8 March 2021
NeoPhotonics’ non-Huawei revenue grows 18% in Q4
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 full-year revenue of $371.2m for 2020, up 4% on 2019’s $356.8m, despite the additional restrictions imposed on 17 August by the US Department of Commerce’s Bureau of Industry and Security (BIS) on exports to China-based Huawei Technologies.
Huawei comprised 40% of 2020’s revenue, Ciena 17% and Acacia Communications 10%. However, excluding Huawei, there were three 10%-or-more customers, with Ciena comprising 29% of non-Huawei revenue, Acacia Communications 17% and Nokia 11%.
With no contribution from Huawei, fourth-quarter 2020 revenue was just $68.2m, down by about a third on $102-103m in both Q3/2020 and a year ago, but above the midpoint of the expected range of $64-70m due to strong execution and good revenue growth from Western customers. Excluding Huawei, Q4 revenue was up 18% on Q3’s $58m non-Huawei revenue, due largely to 400G-and-above product revenue growing by 35% sequentially (and 153% year-on-year) to 46% of total revenue. Full-year 400G-and-above product revenue grew 92% year-on-year. “In Q1/2020 these products grew 46% year-over-year and their growth accelerated to deliver 153% year-on-year growth by Q4,” notes chairman, president & CEO Timothy Jenks.
In Q4/2020 there were four 10%-or-more customers (up from three in Q3, including the now absent Huawei at 44%). These ranged from 10% up to just 22% of revenue each (evidencing increased diversification), amounting to 67% of the total.
On a non-GAAP basis, gross margin was 24.7%, falling from 33.6% in Q3 (just below the firm’s long-term target of 35%), as a small increase in product margins was more than offset by higher excess capacity charges (as expected, given the lower volumes). However, this was still in the upper half of the 22-26% guidance range. Also, the last time that NeoPhotonics’ revenue was down at $68m, gross margin was just 15%. Full-year gross margin has still grown from 2019’s 27.3% to 31.3% for 2020.
“Virtually all of the leading network equipment producers around the world use NeoPhotonics products in their flagship high-speed systems,” claims Jenks. “Over the last three years we have developed advanced manufacturing methods for these highest-speed 400G-and-above products, scaled their production, all while steadily increasing our manufacturing utilization, reducing our depreciation costs and expanding our margins. In spite of the impact of US-China trade tensions, we see our actions benefiting our business for the longer term.”
Operating expenses have been cut from Q3/2020’s $24.5m to a better-than-expected $23.7m in Q4, due to faster execution of spending reductions (scheduled to be about $2m per quarter from Q3/2021, as part of the firm’s restructuring, announced in October, involving a 4% staffing cut).
Compared with operating income of $9.9m (operating margin of 9.7% of revenue) in Q3/2020, in Q4 NeoPhotonics reported an operating loss of $6.9m (-10.1% margin), due to the US Department of Commerce’s restrictions on exports to Huawei.
Likewise, compared with net income of $6.2m ($0.11 per share) in Q3, in Q4 NeoPhotonics reported a net loss of $7.2m ($0.14 per share, better than the midpoint of expectations of $0.18) due to faster implementation of the restructuring announced in Q3. Despite the Q4 loss, full-year net income still grew from just $0.4m ($0.01 per diluted share) in 2019 to $16.7m ($0.31 per diluted share) for 2020.
Cash generated from operations fell from $15m in Q3/2020 to $5.4m in Q4 (nevertheless, full-year operating cash generation rose from $34.7m in 2019 to $54.9m in 2020). Capital expenditure (CapEx) was just under $5m. Free cash flow was hence about $1m in Q4/2020 (although full-year free cash flow rose from $25m to $41m). Cash and cash equivalents, short-term investments and restricted cash rose to $123.3m (the firm’s highest ever).
