Avanex Corporation F2Q08 (Qtr End 12/31/07) Earnings Call Transcript

Feb. 6.08 | About: Avanex Corp. (AVNX)

Avanex Corporation (AVNX) F2Q08 Earnings Call January 31, 2008 4:30 PM ET

Executives

Brooke Deterline, Investor Relations

Jo Major, Chairman, President, and Chief Executive Officer

Marla Sanchez, Senior Vice President and Chief Financial Officer

Analysts

Patrick O’Leary - Piper Jaffray

Todd Koffman – Raymond James

Sam Dubinsky - Oppenheimer

Hamed Khorsand - BWS Financial

Natarajan Subrahmanyan - Sanders Morris Harris

Ajit Pai - Thomas Weisel

Operator

Good afternoon, and welcome to the Avanex Corporation’s Fiscal 2008 Second Quarter financial results conference call. (Operator Instructions) With us on today’s call are Jo Major, Chairman, President and CEO and Marla Sanchez, Senior Vice President and CFO.

I would now like to turn the call over to Ms. Brooke Deterline.

Brooke Deterline

Good afternoon and thank you for joining us today. I’d like to remind you that this call contains forward-looking statements about future events and the future performance of the company. Forward-looking statements are subject to risks and uncertainties and actual results could differ materially from those projected or contemplated by the forward-looking statements.

We encourage you to look at the company’s most recent SEC filings, particularly today’s earnings release, Form 8-K, and the ‘Risk Factors’ section of our most recent Form 10-K and Form 10-Q. Avanex assumes no obligation and does not intend to update any forward-looking statements, including guidance as a result of new developments or otherwise.

In addition, because non-GAAP information is presented on today’s call and in order to comply with the SEC regulation, please note that Avanex has provided a reconciliation table and other information attached in today’s earnings release, which can be found on the company’s website at www.avanex.com.

I’d like to take this opportunity to inform you that the company will present at the Thomas Weisel Technology Conference in San Francisco on February 5th and the Roth Annual Growth Conference in Laguna Niguel, California on February 19th.

With that, I’ll now turn the call over to Jo Major, Chairman, President, and CEO.

Jo Major

Good afternoon everyone and welcome to our second quarter fiscal year 2008 earnings call. We’ll focus on the following points throughout this call. First, we’ll describe the performance of our business. The key point, we are now structured for healthy bottom line growth.

Second, we’ll walk you through our new products and markets that are resulting from executing on our expanding R&D vision. These investments address the largest growth segments of our expanding industry and should lead to healthy top line growth.

We’re pleased with the results of our core business and the development in our long-term business model. In the December quarter, we generated revenue of $52 million; we expanded gross margins to 31% from 19% last year; increased both GAAP and non-GAAP profitability; and put over $6 million of cash on our balance sheet.

Our core business grew from the prior quarter. This growth was driven primarily by strength in our amplifier and dispersion compensation products. The variable margin on our product improved further, with approximately 38% of incremental revenue now flowing through to the bottom line.

At this point, we’ll review our progress in developing new products and revenue streams. Our product strategy combines strong fundamental technologies and manufacturable platform designs with our low-cost manufacturing structure to provide optical solutions with strong value propositions to our customers. Let’s review our new product initiatives by market segment.

Controlled amplification is approximately a $200 million growth market, with Avanex being both the technology and market share leader. This quarter we began shipping our Oasis platform. Oasis is a patented amplification platform providing a very cost-effective amplifier that reduces heat and offers high-performance features to our customers. In the March quarter, this platform will essentially obsolete our previous platform. It will improve the efficiency of the supply chain and our overall cost.

In the June quarter and beyond, this platform will enable revenue growth by expanding our market share. We expect modest revenue growth in the near term, as we complete the transition of our existing customers to this platform, but expect growth during the second half of the calendar year as we expand our lead in market share.

Gain blocks are simple amplifiers with an annual market opportunity of approximately $100 million. During the restructuring of the company, we de-emphasized this market due to margin pressures. To profitably re-engage in this market, we transferred the R&D activity to China and gave P&L responsibility to our component group, where cost reduction is a way of life.

