For fiscal 2015 (ended 27 June), Oclaro Inc of San Jose, CA, USA (which provides components, modules and subsystems for optical communications) has reported revenue of $341.3m, down 12.7% on fiscal 2014's $390.9m. This is due to a 25% decline in legacy 10G and telecom 40G products plus the sale of the Industrial & Consumer business late last October (which had contributed $9.3m in fiscal 2015 up to then, versus $32.2m in full-year 2014), partially offset by 50%-plus growth in 100G products.
For fiscal fourth-quarter 2015, revenue was $82.2m, down 1% on $83m last quarter and 14% on $95.9m a year ago, but at the high end of the $77-83m guidance.
Revenue from 10G-and-lower products was $34m (41% of total revenue), down 14% on $39.4m a year ago although roughly level with $33.8m last quarter. "We continue to see strong demand for our 10G tunable laser product lines, and our laser photodetector chips," notes CEO Greg Dougherty. "We have been successful selling our laser and avalanche photodetector chips into select markets, where we do not intend to compete at the transceiver level," he adds. "For example, we are enjoying strong demand for our 10G laser chips, which go into customized 40G modules for data-center applications."
Revenue from 40G & 100G products was $48m (58% of total revenue), down slightly from $49.2m last quarter and $48.8m a year ago.
Revenue for 40G products in particular fell further, to just $14m (17% of total revenue), down 26% on $19m (23% of total revenue) last quarter and down 43% on $24.5m (26% of total revenue) a year ago. However, the decline in 40G telecom products was mostly offset by further growth in 100G product revenue, to $34m (41% of total revenue), up 12.6% on $30.2m (36% of total revenue) last quarter (when capacity constraints limited the strong growth in 100G client-side CFP and CFP2 modules) and up 40% on $24.3m (just 25% of total revenue) a year ago. "About three months ago, we announced that we were increasing our capacity for our CFPx family of 100G client-side transceivers," says Dougherty. Another contributor to 100G growth was the narrow-linewidth micro-iTLA laser. Oclaro also realized early revenue from its coherent CFP2-ACO transceiver.
Driven by 100G sales, datacom applications have grown from $40.4m (46% of total revenue) last quarter to $41.9m (51% of total revenue), while telecoms applications fell from $42.6m (54% of total revenue) to $40.3m (49% of total revenue).
By regional (compared with last quarter), China grew further, from 35% to 36% of total revenue, while the Americas rebounded from 26% to 31% and Europe from 20% to 22%, as Southeast Asia fell further from 16% to 10%, and Japan fell back from 3% to just 1%. Showing increasing diversification, Oclaro's top four customers represented 16%, 15%, 13% and 11% of total revenue, respectively.
On a non-GAAP basis, gross margin has risen further, from 14.1% a year ago and 15.8% last quarter to 19.9% (above the guidance of 15-19%), driven by both a richer product mix and better operational efficiencies. Full-year gross margin rose from 14% in fiscal 2014 to 17.2% for fiscal 2015.
Resulting from the firm's restructuring programs, operating expenses were cut further, from $27.8m a year ago and $22.6m last quarter to $21.8m. Full-year operating expenses have been cut by $33m (25%) from $132.2m in fiscal 2014 to $99.2m for fiscal 2015.
Operating loss has been cut from $14.3m a year ago and $9.5m last quarter to $5.4m, contributing to full-year operating loss being almost halved from $74.7m in fiscal 2014 to $38.4m for fiscal 2015.
Improved gross margin, coupled with the tight expense control, has led to adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) improving further, from -$9.4m a year ago and -$5.3m last quarter to -$1.2m (better than the guidance of between -$6m and -$2m). Due to this, plus increased capital expenditure (CapEx) of $4.1m (up from $3m last quarter) and restructuring charges of $2.5m, the firm's cash, cash equivalents, restricted cash, and short-term investments hence fell during the quarter from $123.9m to $115.1m.
