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20 August 2014

Oclaro’s 100G growth compensating for legacy 10G decline

For fiscal 2014 (to end 28 June), Oclaro Inc of San Jose, CA, USA (which provides components, modules and subsystems for optical communications) has reported revenue of $390.9m, down 3% on fiscal 2013’s $404.6m.

For fiscal fourth-quarter 2014, revenue was $95.9m, up only slightly on $95.4m both last quarter and a year ago, sustained mainly to continued growth in high-speed products (both the client-side and line-side of the 100G business).

Led by $3m of growth in 100G datacom and lithium niobate modulator products (including the first revenue for 100G coherent micro-ITLAs, plus three-fold sequential growth in shipments of 100G coherent modulators), sales of 40G & 100G transmission products were $48.8m, up 11% on $44.1m last quarter and up 54% on $31.7m a year ago (rising from 33% then 46% to 51% of total revenue). This was offset by sales of 10G-and-lower transmission products of $39.4m, shrinking by 10% from $43.7m last quarter and 31% from $57m a year ago (falling from 60% then 46% to 41% of total revenue).

By end-market, sales of Datacom products grew by 10% from $40.2m last quarter to $44.2m (rising from 42% to 46% of total revenue), while Telecom products shrank by 8% from $47.6m to $44m due to product exits (falling from 50% to 46% of total revenue). Industrial & Consumer sales of $7.7m comprised the remaining 8% of total revenue (roughly level over the last year).

The top 10 customers contributed 82% of revenue (up from 78% last quarter), including three at greater than 10%: Coriant (formally the Optical Networks business of Nokia Siemens Networks) remained the largest, at 24% (up from 21%); Huawei at 13%; and Cisco at 11%. By region, the Americas contributed 29% of revenue, China 28%, Europe 23%, South-east Asia 14% and Japan 6%.

On a non-GAAP basis, gross margin has rebounded partially from last quarter’s sharp dip of 12.3% to 14.1%, due to increased sales of a 100G datacom product. This was despite another quarter of higher-than-usual cost of sales as Oclaro continues to fix historical business process issues. Without the higher E&O (excess and obsolete) reserves, gross margin would have instead been of 18%. Despite the drop in annual revenue, full-year gross margin has risen from 8.8% in fiscal 2013 to 14% for fiscal 2014.

Operating expenses have been cut further to $27.8m, down by 5% on $29m last quarter and down 28% on $39m a year ago, significantly reducing the firm’s breakeven point.

Operating loss was $14.3m, cut from $17.5m last quarter and $28.9m a year ago. Full-year operating loss has been cut from $119.9m in fiscal 2013 to $74.7m for fiscal 2014.

Adjusted EBITDA has been cut from negative $22.1m a year ago and negative $12.3m last quarter to negative $9.4m (compared with the forecast negative $13-9m). Full-year adjusted EBITDA was cut from negative $89.9m in fiscal 2013 to negative $51.5m for fiscal 2014.

Capital expenditure (CapEx) has risen from $2.4m last quarter to about $3m. During fiscal Q4, cash, cash equivalents, restricted cash and short-term investments fell from $122m to $104.1m, due partly to a working capital drain of $10.3m (with accounts payable down as expected).

“The significant year-on-year improvement demonstrates the effective execution of our turn-around plan and validates our focus on being the market leader at 100G,” says CEO Greg Dougherty. “While our work is not over, we’ve substantially transformed the company over the past nine months,” he adds. “First, to fund our recovery we successfully sold assets which allowed us to pay off our debt and to kick off our restructuring plan that we rolled out last November. That plan called for us to lower our cost structure by reducing the number of our sites, reducing our headcount, correcting many broken processes, and essentially beginning to operate as one Oclaro. Secondly, we committed to continuing to invest strongly in R&D and focus our resources on the large 100G markets for telecoms and datacoms.”

Oclaro has now reduced annual operating expenses by $26m (17%). By the end of fiscal Q2, it expects to have only eight major sites, down from the 20 a year-ago, and to have cut its number of fabs from six to three. Headcount will fall from about 2900 a year-ago to approaching 1200 when the sale of the Industrial and Consumer (I&C) business closes.

On 5 August, Japan’s Ushio Opto Semiconductors Inc agreed to buy the I&C business based in Komoro, Japan (which employs about 80 staff, primarily making red and violet laser diodes for medical, measuring, printing and display applications) for 1.85bn yen ($18.5m) in cash, of which 1.6bn yen ($16m) will be paid at the closing and 250m yen ($2.5m) will be paid into escrow and released to Oclaro Japan Inc upon the earlier of six months after the closing or the completion by Oclaro Japan of certain transition services. Closing of the transaction is expected during fiscal second-quarter 2015 (ending 27 December 2014).

“The I&C business has limited synergies with the rest of our business,” comments Dougherty. “It also adds a fair amount of complexity to the organization as it has different customers, different sales channels, market and technologies.” Another reason for divesting the business is that it has a semiconductor laser fab that needed to be relocated after the expiration of Oclaro’s lease in early 2016. “The cost to move the fab into our Sagamihara fab in Japan would have been around $10m. In addition, it would have created a significant distraction to some of our key laser personnel in our Datacom division in Japan. Instead, we will now be able to keep our Japan team focused on 100G modules for data-center application,” he adds.

“The divestiture of our Industrial & Consumer business is another positive step in our ongoing plan to streamline our global operations, strengthen our balance sheet, and focus our product portfolio on the optical communications market, with the main thrust of our R&D on the large and high-growth markets for 100G,” says Dougherty.

