Tim Jenks - Chairman, Chief Executive Officer Ray Wallin - Chief Financial Officer Erica Mannion - Sapphire Investor Relations.

Alex Henderson - Needham Richard Shannon - Craig-Hallum Victor Chiu - Raymond James Dave Kang - B. Riley.

Welcome to the NeoPhotonics, Second Quarter 2015 Conference Call. This call is being webcast live on the NeoPhotonics event calendar webpage at www.neophotonics.com. This call is the property of NeoPhotonics and any reproduction without the written consent of NeoPhotonics is prohibited.

You may listen to the webcast replay of this call by visiting the event calendar page of the NeoPhotonics website. I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations, Investor Relations for NeoPhotonics. Please go ahead. .

Good afternoon. Thank you for joining us to discuss NeoPhotonics operating results for the second quarter of 2015, as well as the company’s outlook for the third quarter of 2015. With me today are Tim Jenks, Chairman and CEO, and Ray Wallin, Chief Financial Officer. Tim will begin with a review of the second quarter.

Ray will review the financial results for the second quarter and provide an outlook for the third quarter of 2015, and then Tim will provide closing comments before opening up the call for questions. We may make statements in this conference call which are not historical facts.

These statements may be considered forward-looking statements that involve risks and uncertainties.

Various factors could cause actual results to differ materially from what is set forth in such forward- looking statements, including those that have been set forth in our press release sent out today, August 6, 2015, our final prospectus relating to our follow-on equity offering filed pursuant to Rule 424 (b) (4) on May 22, 2015 and our most recent Annual and Quarterly Reports on Forms 10-K and 10-Q, all of which we have filed with the Securities and Exchange Commission.

Listeners who do not have a copy of our second quarter 2015 earnings press release may obtain a copy of the press release by visiting the company’s web site. Now, I will turn the call over to CEO, Tim Jenks..

Thank you for joining us today. NeoPhotonics had a strong second quarter. We achieved record quarterly revenue of $85.4 million, which is in line with our projected range of $83 million to $89 million, and represents growth of 10% annually and 5% sequentially.

Our gross margins continue to expand, both annually and sequentially in the quarter, recording a Non-GAAP gross margin of 32.3%, a full 11 percentage point increase over the second quarter of 2014 and a 1 percentage point increase over the prior quarter.

On an earnings per share basis, we continue to make significant progress towards our target model.

As a result of our continued growth, margin expansion and operating cost discipline, we were again profitable posting our fourth consecutive quarter of non-GAAP profitability and our third consecutive quarter of GAAP profitability with earnings of $0.14 and $0.05 per diluted share respectively, which includes the impact from shares issued in our May equity offering.

We generated $11.4 million of EBITDA and we generated $7.7 million of cash from operations during the second quarter. As we’ve articulated on previous calls, our goals are to be a leader in High Speed 100G and beyond product solutions and to deliver sustained profitability.

Our second quarter results continue to demonstrate our strong execution towards these goals with a 5% sequential increase in revenue and a 28% sequential increase in Non-GAAP profitability, plus increases in gross margins, EBITDA and operating cash flow.

I am very pleased with our direction, our progress and our achievements against our objectives, and I thank all of our employees for their hard work and dedication to these goals.

Regarding our outlook, we are mindful of the macro-economic environment, the key elements defining our specific markets, geographic economies and currencies, and the timing of deployments by major telecom carriers, as well as our own product pruning activities. Ray will provide some more detail on these points in a few minutes.

Today telecom service providers represent our largest end-use market, notably for both High Speed 100G products and for Network Products and Solutions, including broadband to access products, and both of these markets have deployments underway for infrastructure build outs in China that are expected to span several years.

Our near term outlook is reflecting timing differences in the next two quarters that are driven, most notably by deployment of 100G infrastructure supporting transport and related mobile networks in China. The timing of these deployments results in our more conservative outlook for the third quarter.

