Oplink Communications, Inc. Q3 2008 Earnings Call Transcript

Oplink Communications, Inc. (OPLK)

Q4 2007 Earnings Call Transcript

May 1, 2008 5:00 pm ET

Executives

Gina DeBoutez – IR, The Blueshirt Group

Joe Liu – CEO

Shirley Yin – CFO

Analysts

Michael Coady – B. Riley & Co.

Patrick Lin – Primarius Capital

Patrick Callery – Piper Jaffray

Steven Weimer – Thomas Weisel Partners

Chris Blackman – Empirical Capital

Macon Rudisill – Keane Investments

Presentation

Operator

Good day, ladies and gentlemen and welcome to today's Oplink Communication's third quarter 2008 conference call. This call is being recorded. Now, for opening remarks and introductions, I would like to turn the call to Ms. Gina DeBoutez. Please go ahead ma'am.

Gina DeBoutez

Good afternoon, ladies and gentlemen. Thank you for joining today on today's conference call to discuss Oplink's third quarter 2008 financial results. This call is being simultaneously webcast on the Investor Relations section of the company's corporate Web site at investors.oplink.com. Joining me on the call today are Joe 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 the 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 the result of new developments or otherwise.

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

Joe Liu

Thank you, Gina. Hello and thanks for joining us today as we report our third quarter financial results, which were slightly better than our pre-announcement in late March. Consolidated revenue for the third was $40.8 million, substantially down as expected over the prior quarter. We experienced a decline in ROADM revenue and shifted OCPA manufacturing to China in the third quarter, resulting in an overall reduction in revenue. We also terminated selected OCP power lines that carry a negative margin and as a result did not have their revenue contribution in the third quarter, as compared to the second quarter. Year-over-year, revenue in the third quarter increased 47.8% over the same period last year, which did not include results from OCP.

Gross margins and operating margins in the third quarter improved over the prior quarter, as we realized cost efficiencies through the reduction in head count, facility restructuring and other cost cutting measures that we took within the OCP business. We made good progress in the transfer of manufacturing to China but still have another quarter of transitioning to complete this process. We shut down the OCT U.S. manufacturing as of March 31 and some of our equipment is now in transit. As a result, our manufacturing capacity will experience limitations due in the first quarter. As a result, our manufacturing capacity will experience a limitation during the first quarter.

In the third quarter, Huawei and Tellabs were our 10% customers on a consolidated basis with good contribution also coming from Nortel, Alcatel Lucent and Cisco, mostly for Motorola and Maxis [ph] products. We are planning for fourth quarter revenue to be in the range of $33 to $37 million with additional cost reduction already underway, we believe that lower revenue in the fourth quarter should not significantly impact non-GAAP net income. As compared to the third quarter, we expect to report non-GAAP net income in the range of $0.08 to $0.12 per share. Although we are in the midst of a challenging transition and integration, we are seeing good progress and really new design opportunities for the future. We expect that the revenue declines we are experiencing will bottom out in the fourth quarter and that our business will start resume revenue and margin growth beginning in fiscal 2009.

With that, I will turn the call over to Shirley for a detailed review of the third 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 third quarter of fiscal 2008. As Joe discussed, consolidated revenue was $40.8 million, as compared to $48.9 million reported in the prior quarter and $27.6 million reported in the third quarter of 2007, which did not include OCP. GAAP net loss for the third quarter was $3.9 million or $0.19 per share. As we discussed in our pre-announcement at the end of March, our GAAP results for the quarter included $6.4 million provision for access and obsolete inventories, primarily related to OCP products. In addition, GAAP results include $1.3 million in stock-based compensation, $547,000 in transitional costs for contract manufacturing, $976,000 in amortization of intangible assets and $69,000 for impairment and other charges, as well as $2.4 million gain on the sale of assets and a benefit of $371,000 adjustments for merger fees.

Consolidated non-GAAP net income for the third quarter was $2.5 million or $0.12 per diluted share, excluding the above mentioned charges. Hereafter, I will only discuss our results on a non-GAAP basis. Our consolidated non-GAAP gross margin was 25.2%, as compared to 23.9% in the prior quarter. In the third quarter, we realized the benefits of cost cutting measures and discontinued negative gross margin product. In addition, revenue in the quarter included a lower mix of ROADM revenue.

In the fourth quarter, we expect continued improvement in gross margins, as we complete the transfer of OCP's production to China and realize an even lower mix of ROADM revenue. Consolidated operating expenses in the third quarter declined by approximately $1.1 million over the prior quarter as we realized a full quarter of benefits from our cost cutting initiatives. We expect operating expenses to decrease slightly in the fourth quarter.

