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25 May 2018

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

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

For first-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 $68.6m, down 4% on $71.7m a year ago and 11% on $76.9m last quarter due to slightly lower volume and the full implementation of annual price reductions (which, together with the Chinese New Year, makes Q1 typically the seasonally softest quarter).

Fiscal Q1/2017 Q2/2017 Q3/2017 Q4/2017 Q1/2018
Revenue $71.7m $73.2m $71.1m $76.9m $68.6m

“Continuing our focus on 100G-and-above High Speed Products, which reached the highest proportion of revenue in our history at 86% in the quarter [up from 84% last quarter], we introduced and demonstrated new products for 400G and 600G coherent and data-center applications,” says chairman & CEO Tim Jenks. “We saw strength in metro and DCI deployments, driven by North America, and we have accelerating demand for these segments going into the remainder of the year,” he adds. “At the same time, while demand in China had stabilized, the recent regulatory and trade actions have introduced new uncertainty in that region, we continue to monitor and adjust plans accordingly.”

“As noted in our 17 April press release on the impact of the US Department of Commerce Denial Order related to [China-based] ZTE, we had expected up to 5% of annualized revenue from ZTE and its suppliers, which will now not be realized as planned,” says Jenks. “Further, we held certain products in inventory for ZTE that were valued at approximately $1.2m that have been written down.”

Despite being up 9% year-on-year, revenue from China was down 5% on last quarter (61% of total revenue). The Americas represented 21% of total revenue.

Huawei Technologies (including its affiliate HiSilicon Technologies) was again the largest customer, at 48% of revenue (up from 42% last quarter). The next four customers represented 36% of total revenue (down from 41%), including 19% from US-based Ciena.

“We did see a slightly lower volume and a different mix of products than expected, resulting in gross margin at the lower end of the range and inventory that was slightly higher than expectations,” says senior VP & chief financial officer Beth Eby. Net inventory rose from $67m to $69m (from 99 days to 104 days of inventory on-hand). “We remain committed to the goal of 90 days of inventory,” notes Eby.

On a non-GAAP basis, gross margin has fallen further, from 26.3% a year ago and 21.3% last quarter to 14.7% (below the forecasted 16-20%) due mainly to the ZTE write-down of $1.2m, as well as the amortization of $3m lower output from the firm’s Japan fab (where full qualification and integration of new equipment for laser manufacturing lines took longer than expected); the full impact of annual price negotiations; and $0.9m in higher-than-expected costs for additional testing to support new customer requirements.

Operating expenses (OpEx) have been cut further, from $30.2m a year ago and $24.1m last quarter to $22.9m (better than the expected $23-24m) due to the absence of one-time charges (officer severance costs) from last quarter plus partial recovery of last quarter’s $0.5m bad debt write-off.

Net loss has worsened further, from $10.7m ($0.25 per diluted share) a year ago and $11.7m ($0.27 per diluted share) last quarter to $14.6m ($0.33 per diluted share), worse than the forecasted $0.32-0.22 per diluted share, due to the annual price reductions and the impact of the ZTE-related write-down.

Compared with positive operating cash flow of $8m last quarter, in Q1/2018 NeoPhotonics used $3.5m of cash in operations. Capital expenditure (CapEx) was $8m (up from $6m) after paying for the newly qualified fab equipment. Free cash flow was hence -$12m (compared with +$2.5m last quarter). During Q1, cash and cash equivalents, short-term investments and restricted cash fell from $93.9m to $86.9m.

For second-quarter 2018, NeoPhotonics expects higher volume to yield a return to revenue growth, to $70-76m. Q2 gross margin should rebound to 18-22%. With operating expenses of $22-23m, net loss per share should be $0.26-0.16.

“While we have largely fixed the product output from our Japan factory, we are seeing a market share shift that, together with the ZTE Denial Order, may result in lighter demand for our legacy 28Gbaud EML [electro-absorptively modulated laser] products during 2018 [causing the Japan fab to remain underloaded, until 53Gbaud EML demand arises in 2019],” says Eby. At March’s OFC 2018 event, NeoPhotonics introduced its 53GBaud Linear Optical Component family, which includes PAM4-capable optical components for 100G and 400G hyperscale data-center applications, as well as drivers and EML lasers in transmitters plus photodetectors and trans-impedance amplifiers in receivers. The product family provides all of the optical content necessary for single-wavelength 100G PAM4 transmission (demonstrated at OFC) and four-wavelength 400G PAM4 transceivers, such as DD-QSFP. “Our focus has moved to using these [EMLs] for 400G-per-wavelength PAM4 applications,” adds Jenks.

The inventory target of 90 days in hand was due to be achieved in Q2/2018, but it now looks like its going to be Q3, notes Eby. “We are focused on cash, cash flow and a return to profitability,” she stresses. “We have reduced OpEx and CapEx commitments for the year, and continue to focus on reducing inventory and improving gross margin to lower our breakeven point,” Eby adds. “We still expect to return to profitability in the second half of 2018, as revenue exceeds the breakeven point in the mid-eighties.”

See related items:

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’ Q1 revenue down 28% year-on-year to $71.7m after sale of Low-Speed Transceiver product line

NeoPhotonics completes sale of Low Speed transceiver business to APAT Optoelectronics

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