Oplink Communications Inc. F3Q10 (Qtr End 03/31/2010) Earnings Call Transcript

Jun.11.10 | About: Oplink Communications, (OPLK)

Oplink Communications Inc. (NASDAQ:OPLK)

F3Q10 (Qtr End 03/31/2010) Earnings Call

April 22, 2010 5:00 PM ET

Executives

Matthew Hunt – Investor Relations

Joe Liu – President and CEO

Shirley Yin – Chief Financial Officer

Analysts

Paul Bonenfant – Morgan Keegan

Vahid Khorsand – BWS Financial

Sven Eenmaa – Thomas Weisel Partners

Dave Kang – B. Riley & Company

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Oplink Communications Q3 Fiscal Year 2010 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, April 22, 2010. I would now like to turn the conference over to Mr. Matthew Hunt. Please go ahead, sir.

Matthew Hunt

Thank you, and good afternoon ladies and gentlemen. Thank you for joining us on today’s conference call to discuss Oplink’s third quarter fiscal 2010 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, 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.

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, President and CEO of Oplink. Please go ahead, Joe.

Joe Liu

Thank you, Matt. Hello and thank you for all joining us today as we report our results for the third quarter of fiscal year 2010. We are pleased to report revenue of $33.6 million, which was at the high-end of the outlook we provided last quarter and non-GAAP EPS of $0.22, which is also at the high-end of our outlook.

In general, the demand environment for the optical components and OMS is improving. As we discussed with you last quarter, in connection with this trend we are working to increase manufacturing headcount while continuing to maintain our high quality standards.

We’re also experiencing challenges in sourcing some materials, particularly semiconductor ICs. With some of our more recent effort underway we expect to start to see the benefits of increased capacity in the next few quarters. 10% customers in the quarter were Tellabs, Huawei and Alcatel-Lucent. We also had strong contribution from Cisco and Nortel.

During the third quarter we closed the acquisition of AMIT Technology, Taiwan. This company’s primary business is connectivity solution, optical connectors, jumper cables, [CASIT], et cetera, for integrators, manufacturers and carriers. The company sells to the enterprise and access market primarily.

We think this is an important addition to Oplink’s product portfolio and to nicely extend our passive market opportunity and geographic exposure. Overtime we intend to transfer volume manufacturing from Taipei, Taiwan to our Zhuhai, China facility which is expected to further improve our overall margin.

In summary with the improved environment in telecomm spending we’re working to ramp our production capabilities to capture market opportunities. However, it will take some time to get our newly hired work force to be productive and we are therefore expecting revenue in the fourth quarter to be in the range of $35 to $38 million.

Now, I will turn the call to Shirley for a detailed financial review. Shirley, please go ahead.

Shirley Yin

Thanks, Joe, and thanks to all of you for joining us today. Revenue for the third quarter was $33.6 million, which compares to $32.7 million reported in the prior quarter. GAAP net income was $2.6 million or $0.12 per diluted share, which included $1.3 million in stock-based compensation and $958,000 in amortization of intangibles. The revenue contribution related to AMIT in the third quarter was approximately $500,000.

On a non-GAAP basis net income was $4.8 million or $0.22 per diluted share, compared to $5.7 million or $0.26 per diluted share reported in the prior quarter. From here on I will be discussing results on a non-GAAP basis. Please see our earnings release for reconciliation of non-GAAP measures to their GAAP counterparts.

Gross margins for the third quarter was 34.5%, which was slightly better than expected as the result of preferred customer and product mix and higher utilization of fully reserved inventory. For the fourth quarter we continue to increase manufacturing headcount and expect productivity lag of several months to negatively impact margins. We also expect a less favorable product and customer mix including lower margin products from AMIT. As a result, gross margins will be lower than the third quarter.

Turning to our operating performance, total operating expenses were $6.5 million, up from the prior quarter as we increased R&D headcount to drive new product initiatives. We have served about $130,000 in operating expenses related to AMIT. For the fourth quarter we will increase operating expenses by about $1 million. We will continue to increase our investment in R&D related to new product development and we’ll absorb a full quarter of expenses related to AMIT. Additionally we expect increased legal fees related to ongoing litigation in the fourth quarter.

