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Oclaro, Inc. (NASDAQ:OCLR)

Q1 2013 Earnings Call

November 5, 2012 4:30 pm ET

Executives

Jim Fanucchi - Summit IR Group

Alain Couder - Chairman of the Board and Chief Executive Officer

Jerry Turin - Chief Financial Officer

Analysts

Kim Watkins - Morgan Stanley

Patrick Newton - Stifel Nicolaus

Kevin Dennean - Citigroup

Alex Henderson - Needham & Company

Hamed Khorsand - BWS Financials

Operator

Good afternoon and welcome to the Oclaro First Quarter Fiscal Year 2013 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 Summit IR Group. Please go ahead, sir.

Jim Fanucchi

Thank you, operator, and thanks to all of you for joining us today. Our speakers are Alain Couder, Chairman and CEO, and Jerry Turin, Chief Financial Officer of Oclaro.

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 December 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 market conditions 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 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 and other documents we periodically file with the SEC. The forward-looking statements discussed today represent Oclaro's views as of the date of this conference call and subsequent events and developments may cause Oclaro's view 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 filed with the SEC, and I refer investors to this release.

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

Alain Couder

So, good afternoon, we have been the new Oclaro now for the past three months. In the past couple of months, I've traveled to Europe, to U.S., Japan and China, and all the customers I met are quite pleased with the merger and they have high expectation in terms of partnering with Oclaro. And, I will discuss that in further detail during this call. But first of all, as you already know, the first quarter of fiscal year 2013, well below expectations. Results were affected by our own execution issues and the intensive integration efforts during this quarter.

Later in the call, Jerry will go through all the detail, but just as a short recap, the revenue was approximately $149 million for first quarter close period. Combined total revenue for the quarter, $160 million, and non-GAAP gross margins 13% and adjusted EBITDA negative $20.6 million, so these disappointing results, you already knew about it through our prior announcement.

So, now, I would like to turn to the good news.

First of all, the new organization of the new Oclaro was in place day one. Our integration activities are on track and most integration actions are now behind us. Our transfers are also on track with Shenzhen moving to Venture in Malaysia and our Japan facility moving to Sagamihara, which is an earthquake-proof building and I will come back to that later on.

The primary focus has been to execute on our new product introduction with the two combined company improving our operational execution, completing our integration and plant synergy to strongly position us for the telecom business rebound. So, as a result of this we have a tangible and measurable result. We successfully accelerated our synergy as newly announced company and expect to reach $9 million in quarterly cost saving in the December quarter. This could mean a bottom line improvement of five points, so that was a tremendous effort, but we are quite pleased with the position we are in beginning this quarter and we expect as a result that I just mentioned.

Let me now switch to the market condition and customer. The telecom market right now is slow, North America is kind of flat. Europe is weak and China is slowing down, Japan is as well slow and therefore the lower demand for our products right now and it's also causing a delay in recovering from the loss business in the flood earlier this year, because the customer who gave the business to our competition during the flood don't have a need for a new supplier right now and I'll come back to that point later on.

We expect pricing also to be throughout the more changing level of historical ramps, because when demand is low, competition on pricing is higher as normal business condition. The customer feedback on the merger continues to be extremely positive. We are now considered as a preferred partner. And as such, we are getting opportunity to be involved in all the new design. We expect that this is going to increase a number of design wins and we believe that we are well positioned to regain the market share that we loss over the fall flood through those new product and new engagement with customer, so that's for the market and the customers.

Now about the products, the new product pipeline of the new Oclaro post-merger is very robust and we expect those new products to have a positive impact on revenue as we run production. First of all, the 100G segment, we expect 100G to be a speed that is going to be there for a long time and very important to the future of optical technology in the telecommunication market and there we are probably as the both the trends of products at that speed, we are releasing product that cover the gamut of the client side and the line side.

