Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Oclaro, Inc. (NASDAQ:OCLR)

F4Q12 Earnings Call

July 31, 2012 4:30 pm ET

Executives

Jim Fanucchi – Owner, Summit IR Group

Alain A. Couder – Chairman, President & Chief Executive Officer, Oclaro, Inc.

Jerry Turin – Chief Financial Officer, Oclaro, Inc.

Analysts

Patrick M. Newton – Stifel, Nicolaus & Co., Inc.

Kimberly Anderson Watkins – Morgan Stanley & Co. LLC

Alex B. Henderson – Needham & Co. LLC

Dave Kang – B. Riley & Co.

Subu Subrahmanyan – TheJudaGroup

Hamed Khorsand – BWS Financial, Inc.

Ameet Prabhu-Salgaonker – RBC Capital Markets Equity Research

Kevin J. Dennean – Citigroup Global Markets

Operator

Good afternoon and welcome to the Oclaro’s Fourth Quarter and Fiscal Year 2012 Financial Results Conference Call. As a reminder, this conference call is being recorded for replay purposes through August 7, 2012.

At this time, I would like to turn the call over to Jim Fanucchi of the Summit IR Group. Please go ahead, sir.

Jim Fanucchi

Thank you, operator, and thanks to all of you for joining us. Our speakers today are Alain Couder, Chairman and CEO; and Jerry Turin, Chief Financial Officer of Oclaro. In addition to the financial press release that was issued today in the Investor section of our website. We have supplemental slides for today’s earnings call. They could be found in the Investor section of the website at www.oclaro.com.

Statements about management’s future expectations, plans or prospects of Oclaro and its business including statements about future financial targets and financial guidance Oclaro’s plans for future operations together with the assumptions underlying these statements, constitute forward-looking statements for the purposes of the Safe Harbor provisions of The Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements concerning financial targets and expectations, and progress toward our target business model, including financial guidance for the fiscal quarter ending September 29, 2012 regarding revenue, non-GAAP gross margin and adjusted EBITDA. Expectations related to the integration of Opnext into Oclaro following the closing of the merger on July 23, 2012, and our market position and future operating prospects, including customer reaction to our merger with Opnext.

There are a number of important factors that could cause the actual results or events to differ materially from those indicated by such forward-looking statements, including the risk factors described in Oclaro’s most recent Annual Report on Form 10-K, most recent quarterly reports on Form 10-Q and Form 10-Q/A, registration statement on Form S-4 and other documents we periodically file with the SEC.

The forward-looking statements discussed today represent Oclaro’s view as of the date of this conference call and subsequent events and developments may cause Oclaro’s views to change. Accordingly actual results may differ materially from those indicated by these forward-looking statements. Oclaro does not intend and is not required to update any forward-looking statements as a result of future developments.

In addition today, we will be discussing non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have and we will file with the SEC and I refer investors to this release.

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

Alain A. Couder

Thank you, Jim. So, today we will focus primarily on the merger. And I will use the set of slides that is on our website. So, this is a very exciting time for Oclaro and the industry. We call it the new Oclaro and the new company in fact is portrayed by the new logo, whereas you probably saw we are keeping the orange color of Opnext and name of Oclaro. And this new Oclaro is really about unleashing the power of speed and light. The power is something very unique, you can control size and intensity of the heat very clearly and you can also with light as the fastest thing now available.

So our employees are highly motivated and we have been traveling around the company between announcement and close as a higher indignity to meet many of the Opnext employee joining us. We also had several meetings with customers and customers have high expectations. They always see us as a very important partner for the future and we also work with our suppliers were we need to better service as a larger company, so quite exciting new environment.

As you know in pictures on the slide number 4, we are now number two in the optical component industry. So, therefore as number two in any good marketing book. A number two is expected to make money, and therefore our focus is very clear. We will focus first on no disruption to customer as we execute the merger and second becoming profitable as soon as possible.

On slide number 5, you have the executive team. As you can see from there, we have three executive joining us from Opnext. Kei Oki, President of Oclaro, Japan; Tadayuki Kanno, I’m not very good at pronouncing Japanese name, but I will learn; and Richard Zoccolillo joining us. We have chosen the best executives from both companies.

And starting day one, we have organized for the new company, which is underway. And we have three key players there, Terry Unter, our Chief Operating Officer will make all the decision regarding Operation; Jim Haynes, our President of Global Business will make all the product development decision for us; and he will now work with our customer to make sure we give them the best service, but also to generate the maximum goals. So these are three key people that I will work with very closely and to whom I can delegate decision in such a way that we grow fast because speed of the execution will be very important. We expect a full integration to take 18 to 24 months and also I passed the normal retirement age, I want to make this integration successful and I committed to my Board and to my team to stay as Chairman and CEO for the next two fiscal years.

