Why Oclaro, Inc. Shares Lost 14% in August

What happened

Stock in optical networks component provider Oclaro, Inc. (NASDAQ: OCLR) fell 14% last month, according to data from S&P Global Intelligence.

So what

Oclaro shares lost value in August after the company reported fiscal fourth-quarter 2017 earnings on Aug. 2. Revenue grew 19.3% over the prior-year quarter. However, that was lower than the company's ending full-year growth rate of 47%.

The fourth quarter top line was affected by product portfolio transitions and a sequential revenue decline of $11 million in China, one of the company's most important markets. The Chinese market for Oclaro's products, which enable high-bandwidth communication for applications such as video streaming and cloud computing, has weakened over the past few quarters. Management had signaled the year-end decline, and thus it wasn't a surprise to investors, but still, shareholders are uneasy as they wait for industry demand in this crucial region to pick up.

Conversely, the North American market has provided Oclaro with growth potential as of late. In the fourth quarter, North America surpassed China as the organization's biggest revenue region, accounting for 39% of total sales, to China's 32%. During 2017, Cisco replaced Huawaei  to become Oclaro's biggest customer.

Despite a bit of revenue pressure, the fourth quarter and full-year report contained positive news as well. Critically, Oclaro improved its gross margin by nearly 11 percentage points in fiscal 2017. This significant jump helped push 2017 operating income to $118.9 million, versus just $15.8 million in fiscal 2016, Oclaro is operating at a much more profitable level going into the new fiscal year.

Now what

Over the past 12 months, Oclaro stock has gained roughly 2%, but this flat result has been marked by much volatility in between, with August's 14% swing typical of the entire year. Management has prepared shareholders for more weakness in China, projecting that the region's revenue will decline by 15% in Q1 2018 but improve to a flat result in the second quarter. As it still comprises a substantial portion of the company's top line, until Chinese demand resumes, shareholders shouldn't be surprised by further volatility in Oclaro's stock price.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.