Oplink Communications' CEO Discusses F3Q 2014 Results - Earnings Call Transcript

Apr.30.14 | About: Oplink Communications, (OPLK)

Oplink Communications, Inc. (NASDAQ:OPLK)

F3Q 2014 Results Earnings Conference Call

April 30, 2014, 04:30 PM ET

Executives

Stephen Welles - Senior Vice President and General Counsel

Joseph Liu - Chairman and Chief Executive Officer

Peter Lee – President and Chief Operating Officer

Shirley Yin - Executive Vice President and Chief Financial Officer

Analysts

Hamed Khorsand - BWS Financial

Patrick Newton - Stifel Nicolaus

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the Oplink Third Quarter Fiscal 2014 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, April 30 of 2014.

I would now like to turn the conference over to Steven Welles, General Counsel of Oplink. Please go ahead sir.

Stephen Welles

Good afternoon, everyone, and thank for joining us on today's call. On the call today are Joe Liu, Chairman and CEO of Oplink; Shirley Yin, CFO of Oplink and Peter Lee, President and COO of Oplink.

Before we get started I'd 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. Risk factors that could cause the actual results to differ from statements on this call can be found in our periodic filings with the SEC.

Forward-looking statements made on this conference call are based on current expectations and Oplink 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. Please go ahead Joe.

Joseph Liu

Thank you, Steve. Thanks to all of you for joining us today as we report our third quarter fiscal 2014 financial results. Revenue for the quarter was $48.1 million, down from $50.4 million in the prior quarter due to some softness in orders we are seeing mainly from customers in Europe. However we remain very optimistic about the long term demand trends and we believe that we are well positioned to capitalize on the trends with our competitive product portfolio and product structure.

There are several design wins and the new projects underway with key customers that we believe will lead to higher revenue growth. Huawei and Tellabs, now Coriant were again our largest customers in the quarter, making up about 29% of revenue consistent with the prior quarter.

We're excited about our new offering connected for X mobile interactive facility business. Our non-pairing, group parallel, global push, software-as-a-service IoT Cloud Platform and in-a-box will soon cover five domains. They are security, safety, care, video and home automation, and we expect these systems to be ready to ship in July. Our industry wholly single socket multiple domain non-pairing [inaudible] funnel play in-a-box security solutions are clearly available to distributors like Ingram Micro and D&H and retail stores like Fry’s Electronics and ClickAway and online stores like Amazon.com, Microsoft.com, Smarthome.com and other sites.

We look forward to share more news on this exciting business in the future. With that I will turn the call to Shirley for the financial review. Shirley please go ahead.

Shirley Yin

Thanks Joe, and thanks all of you for joining us today. Revenue for the quarter was $48.1 million, down from $50.4 million in the prior quarter but up from a year-ago first's fiscal quarter's revenue of $44.1 million. We have a GAAP net loss of $524,000 or $0.03 per share, down from net income of $1.3 million or $0.07 per diluted share in the prior quarter and net income of $2.1 million or $0.11 per diluted share reported for the third quarter of fiscal 2013.

Non-GAAP net income for the third quarter was $270,000 or $0.01 per diluted share, down from $2.4 million or $0.12 per diluted share reported in the prior quarter and $3.4 million or $0.18 per diluted share reported for the third quarter of fiscal 2013. A GAAP to non-GAAP reconciliation is included in our earnings press release.

Our non-GAAP gross margin in the third quarter was 29.4%, down from 31.8% in the prior quarter, due mostly to impact of lower ASPs resulting from annual price negotiations and lower utilization of power manufacturing overheads because of lower revenues. For the same quarter, we expect gross margins to be slightly higher due to slightly higher expected revenues.

Turning to our operating results, total non-GAAP operating expenses were $13.5 million, up from $13.1 million in the prior quarter, due primarily to an increase in R&D expenses for 100G and OMS line nine [inaudible] related projects. For the June quarter, we are expecting operating expenses to be down slightly from the March quarter.

Total expenses incurred by our Oplink connected business was $2.3 million, down from $2.5 million in the prior quarter. We expect Oplink connected business spending in the June quarter to be at about the same level as the March quarter.

Our tax provision expenses were higher in the third quarter primarily driven by lower income in jurisdictions with lower tax rates in the third quarter and lower forecasted income in the fourth quarter. We expect tax provision expenses for the fourth quarter to be in the range of $600,000 to $800,000.

Total headcount at quarter-end was 3,800, down slightly from the prior quarter, due to attrition in labor headcount in our office at Chinese New Year. We closed the quarter with cash, cash equivalents and investments of $161 million, down from $176 million in the prior quarter. We reported $15.5 million worth of stocks during this quarter and shares outstanding at the end of the quarter were 18.5 million shares.

We spent $2.8 million in CapEx during the third quarter consisting mostly of new capital equipment for our optical business, including equipment for our 100G product. We expect total CapEx for fiscal 2014 to be in the $12 billion range, up from the total of $7.6 million in fiscal 2013. Accounts receivable at the end of the third quarter was $37.2 million, up from $31.4 million in the prior quarter due to higher shipments in the last month of the third quarter.

DSOs were 71 days, up from 57 days in the prior quarter. Prior quarter DSOs were lower than average due to our large customer who has longer payment terms paying outstanding invoices before they were due. Inventory was $40.3 million, down slightly from $40.5 million at the end of last quarter. We expect inventory levels to remain at about this level in the June quarter.

In summary, we were currently experiencing some softness in revenues, due mostly to lower order levels from Europe. But we are optimistic about demand trends and we continue to invest resources to meet this potential demand.

