Viavi Solutions Inc (VIAV) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the JDS Uniphase third quarter FY 2002 conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct the question and answer session. At that time, if you have a question please press the one, followed by the four on your telephone.

I would now like to turn the conference over to Jozef Straus, co-chairman, president and CEO. Please go ahead.

Thank you very much.

Welcome to all of you on this call.

I'm joined by Tony Muller, our chief financial officer.

As you may know from last week's announcement, Greg Dougherty, our chief operating officer, is taking a reduced role in daily activities in order to attend to a seriously ill family member. He will not be on the call today.

Our prayers and best wishes are with Greg and his family. And we wish his loved one a speedy recovery.

I will be assuming more of the day-to-day operations and responsibilities until Greg returns, and his management team now reports directly to me.

This afternoon we would like to discuss with you our third quarter results, further progress of our global realignment program and our acquisition of

Now, let me ask Tony to review the safe harbor statement before I provide the market and business report. And Tony covers the financials.

We would like to advise you that our report and the discussions we will have today include forward-looking statements. Forward-looking statements are all statements we make, other than those dealing specifically with historical matters. That is, our historical financial result and any statements we make about the conduct of our business operations and finances up to this moment. Our forward-looking statements include any information or projections we provide on future economic conditions, industry trends, business operations and financial guidance. All forward-looking statements mentioned are subject to risk and uncertainty that could cause actual results to differ materially from those projected in the forward-looking statements.

Some, but not all of the risk and uncertainties are discussed from time to time in the press releases and security's filings of the company with the Securities and Exchange Commission, particularly the risk factor section of our Form 10-Q filed for the quarter ended December 29, 2001. We undertake no obligation to publicly update or revise any forward-looking statements, whether it is as a result of new information, future events or otherwise.

Thanks, Tony.

Our sales in the third quarter were at $262 million, down 8 percent sequentially. In January, we said that March may not represent the low point of our revenue. And our guidance for the June quarter is for a total revenue decline to $210 to $230 million. We still cannot predict the low point of the cycle, which tied the level of certainty as the capital spending environment remains weak.

Therefore, we will undertake further actions in our global realignment program to match our expense structure with the current an anticipated industry environment. We believe that these steps will generate additional cost savings of $165 million annually to bring our break even to approximately $300 million in quarterly sales. This will require additional staff reduction of approximately 2,000 employees, as well as additional site closes.

I must emphasize that this was a very difficult decision for the company and for myself personally. And we greatly regret the necessity of additional reduction among our employees, all of whom have made significant contributions to our success. However, consolidation and financial difficulty among the carriers, which many operate are now being addressed.

While still in the very early stages of resolution, these steps are essential to all industry returning to help. Consolidation has also become, to a lesser extent, at the system and component level. We believe that consolidation is good for the industry and will speed recovery. Most importantly, traffic continues to grow. In fact, there has been recent uncertainty in certain links of the network. These factors suggest the need for future capacity expansion.

In the current environment, carriers continue to tighten the focus on optimizing system performance to reduce operating and maintenance costs, and we hear of carriers preparing for request for proposals for new technologies that accomplish this.

Our customers are concentrating on a smaller universe of new technologies and products, and asking us to play a larger role to a new product introduction and engineering. Specifically, customers are looking to ask for more value of the products with higher level of complexity, intelligence and modernization. Having improved price performance and the assistance we closer to the edge of products. By delivering in these three areas we play a crucial role in increasing the cost for management of carriers.

First, by increasing the...

... we can enable networks to be monitored and provision remodeled, which considerably lowers labor costs. Second, by offering better price performance lower diesel costs for first carriers. And finally, our new fiber optic datacom product allow us to bring more local capacity closer to the edge.

I'm pleased to report that we have been delivering in each of these areas. At the situation in March, we introduced a host of new and preview products that provide our customers with more intelligence and technical content. Among them were the new waveguide links switch and blocker, additional performance monitors, the broadest selection of standard amplifiers, and new transponders, to name a few.

