Oplink Communications, Inc. F4Q09 (Qtr End 6/30/09) Earnings Call Transcript

Oplink Communications, Inc. (OPLK)

F4Q09 (Qtr End 6/30/09) Earnings Call

August 6, 2009 5:00 pm ET

Executives

Matthew Hunt - IR, The Blueshirt Group

Joe Liu - Chief Executive Officer

Shirley Yin - Chief Financial Officer

Analysts

Paul Bonenfant - Morgan Keegan

Sven Eenmaa - Thomas Weisel Partners

Sam Kingston - Pemige Capital

Christopher Longiaru - Sidoti & Company

Presentation

Operator

Welcome to the Oplink Communications fourth quarter and 2009 financial results conference call. (Operator Instructions)

I would like to turn the conference over to the host, Matt Hunt. Please go ahead.

Matt Hunt

Good afternoon, ladies and gentlemen. Thank you for joining us on today's conference call to discuss Oplink's fourth quarter fiscal 2009 financial results. This call is being simultaneously webcast in the Investor Relations section on 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 and 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.

Joe Liu

Thank you, Matt. Hello and thank you for joining us today as we report our fourth quarter and fiscal year 2009 results. For the fourth quarter, we reported total revenue of $32.4 million, a modest sequential increase over $30.8 million and slightly above the outlook we provided last quarter.

We achieved non-GAAP net income per diluted share that was ahead of our outlook for the quarter at $0.15, up from $0.10 per share in the prior quarter. We generated $11.3 million from operations and added to our already strong cash balance, closing the year with $168.7 million in cash, cash equivalents, short and long-term investments.

We did this while continuing to invest in new product capabilities, R&D facilities in China, and also including the expansion of our Zhuhai campus' second dormitory for manufacturing personnel.

Over the last year we have realized a good balance of managing gross margins and operating expenses, while at the same time, investing in our offshore technical capabilities. Our investments have broadened our customer offerings and position us to expand quickly with demand.

Gross margin improved slightly overall. Despite the challenging business climate, we have increased market share due to our cost efficient business model and the strong presence in China. We're well positioned to be the number one passive supplier. As we discussed with you last quarter, we believe that the market and our sales opportunity have more or less stabilized at these levels for the near term. In the fourth quarter we continued to see signs of stabilization and are optimistic about carrier spending as we look ahead.

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

Shirley Yin

Thanks, Joe. Thanks to all of you for joining us today. Revenue for the fourth quarter was $32.4 million, up from 30.8 million reported in the prior quarter and slightly above the outlook we provided last quarter. Our 10% customers in the quarter were Huawei, Tellabs and Alcatel-Lucent. Cisco, Ericsson-Marconi and [APA] were also significant contributors to revenue.

Reported GAAP net income of $249,000 or $0.01 per diluted share, which included $1.2 million in stock-based compensation, $952,000 in amortization intangibles, and $725,000 in loss on sales of assets. I should note, I am particularly pleased with our GAAP profitability in the quarter.

On a non-GAAP basis, net income was $3.1 million or $0.15 cents per diluted share, as compared to $2.1 million or $0.10 per diluted share reported in the prior quarter. For fiscal year 2009, consolidated revenue was $143.7 million. Consolidated GAAP net loss for the fiscal year was $13.8 million or $0.67 per share, including a $4.1 million provision for excess and obsolete inventory, $10.8 million in impairment charges and other costs, $5.4 million in stock-based compensation, $3.8 million in amortization of intangible assets and $725,000 in loss on sales of assets. Consolidated non-GAAP net income was $11 million, up $0.52 per diluted share.

I will now turn to a more detailed review of our fourth quarter results, which I will discuss only on a non-GAAP basis. Please see our earnings release for reconciliation of non-GAAP measures to their GAAP counterpart.

Gross margin for the fourth quarter was 30.6%. Gross margin benefits from the consumption of previously reserved inventory to the same extent as they did in the prior quarter. We expect gross margin for the first quarter of fiscal 2010 to remain at a similar level.

Turning to the operating performance, total operating expenses were down by $253,000 over the prior quarter. This is somewhat due to a lower G&A following the IPO litigation settlement charges taken in the third quarter. We expect that total operating expense in the first quarter of fiscal 2010 to remain at similar levels.

We closed the fourth quarter with total headcount of 2,260, up from 2,150 in the prior quarter. This increase was primarily in manufacturing. Interest and other income for the fourth quarter was $429,000. Our provision for income taxes was $904,000. We expect our provision for income taxes for the first quarter to be in the range of 400 to 600,000.