We are redesigning all key products for this platform, dramatically reducing the cost and lead time of the product. We already have design wins throughout North America and Europe and are now taking products directly into the Chinese market as well. We anticipate significantly expanding our market share here throughout calendar 2008.

The market for wavelength management is in transition from static to dynamic solutions. Because of this, sizing the market is difficult. However, our rough estimate is approximately $250 million. Our fundamental belief is that as bandwidth continues rapid growth Ando DWDM systems enabled by low-cost integrated ROADM architectures will replace SONET systems. This will force significantly more switching complexity upon our core networks. Our product strategy is to be the economic value leader for switching architectures.

These ROADM solutions with their strong patent portfolio continue to gain traction. Our revenue from these products is beginning and our customers are increasingly coming to us for current and next-generation solutions.

To meet the demand we see on the horizon, we are expanding our development team to ensure we meet customer needs throughout 2008 and 2009. Our coming efforts will include formats suitable for core network applications and ROADM solutions rich with integrated functionality like optical performance monitoring and amplification.

We are now winding up all qualification and manufacturing activities with our lead customer this quarter. The great news here is that we are moving from providing simple switch modules to full ROADM subsystems, significantly expanding our long-term revenue opportunities. In the near term, this move to subsystems will push out revenue by a month or so.

Beyond our lead customer, we continue programs with two other Tier 1 customers as well. Revenue from these opportunities should begin in the June quarter and ramp in the second half of the calendar year.

The transmission market is approximately a $600 million opportunity. Our focus here is on tunable transmission with advanced modulation formats. New product offerings are beginning to ramp revenue in Europe and Asia. These slots at both the component and module level provide us with growth opportunities in 2008.

We have stated that we intended for our Essex acquisition to be accretive no later than the June quarter. While our long-term market share remains strong, the current market uncertainty may delay profitability for this acquisition in the near term.

The move to 40-gig transmission systems does require new functionality. As we’ve discussed before, a 40-gig transponder includes a tunable laser, a lithium niobate modulator, a receiver, and drive electronics just like a standard 10-gig transponder, plus tunable dispersion management and amplification.

Based on feedback from all of our Tier 1 and Tier 2 customers, our new tunable dispersion management product coupled with our new Oasis 1600 amplifier meets the need of this growing transmission market. This market is small, but will grow rapidly as the market migrates to 40 gig.

New applications and access technologies are dramatically increasing bandwidth consumption. We’ll be showing the world our new products with both technical and economic differentiation for both core and edge networks at OFC in February. If you’re there, stop by and see where telecom is heading.

Now, I’d like to turn the call over to Marla to discuss our financial results in detail.

Marla Sanchez

Thanks, Jo. Net revenue for the second quarter was $52 million, down 5% from $54.7 million last quarter, and down 7% from $55.6 million last year. Growth was primarily driven by strength in our amplifier and dispersion compensation products offset by the loss of 3S PHOTONICS distribution revenue.

Revenue in North America was $25.9 million, up 7% from $24.1 million last quarter. Europe and Asia revenue was $26.1 million, down 15% from $30.6 million in the prior quarter, driven primarily by the termination of 3SP distribution revenue.

We expect overall revenue in Asia to increase. However, we expect continued quarterly lumpiness due to regular order patterns. Customers with greater than 10% revenue in the quarter were Alcatel-Lucent at 23% and Tellabs at 22%.

Gross margin for the quarter was 31% compared to 28% in the prior quarter and compared to 19% in the same prior last year. Gross margin improvements were due to new products and platforms and continued benefits from programs implemented last year. Without one-time adjustments relating to 3SP, gross margins would have been approximately 29%. We will see gross margin decline in the next quarter as the large portion of our pricing adjustments occur in our third fiscal quarter. As new products are introduced into our revenue stream, we expect gross margin to trend up to our target model of 35%.

