Executives
Matthew Hunt - Investor Counsel, The Blueshirt Group
Joe Liu - President and Chief Executive Officer
Shirley Yin - Senior Vice President of Finance, Chief Financial Officer and Controller
Analysts
Michael Coady - B. Riley & Co.
John Harmon - Needham & Company
Tim Savageaux - Merriman
Sam Dubinsky - Oppenheimer & Co.
Analyst for Ajit Pai - Thomas Weisel Partners
Oplink Communications, Inc. (OPLK) F4Q08 Earnings Call August 14, 2008 5:00 PM ET
Operator
Welcome to the Oplink Communications fourth quarter fiscal year 2008 financial results conference call. (Operator Instructions) I would now like to turn the conference over to Matthew Hunt of the Blueshirt Group.
Matthew Hunt
Thank you for joining us on today's conference call to discuss Oplink's fourth quarter and fiscal year 2008 financial results. This call is being simultaneously webcast on the Investor Relations section of the company’s corporate website at investor.oplink.com.
Joining me on the call today are Joe Liu, CEO; Tom Keegan, President 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 would cause actual results to differ from forward-looking statements can be found in Oplink’s periodic filings with the SEC.
The forward-looking statements and risks stated on this conference call are being based on current expectations as of today and Oplink assumes no responsibility to and does not intend to update or revise them whether as a result of new development or otherwise.
Now I would like to turn the call over to Joe Liu, CEO of Oplink.
Joe Liu
We have a solid quarter reporting consolidated revenue of $37.3 million slightly above the outlook that we provided last quarter. This wrapped up a record fiscal year of 2008 during which we reported consolidated revenue of $176.3 million.
In addition we also announced that our Board of Directors has approved an additional stock purchase or stock repurchase program of $20 million. Finally today we also announced that I will transition myself to Executive Vice Chairman at the beginning of next year. At that time I will begin working on the reduced schedule and Tom Keegan will become CEO of Oplink. Lynne LeBlanc while remain as Chairman of the Board.
As most of you know Tom was appointed President of Oplink in May after serving as Vice President of Business Development and General Council. Tom’s career in business and the law has been diverse working in senior rolls both in business and as independent lawyer advising company’s conducting business in Asia. He speak fluent Mandarin, has extensive firsthand knowledge of challenges and opportunities facing technology company’s operating in Taiwan and China.
He has been a key contributor to the management team since joining Oplink. I look forward to working together with him over the coming month and as a member of the Board over the coming years. Today Tom will take us through the discussion of the fourth quarter results and the outlook for the coming quarters. So, please go ahead Tom.
Tom Keegan
First let me say that I am very excited about the future of Oplink and my roll and the future of the company. Joe’s leadership has help build a strong and profitable company. I am delighted to be working with Joe, Shirley Yin and the rest of Oplink’s talented management team as we build on Oplink’s past success.
Turning to our results for the fourth quarter; build to our large traditional customers for our passive product lines were ahead of our expectations. 10% customers in the fourth quarter were Huawei and Tellabs with good contributions also coming from Cisco, Nortel and Alcatel Lucent.
Metro core and metro edge markets continue to show a strong growth and will remain important areas to focus for our business. As expected revenue from the OCP transceiver business was substantially lower than the prior quarter as production declined while transferring manufacturing to China.
We completed the transfer of manufacturing to China during the quarter, which has taken three quarters, but through which we achieve significant manufacturing and operating efficiencies. We are now turning our focus to ramping production in order to achieve better leverage from our facilities and meet increasing customer demand across the business. This will involve some spending in the near-term to prepare for our future growth opportunities.
For the first quarter of 2009 we are planning for revenue to be in the range of $38 million to $42 million. We expect non-GAAP net income in the range of $0.13 to $0.17 per share, which will excludes certain non-cash or non-recurring charges.
Looking ahead to fiscal 2009, we’re optimistic about our business. Our passive business is solid with good components revenue and very strong OMS demand. We are now positioned to strengthen the OCP transceiver business and to capitalize on new designs and our low cost structure to build a stronger consolidated optical business.
