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14 August 2018

NeoPhotonics’ revenue grows 18% in Q2 to $81.1m

© Semiconductor Today Magazine / Juno PublishiPicture: Disco’s DAL7440 KABRA laser saw.

For second-quarter 2018, NeoPhotonics Corp of San Jose, CA, USA (a vertically integrated designer and manufacturer of hybrid photonic integrated optoelectronic modules and subsystems for high-speed communications networks) has reported revenue of $81.1m, up 18% on $68.6m last quarter and 11% on $73.2m a year ago (well above the $70-76m guidance), driven by robust demand in the Americas and improved demand in China.

Fiscal Q2/2017 Q3/2017 Q4/2017 Q1/2018 Q2/2018
Revenue $73.2m $71.1m $76.9m $68.6m $81.1m

High-Speed Products (for data rates of 100G-and-above) matched last quarter’s record 86% of total revenue, after growing sequentially by $10m.

Sequential growth outside China was 30%, led by very strong demand for high-speed products used in data-center interconnect (DCI) and metro deployments by key customers in the Americas (22% of total revenue) and Europe, the Middle-East & Africa (EMEA, 21% of total revenue). In particular, DCI applications (mostly 400G coherent products) are rapidly approaching $10m (and 10% of revenue).

China represented 57% of total revenue (down from 61% last quarter). Sequential growth in China was the result of deployments at the provincial level as well as exports from China, despite trade tensions and ongoing uncertainties there. “We do not see any share shift in China due to the ZTE ban [the US Department of Commerce’s Denial Order] prior to it being lifted. Thus, the impact of the ban has been net subtractive from the China market,” says chairman & CEO Tim Jenks. “With the ban resolved, we expect additional volume tenders and overall demand growth.”

The top five customers grew 27% quarter-over-quarter (to 80-90% of total revenue) as these key customers succeeded in the market and NeoPhotonics had the capacity to support their rapid volume ramps. “Communication equipment companies’ market share is consolidating among a few leaders, and NeoPhotonics is levered to those market-leading customers,” notes Jenks.

Huawei Technologies (including its affiliate HiSilicon Technologies) remained the largest customer, but down from 48% to 43% of revenue. The next four largest customers comprised 47% of total revenue (up from 36%). Two of these were 10%-or-greater customers (one at 25% and the other 10%).

Due to the higher demand, net inventory has fallen from $69m last quarter to $61m (from 104 days of inventory on hand to 84 days, slightly below the targeted 90 days).

On a non-GAAP basis, gross margin was 20.1%, down from 23.9% a year ago but up from 14.7% last quarter (although the latter was below the expected 16-20% due partly to a $1.2m ZTE-related write-down). Of this, product margin was 30% (up four percentage points quarter-over-quarter due to higher manufacturing utilization and improved costs). This was offset by 9.5% in cost-of-sales charges, consisting primarily of: about five points of inventory revaluation at the new lower standard cost level; about three points of under-absorption (excess capacity) charges, primarily in the externally modulated laser (EML) fab (since factory loading is substantively less than the 80% average); and about 1.5 points of inventory write-offs.

Operating expenses (OpEx) have been cut further, from $24.2m (33.1% of revenue) a year ago and $22.9m (33.4% of revenue) last quarter to $21.8m (26.9% of revenue) due to the timing of R&D-related project spending.

Net loss was $6.3m ($0.14 per diluted share), cut from $14.6m ($0.33 per diluted share) last quarter and below the $6.6m ($0.15 per diluted share) a year ago.

Cash used in operations was $1m (down from $3.5m last quarter). Capital expenditure (CapEx) was $2m (cut from $8m). Free cash flow was hence -$3m.

During the quarter, cash and cash equivalents, short-term investments and restricted cash fell from $86.9m to $67.6m, due mainly to the repayment of $18.6m in debt as it became due, mostly in China. “We do not plan to re-borrow in China until our latest legal dispute with APAT Optoelectronics is resolved,” says senior VP & chief financial officer Beth Eby. Shenzhen-based APAT Optoelectronics Components Co Ltd acquired NeoPhotonics’ Low Speed Transceiver Product assets in January 2017. “This is the third dispute, adding to that previously reported in our 10-Q. This does not have an impact on our China operations, as we have cash and additional credit available in the USA,” she notes.

“We saw continued progress on our new product initiatives,” says Jenks. The firm increased volume shipments of high-baud-rate coherent receivers and ultra-narrow-linewidth tunable lasers for systems operating at 400Gb/s per wavelength which are being deployed in DCI and metro applications. Further, we continued to make good progress on new product design wins and initial shipments for products for applications at 600Gb/s per wavelength, including our complete suite of 64Gbaud micro integrated coherent receiver, coherent driver modulator (CDM) and ultra-narrow-linewidth tunable lasers. For applications inside the data center, we are now making early shipments of 53Gbaud lasers and drivers for single-wavelength 100Gb/s applications. These products are key elements used in 400G client-side DD-QSFP and OSFP transceivers, which are expected to be deployed in large volumes starting next year,” he adds.

