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NeoPhotonics Reports Second Quarter 2016 Financial Results

Revenue of $99.1 million for the quarter, up 16% year over year
Raises full year outlook to 22-25% growth year on year
Achieves high end of profitability outlook; GAAP net income up 49% year on year

SAN JOSE, Calif.--(BUSINESS WIRE)--Aug. 8, 2016-- NeoPhotonics Corporation (NYSE: NPTN), a leading designer and manufacturer of advanced hybrid photonic integrated optoelectronic modules and subsystems for bandwidth-intensive, high-speed communications networks, today announced financial results for its second quarter ended June 30, 2016.

“Globally, we continue to see the overall environment for 100G and beyond products very robust across both telecom and datacenter applications. In spite of PON market softness, we delivered solid financial results in the second quarter including strong profitability at 15 cents per share and cash generation of approximately $10 million. We are accelerating our high speed product growth and we have announced the end of life of our declining and lower margin PON products,” stated Tim Jenks, Chairman and CEO of NeoPhotonics. “We are experiencing an unprecedented level of demand for our 100G products, which we’re seeing as a major and sustaining mid-term trend in China as well as in the west. Given these industry trends and our strong market position, we are raising and narrowing our expected revenue growth for 2016 to a range of 22-25%,” concluded Mr. Jenks.

Second Quarter Summary

Revenue was $99.1 million, up $13.8 million, or 16.1%, from the second quarter of 2015, and flat from the prior quarter
GAAP Gross margin was 27.8%, down from 30.6% in the second quarter of 2015, and down from 31.4% in the prior quarter
Non-GAAP Gross margin was 29.3%, down from 32.3% in the second quarter of 2015, and down from 32.8% in the prior quarter
GAAP Net income was $2.7 million, up from $1.8 million in the second quarter of 2015, and up from $2.3 million in the prior quarter
Non-GAAP Net income was $6.9 million, up from $5.3 million in the second quarter of 2015, down slightly from $7.0 million in the prior quarter
GAAP Diluted earnings per share was $0.06, up from $0.05 per share in the second quarter of 2015 and up from the $0.05 per share in the prior quarter
Non-GAAP Diluted earnings per share was $0.15, up from $0.14 per share in the second quarter of 2015, and flat with $0.15 in the prior quarter
Adjusted EBITDA was $12.0 million, up from $11.4 million in the second quarter of 2015, and down slightly from $12.3 million in the prior quarter

Non-GAAP results exclude $1.3 million of amortization of acquisition-related intangibles and $2.2 million of stock based compensation expenses and $0.8 million of transaction costs.

At June 30, 2016, cash and cash equivalents, short-term investments and restricted cash, together totaled $113.5 million, up $9.7 million from $103.8 million at March 31, 2016. Restricted cash at June 30, 2016 was $2.6 million, down $0.1 million from March 31, 2016.

Outlook for the Quarter Ending September 30, 2016

	GAAP	Non-GAAP
Revenue	$100 to $106 million
Gross Margin	28% to 30%	29% to 31%
Operating Expenses	$26 to $28 million	$23 to $25 million
Earnings per share	$0.01 to $0.09	$0.09 to $0.17

The Non-GAAP outlook for the third quarter of 2016 excludes the impact of expected amortization of intangibles of approximately $1.2 million and the anticipated impact of stock-based compensation of approximately $2.3 million, of which $0.7 million is estimated for cost of goods sold.

The Company announced that it will end of life the sales of PON products within a year. Revenue for PON products for the last four quarters was $43.9 million and had gross margins in the range of 15-20%. For the second half of 2016, the company expects PON products revenue to be less than $10 million with gross margins in the range of 10-15%, down from revenues of $19.8 million in the first half of 2016.

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, August 8, 2016, at 4:30 P.M. Eastern Time (1:30 p.m. Pacific Time). The call will be available, live, to interested parties by dialing +1 844-809-8111. For international callers, please dial +1 541-797-7255. The Conference ID number is 49142007. A live webcast will be available in the Investor Relations section of NeoPhotonics website at: www.neophotonics.com.

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

About NeoPhotonics

NeoPhotonics is a leading designer and manufacturer of advanced hybrid photonic integrated optoelectronic modules and subsystems for bandwidth-intensive, high-speed communications networks. 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, Russia 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, the Company’s market position and industry trends. 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: possible reduction in or volatility of customer orders or delays in shipments of products to customers; timing of customer drawdowns of vendor-managed inventory; 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; economic conditions or natural disasters; volatility in utilization of manufacturing operations, supporting utility services and other 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; the Company’s reliance on a small number of customers for a substantial portion of its revenues; potential pricing pressure that may arise from changing supply or demand conditions in the industry; the impact of any previous or future acquisitions; challenges involving integration of acquired businesses and utilization of acquired technology,; the impact of the discontinuance or end of life of certain products, including certain tunable laser and PON 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, 2015 and its Form 10-Q for the three months ended March 31, 2016. All forward-looking statements are made as of the date of this press release, and the Company disclaims any duty to update such statements.