With that I will turn the call over to Shirley for a detailed review of fourth quarter and fiscal year 2008 financials.
Shirley Yin
Consolidated revenue for the fourth quarter was $37.3 million. This compares to $40.8 million reported in the prior quarter. The sequential revenue decline was expected as we transferred OCP’s manufacturing to China.
GAAP net loss for the fourth quarter was $791,000 or $0.04 per share. This compares to a GAAP net loss of $3.9 million or $0.19 per share reporting in the prior quarter. Consolidating non-GAAP net income for the fourth quarter was $2.8 million or $0.13 per diluted share. This compare to a non-GAAP net income of $2.5 million or $0.12 per diluted share reported for the prior quarter.
A reconciliation of these non-GAAP measures to that GAAP equivalent can be found in our earnings release. For fiscal year 2008, consolidated revenue were $176.3 million, consolidated GAAP net loss for the fiscal year was $6.8 million or $0.31 per share. Consolidating non-GAAP net income was $13.9 million or $0.63 per diluted share.
I will now turn back to our fourth quarter financial results where I will discuss our results only on a non-GAAP basis. Our consolidating non-GAAP gross margin for the periods was 28.7% as compared to 25.2% in a prior quarter. In the fourth quarter, our gross margins benefit from strong performance in our passive components business. We’ve been expecting lower mix of growth in revenue and lower revenue from active components.
In addition, we gained operational efficiencies on our transfer of manufacturing to China that also contributed to improve gross margins. In the coming quarter, we expect to increase manufacturing headcounts to ramp up production to meet customer demand. As a result we expect gross margins to be flat or slightly down in the first quarter. Overall, consolidated operating expenses declined in the fourth quarter as a result of our cost cutting efforts as we continued to improve operating efficiencies.
In the first quarter, we expect operating expenses to be mostly inline with the fourth quarter. R&D expenses were $3 million in the fourth quarter, down from $3.3 million in the prior quarter as the result of our efforts to off shore certain R&D activities. Sales and marketing expenses in a quarter were $2.4 million, down slightly from the prior quarter. G&A expense in the fourth quarter was $3.1 million and changed from the prior quarter.
Interest income for the fourth quarter was $853,000 down over the prior quarters due to a lower interest environment. Our tax provision for the fourth quarter was $137,000; we anticipate tax rate in fiscal 2009 to remain at a level similar to fiscal 2008. Shares outstanding at June 30, increased slightly to $20.7 million. Weighted averaged fully diluted shares outstanding were $21.1 million for the quarter.
Turning to the balance sheet, we generated $4.1 million in cash from operations during the quarter and increased our cash balance to $142.1 million up from $138.3 million in the prior quarter. Accounts receivable at the end of the quarter was $34.2 million with DSOs at 79 days. Consolidated inventory increased slightly at the end of the quarter to $28.3 million in preparation for anticipated shipments in the coming quarter.
As Tom discussed, we expect revenue for the fourth quarter to be in the range of $38 million to $42 million with GAAP earnings to be in the range of $0.02 to $0.06 per diluted share. Non-GAAP net income per diluted share is expected to be in the range of $0.13 to $0.17 excluding amortization of intangible assets, stock-based compensation and other non-cash or non-recurring charges. We look forward to providing you with an update on the progress of our business on our first quarter 2009 conference call.
We will go ahead with the Q&A session.
Question and Answer Session
Operator
(Operator instructions) And our first question comes from the line of Michael Coady with B Reilly; please go ahead.
Michael Coady – B. Riley & Co.
I wanted to try and drill down a little bit more in the revenues in terms of the ROADMs revenues and then the Tellab revenues, the Tellab non-ROADM revenues; would it be possible to break that out?
Joe Liu
The ballpark ROADM for the quarter is 6.5. The non-ROADM is about one. So total is about 7.5 and it will constitute about approximately 21%.
Michael Coady – B. Riley & Co.
