Oplink Communications, Inc. F3Q09 (Qtr End 3/31/09) Earnings Call Transcript

Oplink Communications, Inc. (OPLK)

F3Q09 (Qtr End 3/31/09) Earnings Call

April 23, 2009 5:00 pm ET

Executives

Matthew Hunt – The Blueshirt Group

Joseph Y. Liu – President & Chief Executive Officer

Shirley Yin – Chief Financial Officer

Analysts

John Harmon – Needham and Company

Sven Eenmaa – Thomas Weisel Partners

Shane Pavitt – B. Riley & Company

Paul Bonenfant – Morgan Keegan

Sam Kingston – Penny Capital

Shao Wang – Lotus Investment Management

Presentation

Operator

Welcome to the Oplink Communications Q3 2009 Fiscal 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). And as a reminder the conference is being recorded today on Thursday, 23 of April, 2009.

I will now turn the conference over to Mr. Matthew Hunt, The Blueshirt Group. Please go ahead sir.

Matthew Hunt

Thank you. Good afternoon ladies and gentlemen. Thank you for joining us on today's conference call to discuss Oplink's third quarter fiscal 2009 financial results. This call is being simultaneously webcast on the Investor Relations section of the Company’s website at oplink.com. Joining me on the call today are, Joe Liu, President 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 that Oplink’s actual results may vary materially from those discussed here. Information concerning factors that could cause actual results to differ from forward-looking statements can be found in Oplink’s periodic filings with the SEC.

The 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 would like to turn the call over to Joe Liu, President and CEO of Oplink. Please go ahead Joe.

Joseph Y. Liu

Thank you Matt. Hello, and thank you for joining us today as we report our third quarter of 2009 financial results. We reported total revenue for the quarter of $30.8 million at the higher end of our expected range. We had good gross margins and the expense management in the quarter, as a result non-GAAP net income for the third quarter was $0.10 per share also ahead of our expected range.

Benefiting from tight cost management, we generated $30 million in cash from operations and close the quarter with $157 million in cash and investments up $10.3 million over the prior quarter.

We continue to place a high emphasis on managing our operations to improve margin and lead-time. Our 10% customers in the quarter were again Tellabs and Huawei. Alcatel-Lucent, Nortel, Cisco, and Fujitsu were also significant contributors to revenue.

The majority of our revenue comes from metro core and metro edge projects, believed to be the fast growing market segment for the next generation network upgrade. As we continue taking advantage of our onshore front-end design and customer support in conjunction with offshore back end supply chain in manufacturing. We felt that we are well positioned to gain additional market share. Our designing activity with customers remains high in the third quarter and order activity for the fourth quarter is improving from certain customers and product lines.

With respect to the overall market demand, we have seen some improvement, including inventory depletion at customers, but still lack of enough long-term purchase order to have good visibility on revenue. Hence, we are planning for revenue in the fourth quarter to be in the range of $28 to $32 million.

With that, I will turn the call over to Shirley for a more detailed financial review. Shirley, please?

Shirley Yin

Thanks Joe, and thanks to all of you for joining us today. Revenue for the third quarter was $30.8 million down from $37.6 million reported in the prior quarter, but at the high-end of the range we provided last quarter.

Revenue in the quarter included $500,000 that had been deferred in the prior quarter and it's primarily related to one of Nortel's contract manufacturers. The costs related to revenue were recognizing the prior quarter.

We reported a GAAP net loss of $114,000 a $0.01 per share, which including $1.3 million in stock-based compensation, and $950,000 in amortization of intangibles.

On a non-GAAP basis, net income was $2.1 million, or $0.10 per diluted share as compared to $2.6 million, or $0.12 per diluted share reported in the prior quarter. Non-GAAP gross margin for the third quarter, which excludes stock compensation and amortization of intangibles, was 30.3%, up over the prior quarters 24.5%.

Gross margins in the third quarter benefited from the utilization of previously reserved inventory that was $700,000 greater than in the prior quarter. As I noted earlier, we also recognized $500,000 in revenue in the third quarter where the cost was taken in the second quarter. Excluding these two items, non-GAAP gross margin for the third quarter would have been 26.4%.

We expect non-GAAP gross margins in the fourth quarter to remain at this level. Our solid gross margin performance in the third was out of the result of product mix and lower manufacturing expenses as a result of our headcount reduction efforts and other costs cutting measures. During the third quarter, we reduced headcount by 256, primarily in manufacturing and put in place other temporary employee related cost cutting measures.