Total headcount at March 31st was 3,446, up from 2,718 in the prior quarter, which is primarily the result of increases in manufacturing headcount but also the result of adding more than 100 people related to the acquisition of AMIT. Interest and other income for the third quarter was $292,000. Our provisions for income taxes was $516,000, we expect our provision for income taxes in the fourth quarter to be at a similar level.

Turning to the balance sheet, we closed the quarter with cash and cash equivalents and investments of $184.8 million, down from the prior quarter due to net cash spent to acquire AMIT. Accounts receivable at the end of the quarter were $28.9 million, up from $25.4 million in the prior quarter as our revenue increased and we had more shipments to customer with longer payment terms.

DSOs were 78 days. Inventory was $15.7 million, up materially over the prior quarters as we worked to improve our lead time and prepare for higher revenue.

For the fourth quarter ending June 30th we are planning for revenue to be in the range of $35 to $38 million. GAAP net income for the fourth quarter of 2010 is expected to be in the range of $0.05 to $0.11 per diluted share. And non-GAAP net income is expected to be in the range of $0.16 to $0.22 per diluted share, excluding amortization of intangible asset, stock-based compensation and other non-cash and non-recurring items.

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

Question-and-Answer Session

Operator

Thank you, ma’am. (Operator Instructions) And our first question comes from the line of Paul Bonenfant with Morgan Keegan. Please go ahead, sir.

Paul Bonenfant – Morgan Keegan

Yeah. Hi. Thanks for taking my questions. If I could start with a couple of housekeeping items, you talked about having three 10% customers in the quarter. I’m wondering if you could breakout the percent contribution from each?

Shirley Yin

Yeah. Paul, Tellabs is about 18% and Huawei close to 17%, Alcatel-Lucent at about a little bit more than 10%.

Paul Bonenfant – Morgan Keegan

Okay. And in terms of your segment revenue to the extent that you could breakout your RODM revenue and/or actives or OCP revenue for the quarter?

Shirley Yin

For the quarter active revenue is about $8.8 million.

Paul Bonenfant – Morgan Keegan

Okay. And on a geographic basis?

Shirley Yin

On a geographic basis, North America about 35%, Europe is about 17% and Asia about 45%.

Paul Bonenfant – Morgan Keegan

Okay. Thanks for that. In terms of substantive questions, so you talked about this acquisition, I don’t recall seeing it in the press release maybe it is in the 8-K. Could you talk about the terms of that acquisition and whether your guidance for $35 to $38 million anticipates some level of revenue from that acquisition?

Shirley Yin

Yeah. The acquisition is, we acquired the stock of AMIT and we used cash to make the acquisition and in terms of the guidance we included about $2 million revenue from AMIT.

Paul Bonenfant – Morgan Keegan

Okay. So that includes $2 million.

Shirley Yin

Right.

Paul Bonenfant – Morgan Keegan

All right. So we back that out to get to your organic growth. And I think you also talked about your OpEx going up sequentially by about $1 million and that reflects -- is that largely attributable to the acquisition?

Shirley Yin

Well, partially to the acquisition and then, and also to increased R&D spending as well as legal fees.

Paul Bonenfant – Morgan Keegan

Okay. And how does the acquisition change your long-term operating model target or does it?

Shirley Yin

It doesn’t. At this current quarter it’s about to breakeven. So our plan is as we transfer the manufacturing to China it will improve those margins and to be accretive to the bottom line.

Paul Bonenfant – Morgan Keegan

And your timeframe on that?

Shirley Yin

It’s 6 to 12 months.

Paul Bonenfant – Morgan Keegan

Okay and last question. You talked about last quarter that capacity constraints have led to maybe a 10% short on the top line. How much was left on the table and/or pushed out due to the labor and the component shortages that you talked about in the March quarter?

Joe Liu

I think that it’s probably hard to quantify, anywhere from $5 million to $6 million, maybe even $6 million to $7 million.

Paul Bonenfant – Morgan Keegan

Okay. Thanks. Well, I’ll get back in the queue. Thank you for taking my questions.

Joe Liu

Thank you, Paul.

Shirley Yin

Thanks Paul.

Operator

Thank you. And our next question comes from the line of Hamed Khorsand with BWS Financial. Please go ahead.