For the June quarter, we expect revenue to be in the range of $48 million to $52 million. GAAP net income is expected to be in the range of zero to $0.06 per diluted share. Non-GAAP net income is expected to be in the range of $0.05 to $0.11 per diluted share.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Hamed Khorsand with BWS. Please go ahead.

Hamed Khorsand - BWS Financial

Hi, excuse the background noise. My first question is that you guys are really the first ones are talking about European weakness right now. And during the last call you were indicating that was going to be a soft quarter but then yet the performance was still below consensus. So what’s driving that weakness that you can’t see it the last time you reported and it was only for the few months ago?

Peter Lee

Yeah in optical for us the Europe the key customer for us actually more like the Tier2 type of customers and then we maintained our share and then our position. I think it's more like their overall market demand strength with the buying and then it's more like the program based signal but we still maintained our share and try to gained more from there.

Hamed Khorsand - BWS Financial

Okay, and how are you guys standing on the Datacom side? This has sort been a growth area for lot of the industry?

Peter Lee

In the Datacom [inaudible] silicon side. The first two quarters which started had opportunity and then lived into Datacom portion in last in first quarter, it is above the [inaudible] in terms of percentage. We see more open the product portfolio we are trying diversify; it's going to a longer distance as a product particular parameters and also compares it by through the inside. We continue seeing opportunities. We just have said two quarters revenue was not as expected we are preparing our operation and R&D resource to capture this market.

Hamed Khorsand - BWS Financial

Okay, and then my last question is do you think Oplink Connect is distracting you guys a bit from actually winning new orders on the optical side? Again, I mean you guys are the only ones talking about weakness right now in the order book?

Joseph Liu

Hamed, I don’t believe so and the operation is well covered, definitely so from answering the question I think we delegated Peter to engage fully with the optical side and we are again exceeding the overall sales development.

Hamed Khorsand - BWS Financial

Okay, all right thank you.

Joseph Liu

Thank you, Hamed.

Operator

Thank you. Our next question comes from the line of Patrick Newton with Stifel Nicolaus. Please go ahead.

Patrick Newton - Stifel Nicolaus

See kind of first is couple of housekeeping items, can you tell us what spending for mobile interactive was in the quarter?

Shirley Yin

Yeah it's about $2.3 million.

Patrick Newton - Stifel Nicolaus

Okay. Thank you for that and then kind of another just housekeeping did you purchase any shares in the quarter?

Shirley Yin

Yes, we do, we purchased about $15.5 million, that’s about 900,000 shares.

Patrick Newton - Stifel Nicolaus

Okay. $15.5 million you said?

Shirley Yin

Right, dollars.

Patrick Newton - Stifel Nicolaus

Got you. And so I guess more on to the quarter and have you sort of we are going to say here some meaningful exposure to China and some of the major Chinese manufacturers. Can you may be just talk about thoughts on one more season of the 100G network built in an earnest and how that role out might affect you?

Joseph Liu

Currently our exposure to the 100G in China it's more on the passive [inaudible] quarters, this is another passive transparent to this year. [inaudible]. China is really a growing area for Oplink as reported, the past few quarters especially on the passive side, [inaudible] LTE related roll-out while the product side is very high volume driven, which were China -- we do have some play into that area that's how we saw the growth in China.

Patrick Newton - Stifel Nicolaus

Okay. Thank you. And then just talking about your large data center customer, can you talk about how what that looked like in the quarter and any sense of perhaps when that might again approach 10% of sales?

Peter Lee

It's not 10% yet. And while we hope that to be soon the visibility is not very well. We don't get a very reliable forecast but we do continue to have shipment to this customer we just think that the program project based kind of operating model is kind of a new then therefore we won't be able to give the very good forecast while the orders are flowing we still prepare the material and the capacity -- any upside in the second half of this year.

Patrick Newton - Stifel Nicolaus

So upside in your second half year. And I guess kind of looking back at Tellabs or Korean now, we kind of talked about this last couple of quarters. Can you talk about what you're seeing there and how is -- how is any inventory rationalization kind of work through are you starting to see kind of that return to more normal levels?

Joseph Liu

The revenue wise – but I think it's starting to stabilize. And then while we cannot comment more on customer side it's just from our side we believe that's competition in the -- Tellabs side and probably a good chance for us to get more opportunity to look into -- I think that's we actually have much more from the statements both two – now compared to last year, very busy on few programming, parts, components. So I think overall at least in the next year or two is very positive. But it will take a while to see how this company merge together [in`] profile I think very positive.

Patrick Newton - Stifel Nicolaus

Okay, great. Thanks. And then just one last one from me Shirley I think I missed when you are talking about gross margin expectations. Maybe can you repeat what you said as far as for the third quarter or I am sorry fourth quarter June quarter what do you think gross margin expectations should be?

Shirley Yin

That's, okay. We expect gross margin in June quarter to be slightly up.

Patrick Newton - Stifel Nicolaus

Slightly up.

Shirley Yin

Primarily because of the higher revenues based on expected revenues.

Patrick Newton - Stifel Nicolaus

Okay. And then just to make sure I heard right on the OpEx looks like we're about the same level as the March quarter?

Shirley Yin

We will be slightly lower.

Patrick Newton - Stifel Nicolaus

Okay. Great. That's it from me. Thank you for taking my call.

Shirley Yin

Thanks, Pat.

Joseph Liu

Thank you.

Operator

And I am showing we've no further questions in the queue at this time. Ladies and gentlemen this does conclude our conference for today. We thank you for your participation and you may now disconnect

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