors that could cause actual results to differ materially from those contained in our projections or other forward-looking statements. Optium undertakes no duty to update any forward-looking statements to conform the actual results or changes in the Company's expectations.

During the conference call we will be referencing both GAAP and non-GAAP financial measures. A complete reconciliation between our GAAP and non-GAAP measures is available in the Investor Relations section of our website at http://ir.optium.com. All financial measures discussed during this call, unless otherwise noted, are GAAP.

Today's call will feature an overview from Eitan. Then Dave will review our financial results for the quarter. Eitan will follow with an update on our goal's and strategic priorities for fiscal 2008. Dave will then wrap up with our guidance for the next quarter.

I will now turn the call over to Optium's CEO, Eitan Gertel.

Eitan Gertel

Thank you, Ronnie, and thank all of you for joining us today. This afternoon we reported our financial results for the first quarter of fiscal 2008. We reported revenues of $36.1 million. This is the highest ever for Optium, beating our previously forecasted range for the first quarter of $34 million-$35 million.

GAAP net loss was $1.1 million, or $0.04 per share. On a non-GAAP basis, net income was $2.1 million for the quarter, or $0.08 per share. This is higher than non-GAAP consensus estimate, primarily due to the change in the treatment of patent litigation expenses in our non-GAAP results beginning this quarter, as indicated in our press release.

In all, we are very pleased with these results. Over the last year, we have been rolling out a number of new growth platforms, and I believe we are now beginning to see the benefits of those investments where we share gains, a higher product mix, and new customers. A larger contributor to Optium's sequential revenue growth of almost 35% in the first quarter was a strong rebound in sales of high-end 10G products from our lead telecommunication customers.

As you may recall in the second half of fiscal '07, especially in our fourth quarter, we encounter some tough demand issues that negatively impacted our growth. We also communicated that we anticipated demand recovery to begin in the first half of fiscal 2008. Our actual results are inline without view. A sequential rebound in high-end 10G demand combined with new customer activity in 10G for both 300 pin in XFP led to record high 10 gigabit shipments and revenues in the first quarter.

Our fabulous highly automated manufacturing model, which allows us to deliver 10G and cable TV solutions on lead times as short as three to five weeks, facilitated our ability to respond to this large swing in demand without significantly changed our cost structure. In further analyzing our progress for the first quarter, it is important to circle back to each areas we identified as expected growth drivers for 2008, expansion of our traditional 10G and cable TV market share, acceleration of 40G and ROADM capacity, and shipments and customer diversification.

In the first quarter, we made important progress in each one of these areas. For example; in the 10G, we made great progress in development of our small firm factor 300 pin tunable product. This product, our customers have been requesting, of course, for some time. We have been ramping our 40G and ROADM production capacity aggressively, and both product lines are tracking to growth trends we anticipated for the fiscal year.

In terms of customer diversification, we moved forward with several new customers in the first quarter, especially in the Asian markets, where we have placed a lot of strategic focus for 2008. Clearly, we have a lot going on, and we are excited about the business opportunities we are creating. I will provide more color on each one of those areas later in the call, but first I am going to turn to call over to Dave for a look at our financial results for the quarter.

Dave Renner

Thank you, Eitan. Revenues for the first quarter were $36.1 million, an increase of 28.4%, as compared to $30 million for the same period a year ago. Year-over-year, 10G and 40G combined grew about 10%, and our analog and cable TV product revenues grew by about the same rate.

In addition, ROADM and Circuit Pack revenues grew to, roughly, 8% of our total revenues in the quarter, compared to zero in the same period last year, as we didn't commence shipment until 2Q of fiscal '07.

Sequentially, first quarter revenues grew 34.9%. From product line perspective, a great deal of this increase was due to our ability to respond to the strong demand for shipments of high-end 300 pin 10G product across our telecommunications customer base in the quarter.

10G tunable products continue to represent the majority of our 10G sales. Record 10G shipments and solid contribution from our new 40G product line led to over 50% combined growth in 10G and 40G products from last quarter. 40G revenues, which were immaterial in Q4, grew to over 2% of the revenue mix in Q1.