R&D expenses were $3.3 million in third quarter, down from $3.6 million in the prior quarter. This was primarily related to head count reductions in OCP. We expect R&D expenses to rise in the fourth quarter, as we accelerate our R&D efforts and continue to invest in new product initiatives.

Sales and marketing expenses were $2.5 million, down from $2.8 million in the prior quarter. G&A expenses in the third quarter reduced to $3.1 million from $3.6 million in the prior quarter. Interest income for the third quarter was $1.5 million, down over the prior quarter as a result of lower cash balances and declining interest rates.

Tax provision for the third quarter was $265,000 as we expect it to remain at approximately the same level in the fourth quarter. Shares outstanding at March 31 were 20.6 million. During the quarter, we had slight repurchase activity as we completed our open market repurchase program. Weighted average fully diluted shares outstanding were 21.2 million for the quarter and we expect only slight increase in the coming quarter.

Turning to the balance sheet, our cash balance increased nicely to $138.8 million from $117.3 million in the prior quarter. We closed the sale of the Woodland Hills facility and sold the wafer fab equipment from OCP Asia in Taiwan. Last quarter, we told you that OCP would stay in Woodland Hills until we find an alternate, less expensive site. Recently, we signed a lease for a smaller, less expensive space in nearby Calabasas. This is expected to save additional costs in fiscal 2009. Accounts receivable at the end of the quarter was $33.3 million with DSO at 74 days. Consolidated inventory at the end of the quarter was $25.6 million, compared to $32.5 million in the prior quarter, reflecting the write down of the OCP inventory. As Joe discussed, we expect revenue for the fourth quarter to be in the range of $33 to $37 million, as a result of the continued decline in ROADM revenue.

We expect GAAP earnings to be about break even, more specifically in the range of a loss of $0.03 to an income of $0.01 per diluted share. Non-GAAP net income per diluted share is expected to be in the range of $0.08 to $0.12, excluding amortization of intangible assets, stock-based compensation, charges related to Oplink's acquisition and integration of OCP, as well as other non-recurring charges. We look forward to providing an update on our business in late July as we report our fourth quarter 2008 results. Paul, please go ahead with the Q&A session.

Question-and-Answer Session

Operator

(Operator instructions) And we'll take our first question from Michael Coady with B Reilly.

Michael Coady – B. Riley & Co.

Thanks, good afternoon.

Shirley Yin

Hi, Michael.

Joe Liu

Hi, Michael. How are you?

Michael Coady – B. Riley & Co.

Good thanks. How are you?

Joe Liu

Very good.

Michael Coady – B. Riley & Co.

Would you break out in greater detail the revenues from Huawei and Tellabs? And then, within Tellabs break it down further in terms of ROADM and non-ROADM?

Shirley Yin

Well, on a percentage on (inaudible) they both Tellabs and Huawei, they both were more than 10% for the current quarter. And normally we don't break out further in terms of specific percentage.

Michael Coady – B. Riley & Co.

Okay. You've typically given some idea of what the ROADM revenues were within the Tellabs mix over the last few quarters. Could you provide that detail?

Shirley Yin

Well, the ROADM revenue is about 24% of the consolidated revenue.

Michael Coady – B. Riley & Co.

Okay. And then looking forward, I know you have had some design wins with other Tallab products. Could you talk about the outlook for those, maybe what those were in the quarter? And then what the potential might be as you look out a couple of quarters?

Joe Liu

We don’t have clear visibility in terms of a couple of quarters out but however, we have been qualified in the amplification area, in the performance monitor area, circuit pack area. So, it's really up to – it's up for the customer to ramp the specific product.

Michael Coady – B. Riley & Co.

Okay. Fair enough. I’ll just ask one more question and then jump off or two more questions, quick ones. Joe, you said that you expect the fourth quarter to be at bottom in terms of revenue, and then for expansion thereafter. Given to what appears to be a limited visibility, I guess what gives you comfort in making that statement?

Joe Liu

Well, largely we are concerning with the OCP integration and the OCP will continue – we are shutting down the U.S. manufacturing, the last piece of the manufacturing only as of March 31. So, we are in transition to China. And that's challenging. Some of the OCP revenue may continue to be very stressed for the quarter. And then beyond that, I think the entire team is relaxed after the integration is completed. So, the specific OCP revenue will probably be the lowest in the June quarter and the Oplink business, I think the ROADM that we anticipate some further erosion in the quarter and level off from there. I would say probably level off at somewhere around $5 million per quarter.

