Oclaro third quarter 2014 misses management's expectations

Despite the fact that revenues fell within the company’s guidance, Oclaro, Inc. (NASDAQ: OCLR) CEO Greg Dougherty said that the company’s results for the third quarter of fiscal year 2014, which ended March 29, 2014, failed to meet his expectations. A miss on non-GAAP gross margins contributed to Dougherty’s disappointment.

Despite the fact that revenues fell within the company’s guidance, Oclaro, Inc. (NASDAQ: OCLR) CEO Greg Dougherty said that the company’s results for the third quarter of fiscal year 2014, which ended March 29, 2014, failed to meet his expectations. A miss on non-GAAP gross margins contributed to Dougherty’s disappointment.

Revenues for the quarter came in at $95.4 million, at the lower end of the $93 million to $103 million the optical components and subsystems company forecasted (see "Oclaro management touts progress in second quarter of fiscal 2014"). The figure represented a sequential decline from the second quarter’s $102.9 million.

In a conference call with analysts May 6, Dougherty said three factors suppressed revenues during the quarter:

  1. The company derived less revenue than hoped from vendor managed inventory from two of its largest customers related to some of its 10G products.
  2. Dougherty said that client-side 100G CFP optical transceiver shipments "experienced a bit of a pause" after strong shipments in the previous quarter that were perhaps still being absorbed.
  3. "Execution issues" on the company’s lithium niobate production line prevented Oclaro from meeting the full demand for such products during the quarter.

Meanwhile, GAAP gross margin was 12% for the third quarter of fiscal 2014, 4% off that of the previous quarter. Non-GAAP gross margin also was at 12%, lower than the 13% to 17% previously forecasted. Here, the challenges were the aforementioned execution issues, the fact that the quarter traditionally is when new contract negotiations usually result in price declines (it was 4% this year), and increased contract manufacturing costs. CFO Pete Mangan also cited product rationalizations and production ramp decisions as influential factors.

Overall the quarter saw a GAAP operating loss of $22.5 million (versus a GAAP operating loss of $25.3 million in the previous quarter) and a GAAP net loss of $22.9 million for the second quarter of fiscal 2014. In non-GAAP terms, the third quarter’s operating loss was $17.5 million (slightly worse than the $16.8 million loss in the previous quarter) and the loss from continuing operations was $17.9 million (versus $27.0 million in the second quarter).

Dougherty saw the loss numbers as evidence of progress in Oclaro’s turnaround efforts. "While the March quarter results did not meet our expectations, we continued to make good progress on our turnaround plan,” Dougherty said via a press release. “Gross margin was negatively impacted by certain product rationalization and ramp decisions made during the quarter and issues related to management of our contract manufacturers. These actions masked the progress that we made in executing our restructuring plan, in particular our continued reduction of operating and manufacturing overhead costs, which establish the foundation for improved financial performance."

That improved financial performance may not materialize immediately. The company essentially guided flat for the fourth quarter of fiscal 2014, which ends June 28, 2014, with revenues in the range of $90 million to $100 million. Non-GAAP gross margin should fall between 12% and 16%, and adjusted EBITDA in the range of negative $13 million to negative $9 million. Adjusted EBITDA came in at negative $12.3 million for the recently concluded quarter.

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