Oplink Communications, Inc. (OPLK)

F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

October 30, 2008, 5:00 pm ET

Executives

Matt Hunt – IR, The Blueshirt Group

Tom Keegan – President

Shirley Yin – CFO

Joe Liu – CEO

Analysts

Sven Eenmaa – Thomas Weisel Partners

Michael Coady – B. Riley & Company

John Harmon – Needham & Company

James Young Yohan [ph] – Kingdom Reach [ph]

Presentation

Operator

Good afternoon, ladies and gentlemen, and welcome to the Oplink Communications First Quarter 2009 Fiscal Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) To remind you, this conference is being recorded today, Thursday, October 30^th, 2008. I would now like to turn the conference over to our host, Matt Hunt, Investor Relations. Please go ahead sir.

Matt Hunt

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us on today's conference call to discuss Oplink's first quarter 2009 financial results. This call is being simultaneously webcast on the ‘Investor Relations’ section of the Company’s website at oplink.com. Joining me on the call today are Tom Keegan, President of Oplink; Shirley Yin, CFO; and Joe Liu, CEO.

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 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 developments or otherwise.

Now I would like to turn the call over to Tom Keegan, President of Oplink. Please go ahead, Tom.

Tom Keegan

Hello and thank you for joining us on the call today as we report our first quarter fiscal 2009 results. Joining me on the call today are Joe Liu, our CEO and Shirley Yin, our CFO.

I will briefly outline our business results for the first quarter and discuss our outlook for the December quarter. Shirley will then give you a more detailed review of the first quarter and we will then open the call for your questions.

As you know from our press release, we reported revenues of $43 million, slightly above the range that we provided last quarter, and non-GAAP EPS of $0.15, which is within the range we provided last quarter. We generated $4.3 million in cash from operations during the quarter, increasing our balance of cash and investments to $146.7 million, further strengthening our balance sheet.

Gross margins for the quarter were 25.4% on a non-GAAP basis, down from 28.7% in the prior quarter. The decrease in gross margins was primarily due to the increase in shipments of active products, which currently have lower margins than our passive products, as well as a less favorable mix of passive products shipped during the quarter. Our gross margins for the second quarter will continue under pressure from competitive pricing, potentially lower volume, and poor product mix.

We took an inventory charge of $4.1 million for excess and obsolete inventory, which led to our reporting a GAAP net loss of $3.4 million, or $0.16 per share. This charge resulted primarily from changed sales expectations for certain active products.

In the first quarter, 10% customers were Tellabs, Huawei, and Alcatel-Lucent.

We are cautious about the impact of current macro conditions on telecom capital spending. For the December quarter, we are planning for revenue in the range of $34 million to $38 million, and non-GAAP EPS of $0.03 to $0.07. We are taking steps to ensure that our costs are closely aligned with revenue so that we continue to generate positive cash flow. We are diligently working on new design wins from our customers in the Metro Core and Edge space. We remain optimistic about long term demand for telecom bandwidth and for our product portfolio and design wins in our principal markets of Metro Core and Edge space.

I will now turn the call over to Shirley for a more detailed review of financials for the first quarter of 2009.

Shirley Yin

Thanks, Tom, and thanks to all of you for joining us today as we report results for the first quarter of fiscal year 2009. Revenue for the first quarter was $43 million, up from $37.3 million reported in the prior quarter as we increased manufacturing in china to meet demand for our active product lines.

GAAP net loss for the first quarter was $3.4 million, or $0.16 per share, which included stock compensation expense, amortization of intangibles, and $4.1 million inventory charge that Tom discussed earlier. This compares to a GAAP net loss of $791,000, or $0.04 per share reported for the June quarter.

On a non-GAAP basis, net income was $3.2 million, or $0.15 per diluted share as compared to $2.8 million, or $0.13 per diluted share reported in the prior quarter. Non-GAAP

Non-GAAP gross margin for the quarter was 25.4%, down from 28.7% in the prior quarter. We expect gross margins in the December quarter to be down from this level due to lower utilization of manufacturing overhead resulting from the lower sales volume. Including the $4.1 million inventory charge, GAAP gross margins in the quarter were 14.4%.