We’re guiding to a revenue midpoint of $80 million, margins in-line with this revenue level and a non-GAAP profitable bottom line. NeoPhotonics is a market share leader for key products used in coherent transmission, at 100, 200 and 400 gigabits per second, such as our Integrated Coherent Receivers and Narrow Line-width Tunable Lasers.

Our broad suite of 100G products is used in long haul and metro transport and also in data center interconnect and enterprise applications. Further, we have new products under development for use in next generation pluggable coherent solutions.

We believe our product and technology leadership and advanced hybrid photonic integration is second to none and continues to drive our leading market share position in coherent transmission.

Demonstrating our leadership position in the market, our high speed products, that is products designed for use in 100G and above systems, represented 59% of total revenue in the second quarter, which was yet another record.

Network Products and Solutions represented 41% of total revenue, with sales of products for access networks remaining firm in China, though we continue to view this product group as a mature business. On a geographical basis, in the second quarter we saw continued strength in the U.S.

market, while we experienced some lumpiness in Europe due to inventory rebalancing, primarily associated with the pending acquisition of Alcatel-Lucent by Nokia.

While we expect order patterns to return to normal after the optical transport manufacturing operations of Alcatel-Lucent are transitioned to a contract manufacturer as a part of the acquisition, this and general EU softness may remain hard to predict and possibly continue to be lumpy going forward.

We continue to be excited about the traction of our High Speed 100G and beyond products in rapidly growing datacenter interconnect system applications as this contributed to our strong high speed product group results and within the China market we continued to experience strong demand for all our products, including 100G coherent solutions during the second quarter.

Now beginning in the second half of 2014, we saw a significant acceleration of long-haul optical deployments within China, which continued through the first half of this year.

As we look to the growth drivers of our business for the remainder of the year and through 2016, High Speed 100G coherent long-haul deployments, including in China, will remain a primary contributor.

Our market leadership position, technology roadmap and top-tier customer base will allow us to grow with this market as burgeoning bandwidth needs require both upgrades to existing networks, as well as the build-out of new ones, including for datacenter interconnect.

To ensure NeoPhotonics is best positioned to take advantage of these technology transition cycles, we have continued to introduce new, advanced optical component products into the coherent market. As we’ve discussed, these included two new small-form-factor Coherent Receivers, a high power micro tunable laser and our 100G CFP2 modules.

We’ve also introduced a new, even smaller form factor, micro-ICR. For client and datacenter applications we launched our new 100G CFP4-LR4 transceiver, and we are pursuing PAM4 based 100G transceivers, which will form the basis for 400G transceivers in small form factors.

We see the metro market as the next significant opportunity for 100G coherent solution growth, particularly in 2016 and beyond. On our last call I highlighted the colorless-directionless-contentionless or CDC network architecture, which may likely represent the future of metro optical networking.

We’re encouraged with the progress Verizon has made thus far with this architecture, and we believe once they begin to deploy CDC networks in volume next year; other carriers will quickly look to validate and then deploy the technology as well.

Specific to NeoPhotonics, we believe our multi-cast switch remains a notably unique offering in the industry, leveraging our core strength in complex photonic integrated circuits and highly dense architectures to reduce overall CDC network build-out costs, while increasing the flexibility and deployment approaches.

While the market is still in its early stages of formation, we remain excited about our competitive position, and we believe this market opportunity could increase our TAM by up to $200 million during full-scale deployment.

The datacenter interconnect market, which consists of very high capacity fat pipes between datacenters located tens to thousands of kilometers apart, represents a further distinct market segment and one which has been growing very rapidly.

Several equipment vendors have recently announced custom designed 100G coherent DCI systems, and we expect this market to be a growth driver for our coherent products for the next several years as well.

In summary, we continue to take the long view on the market opportunities ahead of us by investing in next generation products to serve the growing adoption of coherent networks and the use of high speed modules on the client side, while we remain focused on our cost structure and our execution path to sustained profitability.

I’ll now turn the call over to Ray Wallin, our Chief Financial Officer. .

