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Optical components

Avanex Trudges Along

Avanex Corp. (Nasdaq: AVNX) reported a down quarter today, as expected, while the company continues to wrestle with moving its manufacturing to Asia.

For its second quarter, ended Dec. 31, Avanex reported a net loss of $13.4 million, or 9 cents per share, on revenues of $36.1 million, compared with a net loss of $16.9 million, or 12 cents per share, on revenues of $41.2 million in the previous quarter.

For its second quarter a year ago, Avanex reported a net loss of $24.4 million, or 17 cents per share, on revenues of $41.9 million.

Last month, Avanex had braced investors for a weak quarter, citing problems in transferring some work to a contract manufacturer. Investors didn't take kindly to being braced. (See Avanex Gets Slapped.)

Still, Avanex managed some good news, as its non-GAAP loss of 6 cents per share was better than the 10 cents per share forecasted by analysts, according to Reuters Research . Its revenues slightly outpaced the analysts' forecast of $35.9 million.

With optical components showing signs of recovery, Avanex and Bookham Inc. (Nasdaq: BKHM; London: BHM) continue to hit stumbling blocks. Bookham's earnings call earlier this month included a tepid forecast for the March quarter, pummeling its share price. It was particularly brutal for those who'd jumped into Bookham stock on a rave from CNBC stock guru Jim Cramer the prior evening. (See Bookham Basks in 'Cramer Effect'.)

Avanex and Bookham have been struggling to cast off the overdevelopment of the dotcom bubble, as both inherited large components groups from other companies. (See Avanex to Buy Alcatel, Corning Units and Bookham EGM Approves 'Combination'.) In Avanex's case, that's led to flat revenues even as executives say that demand is increasing.

"We are in the unfortunate situation of really changing our cost structure quickly at the same time as our market is growing," Major told analysts on a conference call today.

Avanex shed one fourth of its 585 North American and European employees during the second quarter, Major said. The company, like Bookham and JDSU (Nasdaq: JDSU; Toronto: JDU), is moving some operations to Asia in hopes of lowering costs. Avanex also renegotiated its contract with primary customer Alcatel, a move similar to Bookham's maneuvers with its top customer, Nortel. (See Avanex Does a French Trim and Bookham, Avanex Shore Up.)

All told, Avanex employed 605 as of Dec. 31, with 157 of those in Asia, Major said on the conference call.

Still, signs indicate the market is coming back. JDSU offered some hope in its recent earnings call, saying its optical business grew 8 percent from the prior quarter's figures. (See JDSU Inches Toward Profits.)

Avanex's weak position has created headaches beyond the obvious. For example, two bondholders sent Avanex notices of default last year, citing language in Avanex's SEC filings; Avanex resolved the issue, paying out $4 million last quarter to do so. (See More Trouble for Avanex.)

For its next quarter, Avanex expects revenues to be between $36 million and $40 million; analysts were predicting $39.8 million.

Avanex stock was down 2 cents (1.8%) to $1.12 in early after-hours trading.

— Craig Matsumoto, Senior Editor, Light Reading

oemarket_com 12/5/2012 | 4:05:23 AM
re: Avanex Trudges Along "The reality is that the surviving purchasers of components refused to buy knowing they could not build and maintain next generation networks paying bubble component prices and make money."

True. Maybe component companies will be the last one to benefit from a recovering telecommunication industry, if there is one major recovery.
lite-brite 12/5/2012 | 4:05:24 AM
re: Avanex Trudges Along "IMHO there is a misconception that component prices were beaten down by excessive competition among too many component companies even though the number of companies has been reduced dramatically. "

sounds like a Cisco components buyer!!!
orourke6 12/5/2012 | 4:05:25 AM
re: Avanex Trudges Along IMHO there is a misconception that component prices were beaten down by excessive competition among too many component companies even though the number of companies has been reduced dramatically.
The reality is that the surviving purchasers of components refused to buy knowing they could not build and maintain next generation networks paying bubble component prices and make money.
This situation is not going away which means the component companies have had to find a way to prosper as low-cost producers to survive long-term.
That's happening now and it remains to be seen which strategy will work best. It's also true that business is not always a sum-zero game where one company dominates and everybody else withers away.
oemarket_com 12/5/2012 | 4:05:33 AM
re: Avanex Trudges Along Are there major technology advantages in Avanex's core products? How long can they maintain such advantage? Without it, they can only compete on prices, which is very hard for their current shape.
palogrande 12/5/2012 | 4:05:34 AM
re: Avanex Trudges Along Craig,