Our operating expenses were slightly lower than in the prior quarter. R&D expenditures rose slightly while G&A was down a bit due primarily to lower legal cost. Interest and other income for the first quarter was $927,000, up slightly from the prior quarter. Our provision for income taxes was $456,000.

Turning to the balance sheet, we generated $4.3 million in cash from operating activities in the first quarter and closed the quarter with $146.7 million in cash and cash equivalents, short and long term investments. All of our cash is safely invested, and we have no liquidity issues.

Accounts receivable at the end of the quarter was $32.7 million, down slightly over the prior quarter with DSO’s at 69 days. Inventory was down from $28 million to $24.1 million in the first quarter.

As we look ahead, we are cautious about the overall macro environment and are planning for revenue in the December quarter to be in a range of $34 million to $38 million, with GAAP net loss in a range of $0.03 to $0.07 per share, and non-GAAP EPS to be in the range $0.03 to $0.07 per diluted share, excluding amortization of intangible assets, stock-based compensation and other non-cash or non-recurring items. We expect to continue to generate positive cash flow from operations in the December quarter.

We will be out talking to investors over the next few weeks at conferences and in conjunction with one-on-one marketing schedules, and we hope to see all of you there. In the interim, we will take questions through the operator. Please go ahead, operator.

Question-and-Answer Session

Operator

Thank you, ma’am. (Operator instructions) And our first question comes from Ajit Pai with Thomas Weisel Partners. Go ahead, please.

Sven Eenmaa – Thomas Weisel Partners

Hi, this is Sven Eenmaa calling in for Ajit. I have a couple of questions, if I may. First, wanted to ask about your revenues from Tellabs in the current quarter and what is the outlook there?

Tom Keegan

Sven, how are you doing?

Sven Eenmaa – Thomas Weisel Partners

Good.

Tom Keegan

This quarter, our percentage was approximately 23% from Tellabs and the outlook with Tellabs do remain strong, but we are being very cautious about the number. We think its percentage is probably going to remain in its historical percentage, but we are being cautious about the gross number revenue. So we see some downward side both on the core passive and on the ROADM as well.

Sven Eenmaa – Thomas Weisel Partners

And in terms of the inventory writedowns you guys took in the current quarter, which products were there or what the areas were impacted?

Tom Keegan

The primary source of that came from the active product line and it resulted – basically as the business changed over time and we are getting the inventory process under control and looking towards the future orders that are going to be out there, we reassessed the salability of some of those products and were obliged to take the writedown.

Sven Eenmaa – Thomas Weisel Partners

Okay. By any chance are you changing focus on any of the (inaudible) products or which – is there a change in product strategy, which areas you will be targeting or is the focus still the same as per last quarter?

Tom Keegan

In the – this quarter the focus will be substantially the same. On an ongoing basis we review our transceiver product portfolio with a view toward making sure we are keeping the strongest margins and over time reduce or replace with new designs the lower margin products.

Sven Eenmaa – Thomas Weisel Partners

Okay. And the last question, I just wanted to ask the remaining above 10% customers’ specific revenue shares in the current quarter.

Tom Keegan

The remaining 10% customers, you know Huawei and Alcatel-Lucent–

Sven Eenmaa – Thomas Weisel Partners

Yes.

Tom Keegan

Now, Huawei would be about 14% – 13% to 14%, and ALU about 10%.

Sven Eenmaa – Thomas Weisel Partners

Okay, great, thank you.

Operator

Okay, thank you. And our next comes from Michael Coady with B. Riley and Company. Go ahead please.

Michael Coady – B. Riley & Company

Thanks, good afternoon.

Shirley Yin

Hello, Michael.

Tom Keegan

Hello, Michael.

Michael Coady – B. Riley & Company

Hi, could you – just to go a little bit further and to the revenue segmentation what were the revenues from OCP in the quarter and then what was the core passive business?

Tom Keegan

And for Q1, on the active side, we did between 13 and 14 on the OCP side and then on the – the balance of course was the old Oplink business which comprised probably close to – just under 6.5 and seven for ROADM with 22 plus for the core passive business.

Michael Coady – B. Riley & Company

Okay. And let’s see – did you repurchase any stock during the quarter?

