AES Semigas


11 August 2020

NeoPhotonics’ Q2 revenue rises a more-than-expected 26% year-on-year

For second-quarter 2020, NeoPhotonics Corp of San Jose, CA, USA – a vertically integrated designer and manufacturer of silicon photonics and hybrid photonic integrated circuit (PIC)-based lasers, modules and subsystems for high-speed communications – has reported revenue of $103.2m, up 6% on $97.4m last quarter and up 26% on $81.7m a year ago, and exceeding the $94-102m guidance.

Fiscal Q2/2019 Q3/2019 Q4/2019 Q1/2020 Q2/2020
Revenue $81.7m $92.4m $103.4m $97.4m $103.2m

Sequential growth was driven by cloud and data-center demand as 64-gigabaud and other products for 400G-and-above applications accelerate. High-speed products (for 100G-and-above data rates) now consistently comprise over 90% of revenue.

Based on a review of products that NeoPhotonics ships, revenue was not materially impacted by the addition in late May of China’s FiberHome Technologies Group to the US Department of Commerce’s Bureau of Industry and Security (BIS) Export Administration Regulations (EAR) Entity List (joining Huawei Technologies, added in May 2019).

Similarly, revenue was not materially impacted by the BIS’ latest ban (announced this May) on the use of US software and technology worldwide to design and manufacture chips supplied to Huawei, since NeoPhotonics designs all of its own products.

“We were expecting about $10m of supply-chain headwinds,” says senior VP & chief financial officer Beth Eby. “We were able to mitigate almost all of those, which is how we got the revenue over our guidance range.”

Largest customer Huawei again contributed 52% of total revenue, with the next four customers contributing 30% (down from 33% last quarter). “Our 400G-and-above solutions are also increasing our customer revenue diversification,” says president, CEO & chairman Tim Jenks. “Almost all of the world’s leading network equipment customers leverage NeoPhotonics’ products for their 400G-and-faster systems. Moreover, these customers are now ramping their deployments,” he adds. Excluding NeoPhotonics’s top two customers, the other eight in the top 10 grew revenue collectively by 35% in Q2 over Q1/2020, and this trend is expected to continue.

On a non-GAAP basis, gross margin has risen further, from 25.6% a year ago and 31.2% last quarter to 33.2% (toward the high end of the 30-34% guidance range). Within this, product margins were 36.3%, up from 32% a year ago and 35.8% last quarter due to increased volume. Other cost-of-sales charges had an impact of 3.1 percentage points (an improvement from 4.5 points last quarter), consisting of about 1 point of warranty charges, 1 point of residual tariff adjustments, and 0.5 point of under-utilization and other minor charges.

Operating expense is up from $20.3m (20.9% of revenue) last quarter to $23.6m (22.9% of revenue), but this is lower than the expected $24-25m due to continued pushouts related to the impact of the COVID-19 pandemic.

Net income was $8.7m ($0.16 per diluted share), down from $9.1m ($0.17 per diluted share) last quarter but a big improvement on a net loss of $1.2m ($0.03 per diluted share) a year ago, and exceeding the $0.05-0.15 guidance range as a result of “outstanding execution” in a challenging quarter.

Cash generated from operations was $9.6m, down from $24.9m last quarter but up from just $0.7m a year ago. “We have now had eight quarters of delivering year-over-year revenue growth, expanding gross margin and positive free cash flow,” notes Eby. “We have also delivered four quarters in a row of profitability.”

During the quarter, the firm paid down $4m of debt. Cash and cash equivalents, short-term investments and restricted cash rose by about $4m from $109.5m to $113.3m.

Inventory has been increased from $46.1m to $50.4m. “Increasing our inventory is planned to buffer continued supply-chain volatility,” notes Eby.

“Over the last year, we have reported that our largest customer, Huawei [and their affiliate HiSilicon], has had a plan to build strategic inventory due to trade tensions,” says Jenks. “This action is now complete and future orders will better reflect end-customer demand,” believes Eby. “Given the strength and demand of our highest-speed products, we expect that our other customers will continue to ramp, largely offsetting the Huawei decrease. The net result is a Q3 revenue outlook which is nominally in line with Q2,” she adds. “We are still seeing supply-chain impacts [of COVID-19] in Q3 but, based on our experience in Q1 and in Q2, we believe that we will be able to mitigate those through the quarter. The spending delays are not impacting our project timing.”

For third-quarter 2020, NeoPhotonics expects revenue of $97-105m. Gross margin should be 30-34%, reflecting some increase in under-utilization charges as a result of slower-than-planned deployment by a couple of customers (due to COVID-19) of silicon photonics-based transceivers that use NeoPhotonics’ fixed-wavelength lasers. Operating expenses will rise to $25-26m. “We expect to make up the first-half underspend in the back half of the year to ensure continued success of our 64-gigabaud and 400ZR programs [NeoPhotonics’ 400ZR and 400ZR+ pluggable coherent modules for cloud and Ethernet applications were launched in fourth-quarter 2019, moved from initial sampling in Q1/2020, and are in customer qualifications now]... Investment will continue to drive revenue growth and customer diversification in 2021 and beyond,” says Eby. Earnings per share are hence expected to fall to $0.03-0.13.

“With increasing momentum in 400G-and-above product design wins across almost all of the major network equipment manufacturers globally, and with increasing momentum in 400ZR opportunities, we remain optimistic about the growth prospects for NeoPhotonics,” says Jenks. “Our products for 400G-and-above applications will approach 20% of our total revenue this year,” he adds.

“We will have additional industry leaders become 10% customers during second-half 2020, based on our existing customer orders and delivery commitments for 400G-and-above products,” believes Jenks. “Trade tensions are causing market share shifts between our customers due to the breadth of our design wins and customer base. NeoPhotonics is likely to be a beneficiary of these shifts. For example, a market share shift of one 400G-and-above port, away from our largest customer and to another industry leader, would likely be favorable to NeoPhotonics in revenue terms. Similarly, a market share shift of one 100G port away from our largest customer and to another leader would likely be roughly equivalent to NeoPhotonics in revenue terms,” he adds.

“As our next group of customers ramp their respective systems for 400G-and-above applications, we believe the strength of deployments from these customers will offset potential revenue impact from Huawei’s inventory adjustments,” Jenks concludes.

See related items:

NeoPhotonics and Inphi complete first interoperability demonstration of 400ZR over 120km

NeoPhotonics’ Q1 revenue up a greater-than-expected 23% year-on-year to $97.4m

NeoPhotonics’ 13% revenue growth in Q3 drives return to profit, despite US export restrictions on Huawei

NeoPhotonics’ revenue rises 3% in Q2 as Huawei shipments only partially subject to export ban

Tags: NeoPhotonics PICs



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