The main difference I see is related to FNSR and BKHM. JDSU has opted for the same model. The other two own the manufacturing. From a PNL point of view Avnx is more leveraged. After they-¦re done with the transition their Gross Margins should be in excess of 30+%.Any pickup in demmand will translate in bigger bottom line.
The key, like some else here said, will be in controlling the mnfg. from a distance. They have already scored some big design and mnfg. wins out of their Asian Ops.
I-¦m confident Jo will pull this through.
whyiswhy 12/5/2012 | 4:05:56 AM
re: Avanex Trudges Along "In addition to being a nice guy, Jo may also be a nascent turn-around artist.
JDSU's great strength during the bubble was the depth & breadth of its manufacturing empire. Post-bubble nobody was buying what they were selling even at suicidal below cost prices. Now they are schlepping around China like everybody else. It's called a level playing field.
JDSU's advantage is the size of their wallet. AVNX's advantage is the "mother ship." Bookham has gambled that the money they have spent building an enormous mfg facility in China has not been in vain. Bookham's problem IMHO is in buying Nortel's optical they bought the largest Sonet equipment supplier in the world. Sonet is history and Nortel has gone wireless.
Right before AVNX bought the 3 optic co's they had a little over 100M in cash. After buying the co's, they suffered through the optical nuclear winter like everybody else burning cash along the way, paid through the nose to close the French plant because of the French labor laws, re-structured & re-focused as a contract manufacturer in China and Taiwan, have manageable debt, and still have about 48M in cash.
Have a nice day!"

You have a nice day too, Jo. It's hardly a level playing field when the competition has all the cash on their side of the field.

http://users.belgacom.net/harm...

Playing?

-Why
orourke6 12/5/2012 | 4:05:57 AM
re: Avanex Trudges Along Jo Major, Avnx CEO, is not a lawyer or accountant. He knows the production end of the business from the ground up.
Listen to last weeks CC at their website. He doesn't sound like a guy sitting in the dark somewhere forming committees that will identify problems in a language he can understand and formulate options for his perusal.
He has put together a specific game plan that will take him where he wants to go and seems to have the ability to make decisions on the fly to get the product out the door.
Management counts.
Pete Baldwin 12/5/2012 | 4:05:58 AM
re: Avanex Trudges Along palogrande:
Avanex has moved all of its manufacturing operations to Asia (China & Thailand). It has done so using an outsourcing model to keep mnfg. costs very low.They will be very competitive.

Sure, but hasn't everyone else done the same thing? What makes you think (as you said in a separate post) Avanex can outperform its peers?
flying4s 12/5/2012 | 4:06:07 AM
re: Avanex Trudges Along Its an interesting concept. Ship all the mfg overseas, let go all your mfg staff, keep engineering and R&D at home and save money. Minor stumbling point, 5% of getting an optical component successfully to market is having a great technical idea, but 95% of the work is learning how to mfg it.

Unlike the fabless models in other technologies, building components remains more an art then a science. There are also no good tools to use sitting back at home designing new concepts, and then simply shipping these ideas overseas for building, like those for chips, or pcb implementations. Its still smart people, excel spreadsheets, and lots and lots of lab time.

Can you drive down your mfg costs by going overseas, particularily since they are mainly manual labor costs? Sure, but unlike other technologies where the paper design is key, in optical components the mfg process is the key. Take mfg away from engineering and R&D and soon your "minor start-up issues" become unsolvable long distance headaches, engineering on airplanes, and impossibly detached mfg processes.

Finally in fiberoptics there never has been enough volume to support this fabless model except for a small group of select components. Hardly enough to justify splitting Engineering from Mfg.

Its a very PC idea, outsourcing. But the realities will hit over time, as the companies struggle to create manufacturing controls at a distance that they could not create when it mfg was located just down the hall.

I truly wish them well, because the longer it takes to learn how to build these products simply, reliably, consistently, the less likely the technology will be considered worth the risk by the end customer.

Best guess, kiss US participation good bye as we move engineering and R&D overseas as well in an attempt to once again get the technical folks down the hall from the mfg plant.

palogrande 12/5/2012 | 4:06:14 AM
re: Avanex Trudges Along Avanex has moved all of its manufacturing operations to Asia (China & Thailand). It has done so using an outsourcing model to keep mnfg. costs very low.They will be very competitive.
Restructuring efforts call for this quarter to have the biggest savings from the transition strategy. Next quarter thet-¦ll have additional operational savings in the order of $5MM.

Here is the link to the Co.-¦s IR Dec.2005 presentation.

http://media.corporate-ir.net/...

With respect to research, the Co. is using a hybrid model. It started an engineering office in Shangai to support Asian sales. It uses Chinese engineering talent to develop and design several solutions to its clients while at the same time it keeps research centers in Italy, France and the USA to develop and research new product lines.

