Opnext - Management Still Cautious

Earlier this month, Opnext Inc. (OPXT - Analyst Report) reported revenues of $85.3 million in its fiscal first quarter, up 1.3% year over year and 2.0% sequentially.

The company experienced a rebound in 10G sales in both datacom and telecom applications. 40G sales returned to more normalized levels following the spike in demand in the previous quarter. The top three customers – Ciena Corp. (CIEN - Analyst Report) Cisco Systems Inc. (CSCO - Analyst Report) and Nokia Siemens Networks (NSN) – accounted for 57.6% of total sales. Increased sales to Ciena and Cisco were partially offset by decreased sales to Nokia Siemens.

Gross margin (excluding acquisition related costs and stock based compensation expense) came in at 23.2% compared to 13.5% in the March quarter and 32.3% in the year-ago quarter. The sequential improvement in margin was due to the recent cost reduction measures undertaken by the management, which included consolidating suppliers and centralizing negotiation efforts, improving terms with key suppliers, and shortening cycle times. As a result, Opnext expects to realize $25 million of annualized savings.
 
On a GAAP basis, net loss was $23.7 million or 27 cents per share. On a non-GAAP basis (excluding acquisition related costs and stock based compensation expense), net loss came in at $9.2 million or 10 cents per share, better than the Zacks Consensus Estimate of a loss of 12 cents per share.
 
Going forward, management stated that sales of 40G subsystems will vary depending on the time of carrier deployments. Visibility remains limited and management is still cautious. Nevertheless, the company expects modest growth in 10G and 40G module business. Revenues are projected between $80 million and $90 million for the fiscal second quarter.
 
Opnext designs, manufactures, and markets optical modules and components that transmit and receive data. The company is one of the smaller players in the optical component and module industry, which is dominated by JDS Uniphase Corp. (JDSU - Analyst Report) and Finisar Corp. (FNSR - Snapshot Report).

We think the underlying market fundamentals remain sluggish and that expansion of carrier and enterprise network may only resume in the latter half of 2009. Opnext’s proposed StrataLight acquisition, expected to close in December 2009, may improve the company’s valuation metrics, as it will add to revenues and enhance the company’s growth prospects.

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