Vahid Khorsand – BWS Financial

Hi, actually this is Vahid in for Hamed. Quickly on guidance for the next quarter, could you briefly go over the expenses, I kind of missed that part. And what you -- and you mentioned increase in expenses for the next quarter. Could you briefly review that?

Shirley Yin

From the OpEx standpoint we projected that it will be increased about by $1 million and the reason is primarily related to our acquisition of AMIT. We are going to -- included a fourth quarter expense of AMIT. And secondly, it increased R&D spending and also our increased legal fees.

Vahid Khorsand – BWS Financial

Okay. So is that one reason or the main reason why your non-GAAP EPS isn’t increasing with the revenue guidance increase?

Shirley Yin

All of this are included in our non-GAAP guidance.

Vahid Khorsand – BWS Financial

Okay. And do you think there has been double ordering by customers during the quarter?

Joe Liu

I would tend to believe that probably a small, very small portion of that would probably be not necessarily be double order, specifically with Oplink, but they may place orders with us and as well as with others. So it is hard for us to quantify. But I don’t -- I would not be surprised because of the low lead time that we are currently experiencing. Folks are probably searching for elsewhere for a shorter lead time and it is not necessarily a price issue. Not necessarily -- in other words price is no longer the primary concern in the current market place.

Vahid Khorsand – BWS Financial

Okay. Speaking of that, it looks like there was a 50% increase in inventory levels. Are you able to maintain pricing with such an increase in inventory?

Joe Liu

Increased inventory is a direct response to shorter lead time. We have cut our inventory level to a point where we simply cannot sustain some of the quick turn business and then therefore we are realigning with the financial markets turning around. We are doing the same. We are trying to relax on the amount of inventory that we hold on hand.

Vahid Khorsand – BWS Financial

Okay. And going forward, can operating margin be optimized on a GAAP basis with quarterly revenue on pace, say at $40 million soon?

Shirley Yin

Can you repeat the question?

Vahid Khorsand – BWS Financial

Can your operating margin be optimized on a GAAP basis with quarterly revenue on pace say at $40 million?

Shirley Yin

Yeah. Definitely, I think if quarterly revenue over $40 million we would have leverage from the operating expenses.

Vahid Khorsand – BWS Financial

Okay. Thank you very much.

Shirley Yin

Thank you.

Joe Liu

Thank you.

Operator

Thank you. And our next question comes from the line of Sven Eenmaa with Thomas Weisel Partners. Please go ahead.

Sven Eenmaa – Thomas Weisel Partners

Yeah. Hi. A couple of questions. First one to ask in terms of the headcount, what is the target headcount for the end of the fiscal year now?

Joe Liu

End of fiscal year. We are shooting at 3700.

Sven Eenmaa – Thomas Weisel Partners

Okay. 3700. And AMIT adds, I think you mentioned the AMIT add, that was around 100 people? Was that the number?

Joe Liu

100, yeah, and then exclusively in Taipei, Taiwan.

Sven Eenmaa – Thomas Weisel Partners

Okay. And in terms of AMIT’s gross margins, where are they now and where do you expect to get them?

Shirley Yin

They are at about a little bit more than 20%. And our goal is to get it to about 30%.

Sven Eenmaa – Thomas Weisel Partners

Okay. And is that going to be a step function like 12 months from now or how should we think about modeling this?

Shirley Yin

The 30% will happen at the end of the 12-month period.

Sven Eenmaa – Thomas Weisel Partners

All right.

Joe Liu

So you can model that linearly.

Sven Eenmaa – Thomas Weisel Partners

All right. And the last question I have, in terms of RODM sales, could you give some qualitative color in terms of where they were versus prior quarter and where do you expect them to go in the following quarter?

Joe Liu

We anticipate some growth in the RODM business. However, for the current quarter compared with prior quarter, it is pretty much flat.

Sven Eenmaa – Thomas Weisel Partners

Okay. Great. Thanks very much.

Joe Liu

Thank you.

Operator

Thank you. (Operator Instructions) And our next question is from the line of Dave Kang with B. Riley & Company. Please go ahead.

Dave Kang – B. Riley & Company

Yeah, Joe. Can you go over the headcount numbers once again; what they are now, what was it before and not fiscal year but calendar year, what is your target for calendar year?

