4 November 2011

Opnext’s revenue falls 7.6% as China OEMs start producing 40G modules internally

For its fiscal second-quarter 2012 (to end-September 2011), optical module and component maker Opnext Inc of Fremont, NJ, USA has reported revenue of $86m, down 7.6% on $93.1m last quarter and down 0.5% on $86.4m a year ago.

Cisco Systems Inc was the only customer to represent more than 10% of total revenue. The Americas represented 54% of total revenue, Europe 13%, Japan 11%, and the rest of Asia 21%.

The shortfall on August’s guidance of $89–95m was due mainly to soft demand for 40G subsystems and line-side modules. Also, the shift by larger OEMs in China from externally purchased 40G modules to internally produced modules was faster than expected.

Revenue from 40Gbps and above products of $32.1m has risen by 43.9% from $22.3m a year ago but fallen 5.9% from $34.1m last quarter; $1.5m of the $2m drop coming from 40G subsystems while lower revenue from 40G line-side modules was partially offset by higher 40G and 100G client-side module revenue.

Revenue from 10Gbps and below products of $44.9m is down 11.3% on $50.6m last quarter and down 20.4% on $56.4m a year ago due to lower 10G telecom and SFP module revenue, partially offset by higher 10G datacom revenue.

Revenue from industrial & commercial products is up 16.9% on $7.7m a year ago and 7.1% on $8.4m last quarter to $9m, representing the ninth consecutive quarter of growth.

On a non-GAAP basis, after rising from 22.2% a year ago to 23.5% last quarter, gross margin has fallen to 21.9%.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) has fallen from $1.9m last quarter to just $0.1m, but this is still an improvement on negative $4.4m a year ago. “Despite lower-than-expected revenues and continued appreciation of the yen, we achieved positive adjusted EBITDA, which is indication that our efforts to reduce product cost and control expenses are working” says chairman & CEO Harry Bosco.

Although down from $6.2m a year ago, cash used in operations has risen from $1.7m last quarter to $1.9m. Opnext also used $2.2m for capital expenditure (CapEx) and $2.4m to fund capital lease obligations. During the quarter, cash and cash equivalents hence fell by $6.7m, from $97.2m to $90.5m.

Opnext’s primary contract manufacturer of 10G modules – as well as some of the TOSAs (transmitter optical sub-assemblies) used in them - is Thailand-based Fabrinet Co Ltd, which accounted for $37.3m (43%) of Opnext’s total quarterly revenue. These products are made at Fabrinet’s Chokchai campus in Pathum Thani, where operations have been suspended since 22 October when floodwaters infiltrated the ground floor offices and manufacturing space. In addition, production was limited in the week prior to shutdown as operations were impacted by local transportation and utility issues.

Opnext currently has about $16m of inventory in Thailand ($8m of raw materials and $8m of finished goods). Most finished goods were undamaged, but most of Fabrinet’s work in process (WIP) has been damaged, including some raw materials. Opnext also has production equipment at Chokchai (mainly 10G module test sets with a new original cost of about $31m). Some of the more sophisticated measurement equipments was moved by Fabrinet to the second floor of the building and has escaped damage. Fabrinet expects the insurance provided contractually by them to be adequate to cover the cost of replacing any damaged inventory and equipment.

Fabrinet believes that it is unlikely that production will resume at Chokchai before the end of 2011. “Following the flooding in Thailand, Opnext is executing business continuity contingency plans, expanding the capacity at our manufacturing facility in Totsuka, Japan for our 10G products while moving some capacity [the lower-end 10G products] to our contract manufacturers in China and our facility in Fremont,” says Bosco. “Although this approach of expanding internal manufacturing capacity is inconsistent with our long-term strategy of moving module manufacturers to low cost regions, this is fastest path to recover production and support our customers,” he adds.

“Operationally, our direction is clear. What is less clear is the full extent of the impact of this situation on our financial results for the current and future quarters,” Bosco says. “We will not be able, however, to transition capacity quickly enough to avoid a significant impact on our results for the December quarter,” he adds. The firm is working towards starting manufacturing at the alternative locations by the beginning of December. “Opnext’s priority is to invest the necessary resources to minimize the number of customers impacted and to limit the impact on those affected,” concludes Bosco.

See related items:

Opnext revenue hit by 40G DQPSK and 100G CFP module production constraints

Opnext’s revenue down 1.8% after module assembly stoppage

Opnext grows for fourth consecutive quarter to record $97.1m

Opnext reports higher-than-expected growth, to quarterly record of $86.4m

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