"Q4 results show substantial progress towards realizing our initial stated objective of achieving adjusted EBITDA breakeven," says Dougherty. Full-year adjusted EBITDA was -$20.9m for fiscal 2015, an improvement of $30.6m from fiscal 2014 and $70m from fiscal 2013, driven primarily by cost cutting, operational improvements, and strong 100G product lines.
"Our fourth quarter results demonstrate the significant progress we made over the prior period and highlight how far we have come in just 12 months," says Dougherty. "A little over two years ago, we embarked on an aggressive turnaround journey. We emphasized that it would not be quick, and that we were building a company for long-term success. Many painful steps were taken to reduce our infrastructure costs. We simplified the company in many ways, and we focus our strategy on 100G, which we believe was an area where we could differentiate ourselves in the marketplace," he adds. "At that time, we decided to continue to spend heavily in R&D."
For fiscal first-quarter 2016 (ending 26 September 2015), Oclaro expects revenues of $82-88m (up $3m, at the mid-point, on last quarter). Gross margin should be steady at 18-22%. Adjusted EBITDA is expected to be between negative $3m and breakeven.
"Over the next several quarters, we expect to see our 10G business remain relatively flat, with some ups and downs, as our legacy 10G products are gradually replaced by new higher-margin products [e.g. 10G laser chips]," says Dougherty.
Oclaro expects 40G telecom revenue to step down by $4m to $10m, and remain at that level for the rest of fiscal 2016. "This represents an improvement in our visibility from last quarter's call, at which time we stated that we expected a decrease in sales to beneath the $10m level for 40G during the first half of calendar 2016," notes Dougherty.
However, the decline in 40G should be replaced by growth in 100G products. "We began to realize the benefits of this additional [100G client-side transceiver] capacity on net income in [fiscal] Q4, and expect these benefits to be even stronger in this quarter," says Dougherty. "We expect to see continued sales growth for our entire 100G portfolio, which continues to gain momentum in the marketplace… We began to ramp shipments of pre-production units of our coherent CFP2-ACO product for customer system integration and verification. We will continue to see volumes grow this quarter, and we are expecting meaningful revenue in our December quarter." For the balance of this calendar year, the CFP2-ACO will be primarily shipped from Oclaro's UK production line. In addition, Oclaro has begun trading builds for the coherent CFP2-ACO in its Shenzhen facility. "We will begin building Shenzhen qualification modules during this quarter, as we prepare to go into higher levels of volume production in Asia during the first half of 2016," Dougherty adds. CapEx for fiscal 2016 should be $30-40m, as Oclaro invests in additional capacity for both the 100G client- and line-side growth.
"By continuing to build on our 100G product success, for both client- and line-side applications, we believe we can generate the sales growth necessary to meet our objective of becoming profitable on a non-GAAP operating basis during fiscal year 2016," continues Dougherty. "We believe our non-GAAP operating breakeven model can be achieved when both gross margins and operating expense reach 25% of revenue [starting from a base of $23m per quarter for the September quarter onwards]," adds chief financial officer Pete Mangan.
"One dynamic that we are seeing is stronger market demand for coherent CFP2 transceivers, which operate at both 100 and 200 gigabits," notes Dougherty. "To reinforce our strong position in the CFP2 ACO space, we want to emphasize the fact that we have been successfully shipping CFP2 ACO product for use in both 100G and 200G applications… about one year ago, at ECOC 2014, Oclaro demonstrated the industry's first CFP2 ACO operating at 200G." he adds. "The design-in process for coherent CFP2-ACO is quite lengthy and complicated. There are many hand-shaking functions and interactions between the transceiver and the customer's DSP [digital signal processor]. For these reasons, we believe that there is a significant advantage to being first to market, and we believe we are the leading supplier."
Beyond that, in addition to broadening its 100G product portfolio successfully at both the component and module levels to micro-iTLA narrow-linewidth lasers and lithium niobate modulators, Oclaro is already shipping early prototype examples of higher-bandwidth lithium niobate modulator products for use in single-wavelength 400G systems. "We continue to invest in our future with the intention of being the leading player in 100G and beyond," concludes Dougherty.
