Oplink Communications, Inc. F4Q10 (Qtr End 06/30/10) Earnings Call Transcript

Aug. 2.10 | About: Oplink Communications, (OPLK)

Oplink Communications, Inc. (NASDAQ:OPLK)

F4Q10 (Qtr End 06/30/10) Earnings Call Transcript

August 2, 2010 5:00 pm ET

Executives

Matt Hunt – IR, The Blueshirt Group

Joe Liu – Chairman, President and CEO

Shirley Yin – EVP and CFO

Analysts

Paul Bonenfant – Morgan Keegan

Vahid Khorsand – BWS Financial

Ajit Pai – Stifel Nicolaus

Christopher Longiaru – Sidoti & Company

Dave Kang – B. Riley

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Oplink Communications fourth-quarter 2010 financial results conference call. During today's presentation, all participants 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, Monday, August 2, 2010; and at this time, I would like to turn the conference over to Matt Hunt.

Matt Hunt

Thank you; and good afternoon, ladies and gentlemen. Thank you for joining us on today’s conference call to discuss Oplink’s fourth quarter and fiscal year 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 the 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 would 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 thanks to all of you for joining us today as we report our fourth quarter and fiscal year 2010 results. We are pleased to report a better-than-expected quarter for Oplink, with revenue increase 16% sequentially to $38.9 million and non-GAAP EPS increase from $0.22 to $0.28. Both revenue and EPS were above the outlook we provided last quarter. It was a strong quarter across all lines and geographies.

We feel that the worldwide carriers are spending more on next-generation optical tools to increase bandwidth and service to many new applications. We have experienced these demand trends for several quarters now, and we were able to ramp up our production capacity as a result of our ongoing expansion efforts. Business is strong in both access and metro markets, FTTx is growing, and so is the metro core and the metro edge. We expect these demand trends to continue. 10% customers for Oplink in the fourth quarter were Tellabs, Alcatel-Lucent, and Huawei. We also had a strong contribution from Sienna, Fujitsu, and Cisco.

In summary, we had a good quarter. The outlook for the coming quarter is very positive. However, long-term visibility continues to be limited.

Now, I will turn the call over 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 fourth quarter was $38.9 million, which compares to $33.6 million reported in the prior quarter. GAAP net income was $3.6 million or $0.17 per diluted share, which includes $1.5 million in stock-based compensation and $999,000 in the amortization of intangibles. On a non-GAAP basis, net income was $6.0 million or $0.28 per diluted share, compared to $4.8 million or $0.22 per diluted share reported in the prior quarter.

For fiscal year 2010, consolidated revenues were $138.8 million. Consolidated GAAP net income for the fiscal year was $11.1 million or $0.51 per diluted share, including $6.0 million in stock-based compensation, $3.8 million in amortization of intangible assets. Our revenue in 2010 was down only slightly over $143.7 million reported in 2009. We effectively managed costs and substantially improved our performance. Non-GAAP net income in 2010 increased to $20.9 million, or $0.97 per diluted share, from $11.0 million or $0.52 per diluted share reported in 2009.

Non-GAAP gross margin for the fourth quarter was 33.5%, slightly down from last quarter, as expected. During the quarter, we substantially increased manufacturing headcount and expenses to increase capacity. For the coming quarter, although we are expecting a substantial increase in revenue, we expect our gross margins to remain flat, due to product mix and increased labor costs in our China manufacturing facilities.

Turning to our operating performance, total non-GAAP operating expenses were $7.4 million, as we continued to invest in R&D and new product initiatives. In addition, the fourth quarter also recorded a full quarter of expenses related to our AMIT acquisition. We expect total operating expenses to continue to increase in the coming quarters, as we continue to spend on R&D.

Interest and other income net for the fourth quarter was $108,000. During the fourth quarter, we recorded $600,000 in gains on disposal of assets, which included $200,000 from sales of certain intangible assets, and $400,000 from dissolving one of our subsidiaries. Our provision for income taxes was $330,000. We expect provision for income taxes in the first quarter to be at a range of $400,000 to $600,000. Total headcount at June 30 was 3,821, up from 3,446 at March 31, which is primarily the result of increases in manufacturing and R&D.