Our new datacom optical transceiver business has allowed us to provide price closer to the network for our customers, and this has been well-received, as well.

As you know, we also support customers outside the telecommunication industry. Let me start with cable television. We have solidifying our position with leaders in cable equipment and we are seeing more opportunity here. As with datacom we believe our theater business may have hit a bottom, although we anticipated that near-term growth rates will be flat to model. We believe our non-telecommunication optical business which the cyclical bottom in late 2001.

In the past, we received questions regarding why we were keeping our non-telecom businesses? We kept them because we believe that they were good businesses that had good growth potential, could generate cash and one of our core technologies, to use optical coatings to manage light. Now, we see that these business have another value, as well. That is to add some stability to our revenue and earnings during telecommunication cycles.

Why we are pleased with the accomplishments on the product and technology side of the business and the growth in the non-telecom business, we recognize that additional restructuring must be done because of the continuing downturn and we will be undertaking a further extension of our global realignment program. To date, we have actually done a cost savings and had counter reduction goals, and I'm confident that we can continue to meet our targets.

Additional site closings and employment reductions, although painful, are necessary given the current conditions in our industry. The majority of savings will come from expense reduction in SG&A, cost savings in manufacturing, and savings from additional site closings, supplemented by a more focused approach to research and development. We have done considerable analyses of our research and development budget, including extensive discussion with customers to focus spending on most promising and near-term growth opportunities. Our commitment to developing national relations solutions remains and we will also maintain a sufficient level of investment in the areas where it is important for us to remain the leader in the long-term.

In telecom, transmission of datacom will be our two highest priority areas for research and development spending. And we will continue to fund important programs in WDM components, amplification, and that the greatest opportunity for customer impact. Our investment in research and development to the non-telecom optical areas will continue to be strong.

Investment in enabling technologies are critical to our success, and one of these technologies is waveguides. Waveguides are a platform technology application, specific solutions. And we have decided to shape the whole capability in this area to highly developed base manufacturing process.

Therefore, in spite of all rationalization efforts and to focus on the future growth opportunities, we announced today that we'll be acquiring Scion Photonic in San Jose. For the last couple of years we have been maintaining waveguide manufacturing programs in both flame hydraulics and position or CVD. After carefully evaluating the respective long-term commercial viability each in the context of current next generation applications, and the competitive landscape in the market, we have decided to bring CVD technology in-house through Scion.

Scion's technology is based on CVD and advanced vapor processing that uses eight-inch vapors and provides high-yield and more integrated devices in the competing technologies, because of the next generation manufacturing capability that is based on semiconductor processes. We felt it was the right time to acquire Scion however, even market conditions, we cannot maintain programs in both flame hydraulics and CVD technologies...

... we have made a very difficult decision to scale down manufacturing operations in Columbus, Ohio for the next two quarters, and close the facilities in Ottawa. We continued reductions in locations to streamline operations, creates many difficult decisions, but we must adapt to our markets.

While Greg is on a substantially reduced schedule, I'll be working closely with our management team to take the next steps in our restructuring. I'd like to say that we greatly value the contribution that Greg has made to and our thoughts are now with him and his family. We are fortunate that he has built on a very strong management team that has successfully executed in our global realignment goals to date. And I would like to emphasize that our management team is strong and resolute and focused on the future. I am committed to additional technical innovation and dedication to customers and these the guiding principles that we use for maintaining our leadership position in this industry.

Tony?

Thank you, Jozef.

Let me first review...

... financial numbers for the quarter. Sales of $262 million in the quarter were down 8 percent in the second quarter and at the low end of our sales guidance we acquired from IBM in late December. Pro forma gross margin reflected the cost of the global realignment program, the net effect of the use of inventory previously written down and the inventory charges we have in the ordinary course of running our business.

