NEOPHOTONICS CORPORA

NPTN
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NeoPhotonics : Q3 2020 Results Summary

11/22/2020 | 12:37pm

Q3'20 SUMMARY

NYSE: NPTN

November 2020

Forward Looking Statements and Other Important Cautions

This presentation 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, 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. These forward-looking statements include statements about the following topics: future financial results, demand for the Company's high-speed products, and the Company's market position. 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; 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; the potential for export or other legal restrictions placed on our overseas customers; possible disruptions in the supply chain or in demand for the Company's products due to industry developments including COVID-19; the ability of the Company's vendors and subcontractors to supply or manufacture the Company's products in a timely manner; ability of the Company to meet customer demand; volatility in utilization of manufacturing operations and 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 of assets and related product lines; challenges involving integration of acquired businesses and utilization of acquired technology; 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/A for the year ended December 31, 2019 and the Company's Quarterly Report of Form 10-Q for the three months ended September 30, 2020. All forward-looking statements are made as of the date of this presentation, and the Company disclaims any duty to update such statements.

You may obtain these documents for free by visiting EDGAR on the SEC website at www.sec.gov.

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 of its press release issued on November 2, 2020 and available in the Investor Relations section of the NeoPhotonics website. 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.

2

NeoPhotonics: World leader in the highest speed optoelectronics

Deep Technology for Highest Speed Cloud Solutions

  • Highest speed coherent suite ramping 64 Gbaud / 600Gbps / 800G
  • World's primary supplier of ultra-narrow linewidth tunable lasers enabling highest speed and farthest distance transmission
  • Sampling 400G / 400ZR / 400ZR+ coherent DCO modules enabled by silicon photonics modulator/receiver integration
  • Unique C++ LASERTM for expanded spectrum and capacity

Financial and Operational Scale

  • TTM Revenues as of Q3'20 of ~$406 million
  • 20% YTD growth
  • Beyond Q3 2020, no Huawei revenue due to DOC/BIS restrictions
  • ~1,250 employees (USA, China, Japan, Canada)
  • ~500 Issued Patents

Market Ecosystem

Optical ICs

Components &

For Network Equipment

Telco Carriers/

Modules

Transport | Metro | Data Center

Cloud and Hyperscale

Semi

Fabs

Line Card | Daughter

Central Office / Webscale

Lasers, Drivers,

Components and

Systems

Card | Transponder

Data Center

Amplifiers, Modulators

Transceivers

Products

Customers

3

FIBER OPTIC COMMUNICATIONS: HIGHEST SPEED OVER DISTANCE LEADER

  • A Decade of Delivering the Highest Speed Over Distance In the Industry
  • Technology Development Teamwork: Unique Corporate and Multinational Culture
  • The Outer Limits of Complex Optical Materials Technology
  • Currently Shipping Products that Deliver 32 Terabits per second On One Fiber
  • Technology and Manufacturing: Seamless Organic Team
  • Deep Reservoir of Knowhow Captured in Trade Secrets

$406M TTM Revenues

Accelerating Growth in

~500

Highest Speed Products

~1,250 Employees

20% YTD Growth YoY

and Expanding Margins

(USA, China, Japan, Canada)

Issued Patents

as of Q3'FY20

(400G+ since 2018)

4

A New Era of Growth for NPTN

Our New Era of Growth is Driven by 400G-800Gbps Data Rates and Expanding Use Cases

Our strategy is to rapidly grow the business by supporting the highest speed over distance solutions at 400G and above for telecom equipment providers, and expand our business by ramping our new 400ZR and 400ZR+ coherent modules to Cloud and hyper-scale data center customers starting in 2021.

  • Cloud data centers adopting coherent links leverages NPTN core technologies. These interconnects and network edge provisioning for cloud services drive demand for Speed Over Distance solutions.
  • Demand for NPTN high speed products is strong - accelerating at 400G and beyond, and especially for links requiring the highest Speed Over Distance.
  • Our highest speed products for 400G, 600G and 800G are used by nearly all leading NEMs.
  • YTD 2020 growth is 20%. Excluding Huawei, our YTD growth of 400G and above products is 91%.
  • Excluding Huawei, 400G and above products were 44% of our revenue in Q3. 400G and above revenue has been accelerating throughout the year and we expect this to continue through Q4.
  • We expect 40-50% revenue growth from customers beyond Huawei over the next year.
  • 400ZR and 400ZR+ high speed modules for the data center market are expected to ramp beginning in 2021. 400G and above port growth is forecasted at an 80% CAGR 2019-2024, further accelerating NPTN growth.

