NeoPhotonics' CEO Discusses Q4 2011 Results - Earnings Call Transcript (Prepared Comments)

NeoPhotonics Corporation (NYSE:NPTN)

Q4 2011 & Full Year 2011 Earnings Call

February 14, 2012, 5:00 PM ET


Tim Jenks - Chairman, President and CEO

JD Fay – CFO

Erica Mannion - Investor Relations


Welcome to the NeoPhotonics 2011 Fourth Quarter and Year End Conference Call. This call is being webcast live on the event calendar page of the Investor Relations section of NeoPhotonics’ website at This call is property of NeoPhotonics and any recording, reproduction or transmission of this call without the expressed written consent of NeoPhotonics is strictly prohibited. As a reminder, today’s call is being recorded. You may listen to a webcast replay of this call by going to the event calendar page of the Investor Relations section of NeoPhotonics’ website. I would now like to turn the call over to Erica Mannion, Investor Relations for NeoPhotonics.

Erica Mannion

Good afternoon. Thank you for joining us to discuss NeoPhotonics’ financial and operating results for the fourth quarter and full year of 2011. With me today are Tim Jenks, Chairman, President and CEO and JD Fay, CFO.

The call today contains forward-looking statements that involve risks and uncertainties. These include statements related to NeoPhotonics’ business outlook for the quarter ending March 31, 2012, future periods and industry trends, as well as forward-looking statements that we may make in response to questions. Forward-looking statements are generally indicated by words such as “would”, “believe”, “should”, “expect”, “outlook”, “estimate,” “anticipate”, “forecast” and similar expressions that look toward future events or performance.

Actual results may differ materially from forward-looking statements. Factors that could cause results to differ materially from these statements include those described in today’s press release as well as those detailed in the section entitled "Risk Factors" of the company’s Quarterly Report on Form 10-Q most recently filed with the SEC. NeoPhotonics cautions you not to place undue reliance on forward-looking statements, and that these statements speak only as of the date they are made.

In addition, non-GAAP financial measures will be discussed today. Please visit the Investor Relations section of the NeoPhotonics Web site for a copy of the company’s press release, which contains an explanation of these non-GAAP financial measures as well as a reconciliation to the comparable GAAP measures.

NeoPhotonics will be presenting at the 24th Annual Roth Conference in Laguna Niguel, California on March 12th, and at the Harris & Harris “Meet the Portfolio Day” in New York City on March 13th.

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


Tim Jenks

Thank you for joining us today.

I will provide a financial and business update, discuss progress in our business, update you on our acquisition of Santur Corporation, which we completed during the fourth quarter, and then talk about what we are seeing in the industry as a whole.

NeoPhotonics delivered record revenue for the fourth quarter of 2011 at $57.2 million, significantly above our projected range of $45-$50 million provided in our third quarter conference call. We experienced increased demand across most of our business and in fact, some areas saw demand considerably strengthened. Moreover for NeoPhotonics, as a vertically integrated supplier of optical modules and subsystems, we are not at all dependent on partners in Thailand for any part of our supply chain. Thus, we represent an independent supply chain to our customers, and the flooding in Thailand did not have any direct adverse impact on our ability to produce products. Instead of seeing an anticipated slowing with our customers due to their other suppliers being impacted by flooding in Thailand, we experienced an increase in demand from some customers seeking additional supply. This incrementally positive effect was more notable for 10G products and tunable laser products, both of which are in our Speed and Agility product group. Further, demand from our largest customer was relatively strong in the fourth quarter and well above third quarter demand, though as is often the case this demand was not flat across the quarter, but was stronger in the latter part of the quarter.

We delivered Non-GAAP gross margin above our projected range. Non-GAAP gross margin was 23.5% in the fourth quarter, compared to our projected range of 19-21% following the Santur acquisition and inclusive of the effects of annual price negotiations that were completed during the fourth quarter. Reflecting our higher revenue and higher than expected margin, and inclusive of our “delta” research and development investment we started in the third quarter, we reported Non-GAAP loss per share from continuing operations of $0.26 compared to our projected range of a loss of $0.30 to $0.40.

