Opnext Inc. F109 (Qtr End 6/30/08) 2008 Earnings Call Transcript

Aug. 6.08 | About: Opnext, Inc. (OPXT)

Opnext Inc. (NASDAQ:OPXT)

F109 (Qtr End 6/30/08) 2008 Earnings Call

August 6, 2008 4:30 pm ET

Executives

Doug Dean - VP of Investor Relations

Harry Bosco - President and CEO

Bob Nobile - CFO

Gilles Bouchard - COO

Analysts

John Lau - Jefferies & Company

John Harmon - Needham & Company

Sven Eenmaa - Thomas Weisel Partners

Ehud Gelblum - JPMorgan

Sam Dubinsky - Oppenheimer

Paul Bonenfant - Morgan Keegan

Operator

Good evening my name is Celeste and I will be your conference operator today. At this time I would like to welcome everyone to the Opnext first quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Dean, you may begin your conference.

Doug Dean

Good afternoon, and thank you for joining us today. My name is Doug Dean, and I'm the Vice President of Investor Relations for Opnext. Today we'll discuss our financial results for the first quarter ended June 30, 2008, and provide some commentary regarding our market conditions and business outlook. We'll begin with remarks from Harry Bosco, President and Chief Executive Officer of Opnext; along with our Chief Financial Officer, Bob Nobile our Chief Financial Officer and Gilles Bouchard, our Chief Operating Officer we will then take your questions.

As always in our prepared remarks and our responses to your questions, we will rely on the Safe Harbor exemptions under the rules and regulations of the Securities Act and our Safe Harbor statements in the company's filings with the SEC. Following our prepared remarks, we will address questions from the audiences. At that time please limit your questions to no more than two at a time so we can get to many as you as possible in this session. And now let's introduce Harry Bosco.

Harry Bosco

Thank you, Doug and good afternoon, everyone. I would like to start by saying that revenues for the June quarter were $84.2 million a record for any quarter in the history of Opnext. This represents a growth of nearly 16% over the March quarter and 24% over the quarter ending June of '07. Our gross margin was 32.2% versus 32.9% last quarter. But a constant foreign currency exchange rates, our gross margin improved by 150 basis points. Earnings on a GAAP basis were $0.04 per diluted share, and $0.06 per diluted share on a non-GAAP basis.

This represents our eight consecutive profitable quarter. Last quarter we stated that for the fiscal year 2009, we were well positioned to continue our growth in the 10 gigabit and 40 gig markets, while expanding our 40 gigabit portfolio to address broader application.

Our record top-line performance in the first quarter demonstrates our growth potential and more broadly speaks to the strengths we are seeing across our customer base. On July 9th, we announced an agreement to acquire StrataLight Communications. Clearly in mood to expand our 40G portfolio and address broader network applications.

We're excited about the opportunities that we created by the marriage of Opnext device and module technology with StrataLight subsystem expertise. As we believe the combination defines new leadership in a 40G arena and accelerates development of 100 gigabit product family.

Following a brief review of the quarterly financials Gilles Bouchard will provide some operational insides and discuss the integration planning efforts that are underway with StrataLight. With that I will now turn it over to Bob to review our first quarter results.

Bob Nobile

Thanks, Harry and good afternoon, everyone. For the quarter ended June 30th, we generated sales of $84.2 million, representing growth of $11.5 million, or about 16% as compared to the previous quarter. This growth was broad-based across most of our communication product lines, including XFP 300 pin tunable, Xenpak, X2 and the XFP form factors.

Our 10G and above products grew and excess of 15% to $69.4 million and accounted for over 82% of our total revenue. Our less than 10G product line contributed favorably with over 17% growth to $9.6 million while industrial and commercial product sales increased by $800,000 or 18% to $5.2 million.

Compared to the year-ago quarter ended June 30, 2007, our sales increased $16.4 million, or 24% from $67.8 million. The increase was primarily driven by higher demands for our 40G, 300 pin tuneable, XFP, X2, Xenpak, and XFP products these were partially offset by lower demands for 300 pin fixed wave length modules.

