15 November 2011

Oclaro’s quarterly revenue flat due to Asian telecom slowdown

For its fiscal first-quarter 2012 (ended 1 October 2011), optical component, module and subsystem maker Oclaro Inc of San Jose, CA, USA has reported revenue of $105.8m, down 3% on $109.2m last quarter and 12.8% on $121.3m a year ago. However, about $2.8m of shipments got held up at the end of the quarter due to a major typhoon in Hong Kong.

Revenue for Telecom Components (including lasers, modulators, laser pumps, receivers and integrated lasers and modulators) was $24.8m, down 20% on $31.1m last quarter (and down $11m since the December 2010 quarter, due largely to market slowdowns in Asia). Also, there was an impact of about $3m from a customer-specific evaluation issue on a legacy product which is now being resolved, although the corresponding revenues are not expected to begin to ramp back until the March quarter.

Revenue for Transmission Modules (including 10 and 40G transponders and transceivers) was $24m, up 8% on $22.2m last quarter, although the overall calendar year has seen a drop in 10G transponders, due largely to a soft economy and related market slowness, offset by substantial growth in 40G transponders (including more than $10m in 40G DPSK transponders).

Revenue for Amplification Filtering and Optical Routing (including amplifiers, micro-optics, dispersion compensation, wavelength selective switching modules, and subsystems in ROADM line cards) was $40m, down just 3% on $41.2m last quarter but down 23% on $51.7m a year ago after a decline in tunable dispersion compensation due to slower Asian deployment of 40G. Nevertheless, the amplifier portfolio has shown stability, even on a relatively soft telecom market, and WSS and ROADM products are continuing to gain traction.

Revenue for Industrial & Consumer products (including high-power lasers and VCSELs) was $17.1m, up 17% on $14.6m last quarter and 25% on $13.7m a year ago. At a record $15m, high-power laser revenue has fully recovered from the fab transfer from Tucson, AZ, USA to Europe. However, consumer markets for VCSEL lasers are going through a soft period.

Major customer revenues included Huawei at 13%, Fujitsu at 11%, Cisco at 11% and Alcatel-Lucent at 10%. This compares with Fujitsu at 17%, Huawei at 10%, and Alcatel-Lucent and Ciena both just under 10% last quarter.

Growth in relatively high-margin industrial laser products was offset by drops in revenues for similarly high-margin telecom components and 10G transponders. On a non-GAAP basis, gross margin was 23%, up slightly from 22.9% last quarter. However, this is down from 29% a year ago. The telecom slowdown in 2011 has hit Telecom Components and 10G transponders harder than other product categories. Since the December 2010 quarter, these products have fallen from 45% of the firm’s product mix to just 32% (a major factor in the gross margin decline).

“We are accelerating our new product momentum and intensifying our focus on our core competencies,” says chairman & CEO Alain Couder. Apart from shipping over $10m in 40G DPSK transponders, Oclaro reckons to be the market leader in coherent modules and components, with $2.4m in 40G coherent modules shipped during the quarter, as well as shipping 40G/100G modulators and100G receivers. The firm also claims a strong position in 10G tunable transponders, pluggables and lasers, with volume shipments of tunable XFP (TXFP) modules to one of the top 2 OEMs and one of the top service providers, as well as being first to market with a zero-chirp TXFP (now sampling to multiple customers). Also during the quarter, Oclaro launched two new high-power 980nm pump lasers (including a 600mW dual-chip pump) and sampled a high-port-count 1x23 wavelength-selectable switch (WSS).

Adjusted EBITDA was negative $4.5m, cut slightly from negative $4.7m last quarter but compared with +$10.9m a year ago. Net loss was $11m, up slightly from $10m last quarter and compared with a profit of $6.6m a year ago.

Capital expenditure (CapEx) has been almost halved from the average of $11.5m over the prior three quarters to just $6.2m. Nevertheless, during the quarter, total cash, cash equivalents and restricted cash continued to fall, from $63.4m to $51.7m. On 26 July the firm secured an increase in its line of credit from $25m to $45m and extended its term through 1 August 2014. As of 1 October, the amount drawn under the line of credit was $19.5m.

