Q3 2019 Earnings Call
Welcome to the Neophotonics 2019 third quarter Conference call. This call is being webcast live on the Neophotonics event calendar why pay check www dot Neophotonics dot com.
The property Neophotonics is any recordings reproduction or transmission of this call without the expressed written consent of Neophotonics is prohibited. The webcast is available on the event calendar page of the Neophotonics website I would like to now I'll turn the conference ever Erica Mannion at Shabtai Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us to discuss Neophotonics operating results for the third quarter 2019.
For the fourth quarter of 2019.
We today are changing chairman and CEO and Bell, that's easy Chief Financial Officer, Jim will begin with a review of our business progress in third quarter any discussion of business drivers and products that will then provide financial results for the third quarter.
Before providing outlook for the fourth quarter of 2019 in opening the call for questions.
The company's press release and management's statements. During this call include discussion is a certain non-GAAP financial measures and information.
Putting all income statement in balance sheet amounts and percentages other than revenue otherwise noted.
These non-GAAP financial measures are not prepared in accordance with gap and I'm not a substitute for or superior to measures of financial performance prepared in accordance with gap.
These financial measures and a reconciliation of GAAP to non-GAAP results.
In the company's press release and related form 8-K being filed today, what do you actually see and can be found at the Investor Relations section on Neophotonics website.
[laughter] material contained in the one cash interest so property in copyright of Neophotonics with all rights reserved certain statements in this conference call, which are not historical facts.
Maybe considered forward looking statements that involve risks and uncertainties and include statements regarding future business results Protestant technology development capital needs in availability customer demand inventory levels economic and industry production projection or subsequent events.
Various factors could cause actual results to differ materially.
Some of these risk factors set forth in our press release dated October 31, 2019 energy scratch, Atlanta, and our annual importantly, ASCII filings now ill turn the call over the CEO Tim Jenks.
Thank you Erica and good afternoon, Neophotonics recorded third quarter revenue of $92.4 million at the top end of our outlook up 13% from the prior quarter and similarly up 13% from the same quarter last year.
We achieved strong results driven by increased partnerships to the leaders in the industry strong end customer demand in metro and Dci markets. Our continued leadership in progress on 400 gig and faster solutions and strength in China.
Hi speed products were 92% of revenue, which is up 25% in revenue terms from the same period last year, driven by our leading coherent products. As a reminder, why wave has been the largest system supplier in our industry for several years and as a result has also been neophotonics largest customer.
Third quarter financial results reflect revenue from walk away at 37% from all products that are not subject to U.S. EA are this is down from 46% in 2018, we have weathered the headwinds of walk away technologies inclusion on the B. I guess entities list, thus far and we remain committed to complying with U.S.T.A.R.
Our next four customers again showed strong performance contributing 48% of revenue.
Our business has continued on a strong footing with our leading western customers, especially those serving DC I in metro markets.
Moving to product technology, we made several announcements for the European conference on optical communications last month related to increasing data carrying capacity of optical fiber networks in both telecom and datacenter applications. Our solutions include our C plus plus laser modulator in.
In receiver these products have expanded spectral bandwidth ranges to support the full Super C band, which is 50% more than today's standards network configuration.
These are industry, leading solutions, which allow customers to significantly expand bandwidth and data carrying capacity of their existing and new fiber installations.
Further we announced initial shipments of new arrayed waveguide grading ADW G multiplexers envy multiplexers for high capacity, Hi, baud rate coherent transmission systems.
Based on Neophotonics high volume high reliability planar Lightwave circuits platform. These new way to be G.'s have broad and flat filtered response functions over the past spend to support new coherent systems operating from 60 Gigabaud to 128 Gigabaud.
These support both current state of the art networks and the next generation at 600 gig 800 gig and higher capacities on a single wave length with customized channel spaces.
