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NeoPhotonics Corp. (NYSE:NPTN)

F3Q 2013 Earnings Conference Call

April 9, 2014 4:30 PM ET

Executives

Erica Mannion – IR-Sapphire Investor Relations, LLC

Timothy S. Jenks – Chairman, President and CEO

Clyde Raymond Wallin – SVP and CFO

Analysts

Simon Leopold – Raymond James & Associates, Inc.

Richard Shannon – Craig-Hallum Capital Group LLC

Dave Kang – B. Riley & Co. LLC

Operator

Welcome to the NeoPhotonics conference call to discuss the Company’s restated first and second quarter 2013 financial results and third quarter 2013 financial results, plus the company’s outlook for the fourth quarter of 2013 and first quarter of 2014. This call is being webcast live on the NeoPhotonics event calendar webpage at www.NeoPhotonics.com. This call is the property of NeoPhotonics and any recording, reproduction or transmission of this call without the expressed written consent of NeoPhotonics is prohibited. You may listen to a webcast replay of this call by visiting the event calendar page of the NeoPhotonics website. I would now like to turn the call over to Erica Mannion at Sapphire Investor Relations, Investor Relations for NeoPhotonics.

Erica Mannion

Good afternoon. Thank you for joining us to discuss NeoPhotonics restated first and second quarter 2013 financial results and third quarter 2013 financial results. With me today are Tim Jenks, President and CEO, and Ray Wallin, Chief Financial Officer. Tim will begin with a review of the third quarter, followed by Ray who will provide a financial update including results for the third quarter of 2013 the outlooks for the fourth quarter of 2013 and the first quarter of 2014. Comparisons to prior quarters will be unaudited restated Q1 and Q2 results for 2013. Tim will then conclude with a discussion of trends in the industry and growth opportunities for the company, before opening the call for questions.

We will begin today’s call with the legal disclaimers and safe harbor statement. All material contained in the webcast is the sole property and copyright of NeoPhotonics Corporation, with all rights reserved. Certain statements in this conference call, which are not historical facts, may be considered forward-looking statements that involve risk and uncertainties. Forward-looking statements include statements regarding future business results, future levels of sales and profitability, subsequent events, product and technology development, future customer demand, inventory levels and economic and industry projections. Various factors could cause actual results to differ materially from what is set forth in such forward-looking statements. Some of the factors that could affect the Company’s results have been set forth in our press release dated April 9, 2014 and will also be described in detail in the Company’s SEC filings, including but not limited to, our Annual Report on Form 10-K for the year ended December 31, 2012 and revised Quarterly Reports on Forms 10-Q/A for Q1 and Q2 of 2013 and Form 10-Q for Q3 of 2013, when filed later today. Listeners who do not have a copy of our third quarter 2013 earnings press release may obtain a copy of the press release by visiting the Company’s web site.

Now, I will turn the call over to CEO, Tim Jenks.

Timothy S. Jenks

Thank you for joining us today.

On November 13, 2013 we announced that we would be delayed in filing our Form 10-Q and we hosted a Q3 update call to provide the information we could at that time. We have completed the necessary work to restate our Q1 and Q2of 2013 and at this time we are providing results for the third quarter of 2013.

Before I discuss our business results, I want to call your attention to recent management and board additions. In February we announced that Dr. Rajiv Ramaswami joined our Board of Directors. Dr. Ramaswami serves as Broadcom's Executive Vice President and General Manager of the Infrastructure & Networking Group. And he was previously Vice President and General Manager of the Cloud Services and Switching Technology Group at Cisco Systems. We believe that he will be a strong addition to our Board of Directors.

Also, I want to note that Ray Wallin joined NeoPhotonics as Senior Vice President and Chief Financial Officer in December 2013, succeeding our former interim CFO, Cal Hoagland. Ray comes to NeoPhotonics with more than 30 years of experience in the high technology, industry most recently as Chief Financial Officer of Micrel, Incorporated. Ray has held senior financial management positions at several high growth semiconductor manufacturing companies and has extensive experience with both public and private companies including proven expertise in building a sound financial infrastructure within these companies.

Cal Hoagland has remained with NeoPhotonics as a consultant through our transition and restatement process, as he will continue with us until we file our annual report on Form 10-K with the Securities and Exchange Commission.

Now, moving onto our business and financial results, beginning with our third quarter of 2013.

Our ongoing business activities have remained strong. We have made solid progress in the last twelve months leading up to our September quarter. Our third quarter of 2013reflected the highest revenue in the company’s history at $76.8 million. We achieved a Non-GAAP gross margin of 27.5% and we achieved a Non-GAAPEPS loss of 10 cents per diluted share. Included in the third quarter results are additional G&A expenses required due to the work we have performed on restatements. These details will be discussed later in this call.

