With Oclaro in a waiting game, as China must provide antitrust regulatory approval for Lumentum’s acquisition, and although fibeReality senses that that some people at the former have moved to at least acceptance, others, depending on where they sit in the organization remain pessimistic. For example, individuals on the sales side are nervous about the possibly of being replaced by counterparts at Lumentum. Greg Dougherty, who did a skillful job of pulling Oclaro back from the brink of bankruptcy, when he started in the head position, will apparently not be involved in the daily operations of the combined company. While it is common for there to be reluctance for the CEO of an acquired company to be even put on the board of the firm making the purchase, we wonder if the issue is not a lot deeper, as for example, Lumentum does not seem to be in to find a new CFO. In our opinion, it is quite possible that the CEO, Alan Lowe, has found a yes-man already, who has taken the interim role, somewhat similar to what happened several years ago. (We firmly believe it would make for a better marriage if Dougherty is placed on the board.) Another problem for the Oclaro folks is the struggle in maintaining decent margins that were in the low 40s, and now are coming in the 35-to-40 percent range because of price erosion. Unfortunately, the new amalgamation is not expected to directly help the situation for Oclaro, relating to the client side of the business. All in all, with Lumentum’s focus on market diversification and in targeting products in the traditional space -- along with the reverberations from our expectations of an eventual margin collapse for 3D-sensors, Oclaro may ultimately turn out to be unrecognizable.
We think that it would be a mistake if Lumentum chooses to dump most of Oclaro’s salespeople. It takes a special expertise in selling optical gear, unlike many other products across industries. We think the group is superior to the one from Lumentum, at least on the transceiver side, and a change would likely be detrimental to Oclaro’s existing customer relationships.
The good news for Oclaro, at least for now, is that on the development side, the teams are apparently going to mainly stay intact. We heard through the grapevine that Beck Mason, currently President of Integrated Photonics along with Walter Jankovic, presently President of Optical Connectivity, will remain, and manage those units.
Although Lumentum has stated plans to convert Oclaro’s chip manufacturing facilities, which has had to alarm the latter (they are the major strength being brought to the table) for 3D-sensing purposes, we understand that an Oclaro executive, who has been very close with Dougherty, and was among those who played a critical role in getting rid of losing businesses starting about five years ago, will evidently be in charge of all of the fabs after the merger. The core intellectual expertise for Oclaro is in facilities in both Japan and in the United Kingdom, and the growth of fabs in China were intended to expand the manufacturing capacity at lower cost. Lumentum’s Rose Orchard fab (originally from SDL) may be also be converted for some of Oclaro’s legacy devices.
On the matter of the merger and the effects on Oclaro’s client-side gear, which has been experiencing eroding revenue and great margin pressures, especially with competition from lower quality suppliers, we have recently learned that the only benefit from the new combo will be a bigger entity providing additional breadth and depth. With an expanded range of products, it will be easier to endure the ups and downs, as well to better deal with other hardships in the market. In the long term, we would think such limited solace would not be enough of a satisfactory result for Lumentum’s leadership.
Adding to the lack of patience for inadequate performance on the client side, would be our continuing expectation that Apple will get to disciplining Lumentum for its foolish projection of margins in the past from the customer, along with potentially having to deal with what one might describe as a game of nasty tactics. For example, we have heard that Apple will not shy away in possibly using its powerful position in structuring a deal for a massive order for a huge number of 3D-sensing devices, which it will state has to be delivered by a certain date, even though the smartphone vendor knows it would be impossible for the VCSEL supplier to provide such a quantity within that period of time. As a result, there are penalties assessed, with subsequent price drops.
As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.
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[written by Mark Lutkowitz]