Inside the data center, we announced general availability of our non Hermetic 30 to 40 million Watt DSP laser sources for Silicon Photonics 100 gig per wavelengths fr NDR reach transceivers silicon photonics transceivers require a separate laser to supply like powerful enough to overcome.
Intrinsic losses Neophotonics family of high powered DFB lasers are designed to efficiently coupled to the size. So modulator chip and do not require hermetic packaging, making them in an ideal choice for next generation transceiver modules.
Moreover, these capabilities open some adjacent market opportunities for high speed technologies over the long term.
The fundamental driver of our coherent business is the continued deployment of 100 gig and above coherent ports, which have been growing at 20% or more each year. We expect us to continue for the next several years, we anticipate that 400 gig, we'll continue to ship, while our 600 gig.
Products ramp through this year and next animal soon include 400 ZR Rollouts.
Beyond 2020, we expect that 400, ZR 600 gig and 800 gig will coexist and we will be engaged in each of these.
These approaches all required best in class component performance and are well aligned with our advanced technologies high speed capabilities and strong presence in high speed component platforms.
That I will turn the call over to our CFO Beth E B.
Thank you Tim and good afternoon.
The third quarter came in at the high end of expectations across all of our metric.
Which when combined with favorable foreign exchange resulted in non-GAAP EPS of 11 cents well above the midpoint of our guidance range of a two cents profit.
Neophotonics continues to execute well to improve profitability and cash.
As Tim mentioned revenue was 92.4 million at the high end of our range on strength in the Western Metro and Dci market and continued strength in China.
Our non-GAAP Q3 gross margin was 29% at the upper end of our range and up three points from last quarter.
Within this product margins were approximately 34%.
Two points from last quarter on good execution and continued cost reduction.
Other cost of sales charges of about five point were comprised of approximately four point of under utilization charges, and our laser fab and our factories impacted by U.S.J.R.
And just under a point.
On product shipping apparent charges on product shipping from our U.S. fabs into China.
Moving to operating expenses total non-GAAP operating expense for the third quarter was 22 point Threemillion as expected.
non-GAAP operating profit for the third quarter was 4.4 million or 4.8% compared to a loss of 1% in Q2.
Driven by the higher revenue and gross margin.
In Q3 appreciation of the U.S dollar relative to the Chinese Yuan drove a foreign exchange gain of approximately 2.6 million.
As a reminder, the functional currency of our China operations is the you won the FX gain is driven by the revaluation of trying to balance sheet items to the end of quarter exchange rate.
We view this as temporary good news that will reverse as the Chinese Yuan appreciate.
As a result, non-GAAP net income for the third quarter was 5.4 million compared to a loss of 1.2 million in the second quarter.
This translates to a non-GAAP EPS of 11 cents compared to a loss of three cents in Q2.
The ongoing business drove an S of seven cents at the high end of our forecasted range for the quarter.
Well the after tax FX gain drove an additional four cents a V P S.
For the third quarter adjusted EBITDA was 14.2 million.
I will close that my discussion of the third quarter income statement with a review of our GAAP results.
Third quarter gross margin was 28% up from 19% in Q2.
And up five points compared to the third quarter last year.
The increase from Q2 was related to an increase in product margin.
The lack of inventory write downs related to the why way back [noise].
And the completion in Q2 of accelerated depreciation related to the E O out of certain client module products as announced last year.
Operating expense was 24.9 million up from 23.9 million in the preceding quarter.
Q2 operating expense included a point 8 million dollar gain from the sale of our Russia asset, but did not repeat in Q3.
Operating profit for the third quarter was 1.3 billion, which included 3 million of stock based compensation expense and approximately point 2 million of amortization of acquisition related intangibles.
No profit for the quarter was 2.3 million compared to a 7.3 million dollar loss in the prior period.
Turning to the balance sheet, we finished the quarter with 80 million in cash investments unrestricted cash up 6 million from the prior period on improved profitability.
Net inventory was 49 million or 66 days approximately flat to last quarter on 13% higher revenue as operational efficiency continues to improve.