Our business continues to be driven by our 100G products including those used in telecom Coherent networks, plus contributions from NeoPhotonics Semiconductor, notably also for 100G products. Revenue from our high speed products, which is predominantly 100G, was$28.4 million or 37% of total revenue in the third quarter of 2013, which is an increase of 31%overthe third quarter of 2012.

Revenue attributable to our “Access” product group was approximately 23% of our total revenue; which was up $2.8million sequentially in dollar terms, reflecting normal seasonal strength in our third quarter. It is worth noting that for the nine months ending September 30, our Access product group is at $48.2 million in revenue, which is down 15.4% from the corresponding nine month period one year earlier. While we have introduced several advancements, notably in OLT modules, over the past few years, the range of PON deployments globally is relatively steady. Combining steady volumes with decreasing prices and new entrants in the PON business, especially in China, makes us less optimistic on the prospects for this product group’s growth going forward.

Across our 100G portfolio we have multiple new products in the pipeline that will go to production in 2014. These include our micro narrow line-width tunable laser for Coherent systems, two new Integrated Coherent Receivers, or ICRs, including a compact one for higher port densities and one for high dynamic range, plus a new CFP2 100G transceiver module product that incorporates numerous internally produced components. We believe that each of these products will make important contributions to our strength in 100G.

At the recent OFC trade show held in San Francisco we introduced a new Integrated Coherent Transmitter (or ICT) that is designed to reduce the size of the transmitter optics for a 100G coherent transport link by a factor of four compared to current approaches. The device combines a narrow line-width tunable laser with a dual polarization QPSK modulator in a single compact package. The modulator section utilizes PIC Integration to combine multiple elements onto a single chip and consists of four indium phosphide based Mach-Zehnder modulators plus multiple other important functionalities. This is a key new product addition as it completes our suite of leading 100G solutions while expanding our Total Addressable Market with the addition of state-of-the-art transmitter and modulator solutions.

I will now turn the call over to Ray Wallin, our Chief Financial Officer, who will provide a financial update including financial results for the third quarter of 2013 and the outlooks for the fourth quarter of 2013 and the first quarter of 2014.

Clyde Raymond Wallin

Thank you, Tim, and good afternoon. First of all, let me say that I am very pleased to be part of the NeoPhotonics team as Chief Financial Officer. I believe that this is an exciting time at NeoPhotonics as the company is well positioned to maintain a leadership position in the accelerating global adoption of 100G.

My near-term goals are to get the company current with its SEC reporting requirements, to strengthen and grow our team by hiring additional permanent financial professionals and to significantly improve our internal financial and business controls to remediate our material weaknesses and move towards achieving profitability. In addition to me joining the Company in December 2013, we previously added a Vice President and Worldwide Controller, and recently added a Senior Worldwide Operations Controller. We are currently supplementing this team with interim financial professionals as we continue to build up our finance organization. As was discussed on our Q3 2013 business update call in November 2013, the Company delayed filing its September 30, 2013 Form 10-Q to address a purchase price accounting issue related to our acquisition of NeoPhotonics Semiconductor in Japan duringQ1 2013 and to allow our previously announced new auditor, Deloitte and Touche, to review our financials for each of Q1, Q2 and Q3 2013.

In our November call, we noted we would be restating our Q1 and Q2 2013 financial statements for a matter related to our Q1 2013 acquisition of NeoPhotonics Semiconductor in Japan. Concurrently, we reflected measurement period adjustments to the purchase price allocation which is reflected in the revised Q1 and Q2 filings.

Separate from our restatement work and as part of the SEC’s periodic review process, we received a comment letter from the SEC regarding our 2012 Form 10-K relating to the Rusnano private placement that was completed in April 2012. As a result of the SEC comments, we have enhanced our disclosures in this area.

The net changes to our financials for Q1 and Q2 are complete, and are shown in tables within our amended 10-Qs which will be filed with the SEC today. Let me note the adjustments for the P&L: There was no change in revenues in either the first or second quarter; gross margins were slightly improved in both quarters; our Q1net loss per diluted share increased by6 cents to 40 cents per diluted share, primarily resulting from real estate transfer and transaction taxes that are considered to be acquisition costs, and reconsideration of our income taxes for NeoPhotonics Semiconductor in light of information that came to our attention after the acquisition; our Q2 net loss per diluted share decreased by4 cents to 27 cents, primarily resulting from reconsideration of our income taxes for NeoPhotonics Semiconductor in light of information that also came to our attention after the acquisition.

