For first-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 reported record revenue of $99.1m, up 11.2% on $89.1m last quarter and up 21.8% on $81.4m a year ago (and above expected $92-98m), driven by strength in demand across key 100G products (components, modules and switches).
Revenue for Network Products and Solutions (lower-speed transceivers, <100Gb/s) has declined further, from $37.4m last quarter to $35m (35% of total revenue). Meanwhile, growth in revenue for High Speed Products (100G-and-beyond) accelerated, rising 24% to a record $64.1m (65% of revenue, which is believed to be the highest 100G percentage in the industry).
There were two 10%-or-greater customers: US-based Ciena comprised 16% of total revenue, and China's Huawei Technologies 54%. Of total revenue, 20% came from the Americas, 62% from China, 5% from Japan, and 13% from the rest of the world.
"The rapid increase in demand for 100G products from China and worldwide is a very positive contrast to our normal seasonal pattern in the first quarter as we sold out our capacity for certain key products," says chairman, president & CEO Tim Jenks.
On a non-GAAP basis, gross margin has hence risen further - in contrast to normal seasonality - from 31.3% a year ago and 32.4% last quarter to 32.8% (close to the high-end of the 30-33% guidance range), driven by the favorable product mix and improved fab utilization, as well as being able to maintain favorable pricing for certain products due to industry supply constraints.
Driven by continuing investments in 100G components, modules and switches, operating expenses have risen from $20.2m a year ago and $22.6m last quarter to $23m (23% of revenue). However, as a proportion of revenue, OpEx is just 23%, reduced from 25.4% last quarter (and 24.8% a year ago), i.e. within the 25% target.
Net income has risen further, from $4.2m ($0.13 per diluted share) a year ago and $6.9m ($0.16 per diluted share) last quarter to $7m ($0.15 per diluted share). This represents the firm's seventh consecutive non-GAAP profitable quarter. Likewise, adjusted EBITDA has risen further, from $9.9m a year ago and $11.8m last quarter to a record $12.3m.
During the quarter, cash and cash equivalents, short-term investments and restricted cash rose from $102m to $103.8m. Total debt at end-March was $44.8m.
"Capacity for our key 100G products was booked out, and in the first quarter we shipped at full capacity for certain products, resulting in record revenue," says chief financial officer Ray Wallin. "Our capacity remains booked out for the second quarter as well, and we see demand continuing to grow from the convergence of strength in China, and from data-center and metro deployments. Therefore, we are augmenting and accelerating the capacity expansion plans we discussed last quarter, adding module, component and chip-level capacities. We expect to double our capacity for switches and increase coherent receiver, ultra-narrow-linewidth tunable laser and 100G module capacities by 50% or more over previously planned levels. And, of necessity, these capacity increases will occur incrementally over the next quarters," he adds.
For second-quarter 2016, NeoPhotonics expects revenue of $97-102m. "We do expect our second-quarter manufacturing capacity to be up incrementally as compared to our first quarter, while demand continues to grow. Therefore, as our new capacity adds come on line, we expect to see increasing benefits from the third quarter on, and we expect that in Q2 gross margins will be impacted by the realization of ASP [average selling price] changes together with our ramping up manufacturing inventories to enable our higher volumes overall," says Wallin. Gross margin should be 29-31%, and diluted earnings per share should be $0.08-0.15. "With these higher purchase volumes, we anticipate that we will see continued cost reductions that will be favorable to forward margins."
"Our quarterly non-GAAP operating expense run rate continues to reflect the controls we established to be consistent with our target model, reflecting leverage in our operating model," says Wallin. "In the last seven quarters we have operated at or below our target model of 25% for operating expenses, which we continue through 2016," he adds.
NeoPhotonics' target model for 2016 comprises 35% gross margin, OpEx of 25% of revenue, 10% operating margin, and 15% EBITDA margin. However: "We see the overall environment for 100G products globally as very robust and, given the acceleration in our organic demand, we are bringing additional capacity on line over the next quarters [raising the CapEx forecast for full-year 2016 to 7-9% of revenue]," says Jenks. "As a result, we anticipate revenue growth to be in the range of 20-25% for the year [up from the previous forecast of 15%]," he adds.
"We believe that the industry has entered an expansion cycle where 100G deployments are expanding globally for both telecom and data-center applications and that these two segments are in sync," says Jenks. "Within the China market, we expect the strength we've seen in 100G deployments to continue as we anticipate awards for approximately 30,000 100G ports for the second half of the year and into 2017. Outside of China, we continue to see an on-going worldwide ramp of 100G deployments, particularly in North America and Europe, driven by Verizon and other major carriers, as well as strong growth in the datacenter interconnect market. Within the various end-markets, long-haul remains strong while metro 100G build-outs are beginning and are expected to ramp materially in the second half of 2016, through 2017 and beyond," he adds.
"We have previously articulated several drivers affecting our business. Cloud services are driving a shift in communications architectures to enable high bandwidth, connection density and rapid reconfiguration. Further, 100G coherent transmission is the technology of choice for long haul, metro and DCI connections, and the use of contentionless switching architectures in coherent networks is expanding, and is critical for software-defined networks for content providers' datacenters," Jenks continues. "Finally, data lanes in datacenters are rapidly moving to 25G from 100G and increasingly using single-mode instead of multi-mode fiber. These trends are favorable to NeoPhotonics. As a result, demand for our coherent product suite, our multi-cast switch products, our client and datacenter 100G transceivers, our EML lasers and our high-speed IC components is expected to continue to grow throughout 2016 and beyond."
"Continuing our leadership in 100G-and-beyond solutions, we introduced a number of exciting new products and technologies at OFC [Optical Fiber Communication conference] last month and at the recent FOE [Fiber Optics Expo] trade show in Japan," notes Jenks. "On the line side, these included our multi-rate CFP2-ACO coherent module as well as our new high-bandwidth coherent receiver, which enables 400G transmission using a single DWDM wavelength. For applications inside the datacenter, we announced development of a 400G transceiver based on eight of our 28Gbaud EML lasers using PAM4 transmission, and followed up with 56Gbaud EML lasers that can reach 400G with only four lasers, again utilizing PAM4. Our leading product performance in ultra-narrow linewidth tunable lasers, high-speed and high-sensitivity coherent receivers, and high-data-rate EML lasers has allowed us to rapidly move to new 400G telecom and datacenter applications and to provide our customers with future-proof solutions for today and tomorrow."
