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16 November 2009


Opnext’s revenues depressed by 40G slowdown in US

For its fiscal second-quarter 2010 (ended 30 September 2009), Opnext has reported revenue of $81m, at the low end of August’s forecast of $80-90m. Despite including $24.3m from the former StrataLight Communications Inc (acquired on 9 January), this is up only 1% on $80.2m a year ago and down 5% on $85.3m last quarter.

For 10Gb/s and below products, revenue has fallen 26.2% from $67.6m a year ago to $49.9m (declining in most major product categories except XFP and SFP+ modules). However, it has rebounded by 4% from $48m last quarter. An 8% rise in 10Gb/s revenue (mainly from higher sales of XFP and SFP+ products as sales continue to recover from a March-quarter low) was partially offset by reduced revenue from less than 10Gb/s SFP products (as Opnext continued to be selective in this highly price sensitive market).

Revenue from 40Gb/s products is up fourfold from $7m a year ago to $28m, but this is mainly due to the StrataLight acquisition. Compared to last quarter, 40Gb/s revenue has fallen sharply by a more-than-expected 20.1% (from $35m) due to customers’ inventory reductions and deferred spending for economic reasons. Although down 44.6% from $5.6m a year ago, revenue from industrial & commercial products has rebounded by 34.8% from $2.3m last quarter to $3.1m.

Opnext signed advanced technology development contracts with several customers valued at $7m. During the quarter, $2m was received but this revenue has been deferred pending the achievement of milestones leading to delivery of the final products.

“We were pleased with the growth in our 10G product sales,” says president & CEO Gilles Bouchard. “However, during the quarter we experienced a slowdown in the 40G US backbone market segment due to customer inventory builds and cautious spending tied to the global economic uncertainty,” he adds. “The 40G market is going through the same adjustments and gyrations that the 10G market went through a couple of quarters ago.”

Continued progress in cutting costs (including shedding about 10% of its staff by year-end, announced in April) contributed to improved gross margin. Though down on 30.6% a year ago, non-GAAP gross margin rose from 23.2% last quarter to 24.2%, due mainly to the higher 10Gb/s and industrial & commercial sales, and lower material and outsourcing costs (more than offsetting the impact of lower average selling prices and lower 40G sales).

Compared to a net profit of $3m a year ago, non-GAAP net loss was $9.2m, level with last quarter despite the lower revenue and unfavorable dollar-to-Yen exchange rates.

During the quarter, cash and cash equivalents fell from $165.3m to $155m, reflecting $1.1m of capital expenditure, $2.7m of capital lease payments, $7.7m of cash used in operations, and a $1.2m benefit from foreign currency exchange fluctuations.

“Looking forward to the December quarter, we expect to see bifurcation in our markets, with continuing growth in 10G, while our 40G business will remain affected by customer inventory adjustments,” says Bouchard.

In response to slowing 40G sales and challenging yen exchange rates, Opnext took further initiatives in the second week of October to cut annual operating expenditure by $3.5m. “We expect our streamlined cost structure to provide operating leverage as demand recovers and growth resumes,” says Bouchard.

While business has stabilized at lower levels, the potential market continues to recover. After growing almost 10% in the October quarter, 10G telecom product sales are pushing pre-downturn levels on the strength of SFP modules, while 10G datacom products continue to rebound (after growing more than more than 10%), Bouchard says. “This portion of our business decreased more dramatically during the downturn and has more upside potential.” In addition, Opnext expects industrial & commercial revenue to continue to recover after having bottomed in the June quarter.

Nevertheless, while recent customer engagements have been very positive and suggest an improving tone (with continuing growth in 10G), Bouchard expects 40G business to continue to be challenging, leading to a further drop in revenue in fiscal third-quarter 2010 (to end-December 2009) to $75-80m.

Despite benefits from the higher volume of 10G and industrial communications products as well as continued efforts on cost reduction, chief financial officer Robert Nobile expects margins to also decline.

Nevertheless, Nobile expects 40G product sales to bottom before starting to recover in Q4. In particular, in the October quarter, of nine new qualifications, six were 40G design wins. “We are present in just about every design win in 40G,” claims Bouchard. “It’s a very concentrated market.”

At the European Conference and Exhibition on Optical Communication (ECOC 2009) in Vienna, Austria in late September, Opnext introduced its new 40Gb/s DQPSK modules for DWDM transmission as well as its new compact VSR module for high-density 40Gb/s platforms. It also demonstrated its CFP MSA-compliant module for 100GBASE-LR4 (100 Gigabit Ethernet), which was first debuted at March’s OFC/NFOEC 2009 event in San Diego, CA. Bouchard says that DQPSK is in qualification stages at most customers, with final design wins expected in the next few quarters.

Investment in next-generation products and technology (especially 100G and next-generation 40G transport) will capture market share in the future, Bouchard believes. While Opnext has reduced all other expenditure, R&D spending was $18.7m in the October quarter (up $7.5m on a year ago) and should be towards the high end of the $16-18m range in the December quarter, he expects. Opnext could be profitable today if it was spending as little on R&D as its competitors, but the firm made the conscious decision not to do this, he comments.

See related items:

Opnext halves underlying losses as demand stabilizes

Opnext’s 40Gb/s spike compensates for 10Gb/s inventory burn-off

Opnext’s revenues fall 12% from last quarter

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