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NeoPhotonics Reports Third Quarter 2018 Financial Results

NeoPhotonics Corporation (NYSE: NPTN), a leading designer and manufacturer of optoelectronic solutions for the highest speed communications networks in telecom and data center applications, today announced financial results for its third quarter ended September 30, 2018.

“With continued strength in demand in the third quarter, combined with increasing volume growth across various product lines, we achieved gross margin expansion of nearly 400bps,” said Tim Jenks, NeoPhotonics Chairman and CEO. “With the returning demand for our core products and our successes thus far with multiple customers for our highest speed products, including 600G, we are enthusiastic about the opportunities we see in 2019 and beyond.”

Third Quarter Summary

  • Revenue was $81.7 million, up 1% quarter-over-quarter and 15% year-over-year
  • Gross margin was 23.2%, up from 19.1% in the prior quarter
  • Non-GAAP Gross margin was 24.0%, up from 20.1% in the prior quarter
  • Diluted net loss per share was $0.18, an improvement from a net loss of $0.24 per share in the prior quarter
  • Non-GAAP diluted net loss per share was $0.05, an improvement from a net loss of $0.14 in the prior quarter
  • Cash generated from operations was $13.5 million, up from negative $1.1 million in the prior quarter
  • Adjusted EBITDA was $6.2 million, up from $3.0 million in the prior quarter

Non-GAAP results in the third quarter of 2018 exclude $4.0 million of stock-based compensation expense, $0.3 million of amortization of acquisition-related intangibles, $0.5 million for a litigation settlement and $1.2 million of restructuring charges. A reconciliation of the Non-GAAP and Adjusted EBITDA financial measures to the most directly comparable GAAP financial measures is provided in the financial schedules portion at the end of this press release.

As of September 30, 2018, cash and cash equivalents, short-term investments and restricted cash, together totaled $64.7 million, down $2.9 million compared to June 30, 2018, after repayment of $18.6 million of debt in the quarter. Restricted cash as of September 30, 2018 was $5.2 million, down $1.6 million compared to June 30, 2018.

 

Outlook for the Quarter Ending December 31, 2018

 

      GAAP     Non-GAAP
Revenue     $87 to $92 million
Gross Margin     22% to 26%     24% to 28%
Operating Expenses     $26 to $27 million     $23 million +/- $0.5 million
Earnings per share     $0.17 to $0.07 net loss     $0.08 net loss to $0.02 net profit
       

The Non-GAAP outlook for the fourth quarter of 2018 excludes the expected impact of stock-based compensation expense of approximately $3.8 million, of which $0.5 million is estimated for cost of goods sold, and the impact of expected amortization of intangibles of approximately $0.3 million.

Non-GAAP and Adjusted EBITDA Measures vs. GAAP Financial Measures

The Company’s non-GAAP and adjusted EBITDA measures exclude certain GAAP financial measures. A reconciliation of the Non-GAAP and Adjusted EBITDA financial measures to the most directly comparable GAAP financial measures is provided in the financial schedules portion at the end of this press release. These non-GAAP financial measures differ from GAAP measures with the same captions and may differ from non-GAAP financial measures with the same or similar captions that are used by other companies. As such, these non-GAAP measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

The Company uses these non-GAAP financial measures to analyze its operating performance and future prospects, develop internal budgets and financial goals, and to facilitate period-to-period comparisons. NeoPhotonics believes that these non-GAAP financial measures reflect an additional way of viewing aspects of its operations that, when viewed with its GAAP results, provide a more complete understanding of factors and trends affecting its business.

Conference Call

The Company will host a conference call today, Friday, November 2, 2018 at 8:00 A.M. Eastern Time (5:00 A.M. Pacific Time). The call will be available, live, to interested parties by dialing 800-949-2175. For international callers, please dial +1 323-994-2131. The Conference ID number is 7938846. Please dial into the conference call 5-10 minutes prior to the scheduled start time.

A live webcast will be available in the Investor Relations section of NeoPhotonics’ website at: http://ir.neophotonics.com/phoenix.zhtml?c=236218&p=irol-calendar.

A replay of the webcast will be available in the Investor Relations section of the Company’s web site approximately two hours after the conclusion of the call and remain available for approximately 30 calendar days.

