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In order to strengthen its manufacturing model and save costs, Oclaro, Inc. (OCLR - Snapshot Report) entered into an outsourcing contract. Oclaro recently signed a definitive agreement with Venture Corporation Limited whereby Oclaro will transfer its Shenzhen, China, final assembly and test operations to Venture's Malaysia facility.

Venture has been manufacturing optical products since 1992. The company will transfer these products gradually in a phased and gradual transfer of products over the next three years.

Meanwhile, to ensure a smooth transition, Oclaro will retain control of the manufacturing facility in Shenzhen. The employes will continue to be employed by Oclaro. In addition, quite a few of Venture's workers will relocate to Shenzhen to supervise the transfer  along with  ensuring that the products transitioned to Venture's Malaysia facility are fully qualified by customers before the products are phased out of the Shenzhen facility.

Both the companies have signed a five –year supply agreement. This transfer is expected to result in cost savings around $35 million after paying off the transition and employee retention costs. 

Oclaro already has an outsourcing manufacturing relationship with Fabrinet. This agreement will further strengthen the company’s manufacturing model and enable it to serve its customers better.

Earlier, the company reported a loss of $0.36 per share in the December quarter, better than our estimate of a loss of $0.39 per share.

Earnings estimates have been static in the last few days after declining significantly earlier. The company is expected to continue to post losses in fiscal 2012. Nevertheless, we expect Oclaro to be profitable in 2013.

As of now, we continue to maintain a Neutral recommendation on Oclaro, Inc. Our neutral recommendation is supported by Zacks Rank #3, w which translates into a short-term rating of Hold.

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