Pandemic-driven increased bandwidth deployments a lasting trend
“2020 was a strong and dynamic year for NeoPhotonics, with accelerating market adoption and deployment of our industry-leading ultra-pure-light tunable lasers, high-bandwidth receiver and modulator solutions for the highest-speed-over-distance interconnects,” says Jenks. “From a long-term network investment standpoint, we believe 2020 marked an upward inflection in high-speed network growth. While the pandemic drove needs to increase bandwidth deployments, this is a lasting trend. As the pandemic subsides, we expect that companies will move increasingly to hybrid workforce models in the future, with continuing dependence on working from home. This will increase the need for bandwidth at the edge of the network, and the need for high-speed interconnects throughout the network, thereby continuing to benefit our business.”
“Our strategy is to grow the business by focusing on the highest-speed-over-distance solutions at 400G-and-above for telecom equipment providers. Within this, the newest and highest-data-rate communication systems are operating at 600G and 800G per wavelength, and they are now being offered by several of our customers who directly or indirectly use our high-speed components,” says Jenks.
“For the last three years, we have been steadily introducing new lasers, modulators and receivers for the highest-speed applications at 600Gb/s and 800Gb/s in chassis-based systems, as well as several new high-speed coherent module products, for 400ZR and 400ZR+ applications. As a result, demand for NeoPhotonics’ highest-speed products is very strong, with accelerating market adoption and deployments, and related market share gains at 400Gb/s and beyond, especially for links requiring the highest speed over distance. These high-speed deployments are among the fastest areas of growth in the industry, driven by cloud and data-center demand, and they have been driving our growth and profitability,” Jenks continues.
400G-and-above revenue to continuing doubling year-on-year
“In the first quarter [of 2021], we expect the growth of our 400G-and-faster revenues to continue to more than double versus the previous year’s first quarter,” says Jenks. “With the number of 400G-and-above ports being shipped approximately doubling each year and our market share increasing at these highest speeds, we are seeing our customer diversification continuing to increase.”
For first-quarter 2021, NeoPhotonics expects declines in revenue to $57-62m and gross margin to 18-22%, as normal for the seasonally lowest quarter due to the Chinese New Year shutdowns and the implementation of annual pricing reductions (to be followed by sequential growth in following quarters, “as volume increases and on the implementation of cost reductions through the year,” notes senior VP & chief financial officer Beth Eby). Operating expenses should be cut further to $22-23m (so the midpoint of $22.5m is hitting the targeted restructuring savings of $2m per quarter earlier than forecast). Net loss per share is expected to be $0.20-0.10 (the midpoint of which would be an improvement on Q4/2020’s $0.14).
“While we have had continued strength in the market for our highest-speed products, in recent months we have seen some softness with customers serving the North American cloud market following substantial bandwidth deployments that were pulled into 2020 in response to the pandemic,” says Jenks.
“Current customer indications are that some demand has moved to later in 2021 due to travel restrictions limiting deployment of new systems. This leads us to estimate full-year revenue growth, excluding Huawei, of 25-35%. To reiterate, we believe overall demand in the mid- and long-term for 400G-and-above components and modules remains unchanged,” stresses Eby.
Return to operating profit expected in Q3
“As a result of our efforts to develop products which comply with the most recent BIS restrictions for Huawei, we expect a modest level of shipments to Huawei in forward quarters. With these changes, we still expect to return to operating profit in Q3,” says Eby. “We are well on our way to a more diversified customer business model, even before we ramp the 400ZR modules in the back half of 2021.”
“Products for chassis-based systems operating at 600G and 800G are ramping, and we continue to make progress in gaining design wins and qualifications for 400ZR and 400ZR+ coherent modules with hyper-scale data-center operators. We have shipped dozens of units for qualification and we have installed our first production lines for these modules that are now being readied to ramp volumes,” says Jenks.
“For 2021, we are focused on driving growth in our 400G-and-above product lines, moving into the hyper-scale market with added customers for our 400ZR and 400ZR+ modules and a return to profitability. Our strong cash position and the restructuring allows us to invest for that growth while positioning us for even higher levels of growth and profit in 2022,” he adds.
“With our current rollout of 400ZR and 400ZR+ coherent modules for cloud data-center interconnects (DCI), we look forward to accelerating growth,” says Jenks. “With components for chassis-based high-speed systems and 400ZR and 400ZR+ modules as the growth drivers for our business, we believe rapid growth in our highest-speed products will continue in 2021 and 2022.”