Total operating expenses for the second quarter were $16.9 million or 32% of total revenue. This compares to $15.4 million or 28% of total revenue last quarter, and $19.9 million or 36% of total revenue in the same period last year.

The sequential increase in operating expenses was driven primarily by investments in R&D, legal and other spending for due diligence on potential acquisitions, severance charge, and arbitration costs. Net of arbitration costs, we expect operating expenses to decline. Going forward, we anticipate R&D to remain steady as we invest in new optical technologies in the growing market opportunity.

Operating income in the second quarter was a loss of $0.8 million, up from a loss of $0.2 million last quarter, and down from a loss of $9.4 million in the same period last year. After accounting for net interest and other income of $1.1 million and a provision for international taxes of $0.2 million, net income was $86,000 or break even per diluted share for the second quarter. This compares to a net income of $45,000 or break even per diluted share last quarter, and a net loss of $8.6 million or a loss of $0.04 per diluted share for the same period last year.

On a non-GAAP basis, net income for the second quarter amounted to $2.4 million or a gain of $0.01 per diluted share compared to $2.1 million or a gain of $0.01 per diluted share last quarter. This compares to net loss of $3.5 million or $0.02 loss per diluted share for the same period last year.

We ended the quarter with total cash of $53 million, an increase of $6 million from $47 million in the first quarter. The increase in cash was primarily driven by greater collections, as evidenced by a reduction in days sales outstanding of 70 days compared to 83 days in the prior quarter. We expect DSOs to stay in this range. At the end of the quarter, our total head count was 564. This includes 46 temporary employees and/or consultants.

During the quarter together with the Board, we adopted stock ownership guidelines for our executive officers and directors. Within this program, officers and directors are required to hold significant equity stakes in the company.

Within a five-year period, the CEO must develop a common stock position exceeding three times his base gross salary, the CFO two times and other executive officers one time their base gross salary. Also within the five-year period, outside directors of the company are required to hold a minimum of $200,000 of common stock.

With that, I will turn it back to Jo who will discuss our outlook for the third fiscal quarter of 2008.

Jo Major

Let me turn to the outlook for our third quarter. We expect revenue to be in the range of $46 million to $50 million, with gross margin approximately 25%. The market currently has limited visibility. While most of our customers are excited about meeting the technological and capacity challenges presented by the continual exposure of high bandwidth services and are predicting good growth in calendar 2008, jitters from the global debt and equity markets may slow the capital spending that drives our industry in the near term.

Second, as many of you are aware, we negotiate share and pricing with certain key customers on an annual basis. In general, we’re very pleased with the share negotiated. However, this process resulted in an ASP decline of approximately 9% for the March quarter, offsetting our continual improvement in cost structure.

As previously discussed, we filed an arbitration complaint against 3SP in December for breach of contract. This arbitration complaint may result in total legal expenses of approximately $2-3 million and may take 12 to 24 months to resolve.

One consequence of this situation is the distribution revenue, which we anticipated to gradually decrease throughout calendar 2008, was abruptly terminated in December. From the March quarter on, we will no longer have any distribution responsibility for any 3SP products. On a normalized basis, our underlying business remains strong and the Avanex team remains committed to expanding our product line while achieving our targeted financial model.

In summary, in the second quarter of fiscal 2008, we grew our core business, expanded gross margins, and generated healthy cash. Our new product investments are paying off. We made significant progress across all market segments laying the groundwork for strong growth as capital spending returns.

Our business model is working well. While fundamentals can be overlooked at times, we believe that this focus will allow the company to perform well in slow times and to grow very rapidly with new products and market growth.

Thank you very much. And at this point, we’d like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Patrick O’Leary of Piper Jaffray.

Patrick O’Leary - Piper Jaffray

I was wondering about, the revenue guidance is a little lower, I think, than we were expecting. Could you comment at all on, you mentioned the delay and profitability are accretive on the Essex, can you talk a little bit about the transponder, cost schedules, and how you guys are doing with that?