Our financial condition remains very strong. Cash and short-term investments at the end of March were $1.56 billion, of which $1.45 billion was in cash and short-term and fixed income investments essentially flat from last quarter. We generated $10 million in cash from operations.

Looking at the quarter in more detail...

... written off inventory. Although we reserved other parts in slightly higher amounts. Because of a...

... application of accounting rules, you could expect to see such complementary results in the future, as we apply inventory write-downs to specific parts and later have to write down other sales mic.

Our pro forma gross margin, including realignment and other charges, was 12 percent. If we net out global realignment costs and inventory write-down...

... benefits gross margin was 26 percent or 19 percent without the benefit of the cancellation charges. This was lower than expected at the beginning of the quarter because of a lower margin product mix, more datacom transceivers where we were investing for higher marketshare and certain non-telecommunications products.

Excluding global realignment program charges, R&D was approximately $52 million or 20 percent of sales for the quarter, flat with the second quarter. SG&A expenses, excluding global realignment program charges, were $64.7 million, or 25 percent of sales for the quarter, down 10 percent sequentially. Interest and other income was $11.2 million for the quarter: our pro forma loss of $66 million or 5 cents a share for the third quarter.

These results include global realignment program costs, charges, and benefits related to the write-down of inventory and exclude the costs we have historically excluded, primarily those related to merger and acquisition charges. Again, please note that annual assessments for the March quarter typically exclude costs associated with the JDS interface global realignment program. The pro forma amounts discussed above do not exclude such costs.

Shares for the third quarter were $1.36 billion. Let me now provide some additional details on the global realignment program. Total costs of this program are now estimated to be $1.1 billion of which approximately $876 million was incurred through the end of the third quarter. In the third quarter, we recorded net charges of $25 million of which $26 million was charged to cost , and $10 million was charged to operating expenses.

And a benefit of $11 million was recorded to operating expenses to reflect differences between restructuring costs and amounts previously accrued. Included in the costs of the global realignment program are charges for accelerated depreciation and moving and employee costs related to the phasing out of certain facilities and equipment.

To date, actions taken under the global re-alignment program have reduced annual expected by approximately $880 million, and our current employment level is just under 10,000. Over the next 12 months, we expect to reduce further our annual expense rate by an additional $165 million. We believe the plans we currently have in place will reduce our break even quarterly revenue level to $320 million, and we are planning additional actions to reduce break even to $300 million per quarter.

At a $300 million break even level, we would expect to generate cash from operations at sales levels above $250 million. This would be cash flow from operations. These...

New charges.

These new charges approximately $200 million will flow the first half of fiscal 2003 with all cost savings expected to be realized by the June quarter of 2003. Our financial strength remains considerable. We held $1.65 billion in cash and marketable securities at the end of the quarter of which just under $1.45 billion was cash, money market, and other highly liquid fixed income securities.

Day sales and accounts receivable were 57 days for the quarter as compared to 61 days at the end of December, reflecting strong collections. Global realignment program used approximately $47 million in cash during the quarter. To date, the global realignment program has used $168 million in cash and we expect additional cash outlays of approximately $235 million over future quarters.

Our inventory levels declined 23 percent during the quarter, and less than a quarter of this decline came from net write-offs. Inventory terms for the quarter were not meaningful, because of the large inventory write-downs we have taken. We generated $10 million in cash from operations during the quarter, including cash used by the global realignment program. Our operating cash flows were favorably affected by approximately $70 million in tax refunds received during the quarter.

Capital spending for the quarter was $27 million, year-to-date $114 million, both of which were less than half the depreciation. As we have done for several quarters, we again performed an assessment of our long-lived access pursuant to SFAS 121. This resulted in $3.9 billion in reductions of long-lived assets for the quarter. This amount reflects lower industry analysts' forecast for our industry, lower forecast sales for us, and further delays in our anticipated recovery.

Regarding our acquisition of ScientPlatonics...

... could you comment if that was up sequentially?

And I've got one more follow-up.

