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NeoPhotonics Reports Record Fourth Quarter and Fiscal Year 2016 Financial Results

[March 14, 2017]

NeoPhotonics Reports Record Fourth Quarter and Fiscal Year 2016 Financial Results

NeoPhotonics Corporation (NYSE:NPTN), a leading designer and manufacturer of optoelectronic solutions for the highest speed communications networks in telecom and datacenter applications, today announced financial results for its fourth quarter and year ended December 31, 2016.

"2016 was a strong year for NeoPhotonics and we believe our capacity additions and new product introductions position us well to serve the 100G and beyond market as it continues to grow over the next several years," said Tim Jenks, Chairman and CEO of NeoPhotonics. "Despite near term volatility in our largest served market, we believe the macro trends of the industry favor our core capabilities of delivering the highest performance products for the most demanding applications," concluded Mr. Jenks.

Fourth Quarter Summary

Revenue was $109.8 million, up $20.7 million, or 23%, from the fourth quarter of 2015, and up $6.5 million, or 6%, from the prior quarter
Low Speed Transceiver Product revenue was $12.8 million, down $12.4 million, or 49%, from the fourth quarter of 2015, and down $0.3 million, or 2%, from the prior quarter
Gross margin was 28.3%, approximately flat from 28.2% in the fourth quarter of 2015, and up from 26.6% in the prior quarter
Non-GAAP Gross margin was 29.9%, down from 32.4% in the fourth quarter of 2015, and up from 27.6% in the prior quarter
Net income was $2.0 million, up from net income of $0.4 million in the fourth quarter of 2015, and up from a net loss of $7.2 million in the prior quarter
Non-GAAP Net income was $6.3 million, down from $6.9 million in the fourth quarter of 2015, and up from $2.9 million in the prior quarter
Diluted net income per share was $0.04, up from earnings of $0.01 per share in the fourth quarter of 2015 and up from a loss of $0.17 per share in the prior quarter
Non-GAAP Diluted net income per share was $0.13, down from $0.16 per share in the fourth quarter of 2015, and up from $0.06 in the prior quarter
Adjusted EBITDA was $12.5 million, up from $11.8 million in the fourth quarter of 2015, and up from $8.3 million in the prior quarter

At December 31, 2016, cash and cash equivalents, short-term investments and restricted cash, together totaled $105.6 million, up from $102.9 million at September 30, 2016. Restricted cash at December 31, 2016 was $4.1 million, $1.3 million higher than September 30, 2016.

Annual Summary

Revenue in 2016 was $411.4 million, an increase of $72.0 million, or 21.2% from 2015
Low Speed Transceiver Product revenue was $63.6 million, a decrease of $29.4 million, or 31.6% from 2015
GAAP Gross margin was 28.5%, down 0.7 percentage points from 2015
Non-GAAP Gross margin was 29.9%, or a 1.6 percentage point decrease from 2015
GAAP Net loss for the full year was $0.2 million, down from net income of $3.7 million in 2015
Non-GAAP Net income for the full year was $23.0 million, an improvement from $21.1 million in 2015
GAAP Diluted net loss per share was $0.00, compared to diluted net income per share of $0.09 in 2015
Non-GAAP Diluted net income per share was $0.50, compared to $0.53 in 2015
Adjusted EBITDA was $45.1 million, up from $43.2 million in 2015

Non-GAAP results exclude $0.6 and $4.5 million of amortization of acquisition-related intangibles, $2.6 and $17.1 million of stock-based compensation expense and $1.2 and $2.1 million of costs related to the sale of the assets of our low speed product lines and other acquisition related costs, for the fourth quarter and fiscal year, respectively. 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.

Outlook for the Quarter Ending March 31, 2017

	GAAP	Non-GAAP
Revenue	$67 to $73 million
Gross Margin	27% to 30%	28% to 31%
Operating Expenses	$31 to $33 million	$29 to $31 million
Earnings per share	$0.16 to $0.26 net loss	$0.20 to $0.30 net loss

The Non-GAAP outlook for the first quarter of 2017 excludes the impact of expected amortization of intangibles of approximately $0.4 million, the anticipated impact of stock-based compensation of approximately $1.8 million, of which $0.2 million is estimated for cost of goods sold, and approximately $0.3 million of costs related to the sale of the assets of our low speed product lines. Our GAAP outlook reflects the recognition of an anticipated gain on the sale of our low speed transceiver product assets of approximately $4.0 million or $0.09 per share.

