Oplink Communications F2Q08 (Qtr End 12/31/07) Earnings Call Transcript

Oplink Communications

F2Q08 Earnings Call

January 31, 20085:00 pm ET

Executives

Matthew Hunt, Investor Relations, The Blueshirt Group

Joseph Y. Liu, President, Chief Executive Officer

Shirley Yin, Chief Financial Officer

Analysts

Christopher Longiaru - Sidoti

John Harmon - Needham & Company

Sam Dubinsky – Oppenheimer

Ajit Pai - Thomas Weisel Partners

Michael Coady - B. Riley

Patrick Callery - Piper Jaffray

Dave Kang - Roth Capital Partners

Operator

Good afternoon ladies and gentlemen. Welcome to the Oplink Communications Q2 2008 Financial Conference Call. (Operator Instructions)

I would now like to turn the conference over to Matthew Hunt with The Blueshirt Group.

Matthew Hunt

Thank you, and good afternoon ladies and gentlemen. Thank you for joining us on today’s conference call to discuss Oplink’s second quarter 2008 financial results. This call is being simultaneously webcast on the Investor Relations section of the company’s corporate website at investor.oplink.com. Joining me on the call today areJoe Liu, President and CEO; and Shirley Yin, CFO of Oplink.

Before we get started, I would like to remind you that the following discussion contains forward-looking statements that involve risks and uncertainties and that Oplink’s actual results may vary materially from those discussed here. Information concerning factors that could cause actual results to differ from forward-looking statements can be found in Oplink’s periodic filings with the SEC.

The forward-looking statements and risks stated on this conference call are being based on current expectations as of today, and Oplink assumes no responsibility to and does not intend to update or revise them, whether as a result of new developments or otherwise.

Now, I would like to turn the call over to Joe Liu, President and CEO of Oplink. Go ahead Joe.

Joseph Y. Liu

Thank you, Matt. Hello and thanks to all of you for joining us today as we report our second quarter of 2008. As you know, we closed the acquisition of the 100% interest in OCP during the quarter. As a result, our financials include one month at 58% and two full months at 100% of OCP. Hereafter, all of our results will be discussed on a consolidated basis.

Consolidated revenue for the second quarter was $48.9 million, almost flat with the prior quarter but up 113% over the same period one year ago, which did not include results from OCP. Consolidated GAAP net loss for the second quarter was $3.4 million.

On a non-GAAP basis, excluding items outlined inthe press release, net income was $4.0 million or $0.18 per diluted share. This compared to non-GAAP net income of $4.6 million or $0.20 per diluted share reported inthe year-ago period.

Revenue for the quarter was at the high end of the outlook we provided last quarter. Non-GAAP EPS was $0.18 as compared to our guidance of $0.46, attributed to the progress we made in accelerating cost reduction associated with the OCP acquisition.

For the second quarter, Huawei and Tellab were our 10% customers on a consolidated basis with good contributions also coming from Nortel and Alcatel. We continue to have good demand for natural and access products.

We also saw slight pick up in our long haul business. Our ROADM revenue was stronger than expected inthe second quarter, and we now expect ROADM revenue to decline substantially inthe coming quarters.

In the second quarter, we closed the OCP [inaudible] wafer fab inTaiwan. We consolidated Maryland, UK, and Taiwan facilities; prioritized our R&D projects; reduced U.S. and UK R&D headcounts; and eliminated public company costs for OCP.

We also started a transfer of OCP’s production to our two high facilities, shifted certain U.S. R&D projects to Wuhan inTaiwan. We expect to complete these integration efforts by the fourth quarter of 2008. These measures are expected to continue to improve gross margin performance and lower our operating expense overall over the next two quarters.

While the complete integration of OCP will take a few quarters, we have made meaningful short-term progress and believe these are significant synergies for our business and customers. We will stay focused on completing the steps necessary to maximize cash flow from business, resume Oplink’s historical strong growth margin, and realize greater profitability for shareholders over time.

