Quarter one conference call, April 19, 2000:
Don Scifres:
We're thrilled with results. We ramped across all product lines. 163% increase in fiber optics products, y/y, 35% sequentially. 3.4 pt increase in gross margins.
Great quarter even without exclusions.
Mike Foster:
Revenues of $72.2 million were up 92% y/y and 23% sequentially. DWDM products were up 35% sequentially, and represent 83% of total sales. Terrestrial revenues were up 45% sequentially, 80% y/y. Under sea was up 27% sequentially and was 31% of total revenues. Undersea sales were 12X a year ago.
Modules showed the greatest growth.
Same four 10% customers: Alcatel, Corning, JDSU, and second undersea pump customer.
13 customers were over $1 million.
47.9% gross margins, up 3.4 pts. sequentially, and 7.2 pt increase y/y.
Increases due to higher percentage of telecom customers, better pump laser yields, and more capacity and efficiency in manufacturing.
R&D 8.2%, up 56% y/y.
Excluding non-cash charges , SG&A was 9.2%, vs. 12.2% in Q4, down 7% sequentially, but up y/y.
Excluding acquisitions, etc, operating income was $22 million, 30.5% of revenues, 271% increase y/y. [I missed some numbers and will update after I listen to replay.]
$17 million in net incomes or .22 per share. Up 175% y/y. Shares used were 76.5 million vs. 64.3 million.
2Q will include Veritech acquisition and goodwill for Queensgate.
2Q will have one-time charges of 4.1 million and 3Q will have 7.8 million. These will be excluded from pro forma numbers.
$315 million in cash, $365 million in working capital.
DSOs at 63, vs. 64 last quarter. Inventory turns were 4.4 versus 4.1.
Q1 highlights were significantly increased revenues and higher margins. Projecting 25% or better sequential growth for Q2.
Don Scifres:
This quarter we expanded manufacturing, added new customers, and acquired companies with key technologies.
Where we expect growth to lead us:
1) Increased product breadth
2) Expanded manufacturing.
3) Continued partnering with leading customers
4) Added technologies for next generation products
First strategy:
* Eleven new products released at OFC.
* Market wants more bandwidth per fiber, higher channel counts, increased data rates, and higher power rates.
* RAMAN modulator named outstanding product in 1999. Continuing this year, 30 DDM EDFA product was named one of 10 best at OFC. Highest 980 nm pump modules on the market. . . . Result of revolutionary chip design and new package. Tribute to the engineers who designed and developed it. Expect it to be designed into DWDM amplifiers. . . shipping in May, with production in 3Q.
* Light modulator introduced. 10 gig driver for modulator. Allows equalizing signal on each channel. Important for higher data rates and higher channel counts.
* Three design wins in Q1. ATT co-authored paper on RAMAN. They have upgraded with 2X lengths achieved. 40 gig transmission, longer repeaterless systems, higher channel counts.
* Q1 RAMAN ramped. Revenues greater than all of '99. 13 customers, ATT is one.
Second strategy: teaming up with key customers:
 Get in on ground floor with customers.
 Allows high level of differentiation.
 Once designed in, it's hard to be displaced, i.e, our 5-year contract with ALA.
* 1Q --- 10 new design wins. Several from emerging companies --- with significant potential for future. Will announce some in second half.
Third strategy: expanding manufacturing
 Have to ramp through facility expansion and yield improvements
 New manufacturing in Santa Clara and Victoria, B.C.
 Adding to most sites over the next 6 months
 New facility in Mass. From 12,000 square feet to 20,000
 12,000 sq. ft. expansion in U.K. will be completed in 4Q
 Adding 50,000 square feet in California, will also be completed in Q4
 Expanding Veritech facility in New Jersey, from 18,000 square feet to 60,000 or more.
 Yield improvements: reduced manufacturing inefficiencies and increased yields
 Automation will increase yields
Fourth strategy: Add to key technologies through acquisitions
 RAMAN and EDFA are examples. RAMAN came through Polaroid which we bought in 1999.
 Modulators are significant growth opportunity. RAMAN market will go from $10 million in 1999 to $1.9 billion in 2004. Without acquisitions we could not have been leader.
 Market expanded by Veritech acquisition. High frequency testing capabilities. They were leaders in undersea, now moving to terrestrial market. Several design wins, some including production contracts. This is why we're tripling New Jersey facility.
 Queensgate --- for all optical networks. As more systems move to all optical, there is more demand. Veritech has the only network monitoring system to measure both C & L bands. This market over $1 billion by 2003.
Industry is becoming more sophisticated. We have competitive advantages, and our growth rates are higher.