I believe we said $18 million to $19 million in revenue in our guidance. And yes, it was up sequentially.

OK. On gross margins, you know, obviously the guidance is lower. You're saying it's partly because of a mix of lower telecom sales. But what about fixed manufacturing overhead? Are there any other things going on in that gross margin guidance?

And, you know, you have a 7 percent swing -- 7 percent basis-point swing because of these take-or-pay contracts that you took this quarter. Are you accounting for that, going forward also?

Well, with regard to gross margins, far and away the greatest effect on our gross margins has been load-capacity utilization, as well as low sales in several of our telecommunication -- very high-technology telecommunications components.

These products have reasonably high variable profitability, which means that as their sales decline, the fixed cost in those businesses that we had cut and cut and cut, some of those businesses that are very capital-intensive, related to how we account for the cancellation charge.

There are really two phases in the cancellation charges. The first thing that happens is when we receive an indication from the customer that there's a cancellation in the way in which we calculate our excess inventory with the most conservative method of revenue recognition of all with the cancellation charges, and that is we don't record the charges until we received the cash payment from the customer. And whenever we receive that cash payment, we record the revenue, but of course there are few, if any, costs associated with that revenue in the period when we record it.

OK. So, on the gross margin side, it sounds like pricing isn't really playing in there, so you know, calendar Q1, this is a big quarter with your yearly negotiations with your big OEM, so it sounds like now that you've got those big contracts done, you're -- I mean, coming out of it, do you feel better on pricing or worse on pricing than you felt going into those negotiations?

Let me provide a clarification. In large measure, the customer you refer to as big OEMs last quarter were little OEMs last quarter in terms of the volumes they actually produced.

Prices continue to come down in our industry. We do have new pricing in effect for many of our customers in connection with our annual contract re-negotiations. But I would say far and away the dominant factor affecting our gross margins and causing them to be as low as they were was the very, very low level of capacity utilization; really, stated in another way, our very low level of sales.

OK. Thanks, guys.

Thank you.

Your next question will come from with Morgan Stanley. Please go ahead.

Thanks very much. And good afternoon to both of you, Tony and Jozef.

Hi, David.

Thank you.

Quick question about inventories and component obsolescence. What are you thoughts about which types of components will most rapidly become obsolete due to new technology developments, Jozef? And what kind of time frame do you think we can start thinking about the OEMs writing off their remaining component inventories due to obsolescence?

Well, this is a very good question, David. I think there have been several discussions that passing components may lead to higher degree of modernization and then may in fact by bringing faster. And this may happen, but it didn't happen with the speed what we anticipated, I think. So that's an ongoing issue, situation.

The second thing is, some transponder products, as are coming in, I think as Motorola is coming in, they may in fact be obsolete much faster.

And can you take a short -- just thinking about, you know, a general ballpark of when obsolescence will become significant, in terms of the OEMs needing to...

I will say four to six months.

Don't you think that would be key to the upturn when people become more aggressive about adopting new technologies?

Yes, that's right. That's right. the new technologies for expansion.

OK, that's great. Thanks very much.

Thank you.

Thank you. Your next question will come from with Credit Suisse First Boston. Please go ahead.

Hi, Max.

Hi, guys. Hey, I have a question about your non-telecom business. I think last quarter you indicated that you had a book-to-bill in that business of about 1 and starting to see some increasing momentum. Just wondered how that carried through this quarter and what your outlook was there.

We are seeing great opportunities on a number of companies, especially in the as well as in the products. business, and we encourage opportunities there very much.

Yes. And...

The bookings there have been growing.

OK, so book-to-bill above 1 would be a fair assumption?

We don't want to tell our competitors too much about our business, Max.

OK. Thanks a lot, guys.

Your next question will come from with Soundview Technologies. Please go ahead.

Jozef, I'm wondering what you're seeing in the marketplace that's allowing you today to make some technology choices that maybe six months ago you weren't willing to make?

Such as what, Kevin?

