Good afternoon. Thank you for joining us to discuss NeoPhotonics operating results for the second quarter of 2017 and outlook for the third quarter of 2017.

With me today are Tim Jenks, Chairman and CEO, and Sandra Waechter, Interim Chief Financial Officer. Tim will begin with a review of the second quarter results.

Sandra will then provide financial results for the second quarter and the outlook for the third quarter of fiscal 2017 before turning it back to Tim to provide color on market dynamics, and discuss busines0s drivers and new products before opening the call for questions. The company's press release and management's statements during this call include discussions of certain non-GAAP financial measures and information, including all income statement and balance sheet amounts and percentages other than revenue, unless otherwise noted.

These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. These financial measures and a reconciliation of GAAP to non-GAAP results are provided in the company's press release and related Form 8-K, filed today with the SEC, and can be found at the Investor Relations section of the NeoPhotonics website.

Material contained in the webcast is the sole property and copyright of NeoPhotonics, with all rights reserved. Certain statements in this conference call, which are not historical facts, may be considered forward-looking statements that involve risks and uncertainties, and include statements regarding future business results, levels of sales and profitability, subsequent events, product and technology development, capital needs and availability, customer demand, inventory levels and economic and industry projections.

Various factors could cause actual results to differ materially. Some of these risk factors have been set forth in our press release dated August 3, 2017 and are described at length in our annual and quarterly SEC filings.

Now, I will turn the call over to CEO, Tim Jenks.

Thank you for joining us today. In the second quarter, NeoPhotonics delivered revenue of $73.2 million, coming in at the upper end of our outlook range, and representing sequential growth of 4% after adjusting for the sale of our low speed transceiver product assets in the first quarter.

Driving our sequential increase was strength in 100G and above shipments to customers in North America as well as a stabilization of demand in China. Ciena, our largest customer outside of China, increased to 19% of revenue in the second quarter, up from 14% in the first quarter, representing an increase of approximately $3 million sequentially.

Revenue in the second quarter increased in China by $1.6 million sequentially, or 4%, excluding residual revenue in the first quarter from the low speed transceiver assets that we sold. In fact, we experienced net growth at each of our Chinese network equipment customers other than Huawei, resulting in the region being up sequentially.

When similarly compared, revenue at Huawei decreased to approximately 37% of revenue in the second quarter from 41% in the first quarter, a decrease of $1.4 million, which was in line with our expectations. There are industry reports of Huawei having increasing shipment volumes in the quarter.

However, our shipments to Huawei remained at muted levels as they continued working through their inventory build-up as we discussed on our last call. Non-GAAP gross margin in the second quarter was 24%.

We continue to experience under absorption in our manufacturing facilities as a result of lower than planned shipment volumes to China, and we recorded some obsolescence charges on discontinued products. We continue to operate our production facilities with a focus on efficiency and with lower overhead, and we expect to be able to expand gross margins as finished goods inventory depletes with higher production and shipment volumes.

As we discussed on our last call, in light of both the sale of our low speed transceiver assets and the soft business levels in China, in the second quarter we implemented a series of cost saving measures including limited restructuring actions, reducing SG&A and thinning some R&D and manufacturing overheads for legacy products. As a result of these actions, Non-GAAP operating expenses decreased nearly 20% sequentially to $24.2 million.

While we made good progress on these actions and we believe the business is on good footing to realize increased operating leverage when demand levels return, we continue to see near term challenges with China visibility and forecasts. For the second half of 2017, we continue to see strong demand in regions outside of China driven by North American carriers, with continued strength in metro and DCI deployments.

Within China, it is too early to predict how the full year will unfold with the transition from primarily national backbone to primarily provincial deployments. Our near term growth may continue to be restricted by the China inventory overhang as certain customers are driving their inventories lower across the board.

In addition, the inventory situation may impact some of our customers who also sell to customers in China as they are similarly pressured by the inventory-related actions. While these issues may overshadow metro growth and 400G wins and related early shipments in the near term, we believe that the mid- and long-term market drivers for our business remain compelling, including in China, as they continue to build out national backbone, provincial and metro networks.

I will now turn the call over to Sandra, who joined us as Interim Chief Financial Officer in May. She will provide further detail on our financial performance.

Thank you, Tim, and good afternoon. I am pleased to talk to you on this call today.

I will start with the second quarter financial results and close with the outlook for the third quarter. Revenue for our second quarter totaled $73.2 million, with strength in North America and sequential growth in China, as Tim mentioned.

