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4 February 2008


Avanex grows profit despite falling revenues

For its fiscal second-quarter 2008 (to end-December 2007), optical communications component and module maker Avanex Corp of Fremont, CA, USA has reported revenue of $52m, down 5% on $54.7m last quarter and 7% on $55.6m a year ago.

Alcatel-Lucent comprised 23% of revenue and Telabs 22%. North America represented $25.9m (up 7% on last quarter) and Europe and Asia $26.1m (down 15%, driven mainly by December’s abrupt termination of distribution revenue from 3S Photonics, formerly Avanex France).

Despite the drop in revenue, gross margin has continued to rise, from 19% a year ago and 28% last quarter to 31%. This is due to new products and platforms as well as continued benefits from programs implemented last year. Net income of $86,000 is up from $45,000 last quarter and a loss of $8.6m a year ago.

“We demonstrated strength in our core business [up a few per cent, driven by growth in amplifiers and dispersion compensation products, offset by 3S distribution revenue], achieved solid gross margins and generated over $6m in cash from operations [boosting reserves to $53m],” says chairman, president and CEO Jo Major. “With our healthy operating structure, we are well positioned for future growth from our new products as we take advantage of growing bandwidth demand.”

During the quarter, Avanex began shipping its Oasis amplification platform, which will obsolete the previous platform in the March quarter and, from the June quarter, should boost revenue growth. However, in the near term Avanex expects only modest growth as it completes the transition of existing customers to the new platform.

As increasing bandwidth demand is driving the replacement of SONET by agile DWDM systems enabled by low-cost, integrated reconfigurable optical add-drop multiplexer (ROADM) architectures, Avanex is beginning to see revenue from ROADMs and is expanding its development team to address demand through 2008-2009. In particular, with qualification completing with its lead customer, Avanex is moving from providing it with simple switch modules to full ROADM subsystems. While this presents an opportunity to increase revenue in the long term, in the near term the transition will push out revenue by a month or so.

For fiscal Q3/2008 (to end-March), Avanex expects revenue of $46-50m (down 4-12% sequentially). Gross margin should fall back to 25%, as a large proportion of Avanex’s annual pricing adjustments will occur in that quarter (reducing the average selling price by an expected 9%, out of a total of 15-17% per year). Also, the firm had been expecting the decline in 3S distribution revenue to be spread throughout 2008. Instead, the arbitration complaint filed in late December against 3S for breach of contract may lead to legal expenses of $2-3m and take 12-24 months to resolve.

However, Major expects growth in second-half 2008. For example, ROADM revenue should start up with two other tier-1 customers in the June quarter and ramp in second-half 2008. Also, as new products are released into the revenue stream, gross margin is still expected to trend up to the target model of 35% within the next 9 months.

In particular, after de-emphasizing the gain-block market during Avanex’s restructuring due to margin pressures, the firm is now re-engaging the market profitably after transferring R&D to China. All key products for the platform are being re-designed, with design wins already in America and Europe and products now being taken into the Chinese market.

Regarding last July’s acquisition of the 10Gb/s 300-pin MSA transponder and 10Gb/s XFP MSA transceiver businesses of Essex Corp’s Commercial Communication Products Division (CCPD) in Melbourne, FL, Avanex had intended the acquisition to be accretive to earnings no later than the June quarter. However, while the long-term market remains strong, current market uncertainty may delay profitability in the near term, says Major. Nevetheless, the firm’s new tunable dispersion management product (necessary for 40Gb/s transponders), coupled with the new Oasis 1600 amplifier, is getting feedback from tier-1 and –2 customers that it meets the needs of the growing 40Gb/s transmission market, Avanex says. The market is small, but should grow rapidly as the industry migrates to 40Gb/s, reckons Major.

See related items:

Avanex files complaint against 3S and cuts guidance

Avanex returns to profitability

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