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For its fiscal third-quarter 2008 (ended 29 March), optical component, module and subsystem maker Bookham Inc of San Jose, CA, USA has reported revenue of $59.7m, up 33% on $45m a year ago and up 1% on last quarter’s $59m (compared to a decline from the December to March quarters for the previous two years).

Of total revenue, the telecom division accounted for 73% ($43.9m ), including 13% each from Nortel and Huawei.

“Increased revenue came mostly from strategic products that are important to our long-term success. These include tunable products, 980nm pumps, and high-power lasers,” says president and CEO Alain Couder.

“Tunables are turning into one of our chief products,” he adds. After sequential quarterly growth of 66% in fiscal Q2/08, tunable product revenue grew 75% in Q3, to 16% of total revenue (from just 2% a year ago and 9% in Q2). “We are clearly gaining market share,” Couder believes.

Revenue for 980nm pumps grew 8% on last quarter and 24% year-on-year. In February, Bookham shipped its 500,000th pump (the firm believes it is the leader in the number of pumps shipped to date). With just one other big competitor in the market (JDSU), margins are good, says Couder. Bookham continues to ship pumps to Tyco, but has also started to ship to two more customers.

Revenue for non-telecom products (including high-power lasers) rose 11% sequentially and 22% year-on-year. Gross margins ranged from 24% to 40% (above the company average). “This is an area we want to build out, as it provides margin stability,” says Couder.

Excluding stock compensation of $380,000, overall non-GAAP gross margin was 23%, up from 11% a year ago but down slightly from 24% last quarter (due to increased sales of new products with lower margins). Net loss of $3.4m is down from $18.7m a year ago but up from $1.1m last quarter. Adjusted EBITDA was negative $1.1m, an improvement on negative 14.1m a year ago (though down from positive $0.3m last quarter).

“The year-over-year financial improvement is very significant and the result of the initiatives implemented last year to increase revenue and lower costs,” says Couder. Cost-reduction measures have yielded about $9m in quarterly infrastructure savings from the levels of the December 2006 quarter and have reduced product costs, he adds.

However, Bookham expects a slowdown in revenue growth of tunable products as a result of supply and capacity constraint in back-end processing (not the front-end fab in Caswell, UK, which has moved successfully from 2” to 3” InP wafer processing). Also, over the last few quarters, improvements in gross margin have leveled off as revenue growth (in tunables) has moderated and overhead reductions have been completed, adds chief financial officer Steve Abely.

For its fiscal fourth-quarter 2008 (ending 28 June), excluding restructuring and other non-recurring charges, Bookham expects relatively flat revenue of $58-63m, non-GAAP gross margin of 21-25%, and adjusted EBITDA of negative $3m to positive $1m.

However, Bookham expects to resolve the constraints on tunables and resume rapid growth in the September quarter. “Plans to reduce product cost [for tunables] are fully in place, and will deliver improvements by the September quarter, when the tunables’ margin will no longer be a drag on the average total telecom margin.” Margin for tunable products is expected to rise by 20 percentage points over the next two quarters.

“Our outlook for the remainder of calendar 2008 is positive,” Couder says. “We continue to see increasing demand for our newer telecom products, and we are reducing our non-telecom product manufacturing overheads through leveraging our low-cost Shenzhen manufacturing facility [in China].” Bookham is building up R&D in Shenzhen to focus on quality and manufacturing cost improvements. “Major innovation will come from chips and packaging and lead to breakthroughs in cost reduction over the next 2-3 years,” reckons Couder.

Bookham is transferring most of the photonics tools and solutions manufacturing currently done in San Jose to Shenzhen over the next six months, saving $3-4m per year (recording about $1m in restructuring charges and incurring $1m in manufacturing overhead costs, spread over the next two to three quarters).

For all products, Bookham is also shifting more raw material sourcing to Far East suppliers (expecting 40% to come from lower-cost sources by the end of 2008).

“These cost improvements should translate into better margin results,” reckons Couder. Abely targets gross margin approaching 30% overall in the December quarter.

Continued revenue growth, margin improvement on new products, and overhead cost management during second-half 2008 should result in a transition to positive cash flow from operations (at quarterly revenue of $65m) by the end of 2008, Couder believes.

See related item:

Bookham growth driven by tunables and 980nm pumps, but legacy product fall-off to hit margins in short term

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