As you know the Oclaro had mostly the line side, but not the client side but the combination of the two companies make it a full offering. We are already shipping the 100G coherent transponder, we have samplings of 4X28 tunable CFP transceiver, we're sampling also a 4X28 fixed wavelength CFP transceiver, we are working on short distance VCSEL-based products, we are delivering components to customers who are building 100G solutions themselves, we're delivering initial sample of a line laser that provide a more effective solution and a more reliable solution than the current external cavity laser that our competition offers right now. We are shipping 100G, which are now modulator and we are working on receiver an indium phosphide modulator, so that's very impressive list of 100G component and module and transponder that we are bringing to market.

As far as the 40G segment is concerned, it continues to be an important market for the next two or three years. We have a full product line of transponders spanning the three modulation technique, so called DPSK, DQPSK and Coherent. We are also delivering component to our customer who build their own solution. And on the client side, we are now sampling a very efficient small form factor product called QSFP+, and now full product line of 40G solution include both, QSFP+ and CFP transceiver.

On the 10G segment, the 10G is going to continue to be probably a flat market, because many of the 1G and 2.5G links in fact are migrate into 10G, and as a result of that this will continue to be a source of revenue for us in the next few years as we expect.

On the line side, our Tunable XFP is increasingly successful, and therefore we have a very significant progress with two different versions of this product called, the negative chirp and zero chirp.

On the amplifier side, that continues to be quite an important market for us, so we are now investing in new EDFA and EDRA, and [solution] for our customer. We expect to qualify two new products in the next quarter. On the WSS, we are shipping the 1X23 device, which as you may remember, we are first in market to introduce that and it is critical to future network architecture.

Both industrial and consumer market, we are now shipping multi-beam product for Japan and that's going to increase significantly as the speed of printer, so this is not the telecom market. This is industrial consumer, but that's a very significant evolution out of Japan team in (Inaudible). We're also working at extending the multi-emitter lasers for fiber laser application beyond the current 25 watt module, and in fact the 25 watt module is having very good market traction right now. So, we believe our strong customer relationship and new product will give us many new growth opportunities over the next few quarters, so that the product offerings that we have and breadth of it is excellent for the market that we sell.

Let me move now to integration. On integration, the integration is working very well. As I travel to visit customers, I also traveled to visit the various sites around the world. As the team infrastructure is in place, including in Japan, the new organization coupled with our expense reduction in action we began in September are resisting in synergy at our prior target level in the December quarter as I mentioned before and most synergy will come next year from in-feed in particular that means using Oclaro component into Opnext product, as an example. For instance, tunable laser of VCSEL or lithium niobate modulator are good example in-feed that will make our products more competitive.

Our Venture transfer is on track and we expect to generate cash to sell our inventory and equipment to Venture over the next 18 to 24 months, and we have also been working on risk management with new earthquake proof building in Japan that I mentioned before, so we have selected building, which has specifically been designed to be able to go through earthquake even for fab equipment. In Fabrinet in Thailand, we have been working to make sure that the new building that we move to is adequately protected against the flood, so we should be much better protected against those kinds of potential natural disaster than we were in the past.

Now, last point is to summarize. Overall, we have been working hard to position the company well for the future. Over the past year, we have completed our flood recovery. We made good progress on our strategy to a more valuable cross model by outsourcing our backend assembly and test. In addition, we have closed and made significant progress on the merger integration. And in order to position the company for the future, we also are strengthening our balance sheet with actions such as new line of credit that Jerry will describe.

Jerry, please continue and give us the detailed result and the guidance for this quarter.

Jerry Turin

Thanks, Alain. Over the last 12 months, we have accomplished an awful lot, merger close and issue integration, flood recovery, deal close and initiation of the assembly and test outsourcing activities. However, the team has been stretched and it looks this September quarter we had a number of execution issues that exacerbated the slow market conditions that have been with us for many quarters now.

Our revenues for the quarter ended September 29, 2012 as reported were $149 million, compared to a guidance range of $154 million to $168 million. This includes approximately 10 weeks of revenues from the former Opnext businesses since July 23rd. Our revenues for the full quarter on a pro forma basis, including Opnext for the entire quarter, were $160 million.

