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8 November 2018

NeoPhotonics’ Q3 revenue up 15% year-on-year to $81.7m

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

For third-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 $81.7m, up 1% on $81.1m last quarter and 15% on $71.1m a year ago, driven by strong demand in both the Americas and China.

Fiscal Q3/2017 Q4/2017 Q1/2018 Q2/2018 Q3/2018
Revenue $71.1m $76.9m $68.6m $81.1m $81.7m

High-Speed Products (for data rates of 100G-and-above) comprised 84% of total revenue (down slightly on the record 86% of last quarter). “We saw some mix changes, including an increase in certain passive products that are often used in 100G-and-above networks, but are not classified as High Speed,” notes chairman & CEO Tim Jenks.

Shipments to China comprised 56% of revenue (in-line with 57% last quarter), while the Americas grew to 28% of total revenue (up from 22%) and the rest of the world (RoW) shrank to 16% (down from 21%), as certain customers shifted contract manufacturing locations. In particular, shipments to western customers were up slightly, driven by demand for the firm’s leading high-speed products used in data-center interconnect (DCI) as well as metro deployments.

“Demand in China remained strong due to continuing domestic deployments as well as exports outside of China, despite trade tensions and uncertainties about new tender timing,” says Jenks.

Largest customer Huawei Technologies (including its affiliate HiSilicon Technologies) contributed 47% of total revenue (up from 43% last quarter). Including the other 10%-or-more customers (at 28%), the next four customers comprised 42% (down from 47%, due mostly to inter-period fluctuations among China customers).

On a non-GAAP basis, gross margin has recovered further, from 20.1% last quarter to 24%, due to the continued strength in demand combined with increasing volume growth across various product lines. Specifically, product margin was 32%, up three percentage points quarter-over-quarter due to improved costs and a mix shift toward higher-margin products. This was offset by 8% in cost-of-sales charges, consisting mainly of about six points of inventory revaluation, excess inventory write-downs and other manufacturing charges plus two points of under-absorption (excess capacity) charges, largely in the firm’s externally modulated laser (EML) fab in Japan (for which yield issues have been overcome, but demand is still lighter than desired).

Operating expenses (OpEx) were $22.1m (27% of revenue), up slightly on $21.8m last quarter but cut from $24.7m (34.7% of revenue) a year ago, and lower than expected as the firm met customer non-recurring engineering (NRE) milestones.

Net loss has been slashed further, from $10.9m ($0.25 per diluted share) a year ago and $6.3m ($0.14 per diluted share) last quarter to just $2.1m ($0.05 per diluted share).

Cash generated from operations was positive, at $13.5m, an improvement from negative $1.1m in cash used in operations last quarter and -$25m a year ago. Capital expenditure (CapEx) was $4m. Free cash flow was hence about $10m (compared with -$3m in free cash outflow last quarter).

During the quarter, cash and cash equivalents, short-term investments and restricted cash fell by $2.9m to $64.7m after repayment of $18.6m of debt.

Net inventory was $57m, down $4m from last quarter due to strong demand and the loss of two days of production in China because of Typhoon Mangkhut. This resulted in 82 days of inventory on-hand, slightly below the targeted 90 days.

“We saw stable demand in China across the vast majority of our high-speed product lines which, when coupled with the resumption of orders from ZTE supply chain partners, signals a solid demand environment going forward,” says Jenks. “We continue to monitor the US and China trade situation closely. We do see some customer actions that suggest potential securing of supply, both from NeoPhotonics and other key players in the industry. We are closely tracking customer shipments as well as their purchases to help mitigate strategic inventory buying. We continue to view the larger risk to be the broader macro-economic picture.”

For fourth-quarter 2018, due to continued solid demand in the Americas, additional domestic build outs in China, plus the resumption of shipments to ZTE and its supply chain partners (helping to mitigate continuing under-utilization in the EML fab), NeoPhotonics expects revenue to rise to $87-92m. Gross margin should be 24-28%, despite product margins falling a couple of points due to the initial impact of price reductions. With OpEx of $23m, earnings per share should range between a net loss $0.08 to a net profit of $0.02. “Over the last year, our focus has been on returning to profitability and we believe our results and outlook demonstrate that we are having success,” comments Jenks. However, cash flow could be slightly negative: “We’re a little light on inventory at the moment,” notes chief financial officer Beth Eby. “We’re trying to get some of our finished goods inventory built back up,” she adds.

