Oplink Comm Now Guiding Lower

For the third quarter, Oplink Communications Inc. (OPLK - Snapshot Report) now expects to report revenues around $39 million $40 million, down from the earlier estimate of $41 million $45 million. Due to the revenue shortfall, the company anticipates that Q3 non-GAAP EPS will fall below its previous guidance of $0.12-$0.16, and it expects a GAAP loss for the quarter resulting from a charge for excess and obsolete inventory.

Second quarter FY08 EPS of $0.18 was well ahead of consensus estimate of $0.07, driven by solid cost cutting as operating expenses of $10 million were sharply lower from $12.4 million in the prior quarter. However, given that the company recorded $7 million in one-time charges and the fact that interest income accounted for roughly 60% of pre-tax income, leads to a cautious view of OPLK’s earnings quality and hence P/E multiple.

Gross margins fell to 23.9%, but were guided higher and toward 30% over time as OCP manufacturing shifts to China and potentially as Tellabs Inc.’s (TLAB - Analyst Report) ROADM revenue declines significantly. Oplink guided to Q3:FY2008 EPS of $0.12-0.16, largely driven by interest income.

However, the pre-announcement also follows the push-out of some of OPLK’s European passive components revenue in the December quarter. Another factor in the projected sequential revenue decline is the need to re-qualify certain products of OCP’s that are now being manufactured in China. We expect revenues from these products to resume as early as Q4 and by Q1:FY2009 at the latest.

While the fall-off in ROADM revenues is disappointing, the silver lining is a decrease in lower margin revenues (which should contribute to further margin expansion) and less customer concentration. The stock is currently trading at 16.6 times our reduced FY2008 EPS estimate of $0.56. We have adjusted our FY2008 estimates accordingly and maintain our Hold rating on the stock with a reduced target price of $12. Our current target price implies a P/E of 21.4 times our FY2008 EPS estimate.

Read the full analyst report on OPLK.

Read the full analyst report on TLAB.