So, switching to slide number 6, as new Oclaro is focusing on two markets, the Optical Communication market, which will present about 85% of our revenue and the Industrial & Consumer Lasers present about 15%. If you look at those two markets and their sizes, the Optical Communication was $7 billion market and the Industrial & Consumer that we target about $800 million market. Our market share is only in the 9% to 10% for those markets, and therefore we have a lot of opportunity for growth independent of the market growth itself. And we clearly, we will do everything we can to take advantage of that.

On the page number 7, you have more detail on those two markets. And in particular, Optical Communication split into the core optical market that was focused on the old Oclaro, but this merger between Opnext and the old Oclaro make the enterprise and data center market, very specific market for us. And on the slide, you find all the characteristics that give us leading technology to drive those markets. And one very important element is vertical integration. We really have in all our products, we are ready to grow from the chip level, to the component level, to the module level, to the subsystem level and as a result of that being able to produce the best cost, and therefore the most competitive product.

So on the chip design and manufacturing, we believe this will be a differentiator in the margin producer of the future like it has been in the computer industry in the past, plus this is a demand which we grow our significant investment and therefore the value of entry is very high.

On the Industrial & Consumer, there is basically no product overlap between the ex-Opnext and the old Oclaro, but there is some customer, which are in common. So, we’ll have a larger portfolio and therefore enough opportunity for growth in a market, which is quite stable and more predictable than the telecom market.

We also working with (inaudible) relationship of ex-Opnext and in particular with research lab and the one thing that the Japanese have done in the past 10 years is continue to invest in the research where the western company, we’re out of gas and we didn’t invest too much in research. So, I think that’s going to be another important asset of the new Oclaro.

Switching to slide number 8 and customer, you see that on this slide that the top 16 customer represent a very large portion of our business. So, we clearly will have a very tight relationship with those 15 customers. Cisco is predominant one with significant revenue, and then you have following that the Tier 1 telecom vendor and the Tier 2 telecom vendor.

Customer satisfaction is our number one priority. The good news is that as we have basically a very little product overlap. We will not go to customer and saying, we are going to stop that product and you have to re-qualify from a customer viewpoint. We should be able to make this merger pretty non-eventful. And the relationship with those customer have already evolved with several customer are requested to meet with us before close and after close to make sure that they have a very strategic relationship with us.

Moving to the next slide, which is slide number 9. In order to serve the consumer needs, we have organized right from day one as the company in three business units, which is a combination of the all business unit across old Oclaro and ex-Opnext. And one is the Photonic Component division that will be managed out of Europe and that we’ll also have R&D in China and new product introduction in China, and basically it does the chip level and all the gold-box level of tunable laser photonic integration, modulator, receiver and all that.

Then the second one is module and device business unit, which will be managed out of Japan. So, the ex-Opnext’s Japanese team is taking that and this is a combination of what they were doing, plus business unit of Opnext that was in California, plus some products that we have done in Europe before in the old Oclaro.

And then the third one is the North America, I’m not focusing on the network solution, which is managed out of North America with 90 centers in Shanghai, and new product introduction in China as well, so a very strong thing. I think we have a global footprint that ensure customer proximity and enable co-development of leading edge technology and our worldwide presence will allow us to serve our customer better, and in particular the ex-Opnext didn’t have a strong presence in Europe and the ex-Oclaro, we didn’t have a strong presence in Japan.

So the manufacturing strategy is very clear. This is on slide number 10. We are going to focus the front end, which is in fab and the chip level and wafer level and we will keep that in-house. So we see this as a long-term differentiator and all the element of that will be a key differentiator for Oclaro and a key opportunity to profit on leading edge technology with our custom.

For the back-end, which is putting together the chip into a gold-box, taking of those gold-boxes and putting them into module, and then taking those modules and putting them into subsystems that something that contract manufacturers know what to do. So, we had a strategy to do that. And over the next two years, we will be moving everything to contract manufacturer.

But today, we already are underway. The movement of the Shenzhen manufacturing to Venture and Penang that we announced previously, Zurich back-end is between to a combination of Venture and Penang and Fabrinet in Thailand and now WSS in New Jersey is moving to the Fabrinet, Thailand. And we will also, in the future would be moving the Japanese back-end and the California back-end all as two contract manufacturer. So that’s a significant part of our next year synergies that we’ll discuss in more detail later on.

So moving to synergy and I’m sure, all of you are waiting for that because it is core of what we will be achieving in the next few months. First of all, the fundamental for growth of the market we sell are very strong both in communication and in the industrial. As the demand for more bandwidth, the demand for cloud computing all of that is there, maybe it is not stopping.

One thing which is important is that the carrier of starting to find ways to get the customer to pay for the amount of data that is being transferred. And therefore, they will have more money to spend as a result of that. In fact right now, we have selected customer, which has a significant new design wins and these are mostly in North America and Japan.

