NeoPhotonics third quarter revenue disappoints

Let down by Huawei, its largest customer, NeoPhotonics Corp. (NYSE: NPTN) reported a 16% sequential decrease in revenue during its third quarter, which ended September 30, 2011. The $44 million the company earned during the quarter also represented a 7% decline versus the same quarter in 2010.

Let down by Huawei, its largest customer, NeoPhotonics Corp. (NYSE: NPTN) reported a 16% sequential decrease in revenue during its third quarter, which ended September 30, 2011. The $44 million the company earned during the quarter also represented a 7% decline versus the same quarter in 2010.

The company experienced a net loss of $4.1 million in the quarter, a reversal from the net income of $13.6 million it saw in the previous quarter and the $0.1 million it eked out in the third quarter of 2010. Included in the loss was $0.3 million related to the acquisition of Santur Corp. (see “NeoPhotonics agrees to acquire Santur”)

On the positive side, gross margin in the quarter grew to 27.7%, an increase of 1.2% sequentially. However, that bump paled compared to the 30.2% margin from the third quarter of 2010.

“In the third quarter, we recorded revenue of $44.0 million, which fell short of our original projections for revenue and is disappointing,” said Tim Jenks, NeoPhotonics’ chairman, president, and CEO. “Lower than projected volumes from our largest customer during the quarter negatively impacted our top line. Accordingly, our vendor-managed inventory for all customers of $8.4 million as of the end of the quarter was also considerably higher than our internal projections.

“Nevertheless, we continued to experience sequential growth from many of our other customers, notably in the U.S. and Europe. A positive mix of product revenue and continued growth in our 100G coherent products contributed to the third sequential quarter of gross margin expansion, to 27.7% on a GAAP basis,” Jenks added.

Speaking to analysts on an earnings call this morning, Jenks noted that while NeoPhotonics does not use Fabrinet as a contract manufacturer, the flooding in Thailand still could negatively affect his company’s business. Jenks noted that NeoPhotonics’ products often are used alongside of those from other vendors, some of whom face direct effects from the flood-related closings of two of Fabrinet’s facilities (see “Thai rains knock out Fabrinet, worry optical communications customers”). Therefore, delays in acquiring these complementary products from NeoPhotonics’ competitors may have a ripple effect that reduces demand for NeoPhotonics’ offerings, Jenks said.

On the other hand, in designs where NeoPhotonics products are already qualified as a second source, the company may see an increase in demand to offset flood-related delays in product delivery from their competitors, Jenks allowed.

Jenks also revealed that the company has “formulated an approach” for a switching product for coherent network applications. Work on the switch will continue over the next several quarters.

Looking forward, NeoPhotonics expects ongoing “volatility in volumes” from Huawei, the flooding in Thailand, and the weakness in the world economy will offset the $5 million to $6 million additional revenues it expects from Santur in the current quarter. As a result, the company forecasts revenue for the fourth quarter will be flat to up, in the range of $45 million to $50 million and non-GAAP gross margin to be in the range of 19% to 22%. This would equate to a GAAP diluted net loss per share to be in the range of $0.45 to $0.55.

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