In the coming quarter we expect a decline in ROADM revenue and slight pick up on our OMS business and believe that our transfer of OCP manufacturing and need for customer re-qualification will impact our ability to ship product to certain customers.

As a result, we’re planning for the third quarter revenue to bein the range of $41-45 million. With additional cost reduction already underway, we believe this reduction in revenue should not significantly impact operating income. We expect to report GAAP net income in the range of $0.06 to $0.10 per share and a non-GAAP net income in the range of $0.12 to $0.16 per share for the third quarter.

With that, I will turn the call over to Shirley for a detailed review of second quarter financials. Shirley, please go ahead.

Shirley Yin

Thank you Joe, and thanks to all of you for joining us today as we report results for the second quarter of fiscal 2008. Today I’ll be discussing only consolidated results for the business as we have quickly integrated the OCP acquisition and are moving forward with cost reduction initiatives.

For the second quarter of fiscal 2008, consolidated revenue was $48.9 million, mostly unchanged from $49.2 million reported in the prior quarter but up 113% over $23 million inthe second quarter of fiscal 2007, which did not include OCP. GAAP net loss for the second quarter was $3.4 million or $0.16 per share. This compares to GAAP net income of $3.1 million or $0.14 per diluted share in the same period of last year.

Consolidated non-GAAP net income for the second quarter was $4 million or $0.18 per diluted share excluding approximately $3.5 million in stock-based compensation expense; $4.7 million in expenses incurred by OCP relating to Oplink’s acquisition of OCP; $532,000 in transitional cost for contract manufacturing; $865,000 in amortization of intangible assets; and $626,000 for impairment and other charges, net of a $2.9 million adjustment to reflect the 42% minority interest related to OCP’s portion of these items.

With the acquisition of OCP the amount of amortization of intangibles is fairly material, and going forward we will adjust our GAAP performance for these non-cash items. Here after I will only discuss our results on a non-GAAP basis, excluding the charges as I spelled out a few minutes ago and as outlined in the press release.

Our consolidated gross margin was 23.9% as compared to 25.1% in the prior quarter. This decline is due to a higher mix of ROADM revenue offset by the partial benefits from the transfer of OCP’s production to China.

In the third quarter we expect to seean increase in gross margins as we gain additional benefits from the closure of the OCP fab in Taiwan, continue to transfer OCP’s production to China, and realize a lower mix of ROADM revenue.

Consolidated operating expenses inthe second quarter declined over the prior quarter as we quickly realized cost savings from the integration of OCP. R&D expenses were $3.6 million, down from $4.4 million inthe prior quarter. This was primarily related to the head count reductions in OCP. G&A expenses reduced to $3.6 million from $4.4 million inthe prior quarter.

Sales and marketing costs were mostly inline with our expectations at $2.8 million, down slightly over the prior period. We still expect additional operating cost reductions over the coming quarters. Income from operations was $1.7 million, an increase of $1 million from the first quarter of fiscal 2008. We expect income from operations to continue to improve as we implement various cost-reduction initiatives.

Interest income for the second quarter was $2.1 million, down over the prior quarter as the result of lower cash balances. The effective tax rate for this quarter was 5%. Absolute shares outstanding at December 31st were $20.6 million shares, reflecting the repurchase of shares during the quarter. For the average fully diluted shares outstanding were $22.3 million shares for the quarter.

Turning to the balance sheet, our cash balance declined as expected to $117.3 million from $236.8 million in the prior quarter. We repurchased $39.6 million in common stock and used approximately $80.6 million for the acquisition of OCP.

Since December 31st, we closed the sale of the Woodland Hills facility for net proceeds of $26.1 million, which will be reflected in our Q3 balance sheet. OCP remained in this building for about six months and then relocated to a smaller, less expensive facility. This is expected to save additional costs over time.

Accounts receivable atthe end of quarter were $34.5 million with DSO at 65 days. Consolidated inventory atthe end of the quarter was $32.5 million compared to $36.8 million inthe prior quarter, reflecting purchase accounting adjustments on OCP inventory. In closing, we are satisfied to make the second quarter fiscal 2008 result and optimistic about the future opportunities afforded us with the acquisition of OCP.