So, the market relative for the second half of 2012 is weaker than we announced in the merger in March. And basically if you look at the market data, you could look at it as a flat market with the first half of 2012. So as a result of that, we made some significant decisions and significant work has been happening and we decided to accelerate the implementation of the synergies. The new organization is in place right from day one, and all the reduction in force, which are related to the merger, we have triggered on day one and obviously in accordance with the local law.

The R&D team has already started to implement what we call the infeed meaning that the component done inside and previously brought outside can be introducing the product and therefore leading to a more competitive cost. So as a result of that, we expect the December quarter that we should be able to be around $35 million of annualized synergy and you should remember this is low end of the $35 million to $45 million market that we announced in March as part of the announcement.

So that’s a significant acceleration because at that time we were talking about 18 months to achieve that and now we expect to be able to achieve that by the December quarter, which is starting two months from now. So, Jerry will give you more detail on synergy and give you guidance for this quarter. But we will not discuss the December quarter guidance except probably expected synergy. As I said I’m very enthusiastic about this merger as the enthusiasm of the team grows for Opnext and Oclaro is absolutely understanding.

And I would like to turn to Jerry to give you more detail on the financial numbers.

Jerry Turin

Thanks Alain. Before I discuss the synergies we expect from the merger, let me do a quick recap of the June quarter. Revenue was $104.4 million. Non-GAAP gross margin was 21% and adjusted EBITDA was negative $5 million; all were within our guidance ranges for the quarter.

We ended the quarter with cash, cash equivalents and restricted cash of $62.4 million. During the quarter, we received approximately $19 million in net proceeds from the sale of our building in Shenzhen and $4.6 million in additional insurance advances in connection with Thailand flood losses. We generated approximately $5 million for transfer of assets debenture net of cost incurred. We did not draw additional amount under our line of credit. Our financial press release and the accompanying slides posted in the investor section of our website provide further information on the June quarter financial results.

As Alain already mentioned, we announced the merger several months ago with a target of $35 million to $45 million in synergies at the end of 18 months. As you know, during a merger, there are a number of variables that will drive longer-term synergies, so it can be fully evaluated in debt after the merger closes. Therefore in today’s call, we will outline the key actions that will drive the acceleration of our synergies into the December quarter.

However, we will not be ready today to discuss short and long-term business model target, break-even in revenue levels, part of the right more granular visibility into synergies beyond the December quarter. Since the announcement, we’ve been very focused on driving as many of our deals synergies into the December quarter as possible. As a result, we have already identified opportunities to potentially deliver $9 million of savings in the December quarter improving the December bottom line by $9 million accordingly.

Most of the corresponding actions are within our own control. So, we have a fairly high confidence level in achieving the corresponding results. For example, we’ve already triggered the related workforce reduction actions.

As Alain mentioned, we have already implemented the new organization structure then already recognizes elimination of product development and product management overlap. As a result of these actions and others, we expect to exit December with an R&D run rate approaching our investment model of 13% of revenues. We’ve also aligned our sales forces. We are now one public company instead of two public companies.

Overall, in this same timeframe, we expect to take out close to 20% of SG&A excluding information systems costs. Accordingly, most of the $9 million in savings expected for December will come from operating expenses. This equates to $36 million of synergy savings on an annualized basis realized in our first four quarter together. Now that the merger is closed and while executing on results for the second half of calendar 2012, we’ll also be refining the synergies and the related action plans beyond December and into calendar 2013.

Since synergies were translating primarily into gross margin improvements, (inaudible) and securing the back-end manufacturing strategy, maximizing supply-based leverage with more time to implement and the results also need to work their way through your inventory turns before you realize the positive benefits to the P&L. We do expect significant improvements in these opportunities.

We already believe there is a reasonable probability that the top end of our range will be higher than the original $45 million. How much higher though there are too preliminary yet to comment any more specifically. In addition to synergies, I know you are all interested in relative cash levels of the combined company too. We expect to start with around $110 million in cash (inaudible) taking care and paying at unit costs, which are so quite significant consist of legality, bankruptcy and so forth.

Our target at the end of the December quarter is to hold cash around $100 million. This will include cost in addition of insurance proceeds and will likely include additional borrowings under the line or credit. It would be after paying in the excess of $10 million of restructuring and severance costs associated with this first phase of the merger integration plan. We’ve set our CapEx to run in the range of $6 million to $8 million a quarter during the initial quarters of the combination. So obviously there are a lot of moving pieces on the cash front, but the most important aspect from the cash point of view is to drive our bottom-line break-even as soon as possible.

When comparing our adjusted EBITDA guidance range for September, the magnitude of the $9 million of synergies expected for December of executing the synergies will fairly put us on the right track. That said achieving non-GAAP operating income positive in the December quarter will be a challenge given the current market conditions.

We currently have $25.5 million drawn under our $45 million line of credit. We mean the receivable base of Opnext in the course will result in combined balances we believe can support substantially higher line of credit. We are in discussions to increase the size of the facility accordingly.

