Opnext Reports Second Quarter Unaudited Operating Results

Opnext, Inc. (NASDAQ:OPXT), a global leader in the design and manufacturing of optical modules and components, today announced unaudited financial results for the second fiscal quarter ended September 30, 2009.

Financial Highlights for the Second Quarter Ended September 30, 2009:

• Revenue decreased $4.3 million, or 5.0%, to $81.0 million compared to $85.3 million in the quarter ended June 30, 2009. Revenue from sales of 10Gbps and below products increased $1.9 million, or 4.0%, to $49.9 million, as an 8.0% increase in 10Gbps revenue primarily from higher sales of XFP and SFP+ products was partially offset by reduced revenue from sales of less than 10Gbps SFP products. Revenue from sales of 40Gbps products decreased $7.0 million, or 20.1%, to $28.0 million, and revenue from sales of industrial and commercial products increased $0.8 million, or 34.8%, to $3.1 million.
• Revenue increased $0.8 million, or 1.0%, from $80.2 million in the quarter ended September 30, 2008. Revenue in the quarter ended September 30, 2009, included $24.3 million from the former StrataLight Communications, Inc. (“StrataLight”), which was acquired on January 9, 2009. Revenue from sales of 40Gbps products increased $21.0 million, primarily as a result of the StrataLight acquisition. Revenue from sales of 10Gbps and below products decreased $17.7 million, or 26.2%, while revenue from sales of industrial and commercial products decreased $2.5 million, or 44.6%. The decrease in revenue from sales of 10Gbps and below products occurred in most major product categories except XFP and SFP+ modules.
• Revenue from sales to Cisco Systems, Inc. and Nokia Siemens Networks (“NSN”) represented 47.6% of total revenues, compared to 47.5% for the quarter ended June 30, 2009, as an increase in sales to Cisco offset a decrease in sales to NSN.
• Gross margin was 21.7% compared to 19.6% for the quarter ended June 30, 2009. Gross margin for the September and June quarters included 250 basis point and 360 basis point negative effects, respectively, from non-cash charges and costs associated with the acquisition of StrataLight. Excluding these effects as well as the impact from stock-based compensation expense, non-GAAP gross margin was 24.2% for the quarter ended September 30, 2009, compared to 23.2% for the quarter ended June 30, 2009. The increase in non-GAAP gross margin primarily resulted from higher 10Gbps and industrial and commercial sales volumes, lower material and outsourcing costs and a 170 basis point net benefit from lower inventory charges, which more than offset the negative effect from lower average selling prices and a 190 basis point negative impact from foreign currency exchange fluctuations and hedging programs.
• Operating loss was $17.0 million for the quarter ended September 30, 2009, compared to an operating loss of $23.0 million for the quarter ended June 30, 2009. The reduction in operating loss primarily resulted from lower non-cash charges and costs related to the acquisition of StrataLight. Excluding these items as well as stock-based compensation expense, non-GAAP operating loss was $8.2 million for the quarter ended September 30, 2009, compared to a non-GAAP operating loss of $8.5 million for the quarter ended June 30, 2009. The reduction in non-GAAP operating loss primarily resulted from the improvement in gross margin and lower operating expenses. Operating expenses declined by $0.5 million as $1.0 million of lower spending was partially offset by $0.5 million of unfavorable foreign currency exchange fluctuations.
• Net loss was $17.9 million for the quarter ended September 30, 2009, or $(0.20) per fully diluted share, compared to a net loss of $23.7 million, or $(0.27) per fully diluted share, for the quarter ended June 30, 2009. Non-GAAP net loss for the quarter ended September 30, 2009, which excludes non-cash charges and costs related to the acquisition of StrataLight as well as stock-based compensation expense, was $9.2 million, or $(0.10) per fully diluted share, which was the same as the non-GAAP net loss for the quarter ended June 30, 2009. Net loss per fully diluted share for the quarter ended September 30, 2009, includes a $0.02 negative effect from foreign currency exchange fluctuations and hedging programs relative to the quarter ended June 30, 2009.
• Cash and cash equivalents decreased by approximately $10.2 million to approximately $155.0 million at September 30, 2009, compared to approximately $165.3 million at June 30, 2009, reflecting $1.1 million of capital expenditures, $2.7 million of capital lease payments, $7.7 million of cash used in operations and a $1.2 million benefit from foreign currency exchange fluctuations. Net current assets other than cash and cash equivalents increased by approximately $2.7 million as a result of a $2.9 million increase in accounts receivable and a $7.0 million decrease in accounts payable, partially offset by a $6.5 million decrease in inventories and a $0.7 million net increase in accrued expenses and other current assets.
• EBITDA was negative $8.0 million for the quarter ended September 30, 2009, compared to negative $10.2 million for the quarter ended June 30, 2009. Adjusted EBITDA for the quarter ended September 30, 2009, which excludes non-cash charges and costs related to the acquisition of StrataLight as well as stock-based compensation expense, was negative $3.0 million compared to negative $3.4 million for the quarter ended June 30, 2009.

