DECEMBER 17, 2009 -- With its newly announced acquisition of Xtellus, Oclaro says it now has a complete family of wavelength-selective switches (WSS) capable of powering reconfigurable optical add/drop multiplexer (ROADM) applications over the entire optical network, from the edge to the core. Combining the WSS portfolio with Oclaro's integrated subsystem design capability positions the company favorably within the high-growth ROADM market, according to Oclaro.
The acquisition also completes the overall portfolio of product areas required to support Oclaro's strategic positioning throughout the metro and long-haul areas of the telecommunication market.
Xtellus uses a strategic mix of core technologies, both liquid crystal and MEMS, that will now enable Oclaro to deliver a complete family of scalable WSSs to power ROADM applications across edge and core optical networks. Smaller-port-count edge WSS applications, where managing product costs aggressively is a key to success, are based on liquid-crystal technology. For core WSS applications, Xtellus uses a combination of high-reliability one-axis MEMS to switch across high port counts, while also maintaining liquid crystal for attenuation.
Under the terms of the acquisition agreement, stockholders of Xtellus will receive shares of common stock of Oclaro worth $33 million, a portion of which will be held in escrow for 18 months to support Xtellus' indemnification obligations to Oclaro. The agreement also provides for a value guarantee under which stockholders could receive additional consideration subject to both the share price of Oclaro failing to achieve a certain price level at the end of calendar year 2010 and on the Xtellus business achieving certain revenue targets over Oclaro's corresponding 12-month fiscal period.
Oclaro now expects revenues for its second fiscal quarter ended Jan. 2, 2010 to be in a range from $91 million to $93 million. Revenues from Xtellus to be included in the second-quarter fiscal results of Oclaro, for the 16-day period between the Dec. 16, 2009 close date and Jan. 2, 2010, are not expected to be material.
The terms of the acquisition agreement also provide for a valuation guarantee under which stockholders of Xtellus could receive up to $7 million in additional consideration if Oclaro common stock trades below certain levels at the end of calendar 2010 and Oclaro's revenue from Xtellus products is more than $17 million in calendar 2010. The agreement also calls for a retention program under which certain employees will receive up to an aggregate of $5 million in a combination of cash (to a maximum of $1 million to be paid upon close) and restricted stock awards which will generally be subject to time based vesting and partially subject to the conditions of the value guarantee.
Oclaro still expects to generate net cash in the fiscal quarter ended Jan. 2, 2010, even after paying the cash amounts due at close. Oclaro also expects the operations of Xtellus to be close to breakeven from a non-GAAP operating income point of view in each of the first two quarters of calendar 2010, generating gross margins consistent with Oclaro's corporate targets, and moving into positive non-GAAP operating income range in the second half of calendar 2010. Any Xtellus related net cash burn in the 2010 calendar year is expected to be largely limited to the working capital required to support their corresponding revenue ramp.
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