Optical components

Bookham Still Bleeding

A move to China-based manufacturing is expected to save money for Bookham Inc. (Nasdaq: BKHM) eventually, but for now, it's a cash drain, based on the company's second-quarter results released yesterday.

Bookham missed analysts' expectations badly, thanks to the expense of running dual assembly and test lines -- Paignton, U.K. and Shenzhen, China -- combined with the U.S. dollar's sagging value against the British pound sterling.

For its second quarter ended Jan. 1, Bookham reported losses of $41.1 million, or $1.23 per share, on revenues of $45.8 million (see Bookham Losses Continue in Q2). Pro-forma losses were just 99 cents per share, but that still undercut analysts' expectations of 80 cents per share and revenues of $46.4 million, according to Reuters Research.

Bookham previously reported first-quarter losses of $38.3 million, $1.16 per share, on revenues of $43.6 million. For the December quarter of 2003, Bookham reported losses of $10.6 million, 49 cents per share, on revenues of $40.6 million.

Bookham stock held even at $3.50 in after-hours trading following the earnings call. That must have been a relief to executives after seeing components competitor Avanex Corp. (Nasdaq: AVNX) get pulverized after its earnings call Monday, which included a forecast of flat revenues for the March quarter (see Avanex Slips on Tepid Outlook ).

(Bookham stock was down 31 cents (9%) at $3.19 in midday trading today -- a tough blow, but not as bad as Avanex's 15 percent plunge yesterday.)

The difference could be that Bookham offered a glimmer of hope, including gross margins that might turn positive by June. Still, with gross margins of negative 8 percent -- down from negative 5 percent the previous quarter, thanks to the exchange rate -- Bookham clearly has to cut costs.

Bookham announced not one, but two restructuring plans last year, which combined could save the company $16 million to $20 million per quarter. Both plans are expected to finish by the end of 2005 (see Bookham Opens in China and Bookham Adds to Layoffs).

Another important move is the shift of Bookham's test and assembly to Shenzhen, China, from the Paignton facility. Certainly this would lower costs, but the key is for Bookham to get it done -- because the transition is a cash sink right now.

CEO Georgio Anania explained the situation in a conference call with analysts yesterday. The transfer of products to Shenzhen costs money by itself. On top of that, Bookham has to continue running Paignton as a backup to Shenzhen. Anania noted this "triple spending" -- Paignton, Shenzhen, and the transfer costs -- is keeping operating expenses high for the time being. Significant savings from the move to Shenzhen won't surface until the June quarter, he said.

Anania seemed happy with the progress of the transfer, as 9 percent of Bookham's revenues last quarter -- $4.1 million -- came from products that went through Shenzhen. But with $78 million in cash and investments, Bookham can't keep up this triple spending for long. Last quarter, the company ate through $24.7 million in operating cash, and it consumed a like amount the previous quarter.

Bookham does continue to find ways to prop up its cash position. Last quarter, the company completed a $25.5 million debt conversion, and it negotiated new deadlines for the loans it owes back to Nortel Networks Ltd. (NYSE/Toronto: NT). (See Bookham Closes $25.5M Placement and Bookham Extends Nortel Note).

Despite the cash burn, Anania was upbeat on the call. Bookham is seeing orders increase, with some new customers coming on board. "We're getting booked up not just for this quarter but for next quarter," Anania said.

Thus, while competitors such as Avanex and JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) are bemoaning the lack of visibility in the market, Bookham took the bold step of forecasting revenues for the next two quarters. Revenues should grow slightly, to between $46 million and $48 million in the March quarter, and should increase another 5 to 10 percent during the June quarter, officials said. Gross margins should improve as well, to the point where they could be positive by June.

Orders are growing fast enough that Bookham can't keep up, Anania claimed. The company fell short on manufacturing capacity for some products, because any excess capacity is tied up by the duplicated efforts associated with the Paignton-to-Shenzhen transition. "Had we been able to meet demand, we would have been over $50 million in revenues" for the second quarter, he said.

Anania noted that Bookham is getting "traction with new customers," but the company still relies on Nortel for much of its business. Nortel represented 44 percent of second-quarter revenues, with no other customer representing more than 10 percent of revenues.

— Craig Matsumoto, Senior Editor, Light Reading

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particle_man 12/5/2012 | 3:27:59 AM
re: Bookham Still Bleeding "Orders are growing fast enough that Bookham can't keep up, Anania claimed."

Great news with -8% gross margins!


I hope the next earnings season isn't as dismal for the component guys. What a disaster.
deauxfaux 12/5/2012 | 3:27:57 AM
re: Bookham Still Bleeding This isn't a case where cash is bleeding through a flesh wound, this is a torn Aorta and the patient is dying.

