AES Semigas


24 November 2020

NeoPhotonics’ year-to-date non-Huawei 400G-and-above revenue up 91% year-on-year

For third-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 $102.4m, up 11% on $92.4m a year ago but down 1% on $103.2m last quarter.

Fiscal Q3/2019 Q4/2019 Q1/2020 Q2/2020 Q3/2020
Revenue $92.4m $103.4m $97.4m $103.2m $102.4m

“We’re dealing with the challenges of the global pandemic and with the revised restrictions in August from the Department of Commerce’s Bureau of Industry and Security (BIS) pertaining to [China-based] Huawei,” notes chairman & CEO Tim Jenks.

Largest customer Huawei Technologies contributed 44% of total revenue (down from 52% last quarter). The next four largest customers contributed 39% collectively. In Q3, NeoPhotonics gained a third 10%-or-greater customer (all for 400G-and-above products).

“The trends in our highest-speed-over-distance products are favorable in terms of accelerating growth and in our building and expanded customer base,” believes Jenks. “Keeping in mind that the number of 400G ports being shipped each year is approximately doubling, we are simultaneously gaining market share at the highest speeds.”

In the first nine months of 2020, year-on-year revenue growth was 20%. However, excluding Huawei, year-to-date revenue from 400G-and-above products in particular grew 91% year-on-year, reaching 44% of total revenue in Q3.

“We are pleased to report another strong non-GAAP profitable quarter, driven by our highest-speed products,” says Jenks.

On a non-GAAP basis, gross margin has grown further, from 29% a year ago and 33.2% last quarter to 33.6% (at the high end of the original 30-34% guidance range). Within this, product margin was 36.9%, up slightly from 36.3% last quarter due to a favorable product mix. Other cost-of-sales charges of 3.2 percentage points comprised about 2 points of under-utilization and 1 point of warranty and other minor charges.

Operating expenses have grown from $22.3m a year ago and $23.6m last quarter to $24.5m (24% of revenue), slightly lower than the expected $25-26m due to early execution of cost-reduction programs.

Operating income was $9.9m (operating margin of 9.7% of revenue, just under the operating model of 10%, reflecting continued strong execution throughout the company). This is down from $10.7m (10.4% margin) last quarter but up on $4.4m (4.8% margin) a year ago.

Net income was $6.2m ($0.11 per diluted share, towards the top of the original $0.03-0.13 guidance range), down from $8.7m ($0.16 per diluted share) last quarter but up from $5.4m ($0.11 per diluted share) a year ago.

Cash generated from operations has risen from $9m a year ago and $9.6m last quarter to $15m. Capital expenditure (CapEx) was $4m. During the quarter, NeoPhotonics paid down $1m of debt. Cash and cash equivalents, short-term investments and restricted cash hence rose by $10m to $123m. “This cash level puts us in a good position to continue to invest for the growth that we see in 64 and 96GBaud lasers components and 400ZR and 400ZR+ modules,” says chief financial officer Beth Eby.

In response to the US Department of Commerce’s expanded restrictions on Huawei and its affiliates, in October NeoPhotonics announced that it will manage its business without relying on future revenue contributions from Huawei. “We took decisive actions to better align our capacity and production infrastructure with expected demand levels,” says Jenks. This involves tightening production operations, accounting for Huawei-specific assets and inventory, consolidating indium phosphide (InP) production and implementing an approximately 4% reduction in force.

The cost of making these changes was estimated to be $12.1m through 2021 ($1.1m in severance costs and $11m in inventory and idle asset charges), but these restructuring charges are now expected to be just $10.9m. Of this, $9.4m was recorded in Q3/2020, comprising severance charges of $0.9m, an equipment write-down of $4.1m, and an end-of-life-related inventory write-down of $4.4m ($1.3m less than estimated, due to lower material cancellation charges).

When fully realized, the restructuring allows for breakeven at quarterly revenue of $80m, based on the current product mix. “Within this, we will continue to invest in the growth drivers of our business, including lasers, 64GBaud components and 400G modules,” says Eby. “We expect the continued rapid growth of products for 400G and beyond to drive revenue growth from this point forward.”

For fourth-quarter 2020, with no contribution from Huawei, NeoPhotonics expects revenue of $64-70m, growing by 16% sequentially on the $58m (excluding Huawei) in Q3, and growing by considerably more for 400Gb/s-and-above products. “400G-and-above revenue has been accelerating throughout the year and we expect this to continue through Q4,” says Jenks. “We are seeing increases in design wins, backlog, higher volumes and resulting share gains in our highest-speed-over-distance solutions with a broad range of customers, both historical customers and new customers.”

However, reflecting lower volumes overall and hence higher under-utilization charges (in both the Japan and China factories), gross margin is expected to drop sharply to 22-26%. Loss per share is expected to be $0.13-0.23, with operating expenses of $24-25m, as continued spending reductions are offset by a planned non-recurring engineering (NRE) payment for investment in 400ZR developments.

“We expect to complete our 400ZR collaboration at the lead cloud customers by first-quarter 2021 [after beginning qualification in Q1/2020]. We expect initial volume applications for 400ZR to be with major cloud providers for metro data-center interconnects. These will be new volume customers for us beyond our network equipment manufacturer customer base,” says Jenks. “However, with 400ZR+ capability for longer distances, there is also an opportunity for new use cases to emerge beyond natural data-center interconnects into edge use, 5G backhaul and longer-distance regional interconnects,” he adds.

“We will rapidly grow the business excluding Huawei by supporting the highest-speed-over-distance solutions at 400G-and-above for telecom equipment providers, and expand our business by ramping our 400ZR and 400ZR+ coherent modules to Cloud and hyper-scale data-center customers starting in 2021,” believes Jenks.

“As this market heats up, we will see increasing revenue from an expanded customer group beyond our two historically largest customers. With the industry-leading equipment companies leveraging NeoPhotonics products for their 400G-and-faster systems, our growth is strong with these customers,” says Jenks. “We typically achieve higher-than-average gross margins from our highest-speed products. As these products become an increasing fraction of our revenue mix, we believe we will see a favorable trend in our margins,” he adds.

“Given our design wins, customer forecast and the rate of industry growth at the highest speeds, we are looking forward to seeing our revenue without Huawei grow at 40-50% over the next year,” continues Jenks.

NeoPhotonics expects to get back to non-GAAP operating profit in Q3 and GAAP operating profit in Q4 of 2021 (without revenue from Huawei). “We’ll be continuing the trend of delivering year-over-year growth in revenue and profitability,” believes Eby. “With our increasing momentum in 400G-and-above design wins across major network equipment manufacturers as well as the 400ZR and 400ZR+ opportunities in 2021 and beyond, we remain optimistic that industry trends continue to move in NeoPhotonics favor.”

See related items:

NeoPhotonics consolidating InP production and cutting staffing by 4%

NeoPhotonics assessing impact of US tightening of Huawei restrictions beyond Q3

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

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

Tags: NeoPhotonics PICs




Book This Space