Tom Keegan

We did not yet.

Michael Coady – B. Riley & Company

Okay. So I take it that’s on the table. This window open a couple of days after the – after you report, and so in a couple of days I guess next week?

Tom Keegan

The window does open typically somewhere between two and three days after our – I believe it’s two days.

Michael Coady – B. Riley & Company

Okay. And you are (inaudible) in the market I mean given where the stock is and it probably trades down a little bit on the news today?

Tom Keegan

We can't talk about exactly what we are doing and what the standards are, but we still have our plan in place.

Michael Coady – B. Riley & Company

Okay, great. The real estate you own both in the United States and China, do you have an estimated ballpark market value for that?

Tom Keegan

We do, but we don’t typically give it out. And especially since it’s fluctuating right now it would be powerless [ph] to give perhaps information that may have been three months old.

Michael Coady – B. Riley & Company

Okay, fair enough. And in terms of the gross margin being under pressure I think you or maybe Shirley mentioned a couple of things, competitive pressures in the active components, and then just poor product mix in general. What is your – what’s the outlook for that. We only have more than one quarter timeframe, what kind of visibility do you have in terms of the gross margin improving, I realize that under utilization was part of that and on the revenue outlook. But just in terms of the product mix specifically how do you anticipate that shifting after the December quarter?

Tom Keegan

That’s a good question, Mike. Well, I will tell you initially that we have in this environment poor visibility into Q3 and Q4. So with that as a context, yes we plan to address the issue and yes there is some under utilization. We are under pricing pressure as a result of the macro conditions. There are across the board basically a smaller addressable market, a piece of pie if you prefer that everybody is scrambling for that creates that pricing pressure. From our point of view, what we need to do is to roll out lower cost products and even more so new designs where we have that window of time with the margin improves and we plan on doing that both on the active and the passive side. That’s something that’s going to take some time. In the mean time we are also going to be looking closely at our operating cost to make sure that costs are aligned with the current revenue and just squeeze some efficiencies out perhaps where we hadn’t done so when we were increasing manufacturing to meet what we thought was going to be increased demand in the coming quarters.

Michael Coady – B. Riley & Company

Okay, thanks.

Tom Keegan

This is going to change that.

Michael Coady – B. Riley & Company

Got you. Makes sense. And just one more question. In terms of how you saw the quarter progress, was it pretty strong up until September or – we’ve heard from so many other companies, mid-September really stuck [ph] off. And then how has it trended since then through October? I mean obviously you’ve provided your guidance, but is it stabilized and now would you characterize the outlook as very poor or it is very uncertain?

Tom Keegan

Very uncertain would be my first off-the-cuff reaction. Let me give some color to that. I would say yes, we became more concerned in September as September started to bring in some noise in the industry as well as among our customers about pushing orders out. And that created corresponding price pressure. In this quarter, of course, we have guided down substantially, so there is obviously some conservative estimates on the revenue side. And we have greater uncertainty because there is perhaps in this macro environment greater risk of customers canceling orders after they place them. So uncertainty is the word that comes to my mind.

Michael Coady – B. Riley & Company

Yes, okay. Thank you very much. Good luck in this environment.

Tom Keegan

Thank you, Michael.

Joe Liu

Thank you, Michael.

Operator

Thank you. (Operator instructions) And our next question comes from John Harmon with Needham and Company. Go ahead, please.

John Harmon – Needham & Company

Hi, good afternoon.

Tom Keegan

Hi, John.

Shirley Yin

Hi, John.

Joe Liu

Hello, John.

John Harmon – Needham & Company

So, I would like to ask you another question about inventory charge you took. Was it from one specific customer and you said it was actives but could you be more specific what kind of product it was?

Tom Keegan

It was not one specific product, John. It related basically to the OCPU products as opposed to the OCPA products and that comes up primarily because there is a very large mix of products, very large portfolio of products on the OCPU side and much less so on the OCPA side. And so there is no one customer or one product that result in that. Rather, it’s a – it was a kind of an ongoing alignment – realignment of our business and then we have a drop down in forecast for business and so as we are required to we go through inventory and forecast the prospects for sale over the coming months as our accountant sets the standards and we were obliged to take that write-off.

