NEOPHOTONICS CORP.

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NeoPhotonics Reports Third Quarter 2021 Financial Results

NeoPhotonics Corporation (NYSE: NPTN), a leading developer of silicon photonics and advanced hybrid photonic integrated circuit-based lasers, modules and subsystems for bandwidth-intensive, high speed communications networks, today announced financial results for its third quarter of 2021.

“With our very strong performance in the third quarter, we have returned to operating profit on a non-GAAP basis, as we forecasted one year ago. Operating income on a GAAP basis was a loss of $1.3 million, a substantial improvement over our second quarter. Our accelerated growth has been driven by products for 400G and above applications, including the initial ramp of 400ZR and related products, adding to our 400G and above suite,” said Tim Jenks, Chairman and CEO of NeoPhotonics.

Third Quarter 2021 Summary

Revenue at $83.7 million at the high end of range, up 29% quarter-over-quarter and down 18% year-over-year
Gross margin was 28.4%, up from 15.2% in the prior quarter
Non-GAAP gross margin was 29.4%, up from 21.7% in the prior quarter
Operating income was a loss of $1.3 million, up from a loss of $16.3 million in the prior quarter.
Non-GAAP operating income was positive $1.3 million, up from a loss of $10.3 million in the prior quarter
Net loss per share was $0.04, compared to net loss of $0.34 per share in the prior quarter
Non-GAAP net earnings per share was $0.01, compared to Non-GAAP net loss of $0.22 per share in the prior quarter
Adjusted EBITDA was $6.7 million, up from a negative $5.4 million in the prior quarter

Product Milestones

Products capable of use for 400G and above applications were 50% of revenue
We announced that we have shipped more than two million tunable lasers cumulatively, used in the majority of the total coherent ports delivered since their inception a decade ago.
We announced a new frequency modulated continuous wave laser (FMCW). This laser, together with a high power semiconductor optical amplifier, or SOA, is used in coherent LIDAR applications for autonomous vehicles and for precision industrial instruments.

As of September 30, 2021, cash and cash equivalents, short-term investments and restricted cash totaled $105 million. Free Cash Flow was ($3.6) million. Cash from operations was $0.1 million, including a $4.4 million increase in inventory to buffer the supply chain. Capital purchases were $3.7 million. We drew down $15 million of debt from one of our China credit facilities.

Non-GAAP results in the third quarter of 2021 exclude $2.2 million of stock-based compensation and $0.4 million of accelerated depreciation, amortization and other charges. 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 at the end of this press release.

Related Announcement and Conference Calls

In a separate press release issued today, Lumentum Holdings Inc. and NeoPhotonics (NYSE: NPTN) jointly announced that they have entered into a definitive agreement under which Lumentum will acquire all outstanding shares of NeoPhotonics in an all-cash transaction of $16.00 per share, giving a fully diluted equity value of approximately $918 million. A copy of the press release can be found on the Company’s investor relations website https://ir.neophotonics.com/.

Because of the announced transaction, NeoPhotonics’ earnings call scheduled for November 4, 2021 at 4:30 pm EDT will no longer take place.

Lumentum will host a conference call today, November 4, 2021, at 5:30 am PT/8:30 am ET to discuss the announced transaction. Information about today's call and the related transaction announcement is available on the Lumentum website at http://investor.lumentum.com.

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 at the end of this press release. These 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.

Conference Call

The Company will not be hosting a conference call today.

About NeoPhotonics

NeoPhotonics is a leading developer and manufacturer of lasers and optoelectronic solutions that transmit, receive and switch high-speed digital optical signals for Cloud and hyper-scale data center internet content provider and telecom networks. The Company’s products enable cost-effective, high-speed over distance data transmission and efficient allocation of bandwidth in optical networks. NeoPhotonics maintains headquarters in San Jose, California and ISO 9001:2015 certified engineering and manufacturing facilities in Silicon Valley (USA), Japan and China. For additional information visit www.neophotonics.com.