Free cash flow was approximately 7 million.
Before I discuss our revenue and earnings outlook for the fourth quarter fiscal 2019, I would like to remind everyone of our public filings with the FCC and our Safe Harbor statement included in our press release discusses the risks and uncertainties that could affect future performance, causing actual results to differ materially from our forward.
Looking statements.
Demand signals from our global customers remain positive in China, we see signals that most products are selling through to end customers as evidenced by tender activity.
Looking forward, we believe that certain key customers in China and in the west have a desire to build additional inventory to deal with surges and or to mitigate their perceived supply chain risks.
This is reflected in our outlook.
We expect margins to grow with cost reductions offset by the initial impact of annual price negotiations.
With profitability operating expenses increased slightly on an increase in variable compensation.
Given that the company's expectations for the December 19 quarter off.
Revenue in the range of 94 million 200 million GAAP gross margin in the range of 27% to 31%.
non-GAAP gross margin in the range of 28% to 32%.
GAAP diluted earnings per share in the range of a two cents loss to an eight cents profit.
non-GAAP diluted earnings per share in the range of 14, four cents to 14 stuff.
These numbers are reflective of approximately 52.3 million fully diluted shares.
In summary, well, we continue to monitor the evolving status of U.S., China trade and the global macroeconomic environment. We have made the changes necessary to drive a profitable second half of 2019.
The Neophotonics team is executing well and we will continue to drive toward a consistently profitable business.
This concludes our formal comments and now we would like to ask the operator to open up the line for questions.
Okay.
Thank you if he would like to ask a question. Please single by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure that your mute function is turned off to allow your signal to reach our quick [noise].
Again that star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we'll take our first question from Simon Leopold with Raymond James and Associates.
Yeah. Thank you for taking my question did she's multi she will inform Simon today.
<unk> yeah.
But you mentioned you talked about several customers in China, but also a western culture.
Looking to build inventory can you. Please give us more color on the job I give the and costumers and <unk> and products were.
Total seeing destroyed.
I think it's.
Have a number of customers that are.
Interested in building inventory in China, We think that walkaway has largely to date been unable to come to accumulate meaningful inventories on the products that we supply <unk> based on both their feedback and our own analysis.
And in the west or inventory builds are not large but customers have expressed interest to us in being able to offer any demand surges and or cover perceived supply risk in terms.
And I just didn't just in terms of Ah things be I, possibly being short.
Okay and these studies.
Good inventory.
It's hard to accumulate some inventory.
With respect to deal with some customers it is more for D.C.I. or or or or metro or total neutral.
Oh this is Tim Murray.
I I don't think we we know in all cases, the end use application.
But you know broadly I would have to say it includes both.
And you know there may be there may be.
You know some reality and the fact that you know this this is unlikely to be reduced unless the trade tensions returned to some sense of normal to normalcy.
And Ah.
It's also a just related to you know who will consume available capacity, but it's just the current state of affairs with a with trade.
So we look forward to <unk>.
Fiscal year 20, we take into account.
These inventory builds the youre.
Spirit unseen, particularly in the December quarter, I'm, assuming that.
The beat in <unk>.
Expectations in guidance.
We'll be somehow related to.
Two.
The men purchases, how should we think about what should we model Oh.
2020 expectations for Neophotonics.
Well I think the point here is that a you know there there is some inventory risk, but also customers are going to retain some level of inventory until there's resolution of U.S., China trade, we can't predict a when that will be or to what extent.
Thank you. Thank you Tim Thanks for taking my question.
Thanks, Mary Sue.
Thank you then we'll take on next question from Jan.
With resin blocked.
Securities.
Hi, Jim I guess.
[noise].
Jim Your line is life.
Oh, sorry, the mute.
Oh, Thanks for taking my question, So 10, best and Jeff could you give them a smoking more color on what's the whereas the scrap D.C. I and does the U.S. metro and what kind of outlook.