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, March 14, 2017, at 4:30 P.M. Eastern Time (1:30 p.m. Pacific Time). The call will be available, live, to interested parties by dialing 1-888-481-2877. For international callers, please dial +1 719-325-4937. The Conference ID number is 3735426. 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, demand for the Company's high speed products, 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: the Company's reliance on a small number of customers for a substantial portion of its revenues; ability of the Company to meet customer demand; market growth in China and other key countries; 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; 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; potential pricing pressure that may arise from changing supply or demand conditions in the industry; the impact of any previous or future acquisitions or divestitures; challenges involving integration of acquired businesses and utilization of acquired technology or divestitures of assets and related product lines; the impact of the sale of the low speed transceiver product lines and the discontinuance or end of life of certain other 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 nine months ended September 30, 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
	Dec. 31, 2016			Dec. 31, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	82,500		$	76,088
Short-term investments		19,015			23,294
Restricted cash		4,085			2,660
Accounts receivable, net		80,610			83,161
Inventories, net		48,237			65,602
Assets held for sale		13,953			-
Prepaid expenses and other current assets		22,396			12,393
Total current assets		270,796			263,198
Property, plant and equipment, net		106,867			62,618
Purchased intangible assets, net		5,562			9,852
Goodwill		1,115			1,115
Other long-term assets		6,547			5,095
Total assets	$	390,887		$	341,878

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	84,766		$	50,620
Notes payable and short-term borrowing		30,190			32,657
Current portion of long-term debt		747			760
Accrued and other current liabilities		30,625			27,950
Total current liabilities		146,328			111,987
Long-term debt, net of current portion		10,215			10,759
Other noncurrent liabilities		8,939			7,476
Total liabilities		165,482			130,222

Stockholders' equity:
Common stock		106			102
Additional paid-in capital		532,378			511,750
Accumulated other comprehensive loss		(8,401	)		(1,723	)
Accumulated deficit		(298,678	)		(298,473	)
Total stockholders' equity		225,405			211,656
Total liabilities and stockholders' equity	$	390,887		$	341,878


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


	Three Months Ended									Twelve Months Ended
	Dec. 31, 2016			Sep. 30, 2016			Dec. 31, 2015			Dec. 31, 2016			Dec. 31, 2015

Revenue	$	109,837		$	103,312		$	89,123		$	411,423		$	339,439
Cost of goods sold (1)		78,804			75,863			64,013			294,290			240,358
Gross profit		31,033			27,449			25,110			117,133			99,081
Gross margin		28.3	%		26.6	%		28.2	%		28.5	%		29.2	%
Operating expenses:
Research and development (1)		15,170			17,474			11,831			57,376			44,533
Sales and marketing (1)		4,921			5,936			4,384			18,595			15,823
General and administrative (1)		7,662			9,822			8,636			34,409			31,635
Amortization of purchased intangible assets		234			462			447			1,609			1,791
Acquisition and asset sale related costs		1,202			148			467			2,125			934
Restructuring charges		-			-			-			-			44
Asset impairment charge		-			-			-			-			368
Total operating expenses		29,189			33,842			25,765			114,114			95,128
Income (loss) from operations		1,844			(6,393	)		(655	)		3,019			3,953
Interest income		76			95			37			303			121
Interest expense		(98	)		(103	)		(110	)		(402	)		(1,243	)
Other income, net		1,300			18			1,533			472			3,941
Total interest and other income, net		1,278			10			1,460			373			2,819
Income (loss) before income taxes		3,122			(6,383	)		805			3,392			6,772
Provision for income taxes		(1,126	)		(804	)		(406	)		(3,597	)		(3,104	)
Net income (loss)	$	1,996		$	(7,187	)	$	399		$	(205	)	$	3,668
Basic net income (loss) per share	$	0.05		$	(0.17	)	$	0.01		$	(0.00	)	$	0.10
Diluted net income (loss) per share	$	0.04		$	(0.17	)	$	0.01		$	(0.00	)	$	0.09
Weighted averages shares used to compute basic net income (loss) per share		42,421			42,038			40,739			41,798			37,421
Weighted averages shares used to compute diluted net income (loss) per share		45,767			42,038			42,668			41,798			38,686
(1) Includes stock-based compensation expense as follows for the periods presented:
Cost of goods sold	$	1,525		$	297		$	216		$	3,130		$	1,335
Research and development		252			2,981			692			4,760			2,049
Sales and marketing		501			2,352			619			4,105			1,794
General and administrative		353			3,146			818			5,081			2,585
Total stock-based compensation expense	$	2,631		$	8,776		$	2,345		$	17,076		$	7,763


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									Twelve Months Ended
	Dec. 31, 2016			Sep. 30, 2016			Dec. 31, 2015			Dec. 31, 2016			Dec. 31, 2015

NON-GAAP GROSS PROFIT:
GAAP gross profit	$	31,033		$	27,449		$	25,110		$	117,133		$	99,081
Stock-based compensation expense		1,525			297			216			3,130			1,335
Amortization of purchased intangible assets		329			853			837			2,871			3,349
Depreciation of acquisition-related fixed asset step-up		(67	)		(68	)		(61	)		(261	)		13
Amortization of acquisition-related inventory step-up		-			-			(5	)		-			182
End-of-life related inventory write-down		-			-			2,768			-			2,768
Restructuring charges		-			-			-			-			125
Non-GAAP gross profit	$	32,820		$	28,531		$	28,865		$	122,873		$	106,853
Non-GAAP gross margin as a % of revenue		29.9	%		27.6	%		32.4	%		29.9	%		31.5	%