Analog and cable TV revenues declined sequentially, largely due to order timing. The customer concentration in cable TV can contribute quarter-to-quarter fluctuations, and demand, as a result of the timing of customer projects. We continue to anticipate annual growth for our cable TV product line, and Eitan will discuss this later. We are preparing to ship a number of new advanced cable TV products over the coming quarters.

ROADM revenues, including circuit packs, grew by over 60% from the prior quarter. From a customer perspective, we had three 10%, or greater end customers, that purchase product directly or through contract manufacturers, in the quarter. These customers represented approximately 65% of total revenue. Our top five end customers in the quarter represented approximately 82% of revenues, compared to approximately 85% for the same period last year.

In the remainder of my comments, I will speak to both GAAP and non-GAAP results. I want to highlight that beginning with the first quarter, our non-GAAP results exclude legal expenses incurred in connection with the defense of patent infringement lawsuits brought against Optium, with respect to certain cable TV products. We made this change in order to provide investors with what, we believe, is a better view of our core operating results.

Our non-GAAP results for the current, and all prior, periods is posted on our investor relations website, and has been adjusted to reflect this change. GAAP and non-GAAP gross margins for the quarter were 26.8% and 26.9%, respectively, compared to both GAAP and non-GAAP gross margins of 23.5% and 23.6%, respecdtively, in the prior quarter, and 29% in the same period a year ago.

Gross margin came in at the upper end of the mid-20s, that we have anticipated, primarily due to a greater mix of 10G 300 pin tunable shipments in the quarter. Long reach products, in general, carry higher margins than our short reach products. Overtime, we expect that ROADM and 40G products will contribute to margin expansion, as we achieved volume efficiencies, like thumb, with scale.

At present, these two product lines aren't significant enough to have a material impact, and we're continuing to make capacity investments. In all, pricing in the quarter fell within our overall expectations. GAAP operating expenses for the first quarter were $11.4 million, non-GAAP operating expenses, excluding $2 million of patent litigation expenses, and $1.1 million and other non-GAAP adjustments for the first quarter, were $8.3 million, or 22.9% of revenues.

In the prior quarter, non-GAAP operating expenses including $800,000 of patent litigation cost and other non-GAAP adjustments, were $7.7 million, or 28.7%, of revenues. Sequentially, non-GAAP operating expenses increased roughly $600,000, driven by increased cost associated with growth, such as our customer diversification and capacity expansion efforts.

On a year-to-year comparative, non-GAAP operating expenses increased from $5.4 million, or 17.8% of revenues, to 22.9%, primarily due to the acquisition of Kailight in our fourth quarter, general overhead expansion associated with growth, and cost associated with being a public company.

Interest income of $706,000 declined sequentially, primarily driven by our use of cash during the quarter, as well as lower interest rates. GAAP tax expense was $66,000 in the quarter. Our GAAP effective tax rate will have significant variations quarter-to-quarter, due to the portion of foreign losses, for which there is no recognition of a tax benefit.

As you may recall, in July, we reported a deferred tax asset of $13 million for our U.S. NOLs. Valuation reserves related to our operations in Australia and Israel remain on our books, and could be released at some future date.

Due to our large U.S. and foreign NOLs, our non-GAAP cash effective tax rate is expected to be significantly lower than the GAAP rate for the fiscal year. Last quarter, we had projected this non-GAAP tax rate to be approximately 10% for the fiscal year. For the first quarter, this rate came in at, roughly, 5%.

We incurred a GAAP net loss for the first quarter of $1.1 million, or $0.04 per share. On a non-GAAP basis, net income increased to $2.1 million, or $0.08 per diluted share, from a loss of $359,000, or $0.01 per share for the prior quarter, led, primarily, by substantial revenue growth.

Non-GAAP net income was $3.2 million, or $0.16 per diluted share, for the same period a year ago. The year-over-year change is primarily attributable to new product line investments over the course of the last six to nine months, including our 40G and ROADM product lines.

Moving to the balance sheet and cash flow. Cash and short-term investments totaled $51.6 million at the end of the quarter, down approximately $10 million from the prior quarter. We used, roughly, $7.1 million in cash from operations for the first quarter, largely driven by growth and accounts receivable, as our revenue for the quarter grew significantly.

Capital expenditures for the quarter were $2.3 million. Day sales outstanding in Q1 were 72 days, similar to Q4. Inventory turns for the first quarter were 4.5, compared to 4 in the prior quarter. Back to you, Eitan.

