Oclaro Hits 2016 On A High


Following a hefty restructure, Oclaro posts impressive financials. Can industry expect more of the same, asks Compound Semiconductor.

Latest financial results indicate Oclaro is on the cusp of profitability.

Earlier this month, optical component and module supplier, US-based Oclaro, revealed a key milestone in its first quarter 2016 financial results that set investors buzzing.

By generating its first positive adjusted EBITDA of $4.2 million, it had spectacularly increased what is essentially net income, by $25 million in just two years.

At the same time, $87.5 million revenues came in at the high end of guidance, up by more than $5 million from Q4. And gross margin reached 26%, marking an increase of 6% from last quarter.

Clearly the results spell good news for a company that has recently taken severe measures to reach profitability.

In 2014, chief executive, Greg Dougherty, announced a major re-structuring programme, culling staff numbers by some 50% to 1500.

Meanwhile, operating sites were reduced and the company's GaAs laser diode business sold to II-VI for $115 million, bringing in some $88 million in cash.

Today, shares stand at $3.38, having edged upwards throughout the past year as rival Finisar shares drift down. And as Dougherty said in his recent earning call: "We have firmly put the turnaround challenges behind us."

Alex Henderson, senior analyst at US-based investment banking and asset management firm, Needham, was somewhat surprised by Oclaro's latest results.

As he tells Compound Semiconductor: "Revenues were ahead, but within the range of expectations for improving growth. [But] we were surprised at the sharply better than expected Gross Margins."

The Needham analyst attributes the company's results to three key factors.

First, production is streamlined. Second, money-losing legacy products have been ditched.

Third, manufacturing takes place in regions that have benefited from a strong US dollar; namely Japan and Europe. And now, Oclaro looks set to achieve profitability.

"The company is on the cusp of profitability," says Henderson. "It's already cash-flow positive, and while annual price reductions in the March quarter are likely to slow improvement, it will likely hit the mark in the June quarter."

Potent products

According to Oclaro's Dougherty, latest quarterly revenues were primarily driven by its 100G product lines. 100G product revenue grew by $7 million, or 20%, compared to the previous quarter, and now represents some 47% of total sales.

This isn't an enormous surprise. While 100 Gigabit Ethernet has been a long time coming, industry pundits predict 2016 is set to be a breakthrough year.

IHS Infonetics, for one, has predicted next year will be 'huge' for 100G as products reach market and Internet content providers, for example, shift from 40G to 100G optics, driving sales.

Anticipating rising demand for 100G transceivers, Oclaro increased capacity for its 100G client-side transceivers in early 2015 and has been sampling its QSFP28 transceiver to data centres upgrading to 100G infrastructures

It has also started shipping its DWDM lineside analog-coherent transceiver - deemed to be the company's 'biggest deal' by Henderson - for deployment in this quarter.

And pleasingly for Oclaro, demand from China, for client and lineside 100G products, is rising. According to Dougherty: "It appears our customers are preparing for awards for 100G systems from China Mobile and China Telecom... and we expect to see continued 100G sales growth in China."

Henderson concurs, and points out that other industry players including MACOM, Inphi, Oclaro and Lumentum are also reporting ramping China orders.

"This demand is likely to cause abnormal demand in the first half of 2016," he says. "If stronger China demand picks up enough, it could cause [Oclaro's] March quarter to buck seasonal patterns, resulting in even earlier [profitability]."

So the future looks bright for Oclaro. With shrewd product development beginning to pay off, it has nearly clawed its way back to profitability.

But competition is fierce, and size-wise, the company is small compared to the likes of Finisar and even NeoPhotonics. Could scale be an issue?

Henderson thinks not. "Competition is stiff in VCSEL short range optics but less so in [Oclaro's] high-end integrated segment," he says, "Also, we do not see China-based players moving up in scale with the fab and integrated optics capabilities."

"Oclaro has a very good technology and strong management with a clear roadmap," he adds. "This and its strong offerings could vault them over the next few years."

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