4 February 2015

Oclaro's core communications revenue grows 4% quarter-to-quarter

For its fiscal second-quarter 2015 (ended 27 December 2014), Oclaro Inc of San Jose, CA, USA (which provides components, modules and subsystems for optical communications) has reported revenue of $86.8m, down 15.6% on $102.9m a year ago and 2.7% on $89.2m last quarter but at the high end of the $80-88m guidance range.

By end-market (as a proportion of total revenue), Telecoms business comprised 52%, Datacoms 46% and Industrial & Consumer 2% (compared with 8% last quarter).

The Industrial & Consumer (I&C) business in Komoro, Japan (sold on 27 October 2014 to Japan's Ushio Opto Semiconductors Inc) contributed $1.8m of revenue in fiscal Q2 and $7.5m in fiscal Q1. However, excluding I&C, core communications revenue was $85m, up 4% on $81.7m last quarter.

Revenue growth was driven largely by 100G, which increased by almost 60% quarter-on-quarter (rising from 24% of total sales to almost 40%). "The expansion of our 100G business is the cornerstone of our growth plan. Therefore, we have decided to start breaking out 100G separately from 40G," says CEO Greg Dougherty. As expected, there were continued declines in revenue for both 40G (from 25% of total sales to 22%) and 10G-and-below (from 43% to 37%). "Our recent results validate that our strategy focused on 100G for packet optical transport is indeed working."

Specifically, revenue growth was primarily due to 100G client-side pluggable transceivers, lithium niobate modulators, and narrow-linewidth micro-iTLA lasers. "We saw our 100G client-side business achieved record revenue levels, driven by two factors. One, the market in China bounce backed, as we predicated on our last call. Two, we saw an increase in the adoption of 100G client interfaces in high-end router platforms," says Dougherty. "We continue to see steady progress in growth from our 100G lithium niobate and our micro-iTLA product lines. Both of these businesses are ramping nicely and we expect to see continued growth."

By region, China rose from 23% to 29% of total revenue, while the Americas fell from 32% to 30%, South-east Asia fell from 20% to 18%, and Japan fell further, from 4% to 2%. Europe was level with last quarter, at 21%. There were three greater-than-10% customers: Coriant (dropping from 26% last quarter to 20% as its 40G business fell), Huawei (rising from 11% to 15%) and Alcatel-Lucent (returning as a 10% customer, representing 12.5%), while Cisco fell below 10%.

On a non-GAAP basis, gross margin was 16.5%, down from 16.9% a year ago but level with last quarter and at the high end of the 13-17% guidance range, as a richer mix of 100G products offset the loss of the I&C business' positive contribution.

Operating expenses were $24.2m, down 15% on $28.4m last quarter (due equally to a reduction in I&C-related cost, the absence of year-end audit fees and favorable foreign exchange rates) and down 30% on $34.2m a year ago (as a result of restructuring programs that have significantly reduced R&D spending from $16m to $11.3m and selling, general & administrative spending from $18.2m to $12.9m).

With depreciation of $4.3m, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was negative $5.5m, cut from $8.9m last quarter and $10.7m a year ago, and better than the guidance range of negative $10m to negative $6m. Also, excluding the positive adjusted EBITDA contribution from I&C of $1.9m in fiscal Q1, continuing operations requirements improved by 50% quarter-to-quarter, attributed to the continued improvement in cost structure and good execution on the firm's 100G strategy.

In addition to the adjusted EBITDA of -$5.5m, cash reserves were impacted by the timing of a net $10m accounts payable payment carried over from fiscal Q1, an increase in accounts receivable of $8m, and capital expenditure (CapEx) of $4.5m (compared with $4.7m last quarter). All this was offset by a net $14m received from the sale of the I&C business. Total cash, cash equivalents, restricted cash and short-term investments hence fell during the quarter from $94m to $79m.

"Market demand for 100G in both telecom and datacom continues to build and we expect to leverage our products and technology to drive future revenue growth," says Dougherty. "We expect 40G to continue to ramp down over the next 12-18 months," he adds. "While our overall 10G revenue came down [in fiscal Q2], we are seeing strong demand for our tunable 10G transceiver business."

For fiscal third-quarter 2015 (ending 28 March), Oclaro expects revenue to fall seasonally to $78-85m (including the majority of the impact of the expected 10-15% annual price reductions negotiated in the December quarter). Gross margin should be 13-17%. Adjusted EBITDA is expected to be between -$9m and -$5m.

"Our recent results demonstrate that we are steadily making progress in achieving our financial and business objectives [towards adjusted EBITDA breakeven and then positive operating income]," says Dougherty. "Over the last year, we've reduced the level of [quarterly] revenues needed in our adjusted EBITDA breakeven model from $110m to $100m through a combination of cost reduction and improved operating performance," he adds. "Given our revenue growth, mix of products and our continued vigilance on cost cutting, we now believe that adjusted EBITDA breakeven is achievable at revenue of $90-95m. We expect to hit these targets while still continuing to invest heavily in R&D. We also believe that this updated revenue target is obtainable in the current calendar year." Oclaro expects CapEx to rise to $5-8m per quarter to support growth.

"Our improved financial results reinforce the effectiveness of our turnaround plan," says Dougherty. "We plan to continue to drive improvement in our cost structure throughout the quarters ahead to build a successful and sustainable company," he adds. "As we begin calendar year 2015, we turn our attention to our growth strategy. We are focused on realizing our ambition to be the market leader in 100G optics again for long-haul, metro, enterprise and data-center networks."

"We completed our alpha builds in Q2 of CFP2 coherent products and are very encouraged by the initial performance that our customers are experiencing… The modules are working well with seven different DSPs," notes Dougherty. "Now entering the beta phase, the CFP2 coherent products are not expected to contribute meaningful revenue until late in calendar year 2015. We believe that the availability of pluggable coherent modules will be quickly embraced to long-haul and metropolitan applications," he adds.

"Additionally, we are seeing demand growth of these modules for data-center interconnects, representing a new and potentially significant market opportunity," Dougherty says. "We continue to have much stronger demand than we concurrently satisfy as we go through the typical ramp start-up process for our pilot-production line. We are very focused on successfully ramping the coherent CFP2 into production as it is a key requirement for achieving our growth objectives."

See related items:

Oclaro's quarterly revenue dips while China digests CFP/CFP2 100G shipments

Oclaro expanding manufacturing capacity for 100G client-side pluggable optics

Oclaro's 100G growth compensating for legacy 10G decline

Oclaro's quarterly revenue falls 7% as drop in 10G and pause in 100G outweighs 40G growth

Oclaro's 40 and 100G transmission product revenue grew 20% for second quarter

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