Eitan Gertel

Thanks, Dave. In the last two years we have made some important investments to broaden Optium's product portfolio beyond our traditional cable TV and 10G product offerings, to include 40G and ROADM technologies. Today, these investments provide Optium with added strategic balance and competitive strength.

Throughout fiscal 2008, we intend to continue to build those investments, while putting new strategies in place to further expand Optium addressable markets and customer reach. For the fiscal year, our goal is to grow revenues by 30% or more, assuming there are no unusual surprises, in terms of market conditions and overall economics, and we continue to execute effectively. We feel good about our objectives for the fiscal year. We have the clear strategies in place, strong technologies, and solid manufacturing models to achieve the goal.

In my opening remarks, I highlighted some of the progress we have made in the first quarter in each of the areas identified to drive growth for fiscal 2008: expansion of our 10G and cable TV market share, acceleration of 40G and ROADM capacity and customer diversification.

Taking a closer look at the development in our first quarter. In the 10G products, which continue to comprise the majority of our revenue mix, we shift the highest volume ever from our Horsham facility, this quarter, with strong demand in access key products and tunable. We benefited from a strong rebound in demand from our traditional customers. We also benefited from a new customers, including our first major shipment to a significant new account in Europe.

As I mentioned earlier in Q1, we continue to expand our 10 gigabit product line with initial shipments of our new small form factor 300 pin tunable transceiver. There has been a great feel of industry interest regarding product like this over the last 18 months, so we are very pleased with our progress, and in customer interest we are seeing, today. While new products, new customers and promising market demands all indicated strength of our 10G business for fiscal 2008--well, it also depends on project timing at customer and the carrier level. As a result, we continue to remain cautious, and believe it's appropriate to maintain somewhat conservative outlook for 10G in our growth expectations for the fiscal year at this time.

In cable TV, although we experienced some demand related softness in shipments when compared to last quarter, market indicators remain very positive. We continue to expand our analog and cable TV business to contribute to balance growth of Optium's fiscal 2008. During the first quarter, we geared up a number of new products that targeted the next upgrade cycle for cable TV networks. After successful qualification, we began shipping our new 1310 DWDM product in Q1. This product addresses a high demand for bandwidth capacity expansion coming from cable operators, as they compete with Fiber-to-the-Home solutions. It can allow cable operators to efficiently raise capacity, while utilizing existing fiber infrastructure.

Going forward, we look for progress on our new 1550 DWDM return path note transmitters; together, these two products are design to enable major expansion in bandwidth capacity for MSOs more economically than major network upgrades.

Turning to our 40-gigabit and ROADM product line expansion goal for the year. Sales of the 40-gigabit product, which we first began shipping last quarter, grew to about 2% of revenue in the quarter. Our purchase of Kailight, in May of 2007, provided us with some very strong technologies that have enabled us to offer a full suite of 40G 300 pin solutions, including NRZ, Duo-Binary and DPSK. We are also aggressively developing DQPSK solutions.

To date, we have been shipping 40G module in NRZ and Duo-Binary format. During the first quarter, we also received our first volume purchase order for our 40G, 300 pin DPSK solutions and we are looking forward to execute to that milestone. With this type of momentum, 40G looks to be a solid growth driver for Optium this year.

Our ROADM product line continues to ramp aggressively. As a reminder, our WSS ROADM are developed and manufactured in our Australian facility. Last year, we also extended into ROADM circuit pack, which integrates our WSS for our plug and play customer specific solutions. Those circuit packs are produced here in our facility in Pennsylvania.

In Australia, we have been on an aggressive capacity expansion campaign to meet our capacity ramped targets of 1,000 units per quarter by our third fiscal quarter. The flexibility of our ROADM platform continues to affect customers. This flexible platform offer mix channel planning, 50-gigahertz spacing and drop-and-continue functionality.

At the same time, we've been building out our ROADM product line in response to our customers, including the development of ROADM circuit pack for edge application, and 50-gigahertz high resolution products, to meet customer demand for improved performance in 40G systems.