Jo Major

On the transponder world, we got a nice tunable transponder design we locked in at a Tier 1 customer this quarter. That’ll start rolling in, in March and growing from there. We have a good tunable transponder work going on in Asia, both in China and in Japan.

The comments about market uncertainty, the market does have some limited visibility right now. I’m just a little bit uncertain to see when all those slots turn on, but I think in general the design work is going pretty well. The design work is also going really well on the other piece of transmission. Of course, we sell a lot of componentry into the transmission world. And the new products are going very, very well there for like SFS tunable or next-generation tunables, but again we’re seeing a pretty restricted visibility for those products also.

Patrick O’Leary - Piper Jaffray

Okay, so it’s really just a matter of a lot of uncertainty in terms of when those are picking up?

Jo Major

Yes, it’s a general comment from our customers. We’ve been on the road a lot with our customers. We’re sitting with them all. We’re talking to them about their business needs and their technology needs.

On the technology side, we’re really starting to get a lot of slots that make sense for the company and make sense for our customers. We are very, very excited about that. And I think we have a lot of the right slots that are going to meet the means of networks in the near term.

In the short term, however, we do have the capital markets and the debt markets in a fair amount of turmoil and I think that slows down capital spending while basically the big carriers sort all those things out.

Patrick O’Leary - Piper Jaffray

With respect to your gross margin, obviously, it’s a little bit where you’ve been looking back two quarters, for next quarter, do you see that getting back towards your target at what kind of timeframe?

Marla Sanchez

We had our target of 35%. We’re still shooting to have that within the next nine months.

Jo Major

Understand, this quarter does have the big one-time ASP things and that strongly affects margin, but it also strongly affects the top line performance of the company. And so you should think of our margin performances, as the cost is coming down every quarter and we do that in a really disciplined way, but in this quarter we can’t take our costs down by a full nine points in one quarter.

Patrick O’Leary - Piper Jaffray

I mean it sounds like a lot of cost reduction in a short period of time to me to get that kind of recovery?

Jo Major

Well, I mean I think if you look at the cost reductions required, just part of our industry, this is going to be 15%, 16%, 17% ASP reduction per year has got to be built into the way we do things. So, our cost is coming down 4 or 5 points per quarter by design. So, that’s a kind of normal cost reduction rate for us.

Marla Sanchez

We had also talked about our Oasis platform and our new WSS module, which we actually built with the idea that we would end up having a much better cost structure on them. And as we’ve mentioned, the revenue for those products will be kicking in, in March, but primarily the June and later quarters. So, we’ll end up expecting to have better margins when a lot of those are really in full production.

Jo Major

It’s a good point that new products really provide a delta function down, a strong step function down in cost, and Oasis ramps up very quickly. So, Oasis in the December quarter was a few hundred thousand dollars of revenue, Oasis in the March quarter will be $10 million of revenue, and the Oasis platform in June will be virtually all of our controlled amplifier business.

Operator

Your next question comes from the line of Todd Koffman of Raymond James.

Todd Koffman – Raymond James

Can I ask you, were there any and if they were, how much were the 3S PHOTONICS revenues contributed in the December quarter?

Jo Major

Yes, so we’re right in the middle of litigation with 3SP and we did have a little bit of revenue from 3SP that did shift before they terminated in the middle of December. But we really can’t talk much about that because we’re in the middle of a legal action. And what we can say is we’ve gotten that behind us.

You are looking at an absolutely positively clean revenue picture. We are in a little bit of a period of limited visibility, so the revenue is down a little bit from where we thought it was going to be. But that’s no distribution revenue from 3SP and we’re pretty happy with our ability to grow that revenue stream going forward.

Todd Koffman – Raymond James

And then the March quarter revenue guidance, it looks like if you thought of just mathematically tack on that 9% sequential reduction in average selling prices, that maybe your current revenue guidance doesn’t necessarily reflect sort of this slowdown and I don’t know capital expenditure constraints that you talked about. Did you sort of factor that into the guidance as well?

