11 May 2020
NeoPhotonics’ Q1 revenue up a greater-than-expected 23% year-on-year to $97.4m
For first-quarter 2020, 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) has reported revenue of $97.4m, down 6% on $103.4m last quarter but up 23% on $79.4m a year ago (and exceeding the $83-90m guidance). Growth was driven by a combination of strong end-customer demand in China as well as strong metro and data-center interconnect (DCI) markets in the West, where the firm’s claimed continued leadership in 400G-and-faster solutions addresses the emerging needs for more network bandwidth capacity by both cloud players and carriers.
“The continued strength in our performance reflects our focus on high-speed products, including our unique ultra-pure-light tunable lasers, serving industry leaders in coherent telecom and data-center networks, and the transition of cloud and hyper-scale data-center networks to coherent technologies,” says chairman & CEO Tim Jenks.
Largest customer Huawei contributed 52% of total revenue (up from 41% last quarter) as demand in China has returned following the onset of the COVID-19 coronavirus pandemic. The next four customers contributed 33% of revenue (including one that exceeded 10%), up 10% year-on-year in dollars terms but down sequentially as expected in the first quarter and lower in percentage terms due to the strength of China (which totalled 60% of revenue, up from 55% last quarter). The Americas contributed 19% of total revenue, and the rest of world 21%.
High-speed products (for data rates of 100G-and-above) comprised 92% of revenue, level with last quarter and up from 88% a year ago.
Despite normal seasonality, the extended Chinese New Year shutdown, and supply chain issues due to the COVID-19 pandemic that were expected to impact revenue by $10m, non-GAAP gross margin has risen further, from 22.4% a year ago and 30.9% last quarter to 31.2% (above the midpoint of the 28-32% guidance range), driven by an increase in volume and improved product mix. Specifically, product margin was 35.8%, down by just one percentage point from 36.8% last quarter due to annual pricing reductions offset by a favorable product mix. Moreover, this was up nearly nine points from 27% a year ago, driven by the increasing leadership of the firm’s lasers, it is claimed. Other cost of sales charges of about 4.5 points improved sequentially and consisted of 2 points of under-utilization charges (mostly related to the extended Chinese New Year shut down), just under 2 points of inventory reserves, and just over 0.5 points of sales charges on product shipping from the firm’s US fabs into China (lower than last quarter, as tariffs on most products were eliminated in March).
Operating expense (OpEx) has been cut from $24.3m (30.5% of revenue) last quarter to $20.3m (20.9% of revenue), better the targeted $22-23m. Of the $4m reduction, $1.5m was an expected one-time license fee as a credit to R&D; the remainder is related to COVID-19 impacts in terms of lower travel, fewer marketing events, and a temporary push-out of R&D projects (as some teams were not in the lab). The R&D spending reductions from Q1 will be added to future quarters.
Compared with a loss of $9m ($0.19 per diluted share) a year ago, net income increased from $5.3m ($0.10 per diluted share) last quarter to $9.1m ($0.17 per diluted share, above the $0.00-0.10 guidance range), reflecting “increased value-add products and continued strong execution”.
“We are pleased to deliver another profitable quarter, notably through our seasonally low first quarter, in spite of supply chain risks related to the pandemic,” says Jenks.
Cash generated from operations has risen further, from $8.7m a year ago and $16.3m last quarter to $24.9m. Likewise, free cash flow has grown further, from $5m a year ago and $13m last quarter to $22m.
During the quarter, cash and cash equivalents, short-term investments and restricted cash hence rose by $20.4m to $109.5m. Restricted cash was $10.9m. “Over the last couple of years, we have put a heavy emphasis on cash, cash flow and paying down debt,” notes chief financial officer Beth Eby. Long-term debt was paid down to $41m.
Inventory has been increased from 59 days last quarter to 61 days. “We are taking steps to ensure that we can withstand a variety of potential scenarios that may emerge through the rest of the year, both positive and negative. As part of this, we are working to build inventory to buffer supply chain volatility,” notes Eby.
“As we look forward, the industry continues to move in our direction with higher and higher speed over distance requirements, which are satisfied by our ultra-narrow-linewidth lasers, high-baud-rate coherent components and our coherent pluggable DCO modules utilizing these leading optical components,” says Jenks.
For second-quarter 2020, NeoPhotonics expects revenue of $94-102m, gross margin of 30-34%, OpEx of $24-25m, and diluted earnings per share of a $0.05-0.15.
This outlook includes about $10m of COVID-19-related impact to Q2 revenue, reflecting identified supply chain risks (such as shut downs, as they comply with their local public health orders). “It [the $10m] is a little bit higher risk than I would say that we saw in the first quarter, because what we saw in the first quarter was just waiting for companies to start up in China. Now we’re dealing with a much broader set of suppliers that are potentially impacted by COVID-19… some of them have periods of shutdown,” Eby says. “In the first quarter, it was just risk, and that played out over time in the second quarter… we’ve seen some of them actually impact,” notes Jenks. “Even when those plants sometimes come back up, if they come up at 20-30% capacity, you have a problem. We’ve seen that play out a number of times over the last two months,” he adds. “We expect the supply chain risk to continue into the second half of the year,” concludes Eby.