Question-and-Answer Session
Operator
Your first question comes from John Harmon - Needham & Co.
John Harmon - Needham & Co.
I was curious, what turned out positive on the gross margin line that led you to beat your guidance by so much?
Marla Sanchez
One of the main factors that we had on there was continued improvement on our E&O line. We also had better direct margins and lower manufacturing overhead in general. Most of our variances, a lot of the programs that we've talked about in the past, are really starting to kick in. The other thing to remember is that this was the first quarter that we did not have France on the books at all for the entire quarter.
John Harmon - Needham & Co.
Is there any way to quantify the progress you've made towards reaching your targets on variances?
Marla Sanchez
I think on our target towards variances, what we've really been doing is trying, for example, to get to our E&O to end up being closer to $2 million per quarter which was what we've talked about in the past. We were a little bit better this quarter but I think we had a very good quarter. I'm not sure that I would continue counting on it always being as good as it was quite this quarter.
John Harmon - Needham & Co.
And did you have a say in Pirelli taking over Alcatel-Lucent investment in your company or what do you think their motivation was for taking on the investment?
Jo Major
I think a few things should be said. First, we had a lot of discussions with Pirelli and it's a very core relationship that we've got between the two companies, so there's a very nice relationship that we're looking to develop there, John.
The question of why did Pirelli buy the stake in Avanex, I think is very straightforward: they want to make money in telecommunications. We view Pirelli as a very market savvy investor in optical telecoms and we're quite happy that they selected us as a vehicle to make some investments. We're also in the process right now of exploring how we can collaborate with them.
They've made a lot of investments in some advanced R&D ideas, and Avanex has a really good platform for taking technology to market so there's two pieces of it. One is I think there's a pure financial play that they saw, and we are very happy about that, and the second part of that is that we're quite excited about looking about how we might be able to get the two companies to behave collaboratively and delivering some exciting new products to the market.
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