With all these activity, we're also out growing our existing facility, and have already started the process of expanding into a larger, nearby facility in Sydney, Australia. This new facility will provide us with an additional 20,000 square feet of space, which should accommodate our production plan for the foreseeable future.

In the first quarter, we added two major ROADM customers, as a result of our customer diversification effort in Asia. We also began shipping our 50-gigahertz device to major customers.

In summary, we have a great deal of ROADM activity going on. Our capacity ramp is tracking well to our plans for the year. In terms of revenues, we believe ROADM revenues in the second quarter could double from the first quarter. We would like to see ROADM product comprises about 20% of our revenue mix for the fourth quarter.

Our third area of growth of focus, customer diversification is in the early stages, but could prove to be a significant driver to our growth in the fiscal 2008 across all of our product line. The Asian markets as well as new relationship in Europe are the most promising for us.

Increased sales resources, our manufacturing responsiveness and our broad line of both telecom and cable TV solutions are key to our execution. By the end of our fiscal year, we would like to see 15%-20% of our revenues coming from new customers. These new relationships take a while to develop, but based on our progress today, I think we are well on the path towards meeting that goal.

In summary, our long-term view of Optium growth and profitability remain strong. All of the actions we are underway today are designed to advance our product lines, broaden our customer base, and extend our market opportunities. With consistent execution and continued, favorable optical communication markets, we are looking forward to a solid year of growth and profitability for Optium in fiscal year 2008.

And now I'd like to return the call back to Dave who will wrap up with guidance for the second quarter.

Dave Renner

Thanks Eitan. For the second quarter, we expect revenue to be in the range of $38 million-$39 million. Our guidance incorporates bookings to-date, customer forecast, discussions, and overall market trends. As a general reminder, high customer concentration, and the timing of shipping and deployment cycles that are indicative of our industry, may cause fluctuations in revenues quarter-to-quarter.

Gross margin is expected to be consistent with the first quarter. Our gross margin largely depends on mix especially in 10G. Our short reach products generally carry lower margins than our long reach products.

As I mentioned in last quarter, non-GAAP operating expenses will see another sequential step-up in investments in the second quarter to support our plans for revenue growth, with an increase of roughly $1.1 million primarily in R&D.

As we stated last quarter, we should begin to see some operating leverage in the second half of fiscal '08. Interest income will likely decline sequentially, primarily due to interest rate fluctuation. In terms of tax-rate, as I stated earlier, we are continuing to model a non-cash effective tax-rate of, approximately, 10% for the full year.

That concludes our formal remarks. We will now open up the call for questions. Please go ahead operator.

Question-and-Answer Session

Operator

(Operator Instruction). And we'll take our first question today from Paul Silverstein with Credit Suisse. Mr. Silverstein, your line is open.

Paul Silverstein - Credit Suisse

Thank you. I’m sorry. Couple of things, guys. Can you repeat, did you say that you're expecting margins to be up in the future?

Dave Renner

No, I said they'll be relatively consistent with Q1.

Paul Silverstein - Credit Suisse

Okay. Just a little clarification. If you look at your ROADM revenues, 8% this quarter--what was it in the preceding quarter?

Dave Renner

Our ROADM revenue was -- hold on just a second, Paul. Yeah, it was $1.8 million last quarter. Sorry.

Paul Silverstein - Credit Suisse

It was $1.8 million last quarter, so its up little over a $1 million.

Dave Renner

Yes.

Paul Silverstein - Credit Suisse

Right. If I you look at your 10G revenue, I apologize, I’m trying to make numbers work out, but I thought I heard you say that 10G and 40G were up 10% year-over-year. Obviously, you a 40G a year ago, and I thought I also heard you say that, correct me if I am wrong, but you said--did you say that 10G tunable, or 10G, was up 30% sequentially?

Dave Renner

That's 10G total.

Paul Silverstein - Credit Suisse

10G total was up 30% sequentially. I guess I'm just trying to work out…can you just give us the 10G transceiver number for October?

Dave Renner

For the quarter, yeah, I mean if you do the calculation with, roughly, 2% 40G, you end up with around $26 million type number for 10G.

Paul Silverstein - Credit Suisse

All right, because I thought you did $22.5 million in transceivers back in October '06, and if you take the 2% number you just shared with us on the 40G that was to test, but your 10G business was somewhere more in the area of $24 million, but, I'm willing to take your word for $26 mi;lion for 10G?