Forward-Looking Statements

This communication contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events, including the timing of the proposed transaction and other information related to the proposed transaction. In some cases, you can identify forward-looking statements because they contain words such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these words or other similar terms or expressions that concern the proposed transaction and our expectations, strategy, plans or intentions regarding it. Forward-looking statements in this communication include, but are not limited to, (i) expectations regarding the timing, completion and expected benefits of the proposed transaction, (ii) plans, objectives and intentions with respect to future operations, customers and the market, and (iii) the expected impact of the proposed transaction on the business of the parties. Expectations and beliefs regarding these matters may not materialize, and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include the risk that the transaction may not be completed in a timely manner or at all; the ability to secure regulatory approvals on the terms expected in a timely manner or at all; the effect of the announcement or pendency of the transaction on our business relationships, results of operations and business generally; risks that the proposed transaction disrupts current plans and operations; the risk of litigation and/or regulatory actions related to the proposed transaction; potential impacts of the Covid-19 pandemic; changing supply and demand conditions in the industry; and general market, political, economic and business conditions. The forward-looking statements contained in this communication are also subject to other risks and uncertainties, including those more fully described in filings with the Securities and Exchange Commission, including reports filed on Form 10-K, 10-Q and 8-K and in other filings made by NeoPhotonics and Lumentum with the SEC from time to time and available at www.sec.gov. These forward looking statements are based on current expectations, and with regard to the proposed transaction, are based on Lumentum’s and NeoPhotonics’ current expectations, estimates and projections about the expected date of closing of the proposed transaction and the potential benefits thereof, its business and industry, management’s beliefs and certain assumptions made by NeoPhotonics and Lumentum, all of which are subject to change.

The parties undertake no obligation to update the information contained in this communication or any other forward-looking statement.

Additional Information and Where to Find It

This communication is being made in respect of a proposed business combination involving Lumentum and NeoPhotonics. NeoPhotonics will file relevant materials with the Securities and Exchange Commission (the “SEC”) in connection with the proposed transaction, including a proxy statement on Schedule 14A. Under the proposed terms, promptly after filing its proxy statement with the SEC, NeoPhotonics will mail or otherwise make available the proxy statement and a proxy card to each stockholder entitled to vote at the annual meeting relating to the proposed transaction. NEOPHOTONICS STOCKHOLDERS AND OTHER INVESTORS ARE ADVISED TO CAREFULLY READ THESE MATERIALS (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC IN RESPECT OF THE PROPOSED TRANSACTION WHEN THEY BECOME AVAILABLE, AS THOSE DOCUMENTS WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION AND THE PARTIES TO THE PROPOSED TRANSACTION.

LUMENTUM AND NEOPHOTONICS URGE INVESTORS AND SECURITY HOLDERS TO READ THE PROXY STATEMENT AND OTHER DOCUMENTS FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.

Investors and security holders will be able to obtain these materials (when they are available and filed) free of charge at the SEC’s website, www.sec.gov. Copies of documents filed with the SEC by Lumentum (when they become available) may be obtained free of charge on Lumentum’s website at www.lumentum.com or by contacting Lumentum’s Investor Relations Department at [email protected]. Copies of documents filed with the SEC by NeoPhotonics (when they become available) may be obtained free of charge on NeoPhotonics’ website at https://ir.NeoPhotonics.com/ by contacting NeoPhotonics’ Investor Relations at [email protected].

Participants in the Solicitation

The directors and executive officers of NeoPhotonics may be deemed to be participants in the solicitation of proxies from the stockholders of NeoPhotonics in connection with the proposed transaction. Information regarding the interests of these directors and executive officers in the transaction described herein will be included in the proxy statement described above. Additional information regarding NeoPhotonics’ directors and executive officers is also included in NeoPhotonics’ proxy statement for its 2021 Annual Meeting of Stockholders, which was filed with the SEC on April 16, 2021. These documents are available free of charge as described in the preceding paragraph.

NeoPhotonics Corporation Condensed Consolidated Balance Sheets (Unaudited) (In thousands)

	As of
	Sep. 30, 2021			Dec. 31, 2020

ASSETS
Current assets:
Cash and cash equivalents	$	76,578		$	95,117
Short-term investments	27,674			27,669
Restricted cash	495			489
Accounts receivable, net	57,901			45,232
Inventories	48,663			46,901
Prepaid expenses and other current assets	18,673			20,173
Total current assets	229,984			235,581
Property, plant and equipment, net	57,134			66,765
Operating lease right-of-use assets	13,922			13,823
Purchased intangible assets, net	985			1,468
Goodwill	1,115			1,115
Other long-term assets	5,159			4,912
Total assets	$	308,299		$	323,664

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	59,303		$	43,539
Short-term borrowing, net	14,822			—
Current portion of long-term debt	3,015			3,232
Accrued and other current liabilities	24,983			42,053
Total current liabilities	102,123			88,824
Long-term debt, net of current portion	26,570			30,327
Operating lease liabilities, noncurrent	14,150			14,522
Other noncurrent liabilities	8,315			9,584
Total liabilities	151,158			143,257

Stockholders’ equity:
Common stock	132			126
Additional paid-in capital	604,727			597,460
Accumulated other comprehensive income	1,180			1,735
Accumulated deficit	(448,898		)	(418,914		)
Total stockholders’ equity	157,141			180,407
Total liabilities and stockholders’ equity	$	308,299		$	323,664