“In the near term we continue to ship 28Gbaud lasers for 100G and 2x200G intra-data-center applications. For next-generation systems, we demonstrated at OFC (Optical Networking and Communication Conference & Exhibition) in March our 64Gbaud coherent optical subassembly (COSA) and our nano-tunable laser, and we are developing even higher-baud-rate components for the next generation of DCI and transport systems. We continued to see strong growth in our multi-cast switch shipments, reflecting both strength in metro deployments of colorless, directionless and contentionless (CDC) reconfigurable optical add/drop multiplexers (ROADMs) and the increasing use of contentionless switching solutions in data centers to manage densification,” Jenks continues.

Coherent DCO module revenue grew through the quarter with customer wins and as volumes doubled quarter-on-quarter. “New China tenders will positively contribute to increases in DCO volumes,” says Jenks. “We continue to press forward on our developments for next-generation DCO modules that are complementary to our existing market, as we view these to be important solutions going forward. As such, we are designing our 64Gbaud components into next-gen 400G-and-beyond DCO modules, as we demonstrated in March at the OFC conference.”

“With our new product traction and increasing momentum in our core markets, we are optimistic for continued improvement,” says Jenks.

For third-quarter 2018, NeoPhotonics expects continued demand strength in the Americas (from DCI) and in China (from provincial and metro build outs). “We have not yet planned for any material shipments to ZTE or its supply chain partners,” notes Eby. Revenue should therefore be $79-84m. Gross margin will be 20-24%, a bit lighter than originally expected. “We continue to get that increased volume and cost reduction, but we expect it to be offset by a couple of points of price erosion and a couple of points due to a shift in product mix to lower-margin products,” says Eby. “Because we are not seeing any of the ZTE benefit come back yet, we are still estimating about three points of excess-capacity charge from our EML fab.” With operating expenses rising back slightly to $22-23m, diluted net loss per share should be $0.17-0.07.

“We are a little lighter on breakeven than we expected, as we are still taking underload charges in our EML fab,” says Eby. “We are breakeven in the mid-$80m [of revenue], once we get through the underload charges,” she adds. “We expect to be operating-profit breakeven in the fourth quarter.”

“In Q4, we expect again a little bit of additional volume,” says Eby. “We will start to see the price reductions for next year hit the tail end for December. But we should start to see some of that EML volume come back as the ZTE supply chain comes back,” she adds. “Part of the EML underload was share loss to other laser form factors and part of it was the ZTE supply chain… ZTE has certainly re-engaged with us and each of their supply chain partners [in terms of initial orders]. It will take a quarter or two for two things to happen.”

“We remain enthusiastic about our mid- and long-term prospects,” says Jenks. “First, NeoPhotonics has focused on delivering components and modules with industry-leading performance, which puts us in position to benefit from the current demand acceleration as well as the transition to 400G data rates. We expect that in 2019 we will see 400G become a standard building block for data-center bandwidth and we are a key vendor for all distances. And even higher speeds are expected in the not too distant future, for which we are working with the leading global customers as we develop higher-speed, highly integrated, low-power products. Second, deployments of coherent systems into metro and increasingly metro-edge applications is continuing, first in North America and across the globe. Third, we believe that with the ZTE resolution, China has returned to a normalized demand environment and will continue its 100G-and-beyond network builds in support of the roll-out of 5G wireless systems,” he adds.

“Industry momentum toward fully contentionless networks continues to build, with new adoptions happening which will include certain data-center applications that we expect to drive growth of multi-cast switches over multiple years. And we are actively engaged to extend application of our coherent product suite to adjacent markets such as LiDAR for autonomous vehicles.”

After the end of Q2/2018, NeoPhotonics received a letter of intent for the purchase of its Russia factory for approximately book value. “We do not expect any material gain or loss on this potential transaction,” says Eby. “If a transaction occurs, it would be slightly accretive to gross margin.”

See related items:

NeoPhotonics’ Q1 revenue falls 4% year-on-year, as ZTE loss counteracts growth in North America

NeoPhotonics reports revenue up 8% in Q4 to $76.9m

NeoPhotonics’ Q3 revenue growth in North America and China offset by declines elsewhere

NeoPhotonics restructuring as it reports below expected preliminary Q3 results after uncertain demand from China

NeoPhotonics’ revenue grows in Q2 despite sale of Low-Speed Transceiver product assets  

NeoPhotonics completes sale of Low Speed transceiver business to APAT Optoelectronics

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