Oplink Communication's (OPLK) CEO Joseph Liu on Q4 2014 Results - Earnings Call Transcript

| About: Oplink Communications, (OPLK)

Oplink Communication (NASDAQ:OPLK)

Q4 2014 Earnings Conference Call

August 07, 2014 05:00 p.m. 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

Patrick Newton – Stifel Nicolaus

Operator

Good day, everyone. Welcome to the Oplink Fourth Quarter Fiscal 2014 Earnings Conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Steven Welles, General Counsel. Please go ahead, sir.

Steven Welles

Good afternoon, everyone, and thank you for joining 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. First, I will touch on our results for the quarter and then talk about our strategy for driving continued growth in our core optical business. Then I want to take some time to discuss the comprehensive step of initiatives we have recently announced to position the company for continued success. Finally I will hand it over to Shirly Yin, our CFO, for additional color on the quarter and the financial review.

Revenue for the quarter was $51.5 million, up from $48.1 million in the prior quarter due to primarily to meaningful demand for our optical product in Northern America telecom and datacom market as well as the continued wireless network built out in China. All these results reflect the fundamental strength of our core optical business and we are confident in the long term opportunities and demand for the core business going forward.

I’d like to take a few minutes to talk about strategy for the core business. Over the course of our history, Oplink has emerged as the leading provider of fiber optic product and service that serve as critical building blocks for the telecommunications related industries.

Since starting out as the pure passive component supplier, we have extended our business and now provide integrated optical sub-system, design service and custom solutions to help our customers, innovate and compete cost effectively in a constantly evolving technology landscape.

We are continue to make progress in our vertical integrated design and manufacturing strategy to drive a product roadmap in line with the next generation colorless, directionless, and contentionless or CDC ROADM, as a long haul, mass haul 100G deployment involving integrated passive as active solutions for leading telecom customers.

We are seeing good demand for our 10G portal transceivers and we are developing transceiver to address the expanding 40G and 100G opportunities. We are also seeing growth from web 2.0 datacom data center customers which has traditionally not been a focus for us, we are focused on capitalizing on the significant growth opportunity in our core optical business and confident the business to continue to give significant value over the long term.

Now you all have likely seen the series of strategic initiatives we announced last week to further enhance long term value for our company and our shareholder and as you know we regularly evaluate Oplinks overall strategic direction as well as the optimal mix of cash to meet the need of the business and the direct return of cash to shareholders.

The initiatives resulted from careful review and a deliberation with our board of directors as well as several productive discussions with many of our shareholders. We are committed to driving growth and creating sustainable value for all of our shareholders and we truly believe that these initiatives are the right steps to take to further enhance Oplink’s value and to vision the company for further success.

First, we announced that we have hired Cowen & Company to explore strategic alternative for the Oplink Connected business. We continue to believe Oplink Connected has great long-term potential but we also understand shareholder’s concern regarding the impact of continue investment on our financial results. We believed that refocusing our effort on the core optical business will drive near and long term growth for Oplink for the benefit of all of our shareholders.

We are committed to running an efficient process and have already begun reaching out to potential acquirers. I wanted to emphasize it is still very early in the process and it will be premature to discuss suitors or speculate about timeline or valuation.

We also announced two initiatives design to increase direct return of cash to shareholders, first we announced the initiation of a quarterly dividend, second we announced a $40 million increase to our existing stock repurchase program. We are pleased that our strong balance sheet cash position and solid operating cash flow gives us the flexibility to continue to execute our long term strategic initiatives while increasing current return to shareholders.

Finally, as you know, we also announced a decision to expand our board of the directors by up to two members with relevant industry expertise. Our nominating committee has already identified several potential director candidate and ahs also engaged the service of the National Association of Corporate Directors to further assist us in the process.

Before handing the call off to Shirley, I would like to just to say that since our funding, we have regularly evaluated Oplink's overall business strategy, market position as long term, long range growth opportunities we have also sort out shareholder input and our recent announcement reflect in part the constructive conversations with many of you, our shareholders. We are committed to delivering superior long-term value and believe our recent announcements are reflected of that commitment.

With that, I will turn the call over to Shirley for the financial review. Shirley, please go ahead.

Shirley Yin

Thanks, Joe. And thanks to all of you for joining us today. Revenue for the quarter was 51.1million up from 48.1 million in the prior quarter and up from year-ago fourth quarter revenue of 49.3 million. Our 2-10% customers (inaudible) together they accounted for 30% of revenue for the quarter.

We had GAAP net loss of $4.2 million or $0.23 per share down from net loss of 524,000 or $0.03 per share in the prior quarter and net income of $4.5 million, or $0.23 per diluted share, reported for the fourth quarter of fiscal 2013.

The GAAP net loss for the fourth quarter of fiscal 2014 was due primarily to a $4.9 million excess inventory reserve relating to the Oplink Connected business as part of the Company's recently announced decision to seek strategic alternatives for that business.

