NeoPhotonics blames slow China demand for upcoming layoffs

Citing the fact that soft demand for its products in the China market has continued into the third quarter, NeoPhotonics Corp. (NYSE: NPTN) has announced restructuring efforts that include layoffs. Company management expects the restructuring to reduce quarterly operating expenses immediately and result in an approximately $2 million reduction when fully realized in the first quarter of 2018.

The company did not reveal how many employees will be affected. The restructuring also will include real estate consolidation, a write down of inventory for "certain programs and assets" and a write-down of idle assets. Reduction costs are expected to be approximately $4.8 million, with $4.2 million in asset-write off costs and $0.6 million in severance costs. NeoPhotonics predicts approximately $4.6 million of these costs will fall in the third quarter, with the rest incurred in the fourth quarter.

While reports suggest that optical transceiver sales overall began to climb in the second quarter of this year (see "Optical transceiver sales rebound in 2Q17: LightCounting"), that growth came despite continued weakness in demand from systems houses in China. That softness has yet to show signs of relenting, according to NeoPhotonics.

"Lacking a clear indication of increased demand in China in the third quarter, we initiated several operational changes with the goal of expediting our return to profitability, including implementing certain restructuring initiatives designed to align our business with the current demand environment and lowering manufacturing output to manage inventory levels," said Tim Jenks, chairman and CEO of NeoPhotonics. "In taking these actions, we have maintained our research and development focus on products for next-generation coherent systems, operating at 400 Gbps to beyond 1 Tbps, wherein our advanced hybrid photonic integration provides the highest value."

The restructuring announcement came as NeoPhotonics released preliminary results for the third quarter. The company expects to report revenue between $69 million to $71 million, with GAAP gross margin of approximately 10% to 13% and GAAP loss per share of $0.50 to $0.40, inclusive of the restructuring charges. These figures compare to previous guidance of $70 million to $76 million in revenue, GAAP gross margin of 23% to 26%, and GAAP net loss per share of $0.21 to $0.11.

Meanwhile, the company now expects non-GAAP gross margin will be in the range of 14% to 17% and non-GAAP loss per share in the range of $0.35 to $0.27. Previous guidance called for non-GAAP gross margin of 24% to 27% and non-GAAP loss of $0.17 to $0.07. In addition to the restructuring charges, non-GAAP gross margin and non-GAAP net loss will suffer from the decision to reduce production levels during the quarter because of the lack of visibility into future demand levels in China.

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