NeoPhotonics Corp (NYSE: NPTN) is a leading designer and manufacturer of optoelectronic solutions for the highest speed communications networks in telecom and data center applications. The Company’s products enable cost-effective, high-speed data transmission and efficient allocation of bandwidth over communications networks.
On 5th October, NPTN announced its restructuring actions and preliminary financial results for the third quarter. As a part of its continuing efforts to improve profitability and cash flow, the Company has implemented reduction in force, real estate consolidation, a write-down of inventory for certain programs and assets and a write-down of idle assets.
The restructuring initiatives are expected to help in achieving quick breakeven revenue levels, profitability and free cash flow, while maintaining the Company’s focus on its core capabilities, including its industry-leading coherent components and solutions for datacenter interconnect and telecommunications systems.
The actions being taken are expected to reduce quarterly operating expenses with immediate impact and achieve an approximately two-million-dollar reduction when fully realized in the first quarter of 2018.
The costs to implement these actions are expected to be approximately $4.8 million, with $4.2 million in asset-write off costs and $0.6 million in severance costs. The Company expects to incur approximately $4.6 million of these costs in the third quarter with the remainder to be incurred in the fourth quarter.
Notwithstanding these actions, the company continues to maintain its research and development focus on products for next-generation coherent systems, operating at 400 Gigabits/sec to beyond 1 Terabit/sec, wherein its advanced hybrid photonic integration provides the highest value.
In addition to the restructuring activities, the Company also provided preliminary estimated financial results for the third quarter of 2017.
| Revised Outlook for the Quarter Ending September 30, 2017
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These preliminary results are lower than previously provided revenue of $70 to $76 million, GAAP gross margin of 23% to 26%, and GAAP net loss per share of $0.21 to $0.11.
The performance was negatively impacted by reduced production levels during the quarter resulting from a lack of demand levels in China. This affected overall capacity utilization and gross margin in the third quarter. It said, the company anticipates reduced inventory levels in the fourth quarter, leading to higher-than-expected financial and operational flexibility.
Moreover, while China softness has continued into the third quarter, there is an expectation of relative stability in demand over the medium term.
If the Chinese demand improves, NeoPhotonics is well placed to profit from it and is likely to display considerable operational leverage. Also, this is expected to be supported by company’s recent restructuring initiatives and gradual decrease in inventory levels. As a result, we anticipate modest improvement in the liquidity and overall financial performance of the company.
About the Company: NeoPhotonics is a leading designer and manufacturer of optoelectronic solutions for the highest speed communications networks in telecom and data center 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.
Second quarter financial results:
- Revenue was $73.2 million, up $1.5 million, or 2%, from the prior quarter
- Gross margin was 22.9%, down from 25.8% in the prior quarter
- Net loss was $9.3 million, an improvement from a net loss of $11.5 million in the prior quarter
Liquidity and financial flexibility: As of June 30, 2017, cash and cash equivalents, short-term investments and restricted cash, together totaled $79.0 million, down from $91.5 million at March 31, 2017. Restricted cash as of June 30, 2017, was $3.3 million, down from $3.7 million at March 31, 2017.
The outlook for the third quarter:
Upcoming results: The Company will report financial results for the third quarter ended September 30, 2017, after market close on Monday, November 6, 2017.
Revenue and profitability guidance: Revenue is expected to be in the range of $69 to $71 million, with GAAP gross margin of approximately 10% to 13% and GAAP loss per share of $0.50 to $0.40, inclusive of restructuring charges.
Liquidity and financial flexibility guidance: Cash, cash equivalents, and restricted cash totaled approximately $74 million at the end of the third quarter.
Key risk factors and potential stock drivers:
The immediate and positive outcome of the NeoPhotonics restructuring activities will drive its near-term operational profile, as the company doesn’t have much of a profitable history.
Notwithstanding recent initiatives, operations are expected to remain working capital-intensive for NPTN. Any further stretch in the working capital cycle will adversely affect liquidity and will hence remain a key monitorable.
The company’s present business risk profile and offtake situation are significantly dependent on China. Therefore, and as long as we don’t see meaningful improvement in Chinese demand, the company is less likely to reflect a sharp surge in its stock prices.
It said, should the Chinese demand come back, it would trigger significant operating leverage for the company.
The company’s near-term stock movement is also dependent on its upcoming quarterly result, any major adversities with the same could impinge the stock performance significantly.
Chart:
- On Friday, October 27th, 2017, NPTN closed at $5.27 on an average volume of 1.42 million shares exchanging hands. Market capitalization is $229.98 million. The current RSI is 46.32
- In the past 52 weeks, shares of NPTN have traded as low as $4.61 and as high as $15.37
- At $5.27, shares of NPTN are trading below its 50-day moving average (MA) at $5.66 and below its 200-day MA at $8.11
- The present support and resistance levels for the stock are at $4.99 & $5.82 respectively.
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