What's my take on the numbers????
Hold on while I get the smile off my face. :)
One thing's certain, whoever sold today must be suicidal right now.
Transcribed notes, all errors mine, for the most part financials omitted:
>>>>
Undersea was particularly strong in Q3. We ramped for second major customer and anticipate further profitability/ growth as we continue to ramp. Exceeding estimates in all areas in spite of satellite (defense) decline.
Fiber optics DWDM sales up 3X y/y. Alcatel largest customer in Q3. Had two 10% customers, no clearance to name the second. [Perhaps Tyco?]
Undersea was up 2X over Q2. Could be 30% or more of revs next year. International up 25% seq, 139% y/y, at 42% of revenues; NA up 14% seq, 119% y/y at 53% of Revs; government down 54% seq, 64% y/y at 5% of total versus 24% a year ago.
All income numbers were based on 34.1 million weighted shares. Next quarter will have 37.5 million.
Inventory up to 2.9 million to support DWDM. DSOs were 82 vs. 73 b/c of paperwork. This has since been completed and had it been done before close of Q, DSOs would have been 74. Next quarter will return to June level or lower.
GMs will continue to improve based on increased yields in manufacturing, and change in mix from government to fiber optics, especially undersea systems.
Don Scifres' comments:
Rarely a day passes without a new announcement for another transoceanic system. Fifteen new systems will be put in over the next 18 months. 100% growth to 2004, representing tens of billions in dollars. SDL is extremely well-positioned for this market, especially in 10 gigabit lithium niobate light modulators, 980 nm --- power, stability, and reliability set us apart. Alcatel has announced 32 channel and we have 4 year exclusive. Alcatel is the number one supplier.
Second customer ordered in late June and was anxious to ramp. By September we were manufacturing in volume. We're positioned for even more rapid growth. Third company has approved our chips.
Undersea will be 30% in Q4, and fuels opportunity for Q4 and into 2000.
Another project involves 1450, 1 1/2 watt Raman amplifier for 1550 transmission fiber. Goes longer distance with higher data rates (40 gigabits) and number of transmission channels amplified. High power reliability in single fiber. We're first to qualify. Nine companies have already ordered. Many are looking at terrestrial too. We anticipate continued interest.
Module levels: 3Q over 50% of revenues.
10 gig lithium niobate modulators --- RHK estimates market at $100 million in 1999 and $1 billion by 2003. Ten customers are testing now. Began 10 gig shipments in Q3 b/c of large contract from major customer. Growing in Q4 and even larger ramp next year. Extremely pleased with IOC acquisition.
Metro and CATV:
Demand increases, more products, including 980 nm pumps, amplifiers and lithium niobate 10 gig drivers. Now less than 5% of revs, but increasing interest in metro market. Several million in revs next year.
Manufacturing added:
44,000 sq. foot fab for pump modules added, only a few weeks of down time to make transition. Now can ramp to more fully meet increasing high channel amplifiers. 20,000 sq. feet added in valley for chips. 200,000 per year capacity. Further gross margin expansion in Q4.
Another excellent quarter and even brighter prospects for future.
Q&A:
Q: Targets for UK facility?
A: Ramp proceeding to transfer to 10 gig module pump line. More in Q4, almost 10X increase by Q1 00.
Q: What percentage by then?
A: Too early to say. Large contract. Our only impediment may be ourselves.
Q: Any hiccups so far?
A: No. We anticipate shipping in Q4 and ramping in 2000.
Q: Pricing for 980 pumps?
A: Pricing, there are two pieces: undersea, we've established long term contracts, with favorable margins. Have production efficiencies; 980 pump modules, same ---- give reduced prices over time. But efficiencies continue. GMs improving.
Q: Yield improvements?
A: Considerable advance on yields still possible. In Q4 and all of 2000. 1/2 watt 980 qualification proceeding nicely. 250mw grating stabilizor introduced in Q1 next year.
Q: head count?
A: over 1,000,up 7% in Q3.
Q: Thermal printing market?
A: Grew over 20% sequentially. Next year will grow 10 to 20%.
Q: Customers for fiber amplifiers, EDFAs?
A: Sell to most customers in this area: LU, JDSU, ALA, Corning, Pirelli.
Q: Sequential revenue growth in optical subsystems, re; DWDM?
A: A little over 10% seq.
Q: Military (gov't) now pretty small. Going to zero?
A: Some decline over time, but not as dramatic as this Q.
Q: 19% sequential in commercial will continue?
A: Expecting very good 4Q. total growth in 10 - 15% range. Depends on ramp in submarine. We could exceed. [Same response as last Q.]
Q: Capacity constraints?
A: Depends on third customer. We couldn't provide right now. Next year, yes.
Q: What is risk? Could you lose customers?
A: We have strong product position. It would be difficult to get anywhere else. We did a good job for second customer. We may be able to do more. Yields may improve. Hard to predict.
