Well Coriant is OCLR's largest customer and there are other Oclaro 100G modules that are long haul so this quote may not apply but Oclaro could still be winning this business.
This news confirms the comment from the Oclaro CEO in the Nov 4, 2014 conference call.
"In the first quarter fiscal 2015, revenues came in at the upper end of our guidance at $89.2 million. As discussed in our last call, we expected sales for our 100G client-side business in China to be down in Q1 as major Chinese customers digested shipments from a very strong Q4. We do expect sales for the 100G client for the Chinese market to rebound nicely this quarter driven by customers in and out of China. "
Tellabs is the major 100G supplier to Verizon for the metro network.
Tellabs is now part of Coriant which is the number 1 Oclaro customer
If Koch Industries is trying to consolidate the optical components companies then starting with OPLK is a logical first step as the best managed of the optical companies.
The Oplink management could advise Koch on purchasing Oclaro and JDSU (components group). Basically as these companies are acquired most of their management would be replaced by Oplink management for a significant cost reduction. Other cost reductions could take place as well.
As the industry consolidates to two major players (FNSR as the other supplier), then there will be more pricing power and the investment needed to be competitive will be difficult for the smaller companies including the Chinese.
Here is the discussion of cash from the November 4, 2014 conference call
"Now turning to the balance sheet. Our cash including restricted cash was $94 million, down $10.1 million from Q4. During the quarter, net cash used in operations was $5.7 million and CapEx purchases were $4.7 million. Other significant balance sheet items in Q1 included accounts receivable of $78.2 million or 80 days, which was essentially flat with the last quarter and includes $3.5 million of I&C AR.
Inventory of $75.4 million or 92 days increased $4.3 million in the quarter as we ramped are 100G client and narrow line lasers in the quarter. The $75 million included I&C inventory of $4.3 million.
Accounts payable and accrued expenses of $130 million increased by 6% or $7.2 million in the quarter due to the timing of payments at quarter-end. This total includes $8 million of I&C.
Please note, as shown on our balance sheet, we held $16.9 million of assets and $10.2 million of liabilities for sale related to our I&C business. That completes the review of the first quarter fiscal 2015 results."
Oclaro Inc (NAS:OCLR)
Total Current Assets
$299.0 Mil (As of Sep. 2014)
Total current assets includes Cash and Cash Equivalents, Accounts Receivable, Inventory, and Other Current Assets. Oclaro Inc's total current assets for the quarter that ended in Sep. 2014 was $299.0 Mil.
The possibility that Koch Industries could be targeting OCLR as their next acquisition target is a risk issue for the shorts especially since it could happen quickly.
The Oclaro restructuring, cash, lack of debt, and large write offs make the company ready for acquisition at the right price.
Right price would need to be a multiple of the current market cap.
While it is easy to dismiss any positive moves by Oclaro management there are several steps that have been taken which are the basis of the return to profitability:
1. Restructuring - The Oclaro headcount has been reduced from 3,000 in 2014 to 1,300 in 2014
2. New products - There are new 100G products with Oclaro taking a lead position in technology. 100G will become the major business in 2015 and 2016
3. Margins - The new 100G products have 25%+ margins which are the basis for greatly improved average gross margins
As the product mix shifts from the older to the newer products in 2015 then Oclaro becomes profitable.
Once Oclaro becomes profitable then the acquisition price will be higher so it will be interesting to see if there is a move by an acquiring company in the next 90 days.
In the November 4, 2014 conference call, Oclaro management said that OCLR will be at breakeven profitability in the September 2015 quarter.
In a note to clients, Mark Sue of RBC Capital Markets thinks the Koch Industries deal is a sign of looming consolidation in optical:
We believe the entrance of a well-capitalized buyer from outside the traditional optical space changes dynamics and may increase the pace of industry consolidation that has been foreshadowed over the past year [...] Current fab utilization rates remain low with over-capacity with optical component vendors unable to charge a premium for their innovation. Gross margins are currently weighed by competitive pressures with optical component makers willing to cut pricing to account for high fixed costs, weighing on overall industry profitability. Finisar (FNSR), we believe, may be a net consolidator of optical assets, while JDSU (JDSU) as well as smaller players like Oclaro may be net sellers of assets. A large well-capitalized competitor like Koch Industries could change industry dynamics, turning once buyers into potential sellers.
The move by Koch Industries into optical components with the OPLK acquisition maybe just the first step in a series of acquisitions to include JDSU and OCLR.
The accumulated deficit is an indication that there is a huge tax loss carry forward. Maybe this number is somewhere in the financial statements.
The IRS has some complex rules about how and when this tax loss carry forward can be used so it would need to be structured properly in an acquisition.
To the extent that this tax loss carry forward can be used then it is part of the financial value of Oclaro in an acquisition.
The accumulated deficits are huge and can be transferred to an acquiring company under some complex IRS rules. I found this note in the OCLR financial statements.
"As of December 28, 2013, we had an accumulated deficit of $1,250.6 million."
OCLR can have a value to an a larger profitable company at a multiple of the current stock price when you consider the intellectual property, cash, previous losses that can be transferred to the acquiring company, and profitable sales volumes from the new 100G products in 2015 as the 100G business takes off.
Oclaro has restructured the company for an upcycle in optical as 100G sales take off in 2015. I would think that they are not going to sell at less than $5.
The new HR director would have real value if Oclaro is preparing to be acquired since there will be extensive personnel action with the new parent company.
My guess - Cisco
I am looking at some trends over the next 90 days.
1. Cold Winter - The Weather Centre has been predicting a cold winter in the Eastern half of the US which is just starting to play out now.
2. E&P shale budget cuts for 2015 - The US oil and gas companies will cut their 2015 production budgets 10 - 30%.
3. 2015 production forecasts - There will be revised US supply forecasts for oil and gas after these 2015 E&P budget cuts.
4. OPEC production cuts - While OPEC will not cut production in November, there will be a meeting in Q1/2015 where they announce production cuts.