As Joe discussed, we expect revenue for the third quarter to be inthe range of $41-45 million primarily due to lower ROADM revenue and impacts that our transfer of manufacturing will have on our ability to ship customer orders inthe short term.

This will result in GAAP net income per diluted share in the range of $0.06 to $0.10 and non-GAAP net income per diluted share in the range of $0.12 to $0.16 excluding amortization of intangible assets, stock-based compensation, transitional costs for contract manufacturing, gain from the sale of our facility in Woodland Hills, charges related to Oplink’s acquisition and integration of OCP, as well as other non-recurring charges, if any.

We look forward to providing an update on our business in late April as we report our third quarter 2008 results.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Christopher Longiaru - Sidoti.

Christopher Longiaru - Sidoti

Could we talk a little bit more about basically expecting a decrease in revenue here due to some ROADM weakness? Could you talk about that a little more specifically and how long you think that’s going to play out?

Joseph Y. Liu

You know obviously we saw two pressures from our customer. Primary pressure is from the recent announcement, of Fujitsu being qualified as an alternative supplier to Verizon. But more immediately, we know that one of our competitors, Optium, is also being qualified as an alternative supplier to the Tellab system.

So those are the two reasons that kind of are not new, but we anticipate that the revenues will, because of that, we will have impact. Now, obviously that impact could also come in from Tellabs business extended to vendors like us, but I am not here to comment on our customer’s business.

Christopher Longiaru - Sidoti

Could you give a tax rate and share count to take care of that stuff really quick for the next quarter?

Shirley Yin

Yes, tax rate will be ata similar level as the current quarter. Share counts, absolute shares atthe end of December are 20.6. So normally we have about 500 K to a million shares add back to the diluted shares. So I would estimate about 21.5.

Operator

Thanks. Our next question comes from John Harmon - Needham & Company.

John Harmon - Needham & Company

There areso many moving parts inthe quarter. Let mesee if you can help me nail down some of them. So if you go from your revenue level to kind of the midpoint of your guidance, what is the revenue decrease from lower ROADM revenues that you are expecting and then how much of that is from disruptions, operations, and product discontinuation?

Joseph Y. Liu

The ROADM revenue drop, I guess if we put a range that will probably bein the neighborhood of $4-6 million for the coming quarter. And regarding the OCP actual transfer incurred relating to the for customer re-qualification, I would say that is probably $2-4 million impact for the quarter.

John Harmon - Needham & Company

And you said you are not breaking apart Oplink cost, let’s say, from OCP results anymore. Could you maybe just for the one quarter give us some growth on operating margin guidance?

Shirley Yin

You mean for the second quarter, John?

John Harmon - Needham & Company

Yes, for the third quarter, for the March quarter, please.

Shirley Yin

The March quarter, we look atthe business in more like a consolidated basis as we see increased levels of integration with OCP. So we don’t think a breakdown of the operating expenses will provide meaningful information.

John Harmon - Needham & Company

For the whole company, I’m sorry.

Joseph Y. Liu

The whole company gross margin percentage I think that we will probably benefit maybe 2 to 3 percentage point on the current level.

John Harmon - Needham & Company

And the rest would fall out, but just one question. Your traditional [inaudible] business, I mean, did itgrow inthe quarter, or it’s excluding ROADMs?

Joseph Y. Liu

It didn’t. Actually, it did not because of the softness from the European market. But inthe March quarter, inthe coming quarter we see some strength that the European market are back to normal. So the weakness is largely contributed from the weakness of the European customer, namely Ericsson/Marconi.

John Harmon - Needham & Company

Your share buyback last quarter was pretty aggressive. Is that, at what ratedo you expect to continue your buyback? I guess you could give us some guidance.

Joseph Y. Liu

Our Board will continue to discuss about this, as an ongoing subject. And we were going to have a Board meeting as early as February the 6th, and we’ll probably have some conclusion after that Board meeting. But I think that your question is that, what is our attitude towards the buyback? I think we are still very positive.