Joe Liu

Well, calendar year would be 4000. As we speak, we are at 3400 and we anticipate at the quarter end which is the fiscal year -- year-end, which is the end of the June quarter, we will be at 3700.

Dave Kang – B. Riley & Company

Okay. And what was the -- what was the number at the beginning of the year, like 2900, 2800, something like that?

Joe Liu

2900. You are right. You are absolutely right.

Dave Kang – B. Riley & Company

Okay.

Joe Liu

Those additions that we hired were after Chinese New Year. So those folks brought in probably largely at the end of the quarter which is largely our end of March. So they are not really adding a whole lot of the real productivity yet.

Dave Kang – B. Riley & Company

Okay. And then I guess that is part of the reason for gross margin going down. Also wondering if you can be a little bit more specific in terms of, perhaps quantify what we should expect this quarter in terms of how much of that is due to the new hires versus -- I guess, is RODM going to be up? Is that why that is going to put some downward pressure on gross margin? You talked about, Shirley you mentioned unfavorable product mix, I’m assuming that is one of the reasons. Could you be little bit more -- provide more color on that please?

Shirley Yin

Well, labor expense is definitely one of the big factors to drive down gross margin in the coming quarter. And also we have a little bit unfavorable mix, not necessary just the RODMs. There are other products that we, the primary components are from third party vendors. So it is a little bit on both.

Dave Kang – B. Riley & Company

Okay. And then on Tellabs, so is it pretty much all RODMs or what is the mix between the RODM versus non-RODM for Tellabs business?

Joe Liu

There is a probably 15% non-RODM business and then that piece percentage may grow because of the new design win.

Dave Kang – B. Riley & Company

Got it. Got it. And then lastly on China, can you just talk about business environment in China especially with Huawei being one of your top customers, I understand some of the major Chinese operators are cutting back their CapEx going forward? Just what we should expect from Huawei as well as just overall business activities in China?

Joe Liu

We feel that Huawei will continue to probably perform well. And we are now working with other Chinese brands like ZTE, although they are not, as of now, they are not significant. But we anticipate that they will probably be a name on our significant customer list.

Dave Kang – B. Riley & Company

Got it. And can you clarify, I think someone asked about supply chain issues and you talked about $6 million to $7 million. I mean, can you clarify what you meant by $6 million to $7 million?

Joe Liu

Well, because of the low lead time, we are now quoting on average 8 to 12 weeks. It varies depending on the product and that is not acceptable to many customers. They are used to four to maybe six weeks turnaround time. And that low lead time, I believe, that impacts us, our ability to satisfy our customer. And we are trying very hard to correct that.

Dave Kang – B. Riley & Company

But that is kind of an industry-wide problem, right? So if not you then who else can they turn to?

Joe Liu

I think that we cut. I mean simply just talk about Oplink, I think we cut too deep last February and then looking back. For passive guys to capture the productivity takes time.

Dave Kang – B. Riley & Company

Got it.

Joe Liu

And the business, my estimate is that some of the businesses went to smaller firms that have lesser of the sophistication, however, they can turn a little quicker than we can. So it is important for those equipment guys to get those materials in time from production.

Dave Kang – B. Riley & Company

So, last question is, can you talk about the operating model. I guess there are a couple of moving parts here that made deterioration in gross margin, but what is your longer-term gross margin as well as operating margin targets?

Shirley Yin

Dave, our target is still at the regular level, more than $45 million. Our target gross margin is 35%.

Dave Kang – B. Riley & Company

Okay. And what do you think the operating margin could be?

Shirley Yin

It will be a little bit more than 15 or close to 15.

Dave Kang – B. Riley & Company

Okay, 15. Okay. Got it. All right. Thank you very much.

Joe Liu

Thank you, Dave.

Shirley Yin

Thanks, Dave.

Operator

Ladies and gentlemen, this concludes the Oplink Communications Q3 fiscal year 2010 conference call. If you’d like to listen to a replay of today’s call, please dial 1-800-406-7325 and for international participants, please dial 1-303-590-3030 followed by the access code 4285174, followed by the pound key. This replay will be available until April 29, 2010. Thank you for your participation. You may now disconnect.

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