John Harmon – Needham & Company

Okay. I mean it’s about a third of (inaudible) quarters of sales for OCP and it is kind of a big amount. Is this a once-a-year thing or a once-a-quarter reevaluation?

Tom Keegan

Obviously I hope this is going to be few and far between. In this situation here, we had basically increasing controls on inventory as we get our handle around the inventory that came in from OCPU, but also there was change in business as we eliminated some products by design as well as we moved our manufacturing to China, there were customers who were changing orders, they were ordering – the products they were ordering. And like I said, it was a whole spectrum of products. As you know, it’s a product line where there tends to be small number of orders and a large number of parts. And so we have to keep at least some supply for some critical components in place in order to meet that demand. So that’s the situation looking forward we look closely at so that we can basically bring down our exposure to that and we – as we speak are increasing controls on that. And I am confident and hopeful that the worst of it is over. But the nature of the business is such that with market changes and with customer demand changes there is some risk of that it stays there.

John Harmon – Needham & Company

Okay, thank you. And I believe you said it was your goal to get OCP profitable in September. Did you do it and if you did it given the revenue outlook can you sustain it?

Tom Keegan

We, as you know, we don’t do separate accounting for OCPU, but I’d have to say that with the decrease in margin I don’t think we did do in September.

John Harmon – Needham & Company

Okay. And I think you said you expected the gross margins to be down in December. Can you quantify that? Did you give us a range or give us a better idea of where you are expecting to go?

Tom Keegan

Not a specific number. We – a lot of it depends on – we gave a fairly wide range on the revenue, you noticed, reflects conditions and are being cautious at that time. So a lot depends on capacity utilization, but certainly down 2% is not beyond the realm of possible.

John Harmon – Needham & Company

Okay. And just finally the – looking at your sequentially downward revenue guidance, is that customer-specific or is that really just across the board? And someone asked about this, but what kind of things are your customers tell you? Are they – things slowdown in their business or are they just cautious?

Tom Keegan

I would say that we are getting across the board requests to push out orders among a spectrum of customers, no one particular customer. Obviously, if you look at our revenue in our major customers, you know who the major customers are, but across the board from small to large customers we are getting instances of push-outs and so that’s what reflects both our cautiousness and the lower revenue numbers.

John Harmon – Needham & Company

Okay. Thank you very much.

Tom Keegan

Thank you, John.

Joe Liu

Thank you, John.

Operator

Okay, thank you. (Operator instructions) Okay, and we do have a question from James Young Yohan [ph], go ahead, please – with Kingdom Reach [ph].

James Young Yohan – Kingdom Reach

Hi Tom and also hello Joe, who I know sitting there in the background somewhere.

Tom Keegan

Hey, Jim, how are you?

James Young Yohan – Kingdom Reach

Hi, guys. Just a quick question on the ROADM, I just – $7 million in the quarter, was that correct?

Tom Keegan

Correct.

James Young Yohan – Kingdom Reach

And then Tom or anyone can provide kind of a little outlook going forward for that group, where are you on high-port count devices, where are you on 50-gig devices, and where are you on gross margin for that line?

Tom Keegan

I think you are right on the pass [ph] number. We are guiding down somewhat probably between four and six ROADM for next quarter. And in terms of future, we are working very closely with our customer on that, both for 88 channels on the 100 gigahertz and we are working very closely with (inaudible) 50 gigahertz. We think we have excellent opportunities there, but I don’t think on the 50 gigahertz you are going to see any impact on revenue for sometime for few quarters yet. But we are in the mix. We are very, very hopeful that that’s going to be productive for us, but the outlook for next quarter is in the four to six range.

James Young Yohan – Kingdom Reach

Right. Probably still a growth business when you look out to the rest of the fiscal year?

Tom Keegan

We see it as a growth business.

James Young Yohan – Kingdom Reach

Great. Alright thanks guys.

Tom Keegan

Thank you, Jim.

Joe Liu

Thank you, Jim.

Operator

Okay and thank you. And ladies and gentlemen, that does conclude our conference for today and we’d like to thank you for your participation and for using AT&T Executive Teleconference. Now, disconnect.

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