Oplink Communications' CEO Discusses Q2 2013 Earnings Results - Earnings Call Transcript

Jan.31.13 | About: Oplink Communications, (OPLK)

Oplink Communications, Inc (NASDAQ:OPLK)

Q2 2013 Earnings Call

January 31, 2013 05:00 pm ET

Executives

Matthew Hunt – Director, The Blueshirt Group

Joe Liu – Chairman, Chief Executive Officer

Shirley Yin – Chief Financial Officer

Analysts

Patrick Newton – Stifel Nicolaus

Hamed Khorsand – BWS Financial

Christopher Longiaru – Sidoti & Company

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Oplink Communications Second Quarter Fiscal 2013 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, January 31, 2013.

And I would now like to turn the conference over to Matthew Hunt, The Blueshirt Group for Investor Relations. Please go ahead, sir.

Matthew Hunt

Great. Thank you and good afternoon, ladies and gentlemen. Thank you for joining us on today’s conference call to discuss Oplink’s second quarter fiscal 2013 financial results. This call is being simultaneously webcast on the Investor Relations section of the company’s website at www.oplink.com.

Joining me on the call today are Joe Liu, Chairman and CEO of Oplink; and Shirley Yin, CFO of Oplink.

Before we get started, I would like to remind you that the following discussion contains forward-looking statements that involve risks and uncertainties and that Oplink’s actual results may vary materially from those discussed here.

Information concerning factors that could cause the actual results to differ from forward-looking statements can be found in Oplink’s periodic filings with the SEC. Forward-looking statements made on this conference call are based on current expectations and Oplink assumes no responsibility to and does not intend to update or revise them, whether as a result of new developments or otherwise.

Now, I’d like to turn the call over to Joe Liu, Chairman and CEO of Oplink. Please go ahead, Joe.

Joe Liu

Thanks to all of you for joining us today as we report our second quarter fiscal 2013 financial results. Revenue for the quarter was $45.1 million and non-GAAP EPS was $0.24, at the high end of the outlook we provided last quarter. We have two 10% customer in the quarter, they’re Tellabs and Huawei. Together, these customers accounted for approximately 33% of revenue.

During the quarter, we continued to work on a steady flow of projects with our customers and all of our business held up well, as carriers continues to invest in providing more bandwidths to customers. And we believe our optical component and system provides high value and high level performance and cost effective solutions to our network customers. We continue to bring next generation component module and subsystem solution leading market demand and enhance our long term market position.

Turning to our Mobile Interactive business, we made encouraging progress in the quarter, launching our first product line in December. This product line features smartphone-centric integrated plug-and-play alarm and surveillance systems for the home and business. Our prepackage solution and service are now commercially available. Our business model remains heavily focused on licensing and partnership with brand name partners offering private label, partial as well as total solutions, including helping wireless carriers to capture connected device opportunity.

We showcased these innovations – innovative product line at CES in Las Vegas earlier this month with good reception. And we will also be showcasing at the Mobile World Congress in Barcelona in late February. We’re energized about this opportunity and are ready to rollout second generation product finalized in March. We believe these platform and solutions offering access to a high growth and very large and fast growing addressable market. But we believe it may take a few quarters to develop sales channel as well as service partnership and show meaningful revenue growth.

In summary, we’re pleased with our execution and progress in the second quarter. While the telecom spending environment is not improving considerably, it has continued a relatively stable course. We expect business to remain steady as we move into our third fiscal quarter.

With that I will turn the call over to Shirley for the financial review. Shirley, please go ahead.

Shirley Yin

Thanks, Joe. And thanks to all of you for joining us today as we report our second quarter fiscal 2013 result. Revenue for the quarter was $45.1 million, a slight improvement from the prior quarter. GAAP net income was $3.5 million or $0.18 per diluted share which includes $1.1 million in stock-based compensation and $127,000 in amortization of intangibles. This compares to a GAAP net income of $3.4 million or $0.17 per diluted share reported in the prior quarter.

On a non-GAAP basis, net income for the second quarter was $4.6 million or $0.24 per diluted share at the high end of the range we provided last quarter. This compares to a non-GAAP net income of $5 million or $0.26 per diluted share with $0.40 in the prior quarter. Our calculation of non-GAAP net income for the second quarter assumes an positive pass rate of 24.5%.

From here on, I would discuss our results on a non-GAAP basis. Our gross margin in the second quarter was 36.8%, slightly down from last quarter’s Q2 due to a slightly less favorable mix but still at a very healthy level. Beginning in the third quarter, we expect to see slightly lower margins due to lower ASTs as a result of the recently completed price negotiations with our customers.