Broadly speaking, NeoPhotonics’ core business is in providing photonic integrated circuit, or PIC, based modules and subsystems for bandwidth-intensive, high-speed communications networks. Our products enable cost-effective, high-speed data transmission and efficient allocation of bandwidth over these networks. We sell our products to the leading network equipment vendors globally.

I’d like to begin our business discussion with an overview of our relationship with Huawei Technologies. As many of you know, Huawei is our largest customer and is among the top providers of optical network equipment globally. We sell Huawei approximately 100 different products – more than half of our 41 product families, inclusive of our newly-acquired former Santur products. We are one of Huawei’s select “core partners.” During the fourth quarter, Huawei presented us with its prestigious Golden Award as an “Excellent Core Partner” for our contributions as a supplier of innovative technology, high-quality and on-time delivery of optical modules and subsystems for high-speed, agile and access communications networks. We are proud that NeoPhotonics has been critical to some of the success of Huawei just as Huawei has been pivotal in the success of NeoPhotonics. I believe that the Golden Award from Huawei is a testament to our innovative and high-quality products and high-volume manufacturing capabilities.

Demand for our products from our largest customer was strong in the fourth quarter and more indicative of a normalized quarter when compared to what we saw in the third quarter. We believe that the sequential increase in demand from our largest customer was the result of several factors, including a return to a more traditional ordering pattern, restocking of inventory from an unusually low third quarter, additional demand for speed and access products, and some added demand as other suppliers were impacted by the flooding in Thailand while we were in full production and shipping.

In particular, during the fourth quarter we saw demand increases in products for both10G and 40G systems, as well as strong demand for access products for GPON and GEPON fiber to the home, or FTTH networks. The FTTH network demand was more indicative of the demand we saw in the first half of the year, but which was atypically lower in the third quarter.

Additionally, on the third quarter conference call I discussed the demand impact on our hub-based vendor-managed inventory, or VMI, which is key to understanding our revenue build during a quarter. To summarize VMI for those unfamiliar with it, with a few customers we agree to a rolling production forecast for some of our products; we build to that forecast and ship the products to designated locations. These locations are typically at our customers’ production facilities or their logistics centers. While the products are located at these hubs, they remain on our balance sheet as inventory and revenue is not recognized. When a customer takes a unit of product from the hub, we are notified (we call this a “pull”) and we then record revenue for that product. This system is designed to facilitate our customers’ just-in-time inventory and lead-time management. The customer is not required to pull the products from the hub in the same quarter during which the products are shipped to the hub, and products are typically pulled and the hub replenished on a rolling basis. Further, in certain cases, customers are obligated to pull products in the hub if the products have been there for a specified period of time.

By supporting this model, we believe we are favorably viewed by these customers, and that we earn a larger share of the customer demand for these products. In addition, we believe that the hub model can provide us better visibility into our customers’ demand levels over time – meaning over several quarters. In such cases, we believe the existence of VMI inventory as well as a flexible manufacturing plan that allows rapid conversion of semi-finished work-in-process assemblies to finished goods can be meaningful in capturing volume and share with our customers.

Our VMI revenue typically builds in a relatively steady fashion month-by-month during a quarter, but demand for our products is not typically steady week-by-week within a month. Rather on a weekly basis, normalized demand is weaker during the first weeks of each month within a quarter, and is generally stronger in the back half of each month. Our fourth quarter demand pattern very much fit our view of normalized demand, which contrasted with our third quarter, during which end of quarter demand was exceptionally soft.

As a result, our end of quarter VMI inventory was approximately $4.4 million, down from approximately $8.4 million at the end of the third quarter, and combined with good inventory control, helped to maintain total inventory roughly flat from the third quarter to the fourth quarter, inclusive of the Santur inventory acquired.

We had sequential growth from most our top 10 customers, with Huawei and Ciena each being “greater than 10%” customers. These trends are similar on an annual basis as well, with revenue growth from most of our top 10 customers in 2011.