5

Higher Bandwidth Driving Accelerated Growth

PROJECTIONS INCLUDE 400ZR+ OPPORTUNITY

Rapid Growth in 400G+ PORTS

PORTS SHIPPED

400G+ Ports Forecast at 110K in 2020

Increasing to 1100K in 2024

+80%

COHERENT

CAGR

2019

2020

2021

2022

2023

2024

400G+

400ZR/400ZR+ Modules

High Speed Coherent Is Technology of Choice

Total NPTN 400G+ TAM

400G+ NPTN TAM Forecast to Increase from

$200Mil in 2020 to $1.8Bil in 2024

+70%

CAGR

2019

2020

2021

2022

2023

2024

Components

400ZR/400ZR+ Modules

400ZR/ZR+ Modules and Components

for Chassis-based Systems

6

Source: Current company estimates. No contribution from Huawei in 400ZR estimates.

NeoPhotonics Revenue Longer-Term Outlook

Rapid Revenue Growth for 400G+ Products (excludes Huawei)

Millions

2020 NPTN Revenue

80

>120%

60

119%

41%107%

40

20

-

1Q20

2Q

3Q

4QF

Non-HW Other

Non HW 400G+

Millions

350

300

250

200

150

100

50

-

Four Qtrs Growth Outlook

40-50%

YoY growth

C

20202021 Non-HW Other Non HW 400G+

7

NPTN is Well Positioned to Deliver Substantial Shareholder Value

NPTN shareholders expected to benefit from demand for its high speed products, increasing design wins, and operational efficiencies, all leading to value creation

Operational Growth Drivers

  • NPTN is focused on next generation high speed coherent systems and modules, wherein silicon photonics, lasers and advanced hybrid photonic integration technologies provide the highest value
  • Expansion into Cloud data center markets and expanding customer base
  • Hyper-scaledata center interconnects and network edge provisioning for Cloud services is a large $1Bil market opportunity for NPTN's 400ZR and 400ZR+ high speed modules
  • Our Q4 revenue outlook at $67 million at the midpoint is 16% sequential Q-to-Q growth. Sequential Q3 to Q4 growth reflects good progress toward objective of 40% to 50% growth over the next year.

Financial Drivers & Outlook

  • NPTN has aligned costs to adjust for excluding Huawei and anticipates quickly returning to non-GAAP profitability by Q3 2021.
  • Near-termand long-term outlook is supported by expected future demand for unparalleled next generation products and solutions as well as rigorous expense management. NeoPhotonics will continue acting in the best interests of its shareholders.

8

FINANCIAL VIEW

November 2020

Q3'20 Financial Summary

(Non-GAAP, $M)

Proven track record of financial turn around

Revenue and Gross Margin

Cash and Total Debt

110

35%

90

30%

120

90

25%

70

20%

60

30

50

15%

-

Q1'19 A Q2'19 A Q3'19 A 4Q'19 A Q1'20 A Q2'20 A Q3'20 A

Q1'19 A

Q2'19 A Q3'19 A 4Q'19 A Q1'20 A

Q2'20 A

Q3'20 A

Revenue

Non-GAAP GM%

Cash, Restricted Cash & Short Term Investments

Total Debt

Operating Profit: Non GAAP

Free Cash Flow

15

25

10

20

5

15

10

-

5

Q1'19 A Q2'19 A Q3'19 A 4Q'19 A Q1'20 A Q2'20 A Q3'20 A

(5)

-

Q1'19 A Q2'19 A Q3'19 A 4Q'19 A Q1'20 A Q2'20 A Q3'20 A

(10)

NOTES: Q3'20 non-GAAP Net Income excludes restructuring and asset write downs of $9.4M, stock-based compensation expense of $2.8M,

10 acquisition related intangibles amortization and other costs of $0.3M, and $1.3M of non-GAAP tax adjustments.

Outlook for Q4'20

Q4 Outlook does not include any revenue contribution from Huawei, a loss of 44% of Q3'20 revenue

We expect to return to return to non-GAAP profitability in Q3'21 and GAAP profitability in Q4'21 without Huawei 2020 is expected to remain a profitable year (non-GAAP), reflecting Company's ability to execute turnarounds

Q4'20 non-GAAP Gross Margin reflects an

GAAP

Non-GAAP

Revenue

$64M to $70M

increase in significant underloading on loss of

Huawei volumes.

Gross Margin

20% to 24%

22% to 26%

Operating Expense includes one time payments

Operating

$24.5M to $25.5M

$24M to $25M

for 400G development.

Expenses

GAAP results include a $2.9M gain on litigation

EPS

($0.26) to ($0.16)

($0.23) to ($0.13)

settlement.

Notes:

Q4'20 non-GAAP outlook excludes $3.4M of anticipated stock-based compensation expense, $2.9M gain on litigation settlement, $0.7M of restructuring and asset write downs, $0.3M of amortization of acquisition related intangibles and other costs.

