SAN JOSE, Calif.--(BUSINESS WIRE)--NeoPhotonics (NYSE: NPTN) (“NEOPHOTONICS” or the “Company”), a leading designer and manufacturer of advanced hybrid photonic integrated optoelectronic modules and subsystems for bandwidth-intensive, high-speed communications networks, today announced that it executed a definitive agreement, to sell its Access and Low Speed transceiver product lines (the “Low Speed Business”) to APAT Optoelectronics Components Co., Ltd. (“APAT OE”) of Shenzhen, China, a designer and manufacturer of optical sub-assemblies for telecom and datacom markets.
The assets to be sold include the intellectual property, inventory and fixed assets for NeoPhotonics’ PON products including GPON and GEPON transceiver products at up to 10G data rates, plus 10G and below telecom, bidirectional and specialty transceiver products.
The transaction is valued at approximately $26.4 million, inclusive of post-closing payments under a Transition Services Agreement. The transaction value consists of an equivalent of $25.0 million purchase price plus an additional equivalent of $1.4 million to be paid as certain transition services are delivered. The consideration consists of not less than the equivalent of $23.0 million to be paid in cash in China Renminbi at close and not more than $2.0 million in a US dollar denominated promissory note. In addition, the purchaser will assume outstanding supply chain purchase commitments and will be responsible for payment of value-added tax obligations. The purchase price is subject to adjustment after closing for inventory adjustments and by up to $10 million in the event of potential claims under transaction warranty commitments of NeoPhotonics. The transaction is subject to customary closing conditions and is expected to close in January 2017. The purchaser is further subject to a $1.0 million breakup fee to be held in escrow, which will be applied to the purchase price upon closing or forfeited if the transaction does not close due to certain reasons attributable to the purchaser.
The secured promissory note of up to $2.0 million is for an initial term of six months with an initial interest rate of 6.0% per annum. The note is renewable at six month intervals with an increase in the interest rate by an additional 4% per annum. The note will be secured by inventory and certain fixed assets being purchased in the transaction.
In 2015, and for the first 9 months of 2016, the Low Speed Business generated $92.8 million and $50.7 million in revenue, respectively, and gross profit of $16.7 million and $9.7 million, respectively. Net assets for the business were approximately $18.0 million as of September 30, 2016.
Commenting on the transaction, Tim Jenks, NeoPhotonics Chief Executive Officer, stated, “After a comprehensive evaluation of the alternatives available for the Low Speed Business, we believe this transaction will best benefit our shareholders, customers, and employees. This transaction underscores our objective to focus our efforts on growing high speed optical networking products and solutions based on our advanced hybrid photonic integration technology platform to meet customer demand.” Jenks continued, “We believe the Low Speed Business will benefit from APAT OE's expertise in Access and PON products while continuing to provide quality products, support and services to customers.”
“We are excited to have the NeoPhotonics low speed product team join APAT, and look forward to having more products to sell to our largest customers as well as the opportunity this transaction creates for us to gain many new customers,” commented Rex Gu, Founder and CEO of APAT OE.
Raymond James & Associates, Inc. served as the exclusive financial advisor to NeoPhotonics for the transaction. Proskauer, Rose served as legal counsel to NeoPhotonics.
Updated Outlook for the Fourth Quarter of 2016
NeoPhotonics also announced an updated outlook for the fourth quarter ending December 31, 2016, given recent developments. Demand in the fourth quarter continues to exceed the Company’s capacity to supply High Speed products while production capacities continue to increase. As new capacity has been brought on line, production yields at one of its fab facilities have been lower than anticipated, resulting in delayed shipments and higher manufacturing costs during the quarter versus previous projections.
Taking this factor into account, the Company now expects its fourth quarter outlook to be as follows:
| GAAP | Non-GAAP | |||||
| 4Q’16 Revenue | $105 million to $109 million | |||||
| Gross Margin | 27% to 30% | 28% to 31% | ||||
| Operating Expenses | $30 to $32 million | $27 to $29 million | ||||
| Earnings per share | $(0.08) to $0.00 | $0.03 to $0.11 | ||||
The Non-GAAP outlook for the fourth quarter of 2016 excludes the impact of expected amortization of intangibles of approximately $1.1 million and the anticipated impact of stock-based compensation of approximately $4.4 million, of which $1.4 million is estimated for cost of goods sold, which are unchanged from previous projections.
In the Company’s previously communicated outlook view, the Company anticipated that the Low Speed Business would produce revenues of approximately $10 million in the fourth quarter of 2016 and range from $40 to $45 million in revenue in 2017. The comparable annual revenue for the Low Speed Business in 2016 is expected to be approximately $61 million. Upon divesting the Low Speed Business, the Company’s revenue growth rate for the continuing business is expected to be higher as a result. The Company’s business is seasonal on an annual cycle; the Company’s normalized first quarter revenue over the last several years has typically been 20 to 22% of the year in the first quarter, and then increasing throughout the remainder of the year.
Non-GAAP and Adjusted EBITDA Measures vs. GAAP Financial Measures
The Company’s non-GAAP measures exclude certain GAAP financial measures. 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, December 19, 2016, at 5:00 p.m. Eastern Standard Time (2:00 p.m. Pacific Standard Time). President and Chief Executive Officer, Tim Jenks, and Chief Financial Officer, Ray Wallin, will discuss the transaction and respond to questions. The call will be available, live, to interested parties by dialing 888-857-6930. For international callers, please dial +1 719-457-2604. The Conference ID number is 9032184. A live webcast will also be available in the Investors Relations section of NeoPhotonics’ website at: www.neophotonics.com.
About NeoPhotonics Corporation
NeoPhotonics is a 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 and China. For additional information visit www.neophotonics.com.
About the Low Speed Business
NeoPhotonics’ Low Speed Businesses design, manufacture and sell a portfolio of optical communication transceiver products, including PON, or passive optical network, transceivers as well as optical transceivers used in telecom client, access and enterprise network applications.
About APAT Optoelectronic Components Company, Ltd.
APAT Optoelectronics Components Company, Ltd is a leading designer, developer and global supplier of optical devices primarily in the FTTH market. With a focus on automation and process innovation, APAT OE has achieved a reputation for high quality and is the supplier of choice for many large telecom equipment companies. APAT OE is based in Shenzhen, China, a center for technology innovations and is benefited from the closeness to its key customers and an abundance of engineering talents. For more information, visit APAT OE’s website: www.apatoe.com.
APAT, APAT Optoelectronic, and the APAT logo are trademarks of APAT OE.
© 2016 NeoPhotonics Corporation. All rights reserved. NeoPhotonics and the red dot logo are trademarks of NeoPhotonics Corporation. All other marks are the property of their respective owners.
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: anticipated timing and benefits of the sale transaction, 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 relating to the sale transaction include, but are not limited to, such factors as: potential purchase price adjustments due to non-achievement of post-closing transaction warranty commitments; potential effects of disruption from the transaction; uncertainties as to the timing and ability of NeoPhotonics or APAT to consummate the transaction, including the risk that conditions to closing outside the control of NeoPhotonics are not satisfied; or actual or contingent liabilities or contractual, intellectual property or employment issues that arise as a result of the transaction or efforts to consummate the transaction. Those risks and uncertainties relating to NeoPhotonics’ continuing business 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; challenges involving integration of acquired businesses and utilization of acquired technology; the impact of the anticipated sale of the low speed 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 three and 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.