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Shares Soar For Telco Firms

In the last 12 months, share prices for Oclaro and Finisar have more than doubled. What's driving this growth?




RICHARD STEVEVENSON INVESTIGATES

They say that when you hit rock bottom the only way is up. And that’s been the case for the optical component makers Oclaro. After footing our yearly shareprice leader board in 2012 and again in 2013, it has now managed to climb off the bottom rung – and better still, has leapt all the way to the top (see p. 34).

While fellow optical component maker Finisar can’t match this, its share price has more than doubled over the last 12 months, and together these performances suggest that the optical sector is not a bad place to invest right now. That would make sense, given demand for ever-higher bandwidth and the growth in cloud centres, which require larger data centres and an increasing number of longer, high-speed connections.

The share price of Oclaro is now at its highest point since April 2012. Historically, however, it is still far short of its recent peaks. Back in February 2011 shares were worth around $18, which is about five times what they are today, and if you look at the share prices of the two companies that merged to form Oclaro in April 2009 – Bookham and Avanex – you’ll find that shares sold for far more than that in the dot.com boom. Oclaro will never hit as high a valuation as its predecessors, but there are signs that it is heading in the right direction, even though it is running at a loss. Although it posted a loss of $25.3 million for the fiscal quarter ending on 28 December, 2013, gross margin and revenue were up 4 percent and $6.3 million compared to the previous quarter, and this enabled sales to hit $102.9 million.

To make further improvements to operating margins and take the company to break-even and on to profitability, the board is implementing a substantial restructuring programme. In a conference call on 11 February that discussed earnings for second fiscal quarter, 2014, Oclaro CEO Greg Dougherty updated investors on the goal of halving the workforce of 3000. Reductions in staff numbers began in July 2013, by this January the company was down to 2000 employees, and the following month Dougherty said that Oclaro was on track to be under 1500 people by July.

Alongside the dramatic cull in staff numbers, the company is reducing its number of sites. Recently it operated out of 20 sites, this February it was down to 14 and it should be at just 10 by July. Included within this is the sale of Oclaro’s GaAs laser diode business to II-VI in late 2013. This transaction, which was worth $115 million and announced on 11 September, 2013, provided Oclaro with $88 million in cash and led to a jump in its share price from just over $1.00 to $1.60.



The datacom side of Finisar’s business now accounts for more than two-thirds of the company’s revenue.

Restructuring and resizing takes time and effort, but Dougherty says that this is not preventing Oclaro from investing strongly in its research and development. According to him, Oclaro is focusing on photonic integration, laser innovation and advanced packaging, because this will enable the introduction of components for telecom and datacom applications that consume less power while operating at higher speeds. “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 datacentres as well as tuneable SFP+."

Finisar’s sales flourish

Oclaro’s rival Finisar, which is in third place on the Compound Semiconductor Share Price Leaderboard, has seen its share price climb from around $13 in the first half of 2013 to north of $20 throughout 2014, with a peak of just over $28. This Sunnyvale-headquartered company, which claims to be the world’s largest supplier of optical communication components and subsystems, is in a period of impressive financial performance that includes six successive quarters of revenue growth.

Recent progress is highlighted by looking at the earnings for the third fiscal quarter that ended on 26 January, 2014, and comparing this with the equivalent period for the previous year. Assessing the company in that manner shows that sales have climbed from $238 million to an all-time record high of $294 million, while gross margin has increased 28.5 percent to 35.9 percent.



Although Oclaro’s share price has more than doubled this year, it is not high by historical standards.

Finisar breaks down its quarterly sales figures into those for datacom and telecom applications. The datacom side has seen substantial growth over the last year (see table 1), and topped $210 million in the most recent quarter. This was 3 percent higher than the previous quarter, thanks to increased sales of 40-gigabit Ethernet transceivers.

Now the company is currently positioning itself for further growth, via a combination of acquisitions and the construction of new facilities.

Chief Financial Officer Kurt Adzema told investors on 6 March, 2014,  that in the fourth fiscal quarter the company would spend about $33 million on capital equipment, with the majority of this invested in constructing the shell of the second building of the new Wuxi, China production site. “We expect the shell of the building to be completed by fall of 2015 and now plan to immediately start to fit out several floors of the building and then fit out additional floors over time as needed."

Increased capacity has also resulted from the acquisition of u2t this January. “Finisar added u2t’s InP-based high-speed receivers and photodetectors, including their industry-leading 100G and 200G coherent receivers that are used by multiple system manufacturers today," said Eitan Gertal in the 6 March call. The acquisition is claimed to consolidate Finisar’s previously announced partnership with u2t on InP-based Mach-Zehnder modulators for 100G and 200G coherent applications.

Gertal believes that these receivers, photodiodes and modulator technologies can combine with Finisar’s tuneable lasers to provide a full suite of vertically integrated optical components, which can be used to construct very high-performance modules for the 100G and 200G coherent metro and long-haul markets.

