31 May 2010


Opnext to burn cash for next two quarters whilst increasing capacity

For its fiscal fourth-quarter 2010 (to end March ), optical component and module maker Opnext Inc of Fremont, CA, USA has reported revenue of $76.8m, up 1% on $76.1m last quarter but down 8% on $83.6m a year ago (despite including $14.2m in subsystems from the former StrataLight Communications Inc, acquired on 9 January 2009). This is also down on its guidance of $78-83m, despite seeing demand build throughout the quarter (especially in March). “We had a disappointing fourth quarter,” comments president & CEO Gilles Bouchard.











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

Component supply shortages near the end of the quarter delayed shipments worth several million dollars, contributing to 10G and below revenue for 10Gb/s and below products falling 11% from $55.1m last quarter to $48.9m, due partly to lower shipments of 300-pin tunable products and X2 modules. Nevertheless, this was still up 19% on $41.2m a year ago (due mainly to year-on-year increases in sales of XFP, SFP+, X2 and Xenpak modules).

Due to a drop in sales of subsystems, revenue from 40Gb/s and above products has fallen 45% from $39.7m a year ago to $21.8m. However, this is up 30% on $16.8m last quarter, due to growth in 40Gb/s modules and R&D contract revenues. The resurgence of the 40G market is being driven by major carrier deployments in China, but Opnext is now also seeing deployments in all regions of the world, says Bouchard.

Revenue from industrial & commercial products also grew strongly, up 45% from $5.4m to $6.1m (and more than doubling on $2.8m a year ago).

On a non-GAAP basis, gross margin has risen from 13.5% a year ago and 18.7% last quarter to 20.9%, driven mainly by higher 40Gb/s and above revenue as well as favorable product mix, partially offset by lower average selling prices.

R&D expenses have risen from $16m a year ago and $18m last quarter to $18.4m ( above the forecast $16-18m) , due mainly to higher material and outsourcing costs related to product development prototype builds. Selling, general and administrative (SG&A) expenses have risen from $11.2m a year ago and $11.7m last quarter to $12.4m, due partly to the resumption of payroll taxes at the beginning of the calendar year , as well as higher costs associated with customer samples.

Consequently, though down from $18.5m a year ago, net loss has risen from $12.7m last quarter to $14.5m. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) worsened from -$7.3m last quarter to -$9m.

Cash and cash equivalents has continued to fall, from $146.3m at the end of last quarter to $132.6m, reflecting $2.7m of capital expenditure, $2.5m of capital lease payments, and $8m of cash used in operations (including the final payment of $2.1m for the StrataLight Employee Liquidity Bonus Plan).

The non-GAAP EBITDA breakeven target remains $95m of revenue per quarter. “Getting to that will get us to a better position to get to a positive cash flow position,” says Bouchard. However, “for at least the first half of this year we will continue to use cash,” he warns.

For fiscal first-quarter 2011 (to end June), Opnext expects total revenue to rise to $80-85m. "While we expect sales of 40G and 100G modules to also show strong growth, we expect 40G subsystems sales to be weak, resulting in lower overall 40G and above revenue relative to the March quarter,” says Bouchard. Industrial and commercial revenue should be flat following significant growth in the past two quarters (to back above pre-downturn levels). However, based on customer demand , Opnext expects 10G and below revenue to rebound, although supply constraints are still a challenge industry-wide.

“We have taken actions to improve the availability of parts from our suppliers and to increase our production capacity,” notes Bouchard. Starting last year, Opnext launched an initiative to increase the number of second sources for key components. Also, the firm is increasing module production capacity by about 40% in fiscal first-half 2011. Nevertheless, the firm expects the supply chains of both semiconductor and optical components to remain constrained for at least two quarters.

Gross margin should improve slightly in fiscal Q1 due to higher sales volumes and lower average unit costs (helped by off-shoring and outsourcing of activity in Opnext’s Japan operations), offsetting the drop in average selling prices. “This year we have several important new products coming out primarily from our Japan operations that will contribute to revenues and margins in the near-term [with margins for 40G and above products tending to be higher than the average margins on 10G and below business],” says Bouchard.

As well as adding 16 new slots and four new customers in 10G, in 40G modules Opnext is now qualified in 52 slots across 25 customers (an increase of seven slots and three customers from last quarter) and in 100G it is in the qualification process for eight slots with five customers (an increase of six slots and four customers). “We have made decision to invest very heavily in the 100G program in the face of the declining sub-system business,” notes Bouchard. Most starkly, in the next six months, Opnext expects the proportion of its revenues generated by products less than one year old to be at least five times what it was in 2009. “We have completely renewed the portfolio,” stresses Bouchard.

See related items:

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

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

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