13 November 2014

NeoPhotonics' record $81.6m Q3 revenue driven by 22.9% growth in 40/100G

For third-quarter 2014, NeoPhotonics Corp of San Jose, CA, a vertically integrated designer and manufacturer of both indium phosphide (InP) and silica-on-silicon photonic integrated circuit (PIC)-based modules and subsystems for high-speed communications networks, has reported record revenue of $81.6m (at the high-end of the updated outlook range of $80-82m), up 5.3% on $77.5m last quarter and up 6.2% on $76.8m a year ago.

Fiscal	Q3/2013	Q4/2013	Q1/2014	Q2/2014	Q3/2014
Revenue	$76.8m	$74.4m	$68.2m	$77.5m	$81.6m

There were two 10%-or-greater customers, with Ciena rising from 13% to 17% of total revenue, whereas China’s Huawei Technologies Co Ltd fell from 39% to 35%. Correspondingly, the revenue mix by geographic region was 25% Americas (up from 20% last quarter), 5% Japan (level with last quarter) and 20% rest of the world (compared with 21% last quarter), whereas China was down from 54% to 50%.

The Access product group contributed $17m (20.5% of total revenue), up 3.7% on $16.4m (21% of total revenue) last quarter but down 5.6% on $18m (23% of total revenue) a year ago.

The Speed & Agility product group contributed $60.6m (74% of total revenue), up 8% on $56.2m (72% of total revenue) last quarter and up 14% on $53.2m (69% of total revenue) a year ago. Of this, High Speed products (i.e. 100G and some 40G) contributed $37.1m (45.5% of total revenue), up 22.9% on $30.2m (39% of total revenue) last quarter and up 30.6% on $28.4m (37% of total revenue) a year ago.

“100G deployments were a significant contributor in Q3, as we saw strong demand across all of our 100G products with strong shipments following,” says chairman & CEO Tim Jenks. “While we are pleased to see the 100G China opportunity materialize in volume this quarter, we also saw continued strength in shipments of 100G coherent systems by North American and European network equipment vendors.”

On a non-GAAP basis, gross margin was 26.5% (at the high-end of the updated outlook range of 25-27%, and above the original guidance of 22-26%). This was down from 27.5% a year ago but up from 20.8% last quarter due to a shift in product mix (to higher-margin products, including certain 100G products), ongoing manufacturing process improvements and related reductions in overall manufacturing costs (in particular lower inventory write-downs), along with restructuring actions, offset by restructuring charges impacting cost of goods sold.

“We initiated restructuring and cost reduction plan with a goal of accelerating our path to profitability, by reducing total operating expenses and product costs,” says Jenks. “The focus of this restructuring plan was primarily to decrease our corporate and business operating expenses, including reduced R&D spending, to drive manufacturing efficiencies, and to map further manufacturing and facility efficiencies over time.”

Excluding restructuring charges and amortization expenses, operating expenses were cut by $2.2m (in line with guidance of about $2.5m per quarter savings from restructuring, including both operating expense reductions and reductions to cost of goods sold, despite not having the benefit of a full quarter at the new lower operating expense levels). Sales, general & administrative (SG&A) expenses were $9.8m (12% of revenue), down from $11.8m (15.2% of revenue) last quarter. R&D expenses were $11.8m (14.5% of revenue), down from $12.1m (15.6% of revenue).

Net income was $1.4m ($0.04 per diluted share), improved from a net loss of $7.5m ($0.24 per diluted share) last quarter and $3.2m ($0.10 per diluted share) a year ago, and in line with the stated breakeven level of $80-85m. “While our goal of reaching sustained profitability is not yet complete, we have confidence that actions we are taking put us squarely on the path to sustain profitability,” says Jenks.

Capital expenditure has been cut from $3.8m last quarter to $3.2m, and is expected to be $1.5-2.5m per quarter over the next two quarter.

Driven by $8.9m of cash provided by operating activities, during the quarter cash, cash equivalents and restricted cash and investments rose from $54.4m to $57.9m. Combined notes payable and debt fell from $48m to $46.3m.