Michael Coady – B. Riley & Co.

Okay. Thanks. And then in the pre-announcement in late March, you talked about Europe being soft and I didn't hear that comment in the prepared remarks. You are talking about the June quarter. How is this – what was the impact in the March quarter and how do you see that progressing in the June quarter?

Joe Liu

Actually our original forecast for the European businesses is higher. And in the earnings calls, we sensed that the growth is not there, I mean it’s not in the quarter. The number indicates that the European business in the quarter was flat from a very low December quarter and the outlook for the European business, I think is just slow growth.

Michael Coady – B. Riley & Co.

Okay. And let me just sneak one more question in. Thanks, Joe. In terms of the cash on the balance sheet, I know the authorizing a share buyback would be a Board level decision. When is the next Board meeting and do you have any sense of if the Board or you and the Board are leaning toward that or another use of cash? Thanks a lot for your time.

Joe Liu

We are going to have a Board meeting in a couple of weeks. And as always, this is – we just completed the $40 million buy back. And I think that we will seriously consider another one in the coming Board meeting. However, it is not up for me to make that indication one way or the other.

Michael Coady – B. Riley & Co.

I understand. All right. Thanks again.

Joe Liu

Thank you.

Shirley Yin

Thank you, Michael.

Operator

(Operator instructions) And we'll take our next question from Patrick Lin with Primarius Capital.

Patrick Lin – Primarius Capital

Hi, guys.

Joe Liu

Hi, Patrick, how are you?

Shirley Yin

Hi, Patrick

Patrick Lin – Primarius Capital

I'm calling in and I haven't seen the full press release. But I did see some of the headlines about the balance sheet, so just to follow up on the B. Riley questions here. It looks like market cap of Oplink about $200 million and then $140 million roughly, let's call it in cash, so you get about $60 million enterprise value for – I don't know if you want to call it $160 to $200 million in revenues. Can you give us any more color? Again sorry about not having all the details, but in terms of whether there is other variables on the balance sheet that could either make that number either higher or lower. In other words, whether there's inventory or accounts receivable or anything else that would make the numbers any different?

Joe Liu

Well, we hold, as you probably know, that we hold several pieces of real estate particularly in the area that we probably have $35 million on the book. The real estate project value itself worth that, in addition to the capital equipment.

Patrick Lin – Primarius Capital

Okay.

Joe Liu

But that's my assessment of the real estate holdings that we have. One in Fremont, California about 60,000 square foot, and the facility in Zhuhai is about 600,000 square foot. It's a manufacturing site along with a dormitory. And then also we recently acquired 600,000 Class A office building in Wuhan, China that consumes about $4 million U.S.

Patrick Lin – Primarius Capital

Okay. So, if you mentioned PP&E in real estate and do we need to factor in anything for inventory or is that not that significant?

Shirley Yin

Well, Patrick. It is always hard to predict the balance sheet items but from what we know right now, it looks like inventories and accounts receivable, all these current accounting will probably stay at the current levels.

Patrick Lin – Primarius Capital

Okay. Maybe my overall big picture question then is, based on current market values for PP&E, real estate and then cash, what is the likely or the range for tangible book value because again, if you add in another $35 million plus to the $140 million in net cash, we are almost up to the point where there is almost zero value given for the business itself, right? Unless, I am missing something.

Joe Liu

I guess your assessment, from your angle is correct.

Patrick Lin – Primarius Capital

Okay. No, the point is I'm not – there's no math that I'm missing here in this calculation in terms of the market cap versus the tangible book?

Joe Liu

Yes.

Patrick Lin – Primarius Capital

Thanks. And in terms of visibility and so on and Q4 being the bottom, can you just add a little bit more color to what some of the customers are saying, as well as what you see in terms of the competitive outlook?

Joe Liu

Well, let me give you from the two different angles, of the Oplink angle and the OCP angle. The Oplink angle, we are experiencing some competition on the ROADM front, that's why we are taking the – we'll probably take, hopefully a 50/50 splitting position at our customers’ place. And that would be obvious that – at the peak, we had $14 million quarterly revenue and this would probably be a further, as we indicated further shrinking down to maybe as low as $5 million. That's challenging itself.

However, the other new design that we had, I mentioned to you on the amplifier front, on the circuit pack and other area. That's exciting that we already have some preliminary revenue and they are ready to ramp those product lines once we get the purchase order.