NeoPhotonics Corporation
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands)


	As of
	Jun. 30, 2016			Dec. 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	82,476		$	76,088
Short-term investments		28,427			23,294
Restricted cash		2,580			2,660
Accounts receivable, net		86,859			83,161
Inventories, net		61,515			65,602
Prepaid expenses and other current assets		13,410			12,393
Total current assets		275,267			263,198
Property, plant and equipment, net		76,625			62,618
Purchased intangible assets, net		7,528			9,852
Goodwill		1,115			1,115
Other long-term assets		4,888			5,095
Total assets	$	365,423		$	341,878

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	64,133		$	50,620
Notes payable and short-term borrowing		32,389			32,657
Current portion of long-term debt		892			760
Accrued and other current liabilities		21,919			27,950
Total current liabilities		119,333			111,987
Long-term debt, net of current portion		12,144			10,759
Other noncurrent liabilities		8,456			7,476
Total liabilities		139,933			130,222

Stockholders' equity:
Common stock		104			102
Additional paid-in capital		520,249			511,750
Accumulated other comprehensive loss		(1,376	)		(1,723	)
Accumulated deficit		(293,487	)		(298,473	)
Total stockholders' equity		225,490			211,656
Total liabilities and stockholders' equity	$	365,423		$	341,878

NeoPhotonics Corporation
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except percentages and per share data)


	Three Months Ended									Six Months Ended
	Jun. 30, 2016			Mar. 31, 2016			Jun. 30, 2015			Jun. 30, 2016			Jun. 30, 2015

Revenue	$	99,129		$	99,145		$	85,372		$	198,274		$	166,756
Cost of goods sold (1)		71,600			68,023			59,226			139,623			116,557
Gross profit		27,529			31,122			26,146			58,651			50,199
Gross margin		27.8	%		31.4	%		30.6	%		29.6	%		30.1	%
Operating expenses:
Research and development (1)		11,780			12,952			11,457			24,732			21,939
Sales and marketing (1)		3,807			3,931			3,906			7,738			7,650
General and administrative (1)		7,841			9,084			7,419			16,925			15,615
Amortization of purchased intangible assets		460			453			448			913			897
Acquisition-related costs		775			-			147			775			287
Restructuring charges		-			-			20			-			26
Total operating expenses		24,663			26,420			23,397			51,083			46,414
Income from operations		2,866			4,702			2,749			7,568			3,785
Interest income		77			55			23			132			53
Interest expense		(99	)		(102	)		(456	)		(201	)		(962	)
Other income (expense), net		458			(1,304	)		602			(846	)		556
Total interest and other income (expense), net		436			(1,351	)		169			(915	)		(353	)
Income before income taxes		3,302			3,351			2,918			6,653			3,432
Provision for income taxes		(626	)		(1,041	)		(1,127	)		(1,667	)		(1,541	)
Net income attributable to NeoPhotonics Corporation common stockholders	$	2,676		$	2,310		$	1,791		$	4,986		$	1,891
Basic net income per share	$	0.06		$	0.06		$	0.05		$	0.12		$	0.06
Diluted net income per share	$	0.06		$	0.05		$	0.05		$	0.11		$	0.05
Weighted averages shares used to compute basic net income per share		41,603			41,121			35,684			41,362			34,240
Weighted averages shares used to compute diluted net income per share		44,320			43,648			37,294			44,042			35,128
(1) Includes stock-based compensation expense as follows for the periods presented:
Cost of goods sold	$	719		$	589		$	410		$	1,308		$	780
Research and development		556			971			501			1,527			994
Sales and marketing		365			887			447			1,252			900
General and administrative		590			992			568			1,582			1,308
Total stock-based compensation expense	$	2,230		$	3,439		$	1,926		$	5,669		$	3,982

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									Six Months Ended
	Jun. 30, 2016			Mar. 31, 2016			Jun. 30, 2015			Jun. 30, 2016			Jun. 30, 2015

NON-GAAP GROSS PROFIT:
GAAP gross profit	$	27,529		$	31,122		$	26,146		$	58,651		$	50,199
Stock-based compensation expense		719			589			410			1,308			780
Amortization of purchased intangible assets		848			841			837			1,689			1,676
Depreciation of acquisition-related fixed asset step-up		(64	)		(62	)		(43	)		(126	)		129
Amortization of acquisition-related inventory step-up		-			-			78			-			156
Restructuring charges		-			-			125			-			125
Non-GAAP gross profit	$	29,032		$	32,490		$	27,553		$	61,522		$	53,065
Non-GAAP gross margin as a % of revenue		29.3	%		32.8	%		32.3	%		31.0	%		31.8	%