Sales of our High-Speed Products were $59.4 million or 81% of revenue and Networking Products and Solutions represented $13.8 million or 19% of revenue. Our Non-GAAP gross margin was 24%, down from 26% in the first quarter of 2017, reflecting excess and obsolescence charges on discontinued products as well as under-absorption, given China softness.

Total Non-GAAP operating expense for the second quarter was $24.2 million, a decrease of 20% versus the prior quarter, driven by the cost savings measures in the quarter Tim highlighted earlier and a sequential reduction in higher than typical audit related costs in the first quarter. Non-GAAP operating loss for the second quarter was $6.7 million, or negative 9% of revenue; an improvement of $4.5 million from a negative operating margin of 16% in the first quarter.

Non-GAAP net loss in the second quarter was $6.6 million compared to a loss of $10.7 million in the first quarter. Based on a fully diluted share count of 43.2 million shares, this translates to a Non-GAAP loss per share of 15 cents compared to a loss of 25 cents per share in the prior quarter.

For the second quarter, Adjusted EBITDA was breakeven at $0.0 compared to a loss of $5.2 million in the first quarter of 2017. I will close out my discussion of the second quarter income statement with a review of our GAAP results.

Second quarter gross margin was 23%, down from 26% in the first quarter of 2017. Operating expense was $26.5 million compared to $30.4 million in the preceding quarter.

Recall that the prior quarter operating expense included a one-time gain on sale of our low speed transceiver assets. Operating loss was $9.7 million for the second quarter, which included approximately $0.3 million of amortization of acquisition-related intangibles, $1.9 million of stock-based compensation expense and $0.7 million of restructuring charges.

Net loss was $9.3 million for the quarter, improving from a net loss of $11.5 million in the prior period. Geographically, our revenue mix for the second quarter, excluding low speed transceiver product revenues from the first quarter, was as follows: 20% in the Americas, up from 17% in the first quarter, China was stable at 53%, Japan was down to 3% from 5% and the rest of the world was 24%, down from 25%.

Note that these figures are based on shipment destination, not the end use destination. We had two 10% or greater customers in the second quarter of 2017: Ciena comprised approximately 19% of total revenue, up from 14% in the prior quarter; and Huawei Technologies and its affiliate, HiSilicon Technologies, together comprised 37% of total revenue compared to 41% in the first quarter.

A full reconciliation of our GAAP to non-GAAP numbers for the quarter is included in our press release. Turning to the balance sheet, we finished the quarter with $79.0 million in cash, cash equivalents, and restricted cash, down from $91.5 million at March 31, 2017.

Restricted cash at June 30, 2017 was $3.3 million. Accounts receivable were $56.5 million, with days sales outstanding at 69 days.

Net inventory was $81.3 million, with 130 days of inventory on hand as we enter the second half of the year. As previously disclosed, our current credit agreement with Comerica Bank expires on August 31st and a credit line we have with CITIC Bank in China expires on September 30th.

We are currently working through the due diligence process with a potential new lender that would provide increased flexibility in borrowing and we are hopeful this will come to completion this quarter. We have mitigation plans in place to conserve our cash including a combination of expense and inventory controls.

However, without any recovery in China, there would be doubt that our existing cash would be adequate for the next full year if we did not extend at least one of these credit lines or secure equivalent financing. In line with this effort we borrowed $17 million in China subsequent to the end of the second quarter that will remain in place until early Q1 of 2018.

These matters will be further reflected in our upcoming 10-Q report for the second quarter. Before I discuss our revenue and earnings outlook for the third quarter of fiscal 2017, I want to remind everyone of our public filings with the SEC and our Safe Harbor statement included in our press release that discusses the risks and uncertainties that could affect future performance causing actual results to differ materially from our forward-looking statements.

While China softness has continued into the third quarter we believe we are seeing relative stability in demand. However, there is limited visibility, given the inventory overhang, the move to provincial deployments and customer inventory management changes.

As a result, we anticipate only modest changes in existing inventories and in gross margins, and our factory under-absorption will continue through the remainder of this year. Given these factors, the Company’s expectations for the September 2017 quarter are: Revenue in the range of $70 million to $76 million; GAAP gross margin in the range of 23% to 26%; Non-GAAP gross margin in the range of 24% to 27%; GAAP Diluted net loss per share in the range of 21 cents to 11 cents, and; Non-GAAP diluted net loss per share in the range of 17 cents to 7 cents.

These numbers are reflective of approximately 43.9 million fully diluted shares. Over the last two years we have been adding significant capacity to our production facilities and these projects are nearing completion.

You will recall that our total capex was planned to be approximately $100 million over two years. Cash capital expenditures this year are estimated to total $57 million.