Now I will focus on our business results for the third quarter of 2013. Our revenue for the third quarter of 2013 was $76.8 million, which was toward the higher end of our guidance range and the highest quarterly revenue in the Company’s history. Our record quarterly revenue was primarily due to increased revenue from NeoPhotonics Semiconductor, whose revenue was $14.0 million. This was above our projected range for this business and was a strong contributor to the quarter.

We had three 10% or greater customers in the third quarter of 2013: Alcatel-Lucent at approximately 17 %; compared to 12% in the second quarter; Ciena comprised approximately 13%; compared to 15% in the second quarter; Huawei Technologies comprised approximately 23% of our total revenue compared to 28% in the second quarter

Geographically, our revenue mix for the third quarter was 23% in the Americas, 42% in China, 9% in Japan and 26% in the rest of the world. Note that we track shipment destination rather than end use destination as we talk about geographies.

GAAP gross margin for the third quarter of 2013 was 23.7%, an expansion of over2.9 percentage points sequentially from the 20.8% reported for the second quarter of 2013. Non-GAAP gross margin for the third quarter was 27.5%, at the high end of our projection of 24.0% to 28.0%, and was up 2.4 percentage points from the previous quarter’s Non-GAAP gross margin of 25.1%.Approximately one half of the 2.4 percentage point sequential increase in Non-GAAP gross margin resulted from improved warranty and inventory reserves and the other half resulted from higher manufacturing efficiencies and better material costs.

Continuing with our income statement, SG&A spending for the third quarter was $12.5 million, or 16.3% of revenues, up from $11.2 million, or 15.0% of revenues, in the second quarter. Of this, G&A expenses from the third quarter were $8.9 million, or 11.6% of revenue, up from $7.9 million, or 10.5% of revenue in the prior quarter. The increase in G&A is primarily due to higher accounting fees and consulting costs in accounting. As a result of the additional work performed to enhance our internal controls, we incurred additional G&A expenses of approximately $1 million for the quarter, and we anticipate incurring slightly higher G&A expenses in the fourth quarter of 2013and in the first and second quarter of 2014.

Research and Development expenses were $12.2 million, or 15.9% of revenue, up from $11.1 million, or 14.8% of revenue in the prior quarter. The increase in research and development resulted from making additional investments in our 100G product development efforts.

Total operating expenses in the third quarter of 2013 were$26.7 million, up approximately $3.3 million from the second quarter. Sequentially, our increase in operating expenses were primarily attributed to the previously mentioned increases in SG&A and Research and Development, a restructuring charge of $0.5 million, as we streamlined costs in our lower gross margin legacy products, and a $1.0 million increase to contingent consideration to be paid to the former owners of Santur.

Santur was a company that we acquired in2011. In January 2014 we reached a non-binding verbal agreement, subject to finalization and execution of a written agreement, covering two post-closing items related to this transaction. First, the transaction had a two-year escrow period which ended in October 2013. The escrow amount was $6 million, or approximately12.7% of the acquisition consideration, which would be either paid to the Seller or returned. The parties have now reached a verbal agreement on disposition of these funds. Under the agreement, NeoPhotonics will be paid $3.9 million for claims against the escrowed funds, offset by $2.0 million of contingent consideration payable to the former owners of Santur as an earn out, of which $1.0 million was already accrued in the first half of 2013. This would net to NeoPhotonics$1.9 million. As a subsequent event to the third quarter of 2013, and because the quarter’s results had not yet been filed with the SEC, the $1.0 million additional contingent consideration that was not previously accrued, is recorded in this quarter. We anticipate that we will record the $3.9 million gain when it is paid from the escrow account.

Operating loss for the third quarter was $8.5 million, or 11.1% of revenues, compared to an operating loss of $7.8 million, or 10.4% of revenues for the second quarter of 2013.The effective tax rate for the quarter was 9.0%,as the company made a provision for taxes related to NeoPhotonics Semiconductor in Japan, and for our operations in China.

GAAP net loss for the third quarter of 2013 was $9.4 million, compared with a net loss of $8.3 million in the second quarter of 2013. The increase in the GAAP net loss was primarily driven by our having a tax provision of $0.8 million in the third quarter compared to a tax benefit of $0.1 million in the second quarter of 2013. Diluted loss per share from continuing operations for the third quarter of 2013 was 30 cents per share, slightly worse than a loss of 27 cents per share in the prior quarter and compares to earnings per share of 2 cents per share in the third quarter of 2012.