Jo Major

Our guidance is clearly, the finance guys and the business guys do a bottoms-up that flows in all the ASPs. So, it absolutely, positively includes the ASP reduction. No, I think your point that the revenue isn’t down all that much, I think, is really a great observation. In fact, if you can stay flat when you get an ASP decline of 9% that’s a very, very strong showing.

That being said and I want to make sure that people understand this, our customers are all talking that 2008 is going to be 5%, 10%, 15% up on the revenue side except for a couple of them, so that’s the general theme.

In the short term though, I think that the markets, housing starts affects this, construction starts affects this. And I think we do need to recognize that capital spending will be a little bit lighter or a lot lighter than it would have been without the equity and debt markets slowing down. So, yeah, the revenue is actually pretty solid given that it’s our big revenue hit and that’s a good point. I do want to make sure that people do understand we find visibility to be pretty limited right now.

Todd Koffman – Raymond James

And then just the last question on the transmission products out of Essex. I guess you said that they’ve got a Tier 1 transponder design win, but maybe the timing of the ramp is maybe taking a little bit longer than you would have liked as I think you alluded to not contributing by the June quarter. Is the design win, the Tier 1 design win you are talking about, is that locked and loaded and identified or is that still something that is a verbal indication of interest?

Jo Major

No, no, it’s going to happen, Todd. And when we say accretive, these guys have revenue their first quarter out. They had revenue in the December quarter, which grew nicely. They’ll grow revenue again in the March quarter. So a couple definitions, when we talk about a design win actually we’ve got hard POs, so the call’s done. Everybody is moving forward. That doesn’t mean that the market can’t go in a different direction, but it’s really where we’re in and we’re supplying for production.

For these guys when we talk about them being accretive, what Marla and I are talking about there really is that they’re going to be effectively generating positively to the bottom line. And right now they are not generating, and it doesn’t look to us like they’ll generate enough margins in March. Despite the fact that they’re growing and they’ve got some slots happening, they’re not going to generate enough margins in March to cover the cost of the site.

Todd Koffman – Raymond James

Did you make any comments about their contribution in the June quarter? I thought you said that maybe not in June as well?

Jo Major

What we said is they’d be accretive in June and that’s what we said previous thing. We said that given where market uncertainty is that may push out.

Todd Koffman – Raymond James

So, even though they got this design win, which it sounds like is locked and loaded, the timing of that design win is further out, so that they might not have the leverage in the June quarter?

Marla Sanchez

Yes, don’t forget that we also said that we’ve ended up with it being more of a module and a subsystem that has been designed in as opposed to just [inaudible].

Jo Major

To Todd’s point, Todd, if you want to look at the site, these transmission guys will need two or three slots. When they get two or three good slots going in the sites from an economic basis, it’s a positive contributor. So, one way to think about it is, this slot is actually turning on about when we thought it was going to, but you’ll need two or three things like this for them to get into being a nice profitable site.

Todd Koffman – Raymond James

Okay, just one last, a more general question on market share across a number of your products. Has there been any share shifts one way or the other in any notable way between you or even any other vendors or as across the industry generally shares remain pretty constant despite this annual decline in price?

Jo Major

Well, what we negotiated in shares this year we were very happy with. So, and if you look at the anticipated revenue that these guys are predicting based upon our share and their forecast of their business, those numbers also look real good to us.

Until the dust settles a little bit, it’s always hard to tell kind of in the middle of the battle who is gaining here and who is losing here in market share, but in the annual negotiations that we went through we’re real happy with what we did with our share. And a lot of that is that we need to keep in mind for some of our big customers, we’re bringing in things like ROADM subsystems, so that’s really a good thing, a cool thing.

Another important point is simple things like amplifiers without control, so gain blocks, it’s a $100 million industry that we really de-emphasize because we didn’t have a cost platform in place to let us compete. Now we do. And so now they get a name. They get the marquee player coming out with something that’s very cost attractive to them. That’s got all the quality and all the sophistication that we bring to bear and it’s very easy for us to come back in and reestablish ourselves as a big market taker in that segment.