Based on this forecast we expect our cash used in operations during the third quarter to be approximately $18 million, inclusive of changes in working capital. In the quarter we expect cash capital expenditures to be approximately $12 million.

We anticipate financing these cash requirements with debt, inclusive of our $17 million debt financing in China that I previously discussed. On an operating level, we have scaled our production levels to reflect current demand forecasts, and we continue to closely monitor our operating expense levels.

I’ll now turn the call back to Tim.

Thank you, Sandra. Long term market dynamics driving growth in high speed optics remain robust.

As a company, we are focused on high speed telecom and data center markets and applications, and the drivers we see for these include: First, Metro deployments expanding rapidly across the globe; Second, China is continuing with high speed build-outs over the medium- and long-term and in advance of 5G wireless, and finally, data centers and big data applications are embracing higher modulation technologies including coherent and PAM4 capabilities as their capacity needs increase rapidly. These networks continue to move to higher data rates and increased bandwidth, each of which leverages NeoPhotonics’ core strengths.

In China, the issue remains with respect to timing for the move to provincial deployments and, at certain customers, inventory management. The transition from national backbone deployments to provincial backbone and metro deployments reduces visibility but volumes are expected to increase.

Further, our limited visibility is exacerbated by accumulated inventory and certain supply constraints in the industry. Worldwide, metro and data center interconnect 100G and above coherent deployments continue to grow at accelerated rates.

Capex by web-scale content providers remains robust with multiple mega-data centers planned or under construction, resulting in higher demand for our 100G and beyond components and solutions for data center interconnect applications. 100G is now standard in all line-side and client-side applications and line-side networks are moving rapidly to 200G and 400G, with 600G on the horizon for data center interconnect applications.

This is important, as we believe we are well-positioned to serve these growing 400G and beyond markets with both new products and expanded capacity. In line with these drivers, NeoPhotonics has a broad portfolio of products and solutions and we continue to develop and launch products aimed at 400G and above for telecom and data center applications, as we outlined at OFC this past March and as we have discussed on prior calls.

We expect several of these new products will be entering production, contributing to growth in 2018, including our CFP-DCO modules, two new multicast switch products and key products for initial 400G launches. Furthermore, our MultiCast switches are driven by new deployments of contentionless network architectures, notably in the USA and in China, while other products are all directly benefitting from increasing data rates and higher bandwidth requirements.

Notably our MultiCast switches are based on proven and reliable photonic integration technology and offer superior optical performance, low cost, and scalable designs for customers implementing CDC networks. NeoPhotonics is sampling a full suite of optical components for 400G and 600G transmission including our 64 Gbaud Indium Phosphide micro-Modulator, our 64 Gbaud micro-intradyne coherent receiver and our ultra-narrow linewidth tunable laser in both C-band and L-band variants.

Finally, related to 400G applications inside the data center, we are seeing increasing customer demand for both our high speed component and module solutions including 56 Gbaud EML lasers that will enable single channel 100 Gbps transmission for which we have capable component technology. The mid- and long-term market drivers for our business remain compelling.

China is committed, through the China Broadband 2020 and newer initiatives, to continue to build out the national backbone network and expand buildouts of 100G provincial and metro networks. Our OEM customers in China expect these actions to increase the number of 100G ports in China in 2017 and again in 2018.

In the near term, while we continue to deal with this softer China market, we are tightening expenses as we closely manage inventory and production levels, and drive further cost savings measures. This concludes our formal comments and now I would like to ask the operator to open up the line for questions.

[Audio break] …recently in conversations with the larger carriers in China, certainly China Mobile and China Telecom the expectations is that new tenders are less likely to have material or significant impact in the third quarter and more likely for the fourth quarter, and I think this is really the result of movement you know from the national backbone build out which where that business largely went to incumbents from last year and which was to some extent satisfied by use of accumulated inventory. Two new awards for Provincial and Metro areas which are not really running at high-speed yet and in some cases for example with the China Mobile really not expected to be significant until Q4.

I hope that addresses your question.

And then Sandra, maybe you can help us understand the continue declining in gross margin in the quarter and also on guidance. Given the sequential revenue line improvement, and what we think is the liners suite of products following the spin of your low speed business.

Are we seeing a sequential improvement in gross margin?

So I think I heard a couple of questions there. One is related to our Q2 gross margin relative to Q1.

And that different is largely attributable to excess and obsolescence charges on discontinued products which we view as an anomalously event. And the second is related to under absorption in China.

As we noted, there have been an increase in our inventory level and the capitalized under absorption will flow into our Q3 margin which does put our Q3 margin into perspective.

