Little Good News Expected At Optical Communication CORPORATE FOCUS By SHELLY GARCIA Senior Reporter With no end to the telecommunications downturn in sight, Optical Communication Products Inc. is hunkering down for a long slump. A weakened demand for wireless services has eroded sales and reduced gross margins at the Chatsworth-based company. And while the worst of the sales downturn may be over, the outlook for a reversal remains bleak. Despite steps to cut costs on the one hand and bolster new products on the other, Optical Communication executives do not expect a recovery anytime soon. “We are not projecting any (further) deep reduction in revenue as we predicted over the last few quarters, but what we see beyond the next quarter is still hard to say,” said Muoi Van Tran, chairman and CEO at Optical Communication. “I think it depends a lot on the economy and how the service providers are doing. If they don’t do well, we won’t do well.” As wireless communication, including the Internet and mobile phones, grew in popularity, telecom providers began building networks that could transmit more and more data with more and more speed. Optical Communication, which makes fiber optic components for those networks, flourished. But last year, the supply of products began to outstrip demand. When providers such as AT & T; stopped selling, their suppliers, such as Lucent Technologies, saw their sales erode as well, and their need for components declined in turn. Optical Communication moved quickly to cut its expenses as sales began to slide, and the company slashed 110 jobs last July. It is also moving aggressively to shore up its market position once conditions improve. But after six straight quarters of revenue increases and strong profits, sales at Optical Communication are spiraling downward. “Our revenue has been decreasing over the last few quarters from $39 million to $14.9 million and this quarter $8.8 million,” said Tran. “We believe that this reduced demand is due to the reduced capital spending by service providers as well as existing inventory levels by some of our customers.” In its just reported quarter, Optical Communication registered its third consecutive sales decline. The company saw revenues fall nearly 79 percent to $8.8 million in the company’s first fiscal 2002 quarter ended Dec. 31 from $41.9 million for the same period in the prior year. Earnings decreased to $200,000 for the period or $0.00 per diluted share, from $10.8 million or $0.10 per diluted share in the same period of fiscal 2001. Although its revenues fell within the range analysts expected, Optical Communication disappointed on earnings, which were expected to come in at $0.01 per share, according to Thomson Financial/First Call consensus estimates. The news sent Optical Communication’s stock price sliding to $3.03 per share from $3.13 before the earnings announcement and down from a 52-week high of $19.25. On Feb. 1, shares in Optical Communication closed at $3.09. The outlook is just as problematic. Until the supply chain frees up for providers, Optical Communication is likely to see few orders pouring in, and so far, there’s little evidence that telecom providers will resume their capital expenditures anytime soon. Optical Communication projected that its second 2002 quarter revenues would fall in the $7 million to $9 million range, down precipitously from $47.9 million in the second quarter of fiscal 2001. Worse yet, the sharply reduced sales mean Optical Communication’s fixed operating costs have grown proportionately higher and operating expenses will continue to rise this year as the company continues to invest in R & D.; Optical Communication plans to introduce new transponders and transceivers in 2002 and, in the second quarter, additional hiring. “We are still continuing to bring in additional engineers,” Tran said. “As we add additional heads, you’re going to see that (operating expense) number increase. In the March quarter, we’ll see an increase of 10 or 15 percent.” A continuing decline in revenue levels, coupled with further erosion in gross margins as a result of the increased spending, means Optical Communication is not likely to turn a profit anytime soon, analysts said. “We have lowered our (fiscal 2002) revenue estimate from $38 million to $35.8 million, and our EPS estimate from $0.05 to $0.00,” wrote Conrad W. Leifur and Frank R. McEvoy, research analysts at US Bancorp Piper Jaffray in a report issued on Jan. 30.