Turning to the balance sheet, we closed the quarter with cash and cash equivalents and investments of $160.3 million, down $24.4 million over the prior quarter, primarily due to our repurchase of 1.5 million shares of common stock for $22.0 million during the quarter. Of this amount, we paid $20.8 million during the quarter, with the remaining paid after quarter end. Shares outstanding at the end of the quarter were approximately 19.6 million shares.

Accounts receivable at the end of the quarter were $29.7 million, up from $28.9 million at the end of the prior quarter. DSOs were 70 days for the quarter. Inventory was $20.9 million, again up significantly over the prior quarter, as we worked to improve our lead time and prepared to meet higher product mix.

As Joe discussed, the environment for our products is picking up, and we are planning for sequential increases in revenue. For the first quarter ending September 30, we expect revenue to be in the range of $47 million to $50 million. This guidance includes $2.0 million of sales that we were unable to ship in the fourth quarter, due to capacity and supply constraints.

GAAP net income for the first quarter of fiscal 2011 is expected to be in the range of $0.23 to $0.29 per diluted share; and non-GAAP net income is expected to be in the range of $0.36 to $0.42 per diluted share, excluding amortization of intangible assets, stock-based compensation, 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

Thank you. Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions)

And our first question comes from the line of Paul Bonenfant with Morgan Keegan. Please go ahead.

Paul Bonenfant – Morgan Keegan

Hi, good afternoon. I wanted to start with a couple of typical housekeeping questions. You mentioned you had three 10% customers in the quarter. I am wondering if you could give us the percent contribution from each.

Shirley Yin

Hi, Paul. We will not provide a breakdown for the percentage of each individual customer, but in total, the three customers accounted for about 41% of our revenue.

Paul Bonenfant – Morgan Keegan

Okay, 41% for all three. So, any change from the, I guess, magnitude contribution, quarter over quarter, I think these were the same three as last quarter.

Shirley Yin

Right.

Paul Bonenfant – Morgan Keegan

Okay, can you give us any additional breakout in terms of revenue, the actives revenue in the quarter or the rotem [ph] revenue?

Shirley Yin

Sure. Active revenue is about $9.3 million, but we won't provide the breakdown in rotem revenue. So the rest is passive altogether.

Paul Bonenfant – Morgan Keegan

Okay, and how about, you had guided toward about $2.0 million in contributions from acquired AMIT in the quarter. Is that about where it came in?

Shirley Yin

Yes, AMIT ended about $2.1 million.

Paul Bonenfant – Morgan Keegan

Okay. Can you give us any color on what the expectation is for AMIT in your guidance for the 21% to 29% sequential growth?

Shirley Yin

It is about $3.0 million.

Paul Bonenfant – Morgan Keegan

Okay. And on the stock repurchase, last of the housekeeping questions, I think you mentioned you had repurchased a total of 1.5 million shares, $20.8 million in the quarter and then the remainder after the quarter end?

Shirley Yin

Actually, before the quarter end, on a share basis, we repurchased 1.5 million shares, but we didn't pay all of it. So a portion of this pay is in the quarter.

Paul Bonenfant – Morgan Keegan

Got you. Okay, now you talk about the – in the forecast for the big sequential increase here, I think you mentioned about $2 million comes from the fourth quarter that you weren't able to deliver. Can you give us some of the updates on capacity constraints? I mean, for the March quarter, I think you mentioned it could have been as high as $6 million to $7 million. You know, were there any left on the table in the current quarter? Is the $2 million, and is that essentially all of it, or was there more that you had to leave on the table there?

Joe Liu

There is probably two more that we were not able to deliver. What the – she mentioned that $2 million was – actually we did ship before the conference call.

Paul Bonenfant – Morgan Keegan

I am sorry. What was that, Joe?

Joe Liu

There was in total about $4 million worth of the goods. And $2 million of them, you know, were indeed, we were able to capture, and it was delivered before the call. And there is $2 million more still in the works.

Paul Bonenfant – Morgan Keegan

So during the quarter, before this call. Got you. Can you give us any updates on capacity constraints and material shortages? Is there any improvement in lead times? I think you mentioned there were 8 to 12 weeks coming out of the March quarter.

Joe Liu

Lead time improves on the circuit area such as the pure passives. I think now the lead time is shorter by about two weeks. On the OMS front, you know, on selected chips, all key materials still in tight lead times. So, in general, I think that part of the reason that the inventory went up is on those strategic components that we decided to take order and take delivery to avoid low lead times. So the situation on the material side is also improving, but we still haven't selected delivery pressure.