Let me make sure I understood. The excess on absolute charges, is that also embedding into your non-GAAP gross margin?

Yes, it is.

One last one on products. The multicast switch business team and are you still on track to double your revenue contribution for this business in 2017?

And then we’ve been hearing from market analyst that China is looking to deploy CDC ROADMs using WSS rather than multicast switches for the contentionless functionality. If this is something that you’re also seeing and if so, how this impact what we originally thought could be an incremental business for you?

So the first part of the question is, are we on track. Generally we are on track.

Although part of our forecast had been increases in China that at the moment are looking later in the year. So it will be close as to whether it doubles year on year.

Secondly, with respect to the deployments in China for CDC networks, those are expected to use both WSS and multicast switch. The multicast switch really offer the lower cost and better performance alternative.

And essentially, the expectation is those installations, as they go to CDC, will be using multicast switches which we have developed and qualified for use in the China networks.

So you’re not seeing a slowdown in adoption in China because they are awaiting for CDC ROADMs based on WSS rather on multicast switches for the contentionless functionality.

Yes. We're not seeing any slowdown at all in that sense.

But be mindful that most of our multicast switch shipments thus far have been really to North American carriers, notably the Verizon supply chain. And so from that level, the China business would be increasing total demand from the primarily North American deployments thus far.

So I was hoping if you could talk a little bit about the inventory situation. I was under the impression that the trajectory of business fairly flat on an absolute demand level.

But the inventory was drawing down over the course of the June quarter. And as a result would clear at some point during the third quarter, and that ultimately the gap from the level of revenues you're generating to the real level of demand in the field that you would recover to the real level of demand in the field.

And that that inherently would be sequentially up revenues even in a flat demand environment. Is that what's occurring here, or just at a lower rate of change between the two quarters?

Or do you expect the inventory to continue to be a drag into the fourth quarter? When do you think the inventory actually clears out at most of your vendors - customers?

The situation as you stated I think is – quite reflective of what actually is going on. So we’ve seen inventory clear on some products but not all and that's indicated by just kind of take up levels by customers on certain products.

As I said in the prepared remarks we saw for example in our largest customer we think their shipments in the second quarter were higher than our reflected shipments to them in the second quarter. And then as we look across the customers and their build rates for the year things do increase through the remainder of the year.

So it's hard to say doesn't happen in July or does it happen in August we have seen some products where the take up rates have picked up so we think those are largely clear, but we don't think it's completely over. Then for our business we have some amount of increase in finished goods inventory through that period of time.

And so we have to work through that ourselves through the remainder of the year.

So is there a change in your expectation in terms of the rate of when that inventory clears from say where you were thinking mid or late the second quarter versus where you are now is there anything changed in your thinking or it’s just the processes – extended processes it just takes time?

It is a little bit later and lower than I expected this time a quarter ago and I think that reflects in our outlook. So I think it's pushed out a bit and that is largely because of the situation with China Mobile and China Telecom as I addressed in the prior question set.

That said our customers in China notably Huawei a significant portion of their business is not dependent on the China carriers. And so we have a continued amount of vendor managed inventory pools through the course of the quarter and we’re following that closely.

So I think the timing month-to-month for a given product is difficult to predict, but I think we’re probably down to one or two months before it's largely cleared as you say.

So just going back into the broader question of your inventory so how long do you think it takes for you to clear out what you've got in terms of excess inventory that will then allow you to start to get the rebound in your gross margins on a volume production basis?

Well I think we send in the prepared remarks that we expect to have continuing on absorption through the end of the year and that is the case because of both the amount of inventory and the level of demand. So really through the third and fourth quarter.

So I’m trying to separate between the two as opposed to just simply unabsorbed overhead because you've got unutilized production versus you actually drawing down inventory this in your stocks?

We don't really expect I think Sandra said in her remarks that we don't expect much change in the inventory or therefore in the gross margin in the current quarter for that reason but okay.

Couple questions and forgive me if I have I missed some of those commentary upfront, but you seem this time fairly modest decline in China in the second quarter and obviously some strength, significant strength in the rest of the world. I wondered did you provide kind of any similar metrics for the extent you’re looking at flattish Q3 can you provide any quantification about sort of the extent of the decline in China if there is one versus any potential strength in the rest of the world?

Yes, we didn't provide any outlook for the geographic mix although as we did say the business in China did decrease – or actually the business in China sequentially increased the business that Huawei decreased net-net the region increased. So we’re feeling that we have seen a stabilization in the demand levels in China but we do need to see these standards and the provincial and Metro builds roll through as a result, but we’re feeling that – we have seen a bit of stabilization.