Dave Renner

Yeah, our Q1 prior fiscal year was around $24.5 million.

Paul Silverstein - Credit Suisse

It was $24.5 million, okay. All right, that's helpful. So, I guess I'm curious, it looks like the 10G business is back. I know you can't name the number big customers, but Ericsson, Alcatel Lucent…how stable does that look going forward? Is this just a one-time bump up from the first level last quarter? How confident are you, in terms of the order book, that this actually has legs and is not going back down to the July level?

Dave Renner

Paul, it's what we said before. I mean, we have seen a slowdown at the end of last fiscal year, during Q3 and Q4. And then we said we are projecting according to our customer recovery and we say we have seen the recovery coming back. From what we see, based on our customer projections, and order, and everything we get in from the market, we are still in pretty good about our projection.,Bbut I think as we have said before, we still want to pretty cautious for the first six months of the year, just to make sure everything has happened right way.

Paul Silverstein - Credit Suisse

Okay. And can you tell us what percentage of revenue came from new customer this quarter or are you projecting 15%-20% by the end of the fiscal year? Where are we at right now?

Dave Renner

I didn't get the question. Can you help me?

Paul Silverstein - Credit Suisse

New customers, as a percentage of total revenue in the October quarter?

Dave Renner

I mean we don't give that number. Well, we say we are well in our way to get to our 15%-20%. I mean, we are below half of that, but we are well on our way to get there.

Paul Silverstein - Credit Suisse

So, it sound it would be fair to say it's cleared in the 5% plus and 10%?

Dave Renner

No. I would say it's a more closer to the first number you have, but I mean --

Paul Silverstein - Credit Suisse

Okay.

Dave Renner

We believe we are well on our way to get there.

Paul Silverstein - Credit Suisse

Okay. I'll past it on.

Dave Renner

Okay.

Operator

We'll go next to John Harmon with Needham and Company.

John Harmon - Needham and Company

Hi. Good afternoon, guys. You talked quite a bit about new products and the cable TV space and 40 gig new modulation schemes which is on February, I think I believe you said you are just starting to ship your small form factor 300 pin transponder, what else remains to be done on this pluggable transceivers side? Its making up most of the form factors covered.

Eitan Gertel

With pluggable transceivers, we look for that customer who want us to do. I mean, everybody is talking about whether it's an ability to writing to do and anything else they would like to do, but we believe we have the fleet of product they would like us to deliver today between the WDM long-reach, TDM and the short reaches. And the next thing is to look at an ability on the long run. I mean that's probably at least a year off though and probably it's an R&D area, but not some day customers are going to be requesting in fiscal '08, correct?

Dave Renner

It doesn't look like it's going to be a major driver, but I think as far as timeframe you have the right term.

John Harmon - Needham and Company

And in cable TV, are you -- do you plan to say probably within the transmission area or are there other areas that you are looking at for new products.

Eitan Gertel

In cable TV, we're still in the transmission area and as we mentioned the new product for us the DWDM 1310 and later on we'll talk about probably in the next conference call about the DWDM 1550 return path products. We believe those are the -- as far as our business area in cable TV those are the major [thrust] from a drive capacity in the cable TV infrastructure.

John Harmon - Needham and Company

Okay. Thank you.

Eitan Gertel

Thanks.

Operator

And we'll go next to Hugh Mai with Broadpoint Capital.

Hugh Mai - Broadpoint Capital

Hi, guys, just two quick questions. I guess of the existing volume customers this was the new one. Like, how many are you guys shipping in volume and how many are you guys shipping for just qualifications?

Eitan Gertel

The majority of our shipments in ROADM are for production very small is important for qualification. Qualification product for us is on a demo basis, which are not consistent. Majority of them are not as part of our revenue. So, backing of a little bit, the majority of our shipment of our ROADM by far is for production requirement.

Hugh Mai - Broadpoint Capital

Okay. But I guess like, can you put that in terms of the number of customers? I mean are you shipping most of them to one customer or maybe two, I mean.

Eitan Gertel

Right now, we are shipping ROADM's in different configurations to about five customers. And in total, we are dealing with somewhere in the range of 10 customers.