Turning to our operating performance, total non-GAAP operating expenses were $11.3 million, up from the prior quarter in both R&D and sales and marketing as we continue to invest in mix generation projects within our optical business and spend in sales and marketing related through our Mobile Interactive initiative.

Total expense incurred by our Mobile Interactive division were $1.4 million for the quarter. In the third quarter, we expect overall operating expenses to continue to increase modestly, primarily due to an increase in R&D head count and continued expansion of sales and marketing activities in our mobile interactive business. Total head count at quarter end was 3,284, slightly down from 3,230 at the end of the prior quarter. The decline was primarily related to regular attritions in our manufacturing labor.

Turning to the balance sheet, we generated $2.4 million in cash from operations in the second quarter. We will purchase $5.7 million of stocks and has approximately $23.7 million SKU available under our current repurchased program. We closed the quarter with cash, cash equivalent and investment of $166.7 million.

Diluted share outstanding at the end of the quarter were $19 million. We spent $6.9 million in CapEx during the second quarter about $5.7 million of which was related to the acquisition of an additional facility in San Jose for future expansion. We expect CapEx for fiscal 2013 to be approximately $12 million.

Accounts receivable at the end of the second quarter was $39.5 million, up from $34 million in the prior quarter and DSOs were 80 days, up from 69 days in the prior quarter. These increases are largely due to the timing of sellings and lower collections over holidays. The quality of our receivables is high and we have collected a good portion of these receivables since the close of the quarter.

Inventory was $20 million at the end of the second quarter, up modestly from the prior period mostly related to product associated with our Mobile Interactive business. As we prepare for a further rollout of this business, we are expanding our inventory levels to increase significantly next quarter.

In summary, the second quarter again marked solid fundamentals with the market and the demand environment holding mostly stable and still discussed revenue visibility optics business remain limited. For the March quarter, we expect revenue to be in the range of $42 million to $45 million. GAAP net income is expected to be in the range of $0.09 to $0.15 per diluted share. Non-GAAP net income is expected to be in the range of $0.15 to $0.21 per diluted share. GAAP and non-GAAP net income per diluted share assume an income tax rate of 20%

Now, we’ll take your questions through the operator. Please go ahead, operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Patrick Newton with Stifel, Nicolaus. Please go ahead.

Patrick Newton – Stifel Nicolaus

Yes. Thank you for taking my questions. I guess, surely, on the gross margin outlook it would appear that if I just kind of plug in the midpoint of the revenue and the bottom line that you’re guiding for a pretty substantial – sequential downtick in gross margin, is that a fair way to look at the guidance?

Shirley Yin

I would say that it will be down sliding, it should be less than 100 basis points. The decrease should be less than 100 basis points.

Patrick Newton – Stifel Nicolaus

Okay. So if we look at that, we’re getting kind of none of this 36% level, is that – do you believe that the run rate if you consider this kind of flattish revenue contribution on a go forward basis, is that a sustainable gross margin level or there’s still some downside?

Shirley Yin

There will – it will all have to do with the mix and also the volume of revenue and the magnitude you get from the existing expense. And – but this is the level we would like to maintain.

Patrick Newton – Stifel Nicolaus

Okay. And I guess on the Mobile Interactive, can you let us know what the OpEx contribution was on the quarter and what we should expect in the March quarter?

Shirley Yin

Firstly, the second quarter, we spent $104 million and in the next quarter there will be a few $100,000 more. To a probably at a range about $1.7 million.

Patrick Newton – Stifel Nicolaus

And at what point do we hit kind of sustainable level before we see some incremental revenue?

Shirley Yin

I think that has a lot to do with the revenue and also the prospect of the new business.

Patrick Newton – Stifel Nicolaus

So assuming a revenue doesn’t come on, I guess can you wrap around some expectations on what you would do on the OpEx side? Is there certain revenue threshold you need to achieve before you continue to invest?

Shirley Yin

Well, we would likely attribute below $2 million but of course that’s also a function of the revenue. So if we see the optic in potential revenue and that number could be increase.

Patrick Newton – Stifel Nicolaus

All right. And then I guess Joe for you on the demand front limited visibility in optics but if we look at geographic basis is there any puts and takes that you can perhaps walk us through it seems like Asia was relatively weak in 4Q but sharing some data points that start picking up in the December timeframe, where you seeing that across your business and would love any comments on North America or Europe?