Vent 12/5/2012 | 4:06:17 AM
re: Avanex Trudges Along Palogrande
Care to elaborate
How does avanex have ultra low fab cost with the
fab plant in France
and what does hybrid research mean

Vent
palogrande 12/5/2012 | 4:06:22 AM
re: Avanex Trudges Along Ultra low fab cost & hybrid research. Very bold.
Will outperform peer group if demmand flourishes.
Will it??????????????
Vent 12/5/2012 | 4:06:29 AM
re: Avanex Trudges Along Craig
One good reason for an advantage if one or other goes is the Fab.
the avanex fab is not closed only reduced in size and capacity, Bookham has consolidated the operations of it's fab at Caswell. Fabs cost,
and as more or less opto fabs are yet to get of the ground you can't outsource. Combining fabs would save money Lots. In fact this was bookhams plan they were also on the game for Alcatel optronics and were only just pipped (the french worried about job losses, funny with hindsight)
If you can get enough volume to get the fab producing at a sensible level this does make sense, the rest of the packaging can be outsourced.
Now if one of the new startups can make a succesful buisiness using a fab abd packaging outsourced model that might be interesting.
oh and my fault with Arnania is that he didn't shut the dead ducks quickly enough
(i.e ASOC, Marconi GaAs if something is not going to be profitable ....)
O and don't expect any of the opto companies to make much money sonn (next 4 years) there are still too many players, too many start ups etc keeping prices low

Venting
UberNeoCon 12/5/2012 | 4:06:30 AM
re: Avanex Trudges Along ROTFLMAO....I needed a laugh; thanks. You've got to be an employee, or someone that drank a gallon of AVNX Kool-Aid.

As for "drawing pictures," knock yourself out. I love comedy

Steve0616 12/5/2012 | 4:06:30 AM
re: Avanex Trudges Along If BKHM's on the slippery slopes of sonet, that only means AVNX will still have to slug it out head to head with JDSU's big wallet.

Anyway you slice it, it looks like Avanex will need a big cash infusion somewhere in the near future.
orourke6 12/5/2012 | 4:06:31 AM
re: Avanex Trudges Along 1- Why would AVNX need to swallow 3 optics companies?

To add customers and products to portfolio - standard stuff.

2- Why would any company buy a cash sucking, unprofitable business with No customers other than the "mother ship?"

Because the "mother ship" is Alcatel. Nuff said or should I draw pictures.

3- Everyone has a proprietary dispersion compensation technology.

True. But some are better than others and AVNX sells considerably more than their fair share.

4- The submarine market is nascent at best.

All of optical is nascent.

5- Jo is a nice guy but the company is still unprofitable. Everyone is going to China. Big deal.

In addition to being a nice guy, Jo may also be a nascent turn-around artist.
JDSU's great strength during the bubble was the depth & breadth of its manufacturing empire. Post-bubble nobody was buying what they were selling even at suicidal below cost prices. Now they are schlepping around China like everybody else. It's called a level playing field.
JDSU's advantage is the size of their wallet. AVNX's advantage is the "mother ship." Bookham has gambled that the money they have spent building an enormous mfg facility in China has not been in vain. Bookham's problem IMHO is in buying Nortel's optical they bought the largest Sonet equipment supplier in the world. Sonet is history and Nortel has gone wireless.
Right before AVNX bought the 3 optic co's they had a little over 100M in cash. After buying the co's, they suffered through the optical nuclear winter like everybody else burning cash along the way, paid through the nose to close the French plant because of the French labor laws, re-structured & re-focused as a contract manufacturer in China and Taiwan, have manageable debt, and still have about 48M in cash.
Have a nice day!




deauxfaux 12/5/2012 | 4:06:33 AM
re: Avanex Trudges Along 1) After getting all of the money from the IPO, why would AVNX need to swallow 3 optics companies?

Answer: Despite the wildly successful IPO, AVNX was not a successful, profitable business.

2) Why would any company buy a cash sucking, unprofitable business with NO commercial customers of size other than the "mother ship?"

Answer: AVNX had to guarantee the business to get rid of the brick around their necks

3) Everyone has a proprietary dispersion compensation technology: JDSU, BKHM, etc. etc.

4) The submarine market is nascent at best

5) Jo is a nice guy, but the company is still unprofitable and losing lots of cash. Everyone is going to China; big deal.

