27 September 2013

Oclaro’s revenue falls 4% quarter-on-quarter

Oclaro Inc of San Jose, CA, USA, which provides lasers and optical components, modules and subsystems for optical communications, has announced underwhelming financial results for its fourth-quarter and fiscal year 2013 (ended 29 June). However, the firm has sold off one division and is hoping that the windfall will help it to regain traction.

“While our fiscal fourth-quarter results were in line with our expectations, the continued losses underscore the urgency of our turnaround plans,” commented CEO Greg Dougherty. “We remain focused on transforming Oclaro into a sustainable company that will deliver shareholder value over the long-term,” he added.

“Our sale of the Zurich business [Oclaro Switzerland and its associated laser diodes business division to II-VI Inc on 12 September] demonstrates that we are taking action to create a stable future,” continued Dougherty. “With the resulting cash, we can now take the necessary steps to restructure the company. Our goal will be to focus Oclaro primarily on the optical communications market, and leverage our photonics innovation and long-term customer relationships to return to profitability.”

For Q4/2013, revenue was $136.1m, down 3.9% on $141.6m last quarter. Datacom revenue was about $43m (31.5% of total revenue, compared to 28% last quarter). Telecom revenues were about $76m (56% of revenue), down on $83.1m (59% of revenue) last quarter. “Like many in our peer group, we have seen a bit more strength in Datacom and Telecom,” commented chief financial officer Jerry Turin. Industrial and Consumer revenues were about $17m (12.5% of the total). Oclaro’s 10%-or-greater customers were Cisco (13%) and Huawei (11%).

Research and development (R&D) expenses were $23.9m, cut from $25.2m. Selling, general & administrative (SG&A) expenses were $21.6m, cut from $22.5m last quarter. Combined, these represent a 4% reduction in operating expenses quarter-on-quarter. “We anticipate making significantly more reductions in the future,” noted Turin. Flood-related expense (regarding the flooding in October 2011 at Thailand-based primary contract manufacturer Fabrinet Co Ltd) was a credit of $18.9m, associated with proceeds under flood claims received in the June quarter. “Any remaining cash proceeds from insurance settlement will be limited to $2.5-3.5m,” Turin believes.

Despite the drop in total revenue, on a non-GAAP basis gross margin has risen from 10% to 11%. Net loss was $30.3m, cut from $33.4m last quarter. Adjusted EBITDA was negative $21.1m, an improvement from negative $23.7m last quarter. During the quarter, cash, cash equivalents, restricted cash and short-term investments rebounded from $80.5m to $87.6m.

“In the future, we also expect to collect $14.5m of the receivables of the Zurich business that the terms of sale allow us to retain, up to $8m of additional Zurich deal proceeds upon the clearing of traditional closing conditions in the future,” said Turin. “We expect to pay in the range of $5-6m in professional fees and related costs associated with the Zurich deal. If II-VI exercises adoption to purchase our amplifier business and that deal closes, we would expect to collect another $83m in the future,” he added.

Reorganization

Dougherty explained to analysts how he will use the proceeds from the sale to rebuild Oclaro: “The first thing that we have done is to fully repay our bank borrowing. We plan to begin a substantial restructuring plan which will focus on aligning our operating expenses and manufacturing overhead with our revenues, further reducing our global footprint and streamlining our organization, the objective being to quickly and dramatically reduce our cash burn.

“We have built a company that is far too complex for its size. We have not effectively integrated our acquisitions and not realized the corresponding synergies such as using more of our own components within our modules and subsystems. We have not completed our various outsourced manufacturing transition on the schedule and costs that were established. Our R&D investments have been spread too thinly over too many technologies and products while they are often also focused on manufacturing transfers,” Dougherty added.

“The keys for us to be successful are to simplify our company in terms of geography and organizational structure, to prioritize our activities so that we excel at what we choose to do, such as in R&D where we will invest our resources so that we can offer differentiated products in large and fast-growing markets, and to improve our execution through more focused and greater accountability,” Dougherty continued.

“The results of this action should bring us substantial improvements in efficiencies and cost structure. We have already begun to take some actions to put us on the right path. Some example of these are: for our Wavelength Selective Switch (WSS) product line, the platform itself is behind the market and it would require significant investment in terms of dollars and time to enable switching when using a flexible grid. We’ve decided to no longer invest R&D in this product area. We have consolidated all of our WSS operations at our Korean manufacturing site and have shutdown the WSS activities at facilities in New Jersey and Israel. The de-emphasis of WSS - in addition to the sale of the Zurich business, including the Tucson site - have already reduced our number of sites by four, and we plan to continue to take actions to simplify our global footprint.

“To better serve our customers with our technology we have focused our components R&D on indium phosphide (InP) tunable lasers with and without an integrated Mach-Zehnder modulator for 100G coherent, our micro-iTLA, our 100G coherent lithium niobate modulators, our integrated 10 gigabit tunable [TOSA] with low power consumption, laser modulators for tunable XFP+, and lasers (either direct or externally modulated) for high-density 40G and 100G client interfaces.

“On the client side, we have strong customer traction on our 40G and 100G products. We are focused on reducing size and power consumption without compromising performance for all of the leading form-factors such as CFP, CFP2 and QSFP+.

“For high-speed Internet, Ethernet and enterprise networks, we have seen increased penetration of our 100G CFP Gen2, which is available on both single- and dual-rate variance, as well as our CFP2. For data-center connectivity, we are planning to ramp up our 40G client QSFP+. We continue to leverage our 10G tunable technology to migrate fixed-wavelength transceivers to tunable XFP and SFP+. And finally, we have enjoyed a lot of success recently with our transceivers for use in wireless backhaul infrastructure,” concluded Dougherty.

“In support of this strategy and to create a more variable and flexible business model, we remain committed to transitioning to outsource back-end manufacturing with the transfer out of our Shenzhen manufacturing scheduled for completion in fiscal 2015.”

Forecast

For fiscal first-quarter 2014 (ending 28 September 2013), Oclaro expects revenue of $134-138m, non-GAAP gross margin of 9-11%, and adjusted EBITDA of negative $24m to negative $19m. Guidance includes the expected results of the Zurich business, from end-June through to the transaction’s closing date of 12 September.

“Our guidance for September implies continuing operating cash burn going forward, and we also expect to incur significant restructuring cost in the future,” noted Turin. “In the mean time, we continue to have our line in place with Wells Fargo. Our ability to draw on that line in the future though will be subject to negotiation of certain terms and conditions scheduled to take place over the upcoming weeks. We no longer have any borrowings outstanding from Providence.”

“We now have the funds to begin our restructuring and turnaround,” commented Dougherty. “Earlier in September, we finalized two transactions with II-VI Inc. The first transaction, the deal valued at $115m, was the sale of our high-power laser, VCSEL, 980nm pump laser businesses, including our Zurich subsidiary and GaAs fab, as well as our Tucson R&D facility. By the second transaction, II-VI has secured an exclusive 30-day right to purchase our amplifier and micro-optics business for a total of $88m,” he added. “To secure this right they paid a non-refundable fee of $5m, so the total cash proceeds received for both transactions was $97m.”  

See related items:

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Oclaro and Opnext complete merger

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Visit: www.oclaro.com

By Matthew Peach, Contributing Editor