28 January 2011

Oclaro’s profit dips during investment and ramp-up

For its fiscal second-quarter 2011 (which ended 1 January), optical component, module and subsystem maker Oclaro Inc of San Jose, CA, USA has reported revenue of $120.3m, up 29% on $93.6m a year ago, but down slightly on $121.3m last quarter. “The surge in demand that we experienced coming out of the downturn is over,” comments president & CEO Alain Couder.

Of total revenue, Huawei was 17%, CNA Nortel was 12%, and Alcatel–Lucent was 11%. Telecom revenue was up slightly, from $107.8m last quarter to $108.3m, consistent with the inventory correction that was seen. In particular, products for data rates of 40Gb/s or higher comprised more than 30% of telecom revenue.

Advanced Photonic Solutions (APS) business was $12m (10% of total revenue), down from $13.5m (11% of revenue) last quarter. This is also down from 14% of revenue a year ago, which was before a decline due to: (i) tight inventories while completing the fab transfer from the former Newport Spectra Physics high-powered laser diode business in Tucson, AZ (acquired in July 2009) and the corresponding ramp-up at Oclaro’s fab in Zurich, Switzerland, and (ii) an inventory correction at the APS division’s biggest customers.

Non-GAAP gross margin has risen from 26.8% a year ago and 29% last quarter to 30%. This was despite the mix of: (i) high-margin APS products declining; and (ii) revenue rising from 40Gb/s products of the former Mintera business (prior to implementing cost improvements that should transition these products to above-average margins in the future).

Adjusted EBITDA was $10.1m, up on $4.3m a year ago but down on $10.9m last quarter. Net income was $5.9m, up on $0.9m a year ago but down on $6.6m last quarter.

During the quarter, cash, cash equivalents and restricted cash fell from $94m to $78.1m since, while Oclaro continues to generate positive operating earnings, it is also in investment and growth mode. Capital expenditure rose from $6.9m last quarter to $11.4m, in order to both close capacity gaps and ramp up businesses acquired over the last year.

“We are entering a new phase following the integration of our past acquisitions,” says Couder. “After successfully maintaining design momentum, we are now focused on ramping new products across many of our key markets,” he adds. “Consistent with those priorities, we have enhanced our organizational structure to simplify our customer interface and to strengthen our execution.”

Oclaro has consolidated its five divisions into two primary business units, led by two of its experienced optical industry executives. Former chief operating officer Jim Haynes has been appointed president & general manager of the new Photonic Components business unit (which includes APS). Former executive VP of the Transmission Systems Solutions division Terry Unter (former CEO of Mintera) has been named president & general manager of the new Optical Networks Solutions business unit. Oclaro has also added two senior executives to the management team: Gray Williams (former VP of Worldwide Supply Chain at Logitech) as executive VP, Supply Chain Operations and Quality (leading all backend operations, located mostly in Asia); and Bob Quinn as chief information officer (formerly VP of Operation and Technology at RagingWire Enterprise).

“Market conditions remain strong, and we are expecting revenue growth in the seasonally softer March quarter,” says Couder. For its fiscal third-quarter 2011 (ending 2 April), Oclaro expects revenue to rise to $123–131m, helped by APS revenue starting to bounce back (both from a recovery in VCSEL sales and getting over the fab transfer). Non-GAAP gross margin should be 27–31% (consistent with the December quarter, even while absorbing the impact of new pricing, most of which takes effect at the start of the quarter). Adjusted EBITDA should be $6–11m.

In the upcoming few quarters, CapEx should remain level. Also, Oclaro does not expect any significant capacity issues, other than those associated with improving yields for APS laser diode products as the firm continues to ramp production in Europe.

Chief financial officer Jerry Turin reckons that gross margins could be back in the targeted 35% range by the end of 2011, due to the ramp-up of products like the high-margin tunable XFP as well as the bounce-back in APS, and completing cost improvements for Mintera 40G products (for which revenues are currently doing very well).

See related items:

Oclaro’s quarterly revenue growth slows from 11.4% to 7.6%

Oclaro reports record profitability on 44% revenue growth year-on-year

Oclaro grows margin for third consecutive quarter

Oclaro grows 10%, driving cash generation and investment

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