Operational Highlights for the Second Quarter Ended September 30, 2009

• Cisco awarded Opnext its “Excellence in Productivity” award for 2009, recognizing Opnext for best-in-class supply chain management and the highest level of product value, technology and quality.
• Opnext introduced its new DQPSK modules for DWDM transmission and its new 40Gbps compact VSR module for high density 40Gbps platforms. In addition, the Company demonstrated its CFP MSA compliant module for 100GBASE-LR4 during ECOC 2009.
• Opnext signed advanced technology development contracts with several customers valued at approximately $7.0 million. During the quarter, $2.0 million was received and the associated revenue has been deferred pending achievement of milestones.
• Opnext reached a settlement agreement to resolve its class action lawsuit, subject to final approval by the court.

Market Observations and Guidance:

Commenting on recent market conditions, Opnext, Inc. President and Chief Executive Officer, Gilles Bouchard, said, “We were pleased with the growth in our 10G product sales as well as our continued focus on cost containment, which contributed to improvements in gross margin and adjusted EBITDA in the September quarter versus the June quarter. However, during the quarter we experienced a slowdown in the 40G U.S. backbone market segment due to customer inventory builds and cautious spending tied to the global economic uncertainty.”

“In response to slowing 40G sales and persistently challenging yen exchange rates, we took additional initiatives in October to reduce costs. We expect our streamlined cost structure to provide operating leverage as demand recovers and growth resumes.”

“Looking forward to the December quarter, we expect to see bifurcation in our markets, with continuing growth in 10G, while our 40G business will remain affected by customer inventory adjustments. For these reasons, we expect revenues to be between $75 million and $80 million for our third fiscal quarter ending December 31, 2009,” concluded Mr. Bouchard.

Forward-looking Statements:

Statements made in this press release include forward-looking statements, including, but not limited to, those related to future revenues, growth of revenues, market position, acceptance of certain Opnext products, execution of new development contracts, management’s expectations with respect to the Company’s initiatives, return to profitability and positive cash flow, settlement of litigation, position for future growth, the general market outlook and the outlook for the industry. These statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. Among other things:

• projected sales for the quarter ending December 31, 2009, as well as the general outlook for the future, are based on preliminary estimates, assumptions and projections that management believes to be reasonable at this time, but are beyond management’s control; and
• the market in which Opnext operates is volatile, implementation of operating strategies may not achieve the desired impact relative to changing market conditions and the success of these strategies will depend on the effective implementation of our strategies while minimizing organizational disruption.

Other factors that could cause the Company’s future, including future financial position and results from operations, to differ from current expectations include: the impact of rapidly changing technologies; the impact of competition on product development and pricing; the ability of Opnext to source critical parts and to react to changes in general industry and market conditions, including regulatory developments; expenses associated with litigation; rights to intellectual property; market trends and the adoption of industry standards; the ability of Opnext to integrate, and realize the value from, the acquisition of StrataLight; and consolidations within or affecting the optical modules and components industry. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the Company’s business. Additional information regarding these and other factors can be found in Opnext’s reports filed with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K filed on June 15, 2009, as amended. In providing forward-looking statements, the Company expressly disclaims any obligation to update these statements, publicly or otherwise, whether as a result of new information, future events or otherwise, except to comply with applicable federal and state securities laws.

Conference Call:

Opnext management will conduct a conference call at 1:30 p.m. PT, today, Monday, November 9, 2009, to discuss these results in detail. You may participate in this conference call by dialing 866-365-3198 (United States) or 706-758-6170 (International) prior to the start of the call and providing the Opnext, Inc. name and Conference ID# 37937586. A replay of the conference call can be accessed starting approximately two hours after the call through Monday, November 16, 2009, by dialing 800-642-1687 (United States) or 706-645-9291 (International) and using the Conference ID# 37937586. A live webcast of the call will be accessible on the Investor Relations section of the Company website at http://www.opnext.com. A replay of the webcast will be available following the conclusion of the call on the webcast archive page of the Investor Relations section.