Q: Undersea will be 30% in Q 4, what about 2000?
A: Yes, it will be 30% or larger. Not certain of third customer.
Q: Terrestrial --- any decline there?
A: Yes, sequential decline in pump module b/c of change in facility.
Q: Sequential expansion?
A: Yes. Significantly stronger b/c of new capacity and increased demand. Pump modules are up 125% y/y.
Q: Gross margins were up --- modules help or hurt? What is size of module market?
A: Module gms are lower b/c of ramp-up mode --- and until production volumes reach certain levels. 2.5 gig is not our focus. 10 gig is. Revenues are up sequentially, and really anticipating major build-up in Q4.
Q: RAMAN reduces distance factor and I wonder if it'll affect sales of 980s.
A: RAMAN is complementary to EDFAs. They're bought in conjunction --- there's a demand for both. RAMAN sells for $55,000 to 60,000 and 980 for $2,500. . . would rather sell one RAMAN than a couple 980s. RAMAN extends length and data rates. LU says RAMAN must go to 40 gig applications. ALA, too. We're at the leading edge.
Q: Where used?
A: By adjusting you can amplify at varying wave lengths. 1450 would amplify at 1550.
Q: Demand?
A: We have nine companies now, and increasing interest. Good market. I've seen estimates of 3/4 billion in a couple years. these are industry estimates.
Q: Metro and cable?
A: Different perimeters, but still applicable. Clearly apply to undersea. Plus interest in terrestrial and some from Metro.
Q: Fiber Bragg gratings growing? Are you developing passive side?
A: Fiber Bragg a compliment to undersea pumps. Over a million per quarter. Not as large as chips. Passive: building those we can't get. For example the 980 combiner --- combines 970, 975, 980, and 985 to get 1/2 watt of power. Same as 1480. [I may not have understood this correctly.] We're building unique passives and buyng others.
Q: Corning down?
A: No.
Q: Planer packaging?
A: 1Q 2000.
Q: Plans for selling chips as stand-alone?
A: We're looking at it. We're ramping in undersea and consuming capacity. Eventually we could OEM. Focus is on modules and undersea.
Q; percentage of sales from thermal printing?
A: Around 20%
Q: How big is contribution of second undersea customer?
A: Equal to first.
Q: Number of 10 gig customers in 2000?
A: module customers, have more than 10 testing and buying now. Next year would be happy with those 10. Want 20% of market share of 10 gig.
Q: When do you expect to have third customer on board?
A: They could use chips. Haven't done product and pricing. Don't know we have orders, but know we're qualified.
Q: In Q4?
A: It's possible. But could be Q1 2000.
Q: Share of submarine market?
A: For 980 nm pump chips, not sure. Anticipate over 50% of market share in FY2000. Hard to estimate b/c we're in a ramp phase.
Q: RAMAN --- Will Soliton be deployed?
A: Jury's out on soliton.
Q: Will RAMAN be used?
A: Lots to be gained.
Q: Metro revs next year?
A: Not above 10%. But rapidly growing market. We're at less than 5% now.
Q: Terrestrial customers, are they second generation players?
A: Big ones and small.
Q: modules tracking well?
A: Better than we thought. Surprised at size of contract.
Q: Satellite %?
A: 5% of revs in Q3. No growth. Will trail down.
Q: Incremental gross profit contribution for Q4 are positive. Gross margins direction for next year?
A: Further improvements in Q4 and next year. Undersea and yields and better utilization of factories. Partially off-set by increased R&D. (Will be above 9 to 10%). Still will be gm improvements.
Q: Lengths of contracts?
A: Typically submarine are 1 - 5 years. Terrestrial 12 to 1 1/3 years.
Q: Will these increase?
A: Don't know. Typically what's expected is increased volume for dropped prices. We're not anxious to drop prices.
Q: What is strategy for 1550?
A: Improve output power. Working on over 1 1/2 watts. Product out in future. Hard to say when.
Q: Acquisitions?
A: We continue to look for those that are accretive, have good technology, and broaden product line.
Q: Any in the receiver area?
A: Won't comment. But looking at complete DWDM, receivers could be one.
Q: R&D up. . . SGA same trend?
A: SGA about same in Q4 as Q3. Would like it in 10-12% range.
Q: Tax rate?
A: 35%. Might be a bit below, but 35% is guidance.
*******
This was one of the most upbeat conference calls I've ever followed (except, perhaps, one of JDS Fitels when Josef was in top form). I honestly don't see how any company could be better positioned in its sector. To hear management it's as though the years spent in preparation for this market were the aberration and their new status as a multi-billion company is where they've deserved to be all along. Don Scifres is a delight. There is no question he doesn't treat with respect no matter how repetitive or uninformed. And Mike Foster's no slouch. Of course, he goes home smiling every night.
They're a great team. And this is one shareholder who's smiling!
Pat
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