Why Shares of NeoPhotonics Corp. Dropped Today

By Timothy Green Markets Fool.com

Image source: NeoPhotonics Corp.

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What happened

Shares of NeoPhotonics Corp. (NYSE: NPTN), a manufacturer of optoelectronic products used in communications networks, slumped on Tuesday. The company announced that it was selling its low-speed transceiver business, as well as cutting its guidance for the fourth quarter. The stock was down about 10.5% at 10:45 a.m. EST.

So what

NeoPhotonics plans to sell its low-speed transceiver business, which generated $50.7 million of revenue through the first nine months of 2016, to APAT Optoelectonics Components, a Chinese company. The transaction is valued at $26.4 million and is expected to close in January.

Along with this announcement, NeoPhotonics provided updated guidance to investors. The company cited problems with demand for its high-speed products exceeding supply. Production yields at one of its facilities has been lower than expected, resulting in delayed shipments and higher manufacturing costs.

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NeoPhotonics now expects to produce non-GAAP revenue of $109 million during the fourth quarter, down from a previous guidance range of $109 million to $115 million. Non-GAAP EPS, previously expected in the range of $0.13 to $0.21, will now come in at $0.03 to $0.11 due to higher costs.

Now what

The sale of the low-speed transceiver unit will allow NeoPhotonics to focus on its high-speed business. CEO Tim Jenks explains:

"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."

With manufacturing problems expected to knock down profits during the fourth quarter, this renewed focus should be viewed as a positive. Investors should expect to hear more about NeoPhotonics' manufacturing issues and how the company plans to fix them when it reports its fourth-quarter results in 2017.

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