Non-GAAP net loss from continuing operations for the third quarter of 2013 was $3.2million, improved from the restated net loss of $3.8 million in the second quarter of 2013. Non-GAAP diluted loss per share from continuing operations for the third quarter of 2013 was 10 cents per share as compared to a 12cents per share restated net loss in the preceding quarter, and is down from diluted loss per share from continuing operations of 8 cents per share in the year ago period. Adjusted EBITDA was an income of $1.9 million, an increase from a restated income of $1.4 million in the second quarter and down from $6.4 million in the third quarter of 2012.

Non-GAAP net loss and diluted net loss per share from continuing operations for the third quarter of 2013 excludes certain items that totaled approximately $6.1 million, and these items are described in our press release issued today and which can be found on our website.

Now turning to the balance sheet: our liquidity position remained strong in the quarter. Cash, cash equivalents and short term investments were $70.6 million at the end of the third quarter, compared to $74.4 million at the end of the second quarter and $101.2 million at the end of 2012. Total debt at September 30, 2013 was $44.9 million, a decrease of approximately $1.0 million from the second quarter of 2013.

Cash flow from operations for the quarter was a negative $0.9 million, compared to a negative $5.3 million in the prior quarter.

Accounts receivable balances increased by $5.9 million in the third quarter to $78.9 million, and days sales outstanding were 89days at the end of the third quarter as shipments were back-end loaded, compared to 82days at the end of the prior quarter. The company does not have any significant collection issues.

Net inventory increased approximately $5.5 million during the third quarter to $63.7 million while days of inventory on hand increased to 94days from 91days in the second quarter due to a buildup of inventory for existing products which we expect to be sold in the next several quarters. . Third quarter depreciation and amortization was $5.4 million, approximately the same as recorded in the second quarter.

Capital expenditures totaled $3.8 million in the third quarter, down from $5.4 million in the previous quarter, and slightly down from $4.0 million in the year-ago period. During the quarter the Company purchased additional R&D equipment and manufacturing equipment to provide for on-going R&D programs and production ramps. We continue to expect capital expenditures to generally be in the range of $2.0 million to $4.0 million per quarter for the next several quarters.

Before discussing our outlook for Q4 2013 and Q12014 I would like to provide some insight on some of the factors that can impact our financial results going forward.

First, we expect volume growth of 100G; however at declining prices, due to (1) annual negotiations, which were completed in December, and (2) new entrants into the market. Therefore revenue growth and gross margins will reflect both trends. Second, as Tim stated earlier, overall we are seeing some slowing in our PON business within the Access product group over the longer term that will be offset by our strong 100G growth.

Our business in China has been strengthening but still has considerable variability, due both to our having several large customers there, but also due to the fact that major tenders that are already awarded and others that are planned for deployment during the next year offer only limited guidance as to their timing, volume and duration.

A final point is that through the third quarter of 2013, we were producing the majority of our integrated tunable laser assembly, or “ITLA”, products with an outsourced contract manufacturing partner. During our fourth quarter we undertook and completed the transfer and consolidation of ITLA production in-house for purposes of better managing quality, volume, speed in ramping, and cost. This action is completed; however, it did have a minor impact on our tunable product shipments toward year end.

Now, I will provide a summary of our updated outlook for the fourth quarter of 2013 and the first quarter of 2014.

We anticipate revenue for the fourth quarter ending December 31, 2013 to be in the range of $74to $75 million, updating our prior outlook provided in November 2013 of $70.0 to $76.0 million;

Non-GAAP gross margin will be in the range of 25% to 28%; diluted loss per share from continuing operations will be in the range of .15 to .20, and on a Non-GAAP basis in the range of a loss of 5 to 10 cents per diluted share; we anticipate gross margin and operating expenses for the fourth quarter ending December 31, 2013 to be in line with the third quarter, and we are investing steadily in our R&D, and we expect to continue having a higher than normal level of G&A, as I previously noted.

I would also like to note that we did not provide an outlook previously on Non-GAAP gross margin or diluted earnings per share.

The Non-GAAP outlook for the fourth quarter of 2013 excludes approximately $2.9 million of expenses related to the expected amortization of intangibles, anticipated impact of stock-based compensation and other assets. Of these expenses, $1.1 million is estimated to relate to cost of goods sold.

Moving on to the first quarter of 2014, recall that Q1 is seasonally low historically due to pricing negotiations completed before year end, plus seasonal impact on our Access business and the effective shortening of the quarter with holidays including Chinese New Year. With this in mind, we anticipate revenue for the first quarter ending March31, 2014 to be in the range of $67 million to $69million.

With that, I will turn the call back to Tim.