In conclusion, we are pleased with the progress we made in bringing the two companies together, with our progress in driving improvements through the December quarter, and with how we are positioned for the long-term. Let me reiterate our guidance for the September quarter ended September 29, 2012.

With that, we’ll conclude the financial results in the Opnext business since the merger closed, which is effective July 23, 2012. We expect revenues in the range of $154 million to $168 million. Non-GAAP gross margin in the range of 17% to 21%. Adjusted EBITDA in the range of negative $17 million to negative $8 million.

Now let me turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line Patrick Newton with Stifel, Nicolaus. Please go ahead.

Patrick M. Newton – Stifel, Nicolaus & Co., Inc.

Yes, thank you Jerry and Alain for taking my questions, congratulations on closing the Opnext merger and on the quarter as well. Jerry, I guess on the gross margin guidance, can you help us understand what’s driving gross margin to that 17% to 21% range. And longer-term, I guess especially what you’re delivering a 49% contribution margin in most recent quarters you will still be thinking about that type of 40% to 50% contribution margin in the merged business?

Jerry Turin

Yes. So to start with the question on September, so what we think about September is really a relatively flat quarter to June and with no real synergies coming into play in particular in the gross margin line. So you won’t see much movement to the upside from a margin point of view from the two predecessor companies in the September quarter. From a combined point of view, the contribution margin is probably more in the 43%, 44% range.

As you mentioned, Oclaro historically has been in the high 40% range, Opnext closer to 40%. So depending on the exact mix in any particular quarter, you’re looking at something more in the 43% to 44% range from an incremental point of view.

Patrick M. Newton – Stifel, Nicolaus & Co., Inc.

All right. That’s very helpful. And I guess on the revenue guidance, I’m trying to understand the mix that you’re anticipating from your core Oclaro business and the expectation of the contribution from Opnext given that they have I guess it will be included for about 75% in the quarter. Can you help us understand how your core business you anticipate is going to trend in the September quarter?

Jerry Turin

I think the answer there Patrick is that’s fairly consistent quarter. Quarter-on-quarter we’re seeing fairly flat market conditions. I don’t know if you want to elaborate on that at all Alain.

Alain A. Couder

Which is in line with my comment I think which is the second abstract and you can look at the (inaudible) being flat and the rest of that being Opnext revenue.

Patrick M. Newton – Stifel, Nicolaus & Co., Inc.

All right, that’s helpful. And then I guess, walking through the synergies you are expecting, it would be very helpful if you could provide us with what kind of a run rate for the cost of your information systems and then also I guess regarding the revenue synergies, what is the reasonable duration you expect for you to be able to design Oclaro components into Opnext modules and I know it varies on a case-by-case basis, but should we expect that the majority of these products that are being redesign need to be re-qualified with customers?

Alain A. Couder

Yes, I think this is a good assumption. In terms of re-qualification, most customers will ask for a qualification. This is why we mention that this will happen only in calendar 2013. The synergies that we are seeing in the December quarter happening because we have been acting extremely quickly and therefore one way in October 1 of this year will allow us to make those synergies happen.

Patrick M. Newton – Stifel, Nicolaus & Co., Inc.

Okay. And I guess just one last question for you, and then I’ll jump back in queue, but Alain, you had a very strong quarter in amplification products. I was wondering if you could just walk through, is that partially due to WSS production reaching pre-flood levels in the quarter or what actually drove that and conversely transmission modules are weak sequentially, if you could walk us through some of the puts and takes in those segments, that would be very helpful?

Alain A. Couder

I think the transmission module is more witnessed in the 40G market that have caused that to happen. In the amplification, it is across the board, basically New York litigation is needed for the 40G and 100G network and therefore it’s creating a stronger market demand.

Patrick M. Newton – Stifel, Nicolaus & Co., Inc.

Thank you, good luck.

Jerry Turin

Thanks, Patrick.

Operator

Thank you. And our next question comes from the line of Kim Watkins with Morgan Stanley. Please go ahead.

Kimberly Anderson Watkins – Morgan Stanley & Co. LLC

Thank you. This is Kim Watkins in for Ehud Gelblum. I just wanted to clarify just on the tail end of that prior question, are you now back at pre-flood levels in terms of all your product lines at this point?

Alain A. Couder

We are – our capacity, our production is back to pre-flood level but we have not necessarily got yet the level of older than revenue of pre-flood because our customer had to go to alternate sources and therefore they are still giving some business to them. So overtime we cover that, but we are – you still get numbers on the given product we are not there, but in time of production capacity, yes, we are back to pre-flood capability.

Kimberly Anderson Watkins – Morgan Stanley & Co. LLC

Next, I’ll present my next question which is it sounds like last time you gave guidance and you talked about reaching operating profit breakeven in the December quarter, and now you are talking about that being a challenge given the demand environment. What has changed in the last three months or since the merger was announced, I guess four months now and the demand outlook, is it related to the flood situation and customers looking elsewhere, is it primary demand, if you could just talk about that and maybe in that regard to discuss linearity throughout the quarter.

