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6 February 2014

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

Excluding results from its Zurich-based laser diode business and its Amplifier and Micro-Optics business (sold to II-VI Inc on 12 September and 1 November 2013, respectively), for its fiscal second-quarter 2014 (ended 28 December 2013) Oclaro Inc of San Jose, CA, USA (which provides components, modules and subsystems for optical communications) has reported revenue of $102.9m, up 6.5% on $96.6m last quarter but down 8% on $112.1m a year ago.

By application, revenue was 44% Datacoms, 49% Telecoms and 7% Industrial & Consumer. Datacom revenue grew by 10%, driven mainly by 100G client CFP and CFP2 products and by 40G pluggable transceivers. Telecom revenue grew by almost 4%, driven by strong demand for 40G line-cards (used in North American telecom networks, which continue to build out 40G capacity). “We are now expecting the 40G business to last longer than we thought and continue to be healthy, with modest reductions over the rest of this calendar year,” says CEO Greg Dougherty. “We also saw strength in demand for our 100G coherent products such as lithium niobate modulators and narrow-linewidth tunable lasers,” he adds.

By data rate, while 10G and lower business remained the largest product group (with 48% share), 40 and 100G transmission product revenue grew about 20% for the second consecutive quarter.

Business in China grew by over 10% sequentially, driven partly by demand from customers preparing to participate in China Telecom’s 100G program. “We expect our business in China to remain at about this level as we anticipate seeing continued business from some of the same customers once China Mobile’s 100G tender is awarded, which we understand to be sometime in the first half of this year,” says Dougherty.

Of total revenue, customers in Europe contributed 32%, China 25%, America 18%, Southeast Asia 16% and Japan 9% (compared with 27%, 24%, 23%, 14% and 13% respectively last quarter, indicating a shift from the Americas to Europe).

The top 10 customers contributed 75% of revenue, with three greater than 10%: Coriant (formally the Optical Networks business of Nokia Siemens Networks) became the top customer (15% of total revenue, driving much of 40G business), followed by Cisco (13%) and Huawei (10%). Now that Marlin Equity Partners (which owns Coriant) has completed its acquisition Tellabs and the firms have combined, the new Coriant would have represented 18% of sales, notes Oclaro.

On a non-GAAP basis, gross margin was 17.1%, up from 12.6% last quarter (and just 7.3% the quarter before that), driven by the richer mix of 100G, product cost improvement in high-volume business, and higher sales leveraging fixed overhead.

“The decision to continue to manufacture our high-performance indium phosphide components in Shenzhen was the right call. It has allowed us to ramp up our contract manufacturing partners in a more controlled way and to do a better job of product transitioning [after delays in manufacturing transfer led to supply constraints last quarter],” comments Dougherty. “This decision has provided a level of stability to our manufacturing plants.”

As a result of the improved gross margin and reduced operating expenses (cut by $4.4m to $34.4m), operating loss was $16.8m, cut from $26.6m last quarter. However, due mainly to interest expense of $8.5m (including a make-whole provision associated with $25m of convertible notes exercised in December), net loss was $27m, down only slightly from $27.4m last quarter. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was negative $10.7m, cut by 45% from negative $19.6m last quarter.

But despite the adjusted EBITDA of negative $10.7m and interest expense of $8.5m plus restructuring expenses of $6.7m and transaction costs of $2.7m, net cash received from the Amplifier business sale of $79.6m led to cash, cash equivalents, restricted cash and short-term investments rising by almost $50m during the quarter, from $94.7m to $144m. “We enter 2014 with a much stronger balance sheet and are virtually debt free, having retired our convertible notes in December,” Dougherty says.

“The results for our fiscal second quarter demonstrate solid progress in our turnaround plan as revenue, gross margin and adjusted EBITDA were better than expected,” says Dougherty. “Our restructuring efforts are progressing ahead of schedule, as are the previously announced headcount reduction plans.”