“Our previously announced profit improvement actions are taking hold and moved us into non-GAAP profitability. We expect to operate in a manner focused on our path to profitability; managing expenses tightly, and continuing to operate so as to strengthen our balance sheet,” says Jenks. “Equally important, we believe our product focus on 100G, enhanced by our pending acquisition of Emcore’s tunable laser and transceiver product line [for $17.5m, announced in late October], positions us to be a major contributor to this expanding market segment, and therefore benefit from the accelerating worldwide deployments of 100G systems,” he adds.

“We remain cautious of inferring that these demand cycles will continue directly through the first quarter, as we typically see a seasonal decline in orders from China towards the end of the fourth quarter and into the first quarter, due to year-end activities and then the Chinese New Year holiday,” says Jenks.

Due to typical seasonal pricing, for fourth-quarter 2014 NeoPhotonics hence expects revenue to fall to $74-80m, with gross margin of 24-27%, and returning to a net loss (of $0.01-0.13 per diluted share). “We renegotiate prices with our customers during our fourth quarter, which generally causes revenue and margin to be slightly lower in Q4, and then to have full impact of ASP declines in Q1,” notes chief financial officer Ray Wallin.

“Related to the industry’s ongoing transition from 100G client CFP to CFP2 modules, we’re encouraged by customer demand for our 100G CFP2 products and our having commenced production and shipments of these products in the third quarter,” says Jenks. Volume shipments are on track to ramp in the first and second quarters of 2015, as the momentum of CFP2 adoption is accelerating.

“We are continuing to grow revenues, as we introduce new products in strategic areas, including micro-ITLA, CFP2, Multicast Switch and new coherent receivers and transmitters for 100G and above networks, and each of these contributes to our gross margin dollars,” says Jenks. “Our focus is profitable growth for these new products. We are pruning lower-margin products [to be completed in first-half 2015].”

“With respect to the micro-ITLA segment of tunable lasers, we are encouraged by increases in demand. We expect this to be a growth area for us in the quarters ahead,” says Jenks. “Our high-power photonic-integrated DFB [distributed feedback] array laser is ideally suited for emerging metro and intra-datacenter applications for intermediate distances at 100G and 400G. For compact size, low electrical power consumption and the ability to integrate with other functions such as indium phosphide (InP)-based coherent modulators are critical.”

Supplementing NeoPhotonics’ own internally developed micro-ITLA solution, Emcore’s narrow-linewidth tunable products will expand the size and breadth of NeoPhotonics’ micro-ITLA market opportunity. “Emcore’s extremely narrow-linewidth external cavity laser is ideally suited for advanced modulation formats and long distances at even higher speeds of 400G and above,” reckons Jenks. “The combination of these technologies will allow us to provide customers with a full product suite that more completely serves the entire coherent market,” he adds.

“In this area too, we will focus on profitable areas and future growth strategic products,” Jenks says. “As a result, we do not expect 2015 revenues to reflect the sum of Emcore telecom products with ours - rather we will grow the segments that can contribute to our path to profitability,” he adds. “With the announced Emcore acquisition [which is expected to be finalized by early January], we will not be acquiring manufacturing facilities, real-estate obligations or assembly operations. Therefore, we believe our current breakeven level of about $85m will hold post-acquisition in integration of the Emcore business.”

“In Access, we continue to see strength over the near-term, as a result of growth in China LTE backhaul and FTTx,” says Jenks. “We view LTE backhaul as a growth area that gives strength to this product group, whereas we view the FTTx segment as a mature market.”

• At its recent core partner convention in Shenzhen, China, telecoms network equipment maker Huawei Technologies granted NeoPhotonics an Excellent Core Partner Award. This is the fourth consecutive year that the firm has been recognized by Huawei, out of more than 1000 suppliers, for its “consistency in delivering the highest-performance and -quality products meeting Huawei’s highly specialized requirements”.

See related items:

Emcore selling tunable laser and transceiver product lines to NeoPhotonics for $17.5m

NeoPhotonics grows 13.6% in Q2 to record revenue of $77.5m

NeoPhotonics' revenue grows 22% year-on-year to $68.2m in Q1

NeoPhotonics reducing losses as it confirms Q3/2013's record revenue

NeoPhotonics' quarterly revenue grows 16.1% year-on-year to record $76.8m

JDSU earns Huawei’s Excellent Core Partner Award for third time in past four years

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