We were successful in reducing operating expenses by $840,000 over the prior quarter. Cost cutting measures including a temporary reduction in compensation for our employees in North America. In addition, we are consolidating our Calabasas facility into Fremont in order to reduce cost. We expect our operating expenses to decrease slightly in the fourth quarter of fiscal 2009.

Interest and other income for the third quarter was $327,000, down from $808,000 in the second quarter as the result of lower interest rate. Our provision for income taxes was $729,000. We expect our provision for income taxes for the fourth quarter to be in the range of $300,000 to $400,000.

Turning to the balance sheet, we closed the quarter with cash and cash equivalents, short and long-term investments of $157.1 million, an increase of $10.3 million over the prior quarter. We repurchased 1.1 million in common stock during the quarter.

Accounts receivable at the end of the quarter were $24.3 million, down from $27.9 million in the prior quarter. DSOs were 72 days. Inventory was $14.0 million, down from $21.8 million in the prior quarter. We managed our inventory levels carefully during the quarter and kept it inline with revenue expectations. The decrease in inventory levels during the quarter contributed approximately $7.8 million to positive cash flows generated by operations during the quarter. We do not expect similar declines in inventory levels in the coming quarters.

As Joe discussed, we are optimistic that revenue maybe stabilizing at these levels, but visibility remains limited.

For the June quarter, we are planning for revenue to be in the range of $28 to $32 million inline with the March quarter. GAAP net loss is expected to be in the range of $0.03 to $0.08 per share and non-GAAP net income is expected to be in the range of $0.05 to $0.10 per diluted share. Excluding amortization of intangible assets, stock-based compensation, restructuring charges and other non-cash and non-recurring items.

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

Question-and-Answer Session

Operator

All right. Thank you. (Operator Instructions) John Harmon with Needham and Company. Please go ahead.

John Harmon – Needham and Company

Hi, good afternoon.

Joseph Y. Liu

Hi, John. How are you?

Shirley Yin

Hi, John.

John Harmon – Needham and Company

Hi, I have got a couple of questions for you.

Joseph Y. Liu

Yeah.

John Harmon – Needham and Company

Yes. First of all I think you got your OCP division to break-even before. What was the profitability of it, and what do you think moving it out of Calabasas can do to earnings in that business?

Joseph Y. Liu

We know exactly, just the OCP piece, I think we are breaking even. But I'm not so sure as to detail, whether how profitable that OCP is?

Shirley Yin

John, in general we don’t separately track the performance of these two product lines.

John Harmon – Needham and Company

Okay. All right. But you think it’s probably still at least break-even or better?

Joseph Y. Liu

I honestly believe that’s the case.

John Harmon – Needham and Company

Okay. What was your revenue in the quarter from your ROADM product, please?

Shirley Yin

It's about $4.6 million.

John Harmon – Needham and Company

Okay, thank you. And finally, with one of your competitors selling his business and other parts of the factory to a contract manufacturer, are there any opportunities for you, that competitor might have access certain product lines or are there any risks associated with it?

Joseph Y. Liu

As you know that transaction was completed on the first of April. We are not seening any immediate impact. And but overtime, I believe that we will benefit it because we are in the passive and then passive are basically process intensive and also small order quantity and a lots of the varieties, those are not generally the favorite for the contract manufacturer, particularly EMS are not necessarily welcome these kind of a small quantity and simple quantity varieties. So, I believe that overtime, we will see the benefit, but I don’t think that short-term, it could benefit immediately.

John Harmon – Needham and Company

Okay, thank you.

Joseph Y. Liu

Hey John.

Shirley Yin

Hey John.

Operator

Fine, thank you. Our next is in the line of Ajit Pai with Thomas Weisel Partners. Please go ahead.

Sven Eenmaa – Thomas Weisel Partners

Yes, hi this is Sven Eenmaa calling in for Ajit. I had a couple of questions. First one, I wanted to ask about is, how big where the active product revenues in the quarter?

Joseph Y. Liu

The active is approximately $9 million, which is approximately 30% of our total revenue.

Sven Eenmaa – Thomas Weisel Partners

Okay, and in terms of that you mentioned, you are seeing some inventory reductions that of your customers. Can you be a little more specific in terms of geography, have you seen them mostly in North American based customers, have you seen it out of Asia, out of Europe. Can you provide any color there?

Joseph Y. Liu

Yes, in Northern America, I cannot name specific name, name customer names, but particularly in this case is in the Northern America. We, earlier in our last earning call, I think we mentioned that even if the business come back with the push out at certain customers place, that maybe the case that we will, that the excess inventory could prevent us from benefiting immediately, and that situation has changed. And they have consumed quite a bit of the inventory.

