7 May 2010


Oclaro grows margin for third consecutive quarter

For its fiscal third-quarter 2010 (ended 3 April), optical component, module and subsystem maker Oclaro Inc of San Jose, CA, USA has reported revenue of $101.2m, up 8% on $93.6m last quarter.

Also, this is well over double the $41.2m of predecessor firm Bookham Inc a year ago. However, that was before its merger on 27 April 2009 with Avanex Corp of Fremont, CA to form Oclaro, and before 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).

"Demand remains strong across all our businesses,” says president & CEO Alain Couder. Telecom revenue was $87m (up 6% on $82.2m), while advanced photonics solutions revenue was $14.1m (up 24% on $11.4m).

“We continue to gain share in key product areas," adds Couder. There were three 10% or greater customers: Huawei at 13%, Alcatel-Lucent at 10% and Ciena plus the former Nortel MEN division combined at 10% (the three market share leaders in the telecom markets served, believes Oclaro). Also, five additional customers each comprised greater than 4% of revenue. These included five of the next six equipment companies in terms of telecom market share.

“We increased revenues and gross margins in the historically slow March quarter," notes Couder. This is evidence of the strength of the underlying demand environment of Oclaro’s market share gains and of the gross margin leverage in the firm’s operating business model, adds the chief financial officer Jerry Turin. On a non-GAAP basis, gross margin has risen from 26.8% last quarter to 27.7%.

Operating income has more than doubled from $1.5m to $3.2m. “The leverage of our operating model is beginning to translate to the bottom line,” says Turin. Adjusted EBITDA has risen from $4.3m to $5.8m. Net income has risen from $2.1m to $3.5m (continuing its rise from break-even the quarter before last).

"Our continued operating improvements and revenue growth are driving progress towards realizing our business model targets, which will support opportunities to accelerate innovation and further strengthen our operating machine,” comments Couder.

"We expect strong revenue growth for the June quarter, which should enable continued gross margin improvement,” he adds. For its fiscal fourth-quarter 2010 (ending 3 July), Oclaro expects revenues of $111-116m, non-GAAP gross margin of 30-33% (achieving the target of 30%), and adjusted EBITDA of $8.5-12.5m.

Oclaro now expects its next gross margin target of 35% to be achieved by the end of fiscal 2011 (ended next June). “If the strong demand environment continues, this 35% target could conceivably be achieved as early as the upcoming December quarter,” says Turin.

At 35% gross margin, Oclaro expects non-GAAP operating income targets to be 10-12%, with the parameters of that range largely a function of the level of investment in R&D, says Turin. The firm is currently investing in R&D at about 11% of revenue, but its long-term business model is 13%.

Oclaro prices stock offering to raise $67m

Oclaro has priced its public offering of 6 million newly issued shares of its common stock (announced on 29 April ) at a price of $12 per share. The firm has also granted the underwriters a 30-day option to purchase up to an extra 900,000 shares to cover over-allotments, if any. The offering is expected to close on 12 May (subject to customary closing conditions).

Excluding any exercise of the over-allotment option, Oclaro expects to receive net proceeds of about $67m (after deducting underwriting discounts and commissions and estimated offering expenses). The firm intends to use the net proceeds for general corporate purposes, including working capital. A portion may be used to acquire or invest in complementary businesses, products or technologies.

On 29 April, Oclaro effected a 1-for-5 reverse split of its common stock (which is hence trading temporarily under the symbol ‘OCLRD until on or about 28 May). The number of shares being issued is on a post-split basis.

“With the offering we will have the bandwidth to invest in new opportunities, not only through organic R&D, but also with the ability to take a ‘make-or-buy’ decision,” says Couder. “Should we buy this technology [i.e. from small startup] or should we take 18 months or two years to develop it ourselves? We will have the flexibility to do it.” However, he also raises the possibility of finding a partner that is already to scale, already has the infrastructure, and can deliver faster than Oclaro.

“Also, with this offering we will have the ability to upgrade our fab,” says Couder. “We don't plan to spend a lot of money, but we want to make sure that we are able to scale capacity with volume, make sure we have no single point of failure, and that we will be able to have a better wafer and better yield and distance our competition.”

See related items:

Oclaro grows 10%, driving cash generation and investment

Oclaro acquires wavelength selective switch firm Xtellus

Oclaro goes into underlying operating profit

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