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OPLK > SEC Filings for OPLK > Form 10-Q on 7-Feb-2014All Recent SEC Filings

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Form 10-Q for OPLINK COMMUNICATIONS INC


7-Feb-2014

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking statements

This report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words "expect," "anticipate," "intend," "believe," "estimate" or "assume" or similar language. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. In evaluating our business, you should carefully consider the information set forth below and under the captions "Risk Factors" in addition to the other information set forth herein. We caution you that our business and financial performance are subject to substantial risks and uncertainties. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this Report on Form10-Q.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying Notes in this report, and Management's Discussion and Analysis of Financial Condition and Results of Operations, related financial information and Audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013 filed with the Securities and Exchange Commission ("SEC").

Overview

We design, manufacture and sell optical networking components and subsystems. Our products expand optical bandwidth, amplify optical signals, monitor and protect wavelength performance, redirect light signals, ensure bandwidth distribution connectivity and provide signal transmission and reception within an optical network. Our products enable greater and higher quality bandwidth over longer distances, which reduces network congestion and transmission cost per bit. Our products also enable optical system manufacturers to provide flexible and scalable bandwidth to support the increase of data traffic on the Internet and other public and private networks.

We offer our customers design, integration and optical manufacturing solutions ("OMS") for the production and packaging of highly-integrated optical subsystems and turnkey solutions, based upon a customer's specific product design and specifications. We also offer solutions with lower levels of component integration for customers that place more value on flexibility than would be provided with turnkey solutions.

We have also a new business division, Oplink Security, which has developed and is selling wireless security systems for homes and small businesses that can be monitored and managed with a Smartphone app. The security systems are plug-and-play solutions that are easy to install and eliminate the need for professional installation. The Oplink Security division has no meaningful revenue to date. In the quarter ended December 29, 2013, expenses incurred by the Oplink Security division were approximately $2.5 million. Of the $2.5 million, $2.2 million was included in operating expenses primarily related to research and development and sales and marketing expenses and $0.3 million was included in cost of revenues and negatively impacted our gross profit margin. The process of developing a new business involves considerable risk and uncertainty, and as such, the commercial success of our new Oplink Security division cannot be guaranteed. Please see Part II, Item 1A - Risk Factors for a discussion of some of these risks.

Use of Estimates and Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure. On an ongoing basis, we evaluate our estimates, including those related to product returns, accounts receivable, inventories, intangible assets, warranty obligations, contingencies and litigation.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. These estimates and judgments are reviewed by management on an ongoing basis and by the audit committee of our board of directors at the end of each quarter prior to the public release of our financial results.


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As of the date of the filing of this quarterly report, we believe there have been no material changes to our critical accounting policies and estimates during the three and six months ended December 29, 2013 compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013 as filed with the SEC. Additional information about these critical accounting policies may be found in the "Management's Discussion & Analysis of Financial Condition and Results of Operations" section included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

Results of Operations

Revenues

                                                                    Percentage                                                        Percentage
                        Three Months Ended             Change         Change               Six Months Ended               Change        Change
                                                                (In thousands, except percentage)
                  December 29,      December 30,                                    December 29,      December 30,
                      2013              2012                                            2013              2012
Revenues             $    50,433      $     45,099     $  5,334            11.8 %    $     105,215      $     89,983     $ 15,232            16.9 %

The increase in revenues for the three months ended December 29, 2013 compared to the three months ended December 30, 2012 was primarily due to an increase in revenues in our transmission products as a result of the ramp up of new products. In addition, revenues from our routing and switching products and amplifier products increased as a result of increased unit shipments for these products. Partially offsetting these increases was a decrease in revenues in multiplexing products as a result of lower unit shipments in the three months ended December 29, 2013 compared to the three months ended December 30, 2012.

The increase in revenues for the six months ended December 29, 2013 compared to the six months ended December 30, 2012 was primarily due to an increase in revenues in our transmission products resulting from the new products ramp up. In addition, revenues from routing and switching products increased driven by higher unit shipments. Partially offsetting these increases was a decrease in revenues in our multiplexing products as a result of lower unit shipments. Furthermore, the average selling prices for most of our products declined, which is a characteristic of the industry in which we operate.

Historically, a relatively small number of customers have accounted for a significant portion of our revenues. Our top five customers, although not necessarily the same five customers, together accounted for 51% and 50% of revenues for the three months ended December 29, 2013 and December 30, 2012, respectively, and 52% and 50% of revenues for the six months ended December 29, 2013 and December 30, 2012, respectively.