Those are deployments a in the next few quarters fixed.
So I Didnt hear quite all of your question. Some some color on what was the first part of it could you just repeat at June .
Yeah sure. So the de <unk>, you mentioned that strategy in a DC metro deployments in the U.S. markets. So could you give us more color or maps and also how do you do you think that this is going to be sustainable.
Gross a into next year well. This is just Oh I thought the inventory Butte. Thanks.
Okay. So you know so generally you know we're serving some of the industry's largest players and you know from a supply point of view their business tends to be relatively a relatively steady.
So its a.
You know it it does affect you know do you see I in Metro the specific mixes ER is it's not something we can precisely say however.
You know I think Theres, a general view that the the first half of the year will be a bit lighter than the back half of the year.
General indications are suggesting that.
There is more more business a late in the year and so we would expect that and then of course, you know as as we noted in the last set of questions. You know there. The inventory situation is on top of that so you know relatively steady higher in the second half offset by any changes in it.
The story.
Okay. Thanks, and also after the oldest market consolidation you know with a couple of large.
You know and May happens over the last one or two years.
Do you see any of the structure trenching timbers youre seeing a position in the <unk> product.
Also the competition landscape. Thanks.
Well you know the you know the first an obvious point is that there are you know in terms of quantity. There are fewer number of competitors, although you know.
Competitors, who consolidated our larger.
Oh I think for US you know our our strength is in high speed coherent.
You know this is this is a part of the market that.
Has continued to see a growth and has forecasted increasing port count over the next several years and so at the highest speeds and the highest baud rates.
No.
Each of the companies that have been involved in M&A or not necessarily in those specific segments, but Oh, you know I think there are opportunities for for us where where.
You know if a if an end use customers depending on a couple of vendors and then Oh, you know some of them or consolidate them, they're gonna be looking again for additional vendors. So you know that that does that does make a difference I think the notable one there is you know when when occasion Cisco.
To complete the transaction, they're working on you know it.
Yes.
Consolidates Bulson it usually a network equipment company and end of component module vendor so that may create some more often.
Right.
That's all my questions.
Thank you very much.
Well take our next question from Richard Shannon with Craig Hallum and company.
Hi, Richard and things didn't but hey, Tim how are you. Thanks for taking my questions [noise].
[laughter], let's see here.
You talked about a customers both in China in the western.
Countries that are a little bit of inventory stock what does that suggest for the a potential <unk> rights to negotiations as you go into next year could it be better than normal or is it too soon itself.
So it's always too soon to tell.
Up until up until we get a through most of the fourth quarter.
Right.
We are.
I think I give a in the historical range of 10% to 15% price declines.
I think theres a [noise].
Maybe a little less pricing power this year on that on the a half of our customers, but a little early.
Okay [laughter] as we look into the Oh, obviously after a very nice guy here for the fourth quarter, how should we think about the first quarter. Both from a sales perspective, and gross margins I know you're not going to give exact numbers because you probably don't know them, but maybe give a sense of what you think seasonality. It looks like you know relative to normal obviously.
Noting that there's not a lot of normally optics business and then what does that mean for us for gross margin was that a is that.
Seasonality different your than you've seen in past years.
No I would part of the remember there's two major impacts to the gross margin drop in Q1, one of which is the pricing environment, where when because of the annual price negotiations.
But the other one is that we've just got a shorter production corridor, Oh, Hey, we've got a lot of production in China, and we lose two weeks out in the quarter every year. So we usually end up with me under utilization charge in Q1, our normal trend and you've seen it this year is.
We drop in Q1 gross margin ER and.
Part of that comes back immediately and part of that comes back over the years, we get cost reductions we've seen very good cost reductions this year and.
We're still working on next year, but we have hope.
