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7 February 2007


OCP burning through cash during transition to higher-margin products for US FTTH

For its fiscal first-quarter 2007 (to end-December 2006), fiber-optic component maker Optical Communication Products Inc of Woodland Hills, CA, USA has reported revenue of $17m (down 11% on $19.1m last quarter and 4.1% on $17.7m a year ago). Backlog at the end of December was $7m, compared with $8.6m at the end of September.

Gross margin has also fallen, from 35.6% a year ago and 22.9% last quarter to just 18.8%. Including transition charges of $493,000 related to the planned move of manufacturing of certain higher-volume products to its China contract manufacturer, operating expenses were $9m (52.8% of revenue), up from $6.9m (36%) last quarter. General and administrative expenses also more than doubled year-on-year (to $4.4m), mainly related to executive severance costs, the inclusion of GigaComm, higher professional expenses relating to legal, accounting and consulting services, and unoccupied space in the Woodland Hills facility. Net loss has risen from $1.1m a year ago and $1.4m last quarter to $4.2m.

“Gross margin improvement over time is key to our business strategy,” says CEO Philip F. Otto. “Our first quarter financial performance reflects both the investment costs of our margin improvement initiatives as well as lower unit volume than we had anticipated. During the first quarter we released our first 10 Gigabit Ethernet industrial and extended-temperature XFP components to our principal customer base, reflecting our concerted effort to bring higher-margin products to market,” he adds.

“Additionally, integration of internally sourced lasers from our recently acquired operation in Taiwan (GigaComm) into our existing products is moving ahead according to plan, and we have initiated a program to cull older legacy products from our mix,” Otto says.

OCP claims that it has a leading position in the fiber-to-the-home (FTTH) market in Japan. Now, with prospective, large-scale development of FTTH in the USA, it is seeking to rapidly adapt its products for this market and to carefully select those segments of the market where it believes it can generate consistent returns.

The firm says it remains optimistic about broadband industry forecasts, which call for sustained growth in the optical components market. As part of its stated gross margin improvement plans, OCP is investing in process improvements and product development to address the anticipated market resurgence. The planned level of such investments was not justifiable during the period of telecom market weakness over the past three years, the firm adds.

For fiscal 2007, OCP now expects revenues to be at the low end of its target range of $80-90m. It also expects operating expenses to rise 40-45% year-on-year (including transition charges of $3-3.5m for moving manufacturing to China), mainly due to implementing the firm’s Asia initiatives, its global speed-to-market product strategies (which call for increased international market penetration, rapid product development, and flexible, turnkey manufacturing capacity), and its global business development plans.

In the interim, until these initiatives take effect, OCP expects significant continuing gross margin pressure. Full-year fiscal 2007 gross margin should be about the same as its Q1 gross margin of 18.8%, with potential fluctuations in quarterly results corresponding to major transitional events, including internally sourced laser integration, the planned staffing reduction in conjunction with moving manufacturing to China, and periodic changes in product mix. OCP’s long-term goal is to restore sustainable gross margins to levels greater than 30%.

Part of OCP's cash reserves (which were $124m at the end of December) will therefore be used throughout fiscal 2007 to support working capital and to invest in gross margin improvement initiatives. Reserves are expected to fall from $126.9m at the end of September 2006 to $105-110m at the end of September 2007.