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25 August 2008


Avanex’s sales rebound, but profits fall during new-product ramp

For its fiscal fourth-quarter 2008 (to end June), optical communications component and module maker Avanex Corp of Fremont, CA, USA has reported revenue of $51.8m, rebounding by 5% from the low of $49.6m last quarter and up 1% on $51.1m a year ago. The recovery has been driven by an increase in transmission products sales plus $1.2m of deferred revenue after the settlement of legal proceedings concerning a distribution agreement with former French subsidiary 3S Photonics.

North America comprised 43% of revenues, Europe 32% and Asia 25% (with revenues for the latter up 30% on last quarter). Avanex’s 10% customers were Alcatel (27%) and Tellabs (22%). Other large customers included Nortel and Walkway.

Avanex notes that it has re-categorized its product lines into three key areas - transmission, regeneration and wavelength management - to allow better tracking of progress as it strengthens its portfolio and expands into global market.

Targeting the industry’s largest and fastest-growing market, transmission products (including transceivers, transponder and modulators) grew as much as 25% in Q4 to about a third of total revenue (and more than 50% of design wins). Drivers include the move to higher transmission rates such as 40Gb/s and new modulation format, longer-reach business. The firm also continues to see a trend to tunable components.

Regeneration products (including control amplifiers, gain blocks, dispersion compensation modules and integrated optical performance monitoring products) fell by 12% to about half of revenue (and 30% of design wins).

Wavelength-management products (including both fixed- and reconfigurable-wavelength routing products) grew by 10% to about 15% of revenue (and more than 20% of design wins).

Gross margin was 32%, flat on last quarter but up from 24% a year ago. However, excluding benefits such as the 3S settlement, gross margin would have been lower by 5-6%. Non-GAAP net income was $1.6m, up from breakeven a year ago but down from last quarter’s $2.9m.

For fiscal Q1/2009 (to end-September 2008), Avanex expects gross margin to fall to 20-23% due to: lower revenue of $44-48m (due mainly to a market slowdown in Asia and pricing pressure); a temporary shift in product mix towards lower-margin legacy products (for which Avanex is aiming to reduce sales); a higher-than-expected double-digit decline in average selling price (ASP) for one of Avanex’s highest-revenue products from one particular customer (for a legacy system); and investing in new capacity for key products such as reconfigurable add-drop multiplexing (ROADM) modules and tunable transponders (with R&D expenses also rising slightly to address such growing markets).

After completing restructuring activities in fiscal 2008, in order to compete more effectively in the fastest-growing markets Avanex’s is now replacing lower-margin legacy products by investing in developing next-generation products (e.g. tunable transponders, tunable dispersion compensators and control amplifiers).

However, Giovanni Barbarossa (appointed interim CEO in early July) explains that the drops in margin and income are due to a combination of a delay in Avanex’s ability to bring new products to market and delays in some customers being able to adapt to the new products. In particular, in the optical telecoms equipment industry, time-to-market is the key difference, the firm says.

Avanex’s focus over the next few quarters is therefore to expand margins by improving execution in new product development (bringing products to market faster and at the right time) and strengthening relationships with key customers. Already, in fiscal Q4, Avanex extended its supply agreement with Alcatel-Lucent, and had a number of new design wins with multiple customers. Also, as part of its strategy to expand in high-growth regions, it increased its development sales and operation teams in Asia.

“We’ve been encouraged by our recent design wins and we see significant opportunities for our new products,” says Barbarossa. “We see three or four new product lines coming in that could be very successful, including our tunable dispersion compensation line, WSS/ROADM area, and then also some of our new transmission products (including transponders),” adds VP of finance and interim CFO Mark Weinswig. “We need to invest in new capacity to increase revenue on the new products, especially with the higher-margin products,” he adds.

“There is a considerable opportunity to increase revenue from transmission products as we leverage our next-generation products, including our new tunable transponder platforms and modulators,” believes Barbarossa. “With the market moving to 40Gb/s deployment, new technologies to enable higher transmission rates are critical to meet growing bandwidth demand, so we see a significant opportunity for our regeneration products,” he adds. “In particular, we saw increased traction with customers for new tunable dispersion compensation products, especially in next-generation submarine systems and 40G applications.”

Investment in capacity will continue for the next few quarters as Avanex ramps up new products, says Weinswig. Revenue for new products will help to expand margins, reckons Barbarossa.

For full-year fiscal 2009, Avanex hence expects to see solid revenue growth (even after excluding the $10m generated from 3S in fiscal 2008) as well as profitability for the entire fiscal year. “Our model it’s to reach break-even at around $50m,” says Barbarossa.

See related item:

Avanex stockholders authorize reverse stock split

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