Hugh Mai - Broadpoint Capital

Right. Is that distribution heavily weighted currently, like one or two or--?

Eitan Gertel

The distribution is heavily weighted. Currently from the five, we are shipping in production just three of them.

Hugh Mai - Broadpoint Capital

Okay, got it. Thank you. And can you please refresh me as to why gross margin decline year-over-year, despite the recovery of the high-end 10G products as well as the increasing mix of the ROADM as well as the 40G?

David Renner

Yeah. Sure, Hugh. I mean most of that's due to the capacity investments we've made in 40G and ROADM as well.

Hugh Mai - Broadpoint Capital

Okay, got it. And I guess if you were to include operating expenses attributed with ROADM, are you guys making money on it and if not when would we -- I guess when would we expect you guys to make money?

David Renner

On our ROADM's?

Hugh Mai - Broadpoint Capital

Yeah.

David Renner

Yeah. Of course, sure, we're making healthy gross margin on our ROADM's today.

Hugh Mai - Broadpoint Capital

I understand. But there are operating expenses associated with that and you guys are ramping in terms of production capabilities, right?

Eitan Gertel

As we are ramping in the ROADM, we are expanding our capacity, so a lot of other expense is associated with facility expansion, capacity expansion. So we expect in next quarter or so to be, if you include that I guess to making that breakeven for the business after the growth capacity is done, I guess that's what you're asking me?

Hugh Mai - Broadpoint Capital

Yes, correct.

Eitan Gertel

Okay.

Hugh Mai - Broadpoint Capital

Alright, thank you, guys.

Operator

We'll go next to Sam Dubinsky with CIBC World Markets.

Sam Dubinsky - CIBC World Markets

Yes. Hi. How are you? Just a couple of housekeeping questions. On the ROADM side, are you guys initially designing the primary supplier? Are you coming in as a second source in some of these newer applications? And I have a couple of follow-ups.

Eitan Gertel

It depends on which customer we're talking about and it depends on which ROADM's. If you talk of [irregular] or more, at a 100G type ROADM's, whether it's a 1/4, 1/8, 1/9--depends on which customer--we're either first or second. If you go into the 50-gigahertz devices than the more integrated devices, we can come as a first. It's very customer specific; very application specific.

Sam Dubinsky - CIBC World Markets

Okay. And then, in terms of your tax rate for fiscal year '09, I know its 10% this year. Any color on what that could be next -- the following year?

David Renner

On a non-GAAP basis…

Sam Dubinsky - CIBC World Markets

Yeah, non-GAAP.

David Renner

I think we're planning on the similar type number of approximately 10% non-GAAP.

Sam Dubinsky - CIBC World Markets

Okay. So 10% through fiscal '08 and '09 and also may be some commentary on any color regarding the Emcore litigation, how that's going and if that can be resolved sometime in the next year or so?

Eitan Gertel

The only thing we can comment on is, we are following the process and we are responding accordingly to what the process ask us to do. And we've been through a large expense in Q2, as we said like $2 million, in during Q1 sorry, and according to what we understand at this point, this has, in the future we expect to be lower, but as you know we are following the process, we are not - we are reacting to what out lawyers tell us to do.

Sam Dubinsky - CIBC World Markets

Okay. And in terms of long-term model, can you just give us your target again and sort of may be your timeframe, when you think achieving these are reasonable?

Eitan Gertel

Yeah sure. And I think what we said on our last call was that the type of revenue to get to our long-term operating model was $250 million to $300 million, and that type of timeframe is during fiscal year '09.

Sam Dubinsky - CIBC World Markets

Okay. Thank you.

Operator

We will go next to John Anthony with Cowen & Company.

John Anthony - Cowen & Company

Hey guys, a few questions. I apologize if I missed this. Did you give any sense for SG&A without the patent expense in the current quarter?

Dave Renner

It's in the press release SG&A, without patent…hold on a second, John.

John Anthony - Cowen &Company

I am referring to the guidance.

Dave Renner

To the guidance, I apologize. No, we did not -- our guidance did not include any patent litigation expenses.

John Anthony - Cowen and Company

Great, but I must have missed what the SG&A guidance was for the current quarter?

Dave Renner

We didn’t give it. We gave it as an overall operating expenses and it's mostly in R&D. It's mostly in R&D.