Paul Bonenfant – Morgan Keegan

Okay. And for the guidance for next quarter, it seems like if you are coming in at a similar gross margin and that the OpEx would have to increase sequentially. In the past, you have given us kind of a ballpark figure in terms of, you know, how we should think about that, either on a percentage of sales basis or on a dollar basis.

Shirley Yin

Well, last quarter, I think we gave out $1 million, given the magnitude of the increase. So going forward, we would give out this guidance for gross margins and the directional guidance for OpEx and the guidance on EPS. So you can probably work on the math to figure it out.

Paul Bonenfant – Morgan Keegan

Okay. Fair enough. And last question from me, and I will get back in the queue. Why the cautious tone on visibility? It sounds like things have bounced back quite strongly for you.

Joe Liu

Well, you know, this is not – this is kind of a universal phenomenon. You know, we don’t have good visibility beyond, you know, a couple of quarters. And that cautious there is real. That we don’t have, you know, good visibility, you know, outside of a couple of quarters.

Paul Bonenfant – Morgan Keegan

Okay. I will cede the floor with that. Thank you for taking my questions.

Joe Liu

Thank you, Paul.

Shirley Yin

Thanks, Paul.

Operator

Thank you. Our next question comes from the line of Vahid Khorsand with BWS Financial. Please go ahead.

Vahid Khorsand – BWS Financial

Hi, just following through on that visibility comment there, what is it that is keeping visibility clouded in the industry, is it just purely lead times? What is going on?

Joe Liu

You know, the current book-to-bill is quite high. And you know, we, you know, but the order in our long term, and therefore, you know, our visibility is limited for that matter.

Vahid Khorsand – BWS Financial

Okay. Are you still adding headcount in the current quarter?

Joe Liu

We intend to, yes.

Vahid Khorsand – BWS Financial

At the same kind of rate that you added in Q4?

Joe Liu

At a slower pace, because, you know, I think the lead time has improved, and we are doing a lot of the internal shuffling to make sure that we got enough workforce to cover the entire business, because the order coming in, you know, they don't come in on orderly fashion. You know, sometimes they have shifted our requirement. So we have to make our factory more dynamic than just adding headcount. We are focusing more efficiently more so than just the headcount.

Vahid Khorsand – BWS Financial

Okay. So can I assume that if you slack now in your headcount additions that we could see operating margins start to expand, maybe in Q2 and going forward?

Joe Liu

I wouldn't bank on that. Just on the headcount. I mean, you know, you probably know that we had a very challenging quarter to weather the government mandate salary increase, and we are still mitigating that increase as of now. The increase is substantial. I would say probably 20% in the quarter, or 25% in the quarter. So that is, you know, that is secret shock and we are managing that. So in the coming quarter, I think the headcount, I would say that the addition would probably be limited in, you know, no more than 200, and then we are trying to, you know, move around people so that work flows are more than any.

Vahid Khorsand – BWS Financial

Okay, great. Thank you.

Joe Liu

Thank you.

Operator

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

Ajit Pai – Stifel Nicolaus

Good afternoon.

Joe Liu

Hi, Ajit.

Ajit Pai – Stifel Nicolaus

A couple of quick questions. I think the first is looking at your gross margins beyond the next quarter. I think next quarter you have guided to sort of flattish. One is, you have talked about it increasing labor costs, you have also talked about, you know, certain shortages on the components side. But now, if you are looking at your sort of longer-term target, maybe not one quarter all, but about three quarters, four quarters out, what do you think your gross margins can get to?

Joe Liu

When the revenue, you know, as revenue hits $50 million top line, I would tend to think that gross margins should stay not of $35 million, and OpEx should probably be lower than, you know, $18 million.

Ajit Pai – Stifel Nicolaus

Got it. So you could have some pretty healthy operating margins again. So do you think that it is possible to exceed your December sort of peak of 17% operating margins?

Joe Liu

I think there is a possibility with some caution. The general market is good. I think that we can accomplish that. But otherwise, you know, it would be challenging.

