20 May 2021
NeoPhotonics’ Q1 revenue for 400G-and-above products up 134% year-on-year
For first-quarter 2021, 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 $60.9m, down 11% on $68.2m last quarter and 37% on $97.4m a year ago (albeit in the upper half of the guidance range of $57-62m).
However, the drop was largely due to 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 (formerly NeoPhotonics’ largest customer, comprising 40% of 2020’s revenue). Excluding Huawei from the revenue a year ago, Q1/2021 revenue was up 28% year-on-year.
Also, revenue for 400G-and-above products grew 134% year-on-year (to 52% of total revenue, up from 46% last quarter). “Demand for NeoPhotonics highest-speed products, including ultra-pure-light tunable lasers and 64Gigabaud modulators and receivers, remains 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,” says chairman, president & CEO Timothy Jenks. “These highest-speed deployments are among the fastest areas of growth in the industry and, driven by cloud and data-center demand, they continue to drive our growth in addition to expanding our customer base.”
NeoPhotonics had four 10%-or-greater customers, ranging from 12% to 26% of revenue (collectively comprising 74% of the total).
“Our 400ZR DD-QSFP and OSFP coherent modules for data-center interconnect applications and our CFP2-DCO modules for telecom networks at 400G and 200G long-haul applications continue to make progress,” says Jenks.
“Demand strengthened for our multi-rate CFP2-DCO coherent modules within China in the first quarter. These modules use our leading 64Gigabaud component suite, as well as our C++ LASER and other extended-tuning-range products, to increase total fiber capacity up to 50%. In the customer network trade-off between speed and distance, network equipment manufacturers within China are utilizing our 64Gigabaud high-performance components for long-haul applications to achieve 200Gigabits over a single wavelength,” he adds.
“Our multi-rate 400G CFP2-DCO module is tailored to regional and metro distances. Combined with our C++ LASER product, we believe our module solutions deliver the same, if not better, performance as chassis-based systems while consuming less power in a smaller form factor and lowering cost per bit,” says Jenks.
On a non-GAAP basis, gross margin fell further, from 31.2% a year ago and 24.7% last quarter to 22.4%, but exceeded the expected 18-22% due to a favorable product mix and good execution of cost reductions. Product margin of 40.5% was offset by the expected high levels of excess capacity charges.
Operating expenses were $21.5m (35.3% of revenue), up on $20.3m (20.9% of revenue) a year ago but down from $23.7m last quarter, and less than the expected $22-23m, as some expenses pushed into Q2/2021.
Operating loss was $7.8m (operating margin of -12.9%), up from $6.9m (-10.1% margin) last quarter and compared with an operating profit of $10.1m (10.4% margin) a year ago.
Net loss was $7.5m ($0.15 per share), up from $7.2m ($0.14 per share) last quarter and compared with a net profit of $9.1m ($0.17 per share) a year ago.
During the quarter, cash and cash equivalents, short-term investments and restricted cash fell by $12m from $122.8m to $110.7m, as the firm made payments on previously settled litigation and held inventory levels flat at $46m (with inventory reductions related to the lower revenue offset by an inventory build for critical components, given the IC shortages and new product ramps). Days of inventory rose to 88 days. “We remain in a good position to continue to drive the growth of NeoPhotonics, even while we increase inventories on key chips to buffer supply shortages,” notes senior VP & chief financial officer Beth Eby.
For second-quarter 2021 (to end-June), NeoPhotonics expects revenue of $59-65m, impacted by low- to mid-single-digit millions of supply chain constraints, which disproportionally impact the high-end products. Due to the less favorable product mix plus the expected under-utilization charges, gross margin is hence expected to fall to 17-21%. Operating expenses will rise to $22.5-23.5m due to the expenses that pushed from Q1 into Q2 plus the start-up expenses for manufacturing 400ZR modules. Net loss per share should rise to $0.20-0.30.
Near-term demand in Western carrier markets is muted. “Our customers tell us that they are seeing modest deployment rates at this point in the pandemic, as well as pauses in spending by large carriers following the US 5G wireless spectrum auctions,” says Jenks. “The muted demand is exacerbated by semiconductor shortages. These shortages did not impact us in Q1, but we are seeing some impact in Q2. We expect that this will limit upside in our near term due to the inability to ‘pull in’ IC chip deliveries,” he adds.
“Currently, the China telecom market, too, is muted in regional and metro deployments, with just modest tenders by China Telecom underway. That is, China Mobile business levels currently have been very light. In Q1, we began shipping a subset of our legacy products that comply with EAR [Export Administration Regulations] to Huawei, and we now expect that they could become a moderate sized customer in the near term. We do sell to each of the China network equipment manufacturers, so we would expect to benefit as new carrier tenders materialize later this year.”
“Taking the US and China markets together, demand in the current period is soft overall… This will change in the second half as major global carriers increase their deployment rates as the pandemic subsides, and as hyperscalers begin to roll out initial 400ZR installations,” believes Jenks.
“We see expanding activity in the Western 400ZR market, which initially targeted hyperscale data-center interconnects and then 400ZR+ modules targeted at regional and metro applications,” says Jenks. “Beyond hyperscale data-center operators, we now see more interest in 400G module solutions from network equipment manufacturers. This is important as it supports and validates our view that 400ZR and its architectures is a large market opportunity, delivering significant savings to network operators. We are conducting qualifications with multiple potential customers. Based on current schedules, we expect to increase production to hundreds of units this quarter and to initial deployments in the second half,” he adds.
“We are seeing softness in Q2 and have spot shortages that are constraining our ability to satisfy all of the opportunities we see in the quarter,” says Eby. “These shortages could impact future quarters, though we have a history of working through supply chain challenges. As a result, while there is increased risk, we remain committed to our growth target of 25-35% for the year, excluding Huawei. Our revenue ramp in the second half to meet that target is substantial. We expect the ramp will be in the following areas: (1) unsatisfied demand from Q2 and customers’ second-half ramp of 400G-and-above components, based on their forecasts; (2) coherent module ramps, both telecom and datacom; and (3) stronger China revenue in the second half compared to the first half.”
“For 2021, we are focused on driving growth in our 400G-and-above product lines, moving into the hyperscale market with added customers for our 400ZR and 400ZR+ modules and a return to profitability, still expected in Q3 on a non-GAAP basis,” says Eby. “Our strong cash position allows us to invest for that growth while positioning us for even higher levels of growth and profit in 2022.”
During Q1/2021, NeoPhotonics demonstrated transmission of 400G data rates over 800km using our 400ZR+ coherent modules. “We are excited about the prospects these modules are demonstrating for the next generation of highest-speed-over-distance interconnects,” says Jenks.
“The growth in demand for our 400G-and-above components for chassis-based communications systems is in its early innings,” believes Jenks. “As the market continues to move to higher speeds including 600G and 800G, we are increasingly well-positioned to capture this next wave of growth,” he reckons.