For the full 2014 fiscal year, revenue was $204.8 million, an increase of about 12% from fiscal 2013 revenue of $183.4 million and GAAP net loss per share was $0.06 down from net income of $0.69 per diluted share in fiscal 2013. Non-GAAP net income for fourth quarter was $1.8 million, or $0.10 per diluted share up from 270,000 or $0.01 per diluted share reported in the prior quarter and down from $4.7 million or 20% for diluted share reported for the fourth quarter of fiscal 2013. Non-GAAP net income for year was $8.5 million, or $0.44 per diluted share, compared to $17.6 million or $0.91 per diluted share for fiscal 2013.

A GAAP to non-GAAP reconciliation is included in our earnings press release. Our non-GAAP gross margin in the fourth quarter was 29.9% up from 29.4% in the prior quarter, due mostly to slightly higher utilization of our manufacturing overhead because of higher revenue.

For the September quarter, we expect gross margins to be slightly higher due to higher expected revenue.

Turning to our operating results. Total non-GAAP operating expenses were $13.5 million essentially the same as the prior quarter. Out of that $13.5 million in OpEx, $2.3 million were incurred by our Oplink Connected business about the same level as the prior quarter. As we have previously announced, beginning with the September quarter, the Oplink Connected business will be reclassified as discontinued operations.

For the September quarter, we are expecting expenses to be for the continuation operations to be at the same level of the fourth quarter. We expect expenses for Oplink Connected to increase to 3.5 million which include expenses relating to the process to seek strategic alternatives for that business.

Our tax provision expenses were lower in the fourth quarter primarily driven by higher income in jurisdictions with lower tax rates in the fourth quarter. We expect our tax rate for the September quarter to be approximately 20%.

Total headcount at quarter-end was 3,685, down slightly from the prior quarter, due to attrition in direct labor headcount. We closed the quarter with cash and marketable securities of $140 million down from $161 million in the prior quarter. We repurchased 18.2 million worth of stock during the quarter and shares outstanding at the end of the quarter was 17.5 million. Our board of directors has authorized an increase of $40 million to our existing share repurchase program bringing the current repurchase authorization to 70 million.

Oplink has repurchased $33.6 million of the stock during the last two fiscal quarters and intends to continue to repurchase under the expanded authorization. At current price level, we believe that our stock remains a good buy.

We spend $611,000 in CapEx during the fourth quarter and $10.4 million for fiscal 2014 consisting mostly of new capital equipment for our optical business including equipment for our 100G program. We expect total CapEx for fiscal 2015 to be in the $10 million range.

Accounts receivable at the end of the fourth quarter was $43.6 million, up from $37.2 million in the prior quarter due to higher shipments in the last month of the fourth quarter and higher shipments to customers with longer payment terms.

DSOs were 77 days, up from 71 days in the prior quarter. Inventory was $38.8 million, down from $40.3 million at the end of last quarter primarily due to 4.9 million inventory result related to Oplink Connected business.

We expect inventory levels to remain at about this level in the September quarter. We also recently announced that Oplink will initiate a regular quarterly cash dividend to shareholders beginning in the first fiscal quarter of 2015 with a dividend of $0.05 per share of the company’s common stock.

The initial dividend will be payable to shareholders of record as of August 14, 2014 and will be paid on August 28, 2014. For the September quarter, we expect revenue to be in the range of 53 million to 57 million. GAAP net income from continuing operations is expected to be in the range of $0.14 to $0.20 for diluted share. Non-GAAP net income on continuing operations is expected to be in the range of $0.22 to $0.28 per diluted share.

Expenses to be incurred by Oplink Connected business including expected expenses incurred to seek strategic alternative will be approximately $3.5 million which will presented as discontinued operations.

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

Question-and-Answer Session

Operator

(Operator Instructions). We will go first to Patrick Newton with stifle.

Patrick Newton - Stifel Nicolaus

Thank you and good afternoon Jo and Shirley and Peter thank you for taking questions. I guess I want to start with the Oplink Connected side. I know you said it's very early stages and you don't want to talk too much about the asset value. But from a thought process of how the board is looking at this as far as selling the assets, can you help us understand, are interested parties looking at a subscriber metric, or just any type of level that you could put right us provide us with what you think you can derive from the asset?

Steven Welles

I think made a statement that it’s really in the early stage and not appropriate for me to comment on the timeline or the – it would be very speculative so I would rather not to comment too much color on, just beginning the process.

Patrick Newton - Stifel Nicolaus

Although unwilling to maybe speculate on a timeframe, I assume because you have it in discontinued operations, that if this asset were not sold within 12 months, you would move to shut it down?

Steven Welles

I expect probably much-much sooner than that but again we are getting into a speculation, you gave a number I think that would much-much sooner than that. The goal is not to continue with fund, operating losses but sooner the better.

Patrick Newton - Stifel Nicolaus

Okay. And then, surely, of the $2.3 million in Oplink Connected Oplink OpEx in the June quarter, can you help us understand?