Ajit Pai – Stifel Nicolaus

Okay. And then just looking at the headcount, you talked about already being up by around 400 heads I think from the end of last quarter this quarter. I think you mentioned something in excess of 3800. Where do you see your headcount going in the next couple of quarters, do you see it exceeding 4000 or do see it staying at current levels? You said most of the improvement is going to come from productivity of the current folks other than additional headcount, right?

Joe Liu

Yes, you know, there are several factors to consider. One is the product mix. If more passive components versus OMS, then I think we need additional headcount. Secondly is that if we try to be aggressive on the lead time, continue to drive for shorter lead time, then I think we need to have additional headcount. You know, those are the two major factors for us to make decisions, whether we need increases in the quarter or not.

Ajit Pai – Stifel Nicolaus

And how are you leaning now? Are you leaning now towards adding more headcount or what is the focus?

Joe Liu

I just mentioned that, you know, that we intend to increase by about 200 this quarter.

Ajit Pai – Stifel Nicolaus

Got it. Okay, and then, uses of cash. You know, you bought back shares in the quarter, but you have also got a lot of cash on the balance sheet. Can you give us some color as to, you know, what the M&A environment is like, a number of your competitors have been, you know, active in the M&A side and consolidating. How do you see the environment right now from an M&A perspective, and do you expect use your cash more for share buyback, build on the balance sheet, or what are the other options?

Joe Liu

You know, the option is as always. You know, there is multiple ways to wisely use our cash. I think acquisition is one of them, buyback is one of them, and we are also looking at, you know, to grow some new technology organically, or through some small technology acquisitions. Those are all, you know, possible avenues of spending our cash.

Ajit Pai – Stifel Nicolaus

And how does the M&A environment look? Is anything imminent? Are companies more willing to be acquired, less willing? Are you actively engaged in any dialogue?

Joe Liu

No, we are not. And I think that the market hasn’t changed. I think M&A is an ongoing consideration for, you know, companies big or small.

Ajit Pai – Stifel Nicolaus

Got it. And then the last question is, looking at 40 and 100 gig, you know how rapidly do think that the market adoption is going to take place for the two technologies over the next four to 12 months, and can you describe how Oplink is positioned for these technologies?

Joe Liu

We, as you probably know, a lot of our products are servicing in the 50 gigahertz, which fall into the 40 G market. So we are providing, we as a passive components, one of the largest suppliers. You know, obviously, we need to build a platform to offer, you know, all passive components that we will able to serve in the 40 and the 100 G markets. But limited to the passive, you know, technology. So I think that to answer your question is that, yes, we are ready to offer a platform such that we would be able to serve the 40 or the 100 market.

Ajit Pai – Stifel Nicolaus

And how rapidly do think that market will accelerate?

Joe Liu

There are some activities in the 40s and there is limited activity in the 100s. I think that this is always – the rule of thumb is that when the economics make sense, I think the slip will take place. You know, as we speak right at this moment, you know, that turning point is not there yet.

Ajit Pai – Stifel Nicolaus

Okay, got it. Thank you.

Joe Liu

Thank you, Ajit.

Operator

Thank you. Our next question is from Christopher Longiaru with Sidoti & Company. Please go ahead.

Christopher Longiaru – Sidoti & Company

Hey, guys. Congratulations. Great quarter, great guidance.

Joe Liu

Thank you, Chris.

Christopher Longiaru – Sidoti & Company

I wanted to say, just you know, a bigger picture here, you know, your capitalizing on the expansion in these networks, which is kind of desperately needed, but could you give us an idea of where we are in that transition, and you know, and how you think the progression goes from here?

Joe Liu

You know, this is a very broad question. You know, let us talk about from the access side. I think we saw the FTTx accelerated on a global basis, meaning that not only the Japanese, but also in Northern America as well as in China, those were the major markets that started to deploy, you know, fiber to the node, or fiber to the curb, or even fiber to the home.

Christopher Longiaru – Sidoti & Company

Right.

Joe Liu

And that, you know, in conjunction with, you know, wireless access on, you know, video, not only in the desktop, so that also drives the bandwidth requirement. So all in all, I think my statement on the application now driving the demand of the infrastructure buildup is you know, so in other words, the business is real. It is not, we are – let us build out the infrastructure and then the application will come. So I think that we are experiencing these – this video will be a part of our daily life, and that, you know, is going to eat up a lot of the bandwidth, and then they will completely demand, the increase on the – not only on the type, but also the service.