And we’ve done that. Every place we’ve walked in, we’ve had a really good time with gain blocks this year.

Operator

Your next question comes from the line of Sam Dubinsky - Oppenheimer.

Sam Dubinsky - Oppenheimer

I know you can’t discuss the 3S Photonics business in detail, but could you maybe just say how much the core business grew this quarter?

Jo Major

Yes, couple percent.

Sam Dubinsky - Oppenheimer

Also you mentioned that R&D should be flat and that we should see other expenses, other OpEx decline. Can you maybe give us some more color on how we should model an OpEx going forward?

Marla Sanchez

We had some higher legal costs that were probably a little bit higher than severance costs that we had. So, I would guess that we won’t give you a precise percentage on it, but we do expect it to come down probably about $300,000-600,000 at least just from those expenses that we had that were additional to the prior quarter.

Sam Dubinsky - Oppenheimer

You still have some related party revenue. Can you maybe just describe what that is and how we sort of think about that going forward?

Marla Sanchez

That’s actually Pirelli. Pirelli, because of the shares that they bought when they bought the Alcatel share, they’ve now become a related party to us in that regard. So, it’s just a small product that we sell back and forth to each other, regular commercial transactions that we have.

Sam Dubinsky - Oppenheimer

Is that above or below the target margin? Is that sort of a standard growth business for you guys?

Marla Sanchez

It’s just a regular commercial standard business. There is no special arrangement or anything other than kind of a discount to the sales.

Jo Major

There are, just so that everybody is clear. Pirelli has a ton of technology, a lot of neat technology and there is a lot of work understanding how we can get together and leverage that together. But these things are going on all the time and we’re really pretty excited about that if you’re looking 18 months, two or three years from now. But what Marla was talking about, I think, is the ongoing business between the companies is just sort of standard business right now.

Operator

Your next question comes from the line of Hamed Khorsand - BWS Financial.

Hamed Khorsand - BWS Financial

Just two, one is, could you provide some color on inventory? It seems like what you are saying your core was up about 2%, but inventory was up a little bit more quarter-over-quarter?

Jo Major

Yes, so anytime there is a little bit of a visibility decrease, basically you are looking at a contraction of lead times. And that leads to us working with our customers in anticipation of where their business is going and putting some products onto the shelves, so that when their orders come in and they need to grow, we’ve got the stuff there ready for them. You want to comment, Marla?

Marla Sanchez

Yes. We don’t usually build very much ahead forecast, but looking ahead for some of the ones, especially as Jo said, we are pulling in some lead times on some of the products and we’ve been working with our customers closely on that. So, we do end up building up a little bit of inventory.

Hamed Khorsand - BWS Financial

So that worked down in the March quarter?

Jo Major

We are not going to give guidance on inventory because again we are kind of in a market with limited visibility. One of the things that we will say is that in markets like this when the underlying need for the product is very, very visible and the underlying business driver for the product is very visible and for somewhat artificial reasons the capital spending has pulled back.

Our experience is that when the capital spending comes back, it comes back very hot and heavy. So, these are products that we are pretty sure are going to be taken and we want to make sure that we are there when the customers come back and really need to start pulling these things.

Hamed Khorsand - BWS Financial

My other question was regarding earlier you said you had two Tier 1 customers in place, could you provide some color as to what kind of impact that would make in the March quarter?

Jo Major

Are you talking about the WSS ROADM solution?

Hamed Khorsand - BWS Financial

Yes, the tunable transmission product set?

Jo Major

So, for the tunable, I’ll give comments in two areas. In tunable transmission modules, we secured a Tier 1 design win and that will start revenue this quarter. And then we’ve got other, primarily in Asia we have a lot of exciting opportunities, both in China and Japan. So, that’s kind of where tunable transponders are.

If you look at WSS, so we have a switch module that we are now bringing into sort of ROADM subsystems. There, our lead customer we moved from selling simple switch modules up to full ROADM subsystems for our lead customer.

