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Executives

Matt Hunt – IR, The Blueshirt Group

Joe Liu – Chairman, President and CEO

Shirley Yin – EVP and CFO

Analysts

Ajit Pai – Stifel Nicolaus

Vahid Khorsand – BWS Financial

Todd Kaufman – Raymond James

Oplink (OPLK) F1Q2011 Earnings Call October 28, 2010 5:00 PM ET

Operator

Good day ladies and gentlemen. Thank you for standing by and welcome to the Oplink Communications first-quarter 2011 financial results conference call. [Operator Instructions.] This conference is being recorded today, Thursday, October 28, 2010. I would like to turn the conference over to Matthew Hunt. Please go ahead sir.

Matt Hunt

Thank you, and good afternoon, ladies and gentlemen. Thank you for joining us on today’s conference call to discuss Oplink’s first quarter fiscal year 2011 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, Chairman 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 first quarter of fiscal 2011 results. We're pleased to report a record quarter, with revenue reaching almost $50 million. Revenue increased about 48% year-over-year, and about 28% sequentially. We reported non-GAAP EPS of $0.41 as compared to $0.28 in the prior quarter and $0.21 in the prior year first quarter.

We did not increase [inaudible] headcount during the quarter. Our factory capacity is now at a level that we believe can efficiently handle current demand, and we believe that we have the production flexibility to meet a meaningful increase in demand without any further significant increase in headcount.

We increased our R&D engineering headcount during the quarter by about 30 to help broaden our product offerings, and we have introduced several new devices during the quarter.

Our 10% customers for the quarter we Huawei and Tellabs, and together those two account for approximately 37% of our total revenue. We continue to believe that video streaming and other bandwidth-intensive applications are driving long-term demand for fiber optics across the network, particularly in the access and metro] equipment market overall. FTTx is growing and so are the metro core, metro edge, and Long-Haul markets.

Our outlook for the second quarter is positive, but we are seeing a bit of softness in demand for selected product lines. Production lead times of selected parts and modules have been shortened to our previous normal level of four to six weeks. We remain focused on controlling expenses and meeting normalized demand.

We look forward to reporting to you again next quarter. 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 first quarter was $49.6 million, up 28% from the prior quarter and 48% over the prior year. GAAP net income was $5.6 million, for $0.28 per diluted share, which includes $1.7 million in stock-based compensation and $1 million in amortization of intangibles.

On a non-GAAP basis, net income was $8.3 million, or $0.41 per diluted share, compared to $6 million, or $0.28 per diluted share reported in the prior quarter. Non-GAAP gross margin for the first quarter was 33.9%, up slightly over the 33.5% reported in the prior quarter.

Margins were improved in the quarter as a result of scaling revenue. We also increased labor costs in China. However, our revenue and volume increases were able to offset these increases. We expect margins to be at a similar level next quarter.

Turning to our operating performance, total non-GAAP operating expenses were $7.7 million, up from $7.4 million reported in the fourth quarter as we continue to invest in R&D and new product initiatives. Sales and marketing costs also increased, primarily due to higher commission expense, driven by higher revenue. These increases were partially offset by decreases in G&A expenses. We expect total operating expenses to remain at a similar level in the second quarter.

Interest and other income net was $57,000. Gross interest income for the first quarter was $130,000, largely offset by foreign currency losses. Our provision for income taxes in the quarter was $881,000, primarily due to an increase in taxable income in foreign tax jurisdictions. We expect our provision for income taxes in the current quarter to be at a similar level.

Total headcount at September 30 was 3,855, up from 3,821 in the prior quarter. Our increases were primarily in R&D.

Turning to the balance sheet, we closed the quarter with cash, cash equivalents, and investments of $160 million, down only slightly over the prior quarter. We generated $5.5 million from operations and repurchased 6.5 million of our common stock. Actual shares outstanding at the end of the quarter were approximately 19.4 million.

Accounts receivable at the end of the quarter were $34.2 million, up over 29.7% in the prior quarter. DSOs were 67 days, as compared to 70 days in the prior quarter, due to improved collections and timing of shipments during the quarter. Inventory was $24.3 million, up significantly over $20.9 million in the prior quarter. While we continue to improve our lead time and prepare to meet higher product demand, we strategically increased buffer inventory to be able to capture sales opportunities.

For the second quarter ending December 31, we expect revenue to be in the range of $50 million to $53 million. GAAP net income for the second quarter of fiscal 2011 is expected to be in the range of $0.28 to $0.34 per diluted share, and non-GAAP net income is expected to be in the range of $0.41 to $0.47 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

[Operator Instructions.] Our first question comes from the line of Ajit Pai with Stifel Nicolaus. Please go ahead.

