Chip-Maker Oplink Stays a Hold

Oplink Communications, Inc. (OPLK - Snapshot Report) reported revenues of $40.8 million in Q3 of fiscal, up 47.8% year over year but down 16.6% quarter over quarter. GAAP EPS was ($0.19). Non-GAAP EPS of $0.12 beat our and consensus $0.08 estimate.

Going forward, the management expects that sequential revenue declines in the past few quarters will bottom out in the fourth quarter and revenue growth and margin improvement will resume in fiscal 2009. The management now expects to report revenues around $33.0-$37.0 million in Q4, down from Q3:FY08, primarily due to a further decrease in reconfigurable optical add-drop multiplexer (ROADM) sales.

However, margins are expected to improve in Q4 as the company will complete the transfer of Optical Communication Products, Inc.’s (OCP) production to China and realize lower mix of ROADM revenues. We have adjusted our FY2008 estimates accordingly and maintain our Hold rating on the stock with a target price of $12.00.

We expect revenues from OCP’s products that are already being manufactured in China to resume as early as Q4. While the falloff in ROADM revenues is disappointing, the silver lining is a decrease in lower margin revenues and less customer concentration.

The stock is currently trading at 18.8 times our FY2008 EPS estimate of $0.58. Our current target price of $12 implies a P/E of 20.7 times our FY2008 EPS estimate and 16.0 times our FY2009 EPS estimate.

Read the full analyst report on OPLK