Our direct customers, the network equipment vendors, supply their systems to global telecom service providers. During the fourth quarter, these network equipment vendors and their service provider customers continued to spend on the growth of traffic, supporting the rapid expansion of bandwidth demand driven by mobile video, HD and 3D video, music, social networking, and the proliferation of network-attached devices, such as smartphones, tablet computers, e-readers and gaming devices, that are enabling consumers to access bandwidth-intensive content anytime and anywhere over fixed and wireless networks, including 3G, and increasingly, LTE networks.

Our product groups support each of these system capabilities provided by our customers. Within our product groups in the fourth quarter of 2011, revenue attributable to our “Speed and Agility” products was approximately 52% of our total revenue, up from 37%. Revenue attributable to “Access” products was approximately 31% of total revenue, while down from 34% it was up in absolute terms; and for our “Other Telecom” products (which are legacy products such as DWDM, Sonet and SDH products) revenue was approximately 17% of total revenue, down from 30%. The fourth quarter decline for Other Telecom products was due primarily to decreasing demand for transceivers used in legacy systems at data rates below 10 Gbps. We do expect the 10G market to continue to be a meaningful one for us for the next several years, albeit that we expect the growth in our business to continue to come from higher speeds, as well as agility and access products.

I would like to talk further about our acquisition of Santur Corporation, which closed in October. Santur was a private company located in Fremont, California, and focused on commercializing PIC-based laser array and high density PIC-based packaging technologies for communications networks. We believe that the acquisition enhances our leading position in PIC-based modules and subsystems for high speed networks and will further accelerate our growth in the 100G coherent and cloud computing markets.

I should note that our acquisition of Santur contributes almost exclusively to our Speed and Agility products. Revenue from these former Santur products was approximately $5.8 million for the quarter. We have noted that our Speed and Agility products generally have higher than corporate average gross margins and Access products generally have lower gross margins. This remains the case following the acquisition of Santur; however Santur’s products overall had lower gross margins than the NeoPhotonics product portfolio. As a result, the margin differences for the three product groups have narrowed somewhat for the immediate term.

With this acquisition we are now able to leverage indium phosphide as a platform for 40G, 100G and beyond PIC-based products, thereby expanding our total available market and expanding direct range of applications as well as improving our cost position for these important elements in our modules and subsystems. Examples include PIC-based tunable lasers, arrays of lasers, modulators for 10G and 100G transmitters, and components for coherent transmitters and receivers. The combination complements and extends our PIC technologies and expands our spectrum of key technologies, product opportunities and materials expertise.

A key example of this is the importance of narrow line width tunable lasers, used as both the signal and reference in Coherent transmission systems, and therefore on both the transmit and receive sides. During the fourth quarter of 2011 there were critical shortages of these components due to flooding in Thailand, which impacted customers as well as the few competitors in this market. In response to urgent customer requests, we have more than doubled our capacity for producing these key devices and have since ramped our volume, filling the new capacity, such that we are now expanding capacity further, anticipating additional demand. In addition, we have received orders from seven new customers for these products and additional engagements are underway – these are all new qualifications with customers that have been completed since we closed the acquisition of Santur in October.

Moreover, the new narrow linewidth tunable laser customers include companies that are already among our top 10 customers but who may not have been using the Santur product until now. Due to the significant step up in customer qualifications, the existing strong relationships we have with these customers and our rapidly added capacity, we believe that our increasing share in this important marketplace can be a permanent shift, not a short term supply opportunity.

Additionally, we made substantial progress during the fourth quarter in the integration of Santur into our global company. We combined our respective functions and systems, including integrating our ERP systems, and we continue to work on process improvements. Our integration actions included certain reductions in staffing and elimination of functional redundancies, systems and resources and we are continuing to pursue consolidation of our Silicon Valley facilities. We have consolidated our operating functions, from sales to R&D to operations and finance; these actions have progressed smoothly, resulting in lower combined total operating expenses and a smaller overall footprint. On a run rate basis, the changes we implemented during our fourth quarter are expected to reduce the total combined operating costs by approximately $4-6 million annually, or about $1-1.5 million per quarter. We believe that these changes will make us leaner while also being more flexible and more scalable in response to technology changes and customer needs.