Slide seven, in our earnings call supplement which you can find at our website, trends out our pro forma combined revenues by a product category. We believe these categories maybe helpful in understanding the breadth of our product portfolio and our significant presence across the different areas of the optical network including our well established presence in 40 gig and 100 gig modules. This slide is based on $160 million of revenue for the full September quarter. I will refer to these pro forma full quarter revenues when discussed in revenue trends.

From this slide you can see that our 40 gig and our 100 gig transmission modules were down quarter-on-quarter. This was not a function of lower demand in the quarter. We had a capacity constrained associated with the transition to internal sourcing of 40-gig modulator components for our 40 gig Coherent and our 40-gig DQPSK transponders.

Our ramp of 40 gig and our 100 gig lithium niobate modulators had been impacted by the flood. We went into the September quarter making a decision that we could finally rely on internal scouring of modulators going forward, however the yields in Northbrook came short and we left significant demand on the table. We expect to see some revenue recovery in this category in the December quarter, but are taking a cautious approach in that regard.

Moving on to a 10-gig and lower transmission modules, our revenues in September were $45.5, million compared to $47.6 million in June. It has proven to be more difficult than expected to recover some of our pre-flood share and certain legacy fixed wavelength pluggable devices. On a positive front, revenues from tunable XFP, which are also in this product category were approximately $5 million in the quarter and continue to gain more traction.

Our transmission component revenues were $27.3 million, compared to $28.5 million in June. Our amps, filtering and optical switching revenues were $34.8 million, compared to $36.4 million in June. Demand from certain customers for amplifier subsystem products decreased within the quarter.

Our industrial and consumer revenues were $19.8 million, compared to $21.9 million in June. Across many of these product areas, we had potential revenue upside from the ramp of new products. However, the related execution in the last couple of months may have been impacted by merger planning and merger integration activities. We are very focused on these ramps going forward.

For the remainder of the call, I'll be referring to our results of operations for the financial period being reported, which includes Opnext, since July 23. From a customer point of view, revenues from Cisco were 13% and revenues from Huawei were 11% of our reported revenues for the September quarter.

On the gross margin front, our non-GAAP gross margin was 13%, compared to a guidance range of 17% to 21%. The shortfall was primarily due to lost contribution dollars from lower revenues, however, we also had unabsorbed overhead from running lower volumes through our fabs, approximately 2 million of E&O expense from demand reductions in the quarter and adverse variances in yields in our high powered laser products. Our incremental contribution margins are in excess of 40, and so with top line growth comes margin expansion potential and we also expect to improve margins as related synergies are executed through calendar 2013.

In terms of the operating expense side of the P&L, the specific numbers are in the financial tables of our earnings release. The primary messages I want to convey in this regard are the impact of the expected synergies and the corresponding implications on the business model profile. We continue to expect to deliver $9 million in quarterly synergies in the December quarter. The substantial portion of these savings will be in operating expenses with only a minor impact on gross margin in the December quarter.

We continue to expect in excess of $45 million in annualized synergies and we are targeting to achieve them within the next 12 months. We expect that certain of these synergies, in particular vertical integration of components into modules and subsystem product, will continue to deliver incremental benefit over a longer period of time. We expect to exit the current December '12 quarter with our breakeven EBITDA level at $175 million of revenues.

We continue to plan our business based on an R&D investment level of 13% of revenues and we will probably take a couple of quarter's to get to that level. Our SG&A run rate exiting December should be sufficient to support significant growth going forward with the minimal of incremental spend.

Now, back to the quarter ended September 29, 2012, stock compensation and our cost of sales, R&D and SG&A, included approximately $300,000, $400,000 and $900,000, respectively. Stock compensation over the next few quarters, should trend relatively consistent with these levels. Amortization of intangibles was $2 million. This is based on preliminary estimates of the valuation of intangibles from the Opnext deal, which are subject to refinement as we finalize the appraisal work in future quarters.

The same is true of many of the non-cash opening balance sheets accounts of Opnext, which in some cases have thus far been based on estimates and are subject to refinement based on completion of formal appraisal and valuation studies.