Revenue in the range of $77 million to $83 million; non-GAAP gross margin in the range of 29% to 32%; diluted GAAP net income loss per share in the range of a $0.06 loss to earnings of $0.02, and non-GAAP diluted earnings per share in the range of $0.01 to $0.09 reflective of approximately $0.07 of after-tax non-GAAP adjustments and approximately 43.1 million fully diluted shares.

I would like to provide more color on our outlook. Now for revenue, while the overall market for our 100G solutions remains robust, current timing variations in deployment schedules from one of the largest telecommunications carriers in China have the impact of skewing a portion of our anticipated revenue towards the fourth quarter.

In addition, in the second quarter we completed product pruning actions that we initiated last year, cutting products that represented $23 million of revenues in 2014 and our outlook reflects no further revenue from pruned products.

Our gross margin outlook is impacted by volume and product mix changes, partially offset by manufacturing utilization and process improvements. In addition, we expect some increases in our second half R&D spending as key new products are moving toward general availability.

During the last several quarters we introduced our long-term operating model, which I want to reiterate today. Now we anticipate making steady progress towards our target model goal, which is non-GAAP gross margin of 35%, R&D expenses in the 14% range, SG&A expenses in the 11% range and non-GAAP operating margin of 10%.

I’ll now turn the call back to Tim for some wrap-up comments..

Thank you, Ray. We’ve made significant progress on improved profitability, solid cash flow generation and operating expense reduction and we will continue to focus on these metrics going forward.

With the ongoing strength in 100G long haul deployments and growth in 100G inter-datacenter interconnects, while also taking into account the temporary skewing of tender awards in China, we are optimistic for the rest of this year and into 2016.

We believe our 100G business will continue to accelerate as we see metro launches and switching growth, such as with Verizon’s launch of CDC ROADMs including MCS switching, coupled with additional strength from Data Center Interconnection and core long-haul deployments of 100G coherent systems.

We believe there are a number of potential accelerators to our business and while we are excited about our growth opportunities, we recognize the need to remain disciplined with our operational structure to ensure we deliver on continued progress toward our target model and generate earnings growth to complement our top line.

This concludes our formal comments and now I would like to ask the operator to open up the line for questions..

Thank you [Operator Instructions] Our first question comes from Alex Henderson with Needham..

Well, so guess I really wasn’t expecting such a conservative expectation for the third quarter. But on this side of the coin it sounds like you’re expecting much better than normal seasonality for the fourth quarter.

So given you’d only give guidance one quarter at a time, but obviously there’s been a shift in the timing of those revenues, is it reasonable to look at the full year number here and assume that – is it reasonable to say that the full year number that people were carrying for revenues is still attainable or beatable based off of your current expectations or should we be bringing our estimates in commeasurably for both the third and fourth quarter based on the trajectory of the 3Q guide?.

Okay, Alex I think the key issue here in the whole situation is how China does their deployments for the remainder of the year. We are certainly geared up and ready to support it and ready to support it at levels that we’ve talked about previously.

The timing matters if the deployments for both the broadband and the 100G backbone, all go on as stated in the schedule, then yes, it is possible to complete the year as originally indicated. The big variable is what further tender timing changes get communicated by the carriers..

Can you talk a little bit about what content you’ve been provided by your carrier partners in China and your OEM partners in China that have led you to the timing commentary and what gives you confidence or might give you confidence in this schedule of recovery and that demand as we get into the back half of the year, and specifically if there is any sense of when you knew, what you knew?.

Okay, sure. You know China is – the carrier market is principally three carriers with China Mobile, China Telecom and China Unicom. Certainly in recent periods China mobile has been the one that has gained the most share, and that actually isn’t just in wireless by any means. It absolutely affects the 100G transport as well as broadband access.

So for us, our exposure is the largest in the 100G transport deployments and followed by the broadband access and the wireless and wireless backhaul is the smallest exposure for NeoPhotonics.