Joe Liu

Well we don’t see – we didn’t see a significant market change or market condition change. It’s just flat-ish across the board even in North America. So Europe is a bit weak and the North America states hold up well. Asia including Japan and China both are just flat-ish not very obvious and as we guided for the quarter is kind of flattish to slightly down. So, that kind of summarize what we have seen and our expectations.

Patrick Newton – Stifel Nicolaus

Any order patterns quarter to date or I guess in the month of January also just a continuation of that trend?

Joe Liu

I think so. As we stated, the book-to-bill has been the one recently.

Patrick Newton – Stifel Nicolaus

Great. Thank you for taking my questions. Good luck.

Shirley Yin

Thanks.

Joe Liu

Thanks.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Hamed Khorsand with BWS Financial. Please go ahead.

Hamed Khorsand – BWS Financial

Hi, guys. I just wanted to say what kind of pushback did you see this past quarter on the seasonal price negotiations?

Joe Liu

It’s normal. I don’t think that there’s any abnormal. Probably, we’re talking about 1.5%, maybe 2% per quarter kind of a pattern.

Hamed Khorsand – BWS Financial

Okay. And how many quarters do you think you can – it will take before you can recoup down your gross margin line?

Joe Liu

Well obviously when we give a projection, we tend to give a little more conservative, but as times go on, this means we were probably more – we will better manage on the material income inventory and also efficiency on production. So it kind of sinks well, taper off a couple of quarters.

Hamed Khorsand – BWS Financial

Okay. And it sounds like from your comment there that you said you’re still working out a distribution base for your mobile side of the business so that includes the power as well that’s coming on in March?

Joe Liu

Obviously, when you introduce a new product, people want to wait. And with the new product, we have a lot more new features and we intend to also try to market that aggressively on the new product lines.

But just looking back at the CES show as well as the upcoming MWC, we’re excited because of the wireless carrier, particularly are interested in our product and they were engaging multiple dialogs with the world’s leading wireless carriers.

Hamed Khorsand – BWS Financial

Okay. And then, my last question is you were talking about increase in inventory this quarter and do you have sales to account for that or you just try and hope that you can generate some buzz with your products?

Joe Liu

Well, the nature of the business is not only just hardware but also software and service side of the aspect. In order for us to demonstrate that we have a meaningful solution. This is an embedded system that you have, we have to invest and, therefore, some of the – usables like sensors and the modules that we invested initially and that’s the inventory level that we are holding up on those sensors, modules and as well as the controller.

Hamed Khorsand – BWS Financial

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Christopher Longiaru with Sidoti & Co. Please go ahead.

Christopher Longiaru – Sidoti & Company

Hey, guys.

Shirley Yin

Hey, Chris.

Joe Liu

Hey, Chris.

Christopher Longiaru – Sidoti & Company

Can you just comment a little bit on what you’re saying in terms of inventories and lead times, and how that progress during the course of the quarter?

Joe Liu

Shirley, maybe you can help?

Shirley Yin

Okay. The lead time is due of normal levels from four to six weeks. So inventory level is other than the Mobile Interactive business is our normal level as well.

Christopher Longiaru – Sidoti & Company

Okay. So nothing really changed in the quarter. And just – I jumped on the call late, can you reiterate the gross margin guide?

Shirley Yin

Yes. The gross margin – we expect it to decrease slightly in the third quarter.

Christopher Longiaru – Sidoti & Company

Is that more tied to product mix in general or lower utilization rates?

Shirley Yin

None. It’s largely because of the new pricing, the ASP job.

Christopher Longiaru – Sidoti & Company

ASP job. Okay. And how – and do you expect that to be kind of a trend for the year or is that going to – after this quarter of the year expect that those margins will stabilize and continue for the remainder of 2013?

Shirley Yin

This hype normally happen at the beginning of the year and for some other customers there may another round after June. But we don’t expect a decrease more because of the pricing change. It will be a step function like in January and then maintaining that way.

Christopher Longiaru – Sidoti & Company

All right. I’ll jump back. Thanks, guys.

Shirley Yin

Thanks, Chris.

Christopher Longiaru – Sidoti & Company

You did good.

Operator

Thank you. (Operator Instructions) Thank you. Ladies and gentlemen, this concludes the Oplink Communications second quarter fiscal 2013 earnings conference call. If you would like to listen to a replay of today’s conference, you can dial 303-590-3030 or 1-800-406-7325 and enter the access code of 459-2343 followed by the pound sign. We thank you for your participation. You may now disconnect.

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Oplink Communications (OPLK): FQ2 EPS of $0.24 beats by $0.02. Revenue of $45.1M misses by $0.11M. (PR)