13 February 2012

Opnext’s quarterly revenue falls 38% due to Thailand flooding

For its fiscal third-quarter 2012 (to end-December 2011), optical module and component maker Opnext Inc of Fremont, NJ, USA has reported revenue of $53.1m, down 38.3% on $86m last quarter and down 45.3% on $97.1m a year ago. However, this is due mainly to the loss of production capacity at primary contract manufacturer Fabrinet in Thailand (where most 10G products are assembled and tested) following the flooding there in October.

Cisco Systems Inc and Hitachi Ltd each represented 10% or more of total revenue (43% combined). The Americas represented 46% of total revenue (down from 54% last quarter), Europe 17% (up from 13%), Japan 26% (up from 11%), and the rest of Asia 11% (down from 21%).

Revenue from industrial & commercial products was $6.7m, down 25.5% on $9m last quarter, due mainly to the inventory built up at Japanese industrial laser customers following the earthquake last March. “We anticipate that it will take about two quarters for this demand to recover,” says chief financial officer & senior VP Bob Nobile.

Revenue from 40Gbps-and-above products was $20.2m, down 37% on $32.1m last quarter, as demand for 40Gbps and 100Gbps client-side modules fell (due to the timing of service provider deployments of next-generation systems) and demand for 40G line-side modules fell modestly (as the shift by China OEMs from externally purchased modules to internally produced modules continued).

Due to the disruption caused by the flooding in Thailand, revenue from 10Gbps-and-below products was $26.2m, down 42% on $44.9m last quarter and 57.6% on $61.8m a year ago.

“During the quarter [in December], we started limited assembly and testing of our 10G modules at our facilities in Japan [Totsuka] and California,” says chairman & CEO Harry Bosco. “About $2m of revenue came from products produced at Totsuka and Freemont that were previously assembled at Fabrinet, and about $14m came from shipments by Fabrinet or inventory on hand prior to the flood,” he adds.

On a non-GAAP basis, gross margin has fallen from 21.9% last quarter to 7.1%, due mainly to the lower revenue and a $2.1m (or 4 percentage point) inventory charge resulting from a customer discontinuing use of a 10Gbps product as they transitioned to their next-generation technology. “We have been awarded future 10G opportunities to compensate us for those losses,” notes Nobile.

Excluding $21.7m of fixed asset impairment and damaged inventory charges resulting mainly from the Thailand flood, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) has deteriorated to negative $16m, compared to +$0.1m last quarter and +$1.1m a year ago.

Compared with $2m a year ago and $1.9m last quarter, cash used in operations was cut to $1.4m. Opnext also used $1.4m for capital expenditure (down from CapEx of $2.2m last quarter) and $2.2m to fund capital lease obligations (down from $2.4m). Hence, during the quarter, cash and cash equivalents fell from $90.5m to $85.2m.

“We plan to restart manufacturing in Thailand at Fabrinet’s Pinehurst campus this month, with a return to pre-flood production capacity expected by 31 March,” says Bosco. “We will bring up an additional contract manufacturer in the March timeframe to enable us to dual source the assembly of our high-volume modules. Even though we had minimal inventory of products formally assembled by Fabrinet on 1 January 2012, we expect sequential growth in our 10G-and-below products in the March quarter, as production ramps at Fabrinet’s Pinehurst facility and our new contract manufacturer in parallel while we are continuing production in Totsuka and Freemont,” he adds.

“Future gross margins are expected to benefit from faster growth in 40G-and-above revenues and from new 10G product introductions,” says Bosco. For example, Opnext plans to deliver working samples of its tunable XFP in the March quarter (with mass production by mid-2012). The LR4 module (the multi-wavelength 40G transceiver in a CFP package) began shipping last quarter, and the QSFP version is expected to start shipping to customers this quarter. “The QSFP application and data-centers, where power density and costs are key factors, are critical for success... We view all of these as significant growth opportunities,” he adds. Opnext shipped 100G coherent modules to core customers for qualification in the December quarter, and expects to add several others this quarter. In addition, overall 40G-and-above demand began to improve at the end of December quarter and was strong in January.

Based on the 10G production recovery plan and the improvement to date in orders for 40G-and-above products, for fiscal fourth-quarter 2012 (to end-March) Opnext expects revenue to rebound to $70-75m.

“In addition, we will continue to improve our cost structure through increased vertical integration and by closely watching our expenses,” says Bosco. Opnext expects a 40% gross margin on incremental revenues, consistent with its pre-flood business model. Also, excluding direct flood-related costs, operating expenditure is expected to be consistent with the December quarter. Accordingly, the firm’s pre-flood business model to achieve breakeven adjusted EBITDA on $85m of revenues per quarter and breakeven non-GAAP operating profit on $100m of revenue per quarter (at an exchange rate of 80 yen/$) is still intact.

“Our temporary 10G module manufacturing in Totsuka and Freemont will be transferred back to our contract manufacturers in the June quarter,” says Bosco. “To support our customers during the transition period, we have worked closely with them to prioritize the sequence of our production recovery to meet their critical needs. Based on customer feedback, we expect our 10G and below market share to return to pre-flood levels once production is fully recovered,” he adds. “We are also well positioned with the broad portfolio family of products for 40G-and-above that now includes our 100G coherent modules,” continues Bosco.

“Market data continues to point to high demand for more bandwidth, and our new product floor addresses the high-growth segments of the market,” notes Bosco. “Based on industry analysts’ forecasts, our primary addressable market is predicted to grow more than 20% through 2015, and the 40G-and-above portion is predicted to grow about 40% in the same timeframe.”

See related items:

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

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

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