Well, I mean, you made a decision on a technology today with...

Cyanide, you mean?

Yes, and I think that obviously as you cut your staff as dramatically as you're having to and you try and maintain a leadership position as you're talking, you must be making technology choices today. And I'm wondering what's guiding them other than ?

Kevin, thank you very much. I appreciate the question.

Clearly, we had been thinking about the technology pertaining to Vanguard Manufacturing, long time. And I think has done tremendously well and has delivered in the time of growth.

However, in terms of today's environment, we believe there has been tremendous investment in many different areas, and I think we just reached the opportunity now to use the processes from IC manufacturing, for waivers, the semiconductor industry experience, which in fact remains a platform technology -- platform technology -- for expansion.

As you go from four-inch waivers to 18-inch waivers, provides better consistency building and thinking better.

Now, the other part of the question is, how do we take choices, vis-a-vis about it? Well, investment, which allow you to do that. Those aspects will be in all transponders, in data compilers, in packaging platforms, as well as in the license which allow , then we'll continue paying less than that.

Should we be assuming as we look at your R&D line going forward that we're reaching a point of stability in that line?

Well, I think what we want to say is, you know, we're taking choices vis-a-vis how many R&D -- you know, we can do hundreds of R&D projects with the same platform. You pretty well know several -- two years ago, many, many quarters before, there were some opportunities in many other products, which today are not appearing because of cap-ex decrease as well as our own customers today -- our opportunity is decreasing capacity expansion, which provides different platforming.

We will be putting in commensurate with our sale level, substantial amount of money. And I think we will do well.

OK, thank you.

Thanks.

Your next question will come from with Merrill Lynch. Please go ahead.

Hi, guys.

Hi, Tom.

Hi, Tom.

First of all, a housekeeping question. Can you comment on any differences across geographies, any strength out of Asia that you saw, or any weakness in Europe?

Well, let me put it this way. To the degree there's a weakness, we are strong everywhere, OK? And today's strength there, we'd like to participate.

Clearly, you know, I think, as I indicated last time we believe opportunity in the circuit area, although I have seen some announcement in the last couple days that even that is happening.

But I think we are participating in some activities there which we are putting opportunities and effort in there.

OK. And just coming back to the R&D question, your R&D level on an absolute basis is twice the level it was in 2000, and your revenue certainly isn't. Is there a plan to bring that down? I mean, you didn't really talk about that in restructuring?

Yes, I mean, we'd like to bring in revenue. I don't want to give specific percentages, but it will be a healthy level. I mean, still intending to spend many, many tens of millions of dollars, and it will be in a level which is sustainable, a normal high-technology growth company would need to put investment in to preserve leadership.

And we will have to reduce -- our plans do include some reductions in absolute levels of R&D spending.

OK, thanks. And just one last question, Tony. The $10 million charge in operating expenses, I assume that's all SG&A, not in R&D?

No, well, the bulk of it is SG&A. I believe there are some small amounts in R&D, but it's largely SG&A.

OK. Thanks.

Your next question will come from with Sanford C. Bernstein. Please go ahead.

Hi, it's . Hello, Jozef and Tony.

Hi, .

Hi, there.

Two quick questions. First one: Within your telecom segment, could you drill down a little bit along the product line where do you see the strengths, where do you see the weaknesses?

Well, I think -- just to indicate I think too, I'll break it down to the segmentation. We think that growth opportunity comes in the modules and in transmission products. Our wavelength, routing products are fairly weaker because of the business is essentially much weaker than we used to have.

The metal -- there have been some questions why the metal business is increasing, and we see some opportunities there. But again, still in a much smaller base in terms of the absolute dollar values.

I would also add that, by and large, transmission products on a relative basis are doing better than infrastructure products. Infrastructure products meaning things like amplifiers and WDMs.

OK. What is your current percent of revenue for datacom?

Well, the guidance that we provided for last quarter was, I think, $18 million to $19 million in sales for datacom, and that business was largely performed according to expectations. You can calculate from there.

