New Oclaro sets course

Alain Couder, chairman and CEO of the new incarnation of Oclaro Inc. (NASDAQ: OCLR), reviewed with analysts July 31 the company’s structure and strategy following the closing of its merger with Opnext. The restructuring includes organizing the company into three groups; the strategy includes removing its few redundant product lines and accelerating its cost reduction timeline to achieve in three months what it had promised to do in 18 to 24.

On the final earnings call for the old Oclaro held July 31, Couder said the combined company would continue to focus on telecom (which currently represents 85% of its business) and industrial and commercial products. To meet the demands of these two markets, the company has been reorganized into three groups that combine the assets of Opnext and the old Oclaro:

1. The Photonic Components Business unit, managed out of Europe and Israel, includes the company’s work in photonic integrated circuits, tunable lasers, receivers, and modulators; optical and mechanical design and packaging; wavelength selective switching and MEMs; and high-power lasers and VCSELs.
2. The Optical Network Solutions Business Unit is responsible for maintaining systems architecture expertise, custom and advanced module design, micro-optics and high-power packaging, and pluggable modules. It will be managed out of North America.
3. The Modules and Devices Business Unit will oversee advanced transceiver design and optical packaging, advanced active device R&D, software and value engineering R&D in China, and liquid crystal work. Managed out of Asia, the group also will serve as the company’s manufacturing hub. Couder said that the unit’s R&D work would continue to leverage Opnext’s previous relationship with Hitachi’s R&D arm.
   

Couder revealed a new member of the executive team originally introduced July 24 (see “Oclaro, Opnext merger completed”). Rich Zoccolillo will serve as vice president, integration. He joins Kei Oki, president of Oclaro Japan, Inc., and Tadayuki Kanno, COO of Oclaro Japan and general manager of the Modules and Devices Business Unit, as holdovers from Opnext’s management team. Couder also said that, despite having passed “the normal retirement age,” he had promised the board that he would remain in his current role for two fiscal years.

As previously stated (see “Confident Oclaro, Opnext savor future”), the new Oclaro will be a powerhouse in both optical components and modules/subsystems, Couder asserted. The merger not only creates a broad product line, but insulates the company from shifts in its customers’ strategies. As an example, Couder noted that some system houses in China that had previously purchased 40-Gbps modules from Oclaro or Opnext are shifting to in-house designs. Because of its component offerings, the company has the ability to replace the lost module revenue with component sales to the same customers, he explained.

The process of combining the product lines uncovered few redundancies – with two notable exceptions, coherent 100-Gbps modules and tunable XFPs. The company settled the matter by sticking with whichever effort was more advanced. In the case of 100G, that meant Opnext’s module and subsystem suite (see “SURFnet trials Opnext 100-Gbps subsystem over 3300 km”); the team responsible for Oclaro’s coherent 100G program will now shift its focus toward integrating Oclaro-derived components into the Opnext-designed system. The situation is reversed in the tunable XFP case; Opnext’s efforts in this area were far behind Oclaro’s, and therefore the old Oclaro module will remain in the new company’s product catalog.

The synergy inherent in replacing components bought from other vendors with devices created in-house (primarily Oclaro components into Opnext modules and subsystems) was one factor that originally led Couder and his team to estimate that they could achieve $35 million to $45 million in annualized cost reductions within 18 to 24 months of the merger’s close. However, given an increasingly challenging market environment that Couder says will lead to flat sales at least into the upcoming quarter, the company will accelerate its drive for cost savings. The result will see the company reach the $35 million annualized savings goal as soon as December, with $9 million directly realized by then. The company reorganization (including an unspecified reduction in head count from rationalizing R&D, sales, and marketing organizations) and a nearly 20% reduction in selling, general, and administration (SG&A) expenses will be among the main contributors to this achievement, according to Couder.

Longer term, Oclaro’s new manufacturing strategy also will contribute to lessening expenses and boosting gross margins. The company will retain in-house front-end production processes such as those for wafers and chips. But everything else – including the construction and stuffing of “gold boxes,” modules, and line cards – will move to contract manufacturers. This includes operations currently housed in places such as Zurich, Japan, and California.

Couder stressed that, despite comparative short-term weakness, the fundamentals for sustained growth in optical communications remain in place. With the combined company now the second largest in the space behind Finisar, the new Oclaro should be well-positioned to take advantage of these factors, he believes.

“In any good [business] book, a number two is expected to make money, and therefore our focus is very clear,” Couder quipped. “We will focus first on no disruption to customers as we execute the merger, and second on becoming profitable as soon as possible.”