Move to higher speeds to drive next wave of growth
“The acceleration of our components for 400G-and-above chassis-based systems, which drove much of the growth in 2020, is a strong beginning. As the market continues to move to higher and higher speeds, including 600G and 800G, we are increasingly well positioned to ride this next wave of growth,” reckons senior VP, general manager & chief product officer Dr Wupen Yuen.
“We have announced and are now sampling our newest 96Gigabaud component suite for superb 800G DCI and 400G long-haul transmission, enabled by our ultra-low-noise tunable lasers and ultra-wide-bandwidth modulators and receivers. We expect these products will reach general availability in Q4/2021, adding to the revenue stream of our leading 64Gigabaud component suite,” says Yuen.
“Layered on top of these chassis-based opportunities is the 400ZR and 400ZR+ coherent module market. We believe we have been a leader in launching 400ZR and 400ZR+ modules. These products effectively double our addressable market, while serving a particularly fast-growing segment, given the importance of hyper-scale metro DCI applications. We believe cloud providers, especially hyper-scale data-center customers, will be the early adopters of this technology. These will be new volume customers for us, beyond our customer base of network equipment manufacturers,” he adds.
“Our new 400ZR and 400ZR+ coherent module products are game changers. They package state-of-the-art data rates and system-level interfaces in very small and low-power form factors, enabling them to be plugged directly into routers and switches, bypassing traditional DWDM equipment. This capability enables operators to realize major savings in network equipment, as well as lower total power consumption and better environmental sustainability, thereby driving adoption rates and expanding use cases, including in new areas such as interconnects for distributed edge networks and for 5G cell sites,” Yuen claims.
“We have sampled our 400ZR QSFP-DD and OSFP modules to multiple hyper-scale customers and are in the test and qualification process. We are one of the very few who are capable of meeting the challenging 400ZR optical specification,” Yuen claims. “We continue to expect completion of qualifications in the first half of 2021, with deployments starting in the second half of the year.”
“An important addition is that we have now demonstrated 400ZR+ performance in a QSFP-DD form factor by leveraging the industry-leading optical performance of our tunable laser and silicon photonics components. We believe that 400ZR+ in QSFP-DD form factor will be widely adopted in cloud-based metro networks for 5G. This is important, as the 400ZR+ market segment substantially expands that of standard 400ZR. We expect that our 400ZR+ modules at metro and longer distances will provide a third major growth revenue stream that will begin to ramp in 2022,” he adds.
“Built on our high-performance 64Gigabaud components, our CFP2-DCO 400G modules are now shipping in a high-performance C++ version, offering a wider optical spectrum and, therefore, higher fiber capacity. This product has demonstrated the best transmission performance for 200G and 400G available in a CFP2-DCO form factor,” claims Yuen. “Combining its unique ability to operate in 75GHz channel spacings with the wider C++ spectral band, our CFP2-DCO supports fiber capacity that leads the industry at 32Tb/s for regional and metro applications and 16Tb/s for long haul. This wide spectrum performance equals or exceeds line-card-based 64Gigabaud solutions while reducing power consumption approximately 40%.”
“Each of these new high-speed systems, including 400ZR and 400ZR+ applications, operate over DWDM line systems, including open-line systems. These require specific high performance multiplexing and de-multiplexing products that have unique channel spacings and filter shapes, including channel monitoring capability. For these applications, our athermal multiplexing products (AWGs) specifically designed for 400ZR and 400ZR+ applications have completed qualification and will be deployed in open-line systems in conjunction with the deployment of 400ZR networks.”
“We are at the early stages of several key long-term macro trends. We see rapidly growing global bandwidth demand as a result of cloud services, the new requirements of remote working, artificial intelligence (AI) and machine learning, 3D sensing and light detection & ranging (LiDAR) applications, plus 5G wireless rollouts,” summarizes Yuen. “We believe our advanced technologies for speed-over-distance meet these growing needs at the heart of the industry.”