NeoPhotonics Corporation Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except percentages and per share data)

	Three Months Ended									Nine Months Ended
	Sep. 30, 2021			Jun. 30, 2021			Sep. 30, 2020			Sep. 30, 2021			Sep. 30, 2020
Revenue	$	83,742		$	65,010		$	102,398		$	209,677		$	302,970
Cost of goods sold (1)	59,968			55,135			77,994			162,689			215,338
Gross profit	23,774			9,875			24,404			46,988			87,632
Gross margin	28.4		%	15.2		%	23.8		%	22.4		%	28.9		%
Operating expenses:
Research and development (1)	13,875			15,410			15,276			42,383			40,849
Sales and marketing (1)	3,498			3,362			3,692			10,725			11,630
General and administrative (1)	7,719			7,398			7,758			22,411			23,350
Acquisition and asset sale related costs (recoveries)	28			(36		)	87			155			219
Restructuring charges (recoveries)	(12		)	22			141			10			141
Total operating expenses	25,108			26,156			26,954			75,684			76,189
Income (loss) from operations	(1,334		)	(16,281		)	(2,550		)	(28,696		)	11,443
Interest income	94			140			21			339			141
Interest expense	(207		)	(220		)	(263		)	(654		)	(942		)
Other income (expense), net	43			(880		)	(3,317		)	306			(2,314		)
Total interest and other expense, net	(70		)	(960		)	(3,559		)	(9		)	(3,115		)
Income (loss) before income taxes	(1,404		)	(17,241		)	(6,109		)	(28,705		)	8,328
Income tax provision (benefit)	(456		)	(192		)	1,206			(1,279		)	(1,199		)
Net income (loss)	$	(1,860	)	$	(17,433	)	$	(4,903	)	$	(29,984	)	$	7,129
Basic net income (loss) per share	$	(0.04	)	$	(0.34	)	$	(0.10	)	$	(0.58	)	$	0.14
Diluted net income (loss) per share	$	(0.04	)	$	(0.34	)	$	(0.10	)	$	(0.58	)	$	0.14
Weighted average shares used to compute basic net income (loss) per share	52,427			51,634			49,936			51,599			49,212
Weighted average shares used to compute diluted net income (loss) per share	52,427			51,634			49,936			51,599			51,411

(1) Includes stock-based compensation expense as follows for the periods presented:
Cost of goods sold	$	403		$	572		$	607		$	1,523		$	1,765
Research and development	565			744			748			2,171			2,505
Sales and marketing	353			261			565			1,168			1,833
General and administrative	873			763			853			2,949			2,975
Total stock-based compensation expense	$	2,194		$	2,340		$	2,773		$	7,811		$	9,078

NeoPhotonics Corporation Reconciliation of Condensed Consolidated GAAP Financial Measures to Non-GAAP Financial Measures (Unaudited) (In thousands, except percentages and per share data)

	Three Months Ended									Nine Months Ended
	Sep. 30, 2021			Jun. 30, 2021			Sep. 30, 2020			Sep. 30, 2021			Sep. 30, 2020
NON-GAAP GROSS PROFIT:
GAAP gross profit	$	23,774		$	9,875		$	24,404		$	46,988		$	87,632
Stock-based compensation expense	403			572			607			1,523			1,765
Amortization of purchased intangible assets	154			153			184			492			552
Depreciation of acquisition-related fixed asset step-up	2			3			(8		)	(1		)	(28		)
End-of-life related inventory write-down	—			3,257			4,435			2,680			4,435
Accelerated depreciation	173			157			4,120			504			4,120
Restructuring charges	78			113			706			191			706
Non-GAAP gross profit	$	24,584		$	14,130		$	34,448		$	52,377		$	99,182
Non-GAAP gross margin as a % of revenue	29.4		%	21.7		%	33.6		%	25.0		%	32.7		%

NON-GAAP TOTAL OPERATING EXPENSES:
GAAP total operating expenses	$	25,108		$	26,156		$	26,954		$	75,684		$	76,189
Stock-based compensation expense	(1,791		)	(1,768		)	(2,166		)	(6,288		)	(7,313		)
Depreciation of acquisition-related fixed asset step-up	(19		)	(21		)	(28		)	(65		)	(85		)
Acquisition and asset sale related costs (recoveries)	(28		)	36			(87		)	(155		)	(219		)
Restructuring charges (recoveries)	12			(22		)	(141		)	(10		)	(141		)
Non-GAAP total operating expenses	$	23,282		$	24,381		$	24,532		$	69,166		$	68,431
Non-GAAP total operating expenses as a % of revenue	27.8		%	37.5		%	24.0		%	33.0		%	22.6		%

