15 November 2016

NeoPhotonics reports record revenue of $103.3m in Q3, up 24% year on year

For third-quarter 2016, 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 again reported record revenue, of $103.3m, up 4.2% on $99.1m last quarter and up 23.6% on $83.6m a year ago.

Fiscal	Q3/2015	Q4/2015	Q1/2016	Q2/2016	Q3/2016
Revenue	$83.6m	$89.1m	$99.1m	$99.1m	$103.3m

High Speed Products (100G-and-above) again rose to a new record, from 66% of total revenue last quarter to 67%, with "unprecedented" mid-term demand continuing to increase across all 100G product families (including coherent line-side products, client-side components and modules and multi-cast switches), according to president & CEO Tim Jenks.

Correspondingly, Network Products and Solutions (lower-speed transceivers, <100Gb/s) fell slightly again, from 34% of total revenue last quarter to 33%.

In particular, passive optical network (PON) revenue declined further, to $6.7m (although exceeding the expected $4m).

Of total revenue (compared with last quarter), 61% came from China (up from 60%) and 19% from the Americas (down from 20%), while Japan was 5% and the rest of the world was 15% (both level with quarter).

There were two 10%-or-greater customers, with Huawei Technologies (including Huawei affiliate Hi-Silicon Technologies) at 48% (up from 45% last quarter) and Ciena at 15% of total revenue (down from 16%). There were also four customers representing 5% or more of revenue, demonstrating the continued strength across all of the firm's largest customers.

However, at the end of the quarter (on 30 September), a distribution partner serving parts of the China market unexpectedly filed for bankruptcy reorganization in Hong Kong. As a result of the associated uncertainty with recent payments and receivables, NeoPhotonics reduced revenue in Q3 by $2.25m (mostly impacting high-margin, high-speed 100G products).

Impacted by the distributor reorganization charge of $2.25m in addition to the absorption of some mid-year higher volume-related price adjustments, PON under-recoveries and additional ramp-up costs, non-GAAP gross margin has fallen from 29.8% a year ago and 29.3% last quarter to 27.6% (well below the 29-31% guidance), in accord with the product mix of the greater-than-expected low-margin PON sales and $2.25m-lower high-margin high-speed sales (due to the distributor bankruptcy).

Operating expenses have risen from $21.8m last quarter to $24.7m (24% of sales), towards the upper end of the $23-25m guidance range due to new product R&D, principally for advanced coherent developments (raising R&D spending to 14% of sales).

Net income has fallen back from $4.6m ($0.11 per diluted share) a year ago and $6.9m ($0.15 per diluted share) last quarter to $2.9m ($0.06 per diluted share, below the guidance of $0.09-0.17). Nevertheless, this is still the firm's ninth consecutive non-GAAP profitable quarter. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) has fallen back from $10.2m a year ago and $12m (12.1% of revenue) last quarter to $8.3m (8% of revenue).

Cash flow from operations was $4m, impacted by an increase in accounts receivable from shipments accelerating in the second half of the quarter. Also, as part of its production capacity expansion plan, capital expenditure (CapEx) was about $15m (making $30m year-to-date, in line with cash flow from operations of about $29m and EBITDA of $33m, and on track to be halfway through the 2-year expansion-related spending plan by year end).

During the quarter, cash and cash equivalents, short-term investments and restricted cash collectively hence fell by $10.6m, from $113.5m to $102.9m. However, total debt was cut by $0.9m to $44.5m.

Excluding the impact of the distribution partner's bankruptcy, Q3 revenue would have been $105.6m (near the top end of the $100-106m guidance range), including High Speed 100G-and-beyond product growth of 10% quarter-on-quarter and 53% year-on-year. Gross margin would have been 1.6 percentage points higher at 29.2% (just within the 29-31% guidance range) and earnings per share (EPS) would have been $0.05 higher at $0.11 per share (within the $0.09-0.17 guidance range). "Since the process is a reorganization, there may be opportunities for recovering a portion of this amount as the court makes decisions on creditors and the terms of the restructuring," notes chief financial officer Ray Wallin. "We have already made adjustments to our sales structure for the distributor situation such that our business will not see any additional impact from this," comments Jenks.

Reflecting markets and capital expansion plans, for fourth-quarter 2016 (including PON products) NeoPhotonics expects revenue of $109-115m, up 5.5-11% sequentially. Excluding PON, revenue should be $105-111m, up 8-15% from $97m in Q3. "Demand for leading-edge high-speed products plays directly into our core competencies, making us optimistic about our growth prospects going forward," says Jenks.

Due to the drop in low-margin PON revenue, gross margin should rebound to 30-33%. Operating expenses are expected to rise to $26-28m (including R&D spending remaining 14% of revenue). Nevertheless, earnings per share should rebound to $0.13-0.21. CapEx will rise sharply to $23m.

"To ensure NeoPhotonics has the capacity to serve the ever growing demand for our high-performance 100G products into 2017 and beyond, we are pursuing a 2-year capacity expansion program, the initial fruits of which helped drive our record shipment volumes in the third quarter," says Jenks. "We have been adding capacity for 100G-and-beyond products steadily through the year and we have made progress to eliminate bottlenecks in our supply chain. As a result, we are starting to see the benefits of the increasing output for ultra-narrow line-width tunable lasers as well as coherent receivers, EML lasers, 100G client modules and multicast switches," he adds.

"Capacity constraints continue to exist throughout the overall industry supply chain, which has an effect on our growth rate," Jenks continues. "As incremental industry bottlenecks are addressed, we expect the underlying market demand for 100G-and-beyond products will drive significant growth into 2017 and beyond. This will happen as 100G deployments continue to expand globally for both telecom and data-center applications and as the bulk of our new capacity comes online."

Taking this into account, NeoPhotonics expects full-year revenue growth for 2016 to be about 22% (versus 10.9% in 2015), despite annual PON product revenue falling from nearly $45m to about $30m. "Our capacity additions provide volume increases of 50% or more in coherent products and EML lasers and more than doubling of volume in switches and 100G modules next year," says Jenks. Hence, 2017 should see a higher growth rate (most likely more than 25%), despite the planned end-of-life for certain PON products by mid-2017.

"When our PON changes are complete, our results will no longer have to overcome headwinds from declining revenues from lower-speed products," says Jenks. "Rather, our full product portfolio will be focused on the highest-performance and highest-speed requirements, which are in the highest-growth market segments."

"We have also taken steps to accelerate some of our key R&D developments to intersect new market demand requirements for higher-speed 400G-and-beyond applications and for certain products used in coherent modules," notes Jenks. "We are continuing to launch products and capabilities in support of the industry need for speed at 200G, 400G and even 600G data rates." NeoPhotonics hence expects its R&D investment to exceed prior plans by 1-2% of revenue as it supports these additional programs, due to accelerating some programs "rather dramatically".

See related items:

NeoPhotonics' Q2 revenue up 16% year-on-year to $99.1m, driven by 100G

NeoPhotonics' revenue rises 11% in Q1 to record $99.1m

NeoPhotonics reports record revenue of $89.1m for Q4, driven by 100G sales in China

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

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

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