ARM Purification

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5 March 2015

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

NeoPhotonics Corp of San Jose, CA, a vertically integrated designer and manufacturer of both indium phosphide (InP) and silica-on-silicon photonic integrated circuit (PIC)-based modules and subsystems for high-speed communications networks, has reported record revenue of $79m for a Q4, down 3.2% on $81.6m third-quarter 2014 but up 6.2% on $74.4m for fourth-quarter 2013 (and near the high-end of the guidance range of $74-80m). Full-year revenue has risen by 8.5% from $282.2m in 2013 to $306.2m in 2014.

Fiscal Q4/2013 Q1/2014 Q2/2014 Q3/2014 Q4/2014
Revenue $74.4m $68.2m $77.5m $81.6m $79m

Two customers comprised more than 10% of revenue: Ciena (16%, down from 17% last quarter) and China's Huawei Technologies 42% (up from 35%). Of total revenue, China hence rose strongly from 50% to 55%, whereas the Americas fell from 25% to 23%, Japan from 5% to 4% and the rest of the world from 20% to 18%.

Revenue from the Access product group was $15.3m (19% of total revenue), down 10% on $17m (20.5% of total revenue) last quarter and 12% on $17.4m (23.3% of total revenue) a year ago. Revenue from the Speed & Agility product group was $59.3m (75% of total revenue), down slightly by 2% on $60.6m (74% of total revenue) last quarter but up 16% on $51.8m (69% of total revenue) a year ago.

For full-year 2014, Access products were 20.2% of total revenue (down from 23% in 2013). Speed & Agility products were 73.5% of total revenue, up from 69% of total revenue in 2013. "Driven particularly by 100G products and deployments, our underlying business remains strong and growing.

On a non-GAAP basis, full-year gross margin has fallen from 26% in 2013 to 25% in 2014. However, Q4 gross margin was 30.3%, up from 26.5% last quarter and 27.5% a year ago (and above the guidance range of 24-27%). Also, gross margin expanded by 8.4 percentage points from Q1 to Q4 as a result of lower overall manufacturing costs, vendor cost reductions and a favorable mix shift, partly due to pruning of lower-margin products. Operating expenses have been cut further, from $23.2m a year ago and $20.3m last quarter to $19.2m.

Net income was a record $6.3m ($0.19 per diluted share), an improvement on $1.4m ($0.04 per diluted share) last quarter and a loss of $1.8m ($0.06 per diluted share) a year ago (and above the high-end of initial guidance of a $0.13-0.01 loss). Full-year net loss has been cut from $14.2m ($0.46 per diluted share) for 2013 to $9.2m ($0.29 per diluted share) for 2014.

Profitability is "a direct result of our focus on cost control and product portfolio optimization," says chairman & CEO Tim Jenks. 

NeoPhotonics generated $9.5m of cash inflow from operations. Capital expenditure was $1.9m (down from $3.2m last quarter, leading to full-year CapEx of $11m, less than the normal run-rate of 5% of revenue). Free cash flow was hence $7.6m (up from $5.7m last quarter, totaling $13.3m for second-half 2014). During the quarter, cash and cash equivalents and restricted cash and investments rose by $6.4m, from $57.9m to $64.3m.

After the end of Q4/2014, NeoPhotonics restructured its debt with new arrangements from Comerica Bank and Bank of Tokyo-Mitsubishi UFJ Ltd, which have effectively increased current unrestricted cash by about $22m and increased the firm's available borrowing capacity by about $9m.

Taking into account seasonal declines in average selling process (ASPs), product pruning and the addition of the tunable laser products acquired from Emcore on 5 January, for first-quarter 2015 NeoPhotonics expects revenue of $75-81m, gross margin of 26-30%, and diluted income/loss per share of a loss of $0.09 to earnings of $0.02.

"We intend to maintain our focus on the highest-speed optical network applications and on achieving sustainable profitability," says Jenks. 

"We are continuing actions to prune certain products that are not contributing to profitability," says chief financial officer Ray Wallin. "By the end of the second quarter and in comparison to one year ago, we will have pruned products with historical revenues of $5-10m per quarter in total, which going forward will lower our annual revenue while improving gross margin and profitability," he adds. "On a year-over-year basis and comparing full year 2014 to full year 2015, we will not be selling in 2015 certain products, which contributed revenues of approximately $25m in calendar year 2014. These products, which are in the end-of-life, had 10% or below gross margins and are in a last-time-buy process with customers currently." These products are expected to contribute only $5m of revenue in first-half 2015, then no revenue in second-half 2015. "Nonetheless, we are confident in our ability to execute on our roadmap of a 100G growth, expanding gross margins, tightening expenses and improving cash flow," concludes Wallin.

See related items:

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

NeoPhotonics' revenue grows 22% year-on-year to $68.2m in Q1

Tags: NeoPhotonics PICs

Visit: www.neophotonics.com

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