28 May 2015

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

For first-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 $81.4m, up 3% on $79m last quarter and up 19.4% on $68.2m a year ago (and exceeding the $75-81m guidance). Growth outpaces the traditional seasonal softness due to annual price negotiations and the Chinese New Year. However, revenue included a better-than-forecasted $12m from Emcore products.

Fiscal	Q1/2014	Q2/2014	Q3/2014	Q4/2014	Q1/2015
Revenue	$68.2m	$77.5m	$81.6m	$79m	$81.4m

"We're particularly excited about the strengthening of our market position within the 100G market with our acquisition on 2 January of the tunable laser products of Emcore, which has enhanced our position as the market-share leader for both 100G coherent receivers and 100G narrow-linewidth tunable lasers," says chairman & CEO Tim Jenks.

In accord with its focus on growth in 100Gb/s-and-beyond products, NeoPhotonics has realigned its product group reporting for 2015 from 'Speed & Agility' (including 40Gb/s and 100Gb/s products) and 'Access' to 'High Speed Products' (for 100Gb/s and beyond) and 'Network Products and Solutions' (which includes 40Gb/s products – previously included in the High Speed product group – joining lower-data-rate products). On a like-for-like basis, a record 57% came from High Speed Products (for 100Gb/s and beyond) and 43% from Network Products and Solutions (<100Gb/s).

Two customers comprised more than 10% of revenue: Ciena (23%, up from 16% last quarter) and Huawei Technologies (40%, down from 42%). Of total revenue, the Americas hence rose from 23% to 30%, whereas China fell from 55% to 48%, while Japan rose slightly from 4% to 5% and the rest of the world fell from 18% to 17%.

On a non-GAAP basis, gross margin has risen for a third consecutive quarter, from 22% a year ago and 30.3% last quarter to 31.3% (above the expected 26-30%).

Operating expenses (OpEx) were $20.2m, cut from $22.8m a year ago but up from $19.2m last quarter due mainly to the integration of personnel and associated costs related to the Emcore tunable laser product line. Nevertheless, operating expenses have been within the target model of 25% of revenue for the last three quarters.

Compared with a loss of $7.8m (an operating margin of -11.5% of revenue) a year ago, operating income was $5.3m (6.6% of revenue), up from $4.8m (6.1% of revenue) last quarter.

Although dropping from $6.3m ($0.19 per diluted share) last quarter, net income was $4.2m ($0.13 per diluted share - above the high end of the guidance range of a $0.09 loss to earnings of $0.02). This represented a third consecutive quarter of non-GAAP profitability, compared with a loss of $9.5m ($0.30 per diluted share) a year ago.

Operating cash generation was $7.4m. Hence, after capital expenditure of $2.2m, free cash flow was $5.2m. "This represents the third consecutive quarter of positive cash flow from operations and free cash flow as we focus on effective management of our working capital assets and on driving profitability improvements," notes senior VP & chief financial officer Ray Wallin.

During the quarter, cash and cash equivalents, short-term investments, and restricted cash and investments rose from $64.3m to $74.3m.

Driven mainly by the ramp-up in production to support customer demand (primarily for 100G products) together with inventories from the acquisition of tunable laser products from Emcore, net inventory rose by $7.4m during the quarter to $64.7m (from 92 days on hand to 102 days).

Despite seasonal declines in average selling price (ASP) and product pruning actions (impacting revenues through first-half 2015), for second-quarter 2015 NeoPhotonics expects revenue to rise to $83-89m. Gross margin should be 28-32%, impacted by some further minor ASP changes, pruning low-margin products (with the remaining $5m of about $25m in revenue to go by the end of Q2), a stronger-than-expected mix of Access products (which tend to be lower margin, and seasonally greater in Q2 than Q1), volume and manufacturing utilization, and ongoing manufacturing process improvements. OpEx should rise slightly to about $21m. Diluted earnings per share is expected to be $0.09-0.18.

"We believe our 100 gigabit business will continue to accelerate as we see metro launches and switching growth, such as Verizon's launch of CDC [colorless-directionless-contentionless] ROADMs [reconfigurable optical add-drop multiplexers] including multi-cast switching [MCS], plus additional strength from data-center interconnection deployments of 100 gigabit coherent systems," says Jenks. "Additionally, 100 gigabit deployments remain strong in China as well, and we are adding capacity where needed to support demand. Further, our Access business continues to be stronger than expected," he adds. "While some of this growth is offset by our product pruning initiatives which will be largely complete by the end of the second quarter, at this time and including our Emcore product acquisition, we believe there are a number of potential accelerators to our business and we are optimistic that our 2015 revenue can approach 10% growth over 2014. We are focused on sustained profitability and we will continue to work toward this goal, as well as toward greater alignment with our target operating model," continues Jenks.

"During the last several quarters, we introduced our long-term operating model," notes Wallin. "NeoPhotonics can ultimately deliver, on an annualized basis, non-GAAP gross margin of 35%, R&D expenses in the 13-14% range, SG&A expenses in the 11-12% range and non-GAAP operating margin of 10%," he believes.

See related items:                                                                                                                     

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

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

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