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12 August 2015

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

For second-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 $85.4m, up 10.2% on $77.5m a year ago and up 4.9% on $81.4m last quarter. This is despite the firm pruning from its portfolio products that contributed $2.5m in Q1 (as part of a program announced a year ago – completed by the end of Q2/2015 – to prune low-margin products that contributed $23m in 2014). 

Fiscal Q2/2014 Q3/2014 Q4/2014 Q1/2015 Q2/2015
Revenue $77.5m $81.6m $79m $81.4m $85.4m

"With strong traction of our High Speed Products (for 100G-and-beyond) in transport and metro markets as well as in rapidly growing data-center interconnect (DCI) system applications, a record 59% of our revenue [up from 57% last quarter] was from 100G-and-above High Speed Products [mostly 100G coherent]," says chairman & CEO Tim Jenks.

Network Products and Solutions (<100Gb/s) represented 41% of total revenue (down from 43% last quarter), with sales of products for broadband access networks (level at 20% of total revenue) remaining firm in China (although NeoPhotonics continues to view this product group as a mature business).

"NeoPhotonics is a market share leader for key products used in coherent transmission, at 100, 200 and 400Gb/s, such as our integrated coherent receivers (ICRs) and narrow-linewidth tunable lasers. Our broad suite of 100G products is used in long-haul and metro transport and also in data-center interconnect and enterprise applications," says Jenks. "Telecom service providers represent our largest end-use market, notably for both High Speed 100G products and for Network Products and Solutions, including broadband access products, and both of these markets have deployments underway for infrastructure build-outs in China that are expected to span several years," he adds. 

Of total revenue, China rose from 48% to 50%, while the Americas fell from 30% to 28% and Japan fell from 5% to 4%. The rest of the world rose from 17% to 18%. Specifically, NeoPhotonics saw lumpiness in Europe due to inventory re-balancing (primarily associated with the pending acquisition of Alcatel-Lucent by Nokia). "While we expect order patterns to return to normal after the optical transport manufacturing operations of Alcatel-Lucent are transitioned to a contract manufacturer as a part of the acquisition, this and general EU softness may remain hard to predict and possibly continue to be lumpy going forward," comments Jenks. Contributing 11% of total revenue in Q2, Alcatel-Lucent joined the two existing 10%-or-greater customers: US-based Ciena (22%) and China-based Huawei Technologies (40%).

On a non-GAAP basis, gross margin has risen for a fourth consecutive quarter, from 20.8% a year ago and 31.3% last quarter to 32.3% (above the expected 28-32%). Margin improvement continues to be driven by demand for High-Speed Products (100G and above), with additional volumes in the second quarter, along with cost improvements driving lower manufacturing costs.

Operating expenses were $21.1m (24.8% of revenue), up 5% on $20.2m last quarter but still cut from $22.3m (28.7% of revenue) a year ago. "The operating expense run rate continues to reflect the vigilant management and controls we established in the second half of last year to be consistent with our target model and as we drive for overall profitability improvement," says chief financial officer Ray Wallin. "Now we have successfully operated at our target model of 25% operating expenses for the last four quarters." This is despite expenses from the integration of personnel and associated costs related to acquiring the Emcore tunable laser product line on 2 January. 

Operating income was $6.4m (an operating margin of 7.5% of revenue), an improvement from $5.3m (6.6% of revenue) last quarter and a loss of $6.2m (-8% of revenue) a year ago.

As a result of its continued revenue growth, margin expansion and operating cost discipline, NeoPhotonics has hence posted its fourth consecutive quarter of profitability: net income was $5.3m ($0.14 per diluted share), an improvement on $4.2m ($0.13 per diluted share) last quarter and a loss of $7.5m ($0.24 per diluted share) a year ago. 

Operating cash generation was $7.7m (up from $7.4m last quarter). Hence, after capital expenditure of $3.5m, free cash flow was $4.2m - the fourth consecutive quarter of positive cash flow from operations and free cash flow, as the firm focuses on effective management of working capital assets and on driving profitability improvements.

"We continue to strengthen our liquidity in the quarter, both through our equity offering in May and the subsequent repayment of a portion of our outstanding debt," notes Wallin. In April, NeoPhotonics repaid early the Emcore note for $15.7m that was part of the consideration for acquiring the tunable laser product line. In May, NeoPhotonics raised $45.6m in net proceeds from a public offering of 6.9 million shares. Also, to continue to manage interest costs, NeoPhotonics reduced its short-term bank borrowings by $5m. In conjunction with debt restructuring actions in first-quarter 2015, the net cash position is over $58m. During the quarter, cash and cash equivalents, short-term investments, and restricted cash and investments, rose by $30.1m from $74.3m to $104.4m.

"Our goal is to be a leader in High Speed 100G and beyond product solutions and to deliver sustained profitability. Our second quarter results continue to demonstrate our strong execution towards our profitability goals and our target model with sequential increases in revenue, gross margins, profitability, EBITDA and operating cash flow," says Jenks.

Driven by preparations for both new product launches in manufacturing and build plans supporting second-half 2015, net inventory rose by $4.9m during Q2 to $69.7m (from 102 days on hand to 106 days).

"We continue to be excited about the traction of our High Speed 100G-and-beyond products in rapidly growing data-center interconnect system applications, as this contributed to our strong high-speed product group results, and within the China market we continued to experience strong demand for all our products, including 100G coherent solutions during the second quarter," says Jenks. "Beginning in the second half of 2014, we saw a significant acceleration of long-haul optical deployments within China, which continued through the first half of this year. As we look to the growth drivers of our business for the remainder of the year and through 2016, High Speed 100G coherent long-haul deployments, including in China, will remain a primary contributor," he adds.

"Our near-term outlook is reflecting timing differences in the next two quarters that are driven most notably by deployment of 100G infrastructure supporting transport and related mobile networks in China," says Jenks. "The timing of these deployments results in our more conservative outlook for the third quarter."

Taking into account the now completed pruning of products (that contributed about $2.5m to Q2 revenue), plus the timing variations in China infrastructure build-outs and the temporary Alcatel Lucent re-balancing, for third-quarter 2015 NeoPhotonics expects drops in revenue to $77-83m, in gross margin to 29-32%, and in diluted earnings per share to $0.01-0.09. "We are going to continue to run the factory consistent with the prior quarter because of what we are feeling about the second half, and we continue to generate manufacturing efficiencies and improvements," says Wallin. "So we have a little bit lower volume of the higher-margin products." NeoPhotonics still expects full-year revenue growth of 10% in 2015.

"During the last several quarters we introduced our long-term operating model," says Wallin. "Now we anticipate making steady progress towards our target model goal, which is non-GAAP gross margin of 35%, R&D expenses in the 14% range, SG&A expenses in the 11% range (i.e. total operating expenses of 25% of revenue) and non-GAAP operating margin of 10%."

See related items:

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

NeoPhotonics grows 13.6% in Q2 to record revenue of $77.5m

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