To increase sales, Finisar is also continuing to develop several new products with high levels of efficiency. In the datacom sector, the company boasts that it now has modules that consume less power than those of all of its competitors, and on the optical side, it is shipping beta samples of its tuneable SFP+ modules that consume just 1.5 W, thanks to incorporation of the firm’s low-power tuneable lasers and optical subassemblies. These products and the acquisition of u2t will help to swell sales, which should hit $296 million to $311 million in the fourth fiscal quarter. Gross margins for that period should be 35.5 percent.

TriQuint’s soaring shares

Nestled between Oclaro and Finisar on the leader board is TriQuint, a company with a share prices that has soared from just below $6 to more than $14 in the last 12 months. It would be both easy and wrong to ascribe all of this gain to the upcoming merger with RFMD. The announcement of that merger is partly to thank – when that news came out, the share price leapt from about $9 to $11, and since then is has climbed further – but it is worth noting that TriQuint’s share price increased by 50 percent between May 2013 and early February 2014.

Between those dates the share price shot up by 17 percent on the second quarter earnings and guidance, and nosedived by 20 percent when the third quarter earning were unveiled.

Although the second quarter earnings were not that impressive – revenue hit $190.1 million, up 3 percent sequentially – the market was wooed by the promise of far better times ahead. Back then CEO Ralph Quinsey said: “In quarter three 2013, I expect revenue to jump 30 percent sequentially, bringing significantly improved margins and profitability. I believe quarter three is the beginning of a stronger period of performance for TriQuint, built on a differentiated strategy that is defensible and sustainable."



Increasing use of cloud computing is leading to the growth of datacentres, and aiding the sales of optical component manufacturers such as Oclaro and Finisar.



The company predicted sales for the third quarter of $245 million to $255 million, and on 24 October it revealed that it had met that, posting revenue of $250.8 million. But investors were not that happy – failing to meet its earnings per share forecast did not go down well, and although the company was predicting further sales growth, it was slowing down. It took until early February 2014 for the share price to recover from the knock it took following those results, before jumping on the announcement of the merger for reasons discussed in this month’s feature “RFMD + TriQuint = ?" (see p.36)



Tough times for Anadigics

While share prices of TriQuint’s peers, RFMD and Skyworks, have also increased by more than 50 percent in the last month, it’s not been a great time for every player in this sector. Over that time frame, Anadigics’ share price has tumbled by more than



40 percent, and it is now footing the leader board. Its share price did not take a hammering when the RFMD-TriQuint merger was announced in February, but since the start of March it has slid from $1.80 to $1.25.









Although the majority of compound semiconductor companies listed on the leaderboard have failed to keep pace with the NASDAQ, many of those that  have outperformed this composite have done so by significant margins.



Insight into the current state of Anadigics’ business was provided in the earnings call on 30 April 2014 discussing first fiscal quarter earnings. On that day Terry Gallagher, Vice President and CFO of Anadigics, told investors that revenue for the first quarter totalled $23.3 million. That was a sequential mdecrease of 35.9 percent or $13 million, and in line with prior guidance.



Gallagher broke this down, detailing first quarter sales for cellular of $12.8 million, a 23.4 percent decline; Wi-Fi revenues of $5.1 million, a 64.9 percent sequential decrease; and infrastructure revenues of $5.4 million, up 4.5 percent sequentially. In this quarter gross margin was just 10.9 percent, capacity utilisation was just 45-50 percent, and the company made a net loss of $9.6 million.



Despite all these negatives, CEO Ron Michels was upbeat: “2014 represents a pivotal year for Anadigics. We believe that our business has moved past the turning point and is on a solid path to achieve EBITDA objectives later this year." According to him, the company has attractive products in many different markets, which should lead to greater sales in the coming months and years.

“During the first quarter, we announced several new mobile devices that are powered by our front-end ICs, including the Huawei P6S and Samsung Galaxy Tab Pro," said Michels, who added that the company is shipping production volumes of its latest infrastructure power amplifiers.

Anadigics may also branch out into new markets, by investing in the research and development of a wafer process technology. “This process technology – offered as a foundry service – provides greater scalability, higher performance and increased value in the production of the VCSEL lasers," said Michels, who pointed out that these optical emitters can enable motion capture and sensing capabilities in many high-volume applications, ranging from smartphones to gaming devices.

If Michels can deliver on his promises and get the company inching nearer to profitability, Anadigics’ share price will start to climb. And as Oclaro has shown this year, sometimes that is all it takes to top the leader board. Can Anadigics do this in 2015? Well, we’ll just have to wait and see.



TriQuint’s shares shot up by 17 percent following the report of second fiscal quarter earnings, which included company CEO Ralph Quinsey telling investors that sales would increase by 30 percent in the following quarter.


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