Restructuring, acquisition, and related costs were $12.6 million in the quarter. This includes a substantial portion of the severance associated with the merger integration as the majority of our personal actions have been identified and implemented. This bodes well for achieving our planned synergies in December. Based on our current plans, restructuring and related expenses are expected to run in the $2 million to $5 million range per quarter through the rest of fiscal 2013 declining quarter-on-quarter to the end of June.

Our other income below the line was $39 million in the quarter. This includes a $39.5 million non-cash one-time bargain purchase gain associated with the purchase accounting for the Opnext merger. Our weighted average share count was $80.2 million. We expect this to be more like $90 million for the December quarter when shares associated with the Opnext merger are included for the full quarter. Onto the balance sheet now, cash, cash equivalent, short-term investments and restricted cash were $94.4 million at the end of the September quarter. At the end of the quarter, the outstanding balance drawn on our line of credit was $37 million.

On November 2, 2012, we closed an extension and expansion of the line of credit with Wells Fargo to $50 million, plus an additional uncommitted $50 million accordion feature. We expect this to increase our short-term availability by over $10 million. The new credit agreement is also structured to facilitate the ease by which additional banking partners can potentially participate in a portion of the incremental $50 million in the future. The term of the line is for five years and the financial terms are broadly consistent with our preexisting arrangement with Wells.

We have also now filed Oclaro formal insurance claims associated with the Thailand flood in amounts totaling $35 million. We expect to file incremental claims beyond this amount in calendar 2013, so at this time do not expect those additional claims to be material relative to the $35 million levels. We have previously received $11 million in advances on these claims, so we now have an additional $24 million in play.

The claims are subject to review and sign-off by the insurance companies claims adjusters. There can be no guarantee on timing or final agreed to amounts of related payments. I do at this time, however, anticipate receiving another advance within the current December quarter. We believe our strong balance sheet is important and we continue to work on these sorts of opportunities to reinforce our financial position.

Our accounts receivable as the new Oclaro were $112 million at the end of the quarter, so we do have a substantial base of quality receivables to potentially back an incremental expansion of the line of credit discussed earlier. Our CapEx in the quarter was $7 million and we expect to be able to manage around $5 million a quarter in the upcoming quarters. In addition to the $37 million drawn under the line of credit, we have $19 million loan with the bank in Japan and $29 million in capital leases primarily through Hitachi.

Now, before I reiterate guidance, let me say, we are at the point of our merger where our primarily focus in on business execution and customer support. In the meantime, our guidance reflects the soft December expectations discussed by many of our peers and in many parallel technology spaces. This guidance reflects softer market conditions for December than we expected approximately four weeks ago when we announced our preliminary revenues for the September quarter and the expectation of revenue growth in December.

At this time, we're ready to take advantage of all the work that's been done in the last year and we look forward to driving more positive business momentum ahead. Our guidance for the quarter ended December 30, 2012 is, revenues of $145 million to $162 million, non-GAAP gross margins up 12% to 18%, adjusted EBITDA of negative $20 million to negative $9 million.

So, operator, can you please open the line for questions now?

Question-and-Answer Session

Operator

Yes, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from the line of Kim Watkins from Morgan Stanley. Please go ahead.

Kim Watkins - Morgan Stanley

Thank you. This is Kim in for Ehud. Just wanted to get a sense of the different pieces of the miss this quarter. There are three pieces from what I can understand. Execution issues, the share loss and the impact of the slowing macro? Can you kind of parse that out relative to the $10 million top line miss? Then I'm just curious, when in the quarter, like kind of how did this transpire? When in the quarter that did you realize that business was going to be, or the revenue line was going to be quite a bit lighter than you expected? Then I have a follow up too.

Jerry Turin

Well, we won't be breaking down into the specific items although that the execution is the primary part of the miss although we did see demand softened later in the quarter. At what point in time did we recognize the markets softening and some of the execution issues was difficult to be certain on where you come out until the end of the quarter given the amount of revenues that comes from the VMI and late in quarter terms and given some of the short fall was from execution on things like the modulators, where you are working to improve the yields and possibly increase the output. You are working on that consistently through the quarter to maximize your ability to deliver.