And that’s really exciting for us because it kind of dramatically increases the amount of revenue we can get at. Because we have to develop some pieces of the subsystem and negotiate some things with the customer, that’s going to push revenue out about a month. So, a little bit of it will occur in this quarter, but it will be primarily next quarter revenue.

And then on top of that for WSS ROADMs, we have got a couple things going. We have two Tier 1 customers, one in Asia, and one in Europe, that we’ve got good programs with. Those programs will start generating revenue with one of them in the June quarter and the other one will start in the second half. So, the ROADM revenue should be growing quite nicely every quarter forward that you can see for, say, the next four quarters.

And then the second piece of that is that we’re kind of fortifying that piece of our R&D world, because we’ve gotten a lot of nice traction from our customers and the demand for design work and the demand for us meeting the slots they have is pretty hot and heavy right now. So, we are going to add some people there to take advantage of that revenue opportunity.

Operator

Your next question comes from the line of Natarajan Subrahmanyan - Sanders Morris Harris.

Natarajan Subrahmanyan - Sanders Morris Harris

Jo, I had a question on your guidance, when you had pre-announced the quarter you had expected revenues to be flat to slightly down. Now the new point of the range is kind of about $4 million and obviously the price negotiations are something that you were aware of and you’d factored in. So, I’m wondering if is it just kind of the broader macro environment which is taking flat to slightly down to slightly bigger revenue downtick.

Jo Major

Yes, probably the easiest way to say it is that if you translated my words into numbers and you look from the middle of December to now, we’re probably about 4 percentage points lower than we were. And yes, I think that that’s just a little bit of softening that we’re seeing due to sort of macroeconomic effects. And I think that’s a correct conclusion. We do think the market is a bit softer now than we did in the middle of December.

Natarajan Subrahmanyan - Sanders Morris Harris

And are you seeing that in order patterns? Is that something you’re just being cautious about from commentary from customers? I am just wondering is it more qualitative or is it actually there is some weakness showing up in order patterns?

Jo Major

December bookings were a little lighter than we wanted. Those order trends have picked up a little bit in the March quarter, but I’d describe the market move right now as pretty cautious in the near term. So, people don’t like to place orders until they really, really, really need the stuff and that conservatism from our customers or that cautiousness in placing their POs kind of led us to take our revenue down a little bit.

Natarajan Subrahmanyan - Sanders Morris Harris

And then given the things that are ramping, I mean clearly there is some ramp in the ROADM side, some of it starting out as early as this quarter and it sounds like most of it June and out. And similar on the tunable side, I know you are not guiding multiple quarter, but do you go from March, is it a sharp snap back opportunity you are seeing, is it a more gradual ramp through the course of calendar ‘08?

Jo Major

It is a little tough to give multi-quarter guidance. We have several places where we’re getting a lot of slots. Let me kind of walk through some of the slots we are getting.

The WSS ROADM solution family is starting to get slots and starting to accumulate, if you will, revenue growth opportunities. In Oasis, that transition has gone pretty well and now the team is not inwardly focused so much as getting out and trying to put that into a lot of new slots. And, of course, it’s a great blend of performance and cost, so that’s going pretty well and that’s a growth opportunity for us in June, September, and beyond.

A big exciting one for us is gain blocks and we just completely revamped the cost structure of that. It is a market that’s very easy for us to go back in. We’ve got margin structure that’s attractive to us now. The addition of that is a real opportunity for us to grow as the market demand returns. And then we’ve got transmission both on the move of our componentry into more sophisticated modulation formats and down in size, and then in addition the module sales.

So there is a lot of things that are keying up that when the market comes back, I think we’ll grow very, very rapidly. It’s funny because on the one hand you have the business side of the customers worrying quite a bit and being very, very cautions. On the other side, you have development guys that are really thirsty for new solutions and they’re really struggling to deal with how do they make the networks grow fast enough to meet what they perceive as the coming demand problems.

Natarajan Subrahmanyan - Sanders Morris Harris

And final question on the gross margin side, from 25% in March to 35% it sounds like by the end of September, how much of that is predicated on higher new product mix versus just absolute revenue growth?