How many -- what is the percent of revenue you are actually manufacturing currently in China, and how many people do you have in China?

If I am not mistaken, I think we have about 2,000 people in China. And I don't have the actual volume of manufacturing in China. I need to look into that.

OK. Thank you.

Thank you.

Thanks, .

Your next question will come from with Salomon Smith Barney. Please go ahead.

Hi, guys.

Hi, Tim.

Hi, Tim.

Two questions, one a little bit of housekeeping.

I think, Tony, in your presentation, I missed a comment. You said that you had written down some inventory and also sold some inventory out of reserves. I'm assuming those balanced and matched out?

They were approximately the same. Our reserves were slightly higher than the amount of written-down inventory, but it was not a very significant difference.

This is a slightly confusing situation, because both our auditors and in various communications in the past with the staff of the SEC, they made it clear that inventory reserves have to be taken on a part-number-by-part-number basis. And no one can be so accurate as to predict the sales of each individual part number exactly.

So if we reserve the first part number and actually sell the second part number -- I'm sorry, if the sales of the written down parts are more than we expect and the others are less than we expect, we have a case where we have really two separate disclosure items even though the net effect is essentially a balancing or a zero effect.

OK.

And a question for you Jozef or, you know, Tony. You had mentioned on last quarter's conference call that design activity generally was fairly brisk, largely referring to the large OEMs in optical. I was wondering if you could characterize how things have changed over the past, you know, couple of months.

Well, they are continuing. And in fact, we are engaging heavily on a partnership base because really they themselves can do all the what they want to do. Of course, they themselves, based on the current environment, see some -- you can talk to them. I can also see some decrease in their own level of activities or level of business. So some of those activities may, you know, in the practical realization from design to actual realizations of sales have not started or slowed down or pushed out a little bit.

The other one is the design activity with some of the startups. We are looking at those which with that they'll each have fair chance of winning, or providing the opportunities for carriers. And we are supporting them. Of course, we are also making choices and reviewing the situation where we need to spend our tightened R&D dollars for opportunity to get some revenues.

Would you characterize what the activity that's going on is you're gaining market share, albeit the small amount of revenues that are now flowing into the space?

I would want to say that we always want to gain market share in this environment because we have a strong financial position, technological position and we going aggressively. That's what I would mention at this time.

Thank you.

Thank you.

Your next question will come from with Goldman Sachs. Please go ahead.

Thank you.

Hi there.

Hi, .

Hey, Tony. Hey, Jozef.

Two questions. First on the take or pay contracts that you had. Is there any revenue expectation from those kind of contracts in the next quarter. That's number one.

The answer is yes.

OK.

And the second question is on the lead times that you're seeing and also backlog, can you just talk about how much of the quarter -- this quarter and kind of expectation for next quarter ends up being turns business versus shipped out of backlog?

Well, as of today, a significant portion of the sales represented by our guidance are in our backlog. But we still have a reasonably -- a reasonable amount of business that we have to book and ship this quarter. And as we have consistently done in the past, we have not provided those breakouts in percentage terms, .

Yes. And just in terms of progression, is that changing, increasing, decreasing? Any color on that, Tony? Last quarter and this quarter.

Again, we don't disclose -- we don't disclose this information.

All right. Thank you very much.

Thanks.

Your next question will come from , Thomas Weisel Partners. Please go ahead.

Hi, thanks. It's actually for .

Hi, Reuben.

Hi.

Just wondering if you can comment a bit, joint or further down into design activity, specifically on the datacom front, how that's coming along as far as any new customers that you are working with or just the trends in your datacom business.

Thanks.

The team is energized and they are working very hard to work in this environment. They are bringing, you know, the to customers. And somewhere they think of looking in the opportunities what they have. They demonstrated some samples, for instance, to key customers attend the . Did a successful at the OFC show. We may not see lots of demand on us today on . But you know, you need to look at the business environment, et cetera.