Kim Watkins - Morgan Stanley

Okay. So, I guess my follow-up is, I was interested in some of your pricing comments. I think, Alain, what you said is that you think you're going to be at the upper end of the typical pricing pressure range, which I seem to recall is something like 12% to 15%. The number of your peers in recent weeks on their earnings calls said that they actually think the pricing environment is moderating, so I was hoping if you could just help us bridge that gap in the understanding perhaps, where you're seeing the pressure?

Alain Couder

I think, we are seeing the pressure to the fact that as the demand is lower than expected. Each of us has capacity and I see the customer taking an advantage of that and basically putting us in a situation where we have to compete on price to get more allocation and more margin. That's the way we are approaching that and that's clearly what we are seeing through our VPA negotiations that are going on right now.

Jerry Turin

Yes, Kim. I think, it's also worth noting that I think last year a couple of large peers had particular product areas that were facing severe price pressure based on where they were at in the product cycle, and they were areas where we are not necessarily a substantial player at this point in time. So, I don't necessarily want to speculate on their behalf, but I think some of the moderation from the pricing they saw is related to that factor, whereas if you went back to our commentary last year we felt that there was a pretty reasonable year from a pricing point of view, so it could be the adjustment of that dynamic that they are talking to as well.

Kim Watkins - Morgan Stanley

Okay, so, perhaps, you are out of luck stuff in terms of product cycles with them and that might be a contributing factor?

Jerry Turin

There's one or two products that I think were substantially challenged coming into this last year from a pricing point of view that impacted couple of guys probably more than us I think.

Kim Watkins - Morgan Stanley

Okay. I'll let someone else take it. Thank you.

Operator

Thank you, and our next question comes from the line of Patrick Newton from Stifel Nicolaus. Please go ahead.

Patrick Newton - Stifel Nicolaus

Yeah. Good afternoon, Jerry and Alain. Thank you for taking my questions. I guess for Alain, I think, one lingering question post your acquisition of Opnext was whether or not you were planning on unconsolidated your manufacturing footprint. I think the answer has clearly been no. But I guess given some of these market challenges and some of the execution issues that you are seeing are you revisiting the potential for consolidation of your manufacturing footprint?

Alain Couder

No. We need to distinguish between two manufacturing footprint, the fab and the backend. We are clearly consolidating the backend. That means we're moving over the backend to contract manufacturer and this is moving our Shenzhen manufacturing to Venture in Malaysia. It is moving some of our Japan manufacturing into Southeast Asia and some of our Switzerland backend manufacturing to Malaysia as well, so we are consolidating the backend.

On the frontend which are the fabs, at this point in time, we don't think that it would be prudent to do that. Moving a fab is very complex, and I think we need to stabilize the current execution before we consider that. Clearly, we know what should be done, but we will not stop any of that in the next two quarters for the reason I just mentioned.

Patrick Newton - Stifel Nicolaus

Okay. So just a clarification as far as the backend strategy you've already made the decisions as far as outsourcing from Japan and Switzerland. It sounds like…

Alain Couder

Yes.

Patrick Newton - Stifel Nicolaus

And it sounds like you are using a combination of Venture and Fabrinet just based on the geographies you've pointed to?

Alain Couder

That is correct.

Patrick Newton - Stifel Nicolaus

Okay.

Alain Couder

Perhaps it's the smaller one, but the two main one are Fabrinet and Venture.

Patrick Newton - Stifel Nicolaus

Okay. Perfect. And then I guess Jerry, I might have missed this and I just want to clarify but how much of the $9 million in reduced operating expenses was already structurally in place exiting the September quarter?

Then of the $45 million in annual savings that you discussed, I just wanted to confirm that this is inclusive of the $9 million per quarter in December or roughly $36 million annualized, so that you have kind of an incremental $9 million of expenses or annual savings on the roadmap over the next several quarters.