For the three months ending March 30, 2014, we expect our revenues to be in the range of $48 million to $52 million.

Gross Profit

                                                                      Percentage                                                         Percentage
                           Three Months Ended            Change         Change               Six Months Ended               Change         Change
                                                                   (In thousands, except percentage)
                     December 29,      December 30,                                   December 29,      December 30,
                         2012              2012                                           2012              2012
Gross profit            $    15,946      $     16,529     $  (583 )          (3.5 %)    $     33,643      $     33,159     $    484              1.5 %
Gross profit margin            31.6 %            36.7 %                                         32.0 %            36.9 %

Gross profit decreased for the three months ended December 29, 2013 compared to the three months ended December 30, 2012 primarily due to higher direct material costs and increased labor costs and manufacturing overhead expenses, partially offset by higher revenues. The gross profit was positively impacted by sales of previously reserved inventory of $0.6 million and $1.1 million for the three months ended December 29, 2013 and December 30, 2012, respectively.

Gross profit increased for the six months ended December 29, 2013 compared to the six months ended December 30, 2012 primarily due to higher revenues partially offset by higher direct material costs and increased labor costs and manufacturing overhead expenses. The gross profit was positively impacted by sales of previously reserved inventory of $1.3 million and $2.1 million for the six months ended December 29, 2013 and December 30, 2012, respectively.

Our gross profit margin decreased for the three and six months ended December 29, 2013 compared to the three and six months ended December 30, 2012 primarily due to higher material costs as a percentage of revenues and higher labor costs as a percentage of revenues, partially offset by lower manufacturing overhead expenses as a percentage of revenues.


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We expect our gross profit margin for the three months ending March 30, 2014 to be slightly lower compared to the three months ended December 29, 2013 due to lower average selling prices resulting from annual price negotiations..

Research and Development (R&D)

                                                                   Percentage                                                       Percentage
                         Three Months Ended            Change        Change               Six Months Ended              Change        Change
                                                                (In thousands, except percentage)
                   December 29,     December 30,                                   December 29,      December 30,
                       2013             2012                                           2013              2012
Research and
development           $    6,813      $      5,829     $    984            16.9 %    $     13,603      $     11,260     $  2,343            20.8 %
Stock-based
compensation                 304               257           47            18.3 %             713               638           75            11.8 %
  Total expenses      $    7,117      $      6,086     $  1,031            16.9 %    $     14,316      $     11,898     $  2,418            20.3 %

Research and development expenses increased $1.0 million and $2.4 million for the three and six months ended December 29, 2013 compared to the three and six months ended December 30, 2012. The increase was primarily due to higher salary and other employee-related compensation expenses and an increase in R&D material and consulting expenses attributable to new product development activities

Research and development expenses for the Oplink Security division were $1.1 million for the three months ended December 29, 2013, compared to $0.8 million for the three months ended December 30, 2012, and were $2.2 million for the six months ended December 29, 2013, compared to $1.5 million for the six months ended December 30, 2012.

We expect our research and development expenses, excluding stock-based compensation expense, to remain at approximately the same level for the three months ending March 30, 2014 compared to the three months ended December 29, 2013, for both our optical business and our Oplink Security division.

Sales and Marketing

                                                                     Percentage                                                       Percentage
                         Three Months Ended            Change          Change              Six Months Ended               Change        Change
                                                                 (In thousands, except percentage)
                   December 29,     December 30,                                    December 29,      December 30,
                       2013             2012                                            2013              2012
Sales and
marketing             $    4,011      $      3,349      $    662            19.8 %     $     7,784      $      6,561     $  1,223            18.6 %
Stock-based
compensation                 436               361            75            20.8 %           1,062             1,137          (75 )          (6.6 %)
  Total expenses      $    4,447      $      3,710      $    737            19.9 %     $     8,846      $      7,698     $  1,148            14.9 %

Sales and marketing expenses increased $0.7 million and $1.1 million for the three and six months ended December 29, 2013 compared to the three and six months ended December 30, 2012. The increase was primarily due to increases in salary and other employee-related compensation expenses as a result of an increase in headcount in our Oplink Security division. In addition, commission expense increased as a result of higher revenue.

Sales and marketing expenses for the Oplink Security division were $1.0 million for the three months ended December 29, 2013, compared to $0.5 million for the three months ended December 30, 2012, and were $1.8 million for the six months ended December 29, 2013, compared to $0.9 million for the six months ended December 30, 2012.