Alain A. Couder

No, the flood is absolutely not in clarity – there is no our flood implication in that. The flood is something that has happened last year and we have made the capacity. It is much more the market condition and since March, we have seen the Chinese market slowdown as European situation is not recovering. As I said, we have some selected customers in North America and Japan that I think very strong design win and that are approaching. But the focus from customer in term of demand for the second half have been going down in a significant fashion between March and now August, which is almost five year – five months later.

Jerry Turin

And I think you’re also seeing something very similar, a lot of the technology companies that have been announcing in the last week or so. So the way they have articulated, there it would be – it’s probably fairly consistent with what we’re seeing in the world right now. And I expect this probably going to be similar across the optical space as other folks come out as well.

Kimberly Anderson Watkins – Morgan Stanley & Co. LLC

And then, just regard to linearity throughout this quarter, going to see that in your linearity the order growth you know kind of?

Jerry Turin

I think we’ll see fairly typical linearity, which is more revenues backend loaded within the quarter, but I’m not sure. Certainly at this point, we can’t predict what order flow looks like as we move through the quarter and…

Kimberly Anderson Watkins – Morgan Stanley & Co. LLC

I’m sorry, Jerry and it’s the last quarter. I just want to get a pace of the business?

Jerry Turin

Well, I don’t think there was any trend in the last quarter that either accelerated towards the end or decelerated early on. I think it was fairly consistent with what we’d expect in the steady quarter.

Kimberly Anderson Watkins – Morgan Stanley & Co. LLC

Okay. And then I just have one more clarification on cash. I thought that I heard you say anticipating receiving additional insurance proceeds if you could just classify what those are and then could you also say in that $100 million cash at year end. And then could you also say that assumes an additional drawdown on the line of credit, if I heard that correctly.

Jerry Turin

Yes. So from an insurance point, it’s very difficult to be precise. We are working and very closely with the insurance on our business interruption claims now. Opnext also has losses associated with the flood. There is some significant amount of play but these precise to time and/or the amounts to each one are little bit tricky.

At the same time, we can say that we expect to draw more under our line of credit and how much we drive around the line of credit or exactly how much we collect from insurance is yet to be seen but those are potentially two levers that that we relate to one another in determining how much line of credit we have to draw perhaps it will be a function of how successful we are in maximizing insurance proceeds during that period but it’s just – as I said since the start of the flood, it’s really difficult to predict and to laid out on a specific timeline what those proceeds look like.

Kimberly Anderson Watkins – Morgan Stanley & Co. LLC

Thank you very much.

Operator

Thank you. Our next question comes from the line of Alex Henderson with Needham & Company. Please go ahead.

Alex B. Henderson – Needham & Co. LLC

Hello gentlemen.

Jerry Turin

Hi, Alex.

Alex B. Henderson – Needham & Co. LLC

Assuming you could give us a couple of pieces of data, the first one was when you do this post transaction guidance for the September quarter, you talked about your EBITDA number in your guidance. And we don’t really have the components of the merged company from Opnext that would be in there. Can you give us a little bit more clarity on what your assumptions are between the operating income line and the EBITDA line?

Jerry Turin

From a reconciliation point of view, essentially, the difference is depreciation.

Alex B. Henderson – Needham & Co. LLC

Yeah. And what is the depreciation of the blended company for the two-month period? We don’t have that data so…

Jerry Turin

That’s – I would look to the run rate for the two companies historically, Alex. We can’t be any more precise, because part of the purchase accounting for the deal will reset some of the asset values on the Opnext side and may reset the depreciation periods remaining for those assets. So, as of this time, we actually don’t have a finalized number ourselves for what the depreciation for that period for them is.

Alex B. Henderson – Needham & Co. LLC

Okay. And then, the second question along the same lines, I assume the two-thirds of a quarter for Opnext, is there any portion of that that is being hurt by the accounting rules that making market to cost – causing a reduction in the realization of the revenues of Opnext in the quarter?

Jerry Turin

There shouldn’t be other than any shipments that they’ve made in the early weeks of July before we closed.

Alex B. Henderson – Needham & Co. LLC

So, there is no carry-on inventory commitments or order commitments, anything of that sort. The guidance – you talked about the guidance for the Oclaro, parent, as a whole. Can you talk a little bit more about what the sequential transition from the June quarter to the September quarter might look like relative to the Opnext piece of the business? Is that also expected to be fairly flat on a full-quarter basis?

Jerry Turin

I think that’s a fair assumption, Alex.

Alex B. Henderson – Needham & Co. LLC

Okay. And then, one last question on the product side. Can you just give us any information on whether your wave selective switch business produced any incremental revenues in the quarter or was it flat or – a little bit of thought on that?

Alain A. Couder

I think, in the June quarter, the WSS demand has been fairly strong and we expect a similar situation in the second half.