John Harmon - Needham & Company

Just, whether the remaining amounts you would buy back linearly, or are you trying to do it sooner rather than later?

Joseph Y. Liu

That is beyond my ability to answer that. But my attitude is very positive and I think many of my Board members share that. That’s why you think that the buyback that we have placed there has been aggressively executed.

Operator

Our next question comes from Sam Dubinsky - Oppenheimer.

Sam Dubinsky - Oppenheimer

Is it safe to assume that the ROADM business eventually trends down to zero, or is that not the case? And I have a couple of follow-up questions.

Joseph Y. Liu

It will never be zero. I think that in our trade, customer tends to have a primary supplier and turns to supplier to keep everybody honest. I think in this case, we are clearly the incumbent, and I expect that we will share our revenue base with the competitor. And, as a result, we probably initially guaranteed inthe primary to bethe primary supplier. Over time, it’s a real competition.

Sam Dubinsky - Oppenheimer

Okay. What was ROADMs inthe December quarter, if you can break that out, revenue?

Joseph Y. Liu

That’s close to 13.

Sam Dubinsky - Oppenheimer

And does that business still serve just one customer?

Joseph Y. Liu

Pretty much, yes.

Sam Dubinsky - Oppenheimer

And then you got a gross margin said to be up 2 to 300 basis points. Is that based on the ROADMs trending down over time?

Joseph Y. Liu

Correct.

Sam Dubinsky - Oppenheimer

In terms of your core business, I know you don’t break it out separately anymore, but if I am correct the core business gross margins are 28-30% give or take. When do we see those types of gross margins return to the model, in the combined company?

Joseph Y. Liu

In the prior couple of quarters are now ROADM gross margins have been like you suggest that may bea little bit higher. But if you look at the overall, that including the OCP as well as the ROADM revenue, the average out is probably inthe neighborhood of mid-20s. And we expect this going back to the 30% gross margin as a percentage goes back to 30% probably towards the calendar year fourth quarter.

Sam Dubinsky - Oppenheimer

There have been rumblings about some weakness inthe Chinese infrastructure market. Are you guys seeing that? You just signed some lease inEurope. How is theChina market? What do you see as lead times there, and what do you think the demand specifically in that bucket will be for maybe this quarter and the next coming quarters?

Joseph Y. Liu

We saw slight weakness, not necessarily weakness, for the quarter and I don’t have the crystal ball for the balance of the year. But I think the Chinese market really is a global market, not necessarily a captive market. So whatever that happens impact worldwide I think that will impact our Chinese customer as well.

Sam Dubinsky - Oppenheimer

I just have one last question on the ROADM. I don’t mean to ask too many. But after this one quarter draw down, do you think the share has stabilized within your customer or is there sort of more revenue to come down over time before it stabilizes?

Joseph Y. Liu

I think that we’ll probably anticipate some kind of flat to higher for the future.

Operator

Thanks. Your next question comes from Ajit Pai - Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

The first question is about the pricing environment. Could you give us some color as to how important pricing has become in winning business right now, and also, like recent pricing trends, could you quantify it both on the passive side as well as now your active side?

Joseph Y. Liu

Well, this is a kind of universal comment, and any time you have a slowdown market price becomes depressed. And competition is fierce so I would tend to think that we probably will have accelerated erosion on price looking at not just passive and as well as active. And I seethe coming quarter that the price erosion will probably accelerate as a result of the soft tier marketplace.

Ajit Pai - Thomas Weisel Partners

And then when you look at your balance sheet, it’s one of the best balance sheets inthe industry right now. Could you give us some color? I think you did mention that you are going to have a Board meeting addressing the issue of share buybacks. But what arethe other issues of cash? And after such a large acquisition recently, is the appetite still open for building bulk on the revenue side for your company?