Jerry Turin

Yes. The substantial portion of the $9 million is incremental in December, so if we speak in terms of personnel being a large driver of that, most of the actions took place late in the September quarter, still had minimal impact within September, and will kick in and have full impact or hopefully full impact in the December quarter. Then that $45 million builds off the $36 million. So, the $36 million is inclusive in that and we expect to generate more than $45 million, but we're not necessarily stretching that range specifically. We think we are on target for that and have the opportunity to extend that. And most of those improvements after December will become more weighted towards the gross margin line whereas the improvements in the December quarter are more heavily in the operating expenses to a very significant proportion.

Patrick Newton - Stifel Nicolaus

Okay. And then I guess, Jerry, you had discussed traction with tunable XFPs. Could you quantify that I guess with a quarterly revenue run rate or annual revenue run rate?

Jerry Turin

Yes, so we did $5 million roughly this quarter.

Patrick Newton - Stifel Nicolaus

Perfect. That's why I thought, I said just want to confirm. Thank you.

Jerry Turin

Yup.

Operator

Thank you, and our next question comes from the line of Kevin Dennean from Citigroup. Please go ahead.

Kevin Dennean - Citigroup

Great. Thanks very much. Thank you for taking my question. Just first a quick clarification. Jerry, I thought I heard you say you think you can reach breakeven EBITDA levels at $175 million. What time period were you referencing there?

Jerry Turin

Well, our cost based will be in a position exiting December that at $175 million would be we'd be EBITDA breakeven.

Kevin Dennean - Citigroup

Okay.

Jerry Turin

Of course, given our guidance, we are not saying that we'll be breakeven at the end of December. If we look at our performance in December and then increase the top line to $175 million. That's how to think about the timeline of achieving that.

Kevin Dennean - Citigroup

Understood. Thanks. That's very helpful. I guess, if we could talk for a second about some of the revenues that you lost to competitors following the Thai flood disruptions and do you have some expectations to gain those back and I think you've had that in the past. You still sound confident on that front, but can you discuss a little bit about what gives you that level of confidence that you think you can regain those loss revenues. What gives you the line of sight into regaining some share?

Alain Couder

The confidence is in two places. First of all, I met some customer who told me, we had to give 100% allocation to one of your competitor and we don't feel this is right. We would like to give you back a portion of the allocation in such a way that if there is any problem you are going to play, so that's clearly one thing that we are looking at, but that happened one year ago or so.

We are also coming up with the new generation of products in many instances that are going to be replacing in fact the products that we offered a year ago, so we have an opportunity to go back and really compete for the full allocation there and to have another way to regain the share that we lost to the flood. It is clear that if the market was very bullish today, our customer would give us allocation back much faster, but as the market is slow, it is slower. So that's why new product introduction that we are doing as we speak is going to be very important element of success.

Kevin Dennean - Citigroup

So, Alain, just following up on that, it sounds like it's really two levers. One is just the natural need for customer to have a diverse supplier base and the second is new products.

Alain Couder

Yes.

Kevin Dennean - Citigroup

I was just wondering, if could address how should we think about pricing? I know you mentioned it's going to be sort of towards more aggressive end, but do we have to think about pricing as being one of the main levers that you are using to get back?

Alain Couder

There is the solution. There is the situation. When you have a customer who has given 100% allocation to somebody else, some of the competitor has given them a certain price. So, we clearly have to come with the same price or better price to get some portion of allocation back. That's normal way to compete. Where it is different is that, new product are being designed to a better margins than old generation of product, so when we get back into the share of one customer with new product, then we compete on new product technology and therefore the margin pressure is much less.

Kevin Dennean - Citigroup

Terrific. Thank you very much.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Alex Henderson from Needham & Company. Please go ahead.

Alex Henderson - Needham & Company

I just wanted to get a little bit clarity on some of these numbers that are moving around a little bit. In the third quarter, calendar, the September quarter, what would have the pro forma numbers been for the operating expense lines?

Jerry Turin

We've not disclosed that. There's number of one-time sort of merger related and pre-merger related things in the Opnext standalone, but they've not been reviewed and that we won't be reporting on. I think it's fair to take a look at the operating expense run rates of the two companies going into September though as a reasonable proxy for what the full quarter operating expenses would look like.

