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12 May 2015

Oclaro's revenue constrained by 100G client-side CFP and CFP2 module capacity

For its fiscal third-quarter 2015 (ended 28 March), Oclaro Inc of San Jose, CA, USA (which provides components, modules and subsystems for optical communications) has reported revenue of $83m, down 13% on $95.4m a year ago and down 4% on $86.8m last quarter (or 2% for continuing operations, excluding $1.8m from the Industrial & Consumer business sold on 27 October 2014).

By end-market, Telecoms contributed 54% and Datacoms 46% of sales. By region (compared with last quarter), China grew further, from 29% to 35% of total revenue, while the Americas fell from 30% to 26%, Europe from 21% to 20% and Southeast Asia 18% to 16%, although Japan bounced back slightly from 2% to 3%. Showing increasing diversification, the number of customers contributing more than 10% of total revenue each has risen from three to four (specifically, 19%, 16%, 11% and 10%).

Revenue from 10G products rebounded slightly from $32m last quarter to $33.8m (rising from 37% of total revenue to 41%), driven by strong demand for the 10G tunable laser product line plus growth for lower-speed laser and detector chips. "We are supplying these chips to customers, who are well positioned in markets where Oclaro is not aggressively competing at the module level," notes CEO Greg Dougherty. "Examples of these markets are 40G pluggables, which use four optical channels of 10Gb/s... These chips sales also bring us healthy incremental gross margins," he adds.

Revenue for 40G products was flat on last quarter at about $19m (23% of total revenue), and quarterly revenue is expected to ramp down over the next 12-15 months to just a few million dollars.

Revenue for 100G products shrank from $33.7m to $30.2m (falling back from 39% of total revenue to 36%), due to three main factors: (1) registering the last shipments of legacy 100G large-form-factor modules (about $2m) in fiscal Q2; (2) a significantly greater-than-normal reduction in average selling price (ASP) for 100G client-side products; and (3) capacity constraints limiting the benefit from strong unit volume growth across 100G client-side CFP and CFP2 modules.

"In addition to our market-leading CFP and CFP2 100G client-side products, we introduced and began shipping our CFP4 LR4 product. We have received very positive initial customer feedback on its performance," says Dougherty. "We also continue to see steady progress and growth in our 100G lithium niobate modulators and narrow-linewidth micro-iTLA laser product lines. One year ago we had essentially zero revenue for both of these products. We have successfully grown our market share, and they now both represents strong revenues for us," he adds.

"Results came in at the higher end of our guidance ranges despite the impact of the annual price declines inherent in the first calendar quarter of every year," notes Dougherty. On a non-GAAP basis, gross margin was 15.8%, down from 16.5% last quarter but roughly flat for continuing operations (at the high end of the expected 13-17% range) and up from 12.3% a year ago.

Operating expenses were $22.6m, cut by 6% from $24.2m last quarter (due mainly to elimination of the Industrial & Consumer-related costs) and by 22% on $29.1m a year ago (reflecting the positive results of restructuring and divestiture programs).

This has helped Oclaro to deliver its fourth consecutive quarter of better non-GAAP operating results. With depreciation of $4.2m, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was -$5.3m, cut from -$5.5m last quarter and more than halved from -$12.3m a year ago (and near the upper end of the guidance range of between -$9m and -$5m). "These results further demonstrate the continuing benefits that our cost management and portfolio improvement programs are having on our bottom line," says Dougherty.

On 19 February, Oclaro completed a placement of $65m of five-year 6% convertible senior notes (due 2020), resulting in a net cash increase of $61.6m to further strengthen the balance sheet and to support expansion of the 100G product portfolio.

Hence, despite the EBITDA loss of $5.3m plus capital expenditure (CapEx) of $4.6m (flat on last quarter) and restructuring charges of $2.2m (up from $0.3m), total cash, cash equivalents, restricted cash and short-term investments rose during the quarter from $79m to $123.9m.

For fiscal fourth-quarter 2015 (ending 27 June), Oclaro expects revenue of $77-83m, with growth in 100G products outweighed by a $5m decline in end-of-life 40G telecom business to $14m (prior to a further $4m drop in fiscal Q1/2016 to about $10m). Due to the greater mix of 100G products plus operational improvements, increased fab utilization and continued cost control, gross margin should be 15-19% while adjusted EBITDA should improve further to between negative $6m and negative $2m (keeping the firm on track for adjusted EBITDA break-even by the end of calendar 2015). This is despite restructuring charges rising to $3-5m (rather than the expected $1-3m) as Oclaro completes its global staff reductions initiated in March.

"We also continue to develop new products and to share plans with customers for data rates beyond 100G," says Dougherty. "We continue to work with customers at 100G and 200G." During the March quarter, Oclaro began shipping beta units of its coherent CFP2-ACO transceiver (demonstrated last September at ECOC 2014, operating at 200G in a 16-QAM configuration). "We are now supporting numerous customers for applications in the metro and data-center interconnect markets," says Dougherty. At March's Optical Fiber Communication event (OFC 2015), the coherent CFP2-ACO transceiver received the Lightwave Innovation Award. "Demand continues to be very strong [for the coherent CFP2-ACO transceiver] and we have built up a healthy backlog," he adds. "We expect to further increase our production capability in the current quarter and we remain on track to begin having meaningful revenue late this calendar year." To support its growth plans, Oclaro expects to increase CapEx to $5-8m per quarter. "We remain committed to innovation by investing in R&D [maintaining R&D spending level with last quarter, at $11.3m] and bringing leading-edge technology to market," concludes Dougherty.

See related items:

Oclaro's core communications revenue grows 4% quarter-to-quarter

Oclaro's quarterly revenue dips while China digests CFP/CFP2 100G shipments

Oclaro expanding manufacturing capacity for 100G client-side pluggable optics

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

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

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