Essentially they were forecast as early as the second quarter, essentially in the second quarter that were communicated to us by our customers and of course the major customers in China include Huawei, FiberHome, Alcatel Shanghai Bell and ZTE, all of these carriers are involved.

For us Huawei in the most recent quarter was 40% of revenues, so they are obviously the largest. So the fact that Huawei is a very significant customer to us and China Mobile is a very significant customer to them. The current forecast in China have upwards of 35,000 to 40,000 lines of 100G across all of the carriers for this year.

China Mobile has the largest part of that, in fact slightly more than half. Huawei has the largest part of that and so the intersection of those gives us a view that as our largest customers pushed some planned deliveries from third quarter to fourth quarter it is the skew that Ray talked to.

So timing has been the latter part of Q2 when things became visible with respect to impact on the third quarter, but the actual deployment schedules through the fourth quarter are not yet known..

I see, and the comments you made about ALU, a little surprising given the strength of the ALU results which included 21% growth in their optical business in constant currency, 31% as reported, plus indications of a positive book-to-bill and sharp increases in activity.

I’m a little surprised to hear that that kind of condition has resulted in any caution in your expectations out of the European theater.

Can you address that please?.

Yes, sure. The actual point here is with the announcement of Nokia acquiring Alcatel Lucent.

There were simultaneously certain manufacturing locations for Alcatel in Europe that were being sold I believe to Flextronics and the management of inventory between the new contract manufacturer and Alcatel themselves are in fact different, that causes some lumpiness. It’s not a reflection on the size or a direction of their business.

It’s just management of their inventory in the short term that makes it lumpy. You’ll note that we did point out that Alcatel was an 11% customer for us. In the prior quarter they were not among the 10% customers, so we saw strength at Alcatel Lucent as well..

So the transition of those manufacturing facilities is causing the drawdown in the inventory, in what period? Is that 3Q?.

Well actually there are a couple of impacts. In 2Q their quarterly timing was different than in the past. They are shortening their quarter for shipments and for the second and third quarter their specific management of their fiscal inventory counts vary and how they draw down inventory is not transparent.

So we’re just mindful that it could be lumpy and we’re prepared either way..

So when you talk about the impact that has potentially in your expectations for the third quarter, I mean is that bigger than a bread box or what? I mean we’re talking about a couple of 2 or 3 percentage points of revenues that could swap between quarters as a result of the timing of those production lines filling and ramping or what’s the magnitude of the impact on your 3Q number and wouldn’t that give you some very good clarity that they would normalize into the fourth quarter?.

Well, I would hope it would do as you say; however, we did $85.4 million this second quarter and the midpoint of our guide is $80 million and the impact of this can be in the range of low single digit millions, so for example $2 million, $2.5 million, so 3% of revenues, something like that.

So it’s not immaterial, but it’s a relatively small number in the grand scheme of things, but it matters in our forecast for the third quarter and our outlook..

So, again going back to the point, if 2% to 3% of revenues fall out of the third quarter because of this, doesn’t that just automatically come back in the fourth quarter as the production normalizes..

Well, if and only if their new contract manufacturer runs with the same level of inventory. Actually we would expect them to run a bit liner, so it may not..

Right, but the throughput that they would do in a quarter, don’t they turn most of that inventory?.

I can’t answer that question Alex, I don’t know yet..

All right, okay. I’ll cede the floor. I’ve asked enough questions, thanks..

Okay, thank you Alex..

We’ll take our next question from Richard Shannon with Craig-Hallum..

Hi Tim and Ray, thanks for taking my questions. I don’t mean to beat a dead horse, but I just want to make sure I heard kind of the conclusion of what you and Alex were talking about Tim. So how much of the – well, I guess we have to go off.

I mean can I go off of what I had previously been forecasting, which is a little bit higher than your guidance here. How much of that is coming from China push-out versus Alcatel Lucent. I guess it wasn’t real clear based on yours and Alex’s discourse there..