Alex B. Henderson – Needham & Co. LLC

So, you’re seeing a pickup in your WSS sales?

Alain A. Couder

Yeah.

Alex B. Henderson – Needham & Co. LLC

Okay. Thank you.

Operator

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

Dave Kang – B. Riley & Co.

Thank you. Good afternoon. The first question is I know that Opnext shared R&D with Hitachi in the past. So, can you just go over that relationship going forward?

Alain A. Couder

Yeah, this relation will continue. Hitachi management is continuing the relationship with us and (inaudible) Hitachi and we will clearly continue that.

Dave Kang – B. Riley & Co.

Okay. And then, Opnext management talked – you should talk about in recent quarters about the Chinese customers developing their own 40G products. So, what’s the latest on that? Has that trend changed or...?

Alain A. Couder

No, this trend has not changed and that 40G now we have the – between the two company, we have the full offering, that mean that on 40G coherent, Opnext didn’t have a 40G coherent. On the DPSK, we have been very successful and Opnext was more successful on the QPSK. So, the combination of the two is strong. Yes, some Japanese – some Chinese company are developing their own, but we are also a component supplier, so we see that also as an opportunity for us.

Dave Kang – B. Riley & Co.

Okay. And the last question is regarding R&D, I mean now that you have Opnext products as well, which products will receive most attention in terms of R&D going forward?

Alain A. Couder

We have a very large portfolio, so it’s not which product. That would be a long discussion. But clearly, our focus is on playing a major role in the 40G, 100G deployment from a core optical network viewpoint. But we also see a major opportunity in the enterprise data center with a combination of chip technology from Oclaro and many, many year of expertise of pluggable module packaging from Opnext. And the result of that, we see a lot of interest from many customers. So, that’s the two major focus that we’re going to have on the core optical network.

Jerry Turin

Yeah. And just – I’m sorry Alain. And Dave, just to emphasize something Alain said in there is the component and chip level differentiation and innovation is just as important as the module subsystem level since you’re feeding one into the other, and in combination that’s your competitive advantage. So certainly, supporting the components side of the business as well as going after those higher (inaudible) is important.

Alain A. Couder

Yeah. This is something, which I would like to elaborate on, because what Opnext was – I think, they were having difficulties, and basically they were not a component supplier in terms of tunable laser or modulator and receiver. And therefore, when a customer was developing themselves their 40G module, they would lose the business completely. It’s very different from us, because we are a component supplier. So, if a customer choose to do their own module, we still sell to them components. And our strategy at Oclaro has always been to do it that way, that means to sell at the components level, at the module level, and at the subsystem level, and we’ll continue to do that. And we’ll continue to partner with customers, whether they do their own modules, their own subsystem, or whether they buy from us. So, that’s an important element, because in this telecom market, one of our customers win the business with one guy, the other one loses their business. But in the end, we always find a way to provide technology with whoever wins.

Dave Kang – B. Riley & Co.

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Subu Subrahmanyan The Juda Group. Please go ahead.

Subu Subrahmanyan – The Juda Group

Thank you. I wanted to go back to revenue trends and if you – if I look at your guidance for next quarter, is it fair to assume that it assumes flattish revenues for both Oclaro and Opnext, and just had two months – given kind of only two months contribution from Opnext, it’s about $50 million from Opnext and similar $110 million from Oclaro. Is that a fair calculation, what’s embedded in your guidance?

Alain A. Couder

Well, I don’t think we really want to split that. This is something that we’re not going to give the detail down to the $1 million. I think we gave an overall comment before that would be good enough.

Subu Subrahmanyan – The Juda Group

And that is that in September you expect the demand trends to be flat. I’m sorry, if you commented on December at all, I mean, you said, second half forecasts have been coming down, but are you, at this point, expecting some seasonal improvement in December or is that still looking relatively flat?

Alain A. Couder

We will discuss guidance of December in the October quarter. I think it’s very premature to discuss that now.

Subu Subrahmanyan – The Juda Group

Understood. And the $9 million in OpEx savings for the December quarter, do you expect that to be kind of run rate exiting December or do you expect to realize that for the full quarter in December?

Jerry Turin

No, we expect to realize that for the full quarter, Subu. That means that for the large degree, starting 1st of October, the corresponding savings will be in place.

Subu Subrahmanyan – The Juda Group

Understood. And in terms of the R&D savings or the OpEx savings, I think you mentioned this, but I couldn’t fully understand, are there particular products that you identified as having the most kind of overlapping potential R&D savings from?

Alain A. Couder

Yeah. I can give several examples. For instance, we had the two 100G products, and on those two 100G products, we don’t need two. So, in that case, Opnext was more advanced that we were. So, we’re going to keep the Opnext product, and then leverage work that has been done by the ex-Oclaro team to engineer Oclaro component into the 100G module. We had a similar situation on tunable XFP, but it was the other way around.