Sven Eenmaa – Thomas Weisel Partners

Okay great. And then final question just wanted to ask, how much the Tellabs contribute to your revenues and how much did Huawei as a percent of total?

Joseph Y. Liu

There are 17% and 18% respectively.

Sven Eenmaa – Thomas Weisel Partners

Okay, great. Thanks very much.

Operator

All right, thank you. Our next question Mike Crawford with B. Riley & Company. Please go ahead.

Shane Pavitt – B. Riley & Company

Hi guys, this is Shane Pavitt for Mike Crawford.

Joseph Y. Liu

Hi, Shane, how are you?

Shirley Yin

Hi, Shane.

Shane Pavitt – B. Riley & Company

Well guys. I don’t think this call should go on without addressing the cash, and kind of use for the cash. Can you address that somewhat?

Joseph Y. Liu

Honestly, I have not figured out how to spend all this money. That's just kidding. We just passed through a period of uncertainty, and I think cash is very important in terms of the strategic positioning for the long run. I think that the cash can be use for as a part of the currency for M&A, and is also very useful in terms just holding on to the cash and be just strategically important

Shane Pavitt – B. Riley & Company

Right. So what I guess, what I am alluding to is I am little disappointed with the way the buyback happened. Or I would have liked to have seen more buy back, especially since there were so many days where it traded below cash per share. Currently with enterprise value of around $30 million at the closing price, and the amount of cash that you guys can generate a quarter. As you look at potential M&A targets, is there anything that comes close to what you guys do internally there?

Joseph Y. Liu

I mean, particularly this kind of market, we are trying to take on or acquire a company that either lose money or have lower financial performance than ours, it would probably be a drag for our stock performance. So we have seen offshore company that does have strong income statement. We have seen cases like that, but we have not get in close to wrap up any of these kind of a deal.

Shane Pavitt – B. Riley & Company

Right. So I guess more of a statement to the board that we would like to see a little more aggressive action on the buyback?

Joseph Y. Liu

I will pass the message on, for sure.

Shane Pavitt – B. Riley & Company

I appreciate that. Thank you. That’s all for me.

Joseph Y. Liu

Thank you, John.

Operator

All right. Thank you. Our next question is line of Paul Bonenfant with Morgan Keegan. Please go ahead.

Paul Bonenfant – Morgan Keegan

Yes, hi. Thank you. I'm trying to rationalize your forecast, it sounds like you’re looking for flattish sales at least at the mid point, yet your EPS range, the non-GAAP, is lower than the number that you came in at for the March quarter? Now are there some expectations related to mix or gross margin, may be that I'm not understanding. I think you said your gross margin could be sustainable at about the 26.4% level. If OpEx is also down, it would seen like you could do appreciably better on the EPS line?

Shirley Yin

Paul one of the thing is, the interest of income that we have been, our cash been generating. They are getting a very yield, so that is doing into our forecast as well.

Paul Bonenfant – Morgan Keegan

Okay. How would you characterize the pricing environment today versus say, the last time we spoke?

Joseph Y. Liu

From the last conference call or the OFC, which ever that I think that the lead time is or has been, in other words, the lead time was not that flexible. But I think that, because not only Oplink had this streaming, vigorous streaming. I think across the board. The passive industry including some of the actives, also had major layoffs. So the lead time situation now, in our case is pretty, I wouldn’t call tight, but it is pretty well utilized. So the lead time is, I would say probably between 4 and 6; maybe 5 weeks. And it is normalized. So once the lead time normalized pricing seems to be holding up pretty well. Although that earlier, the pricing pressure is pretty, I would say in the fiscal third quarter, which is the March quarter, the pricing environment, it was pretty comparative.

Paul Bonenfant – Morgan Keegan

Okay. I noted earlier that you said that you didn't have a great visibility on long-term revenue, but do you have a sense for how much of the current improvement in the March quarter and it seems like bottoming that you’re suggesting into the June quarter. How much of that is demand improvement versus channel restocking or inventory restocking?

Joseph Y. Liu

I believe that I mention to you before that, we have seen February, better than January; and March is better than February. And we continue to see that improvement in the confidence level or in the business confidence level. We also believe that our customer have utilized a lot of these shipment that they received in the December quarter and March quarter. So, the fear of even if they receive the go ahead, we may not benefit on the immediate notification. But the situation has changed now that their inventory has been depleted during the quarter or up to now. And I believe that we will benefit should the push out resume the normal purchase pattern that we will benefit right away.

Paul Bonenfant – Morgan Keegan

Okay. Thank you for taking my questions.