Timothy S. Jenks

Thank you, Ray. We continue to work on increasing our content per port in 100G systems, and we believe that our percent of revenue in the 100G business is one of the highest in the market for vendors of optical modules and subsystems. Notably, recent tender awards in China are driving further demand growth for these products, which increases our confidence, at least through Q1 and Q2 of 2014. In addition to our 100G products, our 10G transceivers continued to show strong year-on-year growth, although down in the third quarter from a record second quarter. Our backlog for these products remains strong through the current period. Many of our 10G products are used in wireless backhaul and OTN networks in China and elsewhere, and we expect to see continued volume growth for 10G products in 2014 as well.

Now I would like to talk about demand conditions. China historically has been our largest market, and Huawei Technologies our largest customer. The China market in the first three quarters of 2013was slower than previously expected; this continued in the fourth quarter as only late in the fourth quarter did we see an increasing backlog for wire-line deployments. Moving into the first quarter we have seen further growth in our backlog in China, reflecting increases in these important wire-line deployments. Per our guidance, while we see strength in 1Qof 2014 we are not seeing a strong uptick in revenue from the backlog; but we do expect it to be beneficial to our top line while creating more leverage in our operating model in Q2 of 2014.

We saw strong contributions to revenue from our NeoPhotonics Semiconductor business in 2013, reflecting to some extent the deployment rate of 100G modules which utilize our components. While this has been a strong contributor in 2013, we expect that this will flatten or even decline slightly in 2014,due to current actions to move from the CFP to the CFP2 form factor; that is, until such time as the industry’s demand for CFP2 modules picks up following current sampling and qualification actions. We expect to be supplying lasers and drivers to several manufacturers of CFP2 modules, and this is very positive. However, in the next few quarters we may see some system manufacturers slow their consumption of CFPs as they wait for CFP2 modules to be available in volume.

Now I would like to talk about several key industry trends that we expect to impact NeoPhotonics’ business going forward.

First, as I noted in our last business update, 100G Coherent system shipments to date are system platforms designed for long haul transport though some have been deployed in Metro environments. Based on customer conversations we expect we will begin to see systems specifically designed for Metro deployments begin to ship in the latter part of 2014 and early 2015. This is important, as Metro deployments could result in 3X volume increases versus long haul over the following two years. We believe we are well positioned for this growth in terms of product offerings, design wins and manufacturing capacity, as well as our having important next-generation product developments underway that focus on 100G and beyond.

Second, we see the broad expansion of cloud computing with massively scaled datacenters with related infrastructure updates as beneficial to NeoPhotonics’ business over time, as we supply key elements of high-speed connections within and between datacenters. 100G links are being deployed as high-bandwidth connections between Internet routers within datacenters and central offices within telecom transport networks. 100G, which includes both our optical components and transceiver products, is still a relatively small portion of the datacom market, but it is the fastest-growing portion and will take share over time as enterprise computing and consumer Internet applications continue to consolidate into large cloud-scale datacenters requiring higher bandwidth connections.

Third, the rollout of next-generation 4G LTE and 100G OTN networks, particularly in China, is driving demand for optical transceivers for backhaul links. This is currently the main market driver for 10G single mode transceiver volume growth. We are leveraged to this trend with our 10G 10km and 40km single mode transceivers, for which we are a market leader, and we expect to see continued growth in these applications and products over time.

Now I would like to talk about our vision for the next two years. We expect that 100G transmission technology, which is a basis for future network design, will drive multi-year investment cycles for those companies associated with this emerging paradigm. Our product portfolio addresses these high speed requirements in both carrier telecom and enterprise/datacenter markets, and we expect to continue to be a strong player as the market expands over time. We view 2014 as a transformative year for NeoPhotonics. We are investing heavily in new product platforms, including our advances in Coherent receivers and high speed switching that I have talked about on prior calls, plus advances to Coherent transmission approaches including our “micro ITLA”, or ultra-small form factor integrated tunable laser assembly, which we announced in 2013.

100G will continue to increase in volume and overall share of our business, and this is directly beneficial to NeoPhotonics as we are a leader in 100G optical solutions. In 2011 and in 2013 we completed two M&A transactions which together significantly enhanced our capability to develop and deploy advanced high speed solutions. These businesses are now fully integrated in NeoPhotonics and are strong contributors to our ongoing revenue streams.

At the same time we are gradually phasing out certain products whose growth and profitability prospects are limited. As a result of growth in 2014 and 2015 from 100G,and with the culling of lower margin products and a focus on controlling overall costs, we expect to be in a position to increase our level of profitability and additionally increase our growth rate in 2015.