On the OCP front, as you know, we are experiencing a lot of challenges of shutting down U.S. operation in a hurry and trying to outsource that to either CM or our own facilities in China. And the first batch of transfer was completed and was somewhat very successful is the OCPA operating, which is from Taiwan to China. That is completed and we already are seeing some partial [ph] benefits from that and we are seeing production ramping through our own China facilities. And as far as from the Woodland Hills transfer to a contract manufacturer, SAE, the operation is still underway and we experienced some difficulties coordinating that. But I think that we will be able to weather through the transfer during the June quarter. And that's why we gave a conservative number on the overall OCP revenue. That's the ballpark of the current situation.

Patrick Lin – Primarius Capital

Okay. And just in terms of the competitive landscape. I know you've talked about some of your competitors in the past. Just curious what your perspective has been as you have been competing in this business now for many, many years? Has it gotten harder, easier, about the same, are there people who are focusing more or less in this space?

Joe Liu

Well, I think the competitive landscape hasn't changed and we continue to believe that we are one of the competitive capacity players. And we continue to get favorite consideration when for volume capacity. And we are not viewed as clearly the technology leader but we are a capacity leader. So, with that in mind, I think that the new business that we engage on the OCP front and the model is very similar, that we on hand focusing on the quick turning and on the other hand we look at – we're focusing on the capacity play. So, the competitive landscape, I think, with the macro economic condition, people are cautious. They're more cautious on spending and they are trying to spend their buck more – getting more out of their buck. So, I would say the overall environment is very competitive.

Patrick Lin – Primarius Capital

Okay. Great. Thanks for the update and we'll look forward to hearing more in the future.

Joe Liu

Thank you, Patrick.

Shirley Yin

Thank you, Patrick.

Operator

Next question comes from Patrick Callery with Piper Jaffrey.

Patrick Callery – Piper Jaffray

Hi, guys. Good afternoon and thanks for taking my call. I missed a couple of the things in the beginning. Did you talk a little bit about some of the traditional Oplink passives business and how that came out in the quarter and what's the outlook on the passive side?

Joe Liu

The traditional Oplink passive has two (inaudible). One is componentry and the other one is OMS. I think collectively they did approximately $20 million, which is equivalent to our historical number, maybe slightly lower than the historical number but not much. The outlook for the OMS and the componentry, I think the OMS front, I mentioned, that we have a lot of design wins that are ready to ramp. So, I would tend to think that the ramp will happen part of that in the June quarter and a lot of them will be in September quarter. Starting from September quarter, we will see some of the revenue growth. And that's why I give a very positive guidance, thinking that June quarter would be the worse quarter and we will see more business coming out of the OMS side of the business.

Patrick Callery – Piper Jaffray

Okay, great. And then you mentioned one of the new products, specifically an amplifier circuit pack product. I wonder is that basically built ground-up from Oplink technology or are you guys have technology partners there?

Joe Liu

Yes, it is a combination of a few technologies but I think in this case, the engine is an Oplink engine. The core engine is Oplink.

Patrick Callery – Piper Jaffray

Okay, great. And just real quick, about gross margins, what's your medium or longer-term outlook on getting the gross margins back up to where you have been historically?

Joe Liu

Well, on the Oplink side, we have been seeing in the past greater than 30%, and on the OCP front, their historical number going back two, three years, was north of 30% and recently as low as single digits. So, we model our OCP business in the neighborhood of 25% over time and our Oplink business north of 30%. And so, on a blended basis, we give a model at $50 million top line, 30% gross margin and maybe 16% operating expense. So, net of tax would be in the low teens.

Patrick Callery – Piper Jaffray

Great, thanks, guys.

Joe Liu

Thank you, Patrick.

Operator

Our next question comes from Ajit Pai with Thomas Weisel Partners.

Steven Weimer – Thomas Weisel Partners

Hi, this is Steven Weimer calling in for Ajit. I have a couple of question and I apologize to you addressed it already. But for the last, I think, couple of quarters you've seen some softness in the European side. Is that one customer or more than one customer?

Joe Liu

It's more than one customer but however, the one that we're talking about is the major one. The missed revenue is more than $1 million.

Steven Weimer – Thomas Weisel Partners

Okay. And in terms of – now, looking at your current quarter and if I did my pro forma calculations right and the tax rate varies around 12%, 13%. How should we think about the tax rate going forward?

Shirley Yin

The tax rate is related to the taxable incomes in different tax jurisdictions. So, looking for the next quarter, we will expect that on the dollar basis, it will be approximately the same amount.