About NeoPhotonics

NeoPhotonics is a leading designer and manufacturer of optoelectronic solutions for the highest speed communications networks in telecom and datacenter applications. The Company’s products enable cost-effective, high-speed data transmission and efficient allocation of bandwidth over communications networks. NeoPhotonics maintains headquarters in San Jose, California and ISO 9001:2000 certified engineering and manufacturing facilities in Silicon Valley (USA), Japan and China. For additional information visit www.neophotonics.com.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

This press release includes statements that qualify as forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about the following topics: future financial results, demand for the Company’s high-speed products, and the Company’s market position. Forward-looking statements are subject to certain risks and uncertainties that could cause the actual results to differ materially. Those risks and uncertainties include, but are not limited to, such factors as: the Company’s reliance on a small number of customers for a substantial portion of its revenues; market growth in China and other key countries; possible reduction in or volatility of customer orders or delays in shipments of products to customers; timing of customer drawdowns of vendor-managed inventory; potential governmental trade actions; possible disruptions in the supply chain or in demand for the Company’s products due to industry developments; the ability of the Company's vendors and subcontractors to supply or manufacture the Company's products in a timely manner; ability of the Company to meet customer demand; volatility in utilization of manufacturing operations and manufacturing costs; reductions in the Company’s rate of new design wins, and/or the rate at which design wins go into production, and the rate of customer acceptance of new product introductions; potential pricing pressure that may arise from changing supply or demand conditions in the industry; the impact of any previous or future acquisitions or divestitures of assets and related product lines; challenges involving integration of acquired businesses and utilization of acquired technology; the discontinuance or end of life of certain other products; market adoption, revenue growth and margins of acquired products; changes in demand for the Company's products; the impact of competitive products and pricing and alternative technological advances; the accuracy of estimates used to prepare the Company's financial statements and forecasts; the timely and successful development and market acceptance of new products and upgrades to existing products; the difficulty of predicting future cash needs; the nature of other investment opportunities available to the Company from time to time; the Company’s operating cash flow; changes in economic and industry projections; a decline in general conditions in the telecommunications equipment industry or the world economy generally; and the effects of seasonality. For further discussion of these risks and uncertainties, please refer to the documents the Company files with the SEC from time to time, including the Company's Annual Report on Form 10-K for the year ended December 31, 2017. All forward-looking statements are made as of the date of this press release, and the Company disclaims any duty to update such statements.

©2018 NeoPhotonics Corporation. All rights reserved. NeoPhotonics and the red dot logo are trademarks of NeoPhotonics Corporation. All other marks are the property of their respective owners.

 
NeoPhotonics Corporation
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands)
       
 
As of
Sept. 30,

2018

Dec. 31,

2017

ASSETS
Current assets:
Cash and cash equivalents $ 52,099 $ 78,906
Short-term investments 7,441 12,311
Restricted cash 5,195 2,658
Accounts receivable, net 66,620 67,229
Inventories 57,124 67,301
Assets held for sale 3,192 -
Prepaid expenses and other current assets   28,659     36,235  

Total current assets

220,330 264,640
Property, plant and equipment, net 104,965 127,565
Purchased intangible assets, net 3,320 4,294
Goodwill 1,115 1,115
Other long-term assets   3,080     5,339  
Total assets $ 332,810   $ 402,953  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 54,603 $ 69,017
Notes payable and short-term borrowing 3,634 35,607
Current portion of long-term debt 2,798 6,005
Accrued and other current liabilities   46,857     43,242  
Total current liabilities 107,892 153,871
Long-term debt, net of current portion 50,356 40,556
Other noncurrent liabilities   13,388     14,075  
Total liabilities   171,636     208,502  
 
Stockholders' equity:
Common stock 115 111
Additional paid-in capital 559,371 545,953
Accumulated other comprehensive income (loss) (7,569 ) 398
Accumulated deficit   (390,743 )   (352,011 )
Total stockholders' equity   161,174     194,451  
Total liabilities and stockholders' equity $ 332,810   $ 402,953  
 
 
NeoPhotonics Corporation
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except percentages and per share data)
 