It sounds like you really don't know what you are talking about. Are you a refugee from the yahoo message boards?



orourke6 12/5/2012 | 4:06:35 AM
re: Avanex Trudges Along After the bubble burst Avanex swallowed whole 3 optics co's each larger than itself with all of Corning's optical patents while maintaining a steady revenue stream.
They have an enviable relationship with the powerful Alcatel (a 70% commitment for optical components until 2007) including Alcatel Shanghia-Bell, the largest & most successful western co operating in China.
They have a proprietary patented solution for dispersion compensation, the key enabler in the transition to faster networks and have a quality customer list second to none.
They are a leading player in the optical submarine market.
Their CEO, Jo Major, has been with Avanex only 18 months & from day one has been focused on eliminating the co's substantial cash burn while re-positioning Avanex in a low-cost contract manufacturing environment & both objectives are just now being completed. Name another CEO who has done as well in that time frame.
He did this at the expense of the stock price which means that those among us who have the balls to buy low have a great opportunity to make some money. Maybe!
If you are willing to bet in this space you would do well to put your money on the bandleader.
Pete Baldwin 12/5/2012 | 4:06:38 AM
re: Avanex Trudges Along A merger between the two companies might be great for entertainment value, but that is about it.

Yes.

Likewise, i think most folks believe JDSU has zero interest in acquiring either one -- there's just no reason.
deauxfaux 12/5/2012 | 4:06:39 AM
re: Avanex Trudges Along Lets say that AVNX went away

To simplify the discussion a bit, lets assume for a second that all of the SG&A is completely fungible between the two companies and that substantial functional exists. Obviously, any revenue increase through consolidation would help.R&D could certainly be consolidated to some degree over a period of a year or two.

If there is overlap between customers things get a little dicier. There is no way that a major customer that is buying from both suppliers is going to put all of the business into the hands of one manufacturer. If two companies to consolidate at a major customer, the customer will REDUCE their exposure to the combined entity.

Furthermore, if there is no overlap there is a strong probabilty that the parts are custom or at least a little different. This is the real problem. Without real operating leverage in the manufacturing area, you can't move the gross margin number at all, ensuring poor financial performance.

A merger between the two companies might be great for entertainment value, but that is about it.
o-man 12/5/2012 | 4:06:39 AM
re: Avanex Trudges Along Clearly if two companies are in direct competition it will be advantageous for one if the other fails.

ARE we all positive that revenue equal positve cash flow???? Come on now a first grader can tell you what happens if you put too much water is a broken sive...
Pete Baldwin 12/5/2012 | 4:06:40 AM
re: Avanex Trudges Along Clearly if two companies are in direct competition it will be advantageous for one if the other fails.

Well sure, but my question is whether it will be advantageous *enough*.

There seems to be an optics oversupply for the moment, and the sudden disappearance of Avanex or Bookham would certainly help with pricing pressures et.al.

But if Avanex went away, would that be enough to nudge Bookham into stability, or vice versa?

Maybe the winners in optics will be the companies currently private, or even newer ones that can operate on a fabless model.
DZED 12/5/2012 | 4:06:42 AM
re: Avanex Trudges Along "Mr Anania is a gifted salesman but when it comes to fixing a troubled optics company ...."

Come again?

Bookham is a troubled optics company BECAUSE Anania is running it. He 'fixed' it in the first place.

Anania has made the most disastrous series of decisions in terms of strategy, and every basic mistake in any management textbook in running the company he assembled.

Clearly if two companies are in direct competition it will be advantageous for one if the other fails.

Who will it be?
optigong 12/5/2012 | 4:06:44 AM
re: Avanex Trudges Along Craig,

Not sure if the death of one would benefit the survivor, both companies challenges reside in execution. Put Chinese management and both companies will become profitable quickly.
Mr Anania is a gifted salesman but when it comes to fixing a troubled optics company ....
Pete Baldwin 12/5/2012 | 4:06:47 AM
re: Avanex Trudges Along Still not a lot of love for these two, eh? :) At least they made it this far -- I talked to one investment type a year ago who didn't think both companies would make it to 2006.

Is there any recipe to keep both alive after this year, or do y'all think it's hopeless? Would the elimination of one help the other?
deauxfaux 12/5/2012 | 4:06:49 AM
re: Avanex Trudges Along Avanex and BKHM were twins seperated at birth. Neither was ever profitable, both used money obtained in the public markets to buy failing businesses (Alcatel's, Nortel's and Marconi's) because they never did anything useful as startups.

They do share a core competency: entropy production
DZED 12/5/2012 | 4:06:50 AM
re: Avanex Trudges Along Bookham did not inherit anything, they went out and BOUGHT the component groups of Marconi and Nortel.

Anania's inspired four pronged strategy, acquire - demoralise - decimate - close, does not seem likely to succeed however.
whyiswhy 12/5/2012 | 4:06:50 AM
re: Avanex Trudges Along Jo,

OK, gross margins in the second quarter were 7 percent, 2 percent better. At 2% per quarter, and needing to get to say 30% to have a net to report, that means at least 10 more quarters.

I don't see how the cash can last my friend.

Still in all, good luck.

-Why
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