For first-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 revenue of $68.2m, down 8% on $74.4m last quarter but up 22% on $56.1m a year ago (and the firm’s highest ever Q1 revenue).
There were three 10%-or-greater customers: Alcatel-Lucent at 13% (the same as last quarter); Ciena 14% (down from 16%) and China-based Huawei Technologies 35% (up from 30%). Geographically, the revenue NeoPhotonics mix was 52% from China (up from 47%), 20% from the Americas (down from 23% last quarter), 7% from Japan (down from 9%), and 21% from the rest of the world (level with last quarter).
The Speed & Agility product group contributed $49.8m (73% of total revenue), up $13.7m year-on-year (from 64% of total revenue). Of this, High Speed products (i.e. 100G and to a lesser extent 40G) contributed $28.3m (42% of total revenue), up 29% on a year ago (from 39% of total revenue). However, this is inclusive of the acquisition (at the end of Q1/2013) of LAPIS Optical Components Unit (OCU), a designer and manufacturer of lasers, laser drivers, photodiodes and amplifiers for high-speed networks (now renamed NeoPhotonics Semiconductor), which hence boosted the 100G product portfolio. The Access product group contributed $14.3m (21% of total revenue), down $1.4m year-on-year.
On a non-GAAP basis, gross margin was 22%, down on 23.1% a year ago and (due mainly to the impact of annual price negotiations) down on 27.5% last quarter.
Net loss was $9.5m ($0.30 per diluted share), up from $1.8m ($0.06 per diluted share) last quarter and $5.3m ($0.17 per diluted share) a year ago. Adjusted EBITDA was a loss of $4.2m, compared to +$3m last quarter and a loss of -$1.8m a year ago.
Capital expenditure was $2.1m, down from $5.2m last quarter due to the completion of CapEx programs initiated in Q4/2013. During the quarter, cash, cash equivalents and short-term investments hence fell from $75m to $61.3m.
“Despite ASP [average selling price] declines from fourth-quarter pricing negotiations and the unfavorable impacts of product mix and of the timing of the Chinese New Year, during the quarter we witnessed increasing strength in both our Access shipments and in our backlog for 100G products,” notes president & CEO Tim Jenks. “While the first quarter was a challenging one as we added 100G capacity and announced several new PIC-based 100G products, we are increasingly confident that NeoPhotonics is well positioned to benefit from the rapid growth in deployment of 100G systems worldwide,” he adds.
“NeoPhotonics has made significant progress in scale, product range and focus on new products,” believes Jenks. The integration of NeoPhotonics Semiconductor is now largely complete, with products integrating components from both NeoPhotonics and NeoPhotonics Semiconductor already shipping. Both the next-generation small-form-factor Integrated Coherent Receiver and the new CFP2 100G transceiver have increased NeoPhotonics Semiconductor content over its current-generation products. “China 100G deployments are underway, as witnessed by our increasing backlog for the second and third quarters of 2014, with backlog now building for the fourth quarter as well,” notes Jenks. “Also in first-half 2013 we opened a new factory in Dongguan, China, with the result that we are currently well able to accommodate the increased volumes we are seeing in our business.”
Consequently, during first-quarter 2014 NeoPhotonics’ net inventory rose by $3m to $67.9m while days of inventory on-hand grew from 106 days to 110 days, as the firm builds inventory ahead of the higher expected 100G shipments over the next several quarters.
For second-quarter 2014, NeoPhotonics expects revenue to grow by more than 10% to $73-78m. Gross margin should be 20-25% (an increase of 60 basis points over Q1 at the mid-point of the range due to ongoing operational improvements). Diluted net loss per share should improve to $0.16-0.26.
CapEx is expected to be $3-5m per quarter in the next few quarters. On an annual basis, CapEx is expected to be $12-15m, “suitable to maintain our ongoing growth and production expansion needs”.
“While we continue to see strength in Access over the near-term due to growth in China LTE backhaul and FTTX, we remain cautious on the mid- to long-term strength of this business,” says Jenks. “There are a number of new entrants in the market which will continue pricing pressure, particularly as volume growth in the industry plateaus… We view this as a mature business at a plateau on volume and therefore with declining revenue over the mid-term,” he adds.
“In an effort to align internal resources with long-term growth opportunities and improve our profitability, we are working to cull low-margin products and to reduce their support costs,” notes Jenks. “In order to satisfy end-of-life terms on many of these products, it will take several quarters to ramp down production and, as a result, we expect this initiative to be an ongoing headwind to sales growth through the remainder of 2014.” However: “As we complete our initiative to trim low-margin products from the product portfolio, we anticipate seeing an improvement to gross margins overall.”
“Looking at the full year of 2014, we continue to believe demand is favorable for NeoPhotonics products, with continued potential in high-speed and coherent products in 100G around the world,” reckons chief financial officer Ray Wallin. “The current 100G market strength will be bolstered by metro 100G growth, and then by data-center 100G growth,” adds Jenks. “We view these directions as a megatrend for our business.”
* With the anticipated filing of its Form 10-Q later before the end of June, NeoPhotonics should return to compliance with the filing requirements of the US Securities and Exchange Commission (SEC).