Oplink Warrants a Hold Rec

Oplink Communications, Inc. (OPLK - Snapshot Report) recently reported its Q4:FY08 revenue and EPS above our and consensus estimates, and with margins above our projected levels. The company reported solid growth in its passive components and OMS business, as well as better than expected revenue in ROADMs which more than offset bottoming OCP product sales that were adversely affected by manufacturing transition related capacity constraints.

OPLK guided Q1:FY09 sales above consensus estimates and Q1 pro forma EPS with the guidance range midpoint below consensus estimates. While we are encouraged by the results delivered and the guidance provided in the quarter we are taking a slightly more conservative stance on the ramp of the acquired OCP business and are modestly reducing our FY09 revenue and pro forma EPS estimates. With the company’s cash balance accounting for 53% of its market cap, we view the company’s announced repurchase plan as an incremental positive.

OCP product sales declined in the June quarter, reaching about $8 million, as OPLK completed OCP’s manufacturing transition to China, and the company faced capacity limitations in the quarter. The modest performance in actives was offset by strong OMS and passive component sales. For Q1:FY09, the company expects OCP product revenues to improve by about $3 million-$4 million, with expectations that the OCP business will reach break-even level in the quarter.

Supporting the OCP growth targets, in addition to a sold backlog, the company appears to be making progress with new product initiatives with some of the new transceivers expected this quarter but with most of the launches expected in H1:CY09. We maintain our Hold recommendation on the shares. The stock is currently trading at 16.0 times our FY2009 EPS estimate of $0.87. Our current target price of $13 implies a P/E of 15.0 times our FY2009 EPS estimate.

Read the full analyst report on OPLK