Joseph Y. Liu

Regarding the cash and cash equivalent, taking inthe property, the Woodland Hill facility property proceeds, on a combined basis will probably have slightly over $140 million total. As I mentioned that the stock buyback is one of the subjects that we will discuss atthe coming Board meeting. Using cash for acquisition is another alternative out there.

But we do not have the immediate target. We’re more focusing on completion of the OCP integration. But those arethe open subjects that would be very important in the coming quarters to discuss about it.

Ajit Pai - Thomas Weisel Partners

Which is going forward, not immediately inthe near term but moving out about maybe 18 or 24 months out? What do you expect the tax rate to be for the consolidated company, a pro-forma tax rate?

Shirley Yin

We ask you continue to value our tax positions and that also included the following jurisdiction taxable income as well. So it’s more like a mix of income in different jurisdiction. We don’t go out that far to estimate the tax rate at this point, but we do have a fairly large amount of NOL to carry forward.

Ajit Pai - Thomas Weisel Partners

Joe, if didn’t have NOLs, what would your pro-forma ratebe right now on a blended basis looking at your domestic and international?

Shirley Yin

That will be close to the normal static rate.

Ajit Pai - Thomas Weisel Partners

That would be close to the mid-30s right now?

Shirley Yin

Yes, without NOL.

Ajit Pai - Thomas Weisel Partners

Right, but you have a tax holiday still in China. Wouldn’t that reduce, or in some other foreign jurisdiction as well. Wouldn’t that reduce that rate slightly?

Shirley Yin

It will reduce it slightly, but tax holiday starts in 2007. For 2008 we still have the tax holiday and moving to 2009, we will start to pay tax at half of the normal rate.

Joseph Y. Liu

What happened is that it’s a five-year tax holiday. The first two years is zero basis, and the remaining three year will be half of the standard 25%, which is 12.5% for three years. Now, regarding the federal NOL, we probably still carry about $100 million worth of debt inthe state maybe inthe neighborhood of $60 million.

Ajit Pai - Thomas Weisel Partners

And what percentage of your revenue that fall into that 12.5% kind of current tax rate on a, when you are looking out at ‘09. Would it be 30% or 40% of your revenues?

Shirley Yin

Well, we don’t look to provide that kind of specific information. We looked at more like a blended rate on an overall basis.

Joseph Y. Liu

Yes, that’s just a ballpark. We probably, the revenue is very much in line with our business inChina. It’s a ballpark. And that’s about 20% of our total revenue.

Operator

Thank you. Next question comes from Michael Coady - B. Riley.

Michael Coady - B. Riley

The revenue reduction from OCP inthe third quarter $2-4 million, how much of that relates to discontinued products versus products that need to be even qualified?

Joseph Y. Liu

Actually, the discontinued product is not a major piece. I think the more important is certain customer are very stringent in terms of going through the process, re-qualify anytime that you have a major ECN change or manufacturing side changes. They need to qualify before they take shipments.

So these are all ongoing efforts that we took over the factory only on the beginning of November and we were starting to inform customer and all that, so it takes time to get them motivated to have a speedy re-qualification process.

Michael Coady - B. Riley

And how longdo you think that would take? How many customers were involved here, and how longdo you think that takes?

Joseph Y. Liu

Only a couple of major customer, most of customer understands the benefits, and just a couple of major ones. I prefer not to name names here.

Michael Coady - B. Riley

And in terms of the time, will this be a long, 12-month re-qualification? Or are you talking...

Joseph Y. Liu

No, I wouldn’t think it’s along process. I would saythe worst case will be probably a couple of quarters.

Michael Coady - B. Riley

And then talk about OMS business inthe quarter and expectations going forward. And then I guess excluding the ROADM part from that?

Joseph Y. Liu

Yeah. The OMS side, we have line cars. We have additional amplification product and as well as integrated mux and demux product that have been qualified. in other words already designed in waiting for the ramp.

Michael Coady - B. Riley

And what about success integrating and not OCP and the organization but OCP’s products and Oplink’s products for a more complete solution that you have talked a little bit about in the past?