 
  Three Months Ended     Nine Months Ended
Sept. 30,

2018

    Jun. 30,

2018

    Sept. 30,

2017

Sept. 30,

2018

    Sept. 30,

2017

 
Revenue $ 81,748 $ 81,102 $ 71,121 $ 231,436 $ 216,023
Cost of goods sold (1)   62,815     65,630     60,608     187,849     170,230  
Gross profit 18,933 15,472 10,513 43,587 45,793
Gross margin 23.2 % 19.1 % 14.8 % 18.8 % 21.2 %
Operating expenses:
Research and development (1) 13,177 13,243 14,662 40,308 44,412
Sales and marketing (1) 4,351 3,891 4,071 12,366 12,913
General and administrative (1) 8,592 7,267 7,637 23,509 26,792
Amortization of purchased intangible assets 118 120 119 357 355
Asset sale related costs 251 79 78 344 229
Restructuring charges 1,133 622 2,829 1,786 3,550
Gain on asset sale   -     -     -     -     (2,000 )
Total operating expenses   27,622     25,222     29,396     78,670     86,251  
Loss from operations (8,689 ) (9,750 ) (18,883 ) (35,083 ) (40,458 )
Interest income 85 122 37 300 141
Interest expense (540 ) (759 ) (495 ) (2,007 ) (743 )
Other income (expense), net   1,310     930     (41 )   1,891     197  
Total interest and other income (expense), net   855     293     (499 )   184     (405 )
Loss before income taxes (7,834 ) (9,457 ) (19,382 ) (34,899 ) (40,863 )
Income tax (provision) benefit   (291 )   (1,080 )   1,195     (2,009 )   1,813  
Net loss $ (8,125 ) $ (10,537 ) $ (18,187 ) $ (36,908 ) $ (39,050 )
 
Basic net loss per share $ (0.18 ) $ (0.24 ) $ (0.42 ) $ (0.82 ) $ (0.90 )
Diluted net loss per share $ (0.18 ) $ (0.24 ) $ (0.42 ) $ (0.82 ) $ (0.90 )
 
Weighted average shares used to compute basic net loss per share   45,476     44,665     43,790     44,804     43,212  
Weighted average shares used to compute diluted net loss per share   45,476     44,665     43,790     44,804     43,212  
 
(1) Includes stock-based compensation expense as follows for the periods presented:
Cost of goods sold $ 553 $ 629 $ 340 $ 1,832 $ 811
Research and development 1,016 829 606 2,618 1,779
Sales and marketing 931 642 393 2,511 1,170
General and administrative   1,541     1,039     595     3,566     1,932  
Total stock-based compensation expense $ 4,041   $ 3,139   $ 1,934   $ 10,527   $ 5,692  
 

NeoPhotonics Corporation

Reconciliation of Condensed Consolidated GAAP Financial Measures to Non-GAAP Financial Measures (Unaudited)
(In thousands, except percentages and per share data)
                   
Three Months Ended Nine Months Ended
Sept. 30,

2018

Jun. 30,

2018

Sept. 30,

2017

Sept. 30,

2018

Sept. 30,

2017

 
NON-GAAP GROSS PROFIT:
GAAP gross profit $ 18,933 $ 15,472 $ 10,513 $ 43,587 $ 45,793
Stock-based compensation expense 553 629 340 1,832 811
Amortization of purchased intangible assets 185 184 202 572 667
Depreciation of acquisition-related fixed asset step-up (71 ) (73 ) (68 ) (213 ) (202 )
End-of-life related inventory write-down - - 1,975 - 1,975
Restructuring charges   22     54     285     168     564  
Non-GAAP gross profit $ 19,622   $ 16,266   $ 13,247   $ 45,946   $ 49,608  
Non-GAAP gross margin as a % of revenue 24.0 % 20.1 % 18.6 % 19.9 % 23.0 %
 
NON-GAAP TOTAL OPERATING EXPENSES:
GAAP total operating expenses $ 27,622 $ 25,222 $ 29,396 $ 78,670 $ 86,251
Stock-based compensation expense (3,488 ) (2,510 ) (1,594 ) (8,695 ) (4,881 )
Amortization of purchased intangible assets (118 ) (120 ) (119 ) (357 ) (355 )
Depreciation of acquisition-related fixed asset step-up (65 ) (68 ) (71 ) (200 ) (216 )
Asset sale related costs (252 ) (79 ) (78 ) (345 ) (229 )
Restructuring charges (1,133 ) (622 ) (2,829 ) (1,786 ) (3,550 )
Litigation settlement (450 ) - - (450 ) 64
Gain on asset sale   -     -     -     -     2,000  
Non-GAAP total operating expenses $ 22,116   $ 21,823   $ 24,705   $ 66,837   $ 79,084  
Non-GAAP total operating expenses as a % of revenue 27.1 % 26.9 % 34.7 % 28.9 % 36.6 %
 