In terms of key milestones over the next year you should expect to see: (1) Continuing strength of our 100G product line, including our new product additions; (2) Important product advances released to production that represent the integration of the technologies we have acquired over the last three years into the broader core of NeoPhotonics product capabilities in 100G networks; and (3) Reductions in lower margin product revenues, followed by accelerated growth and profitability.

We have also made certain commitments to expand our presence in Russia. In 2013 we established a physical presence with a sales and engineering center in Moscow; and during the current and next two years we will establish initial capability for product development for the local market as well as some specific manufacturing. We have included additional disclosures in our filings in this regard.

Let me turn to internal operations. We have made a very strong effort over the past five months to improve our reporting, improve our finance and accounting department, strengthen our internal controls, ramp up Deloitte as our new independent auditor and reestablish compliance.

This concludes our formal comments and now I will ask the operator to open up the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Simon Leopold with Raymond James.

Simon Leopold – Raymond James & Associates, Inc.

Great, thanks a lot. A couple of things, I wanted to try to follow up on. one is, just in your opening remarks, you gave us some of the numbers on the Speed and Agility. I didn’t get those down. if you could just repeat the metrics on sales and growth trends at the beginning of the prepared remarks?

Clyde Raymond Wallin

Certainly, thanks for the question, Simon. In the remarks, what I indicated is that let’s see revenue to the access products was approximately 23% of the total, this was up $2.8 million. Revenue from high-speed products was $28.4 million or a 30% of total revenue that was up 31% and let’s see…

Simon Leopold – Raymond James & Associates, Inc.

I think it was right before the comment on access?

Clyde Raymond Wallin

Well, the Speed and Agility was 69% of the total.

Simon Leopold – Raymond James & Associates, Inc.

69%. Okay. And then getting to the timing in terms of getting in compliance, a couple of questions out of that one is, the March quarters I guess essentially complete. I’m just wondering do you plan, intend, hope to have another update call in the not-too-distant future to give us a greater level of detail on the March quarter. Can we get some estimate of timing of when we’d be able to get that detail? And then related to that, if I’m reading the press release correctly, it sounds like, it’s saying we would expect to get a 10-K filing before October 2014. I’m wondering if you could give us a – maybe a tighter window of when we might be able to get a 10-K.

Timothy S. Jenks

Yes. Thanks, Simon. this is Tim. So we have been doing a lot of work around obviously, our Q1 and Q2 and Q3, but also our Q4 and the K and 1Q. So these have all been going on and there is – I think Ray ought to comment on the particular details there, but you should expect that we’re working on all of those in parallel with the intent of getting amount as soon as we can.

Clyde Raymond Wallin

Yes.

Timothy S. Jenks

Ray?

Clyde Raymond Wallin

So over the next several weeks, we expect to finalize our fourth quarter numbers, and then we’ll file our K certainly thereafter and finalize those, we’re in the final stages of completing the audit with Deloitte & Touche. And so as that work is completed, we’ll continue preparing the K. So over the next several weeks, we will hope to get that filed with the SEC. And then from there, we’ll turn our attention to completing the Q1 numbers and they should follow shortly thereafter there.

Simon Leopold – Raymond James & Associates, Inc.

So should we think about that as being within the next 90 days?

Clyde Raymond Wallin

Absolutely, yes.

Simon Leopold – Raymond James & Associates, Inc.

Okay.

Clyde Raymond Wallin

Yes. And 90 days of more than generous timeframe. And I was thinking the next 30 to 45 days.

Simon Leopold – Raymond James & Associates, Inc.

Okay. That’s exactly the kind of answer I’m looking for at that level of details, that’s very helpful to understand that. And then Tim, since you last kind of ramp through the trends in the market for 100-g, it’s – I’m not sure, if I’m hearing it correctly, but it’s my sense that things have maybe flit out a little bit from how you felt, let’s say, six months ago in terms of 100-g where the metro ramp you’re looking talking about late 2014 or early 2015 is a driver. Can you sort of compare or contrast your view of that marketplace today versus how you felt six months ago?

Clyde Raymond Wallin

How about if I comment, how I felt four months ago in November, I think the answer Simon is, yes. I feel the metro market has flit a bit to the right. Let me say first about 100-gig overall. 100-gig overall is fairly strong. In particular, in China, we’ve seen a fair amount of growth in the backlog and we expect that to be as I’ve made in my prepared comments, we expect to see benefit from that in the second quarter. we did see some growth in the first quarter, but mostly reflecting in the backlog. So we would expect the second and third quarter to benefit globally, but in particular, in China for a 100-gig.

