NeoPhotonics’ revenue grows 11% in Q4 to $91.1m

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) has reported full-year revenue growth of 10.1%, from $292.9m in 2017 to $322.5m in 2018.

Fiscal	Q4/2017	Q1/2018	Q2/2018	Q3/2018	Q4/2018
Revenue	$76.9m	$68.6m	$81.1m	$81.7m	$91.1m

Most recently, fourth-quarter revenue was $91.1m, up 11% on $81.7m in Q3/2018 and 19% on $76.9m a year ago, driven by strong demand from both Western customers and China.

Shipments to China comprised 59% of revenue (up from 56% in Q3). Of this, NeoPhotonics’ largest customer Huawei Technologies (including its affiliate HiSilicon Technologies) accounted for 44%. The next four customers collectively comprised 41%. The Americas fell from 27% to 20% of total revenue, as certain customers shifted contract manufacturing locations.

“Demand remained strong across all geographies, similar to the demand dynamics we saw throughout the year,” says chairman & CEO Tim Jenks. “Within the Americas and rest of world, demand in shipments continued their sequential growth trend while within China we saw a larger increase as a result of continuing domestic deployments, especially in provincial network deployments from China Mobile as well as exports outside of China despite trade tensions,” he adds. “During the quarter, we saw growth that was consistent with normal seasonal demand patterns in China across our high-speed product lines.”

High-Speed Products (for data rates of 100G-and-above) comprised 86% of total revenue (up from Q3’s 84%, and equalling Q2’s record). In particular, 400G-and-above products grew to more than 10% of total revenue. “We’re increasingly ramping our 600G coherent solutions as well,” notes Jenks.

“With continued strength in demand, combined with increasing volume growth across leading high-speed product lines, we again achieved solid gross margin expansion,” says Jenks. Although non-GAAP full-year gross margin was down slightly from 22.5% in 2017 to 22.3% in 2018, quarterly gross margin has risen from 21.3% a year ago and 24% in Q3 to 28.6% in Q4. “From Q1 to Q4, our margins expanded steadily by approximately 14 percentage points [from 14.7%], significantly more than our normal annual improvement,” Jenks notes. Specifically, product margin was 31.6%, down only slightly from 32% in Q3 as higher-than-expected volume and solid cost reductions partially offset the impact of the annual price reductions (which will have full impact in Q1/2019). The other cost of sales charges of 3 percentage points consisted of about 150 basis points of under-absorption charges in the firm’s laser fabs and 150 basis points of other charges (mostly the impact of tariffs related to the US-China trade discussions).

Operating expenses (OpEx) were $22.3m, up slightly from $22.1m last quarter but cut from $24.1m a year ago (and down from 31.3% of revenue a year ago and 27.1% last quarter to 24.5%). This was also slightly less than the expected $23m as the firm pushed out certain R&D spending. Full-year OpEx has been cut from $103.2m (35.2% of revenue) in 2017 to $89.1m (27.6% of revenue) in 2018.

Net income was $2.4m ($0.05 per diluted share, slightly better than the expected $0.00-0.04 on a lower tax provision). This was an improvement on a net loss of $2.1m ($0.05 per diluted share) last quarter and $11.7m ($0.27 per diluted share) a year ago. Full-year net loss has been roughly halved from $40m ($0.92 per diluted share) in 2017 to $20.5m ($0.45 per diluted share) in 2018.

“NeoPhotonics delivered its highest revenue quarter in the past two years, with strong orders and shipments, non-GAAP profitable operations and positive cash flow,” says Jenks.

Cash generated from operations was $10.6m, down from $13.5m last quarter but an improvement from -$3.5m (of cash used in operations) a year ago. However, for full-year 2018, cash generated from operations was $19.6m, compared with cash outflow of -$32.8m in 2017.

Free cash flow was $10m in Q4 (an improvement from -$12m in Q3). During the quarter, cash and cash equivalents, short-term investments and restricted cash rose by $12m from $64.7m to $76.7m.

The above non-GAAP results exclude about $5.7m in charges, comprising a $2.2m payment to settle a lawsuit with Lestina International Ltd (pursuant to a purchase commitment for materials related to product assets sold by one of NeoPhotonics’ foreign subsidiaries to APAT Optoelectronics Components Co Ltd in January 2017). They also exclude $3.5m in inventory and asset write-downs for discontinuing manufacturing and selling the end-of-life client transceiver modules after completing last-time production runs through May 2019 (which will also entail accelerated depreciation of about $3m, to be amortized over the final production across the first and second quarters of 2019).

Due to the strong customer demand, net inventory fell further during Q4/2018, from $57m to $52m (from 82 days of inventory on hand to just 69 days, although this should increase back toward the targeted 90 days in Q1/2019).

For first-quarter 2019, NeoPhotonics expects revenue to fall to $77-82m, impacted by the usual seasonal reductions related to Chinese New Year production shutdowns and the full impact of annual price declines. “Additionally, we are seeing some supply-related constraints for certain purchased sub-components potentially pushing out a few million dollars of revenue to Q2,” says senior VP & chief financial officer Beth Eby.

Gross margin should fall to 23-27%. OpEx is expected to rise to $24-25m (including some one-time payments on certain chips and components that the firm is designing, although this range of quarterly OpEx should be sustained for most of 2019). “We will increase R&D spending in 2019 as we invest in our next generation of coherent products,” notes Eby. “Q1 includes early payment to support a number of new chips and components.” Earnings per share is expected to fall back to a net loss of $0.17-0.08.

This non-GAAP outlook excludes stock-based compensation expense of $3.5m, including $0.6m for cost of goods sold, $0.3m for amortization of intangibles, and the $1.5m in restructuring charges for accelerated depreciation on the end-of-life production line.

See related items:

NeoPhotonics raises Q4/2018 profit guidance

NeoPhotonics’ Q3 revenue up 15% year-on-year to $81.7m

NeoPhotonics’ 64GBaud coherent optical components selected by tier-1 customers for 600G system development

NeoPhotonics’ revenue grows 18% in Q2 to $81.1m

NeoPhotonics’ Q1 revenue falls 4% year-on-year, as ZTE loss counteracts growth in North America

NeoPhotonics reports revenue up 8% in Q4 to $76.9m

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