3 November 2015

NeoPhotonics reports higher-than-expected Q3 revenue, despite product pruning

For third-quarter 2015, NeoPhotonics Corp of San Jose, CA, USA (a vertically integrated designer and manufacturer of hybrid photonic integrated optoelectronic modules and subsystems for high-speed communications networks) has reported record revenue of $83.6m, down 2.1% on $85.4m last quarter but up 2.4% on $81.6m a year ago (and above the projected range of $77-83m) despite having pruned products that contributed $23m in annual revenue in 2014.

Fiscal	Q3/2014	Q4/2014	Q1/2015	Q2/2015	Q3/2015
Revenue	$81.6m	$79m	$81.4m	$85.4m	$83.6m

High Speed Products (for 100G-and-beyond) represented 56% of total revenue (falling back from last quarter's record of 59%). Network Products and Solutions (<100Gb/s) represented 44% of total revenue (up from 41% last quarter), with sales of products for access networks demonstrating strength in China.

The two 10%-or-greater customers were China's Huawei Technologies (41% of total revenue, up from 40% last quarter) and US-based Ciena (26% of total revenue, up from 22%). Of total revenue, China fell slightly from 50% to 49% as the Americas rose from 28% to 30%. Japan and the rest of the world were roughly flat, at 4% and 18% respectively.

On a non-GAAP basis, gross margin was 29.8%, up from 26.5% a year ago but down from 32.3% last quarter. However, excluding inventory-related charges from discontinued products, gross margin would have equaled the midpoint of the projected range of 29-32% despite the higher-than-expected mix from Network Products and Solutions.

Operating expenses were $20.7m, up on $20.3m a year ago but cut from $21.1m last quarter (remaining about 24.8% of revenue). "Quarterly operating expense run-rate continues to reflect the vigilant management and controls we established for the year, to be consistent with our target model and as we drive for increased profitability," notes senior VP & chief financial officer Ray Wallin. For the last five quarters, NeoPhotonics has operated at its target operating expense model of 25% of revenue.

Net income was $4.6m ($0.11 per diluted share), down from $5.3m ($0.14 per diluted share) last quarter but up from $1.4m ($0.04 per diluted share) a year ago (and above the expected range of $0.01-0.09). Net income is 6% of revenue (level with last quarter, and up from just 2% a year ago). Likewise, although down from $11.4m (13% of revenue) last quarter, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $10.2m (12% of revenue) is up on $7.3m (9% of revenue) a year ago. 

"We are pleased to report our fourth straight quarter of GAAP profitability and year-over-year revenue and margin expansion, which resulted in our generating $43m of adjusted EBITDA over the last four quarters," says chairman & CEO Tim Jenks.

During the quarter, cash and cash equivalents, short-term investments and restricted cash and investments fell only slightly from $104.4m to $103.6m.

To support anticipated 100G China awards in the fourth quarter, net inventory has been increased by $1.1m to $70.7m (106 days of inventory on hand).

"We continue to expect steady growth in China market over the next two years," says senior VP & chief financial officer Ray Wallin. "The 100G long-haul build-out in China will span upwards of 30 provinces. Fiber-to-the-home [FTTH] roll-outs continue along with 4G wireless installations (albeit at a reduced pace versus the past year) and adding new data-center construction. In particular, we have seen some uptick in demand over the past 4-6 weeks, which gives us more confidence in these forecasts," he adds. "We are excited about the renewed momentum we are seeing in the 100G market and the progress we are making with our strategy of increasing our content per 100G port and extending our products to 400G and beyond."  

Taking into account the product pruning completed in mid-2015 (representing $23m in 2014 annual revenue) plus typical impacts on average selling price (ASP) from annual price negotiations (particularly with the firm's largest customers), for fourth-quarter 2015 NeoPhotonics expects revenue of $82-86m. "While we anticipate solid fourth-quarter volume growth in China for 100G products, we also expect the demand to carry into the first quarter of next year," notes Wallin. Gross margin should rise to 30-34%, despite increases in R&D spending as key new products are moving towards general availability. Diluted earnings per share should be $0.05-0.13.

"As we look to the growth drivers of our business through 2016, High Speed 100G-and-beyond coherent developments and deployments (including in China) will remain a primary contributor," says Jenks. "To ensure NeoPhotonics is best positioned to take advantage of these technology transition cycles, we continue to introduce new products and solutions. Our 100G solutions include new compact receivers and ultra-narrow-linewidth tunable lasers and address both high baud rate and higher-order modulation approaches to 400G," he adds.

"For data-center applications we joined with Inphi at the European Conference on Optical Communications (ECOC) in September to demonstrate a 100G PAM4 10km link, and we believe our capability here will further complement NeoPhotonics' existing line of client-side transceivers, including CFP2-LR4, CFP4-LR4," says Jenks. "We see the metro market as the next significant opportunity for 100G coherent solution growth in 2016 and beyond."

See related items:

NeoPhotonics launches products to support 400G coherent transport for long-haul, metro and data-center interconnect networks

NeoPhotonics' revenue grows 5% in Q2 to record $85.4m, driven by 100G products

NeoPhotonics' revenue grows 3% in Q1 to a record $81.4m, boosted by more-than-expected $12m from Emcore products

NeoPhotonics reports record Q4 revenue of $79m, despite pruning low-margin products, driven by growth in 100G

Emcore completes sale of tunable laser and transceiver product lines for $17.5m  

NeoPhotonics' record $81.6m Q3 revenue driven by 22.9% growth in 40/100G

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