NeoPhotonics: Zacks’Bull of the Day Play

There are a few companies that specialize in high-speed communication networks, but there is one that is best positioned to take advantage of the demand for these networks worldwide.  This company most recently destroyed the Zacks Consensus Earnings and Revenue expectations, and pointed to increased activity in the next few quarters.  Further, this company has produced 5 consecutive quarters of pro forma profitability.  Due to these strong data points, Neophotonics Corp (NPTNSnapshot Report) is the Zacks Bull of the Day.

This Zacks Rank #1 (Strong Buy) is engaged in the design and manufacture of photonic integrated circuit, or PIC, based modules and subsystems for bandwidth-intensive, high-speed communications networks. Products offered by the Company includes high-speed products that enable data transmission at 10Gbps, 40Gbps and 100Gbps, agility products such as ROADMs that dynamically allocate bandwidth to adjust for volatile traffic patterns, and access products that provide high-bandwidth connections to more devices and people over fixed and wireless networks.

According to Tim Jenks, Chairman and CEO, “We are pleased to report our fourth straight quarter of GAAP profitability and year over year revenue and margin expansion, which resulted in our generating $43 million of Adjusted EBITDA over the last four quarters. We are excited about the renewed momentum we are seeing in the 100G market and the progress we are making with our strategy of increasing our content per 100G port and extending our products to 400G and beyond.”

In their most recent quarter, revenues improved +2.4% YoY, gross margins rose +15.5% YoY, non-GAAP gross margins advanced +12.5%, and net income improved from -$1.9 million in Q314 to +$1.4 million in Q315.  Further, the company has a solid balance sheet with cash and cash equivalents valued at $103.6 million.

Going into the fourth quarter 2015, management expects revenues in a range of $82 million to $86 million, above the previous consensus of $80.5 million.  Also, the company sees non-GAAP gross margins in the range of 30%-40%.

As you can see from the graph below, Neophotonics has been significantly outperforming the S&P 500 for over the past six months.

Increasing Estimates

Due to their impressive Q3 earnings numbers and the expectation of improved orders for their 100G at China Mobile for Q4 and beyond, estimates for Q4 15, Q1 16, FY 15, and FY 16 have all increased.  Q4 15 rose from $0.03 to $0.07, FY 15 advanced from $0.22 to $0.33, Q1 16 improved from $0.02 to $0.03, and FY 16 jumped from $0.39 to $0.44.

Bottom Line

After a slowdown in China for their 100G in the previous quarter, management was able to turn the network around and show improving revenues, margins, and growing order activity in the most recent quarter.  Due to management’s guidance, sales are improving in China for Q4 and into 2016, which has set the company up for a positive 2015, and 2016.

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