John Anthony - Cowen & Company

Okay and if I look at -- if I kind of look at the breakdown of the revenue mix, look at the contribution from 40 gig, from ROADM, can you just give us a better sense within 10 gig outside of 300 pin, where you guys are picking up share. It seems if I am doing my math right, you must be picking up share some place. Can you talk about that a little bit?

And then, also relative to a question I was asked before about the lumpiness in 300 pin, both Alcatel and Ericsson have come out recently and kind of mentioned that the environment is lumpy, and that they're continuing to see some pressures. You guys don't seem to be, necessarily, experiencing that, given your guidance. Given that we are in the first week of December here, how much visibility do you guys have through the end of January? It feels like you guys have some pretty good visibility, and I just want to check that with you.

Eitan Gertel

Well, John. There is a lot of questions there, I am trying to figure out if I remember.

John Anthony - Cowen & Company

I'll let you to make up.

Eitan Gertel

So, this I think the first one was on our 300 pin products where are we selling them, I guess?

John Anthony - Cowen & Company

Yes.

Eitan Gertel

So, we are selling to our traditional customers and we also sell this through our diversification. We sell into like a couple of new customers between Europe and China and -- so if you talk about market share, so the new customers obviously bring us new market share and within our customers we believe our share is maintained or slightly higher.

John Anthony - Cowen & Company

And where else within 10 gig, outside of 300 pin are you picking up share. Are you seeing any incremental revenue on new products?

Eitan Gertel

We've seen growth across our 10G quarter-over-quarter, that's for the 300 pin Small Form Factor, and that's for XFP. And XFPs and the TDM, WDM across all XFP, but as you know majority of our revenue in 10G is the tunable product, and the rest of its divided between the 300 pin, fixed devices and the XFP.

John Anthony - Cowen and Company

So, then given that commentary, is it safe to say that the guidance, the sequential increase in your guidance for the January quarter is not based on any material pick up in market share on pluggables? And its largely continuation of the strength that you saw in the October quarter?

Dave Renner

I would say we look at 10G as a whole, and we use the 10G as a whole for our guidance on the next quarter, and our guidance is based on conservative look on the 10G markets for us integrated with all our products, and our growth in the ROADM 40G and execution and growth in the cable TV.

John Anthony - Cowen & Company

Okay, great. Thanks guys.

Dave Renner

Yes.

Operator

We'll take our next question from John Lau with Jefferies & Company.

John Lau - Jefferies & Company

Great, thank you. Just coming back to the cable commentary. You mentioned that it's down sequentially. Is that normal seasonality? And I have a follow-up on the ROADM question. Thank you.

Dave Renner

John, since the number of customers, in general, for cable TV for us is pretty small, we are following what our customer is doing. So their orders to us depend on timing, so we believe actually our share is improving and, in general, in this market. But timing of orders have reduced the quarter-over-quarter revenue slightly, and that's pretty typical to this business. Now, with the added new product we talked about, and the other things we're doing in cable TV on extension of our market share, we believe that's a solid growth for us for the year. As we said before, cable TV is the small part of our revenue in a 20% range, but we still see that's growing across the year, with a new products of WDM 1310, the return pass WDM, and all the historical products, which is our typical cable TV transfer product, which we are doing for years.

John Lau - Jefferies & Company

And that's great. And the follow-up on the ROADM commentary is that you mentioned that you are doubling your capacity, can you give us commentary whether that the industry is capacity constrained right now or is that capacity expansion that you have is more than adequate to keep up with the market demand?

Dave Renner

I think, John, what we said is, that quarter-over-quarter we're going to double our revenue--not double our capacity. And what we've said is, by Q3, our capacity is going to be about the 1000 units per quarter. And I'm not sure that the industry is capacity constrained, but we are capacity constrained as far as revenue at this point.

John Lau - Jefferies & Company

Oh, you are, okay. So that's great, that's a good clarification. Thank you.

Operator

(Operator Instruction). We'll go next to Scott Coleman with Morgan Stanley.