Joseph Y. Liu

That part has not really truly reflected on the overall benefit yet. But I anticipate that would be probably one of the strengths that we can offer the transceiver, going into our own boxes. That would bea benefit from the solution side.

But at this point I think the primary goal for us is to focus on the existing stock that OCP already owned. And then trying to reduce the material, the supply chain, and make it more efficient, and make inthe right inthe margin for ourselves as well as for our customers.

Michael Coady - B. Riley

And then just lastly, wanted to take a look at the March quarter guidance ina little bit more detail in terms of the guidance for the December quarter, you absolutely blew it out of the water. This guidance for the March quarter, how much feasibility do you have into how much share you actually lose on the ROADM side? Is that kind of your best guess? Is this information coming from Tellabs?

And then, I guess, the same question as earlier. On the OCP side, I am I’m sure you have more visibility into that. But, I guess, what’s the variability we could see on the ROADM piece of that?

Joseph Y. Liu

We’ll be very honest. We don’t have a very clear visibility. And I attribute that to our customer maybe slowing down on their needs and maybe from their customer printing orders to their competitors, as well as the competitor taking shares away from Oplink. So those are the likelihood of losing some of our existing share.

Michael Coady - B. Riley

Is that Tellab? Is that coming from Tellab of is that from your expectation that things could bea little bit soft inthe quarter and you’re being prudent relative to guidance?

Joseph Y. Liu

No, we are doing real estimation. So it’s primarily direct from the customer. The other thing will probably bea guess. We do not know whether the softness is from losing shares or losing their business. We don’t know.

Operator

And our next question comes from Patrick Callery - Piper Jaffray.

Patrick Callery - Piper Jaffray

We’ve talked about the ROADMs are ramping down a little bit as well the OCP transceiver contribution, and those have obviously been two big pieces of the business over time. Would you care to venture a little bit of an outlook later into the calendar ‘08 in terms of where you see revenue growth coming from?

Joseph Y. Liu

Like I earlier mentioned, let’s look at from two separate pieces. From the OCP pieces, I would say that by the calendar third quarter and into the fourth quarter our new products will probably beall introduced at that point. Some of that is thecost down versions, some of are the new designs.

But new product introduction takes time to accelerate. If it’s the product that’s already into the replacement sockets then that would give us immediate margin benefits. And a new product introduction, we have to wait a little bit until we getthe volume ramped. That benefit would probably bein calendar year ‘09. That’s regarding the OCP growth potential, from both ends, revenue growth and as well as margin growth.

Now, regarding the ROADM thing I already said it many times, even in a prior conference call is that we are currently enjoying the lead position. That lead is positioned well over time be eroded from both ends. Both end means from the equipment side that Fujitsu is competing with Tellab at Verizon or that has been said or been announced.

And also we have now no longer the sole supplier. We have competition from Optium, and that’s a fact. So those arethe outlook that maybe on the conservative front, but that’s something that we anticipate that erosion coming from.

Patrick Callery - Piper Jaffray

One more point on the ROADM then, do you guys have any kind of strategic developments in place? I know you’ve mentioned inthe past that you’re ata little bit of a price disadvantage. In terms of regaining some of that ROADM share long term, is that a focus product for you guys?

Joseph Y. Liu

That’s the beauty of keeping more than one supplier. We have been humble. We have lowered our price. We have regained the shares. As a long-term effort, we have, as a vendor, as a supplier, we have to figure out ways to reduce thecost and make it more efficient. Otherwise, we will lose the competition.

Operator

Thanks. Your next question comes from Dave Kang - Roth Capital Partners.

Dave Kang - Roth Capital Partners

First question is just a clarification. How much was repurchased during the quarter?

Shirley Yin

We report put itin the total of $39.6 million, almost completed a $40 million program.

Dave Kang - Roth Capital Partners

And it sounds like it’s not done. I guess there will be further discussions, based on some of the questions that were asked. And secondly, regarding your expectation about gross margin improving two to three points in the current March quarter, have you factored inthe pricing negotiations that usually go on inthe March quarter, Joe?