For the quarter, Cisco and Alcatel-Lucent represented 44% and 10% of total sales as compared to 46% and 14% in the previous quarter. During the current quarter, we saw significant improvement in our revenue diversification, as revenues from the balance of our top-10 customers, including, Juniper, Hitachi, Huawei and Fujitsu grew 58% sequentially, and represented 31% of total revenues. Geographically, revenues in North America represented nearly 60% of our total sales, while Europe and Japan each represented 16%, and the rest of Asia was 8%.

Gross margin for the quarter was 32.2% as compared to 32.9% in the previous quarter, and 36% in the June quarter last year. The sequential decrease includes a 210 basis point negative effect from foreign currency exchange fluctuations and the settlement of forward contracts used to hedge our yen exposure.

Our gross margin of constant foreign exchange rates improved by approximately 150 basis points, primarily as a result of cost reductions and favorable product mix. The average yen to dollar exchange rate for this quarter was about 1 yen lower than the March '08 quarter, and resulted in a 20 basis point quarter-over-quarter negative effect on our margins.

The settlement of our forward contracts during the quarter also had a negative impact. We generally purchase our contracts a quarter in advance, and if you recall, the yen was strengthening against the dollar last quarter and traded at less than 100 at the end of March. The contracts we had in place for this quarter would have protected -- would have provided protection had the yen continued to appreciate.

However, the trend reversed and is recently traded around 108 yen for the dollar. Giles will have a bit more to say later about our operational programs to reduce our overall yen exposure.

R&D expenses decreased $500,000 to $10.3 million, and decreased as a percentage of revenue to 12.2% from 14.8%. The expense decrease primarily reflects normal seasonality in spending patterns, including lower levels of R&D materials related to the timing of prototype builds.

SG&A expenses increased $1.2 million from the March quarter to $14.7 million and decreased as a percentage of sales to 17.4% from 18.5%. This increase primarily resulted from higher commission and logistic costs associated with the increased sales volumes, and the reinstatement of performance-based bonus accruals that were partially offset by anticipated lower marketing communications costs.

Operating income, including $1.1 million of stock-based compensation expense, was $2.2 million or 2.6% of sales as compared to an operating loss of $800,000 or negative 1.1% of sales in March. This quarter, operating income increased 3.7%, despite a 220 basis point negative impact from foreign currency exchange fluctuations and the settlement of our forward contracts.

Our operating margins at constant foreign exchange rates improved by 590 basis points quarter-over-quarter. After accounting for net interest income of $900,000, and net other expense of $500,000; net income was $2.6 million or $0.04 per diluted share. GAAP and non-GAAP earnings of $0.04 and $0.06 per diluted share increased from earnings of $0.01 and $0.03 per diluted share in the previous quarter respectively.

This increase primarily resulted from the improved operating results that were partially offset by lower interest rates on short-term investments and higher net exchange losses on foreign currency transactions. Cash and cash equivalents decreased by $7.1 million to $214.6 million at June 30, 2008. Primarily as a result of $3.8 million of short-term yen denominated loan payments, $1.8 million of payments on capital lease obligations, $0.5 million of additional capital investments and $1.2 million negative effect from foreign currency exchange rates.

Cash from operations increased $100,000 but included a $5.6 million negative effect from increased accounts receivable to support the quarter-over-quarter revenue growth. Although accounts receivable increased, day sales outstanding decreased to 65 days from 70 at March 31, 2008. During the quarter, we also entered into another $2 million of capital lease obligations to further expand our production capacity.

So with another strong quarter of profitable growth behind us, let me now turn it over to Gill to provide some operational insights and the status of our StrataLight integration planning efforts.

Gilles Bouchard

Thank you, Bob. Since joining Opnext last November, I've been focused on driving operational improvements throughout the company from customer engagement all the way back to supply-based management.