“Gross margin and adjusted EBITDA were at the higher end of our guidance ranges, despite continued soft market conditions which led to an expected sequential decline in revenues,” says Couder. “Our results demonstrate that the company’s cost-reduction initiatives are gaining traction,” he adds.

By the June 2012 quarter, Oclaro aims to reduce its adjusted EBITDA breakeven level to $110m in quarterly revenue, and its cash flow breakeven to slightly above this $110m threshold (depending on CapEx investments). “We expect to see additional improvements from these actions, continuing beyond June to the end of 2012,” says Couder.

Specifically, Oclaro targets a reduction in staffing, as well as returning R&D spending back towards 13% of revenue (from 16.7% currently). It also aims to transfer back-end high-power laser production from its plant in Zürich, Switzerland to Shenzhen, China (saving $1m per quarter in the next fiscal year). It is also initiating the next step in its long-term site consolidation strategy, and evaluating the divestiture of a couple of non-core product lines.

In addition to its breakeven action plan, Oclaro is taking other measures to move towards a more variable cost model (shifting about $8m per quarter – or a third of its manufacturing overhead – from its fixed-cost base). With the aim of improving its balance sheet, reducing its fixed costs, and focusing on its differentiating core competencies, Oclaro is enhancing the flexibility of its business model.

Specifically, the firm is in final negotiations to outsource all of its final assembly & test operations in Shenzhen to a major contract manufacturer. (Although Oclaro will maintain a presence thereof about 220 staff in R&D and new product introduction, overall company staffing will fall from 2800 to 1200.) This is expected to generate $30-40m in net cash proceeds when the transaction closes in calendar first-quarter 2012 (with additional potential consideration to be received in the future). Oclaro is also finalizing a supply agreement with this contract manufacturer with the goal of reducing product costs over time. “Many of our customers have a long relationship with our potential contract manufacturing partner, and as a result we would expect the transition to be seamless,” comments Couder. “By keeping production in Shenzhen we can ensure continuity of the process and quality for our customer and create a good transition for our staff.”

Oclaro has also signed a new supply agreement with its Thailand-based primary contract manufacturer Fabrinet Co Ltd (which manufactures 30% of Oclaro’s total finished goods), with a term extending through calendar 2013.

However, on 22 October, flood waters in Thailand infiltrated the offices and manufacturing floorspace in buildings 1 and 2 at Fabrinet’s Chokchai campus in Pathum Thani and cut off production at buildings 3, 4 and 5 at its Pinehurst campus (about 7 miles north of Chokchai). Pinehurst produces high-power laser (HPL) and assembles printed circuit boards (some of which are used in Shenzhen). HPL production is expected to resume on 14 November. However, Chokchai represents about 60-70% of Oclaro’s Fabrinet-produced revenue and remains flooded. Recovery of inventory and equipment is in process. In the meantime, its production of tunable dispersion compensation, amplifier and modulator products will be restarted instead mostly in Pinehurst. “In light of the recent Thai floods, our top priority is to restart production in Thailand in order to minimize customer impact,” says Couder. “Many of our resources are being redeployed to support the recovery efforts,” he adds.

For fiscal second-quarter 2012 (to end-December 2011), revenue was expected to increase modestly, with some strengthening of second-tier customers counteracting softness from top-tier customers Huawei, Alcatel and Ciena. However, the flooding in Thailand is expected to lower this by $25-30m, to $75-85m. Gross margin should be down to 13-17%. Adjusted EBITDA is expected to worsen to negative $18-13m. Including capital expenditure associated with flood recovery, CapEx is expected to increase (though probably remaining lower than recent averages).

The flooding in Thailand is also expected to reduce revenue in the March quarter by $10-20m, but by the June quarter revenue should be back to normal, says Oclaro.

See related items:

Oclaro’s ramp of higher-margin products delayed by optical telecom inventory correction

Oclaro hit by Chinese telecom inventory correction

Oclaro cuts quarterly revenue guidance by 8%

Oclaro’s profit dips during investment and ramp-up

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

Tags: Oclaro

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