(OPXT-G)

About Opnext:

Opnext (NASDAQ:OPXT) is the optical technology partner of choice supplying systems providers and OEMs worldwide with the industry's largest portfolio of 10G and higher next generation optical products and solutions. The Company's industry expertise, future-focused thinking and commitment to research and development combine in bringing to market the most advanced technology to the communications, defense, security and biomedical industries. Formed out of Hitachi, Opnext has built on more than 30 years experience in advanced technology to establish its broad portfolio of solutions and solid reputation for excellence in service and delivering value to its customers. For additional information, visit www.opnext.com.

Opnext Non-GAAP Financial Measures

Management excludes certain charges and expenses from its gross margin and operating (loss) income GAAP financial measures for the purpose of assessing the Company's operating performance. Accordingly, the Company provides these non-GAAP measures to its investors as supplemental information, in addition to the GAAP presentation, in an effort to provide greater transparency and insight into management's method of analysis. The Company also provides non-GAAP net (loss) income and net (loss) income per share financial measures to demonstrate the impact of its non-GAAP operating performance measures on these financial measures.

The basis for excluding the following non-GAAP adjustments related to the acquisition of StrataLight is as follows:

Employee Liquidity Bonus Plan compensation: As part of the acquisition of StrataLight, the Company assumed the costs of an employee bonus plan providing certain employees, directors and other designees of StrataLight with a portion of the merger consideration in the form of cash payments and the Company's stock. Twenty-five percent (25%) of the plan awards vested and were distributed on January 31, 2009, and fifty percent (50%) of the plan awards vested and were distributed on October 31, 2009. The remaining twenty-five percent (25%) of the plan awards will vest and are to be distributed during the quarter ending March 31, 2010. The associated expense will be recognized over the distribution period. The Company believes these acquisition-related expenses are not indicative of its core operating performance.

Amortization of purchased intangible assets and fair-value adjustment of acquired inventory: In connection with the acquisition of StrataLight, the Company acquired certain intangible assets related to developed product technology, order backlog, customer relationships and inventory, all of which were recorded at fair-value. The useful lives of the intangible assets range up to five years and the recorded values of the intangible assets are being amortized on a straight-line basis over their respective useful lives. The increase from historical cost to fair-value of acquired inventory is being realized as the goods are sold. The Company believes these acquisition-related expenses are not indicative of its core operating performance.

Business integration costs: During the quarter ended December 31, 2008, the Company began to incur costs associated with the integration of StrataLight. The Company believes these acquisition-related expenses are not indicative of its core operating performance.

Restructuring activities: Shortly after the closing of the acquisition, the Company relocated its corporate headquarters from Eatontown, NJ, to Fremont, CA, and during the quarter ended March 31, 2009, began to incur workforce-related charges, such as severance payments, retention bonuses and employee relocation costs related to a formal restructuring plan and building costs for facilities not required for ongoing operations. The Company believes these acquisition-related expenses are not indicative of its core operating performance.

The basis for excluding the following non-GAAP adjustments and measures is as follows:

Stock-based compensation expense: The Company records compensation expense related to its stock-based awards on a straight-line basis over the requisite service period of the award. Depending upon the size, timing and the terms of the awards, the related non-cash compensation expense may vary significantly. The Company believes these non-cash expenses are not indicative of its core operating performance.

Litigation expenses: During the quarter ended June 30, 2008, the Company began to incur costs associated with a class action claim. The Company believes the claim is non-recurring and the related expenses are not indicative of its core operating performance.

EBITDA and Adjusted EBITDA

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is calculated as net income (loss) excluding the impact of net interest (income) expense, income tax expense, depreciation and amortization of property, plant and equipment and amortization of purchased intangibles. Adjusted EBITDA represents EBITDA excluding non-GAAP financial measures as previously described herein. The non-GAAP financial measures, which are excluded from EBITDA internally when evaluating our operating performance, allow investors to make a more meaningful comparison of our core business operating results over different periods of time and to more meaningfully compare our results to those of similar companies. Management believes that EBITDA and adjusted EBITDA, when viewed with the Company’s GAAP results and the accompanying reconciliation, provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of our core business without regard to potential distortions. Additionally, management believes that EBITDA and adjusted EBITDA permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced. However, EBITDA and adjusted EBITDA are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as alternatives to net income (loss) or cash flow from operating activities as indicators of operating performance or liquidity. The table below provides a reconciliation of net income (loss) to EBITDA and adjusted EBITDA.