Shirley Yin

Yes that 2.3 million is primarily sales and marketing expense and R& D expenses.

Patrick Newton - Stifel Nicolaus

Can you help us understand the rough split? Is that evenly split or is there a majority in one bucket or the other?

Shirley Yin

It’s roughly half and half.

Patrick Newton - Stifel Nicolaus

And then, I guess on the buyback, if we think about some of the strategic initiatives you have made, you would raise that buyback to $70 million. Can you help us -- or I guess what is the exact amount of that allotment that is still available for repurchases?

Shirley Yin

All $70 million after the end of the quarter.

Patrick Newton - Stifel Nicolaus

Okay. Perfect. And then, if we think about your repurchase rate, you did about $18 million this quarter, $15 million in the prior quarter, should we expect a similar accelerated or slower pace as we look at fiscal year ’15?

Shirley Yin

With the buyback depends on timing and price level depends on the market condition and also regulatory incorporate compliance and other factors. We do believe at the current price level our stock is a good buy.

Patrick Newton - Stifel Nicolaus

Okay. And then I guess just shifting to the optical side, Joe, could you discuss a little bit more about the rebound in the data center business, I am assuming this is the same customer that was strong for you previously. Can you let us or I guess talk about what shifted that allowed that project to re-accelerate?

Joseph Liu

We are lucky that we have more than just one. We gain two other two customer in the same what we call web2.0 data center category and there is some for intra data center and some for inter data center application. They are uniquely different but however we are able to serve both and those are continuing trend and then that's the reason why in my script I did mention that this traditionally was not one of our primary focus area and then it is becoming a primary area for us to do take advantage of that volume addressable market.

Patrick Newton - Stifel Nicolaus

And can you comment on the application that you are doing inter and intra data center?

Joseph Liu

There is passive and then there was active, both. On the passive side is more like a data center to data center is more like a win situation and then the intra application would be more transceiver however is more on the longer reach side of the, not the sure reach of the transceiver business.

Patrick Newton - Stifel Nicolaus

So I guess given now that you have a couple more customers in this business, is it fair to say that visibility through fiscal year 2015 is becoming more decent and we should see less lumpy revenue trends?

Joseph Liu

We don’t comment more than a quarter. My visibility right now is only a couple of quarter, so may be a slightly better than just one quarter but still be kind of a pretty seasonal and they can be burst one quarter and then disappear in the next. So they are not the telecom contracts that we can have a longer dependency.

Patrick Newton - Stifel Nicolaus

Okay and then I guess Joe or Shirley on your inventory levels, even with this Oplink Connected write-down, there is still relatively elevated above normalized levels. Can you help us understand if there is any customized products within the inventory side that we maybe experience another write-down? And then if we think about inventory over the next couple of quarters, should we expect it to trend down? And could that cap some potential upside on the gross margin side?

Shirley Yin

We expect next quarter inventory would stay at the same level. The reason is that one is we do have a higher revenue projections and also for some of the key components we do experiencing tend to be longer lead time. So in order to capture the business, we have to provide more buffer inventory. Going forward, just probably the inventory level you are seeing and you are not expecting it come down dramatically.

Patrick Newton - Stifel Nicolaus

Okay. Then I guess on the gross margin on a go forward basis, you have had 29% and change for a couple of quarters. You typically have vacillated as a Company between 30% and 37%, 38% in a peak type of cycle. Should we anticipate as we go through fiscal year 2015 and looking beyond the September quarter that mix should help you push back more towards that kind of mid-30s range?

Shirley Yin

The improvement in gross margin largely depends on product mix and revenue levels. Our current direct labor over-expenses, they tend to be fixed. So as revenue increase we do have leverage from our fixed expenses so we can see gross margin improve.

Patrick Newton - Stifel Nicolaus

And on the mix side, what are your thoughts there?

Shirley Yin

That is based on the current mix.

Patrick Newton - Stifel Nicolaus

Should mix be an improving -- based on the visibility that you are talking about, Joe, should mix be a tailwind or a headwind over the next couple of weeks.

Joseph Liu

Tailwind for sure. There is multiple factors in there. Once we revenue growth and that tremendously helped the manufacturing overhead and I also feel that the product mix we will probably moving into the announce September we will see multiple points of margin improvement. However we can—what I see that the tailwind is probably more than a couple of percentage points.

Patrick Newton - Stifel Nicolaus

I'm sorry. Did I hear you say September should be a couple of hundred of basis points up?

Joseph Liu

Yes.

Patrick Newton - Stifel Nicolaus

I thought Shirley you said earlier up slightly?

Shirley Yin

Yes it’s going to be up slightly in the September quarter but in the longer term we do expect our gross margin to be back to the 33% level.

Patrick Newton - Stifel Nicolaus

Great. Thank you for taking my questions.

Joseph Liu

Thank you, Patrick.

Operator

[Operator Instructions] and with no further questions, I will conclude today’s conference and we do thank you all for joining us today.

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