We expect our sales and marketing expenses, excluding stock-based compensation expense, to remain at approximately the same level for the three months ending March 30, 2014 compared to the three months ended December 29, 2013, for both our optical business and our Oplink Security division.


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General and Administrative

                                                                       Percentage                                                         Percentage
                          Three Months Ended             Change          Change               Six Months Ended               Change         Change
                                                                   (In thousands, except percentage)
                    December 29,     December 30,                                      December 29,      December 30,
                        2013             2012                                              2013              2012
General and
administrative         $    2,203      $      2,108      $      95             4.5 %      $     4,269      $      4,263     $       6             0.1 %
Stock-based
compensation                  418               427             (9 )          (2.1 %)           1,352             1,133           219            19.3 %
  Total expenses       $    2,621      $      2,535      $      86             3.4 %      $     5,621      $      5,396     $     225             4.2 %

General and administrative expenses increased $0.1 million for the three months ended December 29, 2013 compared to the three months ended December 30, 2012. The slight increase was primarily due to increases in salary and other employee-related compensation expense partially offset by lower outside consulting service fees.

General and administrative expenses increased $0.2 million for the six months ended December 29, 2013 compared to the six months ended December 30, 2012. The increase was primarily due to an increase in stock-based compensation expense as a result of additional grants in the six months ended December 29, 2013 compared to the six months ended December 30, 2012.

We expect our general and administrative expenses, excluding stock-based compensation expense, to remain approximately at the same level for the three months ending March 30, 2014 compared to the three months ended December 29, 2013.

Interest income and other, Net

                                                                     Percentage                                                         Percentage
                         Three Months Ended            Change          Change               Six Months Ended              Change          Change
                                                                  (In thousands, except percentage)
                   December 29,      December 30,                                    December 29,      December 30,
                       2013              2012                                            2013              2012
Interest and
other income, net     $       20        $      412     $   (392 )          (95.1 %)     $       52         $     678     $    (626 )          (92.3 %)

Interest income and other, net decreased $0.4 million for the three months ended December 29, 2013 compared to the three months ended December 30, 2012. The decrease was primarily attributable to a gain recognized related to the release of an accrued liability associated with the OCP acquisition in fiscal 2007 during the three months ended December 30, 2012 while we had no such gain in the three months ended December 29, 2013.

Interest income and other, net decreased $0.6 million for the six months ended December 29, 2013 compared to the six months ended December 30, 2012. The decrease was primarily attributable to a gain recognized related to the release of an accrued liability associated with the OCP acquisition in fiscal 2007 and a gain recognized related to sales of marketable equity securities during the six months ended December 30, 2012 while we had no such gains in the six months ended December 29, 2013.

Provision for Income Taxes

As a multinational corporation, we are subject to taxation in the United States and in foreign jurisdictions. The taxation of our business is subject to the application of multiple and sometimes conflicting tax laws and regulations as well as multinational tax conventions. Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations and tax holidays in each geographic region, and the availability of tax credits and carryforwards. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws themselves are subject to change as a result of changes in fiscal policy, changes in legislation, and the evolution of regulations and court rulings. Consequently, taxing authorities may impose tax assessments or judgments against us that could materially impact our tax liability and/or our effective income tax rate.


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We are required to make our best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. We recorded a tax provision of $0.4 million and $1.1 million for the three months ended December 29, 2013 and December 30, 2012, respectively, and a tax provision of $1.2 million and $1.9 million for the six months ended December 29, 2013 and December 30, 2012, respectively. The effective tax rate for the three and six months ended December 29, 2013 differed from the statutory rate primarily due to the mix of foreign earnings, non-deductible stock-based compensation and a research and development deduction in China. The effective tax rate could fluctuate in the future due to changes in the taxable income mix between various jurisdictions.

Although we file U.S. federal, various state, and foreign tax returns, our only major tax jurisdictions are the United States, California, Taiwan and China. The tax years 2005 to 2012 remain open in several jurisdictions.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through issuances of equity. As of December 29, 2013, we had cash, cash equivalents and short-term and long-term investments of $176.2 million and working capital of $210.6 million.

We believe that our current cash, cash equivalent and short-term investment balances will be sufficient to meet our operating and capital requirements for at least the next 12 months. We may use cash and cash equivalents from time to time to fund our acquisition of businesses and technologies. We may be required to raise funds through public or private financings, strategic relationships or other arrangements. We cannot assure you that such funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our failure to raise capital when needed could harm our ability to pursue our business strategy and achieve and maintain profitability.