Alex Henderson - Needham & Company

So when you're talking about $9 million in saving, you are talking about from the pre-established blend, the pre-blended rate on OpEx that the two companies would have had standalone?

Jerry Turin

Yes, so we were talking about from the full quarter September result with what you described as been a reasonable proxy for that baseline.

Alex Henderson - Needham & Company

So, when I'm looking at December number and I get the full benefit, the majority of the benefit of that $9 million, is the increment that is falling out comparable to that, so that I'm only changing the number very slightly, sequentially, on a reported basis?

Jerry Turin

I'm trying to make sure I understood your question, so it's a $9 million improvement from a full quarter. It's not $9 million improvement pro forma shorter quarter.

Alex Henderson - Needham & Company

Right.

Jerry Turin

That answers your question.

Alex Henderson - Needham & Company

The comments about pricing and the comments about the narrow line with laser first off was, was that what you were referring to, with respect to 100%? And then second, you said you're sampling that. Can you give us a little bit more sense of what the timeline on that product might look like?

Jerry Turin

Well, let me clarify the pricing question then I'll let talk Alain about the product itself. So that's a new ramp or new product, so it's not something we had the allotment on before and it certainly wasn't flood impacted. So it's kind of two very independent points.

Alain, do you want to talk about the narrow line?

Alain Couder

On the narrow line, we're coming with two version of that product, we'd be coming out in the next six months with third version, which has some performance capability but it's also a clear cost reduction compared to our current iTLA, and will also be a replacement iTLA and give us better margin on that type of product.

In addition to that EBITDA narrow line capability can be used in the new generation of transponder, so called Coherent modulation, and then later on we'll come with even higher performance laser in such a way that we can go even with better performance results and this one will be higher price. But sampling means that we give them to the customer they are going to go through testing, then we go through design wins that means the I have clearly announced that we have been selected, and then we will work with them in term of ramping production etcetera, so this is not next six months significant revenue, but this is an area where we have a lead because we are competing with old technologies, so called external cavity laser, which are more expensive and less reliable.

Alex Henderson - Needham & Company

Okay, so it's at least at year out before that's meaningful revenue stream for you?

Alain Couder

That's a fair comment.

Alex Henderson - Needham & Company

Okay. Thank you.

Operator

Thank you, and our next question comes from the line of Hamed Khorsand from BWS Financials. Please go ahead.

Hamed Khorsand - BWS Financials

Hi, guys. I was trying to get clarity on comments that you've made regarding the calendar Q4 period and the guidance you provided. I mean, the guidance you are providing on the low end is sequentially down, but then your premade remarks you were talking about recouping some product revenues that you loss in the quarter? So, how much clarity do you have?

Jerry Turin

Well, first when we talked about a specific product, Hamed, you recognize that we have very significant breadth of product base. So, in any given quarter there is going to be churn within that, so driving more 40 gig Coherent doesn't necessarily mean that that alone drives up the entire product based.

I'll let Alain talk a little bit more about the market conditions, but certainly I think we would echo what most of the peers, much of the technology world is saying about limited visibility and then challenges, especially on the telecom side of the host in the December quarter.

Alain, do you want to comment a little further?

Alain Couder

I think, we are in a slowdown of the market for the December quarter right now and our guidance is obviously taking that into account. Right now, we are quite confident with the new product introduction and we did fix some of the execution next issues that we did in the previous quarter, so if we get the right demand then we will be able to perform. If we don't then we want to be on cautious side that's basically where we are at this point in time.

Hamed Khorsand - BWS Financials

Okay. So, I mean, what would need to happen to hit the top end of that range that you are providing? What are you assuming?

Alain Couder

That the market demand be there.

Hamed Khorsand - BWS Financials

Okay. All right. Thank you.

Operator

Thank you, and at this time I would like to turn the conference back over to Mr. Fanucchi for closing comments.

Jim Fanucchi

Great. Thank you, operator, and thanks everyone for joining us for our first quarter financial results conference call and we do look forward to speaking with you again when we report our second quarter results.

Operator

Ladies and gentlemen, this does conclude our conference for today. We thank you all for your participation and you may now disconnect.

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