Joseph Y. Liu

Yes, we have buffered that means that the same amount of revenue that you may have additional quantity, higher channel counts, or number of units.

Dave Kang - Roth Capital Partners

And then I hate to ask about ROADMs, but I do have a couple of questions on the ROADM situation. I thought you said you expect ROADM business to kind of flatten out and actually could go up. But I think right now what’s driving down the ROADM business right now is more of an Optium and the Fujitsu factor. I don’t think ithas really kicked in. Has it? I thought Fujitsu would start to shift to Verizon maybe during summer so I thought they were maybe at least quarter or two away. Or am I mistaken?

Joseph Y. Liu

You are absolutely correct. That factor is not a maybe; it’s not a major or even a factor yet. However that I kind of attribute to normally is we should not comment maybe from the weakness of our customer demand.

Dave Kang - Roth Capital Partners

So at this point sounds like you don’t know whether even though you are still the incumbent company you don’t know whether it’s going to be 80/20 or maybe even 60/40? I mean it’s really not clear from Tellabs at this point what the mix will be between you and Optium?

Joseph Y. Liu

We obviously are fighting very hard to preserve our leadership position. This is an ongoing situation and may change quarter-from-quarter.

Dave Kang - Roth Capital Partners

Is that mean that gross margin for ROADMs will even further deteriorate going forward?

Joseph Y. Liu

That’s for sure.

Dave Kang - Roth Capital Partners

On the flip side of that, it is my understanding is that you do sell other, some other components to Fujitsu as a flash wave. So maybe if you lose certain million dollars for Fujitsu taking share of in Tellabs, I do expect you’ll be compensated with you selling non-ROADM business of products to Fujitsu as flash wave. Can you kind of quantify? Is that like a seven figure or is it more of a 560 or a very small amount at this point?

Joseph Y. Liu

The size that we are talking selling into Tellabs inthe $10 million a quarter range, and then we’re selling into Fujitsu a million dollar range, so it’s really not good enough to offset that loss.

Dave Kang - Roth Capital Partners

I know you talked about theChina market, but just wondering if you can just talk about the overall or maybe even just comment on the European market. But what about the domestic market, I know that [inaudible] and even Avanex earlier today expect business to be somewhat kind of uncertain due to the economic slowdown. Can you just talk about your business environment with related to the overall economic picture?

Joseph Y. Liu

Well that’s just divided in maybe 3 or 4 geographic locations, Asia, including Japan, China, Japan, even Korea. I think that the business from our experience so far is still pretty healthy and particularly inthe FTTX market, which is part of the Gigacom OCP business that the momentum, growth momentum and a customer demand particularly this year end. Their year end is end of March. The demand is very strong.

Northern America, I would tend to believe that North America business for Oplink is it’s a flat too. We haven’t really seen real weakness. We have seen weakness during the quarter meaning the December quarter in Europe, part of that weakness has been I only I guided that we have came out of that weakness. We saw some substantial gain or regain of the business in the March quarter. So and then if you want to talk about that Canadian market separately, and I think the Nortel and other companies are doing well.

Dave Kang - Roth Capital Partners

Just lastly on Fujitsu, I believe right now JDSUhas been a supplier of ROADMs to Fujitsu but I, talking to CoAdna, they believe they have a good chance of getting into Fujitsu flash wave and may be kind of take share away from JDSU and I know that you guys use CoAdna for their WSS. Is there any chance that you can kind of maintain the current relationship with CoAdna or can CoAdna go to Fujitsu by themselves?

Joseph Y. Liu

It’s really Fujitsu’s practice. They do not like to deal with solution providers. They like to deal with the vender direct. In this case CoAdna has to deal with the integration type of issue, but I think they benefited from Fujitsu has very strong historically, very strong prefer buying just a component and they do the integration in-house. Those deal is a kind of a worked out.

Operator

This will conclude today’s teleconference. If you would like to listen to replay of today’s conference please dial into 303-590-3000 or 1-800-405-2236 and enter the access code of 11107060 followed by the pound sign.

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