NON-GAAP OPERATING LOSS:
GAAP loss from operations $ (8,689 ) $ (9,750 ) $ (18,883 ) $ (35,083 ) $ (40,458 )
Stock-based compensation expense 4,041 3,139 1,934 10,527 5,692
Amortization of purchased intangible assets 303 304 321 929 1,022
Depreciation of acquisition-related fixed asset step-up (6 ) (5 ) 3 (13 ) 14
Asset sale related costs 252 79 78 345 229
End-of-life related inventory write-down - - 1,975 - 1,975
Restructuring charges 1,155 676 3,114 1,954 4,114
Litigation settlement 450 - - 450 (64 )
Gain on asset sale   -     -     -     -     (2,000 )
Non-GAAP loss from operations $ (2,494 ) $ (5,557 ) $ (11,458 ) $ (20,891 ) $ (29,476 )
Non-GAAP operating margin as a % of revenue (3.1 )% (6.9 )% (16.1 )% (9.0 )% (13.6 )%
 
 

NeoPhotonics Corporation

Reconciliation of Condensed Consolidated GAAP Financial Measures to Non-GAAP Financial Measures (Unaudited) (Continued)

(In thousands, except percentages and per share data)
                   
Three Months Ended Nine Months Ended
Sept. 30,

2018

Jun. 30,

2018

Sept. 30,

2017

Sept. 30,

2018

Sept. 30,

2017

NON-GAAP NET LOSS:
GAAP net loss $ (8,125 ) $ (10,537 ) $ (18,187 ) $ (36,908 ) $ (39,050 )
Stock-based compensation expense 4,041 3,139 1,934 10,527 5,692
Amortization of purchased intangible assets 303 304 321 929 1,022
Depreciation of acquisition-related fixed asset step-up (6 ) (5 ) 3 (13 ) 14
Asset sale related costs 252 79 78 345 229
End-of-life related inventory write-down - - 1,975 - 1,975
Restructuring charges 1,155 676 3,114 1,954 4,114
Litigation settlement 450 - - 450 (64 )
Gain on asset sale - - - - (2,000 )
Income tax effect of Non-GAAP adjustments   (138 )   42     (114 )   (222 )   (117 )
Non-GAAP net loss $ (2,068 ) $ (6,302 ) $ (10,876 ) $ (22,938 ) $ (28,185 )
Non-GAAP net loss as a % of revenue (2.5 )% (7.8 )% (15.3 )% (9.9 )% (13.0 )%
 
ADJUSTED EBITDA:
GAAP net loss $ (8,125 ) $ (10,537 ) $ (18,187 ) $ (36,908 ) $ (39,050 )
Stock-based compensation expense 4,041 3,139 1,934 10,527 5,692
Amortization of purchased intangible assets 303 304 321 929 1,022
Depreciation of acquisition-related fixed asset step-up (6 ) (5 ) 3 (13 ) 14
Asset sale related costs 252 79 78 345 229
End-of-life related inventory write-down - - 1,975 - 1,975
Restructuring charges 1,155 676 3,114 1,954 4,114
Litigation settlement 450 - - 450 (64 )
Gain on asset sale - - - - (2,000 )
Interest (income) expense, net 455 637 458 1,707 602
Income tax (provision) benefit 291 1,080 (1,195 ) 2,009 (1,813 )
Depreciation expense   7,343     7,607     7,016     22,636     19,608  
Adjusted EBITDA $ 6,159   $ 2,980   $ (4,483 ) $ 3,636   $ (9,671 )
Adjusted EBITDA as a % of revenue 7.5 % 3.7 % (6.3 )% 1.6 % (4.5 )%
 
BASIC AND DILUTED NET LOSS PER SHARE:
GAAP basic net loss per share $ (0.18 ) $ (0.24 ) $ (0.42 ) $ (0.82 ) $ (0.90 )
GAAP diluted net loss per share $ (0.18 ) $ (0.24 ) $ (0.42 ) $ (0.82 ) $ (0.90 )
Non-GAAP basic net loss per share $ (0.05 ) $ (0.14 ) $ (0.25 ) $ (0.51 ) $ (0.65 )
Non-GAAP diluted net loss per share $ (0.05 ) $ (0.14 ) $ (0.25 ) $ (0.51 ) $ (0.65 )
 
SHARES USED TO COMPUTE GAAP AND NON-GAAP BASIC NET LOSS PER SHARE   45,476     44,665     43,790     44,804     43,212  
SHARES USED TO COMPUTE GAAP DILUTED NET LOSS PER SHARE   45,476     44,665     43,790     44,804     43,212  
SHARES USED TO COMPUTE NON-GAAP DILUTED NET LOSS PER SHARE   45,476     44,665     43,790     44,804     43,212  

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