24 March 2017

NeoPhotonics reports record revenue of $109.8m for Q4, driven by High Speed Products sales up 52% year-on-year

For fourth-quarter 2016, NeoPhotonics Corp of San Jose, CA, USA (a vertically integrated designer and manufacturer of hybrid photonic integrated optoelectronic modules and subsystems for high-speed communications networks) has again reported record revenue, of $109.8m, up 6% on $103.3m last quarter and up 23% on $89.1m a year ago.

Fiscal	Q4/2015	Q1/2016	Q2/2016	Q3/2016	Q4/2016
Revenue	$89.1m	$99.1m	$99.1m	$103.3m	$109.8m

Sales of High Speed Products (for 100G-and-beyond) was $78.5m (72% of total revenue), up on $69.2m (67% of revenue) last quarter and up 52% on $51.7m (58% of revenue) a year ago.

Sales of Network Products and Solutions was $31.3m (28% of total revenue), down on $34.1m (33% of revenue) last quarter and down 16% on $37.4m (42% of revenue) a year ago. Of this, Low Speed Transceiver Products contributed just $12.8m (11.7% of total revenue), down 2% on $13.1m (12.7% of revenue) last quarter and down 49% on $25.2m (28% of revenue) a year ago.

Shortly after quarter end (on 14 January 2017), NeoPhotonics completed the sale of its Low-Speed Transceiver product business to APAT Optoelectronics Components Co Ltd (APAT OE) of Shenzhen, China, a designer and manufacturer of optical sub-assemblies for telecom and datacom markets, primarily fiber-to-the-home (FTTH). Excluding Low Speed Transceiver products, NeoPhotonics’ total revenue in Q4/2016 was $97m, up just 8% on last quarter but up 52% on a year ago.

Of total Q4 revenue (compared with last quarter), 65% came from China (up further, from 61%) and 18% from the Americas (down further, from 19%), while Japan was 4% (down from 5%) and the rest of the world was 13% (down from 15%).

There were again two 10%-or-greater customers, with Huawei Technologies (including Huawei affiliate Hi-Silicon Technologies) at 53% (up further, from 48% last quarter) and Ciena at 14% of total revenue (down further, from 15%).

Full-year 2016 revenue was $411.4m, up 21.2% on 2015’s $339.4m. This was driven by High Speed product revenue rising 42% year-on-year, as Low Speed Transceiver Product revenue fell by 31.6% from 2015’s $93m to $63.6m in 2016.

“End-market demand for our 100G-and-beyond products remained robust throughout 2016, with China deployments kicking off a wave of growth beginning back in the fourth quarter of 2015, followed by acceleration in metro and DCI [data-center interconnect] deployments that continued through the year and including a strong fourth quarter,” says chairman & CEO Tim Jenks.

On a non-GAAP basis, Q4 gross margin was 29.9%, up from 27.6% last quarter but down from 32.4% a year ago (and below the expected 30-33%). Full-year gross margin fell from 31.5% in 2015 to 29.9% in 2016.
Operating expenses have risen further, from $22.6m a year ago and $24.7m last quarter to $26.6m. Full-year OpEx has risen from $84.7m in 2015 to $96.1m in 2016, although this has fallen from 24.9% of revenue to 23.4% of revenue.

Net income was $6.3m ($0.13 per diluted share), down from $6.9m ($0.16 per diluted share) a year ago but up from $2.9m ($0.06 per diluted share) last quarter. Full-year net income has risen from $21.1m in 2015 to another record of $23m in 2016.

Adjusted EBITDA was $12.5m, up from $11.8m a year ago and $8.3m last quarter. Full-year adjusted EBITDA has risen from $43.2m in 2015 to another record of $45.1m in 2016.

Cash flow from operations was a record $27.1m (up from just $4m last quarter). Capital expenditure was $21.7m in Q4 (up from $15m last quarter), making $51.7m for full-year 2016 (up from just $16.8m in 2015).

During the quarter, cash and cash equivalents, short-term investments and restricted cash rose from $102.9m to $105.6m.

For first-quarter 2017, NeoPhotonics expects revenue of just $67-73m (well below Q4, even after accounting for a $13m drop from Low Speed Transceiver Product revenue following the sale of those product lines on 14 January). The reduction in outlook is mostly due to delays in the next 100G deployment phase (‘Phase 12’) in China (exacerbated by inventories at some customers). Also, NeoPhotonics is still working through a lingering yield reduction in one of its fabs as well as some supply constraints in certain product lines caused by the rapid ramp of production volumes. “We are rapidly mitigating both of these issues, but expect some residual impact on revenues in the first and also the second quarter,” says chief financial officer Raymond Wallin, adding that these issues (which affect all customers) equate to less than half that of the drop in demand from China. Smaller affects are the Chinese New Year holidays and the typical seasonal low due to annual price reductions.

Gross margin should be 28-31%. Operating expenses are expected to rise further to $29-31m. NeoPhotonics expects to make a net loss of $0.20-0.30 per share.

“The softness in our first quarter outlook directly reflects the views we have from customers on the quarter and their needs,” notes Jenks. “We feel confident this is simply a delay in the timing of deployments, with demand returning once tenders are announced. We see the demand conditions of the first quarter as temporary, and we expect to see a return to sequential growth with further acceleration later in the year through a combination of the next phase of deployments in China as well as new revenue streams from our new product introductions,” he adds.

“Further, we have several key new product introductions which will expand our market opportunity, and position us to benefit from accelerating deployments both in the west and in China in 2017,” Jenks continues. “Demand for 100G-and-beyond products will be stronger in 2017 than in 2016, though later in calendar 2017,” he believes. “We have been expanding capacity and investing in our new product developments and technology in line with this view. Our capacity additions and new product introductions position us well to serve the 100G-and-beyond market as it continues to grow over the next several years.”

“While our performance in 2016 was good, it was constrained by our capacity versus demand,” notes Jenks. “Actions taken during the year to expand production capacities, reduce supply chain bottlenecks and increase manufacturing yields will set the stage for a more robust year in 2017 that will result from anticipated tenders moving to deployment,” he believes.

“The mid- and long-term market drivers for our business remain compelling. China remains committed, through the China Broadband 2020 initiative, to continue build out of the national backbone network and expanded buildouts of 100G provincial and metro networks. Our OEM customers in China tell us they expect these actions to markedly increase the number of 100G ports in China in 2017 over 2016, but now with the preponderance of the deployments in the second half of the year,” says Jenks. “In North America, we continue to see strong demand, with continued metro strength at Verizon, growing DCI deployments and new announcements for AT&T to begin initial 400G installations.”

“Despite near-term volatility in our largest served market, we believe the macro trends of the industry favor our core capabilities of delivering the highest-performance products for the most demanding applications,” Jenks concludes.

See related items:

NeoPhotonics completes sale of Low Speed transceiver business to APAT Optoelectronics

NeoPhotonics selling low-speed transceiver business to China's APAT for $26.4m

NeoPhotonics reports record revenue of $103.3m in Q3, up 24% year on year

NeoPhotonics' Q2 revenue up 16% year-on-year to $99.1m, driven by 100G

NeoPhotonics' revenue rises 11% in Q1 to record $99.1m

NeoPhotonics reports record revenue of $89.1m for Q4, driven by 100G sales in China

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