The point on Alcatel is that it can provide some lumpiness. The cause of the more conservative outlook is essentially all related to China..

Okay, thanks for clarifying that one. Let’s see here, maybe a couple of other questions. Kind of looking a little bit further out you mentioned developing products for the CFP2 coherent pluggable markets. I’m not sure if we’ve talked about your expectations for timing of entering that market.

Can you give us your sense there please?.

No, we haven’t made actually a product introduction announcement and so we won’t be doing that today..

Okay.

Could we expect to see something out of the optical conference in Europe next month?.

I think you can expect to see it when you see it you know. We haven’t made an announcement at this point in time..

Okay. Maybe on another track here, you’ve talked about your Datacenter Interconnect business here. Do you have any sense of how much of your business that is? I’m assuming that’s all 100G. Maybe it’s just a percentage of that, but can you characterize that either way and how it’s trended in the past and where it may go going forward..

Yes. Among our largest customers, we have a number of increases in the 100G business. This quarter we went from 57% to 59% of our revenues from 100G, essentially the preponderance of that from a 100G coherent. These are systems that are essentially – I guess I would call them cousins of metro systems. So you’ve got transport systems and metro systems.

Metro systems are generally special design and a version of that which would be with fewer features if you will for covering fat pipe applications are for the DCI. And we’ve certainly seen in public announcements companies including Ciena and [indiscernible] who have made significant statements about the rate of growth of this.

Our products are essentially important parts of a number of the custom DCI solutions.

What percent is it? We don’t have clear visibility on that, because of the fact that the vision of those systems from our customer are not delineated, but essentially with – I think you should look at it as proportional to the major system companies in terms of their datacenter contact..

Okay, that’s fair. Maybe one last question from me back over to Ray. Given Tim’s comment about if we see the timing of China come back in 100G and maybe getting to or close to the revenue growth expectations you talked about last quarter of up to 10%, what are the odds of you getting to that 35% non-GAAP gross margin number in the fourth quarter.

Is that a good likelihood or can you characterize that in any way, please?.

Yes. Well, I would say it’s going to move us substantially closer to that number, because the 100G products are substantially higher gross margins than the other products in the company. So a higher mix effect there with the gross margin higher for that.

Plus we continue to achieve quarterly manufacturing efficiencies and cost reductions which are adding to our gross margin every quarter, one to two points, so we’ll continue to see that as well. So we get the combination of both the mix effects and the manufacturing efficiency for cost reduction we continue to move through.

So we still see steady progress towards that goal. As we said before, our revenue for the year would be upwards to 10% for the year..

Right. Okay, I appreciate the details there Ray, thanks. That’s all the questions for me..

You’re welcome..

[Operator Instructions] Our next question comes from Simon Leopold with Raymond James..

Hi guys, this is Victor Chiu in for Simon Leopold. Most of my questions have been asked. I just wanted to ask just quickly – oh! Actually just a housekeeping question.

Did you guys break out the – did you guys give the breakout between 100G and non-100G products this quarter?.

Yes, so our high speed products are 100G and above. They are not – this was a change that we did for the first quarter, so they don’t include 40G for example. Its only 100G and above and that percent was 59%, up from 57% in the prior quarter and therefore network products and solutions are the balance.

That would be 41% of revenue in the second quarter..

Okay good, thank you. I wanted to ask about China. We keep hearing that material deployments for access and then part of it with home builds, but with – and if you count everything, the number of these products with the restructuring, how do this impact the results.

Is there a downside there or is there you know now with you guys out of the picture is that possibly going to hurt sales a little more, how does that look, what’s the dynamics there?.

So actually our access, our broadband access products are included within the network product and solutions. These as I said in the comments, they have continued to be quite firm in China.

China Mobile as a company has been increasing share vis-à-vis China Telecom and China Unicom over the last year, but overall the deployments have continued at a good pace. Our percent of revenue from these products is in the 20% of total revenue and it was fairly flat from the first quarter to the second quarter in terms of percent.