Non-GAAP EPS outlook assumes approximately 50.3 million fully diluted shares outstanding.

11

Operating Profit

Operating losses beginning Q4'20 excluding Huawei Forecasting a return to operating profits by Q3'21

Gross Margin

The target for Gross Margin remains 35%

Drivers and Trends

Product margins have increased 10%+ since Q1'19 and will increase slightly on improved product mix.

Excess capacity charges will increase significantly from excludng Huawei.

Insourcing of new products to leverage capacity

Start up costs for modules which drive growth and new customers

Operating Expense

The target for OpEx remains 25% of revenue

Drivers and Trends

Complete start up of modules for new customer group

Review products and programs for highest return

SG&A difficult to scale

Variable compensation reduced on reduced profitability

Proven track record of improving results for cash, cash flow and profitability

12

Near Term and Long Term Value Creation

Specific and Achievable Value Drivers Leveraging Existing Core Capabilities

EXISTING MARKETS

Leader in ultra narrow linewidth tunable lasers and 64Gbaud components

EMERGING MARKETS

Doubling addressable market with 400G Coherent Modules

ASSET LEVERAGE

Increase asset leverage to improve margin structure and cash

  • Increasing customer design wins at highest speeds
  • Accelerating 400G+ market growth with 80% CAGR in ports 2019-2024
  • NPTN forecasting 40-50%year-over-year revenue growth for 2021
  • Leverages skills of existing telecom module business
  • Ultra Narrow Line Width Laser has a sustainable advantage for 400ZR+
  • Rapid module TAM expansion to $1Bil by 2024 and leading market share
  • Product portfolio improvements increase gross margin potential
  • Leverages manufacturing footprint, reducing overhead
  • Real property with assessed value of $88 to $97Mil to be monetized

13

Reference

See also:

www.neophotonics.com/blog/

and Ir.neophotonics.com

Serving Customers From a Global Footprint

Comprehensive Vertical Integration for Multi-Material Hybrid Integration of Optical Solutions

Wuhan, China

Hachioji, Japan

• R&D Site

All Functions

InP/GaAs Fab

Dongguan,

China

  • Volume Manufacturing Site

Shenzhen,

China

  • All Functions
  • Volume Manufacturing Site

CM: Thailand

• Volume

Manufacturing

Site

CM: Japan

  • Volume Manufacturing Site

CM: Taiwan

  • Volume Manufacturing Site

San Jose, CA,

USA

  • PLC Fab
  • Corporate HQ & PLC Fab

Fremont, CA,

USA

  • InP Fab
  • Lasers, arrays

Ottawa, Canada

  • R&D Site

Headcount by Geography

North America

~270

China (~200 contract)

~900

Japan (~150 contract)

~120

ROW

~20

Total Employees

~1300

Agency / Contract

~400

Total (~800 IDL)

~1,700

15

Additional Revenue Detail

By Region

Q1'19

Q2'19

Q3'19

Q4'19

Q1'20

Q2'20

Q3'20

China

57%

48%

48%

55%

60%

61%

56%

Americas

18%

24%

25%

26%

19%

16%

17%

Rest of World

25%

28%

27%

19%

21%

23%

27%

TOTAL

100%

100%

100%

100%

100%

100%

100%

By Product Group

Q1'19

Q2'19

Q3'19

Q4'19

Q1'20

Q2'20

Q3'20

High Speed Products

88%

89%

92%

92%

92%

90%

92%

Networking Products

12%

11%

8%

8%

8%

10%

8%

TOTAL

100%

100%

100%

100%

100%

100%

100%

Customer Detail

Q1'19

Q2'19

Q3'19

Q4'19

Q1'20

Q2'20

Q3'20

Huawei

49%

36%

37%

41%

52%

52%

44%

Top 5

87%

84%

85%

84%

85%

82%

82%

Top 10

95%

94%

96%

95%

95%

94%

95%

TOTAL Customers

2

2

2

2

2

2

3

>10%

16

Revenue by geography is based on the

"ship to" location per customer. It is not

necessarily reflective of end use location.

"High Speed Products" refers to transmitter and receiver products as well as switching and other components for 100G optical transmission applications over distances of 2 to 2,000 kilometers.

"Networking Products" refers to products sold for use in optical communications networks and other applications for use at data rates that are less than 100Gbps. The products include certain passive products that do not explicitly have a data rate specification.