Turning to the balance sheet. We closed the quarter with cash, cash equivalents, short and long-term investments of $168.7 million, an increase of $11.5 million over the prior quarter. Accounts receivable at the end of the quarter were $29 million, up from $24.3 million in the prior quarter, reflecting a slightly more backend loaded quarter. DSOs were 81 days, above our historical level in the 70 days range. Inventory was $10 million, down from $14 million in the prior quarter. We continue to closely monitor inventory levels and keep them in line with revenue expectations.

For the September quarter, we are planning for revenue to be in the range of $30 million to $34 million. As Joe stated, we believe the market has bottomed here, but our visibility remains limited. GAAP net income for the first quarter of 2010 is expected to be in the range of $0.02 to $0.08 per diluted share, and non-GAAP income is expected to be in the range of $0.13 to $0.19 per diluted share, excluding amortization of intangible assets, stock based compensation and other non-cash and nonrecurring items.

Operator

(Operator Instructions)

Our first question comes from the line of Paul Bonenfant with Morgan Keegan.

Paul Bonenfant - Morgan Keegan

I'd like to start with a couple of housekeeping questions if I could. You mention that you had three 10% customers in the quarter. I'm wondering if you could give us what the percent contribution was for each of the Huawei, Tellabs and Alcatel-Lucent.

Shirley Yin

Huawei is about 23%, Tellabs is about 18% and Alcatel-Lucent is about 13%.

Paul Bonenfant - Morgan Keegan

You also mentioned you had three other significant customers in the quarter that came in below 10%?

Shirley Yin

Those are Cisco, (APA) and also Ericsson-Marconi.

Paul Bonenfant - Morgan Keegan

Last housekeeping question, I'm wondering if you can break out for us your revenue for ROADM, and active or OCP?

Shirley Yin

Revenue for ROADM in the quarter is about $5.8 million and the active revenue is about 7.9.

Paul Bonenfant - Morgan Keegan

The gross margin, last quarter's 30.3%, benefited from few one time items that I think you said weren't repeating, but it seems that they have repeated. So when you're talking about gross margin being at a similar level in Q1, are we talking about the gross margin including these benefits, which seem to be repeating?

Shirley Yin

The assumption there is, we assume that inventories that we will be utilizing, that has been fully reserved, will be at a very similar level as the fourth quarter.

Paul Bonenfant - Morgan Keegan

So we should expect gross margin in the 30% range in Q1?

Shirley Yin

A similar range as the fourth quarter.

Paul Bonenfant - Morgan Keegan

That also backs the question of inventories. They're quite low now. I think last quarter you mentioned that the level of inventory that you had reached wasn't sustainable over the long term and yet you're down another $4 million, I think, sequentially, and down almost by half if you look at where you were six months ago. How should we think about inventory's trending going forward?

Shirley Yin

Inventory level, as sales increased, they will be definitely turning up and if you look at activities during the fourth quarter, the volume of purchase is much higher than we did in the third quarter.

Paul Bonenfant - Morgan Keegan

On OpEx, again, you mentioned it would be similar quarter-over-quarter. On the last call you mentioned there was a temporary reduction in compensation for North American employees. I'm wondering when does this reverse and when might we see the impact?

Shirley Yin

Well, actually, we don't have any further pay cut in the fourth quarter. So that meaning we temporarily returning back the pay cuts to our employees in the fourth quarter.

Paul Bonenfant - Morgan Keegan

Last question and then I'll get back into the queue. Did you see any particular strength or weakness by geography this quarter?

Joe Liu

I think they're a normal. Most of Americas is still relatively weak and we saw the China market, as you can tell, that Huawei being 23%, so China for the quarter is the strongest.

Operator

Our next question comes from the line of Sven Eenmaa with Thomas Weisel Partners.

Sven Eenmaa - Thomas Weisel Partners

Hi, this is Sven calling in for Ajit. Couple of quick questions. First, I wanted to ask what was the booked-to-bill in the quarter?

Joe Liu

Well, we don't measure the book-to-bill. However, I would classify that normally we have more than 50% of the business getting into the quarter. We're not seeing that right now. We're seeing less than 50% of the booking getting into the new quarter.

Sven Eenmaa - Thomas Weisel Partners

That leads me to the second question. In terms of looking at your guidance range of like 30 to 34, given the current quarter's revenue level, what are the big moving pieces here in terms of when, we think about the next quarter? Is that on the ROADM side, is it the passive side, is it on active side?

Joe Liu

Well, I think it's very much a stabled. The ROADM will probably stay at this current level. The only thing that we can see at this point is that the China business may drop slightly and we will fill it up with other business.

Sven Eenmaa - Thomas Weisel Partners

In terms of pricing, have you seen any changes in the current quarter or going into the next one?