[laughter] My last question, maybe wasn't Bodyline here last couple of quarters, you talked about a 400 gig or at least more directly from your product point of view 64, Gigabaud and Jim I'd Love to understand what you think youre design win rates. So it looks like that generation versus prior ones as it is it looks as good as better just see wouldn't characterize that.
Look so far would be great to hear.
Yeah. So as you know certainly we've been we've been talking about 400 gig for Awhile and now you know we've also said that you know revenue from that you know has you know it's just it's more than 10% it's material overall and we're also.
Winning both you know design wins, there and then a.
600 gig this is essentially.
Ah you know products that are designed to operate at 32, Gigabaud or 64 Gigabaud. The fact that matter is.
In the in the current China deployment, there's a little mixed towards the 32 gigabaud.
Which which are perhaps an older designs, but they tend to be.
Oh.
Using.
100 gigabit per second data rates with 32 gigabaud products that.
Then to deploy a certain amount of bandwidth you know it actually has a favorable impact on volume for the near term.
This is instead of just moving immediately to 200 gig.
64, Gigabaud for the transport networks. So I think we're doing fine on the design wins I think it says you know a a similar pace due to the past, but Ah you know the the 400 gig and ER cycle has.
Long legs, and and 600 gig is very much in the ramp so I hope that helps.
That does student teacher, and that's that Alan.
Thanks.
Well take our next question from the Hod Sharma with Cowen and company.
[laughter] I bet they thought they could be my question.
Oh, you know what do you put aside some clarification questions. If because please remind me what was the revenue contribution from the.
Next top four customers.
It was or the next for customers in the quarter worth 48%.
And just what was the second largest customer if you haven't given that data.
Oh, we've only given the first one but the you know we as a group we give the the next for but we did have another 10% customer.
Okay. That's helpful No.
In terms of just the model can you just help us understand what the revenue mix from.
North America, China.
Outside of the World was.
Yeah, our business in the Americas was 25% up 20, 427% from the rest of the World down 28, China remained flat at 48%.
So not much of the story there, but also remember for Hod. This is not and use location. This is the locations of customers contract manufacturers.
Got it. Thank you so not to my question regarding the inventory build comet ore the risk of inventory being built at both less than men Chinese customers do you have a can you show what does what.
Amount of your fourth quarter.
Got it is baking in inventory level you know.
This additional demand for him entries.
So you've heard us talk about how hard they that we do a.
Backward looking triangulation of.
Every quarter on the number of port shipped out ER and the amount of of inventory that we think was belt. So our our indications are always backward looking.
So so based on those Triangulations. We don't think there was there was much in Q3, our customers are telling us that there's some inventory level in Q4, but we don't know how much it is and and until the end of the corridor I.
We will we won't know.
All right appreciate it I tried to asking a.
Tim regarding China.
The total rises that given wallabies been handicapped in many ways of getting access to the most cutting edge technology.
That maybe handicapped that ability to be competitive at the most high speed.
You know.
600 gig <unk> 800 gig going on so is it are you seeing any trend in China by the Chinese operators are kind of noting there.
Quire men to accommodate for Wally and if that's the case I eat say instead of way to 400 gig backbone that all good 100 gig backbone because the Chinese can well we can't address that.
But then what the Oh should we be talking about your mix going forward.
Well and the boys margins in fact I.
Associated with that.
Yeah, I think it's a it's a relevant topic you know to the last set of questions I I commented on this in the sense that.
No we do see that trying to carriers have have changed their deployment plans to some extent.
You know too you know really just systems that the wall ways, you know can build and so they tend to be the 32 Gigabaud systems that you know they can they can exercise their supply chain appropriately.
And Ah you know it does provide perhaps an additional volume benefit for a certain amount of bandwidth but.
They've they've pushed out.
Okay.
Movement to you know the 64 Gigabaud, but you know there there are some other things going on they they you know we do see a fair amount of tender activity best commented a bit about that you know we noted or you know literally today. The wall Street Journal reported that you know the M.I. I T. The ministry of industry and Infotechnology in China.