We have made investment in this market segment and we will continue universally to expand our...

To that, design activity -- the bulk of our design -- the design contests that we're in and the design leads we get are not with new customers, but with existing customers for our new products or their new products. And that's where the real business opportunity always is, particularly when you look at the list of customers we have in our datacom industry that is largely all the blue chips you might expect to see there.

OK, thanks.

Just a quick follow up. Are you sampling two gig fiber channel transceivers at this point?

Yes, we having -- I don't want to reveal any specifics.

The answer is, yes.

The answer is, yes.

Thanks a lot.

Amy? Hello, Amy? Hello, Amy? Amy?

Thank you. I do apologize.

Are you on the call, Amy? Are you OK?

Yes, I am.

Your next question is from , . Please go ahead.

Good afternoon.

His, .

How you doing?

Just a couple of questions. Any idea if you could give on early stage companies, private companies at what percentage of revenue they were this quarter?

They're -- they continue to be a high percentage in terms of customer names, but a relatively low percentage in terms of dollars.

So less than 25 percent?

Well, we don't predict it out, but I'm -- I haven't calculated it that way, bit I'm reasonably sure it is.

Secondly, what percentage of did you own before the transaction?

I don't remember. I think it was -- it was under 10 percent.

It was under 10 percent.

Definitely under 10 percent.

Under 10 percent?

Yes.

And finally, when would you expect on a cash-on-cash basis when you're pricing an acquisition like that to get the money back, to get the $47 million? Would it be a one year or two year basis or three year basis? What kind of a pricing exercise would you have done?

Well, we have done quite a bit of financial projections. And i certainly don't want to give you any details, but we would expect to get more than our money back within two years.

All right. Thank you very much.

Your next question will come from with Lehman Brothers. Please go ahead.

Thank you.

Question for you -- two questions for you gentlemen. First of all, I just wanted to make sure I understood this right. Did you say that there was $21 million in cancellation charges in the revenue this quarter?

Yes.

Thanks.

And then the second question is more of a technology question. Given the current acquisition of Psion going into CVD type technology, are you standardizing your manufacturing platforms on maybe particular substrates and you know, your manufacturing which would mean that you would maybe have a greater number of fixed costs, but higher leverage in the upturn? If you could maybe shed some light on that, that'd be great. Thank you.

Not this Psion isn't really applicable for integration in waveguide technologies. And I think that the facility, which is, I think, , this is not the facility which is applicable to some other part of semiconductor operation we have in the company such as or detector. This is basically directly applicable for waveguide and photonic circuits where you've got an optical amplifiers or splitters whatsoever.

And, however, as I indicated before, it -- the technology CVD applies to high-yield manufacturing and more reproducible larger , and I think that is essential.

And the proximity, in fact, to our facility right here in San Jose promotes a great deal of leverage to establish this as a platform for waveguided phase products.

Thank you. Just one last question, for Tony if I could. In the December quarter, what level of inventory write-off did you take? If you could just mention that, that'd be great. Thank you.

I don't recall the number, but if you could call me afterwards I'll be happy to get it for you.

Thanks, Tony.

Your next question will come from , Deutsche Bank. Please go ahead.

Hello, Jozef. Hello, Tony.

Hi, .

One question. You mentioned that there was a sequential improvement in book-to-bill, earned slightly below one. Does that mean that the amount you look for in the business this quarter will be significantly lower than in the last quarter? straus: No, there's no correlation.

There's no correlation because some of our orders are long-lead-time orders. It doesn't mean that they're shippable in the current quarter. They may not be shippable for three months or four months or five months.

OK. Thank you.

The sales force, and, in fact we, and myself and Greg and Don have taken an active role to visiting some of our customers to indicate our great commitment to their business.

OK.

Thank you.

Thank you, sir.

Thank you, Raj.

Thanks, Raj.

Your next question will come from , Raymond James. Please go ahead.

