More on the strategic decisions and cost-cutting measures taken.
SM: How did you do that? Did you change materials, did you negotiate your supply contracts? I mean 70% of material costs is a lot of material costs to shave. JR: The way we did it was we bought a laser fab in Fremont to make lasers. And remember we had started our IC design group, and we are making IC’s instead of buying them from semiconductor companies. We went directly to foundries to produce our own ICs. That dramatically reduced the costs of our own ICs.
We were able to integrate multiple IC functions into a single IC, reducing the number of ICs on a board. We bought an edge emitting laser company, we bought a vertical cavity laser division from Honeywell, so we were able to produce the highest cost elements in our product, which were the lasers, and the photo detectors which were probably second or third in costs.
Then, in 2005, we bought Infineon’s fiber optic division and we shut it down in Europe, in the Czech Republic and Berlin and we moved it to Malaysia, and that gave us not any technology but access to a few European customers.
So, the net result of it is when the crash occurred our gross margins went from 50 something percent to less than 20%. Even two and a half years ago our gross margins were still in the low 20’s, 21%, 22%. The last two and a half years we have taken our margins from that level to our last quarter, when they were 38.8%. We have virtually doubled our gross margins.
We have, over that time, reduced our operating expenses also. Because we moved a lot of functions to Malaysia – jobs that used to be here in Sunnyvale, which was a very painful thing for us to do, but it was part of … if your going to succeed, if you are going to survive you have to change not only your cost structure but your expense structure.
We moved production engineering, we moved process engineering, we moved quality assurance jobs, we moved planning jobs, all sorts of factory support, automation engineering.
SM: Were these people you moved from here, or did you hire in Malaysia?
JR: We hired in Malaysia and had major layoffs in the US. We reduced US employment by a third.
SM: That must have been very painful. JR: It was unpleasant, it was painful. There was nothing I can say about it that was positive other than the net result was positive. It was what we had to do to transform the company, but as a result of all of that we have had five profitable quarters in a row and we just finished our sixth profitable quarter in a row. We are on a track of growth and profitability. Most companies, at least in our industry… we were the first company to become profitable again and I think we have a very enviable track record as a company at this point.