Six Months Ended December 29, 2013

Our operating activities provided cash of $9.1 million in the six months ended December 29, 2013, a decrease of $1.1 million, compared to the six months ended December 30, 2012. The net cash provided by operating activities in the six months ended December 29, 2013 was primarily attributable to a net income of $3.5 million adjusted by non-cash charges of $8.0 million, partially offset by a decrease in working capital of $2.4 million. Non-cash charges in the six months ended December 29, 2013 included $4.3 million in depreciation and amortization expense and $3.3 million in stock-based compensation expense. Net cash used by working capital related items was primarily driven by an increase in inventory of $10.1 million and a decrease in accounts payable of $3.9 million, partially offset by a decrease in accounts receivable of $9.4 million and an increase in accrued liabilities and other liabilities of $2.2 million.

The increase in inventory in the six months ended December 29, 2013 as we continued to build inventory to meet customers' demand for shorter lead-time. In addition, inventory for our Oplink Security business increased significantly in the six months ended December 29, 2013 compared to the six months ended December 30, 2012. In order to maintain an adequate supply of product for our customers, we must carry a certain level of inventory. Our inventory level may vary based primarily upon orders received from our customers, our forecast of demand for these products and lead-time for materials. These considerations are balanced against risk of obsolescence or potentially excess inventory levels. We generally expect the level of inventory to vary from one period to another as a result of changes in the level of sales.

The decrease in accounts payable in the six months ended December 29, 2013 was due to a timing of payments to our vendors.

The decrease in accounts receivable in the six months ended December 29, 2013 was primarily due to early payments from one of our major customers with longer payment term and timing of shipments. We typically bill customers on an open account basis with net thirty to ninety day payment terms. We would generally expect the level of accounts receivable at the end of any quarter to reflect the level of sales in that quarter and to change from one period to another in a direct relationship to the change in the level of sales. Our level of accounts receivable would increase if shipments are made closer to the end of the quarter, if customers delayed their payments, or if we offered extended payment terms to our customers, both of which are more likely to occur during challenging economic times when our customers may have difficulty gaining access to sufficient credit on a timely basis.

The increase in accrued liabilities and other liabilities in the six months ended December 29, 2013 was primarily due to increases in salary payable and bonus payable in China.

Our investing activities used cash of $17.8 million in the six months ended December 29, 2013 primarily due to purchases of investments of $81.9 million, partially offset by cash proceeds from sales and maturities of investments of $74.1 million. In addition, we used $10.0 million to purchase property and equipment. We expect net capital expenditures to be approximately $15 million in fiscal 2014. This estimate includes $10.0 million in net capital expenditures in the six months ended December 29, 2013.


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Our financing activities used cash of $0.1 million in the six months ended December 29, 2013 due to $1.4 million in tax withholding payments related to net share settlements of restricted stock units and $0.2 million of cash spent on the repurchase of our common stock, partially offset by $1.5 million in proceeds from issuance of common stock in connection with the exercise of stock options and purchase of our common stock through our employee stock purchase plan.

Six Months Ended December 30, 2012

Our operating activities provided cash of $10.2 million in the six months ended December 30, 2012, a decrease of $1.6 million, compared to the six months ended January 1, 2012. The net cash provided by operating activities in the six months ended December 30, 2012 was primarily attributable to a net income of $6.8 million adjusted by non-cash charges of $7.1 million and changes in net working capital of $3.8 million. Non-cash charges in the six months ended December 30, 2012 included $3.8 million in depreciation and amortization and $3.1 million in stock-based compensation expense. Net cash used by working capital related items was primarily driven by an increase in accounts receivable of $6.2 million and a decrease in account payable of $0.7 million, partially offset by an increase in accrued liability and others of $2.5 million.

The increase in accounts receivable in the six months ended December 30, 2012 was primarily due to higher revenue in the first six months of fiscal 2013 compared to fiscal 2012, timing of shipments and slow collection over the holidays.

The decrease in accounts payable was due to a timing of payments to our vendors and a lower level of inventory purchases.

The increase in accrued liabilities and other liabilities in the six months ended December 30, 2012 was primarily due to increases in accrued bonus and business taxes payable in China and a higher income tax payable as a result of higher net income in the first six months of fiscal 2013.

. . .

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