In addition, with the integration of Santur we are now leveraging our respective supply chains, which include the use of contract manufacturing partnerships for production of certain products. Going forward we will work to optimize internal manufacturing capabilities as well as CM partners to increase production volume and flexibility while continuing to drive productivity, quality and cost performance.

Finally, on our November conference call we indicated that we believed that we could return to profitability in five to seven quarters, which is now four to six quarters, and we continue to believe we are on track to achieve this.

In our prior two conference calls, we noted that we would make a “delta” investment in research and development to further leverage our PIC technology platform in to next-generation network opportunities in switching and high speed devices. We stated that we expected to spend approximately $1 million per quarter on this initiative for four to six quarters and provide updates along the way.

As part of this effort, we increased staffing at our development center in Wuhan, China and we subsequently opened a design and sourcing center in Tokyo, Japan, to support high speed network module design and sourcing for next generation systems.

A key outcome of this initiative is the development of a Multicast Switch product which is now moving to sampling with lead customers.  A multicast switch critically augments current Reconfigurable Optical Add/Drop Multiplexer, or ROADM, technology to enable next generation “colorless, directionless and contentionless”, or CDC, networks by allowing a series of, for example, 8 incoming ports to be routed out to 8 or 16 or 24 ports.  In current systems, a wavelength channel from a given direction can exit through one and only one port at a ROADM node, meaning that a transponder must be manually deployed at that specific port before the automatic reconfiguration can be utilized.

Our new multi-cast switch is designed to expand the flexibility of the node to enable any port to drop any wavelength (making it colorless) from any direction (making it directionless) and to allow two identical wavelengths from different directions to be dropped through the same switch (making it contentionless).  This is important because it achieves enhanced flexibility and efficiency of the network by directing a wavelength to a port where a transponder has already been deployed without any further manual intervention.  In addition, our Multicast Switch product is designed to be most efficient in coherent optical networks, where the final optical filtering can be performed by, for example, our integrated coherent receiver.

In addition, our high speed device work is focused on developing modules for use in 100G networks and above. These developments are currently underway and we expect to provide updates on progress in future conference calls.

Finally, I would like to comment on new design win progress with our tier 1 customers for 2011. We have stated that design wins, wherein customers qualify NeoPhotonics products for use in their systems plus we receive a purchase order for the products, can be leading indicators of future revenues.

For 2011, we earned 22 total design wins with tier 1 customers, including design wins relating to Santur products in 2011, and our cumulative design wins increased to 128 as of the end of 2011, up considerably from 97 at the end of 2010 and inclusive of legacy Santur wins. Our design wins in 2011 spanned a range of our now 41 product families and included multiple design wins for our integrated coherent receiver for 40G and 100G networks as well as our narrow linewidth tunable lasers. For clarity, for a customer, a single design win can have over 20 different individual product numbers over time. And given the long life cycles of our customers’ systems, a single design win for NeoPhotonics can provide us revenue for several years, in many cases 7 to 10 years. This means that the potential dollar value of the design win could be in the tens of millions of dollars over the life time of the design.

Now I would like to comment on what we see in the industry as a whole. China remains a very active market with continuing volume demand, albeit competitive commercially. Our largest customers are forecasting growth for 2012 after experiencing more muted demand levels in 2011, which were also impacted by the devastating effects of the Japan tsunami and the flooding in Thailand. In particular, notwithstanding some reports suggesting muted carrier capex growth for 2012, capex for investments in 40G and 100G coherent transmission systems, FTTH access network growth and in data center investments appear healthy.

Now turning to our outlook for the first quarter of 2012.

We are pleased with our progress in developing our customer diversification, and also with the favorable response of our customers to our new, coherent and other high speed products, as well as their response to our having added the strength and capabilities of Santur products to our technology and product portfolios. We believe that our multi-quarter trends of broadly growing revenue from our top 10 customers and 40G and 100G products are positive leading indicators, particularly as the momentum for deploying high-speed line-side and client-side networks leveraging coherent and PIC technologies gains momentum. We continue to believe we are in a strong position today given our design win and market share awards earned with our Tier 1 and other customers, with the strength of the products and technology added through the Santur acquisition, and with the new qualification engagements underway. We will remain cautious; however, as we continue our process of integrating Santur and given persistent uncertainty in the macro-economic environment in Europe, as well as a view of potentially moderating spending at carriers, particularly in North America, which could impact our network equipment manufacturer customers. At this point I’ll turn the call over to JD to review our financial performance and first quarter 2012 financial projections.