Ajit Pai – Stifel Nicolaus

I've watched a number of your customers and one of your competitors this morning actually guide down quite significantly, talking about some inventory build as well as push outs, and one of them is one of your top two customers. So could you give us some color as to what you're seeing actually in system level demand as well as what's driving your continued growth while some of your customers are showing weakness?

Joe Liu

We have not seen that order cancelling and push out like you suggest. We have mentioned that in selected product lines we have seen some softness, and shortened lead times, but overall I think that the current quarter, meaning the December quarter, still relatively strong.

Ajit Pai

And so the second question is Tellabs is talking about a pretty decent ramp in their ROADM business. What is your content in that business and is there someone else that's gaining share there or are you well-entrenched?

Joe Liu

I think you used the right word. We are well-entrenched, and I think we are one of the significant beneficiaries in the Tellabs 7100 series, including ROADM. And more than just ROADM we are also in the other sub-systems categories.

Ajit Pai

And the third question would be, you know the ONet, which is a company that manages to capitalize and considers you a competitor. Are you seeing greater competition from local Asian vendors in competing for the Huawei business as well as Asian businesses? Or do you think you're still regaining share now over the past couple of quarters now that you're no longer supply constrained?

Joe Liu

I think clearly there's business that's shared by these new players, including as you suggested ONet is one of the players. But I think that our share at Huawei stays at the level compared the prior quarter. Obviously Huawei is growing, so we have not captured that growing share. We have our share at Huawei.

Ajit Pai

And then the last question is just about your gross margin. You're showing a phenomenal sequential increase in your revenue, but your gross margin improved only slightly, and I think Shirley mentioned that a large part of that was your labor prices in China going up. But from this point onwards, after it's gone up, as your revenues increase, would we expect to see greater operating leverage going forward?

Shirley Yin

Yeah, that would be the case, but also the change in margin largely depends on the product mix as well. Assuming the same mix, that's correct.

Ajit Pai

Right, but during the quarter was there a major shift between your passives and your actives, your actual transponders - the active business - or was it similar to what it's been?

Joe Liu

It has been pretty much tracked and our OMS business is about 40% and the passive business is like 42%, and the active is probably south of 20%.

Operator

The next question is from the line of Vahid Khorsand – BWS Financial. Please go ahead.

Vahid Khorsand – BWS Financial

Do you feel that the increase in overall industry inventory could result in some pricing pressure down the road?

Joe Liu

No doubt about it. That's always an ongoing battle.

Vahid Khorsand

And since you guys have increased capacity as far as headcount in manufacturing your competitors are doing the same. At what point do you think that it becomes a factor?

Joe Liu

You have noticed my statement - from the get go I mentioned that we have not increased production direct labor during the quarter, and I think that we're managing quite well, ahead of the curve trying to improve efficiency over just headcount. So I think the pressure for us to reduce workforce at this point is not in the picture.

Vahid Khorsand

Everyone's been talking about cancellations and push outs but are you seeing any new projects, any new design win activity this quarter?

Joe Liu

Strictly talking about the September quarter, I think that we saw strength across the board, meaning just about every customer we saw strength. And many of the strengths coming out of the new design wins. Moving to the December quarter, I think that we guided slightly up, by 4%-5%. So a [great] deal of some of that I attribute to new design wins as well.

Operator

[Operator Instructions.] The next question is from the line of Todd Kaufman with Raymond James. Please go ahead.

Todd Kaufman – Raymond James

You indicated in your opening remarks that you're seeing a bit of softness and lead times shortening, and I was wondering if you could give more granularity specifically as it relates to what particular product or product areas are seeing that softness.

Joe Liu

The passive business that we have in itself has maybe six different fabrication lines. Out of the six different fabrication lines two of them are seeing obvious shortening. Those are in the passive component category. And that relates to amplifier components as well as certain switch components.

Todd Kaufman

Those end customer demand changes, is that an abrupt adjustment recently, or was this more of a gradual change in terms of order input that you saw through the quarter?

Joe Liu

I would say that gradually we sensed that. The softness doesn't come overnight, so it's a gradual buildup.

Operator

[Operator Instructions.] And I'm showing there are no further questions at this time. Ladies and gentlemen, this does conclude the Oplink Communications first quarter 2011 conference call. If you would like to listen to a replay of today's conference, please dial 1-800-506-7325 or 1-303-590-3030 and enter in the access code of 4378037. Thank you for your participation. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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