We will continue to acquire. Expect activities to enhance industry leadership. Our prospects have never been brighter. Broadband is being gobbled at ever accelerating rates.
Q&A:
Q: Can you comment on terrestrial growth versus undersea?
A: Our customers were mixed. Four were over 10%. Undersea were leading the pack, up 45%. We're broadening our product lines, and demand is being created by the terrestrial market. Demand was not satisfied. We could not make everybody happy. New products allowed us to grow market share.
Q: Yields on high power chips?
A: high power 980 nm --- just now going into production. Proto-types are good compared to this stage on earlier products. Looks to be very successful for Q3. Great product.
Q: Availability of thermo-electric coolers?
A: More efficient package. Chip is more efficient. Don't need higher power cooler. We're working with cooler manufacturer.
Q: Can you give some context for ten new design wins?
A: Three were for modulator and driver, and going very well. Sequential growth in this area 23%. Still production limited. Working on improving yields. Design wins for RAMAN, EDFAs, channel monitoring, and 980 nm. Emerging players are designing in products.
Q: Veritech --- what revenues generated?
A: Veritech ramp --- had excellent prospects going in. Pleased with the business. Not changing our estimates at this point. Great new opportunities.
Q: Was there a change between terrestrial versus undersea?
A: Terrestrial market becoming a combination of long haul and metro/access. Cannot longer tell where products are going. For example, Cisco ships to both long haul and metro.
Q: Can you quantify gross margins?
A: Have split --- yield improvements and manufacturing expansion and efficiencies.
Q: modulators and drivers, 10-gig products?
A: It's all 10 gig. 2 1/2 is very minor. We have to ramp for better yields. Still on trace for estimated revenue levels.
Q: Low cost add-drop?
A: Lots of opportunities for pump-centric designs. Working with fiber optics in Boston area. Released 980 nm pump for low cost market at OFC. Had a great quarter.
Q: Acquisitions? I know you're picky re: buying at right price. Has recent market dip opened up opportunities?
A: Very active in that market. Intend to grab key technologies. Some evaluations were adjusted with emerging companies that may help. Just looking at great companies.
Q: R&D? SG&A?
A: R&D at 9 to 10% remains target. SG&A may trend up during year. Last year we pumped dollars into information systems that have allowed efficiencies. We said 11 to 12% --- it may trend up to that. We're increasing sales and marketing.
Q: 54% was international?
A: Yes, continue to invest in overseas. Two acquisitions in Europe. Is now hub for SDLEurope. Strong sales force. Queensgate has presence in Japan. Good position for Asia-Pacific growth.
Q: 25% sequential growth. In Q2 will that include Veritech and Queensgate?
A: We want to be conservative. No guidance for Q3 and 4 right now.
Q: Classify revenues. Fiber optics were 83% of sales including all acquisitions?
A: Queensgate is 50% telecommunications. Veritech is 100% fiber optics.
Q: Modulator business, how many customers for 10 gig?
A: Five product programs presently.
Q: RAMAN business, how quantify opportunity for this year? What percentage of fiber optics?
A: This year less than 10%. We see great opportunities going forward. 40 gig has great opportunity but not this year but 2001. Rest of fiber optics business is growing so fast it's hard for anything else to catch up.
Q: Are you shipping to third customer?
A: Yes, we have begun shipping. Q2 will be nice quarter for third customer.
Q: Will first and second customers be ramping, too?
A: Generally, yes, they're requesting more products. Have reached high level of production.
Q: Components?
A: Yes, some limits. In modulators and drivers for modulators. Some limits on fibers that were tight.
Q: Status of 40 gig modulator and EA modulators?
A: Focused on 10 gig. Not spending a lot of time on 40. At 10 gigs, lots of work, still exploratory stages re: 40 gigs. Not working on EA modulators now. Focusing on indium phosphates. Will bring out at end of 2000 and beginning of 2001. Higher power pumps, then transmitters --- that could include EA modulator.
Q: What about lower power prices?
A: Pricing very solid. Glut of demand. We can't meet, so can set prices. Customers agree to our pricing. Trying to reduce prices in metro market. Lower power pumps becoming cheaper to produce. Allows good margins. Lower power pump means you need other products. Metro market is not low channel count. Metro will use WDM and even DWDM.
Q: What's the competition in RAMAN space?
A: We sill have highest power in the world. Good example of success is at ATT. We meet real field usage. Some competition in lower power pumps. Indium phosphates --- we're introducing one. One of our papers at OFC announced highest power in indium phosphates.
Q: Gross margins, any guidance?
A: Still have some head room. Operating margins, we got there faster. We're at a good level. Headed to 50% in gross margins. Operating margins should be similar to Q1. We can expect continued improvements. |