Specifically, in the metro market, in November, I commented on that and we thought that that was going to be largely a second half meaning third quarter beginning. We probably see that out one, two maybe two quarters. I think it will still start in the second half in the third quarter and fourth quarter, but the ramp maybe a bit slower. And then ramp up going into 2015.

Simon Leopold – Raymond James & Associates, Inc.

And then on the access business, you sound a little bit more cautious in tone sort of similar thoughts you can offer in terms of how your view on that business for 2014 has evolved?

Clyde Raymond Wallin

Well, there are two parts of that. That business continues to be a strong volume business. but as I noted in my comments, strong volumes that are relatively steady, if prices decline in their new entrance, then we’re not optimistic on the growth prospects for that business. It’s a steady business, but it’s more competitive. And so we have to be therefore more selective on the things that we do. And I would expect that theme to be consistent through 2014.

Simon Leopold – Raymond James & Associates, Inc.

But do you think revenue was down in 2014 versus 2013 for the access business?

Clyde Raymond Wallin

I think it may be down a little bit. What I noted in the comments is that actually over the first nine months of 2014, we saw a decline by just about 16%. And there aren’t large increases in the deployment volumes. And therefore I would expect comparing apples-to-apples; we would see some decline in total revenue for the year probably declines in that single-digit percent.

Simon Leopold – Raymond James & Associates, Inc.

Great, thank you for the answers.

Clyde Raymond Wallin

You bet. Thanks, Simon.

Operator

(Operator Instructions) We’ll go next to Richard Shannon with Craig-Hallum.

Richard Shannon – Craig-Hallum Capital Group LLC

Good afternoon Tim, Ray, how are you doing?

Timothy S. Jenks

Good, Richard. thank you.

Clyde Raymond Wallin

Good.

Richard Shannon – Craig-Hallum Capital Group LLC

Great. Good to be here, good to be able to talk a few finally. I guess just a few questions from me hope to see here. You talked a new ICR receiver product at OFC and as I recall from our conversation significantly higher ASP there. Can you refresh our memory on how much content that does add to you and then when could we start to see the benefit from that?

Timothy S. Jenks

Yes. Actually, just for clarification. We had announced two different ICR products, and in my prepared comments, I talked about both of them. But the more recent addition was actually not a new ICR, but it was a new transmitter. And the transmitter what we call ICT, the transmitter includes the combination of both tunable laser functionality and modulator functionality. And therefore, on a competitive basis, it’s a new product for us entering the transmission side and adding the modulator functionality.

And so the total transmitter is a higher ASP than a tunable laser alone. And so that we would expect those products to have a little impact in the first half of this year. Generally speaking, these products take from the time of announcement there often 12 months to see, some level of material impact on the revenue increase. So while we’ll be shipping those in the latter half of the year, I would expect to see their benefit to be more in early 2015, first quarter 2015.

Richard Shannon – Craig-Hallum Capital Group LLC

Okay, perfect. Another question, Tim, in your prepared remarks, you had alluded to a little bit more competition on the 100-gig side, presumably more – presumably on the lasers. Curious about what the impact will be, I don’t know if you can quantify in terms of maybe share, specifically products that have your lasers in it. But also as you start ramping up metro haul, what kind of initial share might you see in that metro space as well and any comments you can share on that would be great?

Timothy S. Jenks

Just for clarity. I think you said tunable lasers, do you mean tunable lasers or do you mean 100-gig lasers or do you want me to comment on both?

Richard Shannon – Craig-Hallum Capital Group LLC

100-gig. 100-gig lasers specifically.

Timothy S. Jenks

Okay. So generally speaking, there are two approaches for 100-gig lasers that the lasers themselves are not actually native 100-gig, but you can combine four lanes of 25-gig or 10 lanes of 10-gig. and so what we see, as we see modules client side modules that are at a 100-gig, can be 100-gig by the 4x25 approach or the 10x10 approach. And essentially, the form factor here is changing rather than the competitive environment.

So that’s the form factor changing from the current CFP form factor to the newer next generation CFP2. We see that line cards from customers that use the newer CFP2 will be rolling out midyear. So, between now and mid-2014, so between now and then, we’re not expecting any significant rise in the CFP2, the current generation rather we expect that as the line cards go into production in the second half, then we’ll see a pick-up, because of the CFP2.

Richard Shannon – Craig-Hallum Capital Group LLC

Okay, great. And I guess just one last question maybe to follow up on from, I think was Simon earlier. Are you prepared to offer any thoughts on what kind of overall growth, sales growth you might see this year and could we enter into non-GAAP profitability in the second half of the year at any point?

