9 May 2011

Oclaro hit by Chinese telecom inventory correction

For its fiscal third-quarter 2011 (ended 2 April), optical component, module and subsystem maker Oclaro Inc of San Jose, CA, USA has reported revenue of $116.6m, up 15% on $101.1m a year ago but down 3% on $120.3m last quarter (after, as usual, taking a substantial portion of its annual price reductions on 1 January). However, this was also below guidance of $123–131m.



Revenues from greater-than-10% customers included Huawei at 18% and Alcatel at 10%. “Revenues were impacted by inventory corrections at many of our telecom customers [with about 60% of the inventory correction being attributed to China] and by a general slowing among other telecom customers, possibly attributable to caution in the phase of macro events occurring in March,” says chief financial officer Jerry Turin. “Each of these conditions will continue to impact our revenues in the June quarter, and they are likely to have a more significant impact,” he adds.

Due to lower sales of component-level products and an adverse impact on overhead absorption, non-GAAP gross margin has fallen from 30% last quarter to 25% (below the expected 27–31%).

Operating expenses have continued to rise, from $27.8m a year ago and $34.1m last quarter to $35m. In particular, R&D expenses have risen from $11.3m a year ago and $15.7m last quarter to $17.2m. “We slowed our investment ramp in R&D, so the March increase largely represents growth that was already in the pipeline,” says Turin.

Compared with $10.1m last quarter and $5.8m a year ago, adjusted EBITDA was only $1.1m (much less than the expected $6–11m). Net loss was $4.1m, compared with income of $5.9m last quarter and $2.6m a year ago. Cash, cash equivalents and restricted cash continued to fall, from $111.6m a year ago and $78.1m last quarter to $75.7m, after capital expenditure rose from last quarter’s $11.8m to $14.2m.

While certain telecom customers have experienced a short-term inventory correction, Oclaro has continued to invest in its new product pipeline. “We continue to make progress in our new product introductions,” comments Turin. “We hope to have product revenue traction across many of these areas in the June quarter. However we would not expect this traction to deliver either meaningful revenues within the June quarter, or margin improvement in the June quarter in the case of new products at above-average margin potential,” he adds.

“We expect the slowdown to continue through our upcoming fiscal fourth quarter,” says president & CEO Alain Couder. For fiscal fourth-quarter 2011 (ending 2 July), Oclaro expects further declines in revenue to $105–115m, non-GAAP gross margin to 21–24%, and adjusted EBITDA to minus $6.5–1.5m.

“We are now qualified with customers on several new products,” notes Couder. “We are ready to ramp production for the second half of this year on those new programs.”
For example, Oclaro’s acquisition of high-bit-rate optical transport sub-system maker Mintera Corp of Acton, MA, USA last July is starting to bear fruit, the firm says. The 40G DPSK product inherited from them continues to grow in revenue, and this summer Oclaro expects to start selling the first 40G coherent transponder.

However, the 10G market remains a very good market, says the firm. In particular, market adoption of its tunable XFP is now obvious and has significant revenue potential, Couder adds. "We have aggressive plan to ramp our tunable XFP product in the second half [of the calendar year]."

In addition, following the acquisition of Xtellus Inc of Denville, NJ, USA in December 2009, in the March quarter Oclaro started shipping wavelength selective switch (WSS) reconfigurable optical add-drop multiplexer (ROADM) products to two customers, and in the June quarter it is starting to ship not only the WSS itself but also amplifiers including the WSS. “This is very meaningful revenue potential for us in the second half of calendar year,” comments Couder.

“Our planned new products are expected to provide revenue growth and gross margin traction in the second half of the calendar year,” says Couder. “We also remain confident in the second half because of the continued strong demand for broadband in the core optical market, and the increasing reliance on optical functionality throughout the network,” he adds.

Oclaro expects the inventory correction in the telecom market to end this summer, but Couder adds that they will continue to manage the company in a conservative way until they know for sure that the growth has come back. The revenue breakeven point is probably in the low $120m range, he adds. “That’s not a substantial ramp to get back to profitability”.

See related items:

Oclaro cuts quarterly revenue guidance by 8%

Oclaro’s profit dips during investment and ramp-up

Oclaro’s quarterly revenue growth slows from 11.4% to 7.6%

Oclaro reports record profitability on 44% revenue growth year-on-year

Oclaro grows margin for third consecutive quarter

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