NON-GAAP TOTAL OPERATING EXPENSES:
GAAP total operating expenses	$	29,189		$	33,842		$	25,765		$	114,114		$	95,128
Stock-based compensation expense		(1,106	)		(8,479	)		(2,129	)		(13,946	)		(6,428	)
Amortization of purchased intangible assets		(234	)		(462	)		(447	)		(1,609	)		(1,791	)
Depreciation of acquisition-related fixed asset step-up		(79	)		(79	)		(101	)		(334	)		(620	)
Acquisition and asset sale related costs		(1,202	)		(148	)		(467	)		(2,125	)		(934	)
Restructuring charges		-			-			-			-			(44	)
Asset Impairment charges		-			-			-			-			(368	)
Litigation		-			-			-			-			(278	)
Non-GAAP total operating expenses	$	26,568		$	24,674		$	22,621		$	96,100		$	84,665
Non-GAAP total operating expenses as a % of revenue		24.2	%		23.9	%		25.4	%		23.4	%		24.9	%

NON-GAAP OPERATING INCOME (LOSS):
GAAP income (loss) from operations	$	1,844		$	(6,393	)	$	(655	)	$	3,019		$	3,953
Stock-based compensation expense		2,631			8,776			2,345			17,076			7,763
Amortization of purchased intangible assets		563			1,315			1,284			4,480			5,140
Depreciation of acquisition-related fixed asset step-up		12			11			40			73			633
Amortization of acquisition-related inventory step-up		-			-			(5	)		-			182
Acquisition and asset sale related costs		1,202			148			467			2,125			934
End-of-life related inventory write-down		-			-			2,768			-			2,768
Restructuring charges		-			-			-			-			169
Asset Impairment charges		-			-			-			-			368
Litigation		-			-			-			-			278
Non-GAAP income from operations	$	6,252		$	3,857		$	6,244		$	26,773		$	22,188
Non-GAAP operating margin as a % of revenue		5.7	%		3.7	%		7.0	%		6.5	%		6.5	%


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									Twelve Months Ended
	Dec. 31, 2016			Sep. 30, 2016			Dec. 31, 2015			Dec. 31, 2016			Dec. 31, 2015
NON-GAAP NET INCOME (LOSS):
GAAP net income (loss)	$	1,996		$	(7,187	)	$	399		$	(205	)	$	3,668
Stock-based compensation expense		2,631			8,776			2,345			17,076			7,763
Amortization of purchased intangible assets		563			1,315			1,284			4,480			5,140
Depreciation of acquisition-related fixed asset step-up		12			11			40			73			633
Amortization of acquisition-related inventory step-up		-			-			(5	)		-			182
Acquisition and asset sale related costs		1,202			148			467			2,125			934
End-of-life related inventory write-down		-			-			2,768			-			2,768
Restructuring charges		-			-			-			-			169
Asset Impairment charges		-			-			-			-			368
Litigation		-			-			-			-			278
Income tax effect of Non-GAAP adjustments		(114	)		(140	)		(375	)		(513	)		(840	)
Non-GAAP net income	$	6,290		$	2,923		$	6,923		$	23,036		$	21,063
Non-GAAP net income as a % of revenue		5.7	%		2.8	%		7.8	%		5.6	%		6.2	%

ADJUSTED EBITDA:
GAAP net income (loss)	$	1,996		$	(7,187	)	$	399		$	(205	)	$	3,668
Stock-based compensation expense		2,631			8,776			2,345			17,076			7,763
Amortization of purchased intangible assets		563			1,315			1,284			4,480			5,140
Depreciation of acquisition-related fixed asset step-up		12			11			40			73			633
Amortization of acquisition-related inventory step-up		-			-			(5	)		-			182
Acquisition and asset sale related costs		1,202			148			467			2,125			934
End-of-life related inventory write-down		-			-			2,768			-			2,768
Restructuring charges		-			-			-			-			169
Asset Impairment charges		-			-			-			-			368
Litigation		-			-			-			-			278
Interest expense, net		22			8			73			99			1,122
Provision for income taxes		1,126			804			406			3,597			3,104
Depreciation expense		4,905			4,457			4,040			17,847			17,102
Adjusted EBITDA	$	12,457		$	8,332		$	11,817		$	45,092		$	43,231
Adjusted EBITDA as a % of revenue		11.3	%		8.1	%		13.3	%		11.0	%		12.7	%

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
GAAP basic net income (loss) per share	$	0.05		$	(0.17	)	$	0.01		$	(0.00	)	$	0.10
GAAP diluted net income (loss) per share	$	0.04		$	(0.17	)	$	0.01		$	(0.00	)	$	0.09
Non-GAAP basic net income per share	$	0.15		$	0.07		$	0.17		$	0.55		$	0.56
Non-GAAP diluted net income per share	$	0.13		$	0.06		$	0.16		$	0.50		$	0.53

SHARES USED TO COMPUTE GAAP AND NON-GAAP BASIC NET INCOME (LOSS) PER SHARE		42,421			42,038			40,739			41,798			37,421
SHARES USED TO COMPUTE GAAP DILUTED NET INCOME (LOSS) PER SHARE		45,767			42,038			42,668			41,798			38,686
SHARES USED TO COMPUTE NON-GAAP DILUTED NET INCOME PER SHARE		47,126			46,745			44,289			46,133			39,445

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