NON-GAAP TOTAL OPERATING EXPENSES:
GAAP total operating expenses	$	24,663		$	26,420		$	23,397		$	51,083		$	46,414
Stock-based compensation expense		(1,511	)		(2,850	)		(1,516	)		(4,361	)		(3,202	)
Amortization of purchased intangible assets		(460	)		(453	)		(448	)		(913	)		(897	)
Depreciation of acquisition-related fixed asset step-up		(83	)		(93	)		(123	)		(176	)		(413	)
Acquisition-related costs		(775	)		-			(147	)		(775	)		(287	)
Restructuring charges		-			-			(20	)		-			(26	)
Litigation		-			-			-			-			(278	)
Non-GAAP total operating expenses	$	21,834		$	23,024		$	21,143		$	44,858		$	41,311
Non-GAAP total operating expenses as a % of revenue		22.0	%		23.2	%		24.8	%		22.6	%		24.8	%

NON-GAAP OPERATING INCOME:
GAAP income from operations	$	2,866		$	4,702		$	2,749		$	7,568		$	3,785
Stock-based compensation expense		2,230			3,439			1,926			5,669			3,982
Amortization of purchased intangible assets		1,308			1,294			1,285			2,602			2,573
Depreciation of acquisition-related fixed asset step-up		19			31			80			50			542
Amortization of acquisition-related inventory step-up		-			-			78			-			156
Acquisition-related costs		775			-			147			775			287
Restructuring charges		-			-			145			-			151
Litigation		-			-			-			-			278
Non-GAAP income from operations	$	7,198		$	9,466		$	6,410		$	16,664		$	11,754
Non-GAAP operating margin as a % of revenue		7.3	%		9.5	%		7.5	%		8.4	%		7.0	%

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									Six Months Ended
	Jun. 30, 2016			Mar. 31, 2016			Jun. 30, 2015			Jun. 30, 2016			Jun. 30, 2015
NON-GAAP NET INCOME:
GAAP net income	$	2,676		$	2,310		$	1,791		$	4,986		$	1,891
Stock-based compensation expense		2,230			3,439			1,926			5,669			3,982
Amortization of purchased intangible assets		1,308			1,294			1,285			2,602			2,573
Depreciation of acquisition-related fixed asset step-up		19			31			80			50			542
Amortization of acquisition-related inventory step-up		-			-			78			-			156
Acquisition-related costs		775			-			147			775			287
Restructuring charges		-			-			145			-			151
Litigation		-			-			-			-			278
Income tax effect of Non-GAAP adjustments		(135	)		(124	)		(109	)		(259	)		(358	)
Non-GAAP net income	$	6,873		$	6,950		$	5,343		$	13,823		$	9,502
Non-GAAP net income as a % of revenue		6.9	%		7.0	%		6.3	%		7.0	%		5.7	%

ADJUSTED EBITDA:
GAAP net income	$	2,676		$	2,310		$	1,791		$	4,986		$	1,891
Stock-based compensation expense		2,230			3,439			1,926			5,669			3,982
Amortization of purchased intangible assets		1,308			1,294			1,285			2,602			2,573
Depreciation of acquisition-related fixed asset step-up		19			31			80			50			542
Amortization of acquisition-related inventory step-up		-			-			78			-			156
Acquisition-related costs		775			-			147			775			287
Restructuring charges		-			-			145			-			151
Litigation		-			-			-			-			278
Interest expense, net		22			47			433			69			909
Provision for income taxes		626			1,041			1,127			1,667			1,541
Depreciation expense		4,357			4,128			4,375			8,485			8,931
Adjusted EBITDA	$	12,013		$	12,290		$	11,387		$	24,303		$	21,241
Adjusted EBITDA as a % of revenue		12.1	%		12.4	%		13.3	%		12.3	%		12.7	%

BASIC AND DILUTED NET INCOME PER SHARE:
GAAP basic net income per share	$	0.06		$	0.06		$	0.05		$	0.12		$	0.06
GAAP diluted net income per share	$	0.06		$	0.05		$	0.05		$	0.11		$	0.05
Non-GAAP basic net income per share	$	0.17		$	0.17		$	0.15		$	0.33		$	0.28
Non-GAAP diluted net income per share	$	0.15		$	0.15		$	0.14		$	0.31		$	0.26

SHARES USED TO COMPUTE GAAP AND NON-GAAP BASIC NET INCOME PER SHARE		41,603			41,121			35,684			41,362			34,240
SHARES USED TO COMPUTE GAAP DILUTED NET INCOME PER SHARE		44,320			43,648			37,294			44,042			35,128
SHARES USED TO COMPUTE NON-GAAP DILUTED NET INCOME PER SHARE		45,393			45,113			38,465			45,246			36,054

View source version on businesswire.com: http://www.businesswire.com/news/home/20160808006152/en/

Source: NeoPhotonics Corporation

NeoPhotonics Corporation
Clyde R. Wallin, +1-408-678-1852
Chief Financial Officer
ray.wallin@neophotonics.com
or
Sapphire Investor Relations, LLC
Erica Mannion, +1-617-542-6180
Investor Relations
ir@neophotonics.com