What: Shares of Oclaro (NASDAQ:OCLR) opened Wednesday's trading session nearly 17% above Tuesday's closing price. The optical components and laser systems maker held steady, closing the day on a high note and a 20.7% overall gain. The catalyst? Oclaro reported fourth-quarter results after Tuesday's closing bell, edging out revenue estimates and beating earnings estimates by a sound margin.
So what: Year over year, Oclaro's revenues shrank 14.3% to $82.2 million. Analysts had expected even worse, and would have settled for $81.4 million.
On the bottom line, the company saw an adjusted net losses of $0.06 per share. That's up from a $0.23 loss per share in the year-ago period, and comfortably above Wall Street's estimates calling for a $0.09 net loss per share.
The revenue drop was expected, as the optical industry moves from one long-established performance baseline to a newer and faster generation.
"As expected, we saw a $5 million decline in our 40G telecom business," said Oclaro CEO Greg Dougherty in a conference call with analysts, referring to 40-gigabit optical transponders and receivers. "However, we made up for this reduction with strong sales of our market-leading 100G products."
Now what: Looking ahead, Oclaro set the midpoint of its first-quarter revenue guidance range at $85 million and adjusted EBITDA losses roughly in line with the fourth quarter. The sales target sits below the current analyst view. Using EBITDA as a proxy for adjusted earnings, analysts should find the bottom-line update optimistic.
Management has gained more visibility into order trends for its last-generation 40G products, and expects that product line to deliver about $10 million of quarterly sales throughout the just-started fiscal year. Previously, these products were expected to fall off the map rather quickly.
100-gigabit modules are making up for the last 40G sales, jumping 40% above the year-ago quarter to land at $34 million. Oclaro is increasing its production capacity for these popular solutions, and sales should continue to grow rapidly.
Remember that the old product sales aren't decreasing as quickly as feared, add in the strong growth of newer and more profitable products, and you'll see why Oclaro investors are going ga-ga over this report.
Management expects to reach breakeven non-GAAP operating income when adjusted gross margins rise to 25% of revenue while operating costs decrease to the same level. Today, gross margins stand at 19.9%, up from 15.8% in the previous quarter and 14.1% a year ago. Meanwhile, operating expenses decreased 22% to land at 26.5%. Not much further to go, if the company can sustain these improving trends.
"We center our focus on the next milestone, which is to generate operating profit on a non-GAAP base during fiscal year 2016," said Oclaro CFO Pete Mangan. By then, revenues would need to hover in the mid-$90 million range.
The optical industry as a whole is kind of on a roll right now. I'd hate to jinx it, but it's starting to look like the world's major telecoms are about to start upgrading their systems again after a bit of a lull in fiber-optic networking orders.