Joseph Y. Liu

Thank you Paul.

Operator

Fine, thank you. (Operator instructions). Our next question is from Sam Kingston with Penny Capital Please go ahead.

Sam Kingston – Penny Capital

Hi Joe.

Joseph Y. Liu

Hi.

Sam Kingston – Penny Capital

Couple of quick questions, the inventory that you previously reserved that that were consumed during the quarter. Can you give us an idea of what kind of inventory it was?

Shirley Yin

We do our reserve base on the parts specific level. So it’s parts by parts. It depends on any particular product that we may have order, received later, but when we did the forecast, because the reserve is based on forecast. We didn’t have any visibility. So, it is very hard to quantify exactly, which product line. But in general, they are split across passive and active products.

Sam Kingston – Penny Capital

Okay. Can you give us an idea of the capacity utilization you experienced around the quarter?

Joseph Y. Liu

There are three moving parts there, facility, equipment, and personnel. I think the key really is the equipment. Then I think equipment utilization right now, because we are not really having shifts in seven days. So, I would say the equipment utilization is still probably 50%, 60% range. And the personnel, as Shirley mentioned, we have trimmed almost 400 employees that half of them are directly, and half of them are the MOH offshore. And as a result, I think we are probably very well balanced in terms of our direct labor utilization. And as we are starting to ramp, I think we are probably in a position to include additional direct labor.

Sam Kingston – Penny Capital

Okay. Can you give us an idea of, from your vantage point? And as you look into the coming quarter, would you say that its going to be roughly like 90% or even a 100% turns business, or is there any visibility that you have in terms of lead times.

Joseph Y. Liu

Well, just first of all, into the quarter. We have approximately 50% or slightly less than 50% of the forecast business. So really, it is not following too much from the normal pattern. Our normal pattern is into the quarter we have, we tend to have more than 50% of the projected business. And in this case, we probably had slightly less than 50%, but the turn business because of the lead-time is not as pretty short, it’s not in the stretched condition. So, we believe that if we do have turn business, we are pretty well position to capture as much as we can.

Sam Kingston – Penny Capital

Okay.

Joseph Y. Liu

As far as the business that we received the order for the September quarter. We have seen some of that, coming in. So it’s not in a high volume, but we do have visibility into the September quarter now.

Sam Kingston – Penny Capital

Okay, good. In terms of, you have talked about inventories coming down at your customers. Would you say that, that's happened more in the passive area or in the active area. I mean I think generally historically, if my memory serves me correct, the active area generally I think, it has at low points of inventory been the first area to show signs of life. But maybe I am wrong in my recollection, or maybe its different at this time, if you could elaborate that?

Joseph Y. Liu

You are consistently right. In this case it is passive and passive-centric including OMS.

Sam Kingston – Penny Capital

Okay. So that’s where you’re seeing the lowest levels of inventory. And thus you have the best, the more, the outlooks better there, you are saying.

Joseph Y. Liu

I believe so.

Sam Kingston – Penny Capital

Okay.

Joseph Y. Liu

But because it's not across the Board, this is a selective customer, couple of customers that I mentioned, but they tend to be the major customer.

Sam Kingston – Penny Capital

Okay. Great. Thanks a lot. I appreciate it.

Joseph Y. Liu

Thank you, Sam.

Operator

All right. Thank you. The next question is from the line of Shao Wang with Lotus Investment Management. Please go ahead.

Shao Wang – Lotus Investment Management

Good afternoon. Four questions. First I think Shirley you’d mentioned something about $1.1 million in share buyback during the quarter?

Shirley Yin

Yes, that’s correct.

Shao Wang – Lotus Investment Management

Do you have the average price on that? In terms of the share…

Shirley Yin

Average price, it’s a little bit lower than $7.50.

Shao Wang – Lotus Investment Management

$7.50, okay. Totally separate on the headcount, am I thinking right just something around 2100 employees at this point and given the…

Shirley Yin

That’s correct 2150.

Shao Wang – Lotus Investment Management

2150 okay. And then another comment, I am wondering if you can provide some color by geography in terms of what you are seeing on the demand side. Is there any areas it might stand out or how you might comment on geography?

Joseph Y. Liu

Shao, this is Joe. I think that Northern America tends to be about 40% of our business in Northern America. And as I’ve earlier indicated that we have seen some measured changes that the channel inventory has been rapidly consumed, but doesn’t we have not seeing major order flow yet. In China, which is about 20%, 25% of our total business, we see a lot of activity and we also probably benefit that from quarter-to-quarter, we will have some increase in that market segment or in that territory. And in Europe, we see some return of confidence mainly Ericsson, Marconi, smaller player like Edfa and Transmote. And the only market that is slightly behind is the Japanese market, but coming in fairly consistent, I would say the weakness may be 5%, it’s not really very week, I would say just classified as weaker than average.