JD Fay

Thank you, Tim, and good afternoon.

I will review the financial results for the fourth fiscal quarter ended December 31, 2011, the full year of 2011, and conclude with our outlook for the first quarter of 2012. The fourth quarter results include operations of Santur and exclude operations of a small cable TV-related subsidiary in China we expect to sell and have classified as discontinued operations. We expect to close that business sale by the end of the second quarter of 2012. Accordingly, we have adjusted prior periods for comparability.

For the fourth quarter of 2011, revenue was $57.2 million, an increase of approximately 33% from $42.8 million in the third quarter of 2011, and an increase of approximately 14% from $50.2 million in the fourth quarter of 2010. Our fourth quarter of 2011 was 14% higher than the top end of our projections and the highest recorded quarterly revenue in our history.

GAAP gross margin for the fourth quarter of 2011 was 21.5%. Non-GAAP gross margin for the fourth quarter was 23.5% and above the top end of our projections, as compared to the previous quarter’s Non-GAAP gross margin of 27.8%, which excluded the impact of Santur’s operations. Non-GAAP gross margin for the fourth quarter of 2011 excludes amortization of purchased intangibles and other assets relating to the acquisition of Santur of $1.0 million, and stock based compensation and Santur’s pre-acquisition retention expenses of $0.1 million.

Loss from continuing operations for the fourth quarter of 2011 was $22.8 million, as compared to a loss from continuing operations of $4.2 million in the third quarter and income from continuing operations of $0.5 million in the fourth quarter of 2010. Diluted loss per share from continuing operations for the fourth quarter was $0.92. Operating expenses for the fourth quarter of 2011 included a non-cash charge of $13.1 million for the impairment of our goodwill, which is now fully expensed.

Non-GAAP loss from continuing operations for the fourth quarter of 2011 was $6.4 million, as compared to Non-GAAP loss from continuing operations of $3.2 million in the third quarter and Non-GAAP income from continuing operations of $1.8 million in fourth quarter of 2010. Non-GAAP diluted loss per share from continuing operations for the fourth quarter of 2011 was $0.26, as compared to Non-GAAP diluted loss per share from continuing operations of $0.13 cents in the third quarter and Non-GAAP diluted income per share from continuing operations of $0.11 for the fourth quarter of 2010.

Non-GAAP loss from continuing operations and Non-GAAP diluted loss per share from continuing operations for the fourth quarter of 2011 exclude a non-cash goodwill impairment expense of $13.1 million, amortization of purchased intangibles and other assets mainly related to the acquisition of Santur of $1.5 million, stock-based compensation of $0.7 million, Santur’s pre-acquisition retention expenses and integration-related costs of $1.1 million, offsetting restructuring and adjustments relating to the Santur acquisition, and the income tax effects of these adjustments.

Adjusted EBITDA in the fourth quarter of 2011 was a loss of $3.0 million, down from a loss of $0.5 million in the third quarter and from positive Adjusted EBITDA of $4.9 million in the fourth quarter of 2010. The quarterly decline in EBITDA was primarily attributable to higher net loss, partially offset by adjustments relating to the acquisition of Santur described earlier. For the full year of 2012, with anticipated revenue growth and gross margin improvement along with the completion of our restructuring following the acquisition of Santur, we expect to generate positive Adjusted EBITDA for 2012 as a whole.

Next, I will discuss the fourth quarter in further detail.

Our record quarterly revenue was primarily the result of growth in demand for our products that are designed to address traffic bottlenecks in telecommunications networks as the demand for bandwidth continues to grow and carriers expand their network capabilities in response. While the fourth quarter is typically sequentially lower given seasonality in our industry, global holidays that can slow purchasing and deployments, the growth in volume plus additive revenue from Santur products more than offset these effects in the quarter.