Our goal has been to identify and exploit the leverage points in our operating model in order to create a virtual cycle whereby increased revenues lead to both, improved operational results and lower costs. We have been focusing our efforts in the 45 areas.

Number one, improved sales coverage of existing customers and target efforts to develop new accounts. Number 2; enhance our forecasting and planning approach to better respond to the market. We also introduced new processes to optimize our vendor managing entry programs and will be rolling out new advanced planning tools in the next two months. Number 3, find capacity expansion while keeping fixed costs flat, thanks to improved yields and increased manufacturing flexibility.

Number 4, improve our variable costs by launching a company-wide initiative on procurement. This is yielding results in the short-term through renegotiations, but will also generate benefits in the long term as we rationalize and leverage our supply base according to specific commodity strategies.

And number 5, limit your exposure to currency fluctuations by moving more purchases from yen to dollar. As a result of our actions, we expect to reduce our yen exposure by about 25% to less than 60% of total cogs by the end of the year. These types of challenges confront every high-growth company and need to be addressed to maximize profitable growth while better serving customers. It has taken a lot of hard work to get to this point, and I'm pleased to see our efforts are starting to show your operational results. Yet, I also want to make it clear that we're only at the beginning of those initiatives, and there is a lot of work ahead of us to ensure success in this very competitive market.

The ground work we have laid for Opnext will now be the basis for integrating StrataLight in to our business model and realizing the synergies that will come with the combination of both companies. We are on track to complete the closing of the transaction in the October, November time frame. Our next major milestone is the finding of a proxy statement prospectus which we expect to file in the next few days.

We have structured the integration turning effort into several major work streams and an early reading confirms the findings of our due diligence and that is the greatest synergies are expected to come from the leverage of the combined manufacturing and procurement activity as well as the rationalization of future 40G and 100G research and development programs.

I'll leave it at that for now, be assured they I'm excited by the opportunities we had in the marketplace and in our combined technological and operational capabilities let me now turn it back to Harry for closing remarks.

Harry Bosco

Thanks, Gilles for that review. As you can see we have plenty of opportunity before us and every reason to believe that the integration of StrataLight will proceed smoothly and swiftly, and we will be well positioned upon closing to jointly address our customer's needs at network speeds of 40 gigabits and 100 gigabits.

These are the highest growth market segments that industry experts believe will account for two thirds of the 10G and above market by 2011. As Gilles noted, we not only expect synergies from the combination with StrataLight but also expect leverage and scale that will result from joining forces while the integration planning efforts are going forward.

We will not be executing any of these plans until the acquisition is closed. At that time, we will provide you more detail around integration efforts, and be in a better position to talk about the combined financial outlook. With that let me turn to our quarterly guidance and near-term outlook. We have noted several reasons for cautious optimism over the past couple of quarters.

Our near-term outlook has not changed despite the strong growth experienced in the June quarter. While we believe the growth in broadband applications will continue to drive the growth of our business in to the future, we see fluctuates in customer spending in any given quarter, due to the customer's spending patterns. With that in mind we expect revenues in the range of $84 million to $87 million for our second fiscal quarter ending September 30, 2008.

Our gross margins will continue to be impacted by foreign exchange rates and the product mix while operating expenses will grow modestly and should remain relatively consistent with our historical spending patterns. And with that, I'll turn it back to Doug to begin the Q&A session for our call.

Doug Dean

Thanks, Harry. That completes our prepared remarks, and now we'll be glad to take your questions. Though we may get through as many of you as possible, please limit your questions to no more than two at a time. The operator will now provide instructions on how to submit your questions.

Question-and-Answer

Operator

(Operator Instructions). We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of John Lau with Jefferies & Company.

John Lau - Jefferies & Company

Great. Thank you very much. It looks like it is very solid results again. I was wondering if you can comment, as obviously one of your major customers reported last night, and they indicated a little slower growth rate than what you are experiencing. I was wondering if you can help us understand how whether it is platform related or some of the market share gains that are really driving some of the growth that you are seeing? Thank you.