“We completed the last step of our announced workforce restructuring by launching programs in China, Japan and Thailand. All regions where Oclaro operates have now shared the pain of these adjustments,” notes Dougherty. On 1 July 2013, staffing was about 3000, with plans to halve that in one year. As of early January, it was down to about 2000 compared to the planned 2200. “We remain on track to be under 1500 people by July of this year,” Dougherty says. “Our downsizing has been staged, so the associated expense reductions will not always materialize in the period when the actions are taken. Therefore, we expect the cost benefits to be realized over the next few quarters.”

Oclaro also continues to reduce its number of global sites as part of its plan to streamline and simplify the firm. “We have gone from 20 sites to 14 and still expect to be at 10 by July,” says Dougherty. “The smaller footprint is allowing us to begin building better business practices and processes,” he adds. “I expect that being simpler with better processes will make us more efficient in all areas.”

In fiscal Q2, Oclaro spent $6.7m of the $20-25m restructuring plan. It expects this level to continue for the next two quarters and then tail off to $1-2m per quarter in second half calendar 2014.

“Last quarter was a typical time for annual price negotiations with many of our key customers,” notes Dougherty. “The outcome of the negotiations was pretty well in line with both our expectations and the average range for industry in prior years,” he adds. “We will see the impact of these price adjustments in our current quarter.”

For fiscal third-quarter 2014 (to 29 March), Oclaro expects revenue of $93-103m, with gross margin falling to 13-17%. Adjusted EBITDA should be negative $13m to negative $9m. Operating expenses should fall by a further $3m. “We expect to establish a $40m working capital line of credit, but do not plan to utilize the facility this year,” says chief financial officer Pete Mangan.

“We are starting to see the results of our efforts to right-size the company and align with our more focused and simplified strategy,” says Dougherty. “We are still on track to achieve breakeven adjusted EBITDA by the December quarter,” he adds. “The targets in that model are not reflective of a long-term model from the company. However, they are intended to set realistic milestones for us to achieve breakeven.”

Oclaro expects further cash usage this calendar year in the following four areas. (1) to fund remaining restructuring; (2) to fund negative adjusted EBITDA; (3) to normalize accounts payable post-divestiture (which is expected to require $25-30m in cash); and (4) to fund normal capital expenditure (CapEx) of $3-4m per quarter and capital lease payments of about $1m per quarter ($4-5m per quarter together).

Following completion of the restructuring, Oclaro continues to expect that, on revenues of about $110m per quarter, gross margins of 20% and operating expenses of 25% of sales, it will achieve adjusted EBITDA breakeven in the December quarter. “This will be followed by the goals to break even on a non-GAAP operating base, which we expect will require further improvements in our gross margins,” says Mangan.

“One of our challenges as we look forward is the phasing out of some of our legacy and discontinued products such as previous generations of 10G pluggable transceivers, 40G QPSK modules as well as our WSS [wavelength-selectable switch] product line,” notes Dougherty. “While I am confident that we have many promising developments in our R&D pipeline, we will need to continue to improve our execution in introducing new products into volume manufacturing to address this challenge,” he adds.

“We remain focused on the concept of photonic integration, laser innovation and advanced packaging to enable the emerging needs for higher speeds, lower power consumption, higher port counts and density and lower cost for both telecom and datacom applications,” says Dougherty. “These emerging market trends played very well to our core strength.

“We have targeted development activity in the high-growth areas of components and modules for 100G coherent application, indium phosphide integrated circuits, 100G client interfaces, 40G and 100G modules for data-centers as well as tunable SFP+,” Dougherty continues. “As evidenced with some of our progress and focus at OFC [Optical Fiber Communications conference] next month, we will present two exciting papers on our photonic integrated circuits for use in 100G coherent networks.” One paper discusses a highly integrated balance receiver and the other an integrated tunable laser plus modulator in a small package. “Both of these papers highlight our ability to provide photonic integrated circuits in indium phosphide with world-class performance,” Dougherty adds. “In addition, one of our key customers will actually present a paper demonstrating the performance that they achieved by using our integrated indium phosphide optical components with their proprietary DSP [digital signal processor] in a 100G coherent system.”

See related items:

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

Oclaro’s quarterly revenue falls 11%

Oclaro reports improved quarterly results

Tags: Oclaro

Visit: www.oclaro.com

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