So up in absolute dollars, flat in terms of percent, but continuing strong..

But you guys have mentioned exiting the roller access portion of the business there, is that correct?.

Actually what we said is that we were pruning lower margin products that comprised $23 million in 2014 and in fact the products that were included there expand a range of applications.

So they did include some things that were access, but they also included some things that you might call first generation 100G, things that were no longer competitive and that we have now taken out of the product line. So it wasn’t just access.

It was somewhere included, but generally it’s continued to be about 20% of our business and continuing strong..

Are you continuing to prune or….

No, we’ve completed the pruning action that we started one year ago and that was completed by the end of the second quarter and as Ray indicated, those pruned products are no longer in our forecast and will not generate any revenue in the third quarter and four quarter. .

Okay, got it. And then I guess I just wanted to ask about gross margin for next quarter.

The lower gross margin, can you give us a little color around that? Is that primarily from the lower volume I presume from the conservative outlook or are there other factors impacting the lower gross margin for next quarter?.

Yes, its principally as you are thinking about it from the lower volume and the mix effects. As we said in our comments, we are going to continue to run the factory consistent with the prior quarter because of what we are feeling about the second half and we continue to generate manufacturing efficiencies and improvements.

So we do have a little bit lower volume of the higher margin products. .

Okay, great. Thank you very much. .

Thank you, Victor. .

We’ll take our next question from Dave Kang with B. Riley..

Thank you, good afternoon. First question is regarding pruning.

So how much was that in second quarter?.

See, in the first half it was in the range of $5 million or $6 million and about half of it in each quarter..

Okay, so let’s say $2.5 million, so basically – so what I’m getting at is from second to third quarter your total sales will decline about $5.5 million and looks like right there $2.5 million is attributable to that pruning.

It is appearing in the third quarter, is that correct?.

That is correct. .

So and you talked about ALU disruption and that’s another couple of millions. So that’s about $5 million right there, right.

So where is China, how much of the China impact I guess, that’s what I’m trying to figure out how much of the China push-out is impacting your third quarter revenue?.

Well, the range of revenue is $77 million to $83 million and the pruning is as you stated about $2 million, $2.5 million. We don’t actually know what the impact of Alcatel will be, so as we suggested it’s lumpy, but we haven’t specifically factored in a number, but there is variation there. We maintained a $6 million spread.

So the impact of China, it impacts both the mid-point and the low end..

Got it, so basically I mean, $2.5 million is pruning and then the other whatever is a combination of ALU and China, that’s what it sounds like. .

I would say Dave that the primary impact of our having a more conservative outlook is the skewing of the China deployment, that is a the primary impact..

And then, I may have missed it, but did you explain what’s causing this skewing with this push-out? Is that related to any of the Chinese government investigations that we heard before?.

Well, you know that’s an interesting question that we can’t fully answer. There are know – there have been press releases in China that pertain to certain executives, certain of the largest companies. Does that actually affect the timing, we can’t directly connect the dots there, but it’s a possibility.

The other thing is that, of course we do have a relative new government in China and October, November they will release a new Five Year Plan. What is the timing of infrastructure, new releases relative to the five year plan, we don’t specifically know.

But what we do know is that in particular, in the order of China Mobile followed by China Telecom and lastly China Unicom, those three companies have specific share of the 100G deployments earmarked for this year and the biggest piece is yet to be released and therefore until its actually released and in the backlog, we have to reflect that in our more conservative guidance.

.

Okay, and then just a couple more. Regarding your 100G mix, you have several components there. I was wondering, I figure you are not going to break it out, so if you are not going to break it out, at least can you give us or maybe can you just rank them like Micro ITLA, ICR, 100G CFP2, what’s the largest, what’s the smallest, just give us a flavor..

Well, our coherent products suite is larger than the client side products, although both have been growing over the last three years, and the receivers versus transmitters, for NeoPhotonics generally the receivers are larger than the transmitters, transmitters include ITLAs, micro-ITLA and various versions of that, so – and then the 100G modules which include CFP2 and CFP4 modules, those probably have the highest growth rate, but they would be ranked number three in terms of current contribution revenue.