Harry Bosco

John, we had a solid quarter as you can see, and we saw heavy demand in serving the 10 gigabit Ethernet in the telecom side, and if you take a look at Cisco their comments, I can not see the exact impact of what they are talking about here but we have a broad coverage of products across many of Cisco's products. So we may see one area go down a little bit, the other areas pick it up. So we do not see any decrease in demand coming in.

John Lau - Jefferies & Company

Great. Would you attribute some of that to market share wins or is that pretty stable at this point.

Harry Bosco

As you can see, we are diversifying our revenues more. We look at those Top 10 customers and exclude the Top 2, the others grew 58% for the last quarter. So we are seeing broad coverage of some of our key products.

John Lau - Jefferies & Company

Great. Thank you very much.

Operator

Your next question comes from the line of John Harmon with Needham & Company.

John Harmon - Needham & Company

Hi, good afternoon.

Bob Nobile

Hi, John.

John Harmon - Needham & Company

You talked about this, excluding currency, a 150 basis point sequential improvement in gross margins. I was wondering to what extent that component pricing might have contributed to that? For example, I believe tunable laser prices went down quite a bit in the early part of this year.

Bob Nobile

Well, that 150 basis points, John is a combination of both favorable product mix, as well as cost improvements and manufacturing improvements across the product line, across the factories, and obviously those reduced normal and, as expected, price declines quarter-over-quarter.

John Harmon - Needham & Company

Okay, thank you. This is, maybe you can talk about how this all changes once you close the StrataLight acquisition. About a quarter ago you were certainly pumping up against capacity constraints on your test equipment for your 40 gig product line. I was wondering if you have been able to release those bottlenecks? Again how does StrataLight change the equation?

Bob Nobile

I think first of all we are mainly in the client side of the 40 gig modules, although we just introduced the line side, and we still have to reconcile that with the integration StrataLight. You look at your 40 gig capacity; we are staying on track within seasonal capacity this second half of this fiscal year. So we are running about close to maximum capacity, but we have, the orders are coming in fairly steady and we will see growth in the second half.

John Harmon - Needham & Company

If I can just do a quick follow-up, are you adding capacity just in line with demand, or are you trying to get ahead of demand a little bit?

Bob Nobile

We have about a three-month lead time, so we have ordered the equipment to increase our capacity and we will be installing that in over the next quarter.

John Harmon - Needham & Company

Thank you.

Operator

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

Sven Eenmaa - Thomas Weisel Partners

Yes, hi. This is Sven Eenmaa calling in for Ajit. I have a couple of quick questions. First, I wanted to ask how big were the 40 gig revenues in the current quarter?

Bob Nobile

Around $10 million.

Sven Eenmaa - Thomas Weisel Partners

Okay, great. The second question; I wanted to get a sense in terms of your product mix, telecom versus datacom in the current quarter? What it was versus prior quarter? When you look at the guidance for the next quarter, how do you see that changing?

Bob Nobile

Our split between, on the 10G side of the business between telecom and datacom is that, they are about equal to each other, telecom being a little bit higher. The growth rates in both of those areas quarter-over-quarter were consistent.

Harry Bosco

Also, the 40 gig goes in both telecom and datacom side. So you look at that as an XFP also over the last quarter, it is difficult to see and split it out exactly.

Sven Eenmaa - Thomas Weisel Partners

Okay, great. Thank you.

Operator

Your next question comes from the line of Ehud Gelblum with JPMorgan.

Ehud Gelblum - JPMorgan

Hi, thank you very much. First of all, the capacity that you are adding, you said you did around $10 million in 40 gigabit. Was that the amount of capacity that you had? So did you mark that as your full year capacity, or was there some extra revenue you could have had that you just did not have the capacity for it? You said you are expanding your capacity. Are you expanding in 40 gig or are you expanding it in 10 gig? Then if you can give us a sense on the OpEx, I think, Bob, you said that it goes up next quarter, but - or Harry you may have said that, but that it stays within historical trends. If you can give a sense as to what you meant by that, I was not quite sure? That is all.

