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17 May 2007

OCP losses worsen as it gears for China manufacturing transfer

For its second-quarter 2007 (to end March), fiber-optic component maker Optical Communication Products Inc of Woodland Hills, CA, USA has reported revenue of $16.4m, down 3.7% on $17.0m last quarter and 10.6% on $18.3m a year ago.

Gross margin has fallen from 34.7% a year ago to 18.8% last quarter and now minus 3.5%. This reflects a lower average selling price (ASP), lower margin products, and a non-cash inventory reserve charge of $3.2m to adjust current inventories on hand to market value, says the firm.

Operating expenses have risen from $5.6m a year ago then $9.0m last quarter (including transition charges of $460,000) to $18.0m (including $851,000 in transition costs associated with the planned move of manufacturing to China and a non-cash goodwill impairment charge of $8.5m). The increased transition charges were due mainly to the accrual of severance benefits as the firm approaches its planned workforce reduction during fiscal Q4/2007. Net loss was $17.1m, compared with $4.2m last quarter and a net income of $2.1m a year ago.

“OCP is in the midst of a turnaround that began last year and will continue into fiscal 2008,” says CEO Philip F. Otto. “Transitions of this magnitude take time, and we are confident that the decisions we have made are the right ones to position OCP for a return to growth,” he adds. “We expected margin volatility and significant transition-related charges throughout fiscal 2007. Our second quarter results, however, also reflected industry-wide price erosion and softening of the fiber-to-the-home (FTTH) market in Japan.”

OCP has reduced its fiscal 2007 targets for revenue to $65-70m (from $80-90m) and for gross margin to 10-12%. OCP says that its long-term goal is to restore sustainable gross margin to levels greater than 30% through strategic initiatives including internally sourced laser integration, reducing the workforce in conjunction with moving manufacturing to China, and transitioning to a higher-margin product mix over time.

* On 23 April, OCP's board received a letter from Oplink Communications Inc indicating that it had entered into a stock purchase agreement to purchase Furukawa Electric Co Ltd’s 58.1% stake in OCP. Oplink also proposes to purchase OCP's remaining remaining stock at $1.50 per share. Oplink’s unsolicited offer is under evaluation by a special committee of OCP’s board. In the meantime, the committee has adopted a 30-day shareholder rights plan to protect the interests of OCP’s minority shareholders, and Oplink has since filed suit to challenge its adoption.