2 February 2010


Oclaro grows 10%, driving cash generation and investment

For its fiscal second-quarter 2010 (ended 2 January), Oclaro Inc of San Jose, CA, USA, which makes optical components and modules for communications, industrial and consumer applications, has reported revenues of $93.6m. Even allowing for $300,000 after mid-December’s acquisition of Xtellus Inc of Denville, NJ, which makes wavelength selective switching (WSS) products for reconfigurable optical add/drop multiplexers (ROADMs), this is above late October’s guidance of $87-92m and mid-December’s raised guidance of $91–93m.

Revenue is also up 10% on $85.1m last quarter and more than double $43.4m a year ago. However, the latter follows the formation of Oclaro on 27 April from the merger of San Jose-based Bookham Inc with Avanex Corp of Fremont, CA. It is also affected by July’s acquisition of the high-power laser diode business of Newport Spectra Physics (in exchange for laser and photonics components supplier Newport Corp of Irvine, CA acquiring Oclaro’s Advanced Photonics Solutions division’s New Focus business).

Of fiscal Q2’s revenue, the Advanced Photonics Solutions business contributed $11.3m, up 4.5% on $10.8m last quarter. Telecom revenue was $82.3m, up 11% on $74.2m last quarter (including growth in both the Transmission and the Regeneration & Optical Routing segments).

On a non-GAAP basis, gross margin has risen from 17.9% a year ago to 26.1% last quarter and now 26.8%. Adjusted EBITDA has improved to $4.3m, from $4.1m last quarter and minus $3.3m a year ago.

Though still down on $3.3m a year ago, non-GAAP net income was $2.1m, up on break-even last quarter. During the quarter, after capital expenditure of $1.6m and using $2.9m in cash for restructuring expenses, Oclaro’s cash balance grew from $52.5m to $56m.

“Generating positive cash flow, on top of 10% sequential revenue growth, in our second full quarter since the creation of Oclaro is a significant accomplishment,” says president & CEO Alain Couder, who thanks staff for their contribution during the downturn and the extra effort to execute on integration (leading to $1.5m of bonuses being approved for non-executive staff in the March 2010 quarter). “From a strategic perspective, we took steps to acquire Xtellus Inc and secure the WSS technology critical to our product portfolio.”

For its fiscal third-quarter 2010 (ending 3 April), Oclaro expects revenue to rise 3.5–9% to $97–102m (including $2–3m of Xtellus-related revenues). “We expect to grow our revenue and are driving to increase our gross margins in what is traditionally a seasonally weaker March quarter,” says Couder. Non-GAAP gross margin should be 26–29%, tempered by half of the annualized price erosion of 15% impacting the March quarter (as the industry shifts from renegotiating pricing twice a year, in December and June, to just once a year in December). “Improving our gross margins in the quarter when our industry experiences the bulk of its annual pricing re-negotiations would demonstrate our ability to continually drive costs out of our products and leverage our global skill and infrastructure,” notes Couder. In addition, adjusted EBITDA should be $4–7.5m.

In fiscal Q3, capital expenditure should rise above $3m as Oclaro invests in R&D (expecting to see revenue from VCSELs related to Intel’s LightPeak technology in late 2010) as well as building inventories to enable the firm to respond to demand. Oclaro therefore expects to consume cash. Nevertheless, the cash balance should be maintained over $50m, helped by cutting operating expenditure by $0.5–1m.

In particular, integration of acquisitions is on track, with the Spectra Physics’ high-power laser diode wafer fab in Tucson, AZ due to be closed by the end of March (via consolidation into Oclaro’s fabs in Caswell, UK and Zurich, Switzerland). Also, closure of the former Avanex site in Bangkok, Thailand is underway, with most staff being relocated to the nearby site of Avanex’s subcontract manufacturer Fabrinet. Couder estimates that the ‘wrap-up’ of synergies from such integration should add between two and three percentage points to gross margin, reaching the firm’s target of 30% in the quarter to end-June. The next target will be 35%.

Couder comments that Oclaro is targeting Xtellus-related revenue of $17–23m for the coming year. However, to grow revenues further, he says that the firm could consider further acquisitions, including in non-telecom sectors (to extend its available market). Nevertheless, the focus remains first on making progress on manufacturing execution beyond the current phase of integration, he stresses.

See related items:

Oclaro acquires wavelength selective switch firm Xtellus

Oclaro goes into underlying operating profit

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