6 August 2010


Opnext’s growth limited by supply constraints

For its fiscal first-quarter 2011 (to end-June 2010), optical module and component maker Opnext Inc of Fremont, NJ, USA has reported revenue of $78.9m (below the forecast $80–85m). This is down 7.5% on $85.3m a year ago but up 2.7% on $76.8m last quarter, despite continuing supply constraints.











Table: Opnext's revenue over the last four quarters.

Of total revenue, 10% or more came from each of Cisco Systems Inc, Alcatel-Lucent and (for the first time) China’s Huawei Technologies Co Ltd (51% combined, up from 44% last quarter). North America represented 44% of total revenue, Europe 22%, Japan 13%, and the rest of Asia 21%.

Revenue from sales of industrial and commercial products grew for a fourth consecutive quarter to $6.7m, up 9.8% on $6.1m last quarter and up 191% on the record low of $2.3m a year ago (and well above pre-downturn levels).

Revenue from sales of 10Gbps and below products was $55.8m, rebounding 14.2% from last quarter’s dip of $48.9m (after increased sales of 300-pin tunables, XFP, and SFP+ modules, offset by decreased sales of Xenpak modules).

Revenue from sales of 40Gbps and above products was to $16.3m, down 25.2% on $21.8m last quarter (due to a 60% drop in 40Gbps subsystems sales and lower R&D contract revenue, offset by a 31% rise in 40Gbps module sales).

“Demand for 40Gbps subsystems was weaker than expected and was the primary reason total revenue came in under plan,” says president & CEO Gilles Bouchard. Excluding 40G subsystems (which have fallen to just 5% of total revenue), all other revenues collectively grew by $21.6m (40%) year-on-year.

Non-GAAP gross margin of 20.9% is down on 23.2% a year ago and flat on last quarter. This was favorably impacted by lower average per-unit material and outsourcing costs, and lower excess and obsolete inventory charges, but unfavorably impacted by a lower mix of 40Gbps and above revenue and lower average per-unit selling prices.

Though up from $8.5m a year ago, non-GAAP operating loss has been cut from $14.7m last quarter to $12m. This is due to higher gross margin dollars and lower R&D expenses, offset by higher selling, general & administrative expenses. R&D expenses fell by $2.5m (from last quarter’s $18.4m to $15.8m, below the targeted $16–18m per quarter), due mainly to lower material and outsourcing costs for advanced product development programs. SG&A expenses rose $300,000 to $12.7m.

Though still down on negative $3.4m a year ago, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) improved from negative $9m last quarter to negative $6.1m.

Cash and cash equivalents fell by $25.8m from $132.6m to $106.9m (after $19.7m of cash used in operations, $3.1m of capital expenditure, and $2.6m of capital lease payments), as Opnext continues investment in new capacity to support growth and new products.

For fiscal second-quarter 2011 (to end-September 2010), Opnext expects sales of 10Gbps and below products to show solid growth (as supply constraints gradually improve), sales of 40Gbps and above products to remain flat (during new product ramp-up and an inflection point on subsystems), and sales of industrial and commercial products to grow modestly. Total revenue should rise 1.4–7.7% to $80–85m. Gross margin should improve slightly due to a more favorable product mix and improved volumes. CapEx and capital lease requirements should remain relatively constant as Opnext completes capacity expansions.

“Based on recent order activity, we expect [40G] subsystem sales to be slightly down in Q2 and then show some growth in the second half [as excess inventory is worked through at one particular customer],” says Bouchard. “We are at an inflection point where this offsetting effect is either minimal or turns positive.”

In fiscal second-half 2011, gross margin should improve as a result of favorable product mix and cost reductions in several internally developed components. Also, R&D spending should taper off to about $14m per quarter as several advanced development programs transition to product introduction efforts. Opnext hence expects to achieve breakeven EBITDA when revenue reaches $90m per quarter (an improvement on the previous goal of $95m). These factors, together with continued working capital management, should also reduce cash utilization.

See related items:

Opnext to burn cash for next two quarters whilst increasing capacity

Opnext revenue falls a further 6% quarter-to-quarter

Opnext’s revenues depressed by 40G slowdown in US

Opnext halves underlying losses as demand stabilizes

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