Uh huh.
He said that a the three national carriers or you know going to open up there Fiveg rollouts, an additional 50 cities and that of course you know.
You know, it's an indirect element, but it loads up backbone network. So they're going to continue to need some more bandwidth. So and then you know directly to your point of their supply chain. You generally speaking the limit is electronic Icees, you know, it's not necessarily optics and ER.
So.
Our business as a result.
Has benefited from that fact.
Hope that helps.
Well take our next question Tim Savageaux.
Hello, Tim Tim.
Oh.
Sorry about that [noise].
Good afternoon, and congrats on a strong sort of results.
A couple of questions. Thank you went through the geographic breakout or they're just want to confirm but you only had one additional 10% customer and work.
We have to 10% customers I mean outside of what I want to go okay kind of would walk away.
Got it well.
So moving back to kind of them the macro level, there's been a lot of references today. Both this morning and this afternoon.
Two.
Multi year.
Gross and visibility support you mentioned 100 gig port gross written or.
What are your competitors this morning.
Did the same and also made reference to a tremendous quote unquote Amanda tender activity.
So my I guess my simple question is what has happened to you're going to give you guys. All this multi your visibility.
Well first of all I don't think we've commented on any multiyear visibility.
So it's hard to talk about 200, gulfports growing 20% for several years I guess is what you're south.
In industry projections are our you know.
You know showing continued growth in coherent ports, but visibility and forecasts are not same thing. So up you know, we see the forecast and it's really a analysts and analytics as opposed to.
Comments that you may be referring to from this morning, where certain companies may have talked about either anecdotal evidence on tender activity or perhaps you know multiyear.
Agreements. So you know we see you know macro trends, where there's a continuing level of interest in in a deployment of coherent ports I I just comment a few minutes ago about you know the indirect effect of Oh, five GE, increasing in its deployment and now that fills up them the backbone.
Networks, whether their national backbone or provincial backbone and recall from prior conversations in China.
No you you know if there are our national tenders, you know, there's a bit more visibility when it's when it's a provincial tender there isn't a tremendous amount of visibility, but there may be.
Anecdotal evidence so you know what we're seeing is.
You know China is continuing to move forward with its its level of deployment, they're continuing to Oh, you know each of the three wireless carriers are are continuing to open a new deployments and then all of that portends additional cap capacity requirements on the backbone networks.
That you know our core products serve.
I I hope that addresses the question.
It does and just to quickly follow up on that I mean, you did make references to the churn or 10 tender activity earlier in the call.
I guess, where would you characterize that on the continuum from anecdotal to visibility in terms of your commentary or how you're seeing tender activity in China.
Well, let's see you know compared to historical the actual.
Published visibility is a bit less because of.
Of the movement from National.
As the preponderance of tenders to provincial as the preponderance of tenders.
We have seen certain published information coming from.
Coming from China Mobile you know the numbers are not large but you know it does it does suggest with various awards that that there isn't much of share shifts between any of the major equipment companies and then there there are continued deployments of existing system.
As an additional capacity or to the installed base. So you know.
Are you know in spite of Ah inspite of the a the trade band you know business is continuing to roll in China.
Got it then.
You specifically look at sure.
Our revenue guide.
Do you see any change.
Looking sequentially I guess between what you saw in Q3, where it looked like.
Yeah, you start kind of equal amounts of at least absolute dollar growth in China in the rest of world.
As you look forward to Q4 is there any buyer.
In terms or who own your customers or geographies in terms of what you expect to drive that group.
Well, we expected to be about level in Q4.
Okay. So similar I guess, yeah, yeah simonton.
Q3, great.
Or similar similar east versus West and you know on a proportional level yes.
Got it.
And I think last one for me if for no.
So you'd mentioned some product announcements around silicon photonics are coming out of the car care and.
Yeah, I guess in general you as you look out the intra data center opportunity and maybe you can respond to this in the context of how you talked about 400 600 gig or maybe there's some overlap there.