Okay thanks and then your expectations that are factored into the Q1 guidance for ROADMs as well as what kind of pick up you think you might see from the OCP business?
Joe Liu
The OCP business is about $3 million to $4 million.
Michael Coady – B. Riley & Co.
Okay and Q1 and then what was that in Q4?
Joe Liu
No, no I mean increase, from quarter-to-quarter. I think we guided in the prior quarter that June quarter would be the lowest ever and then total combined for the quarter is slightly over eight and we’re looking at somewhere around 12 for the OCP business for the first quarter.
Michael Coady – B. Riley & Co.
Okay, great. Thanks and then just I’ll ask one more question and jump back in the queue. You mentioned some design wins in the press release and you talked in the past about some activity that you’ve had with tallabs and new projects etc. Could you talk about the progress with those and your general expectations in either Q1 or just fiscal ’09?
Joe Liu
Those design wins may not take fruition soon, but I think the ongoing design wins already are good enough. I think the outlook for tallab in the first quarter, we have some growth built in.
Operator
Thank you. Your next question comes from the line of John Harmon, with Needham & Company; please go ahead.
John Harmon - Needham & Company
A couple of questions please. I think you were talking about that your goal was to get the remaining OCP business to break-even in the quarter. Did you achieve it or did you achieve it towards the end of the quarter and I mean is that the OCP contribution behind your sequentially higher EPS guidance for Q1.
Joe Liu
We have not reached our break-evens for the June quarter, but anticipate that we will break-even in the September quarter. In other words Q1 we will reach that, assuming that we can hit the $12 million target.
John Harmon - Needham & Company
Okay and then clearly from that point onwards it will be your profit contributor. Moving onto your ROADM business I think you said you expected to kind of bottom out at about $5 million a quarter, because that mean, it goes down a little bit in Q1 or is it essentially there?
Joe Liu
Well, actually we have factored it in. There will a couple of million dollars more than the June quarter. So June is at 6.5, so we’re looking 8.5.
John Harmon - Needham & Company
And could it growth from there or would it kind of steady, at that steady stable level?
Joe Liu
We don’t have that visibility, but I think that the product that we’re associating with, the 7,100 is still very strong.
John Harmon - Needham & Company
Okay thank you and just a last question. You talked about the new products on the OCP side; to what extent was their R&D machine disrupted through the changes; in other words when do you think new products might be available?
Joe Liu
The new products, some of them will be available even as early at this week, I mean this quarter, but most of them will probably take through a benefit in the coming second half of the fiscal, which is the beginning of calendar 2009 and then including some of the 10G pluggables and some of the redesign of the 2.5 and below.
Operator
Thank you. Our next question comes from the line of Tim Savageaux with Merriman; please go ahead.
Tim Savageaux – Merriman
Onto a couple of questions about the business; it looks as if Tellabs and the ROADM business in general maybe active a little bit better that you thought it might heading into the quarter. I wonder if you can give us any color to why that might be either a slower than expected ramp with potential second sources, greater than expected demand out of Tellabs, but I’ve been expecting that business to comedown a little more sharply. I wonder if you might be able to comment on that?
Joe Liu
I love to comment on that probably privately, this is really into the competition and I generally apprise my competitors and I’m not trying to talk down them. So, I might open to have a call after the conference call.
Tim Savageaux – Merriman
Okay. It sounds good and also with regard to the guidance moving forward where you do seem to expect a pretty healthy increase although all pretty much derived from OCP; is that really a result of the re-qualifications in kind of fixing previous problems or should we read anything into overall industry or customer related demand from that increase?
Joe Liu
It is purely, that we sharpened our skill set in terms of transferring the OCP products. As you know that we’re wearing the OCP shoes and then those OCP businesses were highly customized and don’t have a whole lot of volume, but has pretty good gross margin in general. These kind of small volume varieties, some of them go back 5 year or 10 years.