For the fourth quarter of 2011, our ten largest customers accounted for approximately 90% of our total revenue. Revenue from Huawei Technologies, our largest customer, in the fourth quarter increased approximately 46% sequentially from the third quarter of 2011 as we saw a return to a higher order pattern suggesting the customer was normalizing its inventory after an unusually low third quarter, along with higher demand. As a result, Huawei’s revenue as a percent of our total in the fourth quarter increased sequentially to 47%, up from 44% in the third quarter and down from 52% in the second quarter. Ciena comprised approximately 11% of revenue in the fourth quarter as well.

Next, I would like to briefly summarize the new line items in the operating expenses portion of our income statement for the fourth quarter to help provide further context. First, I discussed a bit earlier that operating expenses for the fourth quarter included a $13.1 million non-cash charge for an impairment of our acquisition-related goodwill, resulting from an annual review of our goodwill and, similar to other companies in our industry over the past couple of quarters, in light of the decrease in our market capitalization as of December 31, 2011.

Second, as indicated on our November conference call, we began integrating Santur into our global operations in the fourth quarter. As a result, we incurred restructuring expenses in the fourth quarter of approximately $1.3 million. These expenses were primarily related to severance costs associated with the reduction in force we implemented when we combined Santur with NeoPhotonics and as we harmonized our respective product roadmaps to optimize our offerings and eliminate potential redundancies. We have provided all communications relating to personnel reductions internally, although certain affected personnel will complete their employment in this quarter. Consequently, we do anticipate modest restructuring charges for integration in 2012.

Finally, in connection with our final purchase price accounting for the Santur acquisition, we recorded adjustments relating to acquired fixed assets and inventory and the contingent consideration that Santur stockholders could earn during 2012.

Total operating expense in the fourth quarter of 2011 was $35.1 million, as compared to $16.1 million in the third quarter, and compared to $12.7 million in the fourth quarter of 2010. As mentioned, operating expenses included a $13.1 million non-cash of impairment of goodwill expense recorded in the quarter, without which operating expenses was $22 million.

For the remaining operating expenses, the increases in operating expenses were primarily due to the addition of Santur’s operations to the company and which were not yet offset by our restructuring efforts that commenced in the quarter. The break-down of these remaining operating expenses is: research and development was $11.0 million, up from $7.1 million in the prior quarter; sales and marketing was $3.4 million, up slightly from $3.1 million; general and administrative was $7.3 million, up from $5.9 million; and amortization of purchased intangibles was $0.3 million, up from $0.1 million. Included in the foregoing operating expenses is $0.6 million of stock compensation expense and $1.1 million of acquisition-related expenses. Also relating to the Santur acquisition in operating expense was the restructuring and the earn-out expenses that largely offset each other.

Now, I will provide an overview of our financial results for the full year of 2011.

NeoPhotonics delivered record annual revenue for fiscal year 2011. Total revenue was $201.0 million, an increase of $23.3 million, or 13%, over revenue of $177.7 million in 2010. Gross margin for 2011 was 24.9%, down from 30.6% in 2010. Loss from continuing operations for 2011 was $15.4 million, which was down from income of $3.7 million in 2010.

Non-GAAP gross margin for 2011 was 25.7%, as compared to 31.9% in 2010. Non-GAAP gross margin for 2011 excludes amortization of purchased intangibles and other assets relating to the acquisition of Santur of $1.1 million, and stock based compensation and Santur’s pre-acquisition retention expenses of $0.1 million.

Non-GAAP loss from continuing operations for 2011 was $9.6 million, down from non-GAAP income from continuing operations of $9.0 million in 2010. Non-GAAP loss from continuing operations for 2011 excludes the elements I’ve previously discussed, along with a second quarter gain on sale of an unconsolidated investee and the income tax effects of these adjustments, as detailed in today’s news release available on our website.

Non-GAAP diluted loss per share from continuing operations for 2011 was $0.40 as compared to Non-GAAP diluted income per share from continuing operations of $0.53 in 2010, on 22.4 million diluted shares for 2011 and 17.1 million diluted shares for 2010.