So you’re now looking for sort of incremental downtick in China more kind of flattish in both regions I guess China and rest of the world?

Yes, but I’ll be careful in answering that Tim because customer-by-customer it maybe not be the same. So you just as we saw the second quarter up China as a region we did see our largest customer down.

And so the third quarter has limited visibility and it’s exacerbated by the inventory situation. So it's really hard to predict with high confidence.

Understood second question you had mentioned a couple of measures to address the cash situation and the balance sheet including some borrowings I wonder if that includes potential monetization of real estate assets and as you can discuss the potential value there and any opportunities to unlock that value?

So NeoPhotonics owns real estate in both Japan and China. So if you're referring to those.

Yes.

We have the ability to leverage that in terms of debt we don't have current plans for selling those assets.

Can you estimate at all what kind of capacity you might have there?

Well let’s see I would expect that the range of value is approaching $50 million but not significantly above that.

And final question, do you think the company can achieve breakeven and look you can define that how would you like earnings, EBITDA, free cash flow in the fourth quarter?

So I’ll let Sandra to comment on this in just a second, but I think at the end of 3rd March we did point out that on EBITDA basis we were breakeven as currently reported in the second quarter, but Sandra you want to talk about this one.

Absolutely Tim as mentioned we were breakeven in the second quarter on an adjusted EBITDA basis and we would expect to be positive on an adjusted EBITDA basis for both the third and the fourth quarter of this year.

And just to reiterate and you do expect capital spending to come down to that kind of single-digit millions type level in Q4?

I would say we maybe low double-digit in Q4.

Just can you go over, I missed your comments about Comerica and Japan and also borrowing in China, can you just go over some of those numbers once again?

Certainly, so at this point in time we have borrowed $20 million from Comerica on our $30 million facility and we have borrowed $17 million from Civic in China and then we have capacity on that civic line up to $39.2 million and we have additional capacity of approximately $17.7 million from Shanghai Pudong in China.

Got it.

Does that answer your question?

Yes but then you said something about Comerica end of August and Japan due like September-October. Can you repeat those dates again?

Yes, absolutely. The Comerica line expires on August 31, and the Civic line is due for its renewal on September 30.

So we have two lines that are up for renewal in the third quarter. And as I previously mentioned, we are talking to all parties about potential expansion and of course, an extension of our capacity.

I don’t know if you guys talked about backlog. Can you just talk about how your backlog has behaved this year?

The most important thing, Dave, I think with respect to backlog is, we do note in the current quarter, for example, that 37% of our revenue was the Huawei and on a geographic basis, our exposure to China on a regular basis is in the vicinity of 50%. Most of that business is served by vendor managed inventory or versions of vendor managed inventory, and a result that is a more forecast based and backlog based.

It's also worth noting that of our top five customers, in fact, all of them have versions of vendor managed inventory. So we do see ups and downs overall in our backlog.

I think from the end of the fourth quarter through this year as you asked, our backlog actually came down a bit because certainly the China business is not all VMI. And so that business did come down a bit.

But we have seen some level of stabilization, but the specific backlog that would exclude the largest customers and largest China customers isn't necessarily reflected in the full business.

And regarding inventories, any risk of write-down? I mean whatever the amount.

One of the things that Sandra talked about is the fact that we did have some [E&O] reserves that we took this quarter. We look at that some carefully, and Sandra might want to comment on that, but we do look at it some carefully and we do it really with respect to what is the current outlook.

So if the outlook has adjusted, we adjust accordingly. So I don't think there's an increased risk if that's what you're asking.

And lastly on cost savings program. So OpEx came down, sounds like it’s still ongoing.

Can you quantify maybe for what duration/timeframe we’re talking about?

Sandra, you want to talk about that?

So I would say that OpEx controls are in place, and we are always monitoring our OpEx levels. We would expect that we will see fairly tight spending controls in the third quarter and potentially into the fourth quarter.

It really is dependent on our visibility with our various customers around the world.

Dave, you may or may not have heard the comments on the call. But from the first quarter to the second quarter, our OpEx actually did drop by about 20%.

Sandra recalled the fact that we recorded a gain in the first quarter. But nonetheless, we dropped 20% in OpEx.

So I think we've been reasonably effective. And then as we anticipate seeing some level of pickup in demand, we think that that would help quite a bit with the operating leverage going forward.

Thank you very much, Melissa. I want to thank everyone for your time and interest in listening to the conference call with NeoPhotonics today.

We look forward to talking to you on our next call. Good bye.