Scott Coleman - Morgan Stanley

Thank you very much. A couple of questions on my front. Maybe if we could stick on the cable topic for a minute. I think in the past, you have said cable is pretty consistently between 20% and 25% of sales; last quarter you talked about adding a new leading cable customer, and that looks like, if I'm dong the math right, your cable revenue dropped to 15%-16% of sales this quarter, which seems more than a seasonal downturn, given the kind of revenues we're talking about here. So, is there anything else going on, maybe some--an inventory issue there--or because it doesn't feel like there is a slowdown in cable optical spending going on?

Dave Renner

We don't believe so, Scott. I mean, our major revenue for cable is still coming from one customer, the second customer is ramping up, and as we have said in the last call, we believe the full ramp up is going to be completed by the end of the second quarter. And so, we don't believe at that, but we believe it's more of a customer timing related issue.

Scott Coleman - Morgan Stanley

Okay.

Dave Renner

Like I have said, we believe the cable will grow nicely during the year, and between our comp products,--there are new products--we should be a very good balance for our growth for the year.

Scott Coleman - Morgan Stanley

Okay. And when you think about growth in fiscal '08, you talked about growing 30% or better, you have alluded to an expectation for growth in the cable and analog sector. Can you help us understand, generally speaking, the growth you are expecting in your major product categories?

I know it's hard for 40-gig and ROADM, because they were so small last year, but just maybe with 10-gig and with cable TV, do you expect both of those to grow around 30% or one of them can grow faster than the other?

Eitan Gertel

I think, Scott, what we said before is that the mix of all our products we expect it to be 30%.

Scott Coleman - Morgan Stanley

Right.

Eitan Gertel

What we said is, we want to stay cautious for this point about 10G, and we see strength in the market; we see strength in what we get from our customers, but we still want to stay cautious for the 10G. But we see the growth coming from our new product deployments, and new product also includes new products and cable TV.

Scott Coleman - Morgan Stanley

Okay.

Eitan Gertel

We don't expect the cable TV to grow as fast as our new products, like the ROADM and the 40G, but we still expect to get a healthy growth from it for the year.

Scott Coleman - Morgan Stanley

Okay.

Eitan Gertel

The 30% you see is an integrated number for all the contribution.

Scott Coleman - Morgan Stanley

Understood. Would it be correct for me to interpret your comments, Eitan, to say that, obviously, ROADM and 40-gig in percentage terms will be the fastest growing than cable TV, and then 10-gig, because you're still somewhat conservative there? Is that a reasonable assumption at this point?

Eitan Gertel

I don't think it's unreasonable, but it's hard to say at this point, because we are cautious, but we'll see what happens. What we do say is, that the 40G we expected to be 20% of our revenue by Q4.

Scott Coleman - Morgan Stanley

40G or ROADM.

Eitan Gertel

Sorry. Not 40G, ROADM. Sorry, I got mixed up.

Scott Coleman - Morgan Stanley

Then a Freudian slip there anytime.

Eitan Gertel

No. I am not.

Scott Coleman - Morgan Stanley

Okay, alright. And then maybe one last a few questions on Kailight. It would seem that at 2% of sales in this type of quarter is probably a little bit ahead of plan. I'm wondering if the shipments are beyond, shipments at this point or if these are production shipments.

And given, at least if my assumption is right, that this is a little bit ahead of plan. If your accretion expectation, these are the timing or the magnitude for the second half of fiscal '08, is maybe tracking ahead of where you thought.

Eitan Gertel

I think Scott, if you look at this, this is pretty much on plan where we plan it to be, right now the shipments we do on the NRZ and Duo-Binary is production shipments. And the other new modulation schemes it's more often a qualification side, which we expected to be accelerated during Q2. But in general, if you look at the 40G, I would say right now we are on plan.

Scott Coleman - Morgan Stanley

Okay. And are you shipping to more than one customer at this point?

Eitan Gertel

Yes, we are.

Scott Coleman - Morgan Stanley

Okay. Thanks a lot guys.

Eitan Gertel

Thanks Scott.

Operator

And that concludes today's question and answer session. At this time, I would like to turn things back Eitan Gertel for any additional or closing comments.

Eitan Gertel

Thank you all for attending the conference call. We hope we addressed all of your questions. We ask that you please coordinate additional request through Director of Investor Relations, Veronica Rosa. Ronnie's direct dial and email contact information is contained on today's press release. Have a great evening.

Operator

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.

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