Steven Weimer – Thomas Weisel Partners

Okay. That's very helpful. And the last question I have is in terms of OCP product requalification requirements. I think last quarter you provided a number in terms of how much that impacted your revenue growth or revenue from that side of the business. Has that magnitude changed and how much in this quarter?

Joe Liu

It has changed quite a bit. We have managed to work with the customer and we have been qualified in most of the major customer site. In this case, it's qualified SAE and we have not gotten the qualification at our own facility in Zhuhai. The strategy is that we are focusing on our manufacturing at SAE to ramp our current production. So, with that in mind, I think the impact on the requalification is minimized.

Steven Weimer – Thomas Weisel Partners

Great. Thank you.

Joe Liu

Thank you.

Operator

(Operator instructions) And we'll take our next question from Chris Blackman with Empirical Capital

Chris Blackman – Empirical Capital

Yes, just one question to follow up on your stock repurchase. I was just pulling up your most recent Q, the one that was issued from your second quarter and you had repurchased like I think, $39.6 million in previous six months worth of stock. Can you tell me the average price you paid on that?

Joe Liu

We cannot comment on that, I am sorry.

Chris Blackman – Empirical Capital

Well, can you tell me how many shares you bought back then?

Shirley Yin

It's approximately 2 million shares.

Chris Blackman – Empirical Capital

Approximately 2 million? So, you paid on average close to $20 a share? I am sorry.

Joe Liu

I don't have that number handy. In terms of the total buy back, I would say somewhere between 2.6 and 3 million shares.

Chris Blackman – Empirical Capital

Okay. I'm just coming out of your Q, it shows you spent $39.6 million in those previous six months on the stock. All right, and then it also said in subsequent events that you spent $422,000 during January of '08 I guess completing that $40 million stock buyback. Do you know how many shares you bought back on that $424,000?

Shirley Yin

Well, you can watch for the Q that will be released next Friday. And that would give you the exact share count. I don't have the exact number right here.

Chris Blackman – Empirical Capital

Okay. Any sense of accretion, at what levels the stock becomes accretive or how accretive in buying back?

Shirley Yin

Well, there's a lot of considerations that we have to take into account, not just the stock price, the level of the stock price.

Chris Blackman – Empirical Capital

Right.

Joe Liu

If you use some simple way of calculating that by comparing it with interest rates or comparing with whatever ways that we can measure our cash, that would be simple minded way of looking at that. You guys can probably calculate fairly easy on the interest rate that we can get out of the buyback versus EPS.

Chris Blackman – Empirical Capital

How much stock would you anticipate that Joe, you will be issuing in the coming year for employees, any idea?

Joe Liu

Historically, we use probably like 2% of our outstanding.

Chris Blackman – Empirical Capital

Okay.

Joe Liu

And 2% of our current outstanding is only roughly 21 million shares. So, it’s ballpark 0.5 million shares.

Chris Blackman – Empirical Capital

Okay, got you. And then again, to find out how many shares you repurchased in the last six months prior to the subsequent event, the $36.9 million is in the Q, where would I find that to get an average price or a total number of shares?

Shirley Yin

Well, the total shares outstanding will be in the balance sheet. If you look at the balance sheet, it will tell you how many shares outstanding at the end of the period.

Chris Blackman – Empirical Capital

Yes. I understand that. Okay, I guess --

Joe Liu

I'll give you another way, a easier way of averaging that would be that the purchase was before December and then before December our share price was substantially higher than the current level.

Chris Blackman – Empirical Capital

Yes, for six months. I was just looking for an average. I thought you might have shares or the amount of the shares or the price. But that's all right.

Joe Liu

Yes, we typically use a 10b-5 program. So, basically, we are not following the market that close.

Chris Blackman – Empirical Capital

Right. And finally, I hate to beat a horse with a dead bush or the saying goes. Has your Board been precluded, I mean with the preannouncement you have and of course a Board could collectively come together quickly to approve a stock buyback at any time. And you've got a meeting scheduled, as you mentioned, a couple of weeks out. But are there any factors that precluded you from being able to buy since the stock has dropped so hard with the pre-release, has that precluded you from making a decision to buy back prior to now?

Joe Liu

No, I think the Board is probably looking at – I'm not speaking for the Board. I'm just guessing from my advantage point. The Board is looking at a broader point consideration on other strategic alternatives including acquisitions, including other benefits. Whatever the Board decision is, it's primarily for the best interest of the shareholder. So, management – I can propose something and then we have a fair and open minded discussion. And then come to conclusion on the buyback. Obviously, at different times, people have different considerations or concerns.

