8 November 2011

NeoPhotonics grows margin in Q3 despite 16% revenue drop to $44m

For third-quarter 2011, NeoPhotonics Corp of San Jose, CA, a vertically integrated designer and manufacturer of photonic integrated circuit (PIC)-based modules and subsystems for bandwidth-intensive, high-speed communications networks, has reported revenue of $44m, down 16% on $52.1m in Q2 and down 7% on $47.2m a year ago, and below the original guidance (given on 4 August) of $48-53m.

“Lower-than-projected volumes from our largest customer during the quarter negatively impacted our top line,” notes chairman, president & CEO Tim Jenks. China’s Huawei Technologies fell from 51% to 42% of total revenue (with the remaining top-10 customers comprising 46% of revenue, including second-largest Alcatel-Lucent at 10%). The drop is attributed to reduced capital expenditure (CapEx) on 10G and 40G transport and metro systems in China, as well as slower-than-anticipated consumption of access products for GPON and GEPON fiber-to-the-home (FTTH) networks. “This FTTH network aspect emerged late in the quarter and was surprising to us, given Huawei’s strength in national broadband deployments as well as the rapid rise in demand for these products experienced during the first half of the year, notably to support China Telecom,” comments Jenks.

Also, overall demand in the last two weeks of September was exceptionally weak. “Accordingly, our vendor-managed inventory for all customers of $8.4m (as of the end of the quarter) was also considerably higher than our internal projections,” Jenks says. NeoPhotonics total inventory hence rose during the quarter from $28.9m to $35.9m. “If we had shipped about half of our vendor-managed inventory as of the end of the quarter as we expected, then revenue for the third quarter would have been within our original projections,” he notes.

“Nevertheless, we continued to experience sequential growth from many of our other customers [6 out of the top 10], notably in the US and Europe,” Jenks says. In contrast to the demand for ‘Access’ products falling from 43% to 35% of total revenue, demand for ‘Speed and Agility’ products continued (rising from 32% to 36% of total revenue), including a fourth sequential quarter of growth in 100G coherent products. Demand for ‘Other Telecom’ products (legacy products such as DWDM, SONET and SDH devices) rose from 25% to 29% of total revenue.

As Speed and Agility products generally have higher gross margins than Access products, the positive revenue mix plus continued growth in 100G coherent products contributed to the third sequential quarter of margin expansion. On a non-GAAP basis, gross margin was 27.5%, down from 30.9% a year ago but up from 26.2% in Q2 (and above the projected 26%).

Net loss was $3.2m, compared to break-evenĀ  in Q2 and net income of $1.2m a year ago. During the quarter, capital expenditure was $3.3m. Total cash, cash equivalents and short- and long-term investments fell to $103.4m from $107.5m last quarter.

During Q3, NeoPhotonics added to its SFP+ transceiver product suite with products that enhance its existing portfolio of 6G and 10G SFP+ transceivers for Common Public Radio Interface (CPRI), 10G Ethernet and SONET/SDH transport applications. The transceivers are designed to support the environmental impact initiatives of carriers as they seek to reduce their broadband networks’ power consumption and carbon footprint.

NeoPhotonics also announced sample availability of its first extended-reach transceiver module for 10G PON applications in an XFP form factor (designed to enable carriers to leverage investments in existing infrastructure by being backward compatible for upgrading fiber-optic broadband access networks from 1.25G and 2.5G to 10G data rates), as well as its first 40G transceiver module in a CFP form factor for cloud and data-center applications (designed to meet increasing bandwidth demand in data centers). Compared with a traditional 10G approach, the new pluggable transceiver module transmits four times the data over single-mode fiber at

During the quarter, NeoPhotonics signed leases to establish new facilities including: a design and sourcing center in Tokyo, Japan (to support high-speed network module design for next-generation systems and sourcing); a design center in Wuhan, China’s ‘Optics Valley’ (to support next-generation optical subsystem and integration design); and a production facility in Dongguan, Guangdong province, southern China (45 minutes’ drive from the firm’s existing facility in Shenzhen, to provide greater manufacturing capacity for its global customer base). The 80,000ft2 factory will be facilitized in phases, involving capital expenditure of about $9m over the next 5-7 quarters (including $3m for the first phase) while becoming operational by the end of 2012.