Bob Nobile

Yes, let me go over the 40 gigabit capacity first. Our capacity is really, depends on the mix of the products, not as the 40 gigabit and 43 gigabit. They have different testing times depending on the mix. We are running pretty close to capacity, but it is about what the order fill is coming in right now. We do see forecasting that says those orders will go up, therefore, we are planning to increase that capacity. That is in 40 gigabits. In 10 gigabits we are seeing XFP grow substantially. So we can increase the capacity around the XFP lines also.

Ehud Gelblum - JPMorgan

So, the upside of this quarter mainly came from 10 gig. You did not obviously upside 40 gig. You could not have done that?

Bob Nobile

That is exactly right.

Ehud Gelblum - JPMorgan

It came in 10 gig XFP?

Bob Nobile

In XFP as well as the 10 gigabit Ethernet stuff. Regarding your question on operating expenses, Ehud; First let's talk about R&D, you'll see, quarter-over-quarter, our R&D expenses were down about $0.5 million. As we talked in the past, we tend to see lumpiness in this regarding the material builds for the prototype models and that variation can range anywhere from $0.5 million up to $1.5 million.

Ehud Gelblum - JPMorgan

Variation?

Bob Nobile

That is correct. So you can expect an increase next quarter in our R&D, somewhere in that range. In terms of SG&A expenses, we are at a baseline this quarter. The only thing that we did not have this quarter that you would tend to see next quarter, is the additional cost for the [EcoX 15th 1:38] show, and that tends to run several hundred thousand dollars a quarter, or I should say for the show. So we should, next quarter you will see increases for that as well as normal variable costs for commissions and logistics.

Ehud Gelblum - JPMorgan

So, all tolled, we are looking around three-quarters of $1 million to $1.2 million or so in additional OpEx. Is that a good ballpark figure?

Bob Nobile

Yes. Again, it all depends on the R&D materials. If they wind up on the high-end, that could bring it up even to 2 million.

Ehud Gelblum - JPMorgan

Okay. One last question: it sounds like your gross margin is actually doing pretty well. If we can take out the foreign exchange on the hedging which hurts you, at what point will those no longer hurt you if we could actually see gross margins stabilizing when moving up?

Bob Nobile

As Gilles mentioned, some of the procurement programs that we have in place will help us you know, into the last quarter of this year. What we by moving a good portion of our procurement out of yen and into dollars, our historical cost trend of or I should say our historical yen trend of cost of goods is going to move down from about the 80% of total cogs down to about 60% of total cogs. So we will see that as age improvement, yet that piece of it will continue to impact us.

Ehud Gelblum - JPMorgan

At what point will not it impact gross margins anymore? Does have it to get down to 40% or 20% before it for gross margin is clean or can a 60% in gross margin be untouched by FX?

Harry Bosco

I think yen as long as you have 50% of your cost in yen, you are going to have that impact; and there are lot of these parts you can only buy out of Japan.

Gilles Bouchard

I think at the moment here, that the operational piece is going to start reaching the rate of initial return at the end of the year, and then we will have to look at financial strategies to mitigate that.

Ehud Gelblum - JPMorgan

Okay. Thank you.

Harry Bosco

Thanks.

Operator

Your next question comes from the line of Sam Dubinsky with Oppenheimer

Sam Dubinsky - Oppenheimer

I have just couple of quick questions. Just to be clear, are you still expanding 40G capacity? I though it would expand 20% this quarter then fall by 30% next quarter? Was there a little bit of a delay on 40G capacity expansion, or is everything still on track? Then I have a couple of follow-ups.

Harry Bosco

It is on track to have it in place by the end of September.