It tends to be difficult in transfer and then we experience some material and supply chain issues and some IC obsolescence, just all kinds of the transfer issues. Now, we finally have our good hands on that granted the transfer or the shutdown of the operation was maybe too fast and didn’t have all the preparation done before the shutdown.
Tim Savageaux – Merriman
And one final question, I’ll pass it on. Obviously Oplink has a lot of fairly company specific issues moving its results around over the last year. However, I do want to ask as you kind of look at the industry wide demand across your customer base, the context of a fair bit of concern about systems guys and carries slowing down, what kind of demand trends are you seeing now as sort of in the quarter and moving forward, in a general sense compared to maybe what you saw six months or a year ago?
Joe Liu
I think within six months ago we probably don’t have that kind of a confidence; in other words the confident level for our business I think is stronger than six ago, mainly is because the segment that we’re focusing on is the metro edge and metro core, particularly in the core area and also in the edge area, but in the metro not the edge, but the metro edge it continues to be very, very strong and so we don’t have order problems, we have deliver problem, we have delivery challenges right now.
Operator
Thank you. Our next question comes from the line of Sam Dubinsky with Oppenheimer; please go ahead.
Sam Dubinsky - Oppenheimer & Co.
Ericsson used to be a fairly important customer for you guys and I think that may have caused a hick up in past. Could you just comment on demand from this customer and then I have a couple of follow-ups.
Joe Liu
Give me one second to give you the percentage. Ericsson has gradually comeback and they’re about 5% for the quarter, so they came from 2%, 3% up from the prior quarter.
Sam Dubinsky - Oppenheimer & Co
So Ericsson is ordering again basically.
Joe Liu
The answer is that they always ordered the volume that is picking up; I will say double during the quarter.
Sam Dubinsky - Oppenheimer & Co
Okay and then on the OCP side, when you acquired this business at one point it was north of the $60 million run rate; I know you’re deemphasizing certain products as you re-qualify others; what is the theoretical, like a steady state run rate for this business, to once the product that are already qualified and ramping?
Joe Liu
I would say that, the short-term goal is to hit the $12 million mark and as soon as our new design come out, I thing we’ll probably have more market share, but at the same time as the ASP erodes, I think that one could shoot that in the fourth quarter timeframe; we could take the company to it’s $60 million mark gain.
Sam Dubinsky - Oppenheimer & Co
Okay, you’re going to do that in 2009?
Joe Liu
In 2009, yes.
Sam Dubinsky - Oppenheimer & Co
Okay and so are you guiding the ROADM business to be about $8.5 million in the OCP distribute of 12 which infers that half the business maybe down; could you maybe explain why it’ll be down. Is that just weakness in certain verticals, is it pricing?
Joe Liu
Well, if you break it down to the specifics, this is in the high-end of the range, but this management team has traditionally been conservative.
Sam Dubinsky - Oppenheimer & Co
And also my last question; could you maybe just breakdown what the OCP or the actives margins were this quarter, gross margins and what they should be next quarter?
Joe Liu
We don’t normally breakdown the gross margin by actives versus passive, but in general I think the active gross margin is lower than the passive. So sort of there is a spectrum from as low as 20% to as high as 40%, 50%. The blended average for the quarter is 28.7%.
Sam Dubinsky - Oppenheimer & Co
But the OCP business has dropped in terms of they are operating above 20% gross margin verse when you acquire the business I think the gross margins were at.
Joe Liu
Single digit.
Operator
Your next question comes from Ajit Pai with Thomas Weisel Partners; please go ahead.
Analyst for Ajit Pai - Thomas Weisel Partners
I have a couple of quick questions; first it has to do with operating expenses. Now when you have completed your streamlining of OCP are you at your optimal run rate in terms of general and administrative and sales and marketing in the R&D side of the business or is there more production to come.
Joe Liu
I think we intend to move up the R&D slightly and keep the sales marketing inline and then there is little room for the G&A to go down further as we fully integrate the OCP business. So overall I think we’re still looking at somewhere between 8 and 8.5.