Adjusted EBITDA for 2011 was $2.7 million, as compared to $20.6 million in 2010 on the decrease of net income to a loss from the prior year.

On the balance sheet, we ended the fourth quarter of 2011 with cash, cash equivalents and short-term investments of $86.4 million, down from $103.0 million at the end of the third quarter of 2011, primarily due to paying the purchase price for Santur; and up from $24.7 million at the end of 2010.

In the fourth quarter of 2011, we consumed approximately $2.2 million of cash from operations and spent approximately $3.2 million for capital expenditures. For the full year of 2011, we generated approximately $101.8 million of cash from financing activities, partially offset by cash consumed from operations to fund our growth of approximately $11.7 million and capital expenditures of approximately $11.7 million. Capital expenditures were slightly less than 6% of revenue in 2011. Total bank debt at December 31, 2011 was $27.2 million, up from $13.3 million at December 31, 2010, reflecting the debt drawn to partially finance the purchase of Santur.

Inventory at December 31, 2011, inclusive of Santur inventory acquired, was $35.3 million, flat with the prior quarter’s balance of $35.2 million, and up from $18.5 million at the end of 2010.

Accounts receivable at December 31, 2011 was $68.9 million, an increase of approximately 20% from $57.6 million in the third quarter of 2011, and which was a growth rate lower than the sequential growth in revenue. Days sales outstanding declined to 100 days from 134 days on improved collections.

Now, I will provide our outlook for the first quarter of 2012.

As a reminder, the first calendar quarter is typically our seasonally lowest quarter as it is impacted by the confluence of the full impact of new pricing negotiated in the middle of the prior quarter, which generally causes a sequential decline in revenue; and shorter production time at our facilities and at our customers due to holidays in China, which means fewer working days and an associated impact to demand, overhead recoveries and margin compression, and the determination of capex spending levels, particularly in Asia.

We believe demand is building after a volatile 2011. In particular, we believe that our third quarter 2011 revenue was unusually low and there were some pushing out of orders that were then realized in the fourth quarter along with some higher overall demand as discussed. Consequently, the fourth quarter was unusually high for a traditionally seasonally lower quarter. If you were to normalize, or average, the revenue for the back half of 2011, the result would be approximately $50 million of revenue per quarter.

Further, we expect a fairly typical seasonally low first quarter, plus revenue from Santur, particularly for tunable lasers as discussed earlier, and we expect improving fundamentals in customer behavior during the quarter. Based on these assumptions, we anticipate revenue for the first quarter ending March 31, 2012 to be in the range of $46 million to $51 million.

Non-GAAP gross margin, which includes our expectations for the gross margin from Santur revenue that is currently below our corporate average, is anticipated to be in the range of 20% to 22%. It is typical for our gross margins to remain lower during our seasonally low first quarter before improving as we layer in cost reductions and greater economies of scale with growth in volume and revenues in subsequent quarters.

Non-GAAP loss per share is anticipated to be in the range of $0.25 – $0.35, which suggests that we expect to start to see signs of a return to expanding operating leverage after having acquired Santur and notwithstanding being in a seasonally low quarter.

The Non-GAAP outlook excludes the expected amortization of purchased intangibles and other assets relating to the acquisition of Santur of approximately of $1.6 million, the anticipated impact of stock based compensation and Santur’s pre-acquisition retention expenses of approximately $2.1 million, and the anticipated impact of restructuring charges relating to the Santur acquisition of approximately $0.3 million. Of these amounts, approximately $1.4 million is estimated to relate to cost of goods sold.

The share count assumption used to estimate the first quarter is approximately 25.0 million. This estimate can change based on stock and option activity in the period.

This concludes our formal comments for the fourth quarter 2011 conference call. Now I will ask the operator to open up the line for questions.

Question-and-Answer Session

[Q&A Session]

Tim Jenks (Closing Comments)

Thank you for joining us today.

Thank you for joining us today. Before we conclude, I would like to thank our shareholders for their time today and their continued interest in our company, our customers and our employees for their dedication. We look forward to updating you on our progress in the future.

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