Sam Dubinsky - Oppenheimer

That is the…

Harry Bosco

The first bite. With these things, it is the mix that we worry about, because it does take substantial time on 43 gigabits in testing versus 40. So, it is a mix.

Sam Dubinsky - Oppenheimer

Can it increase by 20% by the September quarter, and then 30% sometime later in the year?

Harry Bosco

Yes, we are looking at 50% by the end of the year, right.

Sam Dubinsky - Oppenheimer

Then on the yen issue, when you give those yen targets in terms of minimizing your exposure, does that include the contribution from StrataLight. If StrataLight is included should not that minimize your exposure even more on a blended base?

Bob Nobile

That is correct.

Sam Dubinsky - Oppenheimer

That is without the StrataLight.

Bob Nobile

That is correct.

Sam Dubinsky - Oppenheimer

Bob, where do you see growth coming from in the back half of the year in terms of geography or application, and you just comment on things like lead times and inventory. I would just like to get your perspective.

Harry Bosco

First of all I think it is broad brushed as far as where we see the demand coming. It is clearly going to be in the tunable area. We will see the 40G kick up I think 10 gigabit Ethernet is going to stay strong, because the large core routers are going out there with their edge vehicles, so that is going to stay in tact. I think that basically we will see it because of the broad customer base we have now, we will start to see those kick in more revenues. Take the case of 40Gs, just for an example. We have 12 customers that qualified our modules. We have four more underway for qualification. So again, that will be across a broad base, so we will pick up 40G business as it gets created. So I think, again, it is going to be broad brushed, but if you had to pick the ones it would be tunable, they would be XMP and 40G.

Sam Dubinsky - Oppenheimer

Thanks, can you quantify gross margin? You said they would be down next quarter. Can you quantify the magnitude, or is that largely currency driven?

Bob Nobile

There will be two primary drivers it to. Obviously currency, depending on where it falls out for the quarter, but the other will be product mix, depending on where the growth ultimately winds up.

Sam Dubinsky - Oppenheimer

Okay. Thank you. I appreciate it.

Harry Bosco

Thanks Sam.

Operator

Your next question comes from the line of Paul Bonenfant with Morgan Keegan.

Paul Bonenfant - Morgan Keegan

Hi, thank you. I just wanted to apologize first for delivering 40G growth questions, but I think you had talked about adding about 20% capacity this quarter and another, 30% next quarter, and according to my model, it seems like your 40G revenues were flattish sequentially, and I am just wondering are you behind schedule on the capacity increases or did you hit a snag there?

Harry Bosco

No we are keeping up with the demand we are seeing coming in right now. However, again we have to forecast out and the forecasts are showing that we will see the growth come in. So we have to put that capacity in.

Paul Bonenfant - Morgan Keegan

However, you are still calling for that 20% and 30% increase to hit by the time you are exiting the year?

Harry Bosco

That is right.

Paul Bonenfant - Morgan Keegan

Okay. Just to clarify, again, from your commentary earlier, are we assuming that gross margin will be down sequentially? Or is that just a possibility based on how the ultimate mix comes in and the frequency that currency exchange affects it?

Bob Nobile

Depending on where currencies come out, and depending upon where the product mix comes out will depend on which trend, what the direction of margins will be.

Paul Bonenfant - Morgan Keegan

I have a quick question on customers and then I want to switch to industrial and commercial issues which do not seem to get a lot of airtime. Your revenues from Alcatel-Lucent seems to be in steady decline? Is this related to the softness that you are seeing in Europe or are there some other factors that work there?

Harry Bosco

We have a couple of products which just have been qualified in Q1 at Alcatel-Lucent, the cost reduce products. We see the revenue starting to kick up on those now. We have always seen any fluctuations and we are going to continue to see that, because it depends on what customers they get. However, certainly XFP is strong, the tunable, again it qualified the more cost reduced version, it has kicked up those revenues.

Paul Bonenfant - Morgan Keegan

If you give us some insight into how you see the progression of the industrial and commercial revenues for quarterly? Or how you see them growing sequentially out through the end of the year. It just get tends to bounce around a fair amount?