.

So I guess it will be the coherent portion that will be pushed out, certainly not the client side. .

That’s correct, thank you for pointing that out. The deployment of a 100G which is talked about is perhaps 20,000 lines, 20,000 lines would be all coherent 100G line cards..

Got it. And then on MCS that you talked about, you said $200 million, is that what annually or total? I think I missed it when you said $200 million..

That would be an annual TAM in the total market, okay. Its total market at full deployment rates, it’s not one end used customer and it’s not 2016. It’s the estimate of the size of deployments in full deployment scale..

Got it, and then I believe you said there are only about two major competitors there, right. Is that still the case or has it changed..

We believe that’s accurate, yes. .

Yes, okay, and then what about any kind of design win activity there, MCS, especially for metro operate cycle for next year..

Relationships with customers, specific design wins aren’t generally disclosed, however we are shipping these in field trials currently and we would expect that to be important for going forward and for the rate of growth in 2016. So we’ve been actively working to scale up our production line and be ready for general availability..

Got it. All right, thank you..

We have a follow-up question from Alex Henderson. .

Thanks, a couple of questions. First one, just on the Rusnano situation, can you talk about where you are with respect to lockup agreement on any stock they have? Is that part of any the agreement that you came up with in July or will they free to sell at some point in the open market..

They were locked – we did the equity offering in May and as part of that equity offering they committed to locking up for I believe it was six months..

Just a traditional lockup with the underwriter Alex..

So just a traditional lockup, so that’s still in force. .

Okay and then second question, historically you’ve had a sequential decline into the December quarter from the September quarter. That has been predominately driven by the fact that you had Access products being larger portion of your revenues and its gradually been diminishing as an impact.

Should we still think of the fourth quarter as having that seasonal pattern or is it reasonable to think that now that you’ve exercised, some of these lower margins products shifted away from some of the access, seeing such a large growth rate in the Higher Speed 100G product areas which you don’t seem to have that seasonality.

That going forward we might be seeing sequential growth in the December quarters. .

Yes, so over the last five years, one year saw a decline in the third quarter versus the second quarter; I believe that was 2011.

Essentially most years see the third quarter larger than the second quarter and most years see the fourth quarter flat or slightly down and that is generally driven by moving into the end of the year, the holiday season, as well as pricing declines that can affect some customers for one month.

Having said that, about one out of the last five years we saw a very healthy increase in the fourth quarter over the third quarter and that had to do with deployment schedules on programs, so all of our normal patterns are just reflective of the sum of all deployments.

Now, we do have in our top three customers, our top three customers in the most recent quarter did represent 70% of our revenue and therefore a significant change in one of the major customers does affect our revenue pattern.

So based on what we are seeing in China, based on the 100G deployment plans, it’s entirely possible that the fourth quarter could be up relative to the third quarter. It’s not – well four out of five years have been flat to slightly down. It’s also that four out of five years are up in the third quarter versus the second.

So I’m just reflecting on the historical pattern.

Did that answer your question Alex?.

It did. I certainly got the general gist to that comment.

A second question, given what you know about the deployments in China in terms of the scale of what they are doing, the commitment they have to 400 cities, the commitment they have to 30 provinces, is it reasonable to think that this business is going to decelerate for any extended period of time or is it more likely that in fact that’s a substantial increase in demand over a period of time, which should have double digit growth attached to it on an annualized based..

with the 30 provinces, the 400 cities to continue to drive growth in the 100G area, to continue to drive growth in broadband access and to continue to be an overall accelerator for our business and our third quarter we are being conservative because of the timing schedules. But I think the macro trend is much, much on the favorable side.

So I think your thesis as your asked is spot on. .

Another question, more on the operating side of things. I was a little confused about your comment about the tax rate. Could you explain to me what you meant by bridging towards higher tax rate.