Watching Dr. Anania and his fellow "physicians" operate is like seeing that episode of the Three Stooges performing an operation. But there really isn't anything funny at all about destroying $1,000,000,000.

DZED 12/5/2012 | 3:27:53 AM
re: Bookham Still Bleeding What a load of crap.

Bookham has been desparate for orders for eons, had laid off thousands of employees, put lines in mothballs, now even has two parallel production lines.

Now customers want a 10% increase in production (Ananias figures:- $50m projected -$45m actual) and Bookham can't rise to it?

Has Bookham been so badly mismanaged it can't manage a 10% increase in output? Since each site is running only one shift the obvious conclusion is these statements can't be true.

Either this is incompetence on an incredible scale or the execs are saying anything to cover their inadequacies and keep the gravy train running just a bit longer.

The forward looking statements must therefore be dross also.
DZED 12/5/2012 | 3:26:42 AM
re: Bookham Still Bleeding Revenue is one thing.

At Bookham cost of sales exceeds revenue = negative gross margin, Bookham is handing out dollar bills with its products. Bookham has been in this position since it was founded, it has never achieved a positive contribution on ANY product it has made.

Adding overheads = -40% profit ie cash burn = revenue - not sustainable and, after five years in this state, never recoverable.

With 1-2 quarters of cash left its down the plug hole time. Its not going to turn around.

But you're right, there is an opportunity.
If someone could pick up the revenues and lose the overheads maybe its usable.

Assuming Bookham files for bankruptcy then someone could pick up some useful business units for not very much, avoid the costs of disposing of the less useful parts and the exec team who destroyed the company walk away with wads of cash.

On this basis now is not the time to be buying shares, Bookham Inc is not going to survive as it is. Bookham lost 80% of its value last year, and has already lost 50% of its value this year. This knife is falling fast.
secor77 12/5/2012 | 3:26:42 AM
re: Bookham Still Bleeding Less than 100 million for a company with over 160 million in revenue per year seems cheap to me. Unless you see them going out of business, I would recommend buying right now.
lastmile 12/5/2012 | 3:26:40 AM
re: Bookham Still Bleeding Revenue is one thing.

At Bookham cost of sales exceeds revenue = negative gross margin.

It's the same story with AVNX and JDSU.

AVNX has a little more cash and JDSU has much more cash.

If cash is king then the demise protocol will be #1BKHM(2005) followed by #2AVNX(2006) followed by #3JDSU(2010).

There is still an opportunity. Who will buy whom is any body's guess.

There are three different knives. One is falling faster than the others.
DZED 12/5/2012 | 3:26:38 AM
re: Bookham Still Bleeding Tricky question, is it better to:

A) Wait and see what happens, who if anyone picks it up when it folds?

B) Wait until the share price is low enough and just buy it to close it?
If past trends are a guide (and they are with Bookham) the share price will be $1 in six weeks time. Would it be worthwhile for JDSU to buy it at $33.5m to get a (minor and incompetent) competitor out of the way?

It'll be interesting to see, Avanex, JDSU, maybe Huawei standing around, one might catch the knife just before it hits the deck.

Kind of like poker...
Vent 12/5/2012 | 3:26:38 AM
re: Bookham Still Bleeding One thing to note
If Bookham do go this year
This means less price pressure
+higher volumes for Avnx and JDSU
it could be just what they need to become profitable. This assumes that the capacity that bookham has is completely lost and nobody picks it up on the cheap. what these companies need is sufficient volume to make the large investments they have in fabs and production facilities economic be they in US,Europe or china
rjs 12/5/2012 | 3:26:36 AM
re: Bookham Still Bleeding Yes, 160M in revenue, but at negative gross margins!!

The purpose of a business entity is to make profit.Period. Bookham is not even a charitable organization, atleast a charity gets tax breaks and does something good.

The component business is hurting because of the
simple fact that margins are slim or negative, and
the companies think that by increasing revenue they
are going to get rid of this problem, so they undercut each other and the margins go down even further. This is a death spiral.

The optical component industry needs corporate raiders to clean up the mess and bring some consolidation and stability to this chaos. I wonder what wallstreet is up to, can't they see that this is a gold mine.

rjs 12/5/2012 | 3:26:35 AM
re: Bookham Still Bleeding For commoditized and standardized parts, prices
should finally come in line with costs.
This is what is happening in component business.
The JDSU and AVNX of the world will finally
go where they can bring their prices in line with
the COGS.

If it costs less for the Indians and Chinese, then
you should really look at things carefully. One cannot violate laws of economics for too long.

The emperor is walking naked, but he has a great
body and some women like what they see!!


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