Oclaro was more advanced than Opnext, so we’ll keep that. And we have already informed our customer of all those sureties, but these are the new product. If you look at the old product, basically, we will continue to produce the (inaudible) product, and they’re ready to overlap. Those two products are the major overlaps and that’s it. So, from a customer’s viewpoint, customers have already been informed and I’m not aware of any problem with any customer at this point in time.

In fact, we look at the customer opportunity different way. It’s something that we cannot predict for the next six months. It’s too early. But over time, we are going to present to each customer a [merged] product line. And in several customer, Opnext was weaker than we were or the other way around, and they’re presenting a broader portfolio. I think we have an opportunity for increased penetration of many of the customers and the potential opportunity for growth. But we will discuss that when we understand this in more detail. It’s premature to do that today.

Subu Subrahmanyan – The Juda Group

Got it. Thank you very much.

Operator

Thank you. Our next question comes from the line of Hamed Khorsand with BWS Financial. Please go ahead.

Hamed Khorsand – BWS Financial, Inc.

Hi. I just wanted to get an understanding for the September quarter, are you expecting much change in the product mix?

Jerry Turin

I don’t think, we see any dramatic change in the product mix, Hamed.

Hamed Khorsand – BWS Financial, Inc.

Okay.

Jerry Turin

Fairly consistent patterns.

Hamed Khorsand – BWS Financial, Inc.

So, why are you providing gross margin guidance of 17% to 21%, when June quarter gross margin was 21%?

Jerry Turin

We’re combined, we’re a new company now. So, we have – so, of course, to the extent, we’re going to have a substantial portion of our products being former Opnext products. We certainly have a different mix quarter-on-quarter from that perspective. But looking at two standalone companies, we don’t expect significant mix change from what they would have delivered as standalone companies in June.

Hamed Khorsand – BWS Financial, Inc.

Okay. And from going out to the January quarter, sorry, not January, the March quarter in 2013. If we assume that it’s still a flat market and what are you projecting from – as far as all these savings, would you be profitable at that moment or are you still going to be lingering near the break-even point, taking in consideration $9 million in savings?

Jerry Turin

Well, I mean, you take into consideration the $9 million in savings, incremental savings into March, there will be some that continue into March. But when we think in terms of the gross margin improvement areas, premature now for us to quantify exactly how much will be coming into the March quarter. But certainly, when you think about the sort of things that we talked about today and that Alain’s talked about, and I think you guys understand some of the value proposition of [integrating] lasers and modules, sorry, modulators into a vertical product, accelerating some manufacturing transitions to Asia, things like that are fairly significant dollars. So, even though we haven’t quantified them, certainly the momentum continues now into 2013 from a synergy saving point of view.

Hamed Khorsand – BWS Financial, Inc.

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Mark Sue with RBC Capital Markets. Please go ahead.

Ameet Prabhu-Salgaonker – RBC Capital Markets Equity Research

Thank you, gentlemen. This is Ameet Prabhu calling on behalf of Mark Sue. Looking beyond synergies, could you discuss your thoughts on the longer-term margin trends for Oclaro, in particular, and industry in general? Do you expect some of the pricing competition to subside in calendar 2013, and should we look at any margin improvements or should we look at the margin improvements as a multi-year process?

Alain A. Couder

Yeah. Well, first of all, we discussed the margin improvement will be primarily the result of two things, which is what we call the in-feed that in the use of Oclaro component into Opnext product, and then also a couple of Opnext components into Oclaro product. So, this is one element.

The other element of gross margin improvement will come from moving manufacturing to a low-cost region, so mostly from Zurich, California and Japan to low-cost region and moving them at the same time to contract manufacturers. That’s the two major element of gross margin improvement.

Those will happen over the next 18 to 24 months. But during calendar 2013, we should see – we expect to see a gradual improvement. We need to get to know much better the various formats. I know that we have been one company for one week. You need to give us a little more time in such a way that we can have the better clarity on how quickly we can improve the gross margin. But clearly, over the 18-month period that we mentioned, Jerry already mentioned that we think that we will reach to the $45 million in revenue synergy and maybe better.

Ameet Prabhu-Salgaonker – RBC Capital Markets Equity Research

Actually, my question was more in terms of the industry margins. So, essentially, moving – looking beyond what already that are achieving from synergies?

Alain A. Couder

Yeah. I think that we’re now number two in the industry. And if you look at the business model that the leader in the industry can achieve, we certainly cannot tell you when we can achieve it. But when we have the size and the scale, we’ll achieve that over time, but we cannot give you any position on that, but that’s clearly our goal.

Ameet Prabhu-Salgaonker – RBC Capital Markets Equity Research

Okay. And would you discuss sort of the adoption trends that you’ve seen in 100 gig and sort of how does your 100 gig portfolio stack up to the merger?

Alain A. Couder

I think, the 100G is clearly becoming adopted in the various form. One is for the long haul in the term of [clear navigation], but we also have the so-called 4x25, which is so-called, so there is two (inaudible) going after this type of market. But we don’t expect any volume production until 2013.