Shao Wang – Lotus Investment Management

Okay.

Joseph Y. Liu

In Northern America, we’ve seen some positive signs, Europe also positive signs the China market see some real growth and the Japanese market tends to be like 10% to 15% of our share, just little bit weaker so far.

Shao Wang – Lotus Investment Management

Okay. And lastly Joe, as I remember at the last conference call you basically made a comment that you thought this downturn or this downdraft would be much shorter than what happened in 2001. Is your conviction higher or lower on that comment at this point?

Joseph Y. Liu

At this point, I think that this will be a much shorter for our industry. And I’m not sure other industry, but for Telecom per se, that we have quickly stop the free fall, as I indicated that our revenue base, revenue we’ve seen that building the bottom even in the March quarter. So we have a little bit more confidence, but however, we have lesser visibility than before. In other words, we have not seen enough solid purchase order and therefore we gave a flat guidance.

Shao Wang – Lotus Investment Management

Understood. Okay. All right, thank you.

Joseph Y. Liu

Thank you.

Operator

All right. Thank you. (Operator Instructions). We have a follow-up from John Harmon. Please go ahead.

John Harmon – Needham and Company

Hi, there.

Joseph Y. Liu

Hi John.

John Harmon – Needham and Company

I have other miscellaneous questions. You talked about your inventory reductions, but I am just kind of curious that how you pulled it off. I mean you took your inventory down by almost half in one quarter, back to pre-OCP levels, you said it wouldn’t exactly stay at this point, but anything you could elaborate, it would appreciated.

Joseph Y. Liu

Well, we were in the crisis mode in the beginning of the year. And so, we went in there and did a lot of effort trying to utilize whatever inventory that we have. And that drive generally did a substantial benefit. And greater benefit than we expected maybe Shirley you can add flavor to that. Shirley made personal physical trip to stay there for a week. And managing and get everybody's attention on the crisis. And I think under the crisis mode we were able to, particularly utilize some of those excess inventory.

Shirley Yin

And also, John, in the quarter, we actually cut down our purchase a lot. We only purchased, we cut down the forecast portion and pretty much only purchased those that we had an order on hand. So that's why we don't expect inventory, we remain at this low level in the coming quarters.

John Harmon – Needham and Company

Okay, thank you. And a question about the, someone did ask about the acquisition environment, but given that you do have so much cash and that there are a lot of private companies that look like they are about to turn out the lights. Are you looking at more companies, are prices being asked reasonable, and are you willing to take on the headaches that you took on for something like an OCP?

Joseph Y. Liu

Well, we are very willing to take a look at good opportunity. We will never pass good opportunity. And but honestly, the deal flow, level of deal, at least not, come across our table. Not that many that are worth our immediate attention. Like I said, it is difficult to find target companies that has good solid financial performance. And we don't want to run into another OCP situation, where we have to go in there and try to clean up the operation. And that would probably be the least thing we will do, lastly we will do. But we are looking as I mentioned to you that we have seen deals, overseas deals that has reasonable income statement. But I have not generated result yet.

John Harmon – Needham and Company

Sure. Thank you. And just finally you just got this a bit in the last question I am just trying to put the pieces together a little bit. You think that a lot of the demand you are seeing today, do you think inventory has been depleted and what you are shipping today is resulting from true demand. And you talked about a high level of activity and increasing confidence. I know you have a limited visibility. But I mean do you think demand could pick up again in the September quarter. Do you have any idea, how the September quarter could look at this point?

Joseph Y. Liu

Well, based on what I just mentioned to you, I think the confidence level is back, and our customer in this case, the System House, their inventory has been drawn pretty fast. In the beginning of the year until now, I think that some of the push out that they announced probably already expired. Based on the information that we got on the inventory. So I would tend to believe that if we are not seeing in the June quarter, we will benefit it in the September quarter for sure.

John Harmon – Needham and Company

Okay. Thank you.

Joseph Y. Liu

Okay.

Operator

All right. Thank you. And with that, there are no further questions at this time. That will conclude our conference for today. If you would like to listen to a replay of today’s conference, you can do so beginning approximately one hour from now. It will be available by dialing 1-800-405-2236 or 303-590-3000 and put the access code 11130531. Those numbers again 1-800-405-2236 or 303-590-3000 and put the access code 11130531. ACT would like to thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.

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