“Chinese New Year and annual pricing negotiations in Q4 will mean that revenue and margins will be lower in Q1,” says Eby. “As in 2018, margins will recover through the year [as the firm both ramps through the year and gets cost reductions through], but current tariff rules will result in added charges on components that we make in the US and supply to our factories in China. This will result in cost of goods sold (COGS) increasing approximately 1 percentage point for as long as the tariffs remain in place,” Eby adds. “We also expect R&D to be up slightly through the year, as we increase investments on next-generation products.”

“We have also remained focused on execution to extend our leadership position in the high-speed digital optoelectronics market with 400-600G-and-above solutions for data-center interconnects as well as telecom, and on silicon photonics innovations,” says Jenks.

“Our currently available suite of 64Gbaud high-speed optical components for coherent systems, including receivers, modulators and ultra-narrow-linewidth tunable lasers, are being used by multiple major customers to develop systems with 400Gb/s- and 600Gb/s-per-wavelength transport capacity,” says Jenks. “Such system developments by leading OEMs, several of whom use our products, were the focus of much publicity at the European Conference on Optical Communications trade show (ECOC) last month in Rome, Italy,” he adds.

“At ECOC, we also highlighted our next generation of coherent products, which reduce the size of coherent optics approximately in half, while featuring the highest performance levels that are required for 400Gb/s- and 600Gb/s-per-wavelength transmission. Our coherent optical subassembly (COSA) integrates our 64Gbaud coherent driver-modulator with our 64Gbaud coherent receiver in a very compact form factor,” continues Jenks. “Similarly, our Nano ultra-narrow-linewidth external-cavity tunable laser again cuts the size approximately in half, while featuring industry-leading linewidth and low phase noise and with low electrical power consumption,” he adds. “We demonstrated these next-generation high-speed optics products in operation at the OFC conference last March, both individually and incorporated into a compact 400G pluggable module.”

“On the line side, our currently shipping CFP-DCO coherent module completed another major customer qualification. And we see strength in our Multicast Switch product line trends, with demand in both telecom and data-center applications, as this product line offers a scalable and cost-effective solution for managing fiber densification in data centers.”

For shorter-reach data-center and client-side applications, NeoPhotonics sees increasing demand for its EML lasers and its laser sources for silicon photonics-based transceiver modules. In addition to its 28Gbaud EML lasers, NeoPhotonics has introduced a full suite of 53Gbaud components for single-wavelength 100G PAM4-based transceiver modules, including an uncooled, non-hermetic EML laser, along with 53Gbaud drivers, detectors and trans-impedance amplifiers (TIAs). For silicon photonics-based modules, NeoPhotonics offers non-hermetic continuous-wave laser light sources as well as drivers for silicon modulators, and it is now receiving orders for 100G-per-wavelength applications.

“With returning strength in demand for our core products and our successes thus far with multiple customers for our highest-speed product introductions, we are enthusiastic about the opportunities we see in 2019 and beyond,” Jenks says. “Industry trends continue to move in our favor, notably through the push to even higher speeds such as 400G, 600G and beyond as well as the adoption of coherent architectures in metro and metro-edge markets, which we believe places NeoPhotonics in an advantageous position. Similarly, industry momentum toward fully contentionless networks continues to build both in telecom and certain data-center applications, which we expect to drive growth of multi-cast switches over multiple years. And we are actively engaged to extend the application of our coherent product suite to adjacent markets such as cable TV and LiDAR for autonomous vehicles.”

See related items:

NeoPhotonics’ 64GBaud coherent optical components selected by tier-1 customers for 600G system development

NeoPhotonics showcasing lasers and components for 400G EML and silicon photonics-based data-center links

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

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

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