Harry Bosco

Yes, it is actually, we had a good quarter last quarter. The defense and security area increased substantially. We have some new applications on high-powered lasers in the medical area in displays. So that is pretty exciting to us. Then we have the multi-beam lasers being put out for high-speed printers. Again these applications take a long time to get proven in, and it is usually customized for those applications. However, once you have qualified in, you certainly re-benefit the revenues. We will see it growing probably $500,000 something like that quarter-over-quarter. Then finally, as some of these applications kick in, we will see growth faster. However, they are nice, they are good applications.

Paul Bonenfant - Morgan Keegan

Okay, that is helpful. Thanks for taking my questions.

Harry Bosco

Okay.

Operator

Your next question comes from the line of [19th 1:48?] John with Bojian Capital Management.

NEW SPEAKER

Hi. Most of my questions were answered, but I have a couple of questions on StrataLight - or would you rather have me take it offline?

Harry Bosco

Its right, we can not really say too much about it until the deal is closed. The proxy is going to get filed; you will see more information on StrataLight then.

NEW SPEAKER

Okay. I will just take it offline. Thanks very much.

Harry Bosco

Okay.

Operator

Your next question comes from the line of Ehud Gelblum with JPMorgan.

Ehud Gelblum - JPMorgan

Hi, thank you very much for the follow-up. A follow-up to the previous question, but also trying to dig a little bit deeper into what you are seeing out there in the market. Cisco was not the only company to start hinting that carrier spending in certain areas may be slowing down. Are you seeing when you look at the telecom side of your business -- are you seeing any slowdown at all in uptake on any of the three sides of the business, the 40 gig, the 10 gig, and the less than 10 gig? It does look as though certainly on the capacity side while you are not expanding, while you are expanding certainly in line with demand, it does look as the demand may have been flat quarter-over-quarter. Did that match your expectations or did that show little bit of a slowdown?

Harry Bosco

No, I think the 40 gigabit market really is in its infancy right now. It depends on how many projects it starts getting deployed, and so we have multiple customers bidding on multiple projects. As they pick up, we are going to see the demand come up. You know what happens here is, they usually partially put the electronic button out there and equipment [bop?] as the demand goes up. So I think we are just starting to see the front-end of it, and you are seeing multiple projects getting deployed, and as they kick in, we will start to see those revenues climb.

Ehud Gelblum - JPMorgan

Are you seeing softness at all in any parts of telecom?

Harry Bosco

No, we have not, in fact, XFP is growing extremely fast, and tunable is growing. The 300 PNX actually has picked up fixed 300 PN because of some projects in India actually, has put a big demand on those. So we see that coming in. you just go across them. Xenpak is still fairly strong for us, X2 is still strong for us.

Ehud Gelblum - JPMorgan

How about on the datacom side?

Harry Bosco

No we do not see any X2 on the Xenpak side, it is strong for us.

Ehud Gelblum - JPMorgan

Those are on the datacom. So you are seeing no weakness from a 30,000-foot view in terms of overall demand on either the telecom or data come side?

Harry Bosco

Actually my guidance is one of these things where I try to keep it as cautious as possible here, but we see the demand coming in.

Ehud Gelblum - JPMorgan

Excellent. Okay, thank you.

Harry Bosco

Thanks.

Operator

You have no further questions.

Doug Dean

Thank you, operator. With no more questions, that concludes our investor call for today. Thank you all for joining us. Operator, please provide the replay instructions.

Operator

Thank you for participating in today's Opnext first quarter earnings conference call. This call will be available for replay beginning at 7:30 p.m. Eastern standard time today through 11:59 p.m. Eastern standard time on Wednesday, August 13, 2008. The conference ID number for the replay is 57493059. Again, the conference ID number for the replay is 57493059. The number to dial for the replay is 1-800-642-1687 or 1-706-645-9291. Thank you.

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