40G is not very strong, but it is deploying in the steady fashion, and 10G continue to be there. In fact, 10G will continue to be there for a long time in the access market and in the metro market. In fact, I was discussing with one of carriers last week, and now they’re going to start deploying a sequel connection in – just between the wireless antenna of their cell phone network and the local hub. And this will use 1G to 10G speed. They don’t need more than that. So, we’re going to see a 10G market staying around for quite a while.

Ameet Prabhu-Salgaonker – RBC Capital Markets Equity Research

Okay. Thank you, gentlemen.

Operator

Thank you. Our next question is from the line of Alex Henderson with Needham & Company. Please ago ahead.

Alex B. Henderson – Needham & Co. LLC

Yeah, I was wondering, we’ll just go back a little bit on the $9 million in cost savings that you expect to generate by the end of the September quarter timeframe. So as you go into December, I guess, it’s in there the whole quarter. I’m trying to determine what base I should be thinking about relative to that $9 million coming out. Obviously, we can’t use the R&D and SG&A levels that are in the September guidance, because that’s only two-thirds of the quarter for Opnext.

Would it be reasonable to jug up the revenue rate to the December expected rate assuming the flat sequential quarter, and use that – the same percentages that we will be using for the September quarter on that incremental piece of revenue to get the baseline, which I think, if we do that, mechanically, we’ll get you around – an OpEx number around $55 million to $60 million? Is that the kind of the base that we’re taking the $9 million off of?

Jerry Turin

Well, I think you’ll have an Oclaro base from the June results. And I think, you’ll have, yeah, an Opnext base, perhaps, from their March results. Yeah. And we obviously won’t be releasing – publically releasing June results, because they won’t be audited and so forth. But from a high-level point of view and I expect you’re familiar with Opnext to start with, there’s probably a baseline that existed in models for Opnext and thinking about as a starting point with other June as a starting point and then building the synergies on top of that, probably, is reasonable an approach as any.

Operator

Thank you. And our last question comes from the line of Kevin Dennean with Citigroup. Please go ahead.

Kevin J. Dennean – Citigroup Global Markets

Great. Thanks very much. I apologize in advance if I missed this. But I think, I’ve heard a couple of times you mentioned that demand has deteriorated over the last three months. Can you give us a sense for how that progressed? Did we not see kind of the pick up that you’d expect through the June quarter or were we seeing continuous kind of cut or push-outs to your order book?

Alain A. Couder

I think we have seen the selected pick up from selected customers in North America and in Japan. But at the same time, we have seen no recovery in Europe, Europe is, for the reason you know, is still quite free, and we have seen a slowdown in China, which we were not expecting in the March timeframe. That’s basically where we are. But the fundamental demand – and I was discussing about the carrier here. The fundamental demand is absolutely there. So, the carriers have no choice, but to invest in long haul and metro. And the enterprise data center needs are going. So, I expect the business to be very solid.

In fact, if you look at the story of the industry over the past 10 years, there have been ups and down, but a growth rate of around 10% has been there over the past 10 years. So, some time, it’s flat and then there is a pick up, and all of that. But I don’t see any reason for this growth to slow down, because as I said the fundamentals of video, transmission and cloud computing and all of that is there and we’re not going to stop our kid to use our cell phone and send images and all that.

Kevin J. Dennean – Citigroup Global Markets

Yeah.

Alain A. Couder

So, that’s right.

Kevin J. Dennean – Citigroup Global Markets

Alain, just digging into your comment on China slowing, obviously, your Chinese OEM customers, Huawei and [Fuji], they participate in a fairly large export market. So, when you say that China demand is slowing, do you have a sense – are you referring to demand from your Chinese OEMs or are you trying – are you signaling that there has been some sort of a slowdown in Chinese telco build-outs?

Alain A. Couder

China telco build-out.

Kevin J. Dennean – Citigroup Global Markets

Okay. And then, one last question for me, when we think about the September guidance, should we think about within telecom portions of kind of core Oclaro, any differentiation among the product sets, anything that’s standing out as being particularly unique or not seeing an improvement?

Jerry Turin

I wouldn’t say so. Jim, certainly as Alain pointed out 40-gig, the module level was a little bit slow, a little bit carrier-specific likely, but I’m not sure there is a similar trend that stands out in September.

Operator

Thank you. And at this time, I’d like to turn the conference back to Jim Fanucchi for any closing remarks.

Jim Fanucchi

Okay, operator, and thank you, everyone, for joining us today. We look forward to speaking with you again when we report our financial results for the September quarter. Thank you.

Operator

Thank you. Ladies and gentlemen that does conclude the Oclaro fourth quarter and fiscal year 2012 financial results conference call. We thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Oclaro's CEO Discusses F4Q12 Results - Earnings Call Transcript
This Transcript
All Transcripts