Chris Blackman – Empirical Capital

Yes. I understand. But as a previous as a person in the queue pointed out, it really – when you back out the assets, the rest of the business is really trading for very little if any value at all. The capital structure, I guess the question should be raised on capital structure. But anyway, thank you.

Joe Liu

Thank you.

Operator

Our next question comes from Macon Rudisill with Keane Investments.

Macon Rudisill – Keane Capital Management

Hi, Joe, how are you doing?

Joe Liu

Very good.

Macon Rudisill – Keane Capital Management

Just a quick question here, what exactly does a ROADM do? And I listened to some people that went to the optical show and they came back from the optical show and they said, JDS Uniphase has a ROADM and their ROADM is taking share. And Oplink is not doing the best job of being out there selling their ROADM. And then when you listen to – it seems like the weakness here is in the ROADM business. So, I think fundamentally, the investors – could you explain exactly what the part does and why it's a critical part in this business and why it's not going to completely commoditize and go away at some point?

Joe Liu

Okay. Let me try to spend a few minutes explaining to you what is a ROADM and where do we stand in terms of our competitive advantage. A ROADM is a reconfigurable optical add-drop multiplexer, add-drop module, including multiplexing function in there.

Macon Rudisill – Keane Capital Management

Okay. And it represents what percent of your total business now?

Joe Liu

Currently, it represents about a quarter of our total revenue.

Macon Rudisill – Keane Capital Management

Okay. And what is currently the weakest part of the business and what is the weakest link in your product line, in terms of a revenue standpoint?

Joe Liu

Revenue standpoint, the most challenging part is; a) a ROADM requires a key component in there, which we generally call them the optical engine. That is a device called WSS and we are partnering with another vendor for the total solution. And since we don't own the engine and then therefore, the margin is difficult to control and that's the weakness of the Oplink solution. However, there were – our good – our strength is in the so-called trade space optics. So, the engine, doing the selective – the switch function. And then passed on to us where we can manipulate and manage the light travels outside of the fiber, as well as the managing those signals.

Macon Rudisill – Keane Capital Management

And who else and who are the other leading ROADM manufacturers? I know JDS Uniphase but who has the market share leadership in ROADM's in the industry?

Joe Liu

Well, there are really only a few who have real significant revenue. JDS they are being one and there is a new player. And I wouldn't call them that new, that they have been in the market for some time, that's Optium. Our challenge is that we are competing with Optium at our customer, in this case, Tellabs site.

Macon Rudisill – Keane Capital Management

Okay. So, if you have a customer like a JDS Uniphase and if a ROADM is a standard part, it's a plumbing, it's a standard part, do you see – I guess my question is, you would think JDS Uniphase being a bigger, larger company could also make a ROADM that they could sell at a lower price and then you’ll never able to get any – and then you having to buy this engine and you can't control the price on the engine. So, between the two, it's never a business that allows you to have really any good margins. It's 25% of your business, why do you think that your ROADM product will be a successful long-term product for you in the industry that at some point can stop the margin bleeding and allow you to move on? How do you compete in ROADM's against a JDS Uniphase?

Joe Liu

Well, first of all, the scenario that you just offered is not totally appropriate because you are trying to use the ROADM as a commodity item. It is far from come commoditized yet. It's really customized to each individual customer's specific application. That's where the opportunity arises that we tailor our ROADM's to our customers' requirements. In other words, it's custom made to the specific requirement. So, it's different from a commodity. That's number one. That requires a lot of engineering support as well as customer support.

Macon Rudisill – Keane Capital Management

Do you think your market share in ROADM's is – how would it compare to what it is this year versus last year?

Joe Liu

We see a declining of market share because we were the sole source supplier at our customer site and the situation has changed at the end of last year. And we are no longer the sole supplier.

Macon Rudisill – Keane Capital Management

Okay. So, the ROADM business is becoming more competitive not less competitive?

Joe Liu

More competitive, for sure. And this is not just at one customer site.

Macon Rudisill – Keane Capital Management

Okay. I'll just try to have some questions off line. I'm just trying – because to the earlier investor's comment about the valuation of the company at this price, there really is no value being assigned to the company. But I guess it's just more of a macro issue at this point. I'm not sure. Thank you.

Joe Liu

Yes, you are right. Thank you.

Operator

There are no further questions in the queue. I would like to end the conference call by saying thank you for calling and have a nice day.

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: [e-mail]. Thank you!