Is the 18.8% non-GAAP in the June quarter the right number for the back half of the year or what are we looking at here? I’m a little confused by the commentary. .

Yes, so last conference call, we established that there would be about 18.5% full year estimate for the tax rate based on the distribution of our profits and our profit levels for 2015. Based on our latest assessment, our forecast and our income by jurisdiction, we are now believing that 18.5% on a full year basis would be 20% to 22%. .

So would that imply that you expect better earnings in the back half of the year in non-China geographies, is that what I’m hearing. .

No. What it implies is that we reassessed our view of the profitability by geography and its resulted in higher profits and areas being taxed, so that our overall rate is….

That actually includes, it doesn’t exclude China..

It doesn’t exclude China, it includes everything, China, Japan and U.S. of course. So yes, it’s just looking at the business and because we have to set the tax rate on a full year basis and so we’ve been – Q2 profits were excellent, Q1 was excellent and we’ve considered what’s going to happen in the second half.

So the result of that is, that our view now is that we’ll have higher profitability, higher tax. .

The comment Alex, this is Tim. The comment that we used on bridging is because we were previously expecting 18.5% and now are expecting 20% to 22%, we had to increase tax accrual in the second quarter to account for that. .

Well, I guess I’m still confused, wouldn’t you have to increase the tax accrual over the mid-point of the target range.

If you are going to do 20% to 22% for the full year, then don’t you have to increase it over 22% to bring the 15.5% for the first quarter?.

That is correct, you’re absolutely right. In fact the second quarter tax rate in believe was 38%. .

Well, I’ll have to look at this, we’ll talk about this one offline. It doesn’t put to my numbers here.

Just to be clear here, if I’m looking out into the ‘16 timeframe and beyond, if your outlook for the full year ’16, without offering a particular forecast, but better than what’d you’d been thinking before or is it somehow eroded by what’s going on in China, should we be more conservative on the outlook for ’16 or are we still just as optimistic on the outlook for year than – how do we think about this situation that you are putting us in here?.

I think that the outlook we have for 2016 is essentially unchanged and we use the term skew, we see that the second half of the year, third quarter might be a little lower, the fourth quarter and then the first might be a little higher, but the overall outlook really hasn’t changed. What’s changed is the timing of the tenders and their deployment. .

And you’re sure that there is no inventory build or anything along that lines in that geography that could be accounting for any of this issue. .

Well, I’ve read commentaries from a number of tech companies that do a lot of business in China and without a doubt they and we have certain about of inventory that’s in China. I don’t think that’s what’s going on here. I think what’s going on here is related to the timing of 20,000 lines of a 100G deployment; that’s what’s going on.

It’s nothing different than that and I don’t think it’s an inventory correction, no. .

On the pricing and competitive front, is there any change in competitive or pricing dynamics that could account for a skew to the numbers? Have you had any shift in share, have you guys see any competitive entry that would change pricing conditions, anything along those lines?.

At this point in the year, no Alex. Timing does matter, because negotiations take place in the fourth quarter, so timing matters, but at this point no, there are no changes to that. .

All right, on the OpEx line I assume it’s fairly flat sequentially at 2Q levels, with a little bit of increase in R&D as you indicated. .

Yes, we will see the sales and marketing and the G&A being roughly flat and then we’ll see the R&D coming up reflecting that we are delivering on our new product introductions if these products are beginning to roll out into the market place and getting into production in our factories. So that’s going to show a little bit of an increase in R&D..

All right, I’ll cede the floor. Thank you. .

Thank you, Alex..

There are no further phone questions at this time. I’d like to turn the call back to Tim Jenks for any additional or closing remarks. .

Thank you very much operator. In closing I’d like to thank everyone for taking time today to join our call and to thank our employees for their dedication in helping us achieve our goals. We look forward to updating you on our progress on our next quarterly call. Thank you and have a good evening..

And that does conclude today’s conference. We thank you for your participation..