“Demand for CFP form factor for client side has peaked and we will see it decline some over the next few quarters as customers gradually transition to the new CFP2 form factor. Our focus has allowed us to successfully introduce and ramp up production of our client-side CFP2 transceiver,” Dougherty continues. “We’re currently the market leader in single-mode 100G products for client-side,” he believes, based on seeing 30% growth in fiscal Q4, driven by China-based demand. “We intend to leverage this success into the emerging single-mode data-center opportunities. We also have begun shipping samples of our coherent CFP2 to several key customers for line-side application. This is another area where we’re in a market leadership position,” he adds.

“Longer term, we expect to see solid growth from 100G coherent products for transmission and from the conversion of data centers to single-mode fiber and to 100G data rates,” says Dougherty. “We continue to invest substantially in R&D in these areas and are strongly positioned technically in both. We further establish ourselves as a market leader in 100G client-side products with our CFP and CFP2. We also believe that the coherent CFP2, our emerging flagship product, will serve as a growth engine for us in many years to come. In Q4, we shipped our first coherent CFP2 product to several key customers. The system test results of these customers have been very good and have reinforced our first-to-market position and our technical differentiation. Results show the customers will be able to use coherent CFP2 for both metro and long-haul applications.”

While the CFP2 is expected to be Oclaro’s flagship product, it is based on a platform approach that allows customers to buy either a CFP2 pluggable module or the discrete transmit and receive components or system architectures utilizing embedded optics configuration. This platform approach leverages the firm’s indium phosphide (InP) photonic integrated circuit (PIC), which allows for small size, lower power consumption and excellent performance, says Dougherty. The new pilot-production line is up and running in Caswell, UK, and will be shipping coherent CFP2 products next quarter. “We believe that the market for the coherent CFP2 will be in the hundreds of millions of dollars within about two years. We expect to be well positioned to capture a significant share of this growing market,” he adds.

For fiscal first-quarter 2015 (ending 27 September 2014), which will still include a full quarter of the I&C business (about $7.7m), Oclaro expects revenue to fall to $83-91m (down by about $9m at the midpoint of this range). Despite this, gross margin should be 12-16%. Adjusted EBITDA is expected to be negative $13-9m.

“Despite a projected slower start to the fiscal year, due primarily to the decline in 40G [line-card business at AT&T] and lower-speed [10G] legacy products, we expect to continue improving our bottom line in fiscal 2015 through our lower cost structure and strong demand for new 100G products,” says Dougherty. “Overall, on the 100G client-side, we expect Chinese demand to slow down a bit in Q1 [following a very good fiscal Q4/2014] and pick up again in Q2 with the next anticipated infrastructure projects from the leading service providers there. We are continuing to invest in next-generation high-speed DFB lasers, receivers and advanced packaging to address the market needs for the conversion of data centers to 100G and single-mode fiber,” he adds.

“Our new 100G products will continue to ramp and become an even larger revenue contributor in the coming quarters, overtaking the legacy product revenue roll off around mid-calendar year in 2015,” reckons Dougherty.

Regarding 100G coherent micro-iTLAs, Dougherty says: “While we did not ramp this quickly as we had planned, we expect to see continued growth as again we have much more demand than we can shift.” Micro-iTLA product revenue is expected to grow three-fold in the September quarter and then by a further 150-200% in the December quarter. Also, after tripling from the March to June quarters, shipments of 100G coherent lithium niobate modulators are expected to double by the December quarter after significant capital investments have been made to double manufacturing capacity in the next 4-5 months, as very strong order backlog for fiscal Q1 and Q2 means that demand is currently outstripping the firm’s ability to supply the products. CapEx and capital lease needs collectively are hence rising to about $5m per quarter.

Oclaro has hence decided to no longer move and/or re-qualify any more 10G InP products to its contract manufacturing partners, allowing them to helping with the expected steep production ramp of 100G products (at the cost of a one-time restructuring charge of about $3m in fiscal Q4/2014).

“Through our actions this past year to rebuild, revitalize and focus the company, we’re on a much stronger financial foundation and have a healthy new product pipeline,” says Dougherty. “Now that we are completely focused on the optical communications market, our strategy is clear to be a leading innovator and provider of 100G solutions for line- and client-side applications.”

Since the I&C business contributed revenue of $29m, gross margin of 50% and about $8m of positive adjusted EBITDA in full-year fiscal 2014, Oclaro has revised its adjusted EBITDA breakeven model and timeline from $110m in quarterly revenue to $100m (together with 20% gross margin and 25% operating expenses) by the quarter to end-September 2015 (rather than the December 2014 quarter). However, breakeven on a non-GAAP (operating income) basis will require $105-110m in quarterly revenue (with gross margin of 25%, and operating expenses remaining at 25%), driven by revenue growth from the firm’s new high-margin coherent 100G products.

See related items:

Oclaro’s quarterly revenue falls 7% as drop in 10G and pause in 100G outweighs 40G growth

Oclaro’s 40 and 100G transmission product revenue grew 20% for second quarter

Oclaro announces exchange of all convertible debt

Oclaro closes sale of Amplifier and Micro-Optics business to II-VI Inc

Oclaro sells Zurich GaAs laser diode business to II-VI for $115m

Oclaro’s strong growth from 40G and 100G transmission products constrained by delays in transferring to contract manufacturers

Oclaro’s revenue falls 4% quarter-on-quarter

Tags: Oclaro

Visit: www.oclaro.com

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