Is that yet at a level that you would consider material for the company in terms of.
You know who.
Laser volumes into that opportunity or or when would you expect that to be the case.
Yeah. So what we're referring to here is you know in particular.
Starting from the announcement that I referred to in the prepared remarks, we're talking about.
Laser products that are used in F. R. <unk> D. Our silicon Photonics based transceivers and so on a you know on on a percentage basis.
Of revenue is still relatively small and are you know I think that's gonna stay the case until such time is actually the deployment rate of those silicon photonics based transceivers.
It will become the main story, which they you know they have not yet done and Oh, you know, there's there's lots of interest lots of activity and are you know forecasted steep ramps but.
You know it it.
You know for it to be a material needle movie move or we need several quarters yet.
Okay. Thanks.
Thanks, Tim.
Well take our next question from Michael Genovese with MKM partners.
Great. Thanks, very much 'cause, it's good to walk away percentage in the quarter again I missed that.
Here are there any seven while he was 37% and their prepared remarks, we said that was down.
From the 2018 full year number was 48% so were down from last year. It was 48 now we're running about 37.
Okay got it thanks I.
Actually my question.
Touching <unk> just a fraction like it was pretty stable Mike It was 46%.
In 2018, my mistake, sorry [laughter].
Okay. Thank you.
I I mean, that's it's a question.
What we've been talking about some that seems a slightly differently. Yeah. When you reported the last quarter. You suggested at that time that you had pretty good fourth quarter visibility in the quarter would probably be about flat sequentially and now you're guiding up I'm wondering you know does the how much of the change and that seems to be better.
Is this is the inventory build that you're expecting and how much is other things strengthening outside of the inventory build and and any detail you could give on what's actually gotten better would be would be helpful.
Well you know the this is actually you know key to why we talked about it in her prepared remarks, we we did see it is similar and then you know to some extent, we do see a you know customers asking for us it for a bit more but also being interested in in a bit of [noise].
Potential inventory so.
There there is a risk that that that difference.
You know overtime proves out to be a you know importantly, we can't quantify fully at the moment, maybe a you know best you might have a further view.
And I don't think I too would I said earlier I don't know that we know until after the quarters over.
Because I think.
Oh, just use why ways. An example, they would've thought that they would have been able to don't build some inventory already but demand remained strong. So we don't know what Oh. This is really an increase in demand because part of the reason customers want to build some inventories to protect against surges and.
Man so until until we're after the fact, we don't really know what.
What was sold through in demand versus what is Uh huh.
What inventory buffer.
Okay. That's that's helpful and I I want to I'm also sort of clarify some of the what we're talking about with inventory build.
It sounds to me, but I just want to make sure. This is right that you're saying that.
Chinese customers would be building inventory because of the geopolitical tensions are that the trade tensions sorry, and and that you as customers are north American or western customers.
Our building inventory because of demand surges or are they also concerned about the trade tensions.
I think its demands <unk> potential demand surges again. This is that this is all anecdotal conversations its potential demand urges or perceived supply chain risk.
If other customers because of geopolitical tensions are going to ER to buy extra inventory of certain part.
Right. Okay and then my last question is just I just want to I mean, you know.
There's been a good conference calls and you guys sound.
Im confident about what about what's going on.
Out there I, but I just wanted to ask you know your comfort level, knowing that customers are building inventory, yeah, because that is the optical industry building inventory.
Sounds bad to people or where you know sounds.
He brings a bad memories right, but it's sort of this type of inventory build good. This reason at this point in time you know are you comfortable with this are you worried about.
You know maybe maybe a you know will be at a in a couple of quarters, we'll get a level revenues well below where we are now because of inventory or how comfortable argue that you don't think that something like that would happen.
Well, you know Mike or.
I know you have long memory and and are you know.
It would be wrong and say, we have that we have comfort with it but you know it's it's the neighborhood we live in and the time we live in.
