3 August 2011

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

For its fiscal fourth-quarter 2011 (ended 2 July), optical component, module and subsystem maker Oclaro Inc of San Jose, CA, USA has reported revenue of $109.2m, down 3% on $112.7m on a year ago and 5.6% on $115.7m last quarter. However, despite slowness in the optical telecom sector during an inventory correction lasting much of the year, for full-year fiscal 2011, revenue was $466.5m, up 19% on fiscal 2010’s $392.5m.

Total revenue from non-telecom products (including high-power lasers, filters, and high-volume VCSEL products for consumer applications) was $15.1m, up 10% on $13.7m last quarter. In particular, revenue from high-power laser business was up by $1m (about 10%).

Greater-than-10% customers for the quarter were Fujitsu (17%) and Huawei (10%, down from 18% last quarter), while both Alcatel-Lucent and Ciena were just under 10%. “Fujitsu has risen into the ‘major customer’ category on the strength of 40G transponder sales,” notes chief financial officer Jerry Turin.

“In fiscal 2010 we transformed Oclaro into a tier-one supplier of optical components and subsystems through a series of strategic initiatives,” comments chairman & CEO Alain Couder. “In fiscal 2011 we began structuring the integrated company to scale, while accelerating our investment in new product innovation,” he adds. For example, Q4/2011 included initial shipments of new products including 40G coherent transponders, tunable XFP transceivers, 40G lithium niobate external modulators, and an integrated ROADM (reconfigurable optical add–drop multiplexer) line card. In total, these revenues were below $1m. “However, even these modest revenue levels establish important traction on the related revenue guidance,” Turin reckons. “As a result, we believe we are well positioned for growth as the telecom optical market recovers,” adds Couder.   

Non-GAAP gross margin has fallen further, from 30.7% a year ago and 24.9% last quarter to 22.9%. This is due to: more than $3m of excess and obsolete inventory reserves and related charges; and lower wafer fab overhead absorption (caused by a decline in revenue from photonic components products, which tend to be at the packaged chip level during the market softness, and the continued inventory correction in the optical market). Oclaro’s inventories soared by 15% from $87.5m to $100.2m. Full-year gross margin fell from 28% in fiscal 2010 to 26.8% for fiscal 2011.  

Compared with $17.2m last quarter, Oclaro is now investing $18.9m per quarter in R&D, which is $7.4m (64%) more than a year ago. Consequently, full-year R&D spending has risen by $24m from $41.5m in fiscal 2010 to $65.5m for fiscal 2011. The firm also had $4.5m more depreciation expense in fiscal 2011, associated with capital investments in scaling the firm for long-term growth and new product introductions.

Consequently, compared with +$12.3m a year ago and +$0.7m last quarter, adjusted EBITDA was negative $4.7m for fiscal Q4/2011. Consequently, full-year adjusted EBITDA has fallen from $26.5m in fiscal 2010 to $17m for fiscal 2011.  

Compared with net income of $10.6m a year ago, non-GAAP net loss has more than doubled from $4.5m last quarter to $10m. So, compared with net income of $14.1m for full-year fiscal 2010, full-year fiscal 2011 yielded a net loss of $2m.

After capital expenditure of $9m (up from $6.2m a year ago, but cut from $14m last quarter), cash, cash equivalents and restricted cash fell during the quarter from $75.7m to $63.4m. Although no amounts were drawn under Oclaro’s $25m line of credit as of 2 July, on 26 July the firm closed an increase to $45m and extended its term through 1 August 2014.

For its fiscal first-quarter 2012 (ending 1 October 2011), Oclaro expects relatively flat revenue of $103–113m, due to uncertainty for the core optical market, offset by growth in the high-power laser market. “We have not yet seen a meaningful recovery of the component-level product revenues,” says Turin. The firm also expects non-GAAP gross margin of 18–24% and adjusted EBITDA of negative $8.5–2.5m. “With our inventories up and our revenues relatively flat, it is taking longer for us to realize the benefit of cost improvements in our product,” he adds. “At the same time, customer price decreases continue right on schedule with a top competitive environment among our customers reinforcing pricing pressure. The disconnect between timing of our cost improvement and timing of price reduction is not helpful for gross margin,” Turin comments. 

“We don’t expect a significant enough ramp of higher-margin new products within September [contrary to expectation on entering this calendar year] to move the needle on overall company gross margin,” Turin continues. “We plan on holding R&D spending flat in the September quarter [with CapEx of about $9m],” he notes. 

“As of now, we believe the potential aggregate revenues in the December quarter from all of our 40G transponders — our tunable XFP, our 40G and 100G modulators and our WSS ROADM-related products — could be in the $25–30m range,” says Turin. “While we are beginning to see some progress on these new products, the overall markets for our telecom optical product has continued to be soft.” Nevertheless, as revenue growth returns, Oclaro expects R&D spending to move back towards its 13%-of-revenue target.

See related items:

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%

Oclaro reports record profitability on 44% revenue growth year-on-year

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