Marla Sanchez

We tend to not count on absolute revenue growth to do very much for us. We end up working trying to do, as we have talked about in the past, trying to get an operating model that works at about the range that we are at pretty much now. And working on cost cutting and improvements in the efficiency of our cost structure and in the new product rollout that we’re looking at to get us to the gross margin improvements that we’re talking about.

Natarajan Subrahmanyan - Sanders Morris Harris

Do you expect it to be fairly linear over June and September?

Jo Major

What, margin of growth?

Natarajan Subrahmanyan - Sanders Morris Harris

Yes, the 25% to 35% in two quarters.

Jo Major

We actually don’t give guidance as to how much we’re going to grow multiple quarters out in margin. But clearly the development programs we have coupled with cost reductions do drive margin increases pretty nicely.

One of the comments that I’d make kind of on top of what Marla said is we’ve been starting to talk with Wall Street right now about variable margins. So that people understand if the business goes up, the variable margins for the business continue to get more and more attractive.

We are a low fixed-cost business, so that if the market gets rough for a little while, it really doesn’t burn us too bad. But we are developing pretty good flow-through margin. So, in the last quarter, our flow-through margin was approaching 40%. And you can see that when the growth does come back and all of these new products start to wash through the system, although we don’t bank on revenue as being the revenue growth as the way that we get from A to B, where we are right now when the revenue growth comes back and we think it will come back, could come back very, very strong. It should flow through our system very nicely and take the company nicely and do a position of profitability.

Operator

Your next question comes from the line of Ajit Pai - Thomas Weisel.

Ajit Pai - Thomas Weisel

One quick question and that’s just looking at your largest customer sales, the trajectory over the past four quarters has been moving down faster than the pricing decline they have indicated. Can you give us some color as to, two or three things regarding that, one is are they trying to continue to diversify away from you? How much of that is to do with the consolidation and the impacts of the Alcatel-Lucent consolidation are behind us or we still see some of that happening?

Jo Major

It’s much more simple than that. We had a legacy fixed wavelength transponder that drove a lot of revenue through the company and that legacy thing is winding down. It does sort of a special market for Alcatel, so it’s likely that it’s going to remain fairly flat. But we saw a bubble of that particular product and as that product came down, it made it look like the whole business with Alcatel was going sideways.

So that is a legacy transmission thing that is kind of moving gradually into the sunset now. It had a fairly sharp decline over the last year. What you’re going to see now as we go forward with Alcatel is that we are taking dispersion compensation products in there. We are taking ROADM stuff in there. We clearly are going back in with gain blocks and saying, “Hey, you buy a lot of gain blocks”. We got great gain block pricing.

We’re obviously interested in serving their transmission needs both at the modulator level and at transponder levels. Those things are going to start to come through and you’ll start to see Alcatel grow again. The Alcatel trending down slightly is simply due to one big legacy transmission product kind of riding off into the sunset.

Ajit Pai - Thomas Weisel

The impact of the consolidation is that already behind us or do you expect that to have any impact on volatility in revenues for you over the next two to three quarters? Just outside of the macro environment, just the consolidation and the rationalization of the product portfolio?

Jo Major

No, with respect to all of our customers or Alcatel-Lucent?

Ajit Pai - Thomas Weisel

Just Alcatel-Lucent?

Jo Major

Yes, I don’t think we’re seeing anything there. In fact, we’re trying to be real active with getting into a lot of sort of the Lucent side of the business, if you will, so we see some upsides there.

But basically everything that happened got done in the pricing negotiations in terms of what slots do we get and how do we look. And we came out of that pretty excited about what’s going on. We got some new slots and we got some nice share increases in places like gain blocks.

Operator

Ladies and gentlemen, we have reached the allotted time for questions. I would now like to turn the conference back to Chairman, President and CEO, Jo Major, for closing remarks.

Jo Major

Thank you very much for attending our call. We wish you good afternoon and stay posted. Thank you very much. Bye-bye.

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