Oclaro: Inventory correction over, but revenue slump continues in 4Q11

Oclaro Inc. (NASDAQ:OCLR) Chairman, President, and CEO Alain Couder told participants in the company’s fourth quarter and fiscal year 2011 conference call July 28 that the inventory correction in optical components and subsystems is over. However, that doesn’t necessarily mean an immediate market rebound, as Oclaro’s fourth quarter 2011 results illustrated. The company reported 4Q11 revenues of $109.2 million, down from the third quarter’s $115.7 million. Couder also offered a flat revenue guidance for the next quarter.

Oclaro said GAAP gross margin was 23% for the quarter, down 2% from the previous quarter. GAAP gross margin for the quarter suffered “approximately 3% points of impact from excess and obsolete reserves and related inventory valuation charges,” according to a company press statement.

The company reported revenues of $466.5 million for the full year, an improvement over for the $392.5 million Oclaro earned in fiscal 2010. However, whereas Oclaro realized GAAP operating income of $4.8 million on those lower revenues last year, the company reported a GAAP operating loss of $33.6 million for fiscal 2011, including $20 million of impairment charges following the company's annual review of goodwill.

Margins for the year also suffered in comparison to 2010. Oclaro saw 27% GAAP gross margin in fiscal 2011 versus 28% in fiscal 2010.

Couder and CFO Jerry Turin pointed to an increased level of R&D spending as a major contributor to margin downturn and loss for the full fiscal year. For example, the company is spending $18.9 million a quarter on R&D, $7.4 million (64%) more than in the fourth quarter of fiscal 2010. As part of the fruits of this effort, the company expects to begin realizing nearly $1 million in revenues in the upcoming quarter from such new products as 40-Gbps coherent and non-coherent transponders, tunable XFP transceivers, 40G lithium niobate external modulators, and an integrated ROADM line card. Couder also told those on the call that the company would begin sampling a 1x23 wavelength selective switch (WSS) to a customer in the upcoming quarter as well.

However, perhaps the most interesting part of the call came when Couder, responding to a question regarding the catalysts for a revenue guidance of $103 million to $113 million, said that the main obstacle to a more positive outlook was a lack of visibility by his clients regarding carrier spending plans. “We think most of the inventory correction is over,” he stated.

Visibility among his customers is now “weeks rather than months,” Couder explained. This has led to volatility among his customer mix. For example, usual bellwether Huawei dropped from 18% of revenues in 3Q11 to 10% in 4Q11, while Fujitsu jumped to 17% in the quarter on the strength of 40-Gbps transponder and specialized amplifier sales. Both Couder and his competitors at Finisar cited softening in Huawei’s demand for WSS subsystems earlier in the year as a catalyst for the current downturn (see “Oclaro: We’ll miss 3Q11 guidance”).

Gross margins are also expected to remain flat, due in part to the fact that while customer inventory pressures may have eased, Oclaro’s inventory issues have not. Couder named internal inventory reduction as a main goal for the second half of the year, which would clear the way for production improvements and the delivery of more high-margin products to buoy gross margins.

Couder and Turin also said that customers were starting to pressure the company on price for certain products, 40-Gbps technology among them.

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