Analyst for Ajit Pai - Thomas Weisel Partners
Okay and now as Tom mentioned earlier there would be I guess additional investments in terms of R&D throughout this year to ramp OCP; what quarter will they be kind of emphased on. Is that now next two quarters and then R&D will flatten out or how should we think about that?
Joe Liu
That’s a ongoing effort; I think we have invested quite a bit. Since last year however the financial seems to indicate that we have some advantage, largely is because the selected R&D offshoring and we now have a sizable R&D center in Central China, a place call Wuhan, we have over 100 employees there; at the same time we’re trending our U.S. R&D Group to about 20, 25 employees and I think that’s the direct results. We cut the R&D, it used to be like 50 down by about a half.
Analyst for Ajit Pai - Thomas Weisel Partners
Okay great thanks. A couple of additional questions; I first wanted to ask how much was Huawei in the quarter?
Joe Liu
Huawei is approximately 20%.
Analyst for Ajit Pai - Thomas Weisel Partners
Okay great and the last question, I just wanted to ask in terms of the pricing on the market and what are the pricing trends currently, both if you can comment separately on the passive side and active side.
Joe Liu
In general as soon as the delivery on capacity is a part of the conversation. I think that the pricing are starting to firm up just operating experience in the quarter. The pressure is very, very low, so the price erosion is very, very slow.
Operator
Thank you. Your next question is a follow-up from the line of Michael Coady with B. Riley. Please go ahead.
Michael Coady - B. Riley & Company, Inc.
Thanks just a housekeeping question Shirley. The CapEx in the quarter, I see the cash flow statement, but you’ve got that CapEx netted with sales of equipment, so just what it was on a kind of a net CapEx basis in fiscal year 2008 and then your expectations for ’09 please.
Shirley Yin
I think we are looking at about $6 million CapEx in the next fiscal year. So, it’s about $1.5 million each quarter.
Michael Coady - B. Riley & Company, Inc.
Okay and then a separate question Joe or Tom for you; the OMS business with Huawei has been somewhat of a non-started, does that look like it might pick up in 2009 again?
Joe Liu
I don’t think so. I think that the Huawie’s strategy of viewing this OMS would compete with their current strategy. So, I don’t think that we will have further fruition on the OMS side with Huawei. On the other hand we’ll probably have more competency or module level of the business for the coming year with Huawei.
Operator
Thank you. Next question is a follow-up from the line of Tim Savageaux with Merriman; please go ahead.
Tim Savageaux - Merriman Curhan Ford & Co.
Yes, one detail as well. I believe last quarter you may have provided at least sometime in the past an indication of what the top five customers may have been in the aggregate as a percent of revenue; perhaps you did as well, but I missed it, but I wanted to ask that question and also certainly in the context of the management changes that you’ve indicated, may we ask for an update on the company’s view and also in the context of share buyback and a cash balance, but I think may continue to afford you a little less flexibility as a potential continued buyer. Joe as you exit the decision through the second half of the year, what your current thoughts are in industry consolidation? What sort of role you see Oplink playing going forward. Thanks.
Joe Liu
Okay. So, you got three questions, let me answer you one-by-one. The five major customers as I indicated, the more than 10%; the Tellabs is at 21%; Huawei is approximately 18%, Nortel, ALU and Cisco are the trading three and they are at 7%, 7% and 5%.
The share buyback; at the end of the quarter we have $142 million cash or equivalent and the announced $20 million buyback is approximately 15% of the cash that we have. The third question regarding to the industry consolidation and Oplink’s role, as you know that we are in a little bit difference business; we’re in the passive side of the business and we try to look at from both end, we will continue to look at other smaller passive players at the same time we will look at the active opportunity, all primarily offshore and on the other hand if we have other major active player looking at the passives then I think we’re opened to all strategic alternatives and we are not quite finished with the OCP integration yet, so we have not really spent much time looking at major M&A opportunities.
Operator
Thank you. There are no further questions. That will conclude the Oplink Communications fourth quarter fiscal year 2008 financial results conference call. We thank you for your participation today.
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