Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Daniel Morris – Oppenheimer.
Daniel Morris – Oppenheimer
Could you talk a little bit more about what your Yen exposure is now? I know you’ve been taking steps to reduce it.
Robert Nobile
Over time we’ve been able to reduce our cost of goods Yen exposure from about 80% of our total cost down to the mid 30’s. That came from two fronts; the changes that we made in our procurement efforts as well as the acquisition of StrataLight helped us there.
And then on our operating expense side, still about a third more significant piece of that being on the R&D portion of that on our expenses in Japan.
Daniel Morris – Oppenheimer
With regards to the 40G decline that you’re seeing and I know you’ve associated that with inventory reductions, how confident are you that the inventory reductions and reins on projects as opposed to the share loss?
Gilles Bouchard
We know for sure it’s not share loss because as you know it’s a great market in which we have high market share and so we have pretty good visibility to what’s happening. So it’s clearly due to the level of caution on spend and customer entry levels and it would definitely factor in starting in Q3 and Q4.
Daniel Morris – Oppenheimer
It sounded like you added another nine design wins on the 40G side. Would you say your share of the nine wins, has it been increasing, decreasing, holding?
Giles Bouchard
Basically we are present in just about every design win in 40G. It’s a very concentrated market. I think we’re very involved with opportunities and on the line side again, we’ve got six new design wins this quarter, so I think design wins is very high. Again, we do have the market downturn here which is independent of the market share and design win situation.
Daniel Morris – Oppenheimer
And turning to the gross margins, with the 40G declining and revenues also declining sequentially how should we think about margins?
Robert Nobile
Looking toward the third quarter we’re expecting our margins to deteriorate, and we will receive benefits as a result of the higher volumes of 10G and industrial communications products as well as our continued efforts on cost reductions in both fixed and variable.
But with the decline in the 40G revenues as you indicated and the little bit of currency and your normal quarter over quarter ASP decline, we don’t believe that the benefit from the 10G side and the costs are going to be able to offset the downside.
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