Oclaro: Out with QSFP28 CWDM4, in with coherent DCO, 400G modules

Greg Doherty, CEO at Oclaro Inc. (NASDAQ:OCLR), revealed on a analyst call yesterday to review the company's most recent quarterly results that he's decided to forego further development of 100G QSFP28 CWDM4 optical transceivers. Instead, Oclaro will focus its module work on development of digital coherent optics (DCO) and PAM4-enabled QSFP56-DD 400 Gigabit Ethernet devices, both of which should be on display at OFC 2018 in San Diego next month.

Greg Doherty, CEO at Oclaro Inc. (NASDAQ:OCLR), revealed on a analyst call yesterday to review the company's most recent quarterly results that he's decided to forego further development of 100G QSFP28 CWDM4 optical transceivers. Instead, Oclaro will focus its module work on development of digital coherent optics (DCO) and PAM4-enabled QSFP56-DD 400 Gigabit Ethernet devices, both of which should be on display at OFC 2018 in San Diego next month.

Doherty noted that the company currently derives most of its QSFP28 revenue from 100GBASE-LR4 transceivers. He told attendees on the call that when it comes to CWDM4 QSFP28, "we continue to see very unhealthy pricing practices in the market from many of the lower-spec variants." He therefore said that Oclaro only will support current CWDM4 optical transceiver customers going forward.

Overall, Doherty doesn't see a lot of growth opportunities for his company in 100G client-side transceivers. He noted that revenues from such transceivers (which include modules in both the CFP and QSFP families) dropped by $15 million in the recently concluded fiscal second quarter; he expects sales to decrease by another $13 million in the current third quarter. Beyond that, Doherty predicted 100-Gbps client-side transceiver revenues will remain sequentially flat for the remainder of calendar year 2018.

Doherty is much more bullish on 400G transceivers, which he described as a $280 million opportunity in 2019 that should grow to $720 million in 2020. Oclaro will begin shipping 400G QSFP56-DD transceivers this calendar year, Doherty asserted.

Meanwhile, Oclaro also has coherent DCO modules in the works, although Doherty didn't mention the form factors in the pipeline. Oclaro is one of three companies that have partnered with Ciena for development of coherent modules based on Ciena's WaveLogic Ai coherent DSP (see "Ciena to license WaveLogic Ai coherent DSP to optical module vendors" and "Ciena and the wandering WaveLogic Ai"). The initial target discussed at the time of the partnership announcement was 5x7-inch modules, which likely will reach the market first. However, Oclaro sources at OFC 2017 indicated the company also has interest in DCO modules in smaller packages. Doherty said that Oclaro should begin shipping DCO modules for revenue early in 2019. He added that the company has multiple DCO products on its roadmap, not all of which would use the Ciena DSP. The modules will target 400-Gbps and 1.2-Tbps applications.

Doherty noted that a systems customer in China has indicated interest in creating DCO modules of their own, which would provide a market for Oclaro's ICT/ICR and tunable laser components. This business opportunity arises against a backdrop of Chinese government plans to beef up the country's optical communications development capabilities (see "New 5-Year Optical Component Plan from China’s MIIT spells trouble for foreign suppliers: Cignal AI"). In response to a question from an analyst, Doherty expressed confidence that the Chinese initiative wouldn't significantly damage Oclaro's long-term prospects.

"We think China will be strong at the module level and probably for the client side in the 5G and access markets. There we've been supplying chips, and we'll continue to supply laser chips and it will be a lucrative market for us that way," he commented. "At the high end, we don't see them anytime soon being a major player at the high-end, particularly in coherent. In fact, if I remember in the Ministry's report the five-year target was only to buy I think it was 20% of the higher-end modules in China."

Oclaro reported revenues of $139.3 million for the second quarter of fiscal year 2018, which ended December 30, 2017. That figure was a decline from both the previous quarter ($155.6 million) and the year-ago quarter ($153.9 million). GAAP gross margin was 37.2%, also down sequentially and year-on-year. GAAP earnings per diluted share of $0.11 also was off accordingly versus the $0.16 enjoyed in the first quarter of fiscal 2018 and the $0.18 reported for fiscal 2Q17.

Non-GAAP gross margin was 38.4% for the recently concluded quarter, with non-GAAP earnings per share coming in at $0.14. Looking toward the current quarter, which ends March 31, 2018, Oclaro management forecasts further declines. Revenues are predicted to range between $120 million to $128 million, with non-GAAP gross margin in the range of 34% to 37%. Non-GAAP operating income should be in the range of $13 million to $17 million (versus $24.5 million in FY2Q). However, Doherty predicted on the call that the company's revenue performance will rebound in fiscal Q4 by about 5% sequentially, in part because of the DCO and 400G opportunities as well as sales from the company's 10- and 25-Gbps product lines.

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