7 May 2012

Oclaro’s growth constrained by Thailand flood recovery and Shenzhen plant stoppage

For its fiscal third-quarter 2012 (to end-March), optical communications and laser component, module and subsystem maker Oclaro Inc of San Jose, CA, USA has reported revenue of $88.7m, up 2.5% on $86.5m last quarter (returning to growth after last quarter’s drop of 18%). However, this is still down 23% on $115.7m a year ago and below the guidance of $90-97m.


Revenue and operating results continued to be materially impacted by October’s flooding at Thailand-based primary contract manufacturer Fabrinet Co Ltd (which made 30% of Oclaro’s total finished goods). However, revenue was also adversely impacted by about $4m due to a 10-work-day stoppage in Oclaro’s back-end assembly & test facility in Shenzhen, China (which has since been resolved and is back in full production). “Unfortunately, this work stoppage is becoming more common in this part of China,” comments chairman & CEO Alain Couder.

Flood recovery is largely completed, with commercial shipments re-starting (at Fabrinet’s Pinehurst facility) for high-power lasers in November, tunable dispersion compensators at the end of January, and amplifiers in December (all now back to pre-flood production capacity). However, two product lines – lithium niobate external modulators and wavelength-selectable switches (WSS) – will only return to full capacity in June. Commercial shipments re-started for modulators in January (from Pinehurst) and for WSS products in May (but only from Oclaro’s alternative facilities in the West).

Although down on $47.4m a year ago, revenue from Amplification, Filtering and Optical Routing (amplifiers, micro-optics, dispersion compensation, WSS modules and subsystems and ROADM line-cards) has rebounded from a low of $20.6m last quarter to $23.6m, due mainly to increased production output on flood recovery product lines.

While down on $33.9m a year ago, revenue from Telecom Components (lasers, modulators, laser pumps, receivers, and integrated lasers and modulators) has rebounded from $22.3m last quarter to $23.5m, due partly to initial shipments of 10G modulators that had been impacted by the flood previously.

Although still up on $24.9m a year ago, revenue from Transmission Modules (10G and 40G transponders and transceivers) has fallen back from $31.4m last quarter to $28.3m, with 40G relatively flat and a decrease in the 10G product.

Revenue from Industrial & Consumer products has rebounded from a low of $12.2m last quarter to $13.3m, with high-power laser revenue up as a result of flood recovery, and vertical-cavity surface-emitting lasers (VCSELs) for consumer applications up after a seasonally weaker December quarter.

Fujitsu was the only greater-than-10% customer, at 16%, leaving “a nice diversification of our remaining revenues broadly across our other major customers”, says Couder. However, the mix of 10% customers (which last quarter included Infinera and Ciena, and previously Huawei and Alcatel) has been atypical in the short term, following the Thailand flood, which affected customers varyingly according to their mix of product types and the corresponding manufacturing sites.

“Despite lower-than-forecasted revenues resulting from a short-term work stoppage in our China factory, progress with our cost-reduction and margin improvement initiatives enabled Oclaro to achieve gross margin and adjusted EBITDA within the guidance ranges we provided on 26 January [of 14-19% and negative $13.5-9m, respectively],” says Couder.

On a non-GAAP basis, gross margin of 15.9% is down from 24.9% a year ago but showing recovery from last quarter’s 13% as the firm makes “meaningful progress towards pre-flood levels” (especially as March is usually a challenging quarter because much of the new customers pricing takes effect on 1 January).

R&D expenses have been cut further, from $16.7m last quarter to $14.7m as a result of cost-control efforts. Selling, general & administrative (SG&A) expenses were $14m, up from $13.5m last quarter. However, this was down on the average of $15.9m for the three prior quarters.

Although still worse than $3.3m a year ago, operating loss has been cut from $18.9m last quarter (excluding $9.1m of write-offs and expenses due to the flooding in Thailand) to $14.6m (excluding a net gain of $3.3m, comprising $6.4m from preliminary insurance advances, offset by $3.1m of flood related expenses).

Although still down on a profit of $0.7m a year ago, adjusted EBITDA has improved from negative $14.3m last quarter to negative $9.9m. This bottom-line improvement of $4.4m (on revenue growth of just $2.2m) shows that profitability improvement initiatives are having an effect, says the firm. Non-GAAP net loss has been cut from $17.4m last quarter to $15.5m (although this is still worse than $4.5m a year ago).

Capital expenditure (CapEx) was $6.8m, mostly related to flood recovery. During the quarter, cash, cash equivalents and restricted cash fell from $54.2m to $51.1m. This included the $6.4m from the flood-related preliminary insurance advance plus an additional $6m drawn under the firm’s $45m credit facility (making a total outstanding balance of $25.5m drawn).

In addition, Oclaro expects to receive substantial additional insurance proceeds in calendar second-half 2012. It also expects the June quarter to generate $10-15m of cash as a result of starting the transition (over the next three years) of assembly & test operations in Shenzhen to the Malaysia facility of Singapore-based contract manufacturer Venture Corporation Ltd (announced on 21March). “The move to Malaysia will provide us with a much more stable manufacturing environment,” reckons Couder. Oclaro is actively marketing its Shenzhen building for sale (with production there expected to cease in last-quarter 2013).

For fiscal fourth-quarter 2012 (to end-June), Oclaro expects revenue to continue to recover, to $100-109m, despite still being impacted slightly by the flood. Gross margin should recover to 19-23%, and adjusted EBITDA to negative $6.5-1.0m. CapEx should be within $6m per quarter on an ongoing run rate (significantly less than pre-flood periods).

Guidance is based on performance as a standalone company and does not include any of the operating results of optical component, module and subsystem maker Opnext Inc of Fremont, CA, USA, with which Oclaro in late March agreed a merger (which should make the combined firm the second largest optical component and module maker). The transaction is expected to close in July.

“As part of the synergies, we will be moving their manufacturing out of Japan and out of California,” says Couder regarding Opnext. “We will reduce the number of suppliers for our customers and provide them with a larger and more stable supplier,” he adds. “We plan to be non-GAAP operating margin positive in the December 2012 quarter and to realize $35-45m of analyzed synergy by the December 2013 quarter.”

See related items:

Oclaro and Opnext agree to merge

Oclaro’s quarterly revenue down 28% year-on-year

Oclaro’s quarterly revenue flat due to Asian telecom slowdown

Oclaro’s ramp of higher-margin products delayed by optical telecom inventory correction

Oclaro hit by Chinese telecom inventory correction

Oclaro cuts quarterly revenue guidance by 8%

Tags: Oclaro

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