And so what we try and do is we try and get a handle on you know what is the magnitude and then what might be the effect over how much time. So again as we said earlier you know if there is some level of inventory than a at some point they will use it and and.
So.
We can say now that they're you know if it for the for the concerns on on either a trade tension or a supply chain you know in supply chain is indirectly also related to <unk> to a trade tensions you know it essentially unless there's you know some level of you know said.
Oh man that causes a our large Chinese customers too.
Suddenly be comfortable with U.S. trade policy in U.S.
Supply partners.
This won't change and so you know we have a choice we have our choices to supply or not supply.
And we generally to supply.
Great well, thanks, thanks, very much like tenant that.
Thanks for taking the questions.
Yeah. Thanks, Mike.
As a reminder, if he would like to ask a question. Please press star one well take our next question from Tom definitely.
Yes. Good afternoon, I was hoping you could give us color, yeah, Hulu, [laughter], Oh, well and get a little color on what you're seeing in China outside of walk away at this point.
Well you know the.
The three principal you know national carriers, China, Mobile, China, Telecom and China Unicom all rely on the.
Oh, a constant set a network equipment manufacturers and outside of walk away. That's you know ZT E Fiberhome Alcatel Shanghai Bell.
You know Nokia being the principal there.
And you know in general.
The concern that we have expressed on prior conference calls or when there are perturbations Ah Ah you know in U.S. trying to trade or you know with the entities listings has generally been whether or not there's meaningful share shift while way has been an important customer.
To us fiber home and G.D.R. also customers of ours at varying levels and and Ah you know, it's important to our business to know if their share shifts going on I commented or little bit earlier, Tom about the you know we do see some numbers being published recently in a tender award from China.
Mobile.
Were you know a ball way actually want about 65% of the ports. It was relatively small total number.
But you know the the break down between each of them network equipment companies in the share awards. They got in this tender really suggested no material change.
Historical view that were used to and so you know the.
Chinese network equipment companies other than a walk away.
You know they are on one hand, they're holding their own but they're they're.
There are really on the able to make material gains in share within the domestic market.
That's how we see it today.
Okay. That's interesting. Thanks, and then did you mentioned earlier that you you had a inventory write downs warm weather.
Hi in Q2.
It is three point.
Three point.
6 million dollar inventory write down of why waste specific inventory.
Was EA our product.
Okay.
And then finally are you seeing the trend towards longer contracts are longer supply agreements I was built in price declines versus you know the annual price negotiation.
Are you know I think the you know the short answer is is yes, but.
You know to put a little more color on that.
You know the current state of affairs is not necessarily normal.
And you know customers.
A a round the world you know the realization is a couple of largest systems companies on you know in the world or Chinese and.
No.
Because of the largest of them hallway is subject to the entities listing.
You know there.
You know less able perhaps to flex their procurement muscle then then they might under you know what we previously viewed as normal but.
Both they and and other customers therefore.
No. We are always looking for how to operate the most effectively in this competitive neighborhood and Ah you know if if if you have a new normal then you end up with variations on the theme and I think that's what you're referring to here.
People are you know in short.
There are really interested in.
As opposed to having you know quote unquote, a long term price agreement with fixed price reductions what they're really interested in is securing supply.
Rather than.
Ah yes.
You know securing supply with with cost reductions built in rather than you know either having to beat up their suppliers for cost reductions or worrying about consolidation in their supply chain that might interrupt.
What they had a planned on so I think these are some of the dynamics that that.
Open.
Alternatives from what we're used to.
Okay. Thanks, that's good color.
Okay, great. Thanks, a lot.
This concludes today's question and answer session I will now I'll turn the call ever to Mr. Chen Tim Jenks for closing remarks.
Thank you very much.
To everyone for your time, an interesting neophotonics we appreciate.
The diligent work of our employees and our suppliers and we look forward to updating you on our progress in the future.
Happy Halloween.
Ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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