Timothy S. Jenks

Well, let’s see an answer to your first question, I’m not yet prepared to say what the total growth will be. We have limited visibility on the second half. We do have strong backlog growth. we are looking for strong second quarter. We do expect the second and third quarter notably in China to be strong. for the full year, we don’t yet know, as Ray indicated though over next several weeks will probably have two more opportunities stock and conference calls and we’ll know more about that during that time.

I think that profitability, the numbers that Ray reported we have – we’ve been spending about $1 million a quarter extra on our accounting work over the last couple of quarters. And I think those are not necessarily continuing expenses, we don’t expect them to be. It’s possible therefore with the higher volumes for the second and third quarter that we could reach potentially profitability. but I would say on a full-year basis, I wouldn’t expect that this year, maybe we’ll see it a quarter, but we won’t see it for the year that would – I’d be having look toward next year.

Richard Shannon – Craig-Hallum Capital Group LLC

Okay, that is fair. I think that’s all from me. I think I’ll jump out of line and requeue. But thank you very much guys.

Timothy S. Jenks

Thank you, Richard.

Operator

(Operator Instructions) And we’ll hear now from Dave Kang with B. Riley.

Dave Kang – B. Riley & Co. LLC

Yes, thank you. Good afternoon. So you talked about some kind of a little production initially occurred. is that ITLA, and can you quantify the situation and where are we now?

Timothy S. Jenks

So I talked about production issues in November, but not today. We did in the first half of 2013, we were ramping certain 100-gig modules, and we had some yield issues that was thought several months ago. So that’s not an issue, I also Ray did note in his comments that we had transferred our tunable laser products in-house from a CM2 in-house and that was completed during the fourth quarter.

Dave Kang – B. Riley & Co. LLC

Okay, all right. and then it sounds like that you are adding capacity and can you just talk about the current capacity situation, I mean do you have ample capacity to meet growing demands and for which particular products are you ramping capacity?

Timothy S. Jenks

Well, the focus of our capacity additions not surprisingly is 100-gig space. These, broadly speaking, include both receivers and transmitters and tunable lasers for the 100-gig coherent systems, as well as our capacity for the modules, the CFP and CFP2 type modules and their components. So we have been adding capacity, we’re…

Dave Kang – B. Riley & Co. LLC

Okay.

Timothy S. Jenks

potentially, we’re doing our best as stay ahead of demand and have available capacity for continued expansion.

Dave Kang – B. Riley & Co. LLC

Got it. And can you just talk about the price adjustments you guys may include, was it better or worse or kind of in line?

Timothy S. Jenks

Typically in last couple of years, we’ve talked about price decreases on an annual basis of the 10% to 15% on an annual basis. You could call that 3% or 4% on a quarterly basis, but it really happens mostly in the fourth quarter. We were in that range yet again, so not much difference than normal.

Dave Kang – B. Riley & Co. LLC

Okay. And lastly, you mentioned there with our growing backlog, especially with China’s strength being used. Do you expect second quarter, as well as third quarter to be strong? so I was wondering if you can provide any color I mean, excuse me, should we expect maybe a stronger seasonality in second quarter than normal?

Timothy S. Jenks

I would say that in general, we see the first quarter to be our seasonal low and Ray made some comments about that. I would expect that to be the case this year. We’ve provided revenue guidance for the first quarter and we would expect to have a strong second quarter as an up-tick versus first quarter. I would state however, in comparison to last year, 2013.

In 2013, one quarter, we did not have the revenue of NeoPhotonics Semiconductor and in second quarter, we did. So even though we’ll have a strong up-tick in our second quarter versus our first quarter, if you just look directly versus last year, it might not appear to be as large, but…

Dave Kang – B. Riley & Co. LLC

But if you can normalize that if you strip out that portion?

Timothy S. Jenks

And I would expect it to be a strong, a normal increase maybe slightly above normal, because of that.

Dave Kang – B. Riley & Co. LLC

Got it.

Timothy S. Jenks

The strength of the backlog.

Dave Kang – B. Riley & Co. LLC

Got it, all right. Thank you.

Timothy S. Jenks

Thanks, Dave.

Operator

And we have no further questions at this time. Mr. Jenks, I’ll turn things back to you for closing remarks.

Timothy S. Jenks

Okay, thank you, Kellianne. In closing I would like to thank everyone for taking time to join our call today. I would also like to thank our shareholders for their patience while we completed the restatement of our Q1 and Q2 2013 financials and then finalized our Q3 2013 financials. We look forward to updating you on our progress on our next quarterly call. Have a good day. Bye-bye.

Operator

And that will conclude today’s conference. again, thank you all for joining us.

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