Hi, it's Chris Fisher for Todd Koffman.

Hi, Chris.

Hi, how are you doing? Jozef, in your opening comments, you referenced research which indicates increasing latency on certain links of the network. Who performed the research, and what type of links were they examining?

I believe it was one of the analysts...

site analyst who has written and published.

And maybe we can discuss it off line. I think it provides some degree, in large degree of precision to this latency.

OK.

And in the report, it highlighted, just on a sampling basis, some specific city-pair links where this latency was observed over a period of about six months. There are -- excuse me, increasing levels of latency were observed over a period of about six months.

OK. Thank you.

Your next question will come from with US Bancorp Piper Jaffray. Please go ahead.

Hi. Good afternoon.

Hi, Conrad.

Were there any cancellation charges in revenues in the last quarter?

Yes, something around 1 percent or less of sales.

And could you ballpark what the expectation is in the current quarter? Is if going to be about the same, or is it going to be a lot less?

Well, we're not quite sure yet. Because it's one thing to have a contract, and then negotiate with a customer. And remember, with each of our customers we have long-term relationships, and many, many other facets to a relationship. And we will not recognize the revenue until the cash is actually received. So it's a little bit difficult to predict it with a high level of certainty, but we do expect to have some level of cancellations. They could be equal to or even greater than we incurred this past quarter, or they could be less.

OK. And could you give us a sense of how much you expect the module mix to increase in Q4?

I don't have a specific estimate on that that I can give you. But it probably will increase.

OK. Thanks.

That is the overall macro-trend in our industry.

Amy, we have time for two more questions -- excuse me, two more questioners.

Questioners? OK, thank you. Your next question will come from with Wachovia. Please go ahead.

Tony, would you clarify for us gross margin guidance? Does that include or exclude the inventory write-offs? Expected?

It would be the net of inventory write-offs. We all -- every company, particularly companies that use the rigorous methods that we do -- always will have some write-downs in inventory. And the guidance that we've provided assumes a net of write-downs in the ordinary course of business, and the use of some inventory that's been written off because we are just not perfect in forecasting sales mix.

Got you. And in thin film products and instrumentation, was the currency printing business that I believe you got from OCLI way back when, was that a pretty important contributor?

Yes.

Thanks.

Maybe one more question -- one more set of questions, if we have it.

Thank you. Your last question will come from with Robertson Stephens. Please go ahead.

Hi, .

Hi, .

Yes, good afternoon. One question, the gross margin, if I could. It was good to see the side of the business to return to sequential growth as well as operating profitability. I'm wondering if you could use that business and then the network and marginal business, look at each separately and tell us what the steady-state gross margins are for those two businesses, as well as the combined steady-state gross margin for the whole company at break-even revenue levels above $300 million?

At $300 million -- I can answer the second set of your questions. The first with regard to providing detailed product line gross margin breakdown, that we can't do. Or I should say, we chose not to do that.

In our forecasts, as we model the company at a $300 million break even. We would expect gross margins to be in the low 30s.

And is that the steady-state gross margin for the company going forward, Tony, even as .

No, we certainly do not expect that to be the gross margin in perpetuity. In an up cycle, peak of an up cycle, we still expect this business to be able to provide very attractive gross margins. But of course, we need much higher sales levels to do that.

OK, fair enough.

And coming back to the turns question, if I could? I think the previous question was do you need increased or less turns. I'm wondering maybe not talk about the difference, but rather tell us what kinds of turns you need to make the low end of your guidance?

Oh, I really want to get warnings get a pick up, you know, for communications.

We need an up turn to get to $250 million, .

One good turn is good, , too, OK.

Jozef, do you want to...

Yes. Again, I just want to thank you very much for participating in this call. Thank you very much for your support. Thank you very much for patience. And again, I hope to see you in the conferences and shows. And again, our prayers go for Greg and his family in this difficult situation.

Thank you very much.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and please ask you to disconnect your lines.

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