Christopher Longiaru – Sidoti & Company

Got you. All right. That is all I have for now.

Joe Liu

Thank you, Chris.

Operator

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

Dave Kang – B. Riley

Good afternoon. So first question is, how much was legal fees related to the Chinus [ph] litigation?

Shirley Yin

It is not as much as we originally forecast.

Dave Kang – B. Riley

So I would say that it is $250,000, but then I guess it is getting –

Shirley Yin

That is right.

Dave Kang – B. Riley

Okay.

Joe Liu

It is in the –

Dave Kang – B. Riley

Is it five or six figures?

Joe Liu

Five.

Dave Kang – B. Riley

Five. And then, so can you give us an update, you know, what Chinus are planning to do and all that?

Joe Liu

I cannot comment, you know, at this point.

Dave Kang – B. Riley

Okay. And then, I guess your R&D was up about $400,000. Was that, mostly what, SFP+, 8x8 rotems, any color there? And where does it go from here, should we expect similar increases going forward, or is it going to taper off?

Shirley Yin

I think we will continue to increase spending in R&D, and Joe can comment on the projects.

Joe Liu

Yes, basically, like earlier we answered to Ajit that we wanted to offer the 40 and 100 g platform, consequently, those are the necessary R&D spending, to make sure that we are indeed able to supply all of these key passive components as well as OMS solutions to our customers. So they are our next generation platform.

Dave Kang – B. Riley

Okay. But then you also talked about SFP+ as well as I think you guys are working on FIH rotems. Any updates on those two products?

Joe Liu

You know, those have made pretty good progress, as well as the SFP package. You know, those are all getting new design wins. So, you know –

Dave Kang – B. Riley

When can we expect some contribution from these three products?

Joe Liu

New rotem will probably pick up pretty soon and also on the low rich SFP, that is also had some new wins, as well as the SFP WDM lasers. So, you know, all in all, I mean, those are all growing areas.

Dave Kang – B. Riley

Now, the FIH, that is all in-house or are you still sourcing from Coedna?

Joe Liu

Yes, WSS is still outsourced.

Dave Kang – B. Riley

Okay.

Joe Liu

But we don’t have more than one outsource supplier.

Dave Kang – B. Riley

Okay. So I guess margin-wise, we shouldn’t expect any changes then?

Joe Liu

Approximately, yes.

Dave Kang – B. Riley

Okay, okay. And then CapEx, I mean, what should we expect for CapEx this year?

Shirley Yin

In the coming year, probably we are looking at some $8 million to $10 million.

Dave Kang – B. Riley

All right. And then, I guess the last question is, last week, I am sure you heard about the AT&T announcement about three vendors, and I guess, well Tellabs was not among those three vendors. How, if any, would that impact your business with Tellabs, especially rotems and maybe just use this platform as an opportunity to clarify the situation?

Joe Liu

Very specifically, no impact to offering. The products related to AT&T and Tellabs is primarily on the router side of the business. Those were the copper 8500. And then, you know, our project is only related to the 7100 transfer as well as switch. So the 7100 is going very well, nicely at Tellabs. So, you know, business-wise, I think not only no impact to I think our competitors, companies like ours probably will not get impact either.

Dave Kang – B. Riley

All right. Thank you.

Operator

Thank you. Our next question is a follow-up from the line of Paul Bonenfant with Morgan Keegan. Please go ahead.

Paul Bonenfant – Morgan Keegan

Yes, hi. Just one more in the category of housekeeping, I guess. Could you give us revenue by geography in the quarter? Is that something you still disclose?

Shirley Yin

Yes. North America is about 33% and Europe, it is about 22%, and the rest is Asia.

Paul Bonenfant – Morgan Keegan

Okay. And in the current quarter, did you mention that you saw strength from any particular geography?

Joe Liu

Business for us, Northern America is strong, Europe is strong, and I think China is also strong. For the current quarter.

Paul Bonenfant – Morgan Keegan

Thanks again for taking my question.

Joe Liu

Thank you, Paul.

Operator

Thank you. And ladies and gentlemen, this does conclude the Oplink Communications fourth quarter 2010 financial results conference call. If you would like to listen to a replay of today's conference, please dial 1800-406-7325 or 303-590-3030, using the access code of 4336089 followed by the pound key. We would like to thank you for your participation today and you may now disconnect.

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