Q3'20 P&L Performance (Non-GAAP)

(% of Revenue)

Q1'19

Q2'19

Q3'19

Q4'19

Q1'20

Q2'20

Q3'20

Target

Model

Revenue $

$79.4M

$81.7M

$92.4M

$103.4M

$97.4M

$103.2M

$102.4M

100%

Product Margin %

27%

32%

34%

37%

36%

36%

37%

Mfg. Inefficiencies

(4)%

(5)%

(4)%

(4)%

(4)%

(1)%

(2)%

Other COGS

(1)%

(1)%

(1)%

(2)%

(1)%

(2)%

(1)%

Gross Margin %

22%

26%

29%

31%

31%

33%

34%

35%

R&D

17%

16%

14%

14%

11%

12%

14%

S&M

5%

4%

4%

3%

3%

3%

3%

G&A

8%

7%

7%

6%

6%

7%

7%

TOTAL OPEX

30%

27%

24%

24%

21%

23%

24%

25%

Operating Margin

(8)%

(1)%

5%

7%

10%

10%

10%

10%

EBITDA

(1)%

8%

15%

12%

18%

16%

13%

15%

Note:

Q3'20 non-GAAP Net Income excludes restructuring and asset write downs of $9.4M, stock-based compensation expense of $2.8M, acquisition related intangibles amortization and other costs of $0.3M, and $1.3M of non-GAAP tax adjustments..

17

Q3'20 P&L Performance (Non-GAAP)

($ Millions)

Q1'19

Q2'19

Q3'19

Q4'19

Q1'20

Q2'20

Q3'20

Revenue $

$79.4

$81.7

$92.4

$103.4

$97.4

$103.2

$102.4

Product Margin $

21.5

26.3

31.8

38.0

34.8

37.4

37.7

Mfg. Inefficiencies

(2.7)

(4.4)

(3.5)

(4.6)

(4.2)

(1.4)

(2.4)

Other COGS

(1.0)

(1.0)

(1.5)

(1.5)

(0.2)

(1.7)

(0.9)

Gross Margin $

17.8

20.9

26.8

31.9

30.4

34.3

34.4

R&D

13.8

13.0

12.9

14.7

11.1

12.7

14.5

S&M

3.9

3.0

3.2

3.5

3.1

3.5

3.1

G&A

6.6

6.1

6.2

6.2

6.1

7.4

6.9

TOTAL OPEX

24.2

22.1

22.3

24.3

20.3

23.6

24.5

Operating Margin

($6.5)

($1.2)

$4.4

$7.6

$10.1

$10.7

$9.9

Adj. EBITDA

($0.8)

$6.8

$14.2

$12.5

$17.8

$16.9

$13.1

Q3'20 GAAP

Financial Measures to Non-GAAP Reconciliation

GAAP Net Income

($4.9M)

Restructuring & Asset Write-downs

9.4

Stock-based compensation expense

2.8

Amortization & other costs

0.3

Income tax effect of Non-GAAP

& other adjustments

($1.4)

Non-GAAP Net Income

$6.2M

18

Q3'20 P&L Performance (GAAP)

($ Millions)

Q1'19

Q2'19

Q3'19

Q4'19

Q1'20

Q2'20

Q3'20

Revenue $

$79.4

$81.7

$92.4

$103.4

$97.4

$103.2

$102.4

Product Margin $

21.5

26.3

31.8

38.0

34.8

37.4

37.7

Mfg. Inefficiencies

(1.4)

(4.4)

(3.5)

(4.6)

(4.2)

(1.4)

(2.4)

Period Costs

(2.4)

(1.0)

(1.5)

(1.5)

(0.2)

(1.7)

(0.9)

Other Charges

(2.0)

(5.2)

(0.6)

(0.7)

(0.7)

(0.8)

(10.0)

Gross Margin $

15.7

15.7

26.2

31.2

29.7

33.5

24.4

R&D

14.7

13.8

13.7

15.5

11.9

13.7

15.3

S&M

4.6

3.6

3.8

4.0

3.6

4.3

3.7

G&A

7.8

7.2

7.4

7.4

6.8

8.8

7.8

Other

0.6

(0.7)

-

-

-

0.1

0.2

Charges

TOTAL OPEX

27.7

23.9

24.9

26.9

22.3

26.9

27.0

Operating Margin

$(11.9)

$(8.2)

$1.3

$4.3

$7.4

$6.6

($2.6)

19

Q3'20 Balance Sheet

($ Millions)

Q1'19

Q2'19

Q3'19

Q4'19

Q1'20

Q2'20

Q3'20

Cash & Equivalents

$79

$74

$80

$89

$109

$113

$123

Working Capital

111

108

114

122

133

144

149

Total Assets

$344

$319

$325

$335

$342

$349

$346

Total Debt

56

48

48

42

41

36

35

Total Liabilities

192

171

175

174

175

170

165

Shareholders' Equity

153

148

150

160

168

179

181

20

Thank you

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NeoPhotonics Corporation published this content on 02 November 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 22 November 2020 17:36:03 UTC

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