NeoPhotonics has also amended its credit facilities with Comerica Bank to provide an increased $35m facility including a revolving line of credit, term loan and an equipment loan. The firm drew $28m of this in October to partially fund the acquisition of Santur Corp of Fremont, CA, USA, a designer and manufacturer of indium phosphide (InP)-based PIC products.

Founded in 2000, Santur has focused on commercializing PIC-based laser array and packaging technologies for communications, shipping about 400,000 active PIC-based products to date. The firm has about 140 staff in a facility that includes an InP fab, labs, and engineering and administrative space. Its primary assembly & test capability is provided by a contract manufacturer in Malaysia. NeoPhotonics says that Santur’s technology includes established telecom designs offering wide tunability as well as high-speed transceivers. Products are designed to provide reduced size, power consumption and cost for a wide range of DWDM, coherent and client-side networking applications in 10G, 40G and 100G networks.

In contrast, NeoPhotonics has focused on PIC products that use hybrid integration technologies to combine internally produced silica on silicon chips, while purchasing InP devices for certain advanced products. Santur boosts NeoPhotonics’ number of product families to 43.

Although there is some overlap in customer bases, such as Alcatel-Lucent, Ciena and Huawei, Santur brings certain data-networking customers, such as Google, that expand NeoPhotonics’ customer base. “The acquisition of Santur improves our consolidated customer mix, decreases our customer concentration, and increases our exposure to data networking from a telecom focus and can provide sales synergies over time,” believes Jenks.

“With Santur, we have acquired a broad-based InP capability that includes tunable lasers, arrays of lasers, InP modulators, transmitters, and components for coherent receivers,” says Jenks. “By combining active InP PICs from Santur with our hybrid PICs, we can provide the transmit side of coherent systems as well as the receive side. We can also create highly integrated PICs that contain multiple channels of 10, 40 and 100G together. Combined, the two companies complement each other’s PIC technologies and expand our spectrum of key technologies, product opportunities and materials expertise,” he adds. “The acquisition enhances our leading position in PIC-based modules and subsystems for high-speed networks and can further accelerate our growth in the 100G coherent and cloud computing markets,” Jenks believes.

Santur recorded revenue of $21m for first-half 2011, and about $10m in Q3. In future, NeoPhotonics will report Santur’s revenue within its Speed and Agility product group.

For fourth-quarter 2011, NeoPhotonics anticipates that results could be impacted by continued volatility in volumes demanded by its largest customer (due to lower-than-projected demand in China), the flooding in Thailand (indirectly, since some customers’ systems use components of other suppliers that use contract manufacturing there), and uncertainty in the macro-economic environments in Europe and North America.

“The inventory oversupply issue that characterized the industry at the beginning of this year has played out; we do not believe that oversupply will continue to materially impact the industry in the fourth quarter,” believes Jenks. “Nevertheless, we do not expect a ‘snap back’ in demand, because our experience is that demand that is pushed to the future does not generally have a cumulating effect on top of the next quarter’s more natural demand,” he adds.

Accordingly, for Q4/2011 NeoPhotonics expects revenue to rise only slightly to $45-50m (including $5-6m from Santur, from 13 October) and gross margin to fall to 19-22% (impacted by below-corporate-average margin from Santur products).

“Though we will remain cautious in our outlook for the fourth quarter, we also remain firm believers that the demands for greater bandwidth, elimination of network bottlenecks and higher transmission speeds will continue, and that these trends will continue to drive the demand for our products,” concludes Jenks.

“While Santur has not been profitable historically, we believe that as a combined entity, we can grow the business and manage expenses to drive Santur’s operations to contribute to earnings,” he adds. “We currently expect that Santur’s operations would contribute to earnings in five to seven quarters.”

See related items:

NeoPhotonics’ revenue grows 14% year-on-year to record $52.1m

Tags: NeoPhotonics PICs Santur

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