NON-GAAP OPERATING INCOME (LOSS):
GAAP income (loss) from operations	$	(1,334	)	$	(16,281	)	$	(2,550	)	$	(28,696	)	$	11,443
Stock-based compensation expense	2,194			2,340			2,773			7,811			9,078
Amortization of purchased intangible assets	154			153			184			492			552
Depreciation of acquisition-related fixed asset step-up	21			24			20			64			57
Acquisition and asset sale related costs (recoveries)	28			(36		)	87			155			219
End-of-life related inventory write-down	—			3,257			4,435			2,680			4,435
Accelerated depreciation	173			157			4,120			504			4,120
Restructuring charges	66			135			847			201			847
Non-GAAP income (loss) from operations	$	1,302		$	(10,251	)	$	9,916		$	(16,789	)	$	30,751
Non-GAAP operating margin as a % of revenue	1.6		%	(15.8		)%	9.7		%	(8.0		)%	10.1		%

NeoPhotonics Corporation Reconciliation of Condensed Consolidated GAAP Financial Measures to Non-GAAP Financial Measures (Unaudited) (Continued) (In thousands, except percentages and per share data)

	Three Months Ended									Nine Months Ended
	Sep. 30, 2021			Jun. 30, 2021			Sep. 30, 2020			Sep. 30, 2021			Sep. 30, 2020
NON-GAAP NET INCOME (LOSS):
GAAP net income (loss)	$	(1,860	)	$	(17,433	)	$	(4,903	)	$	(29,984	)	$	7,129
Stock-based compensation expense	2,194			2,340			2,773			7,811			9,078
Amortization of purchased intangible assets	154			153			184			492			552
Depreciation of acquisition-related fixed asset step-up	21			24			20			64			57
Acquisition and asset sale related costs (recoveries)	28			(36		)	87			155			219
End-of-life related inventory write-down	—			3,257			4,435			2,680			4,435
Accelerated depreciation	173			157			4,120			504			4,120
Restructuring charges	66			135			847			201			847
Income tax effect of Non-GAAP adjustments	—			(17		)	(1,327		)	(19		)	(2,461		)
Non-GAAP net income (loss)	$	776		$	(11,420	)	$	6,236		$	(18,096	)	$	23,976
Non-GAAP net income (loss) as a % of revenue	0.9		%	(17.6		)%	6.1		%	(8.6		)%	7.9		%

ADJUSTED EBITDA:
GAAP net income (loss)	$	(1,860	)	$	(17,433	)	$	(4,903	)	$	(29,984	)	$	7,129
Stock-based compensation expense	2,194			2,340			2,773			7,811			9,078
Amortization of purchased intangible assets	154			153			184			492			552
Depreciation of acquisition-related fixed asset step-up	21			24			20			64			57
Acquisition and asset sale related costs (recoveries)	28			(36		)	87			155			219
End-of-life related inventory write-down	—			3,257			4,435			2,680			4,435
Accelerated depreciation	173			157			4,120			504			4,120
Restructuring charges	66			135			847			201			847
Interest expense, net	113			80			242			315			801
Income tax provision (benefit)	456			191			(1,206		)	1,279			1,199
Depreciation expense	5,380			5,771			6,479			17,154			19,366
Adjusted EBITDA	$	6,725		$	(5,361	)	$	13,078		$	671		$	47,803
Adjusted EBITDA as a % of revenue	8.0		%	(8.2		)%	12.8		%	0.3		%	15.8		%

BASIC AND DILUTED NET INCOME (LOSS) PER SHARE:
GAAP basic net income (loss) per share	$	(0.04	)	$	(0.34	)	$	(0.10	)	$	(0.58	)	$	0.14
GAAP diluted net income (loss) per share	$	(0.04	)	$	(0.34	)	$	(0.10	)	$	(0.58	)	$	0.14
Non-GAAP basic net income (loss) per share	$	0.01		$	(0.22	)	$	0.12		$	(0.35	)	$	0.49
Non-GAAP diluted net income (loss) per share	$	0.01		$	(0.22	)	$	0.11		$	(0.35	)	$	0.45

SHARES USED TO COMPUTE GAAP AND NON-GAAP BASIC NET INCOME (LOSS) PER SHARE	52,427			51,634			49,936			51,599			49,212
SHARES USED TO COMPUTE GAAP DILUTED NET INCOME (LOSS) PER SHARE	52,427			51,634			49,936			51,599			51,411
SHARES USED TO COMPUTE NON-GAAP DILUTED NET INCOME (LOSS) PER SHARE	55,971			51,634			54,385			51,599			53,730

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