Joe Liu

Pricing, I think is probably fairly competitive. Any time you have this term business, price and quick turn delivery tends to be unaligned, so I see this tough environment probably last for a couple of other quarters.

Operator

(Operator Instructions) Your next question comes from the line of Sam Kingston with Pemige Capital. Please go ahead.

Sam Kingston - Pemige Capital

Could you tell us a little bit about the quarter in terms of linearity, how it trended?

Joe Liu

We were probably backend loaded more so than ever. I mean the last month of the quarter was busier than ever. Normally, the linearity is pretty normal across the entire quarter, but just so happened this quarter it was backend loaded.

Sam Kingston - Pemige Capital

Do you think that's going to be a trend that continues in the coming quarter, where you're going to see a backend loaded quarter or you think it's going to go back to being linear?

Joe Liu

I think it will go back to normal.

Sam Kingston - Pemige Capital

Someone asked about the inventories earlier and, I was just looking back. I mean the inventories are the same level now when you guys were generating around $19 million, $20 million in revenue. So I guess the question is what would be your ideal level of inventory at the state of the company now? Where would you want them to be, say, at the end of next quarter or the end of the year?

Shirley Yin

Sam, inventory level is normally a function of revenues for the quarter, so next quarter we're expecting similar levels of revenue, but I would expect inventory would be increased slightly, well, of course, it's hard to predict, the inventory vary at the end of the quarter, but it will be at the teens, probably below 15.

Sam Kingston - Pemige Capital

Joe, you mentioned that you were expecting China to drop a little bit in the coming quarter. Can you elaborate a little bit on why you think that's going to happen?

Joe Liu

Well, the first couple of quarters, I think that the surge coming out and a lot of them coming out of the 3G backhaul (filled) out and I think the inventory level based on our (inaudible) the inventory level is at a level where they probably need to digest a little bit. So I would tend to think that particularly the September quarter could be soft here and towards the end of the year they'll probably pick up again.

Sam Kingston - Pemige Capital

So it's towards the end. So the second half of the year you expect the revenues to come back a little bit?

Joe Liu

Yes.

Sam Kingston - Pemige Capital

What about the stock buy back? Can you update us? I don't think you didn't buy any stock in the quarter, correct?

Joe Liu

Correct.

Sam Kingston - Pemige Capital

What's left on your available buy back and what do you anticipate going forward?

Joe Liu

Well, we still have a active program alive and from time to time our Board will get together and review the market condition and also judging from how we better utilize our cash. So that decision is kind of a dynamic.

Sam Kingston - Pemige Capital

How much is left under the current program?

Joe Liu

I believe so it is probably $16 million, $17 million.

Operator

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

Christopher Longiaru - Sidoti & Company

I had a little phone problem. So my question is you've done a really good job on the cost cutting side. We talked about demand kind of escalating throughout the course of the year and in the second half of the year. What's your operating cost picture going to look like as that happens? Are you going to be able to maintain this operating cost level?

Shirley Yin

That's what we expect. It will be at a similar level for 2010. Depending on how revenue goes.

Christopher Longiaru - Sidoti & Company

You're expecting revenue to escalate in the second half of the year. Under that assumption would it still be around these levels?

Shirley Yin

It should be around that level.

Christopher Longiaru - Sidoti & Company

Is there anything else on the cost cutting front that you guys are working on or have we seen all the benefits of the reductions in headcount and the movements of operations or are we going to see more in the future?

Joe Liu

We are probably at the tail-end of the OCP transfer, so we may see some additional benefits, but I think, like I said, we're probably at the tail-end, I would say 90%, 95% completed, meaning the transfer completed.

Operator

Thank you. Our next question comes from the line of Paul Bonenfant with Morgan Keegan.

Paul Bonenfant - Morgan Keegan

Just a real quick follow-up. I'm wondering if you could talk about whether the competitive situation has changed, for example, relative to potential share shifts in result of recent competitor outsourcing?

Joe Liu

Well, we don't know the details, but I believe that we continue in this kind of a competitive environment, I think we're convenient in gaining additional shares as the pie temporarily shrinks and I think we probably maintain a bigger piece of the pie.

Operator

Thank you. And there are no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Joe Liu

Thanks for everyone joining today and thank you, operator.

Operator

Thank you. Ladies and gentlemen, this concludes the Oplink Communications fourth quarter 2009 fiscal earnings call. if you'd like to listen to a replay of today's conference please dial 303-590-3030 or 800-406-7325 and enter the access code 4123158. Again those numbers are, 303-590-3030 or 800-406-7325, and the access code again is 4123158, followed by the pound sign.

This does conclude our conference for today. We would like to thank you for your participation and you may now disconnect.

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